Real estate can be a valuable tool to build wealth as it offers an inflation hedge, provides tax benefits and can be passed down through generations. However, real estate can have high barriers to entry.
The median existing-home price for all housing types in February 2022 was $357,300, up 15% from the $310,600 level recorded in February 2021.
Luckily, you can find ways to invest in real estate for retirement that don’t require a large amount of capital, including exchange-traded funds (ETFs) that invest in real estate investment trusts (REITs), self-directed IRAs and crowdfunding.
REITs pool investor funds and provide access to a diversified fund of real estate investments. Like REITs, REIT ETFs invest in a large portfolio of real estate stocks. As ETFs, they’re publicly traded with prices fluctuating throughout the day.
Some REIT ETFs mimic real estate benchmarks like the Dow Jones U.S. Real Estate Index. REIT ETFs that track these benchmarks are referred to as passive funds since they don’t have a fund manager. One main advantage of REIT ETFs is low fees. For example, the Vanguard Real Estate Investment Fund (NYSEARCA: VNQ) has an expense ratio of 0.12%.
Another benefit of being publicly traded is that these REITs are available via online brokerages like Charles Schwab or Fidelity. Investors can gain real estate exposure by investing in fractional shares of REIT ETFs for as little as $20. REIT ETFs can offer higher-than-average dividend yields (3% to 4%+) compared to a typical stock dividend yield of approximately 2%.
One great strategy to invest in real estate for retirement and lower taxes at the same time is with a self-directed IRA. Like IRAs, self-directed IRAs offer similar tax advantages such as tax-deductible contributions (up to certain limits) and tax-deferred growth. Investors can also create a Roth self-directed IRA, which can provide tax-free growth.
However, the main difference between a regular IRA and a self-directed IRA is that self-directed IRAs can hold alternative investments like precious metals, tax liens, collectibles and real estate. Standard IRAs are meant for more common investments like stocks, bonds, ETFs and mutual funds.
Self-directed IRAs offer more investment options but come with complex rules. For example, you can’t purchase a property with a mortgage with your self-directed IRA. Instead, you can pay in cash or use an undivided interest in your IRA account, letting you partner with another investor to purchase the property.
With a self-directed IRA, you must also pay for expenses via IRA funds and hire a third-party property manager for repairs and management.
Crowdfunding is a relatively new option that lets investors buy fractions of real estate investments. Investors can select from a wide variety of projects that include multi-family, retail, office and apartment buildings.
Leaders in the real estate crowdfunding space include CrowdStreet, RealtyMogul and Arrived Homes. Investors can gain exposure to real estate for an initial investment that ranges from $100 to $35,000. Investors can also use a self-directed IRA to invest in real estate crowdfunding projects while taking advantage of tax benefits.
Real estate has and will continue to be used as a tool to build generational wealth. It provides tax benefits and can also be especially profitable during high inflation. Real estate prices are rising throughout the U.S., making it harder to break into this market. REIT ETFs, self-directed IRAs and crowdfunding platforms help level the playing field.
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