It's not unusual: An investor five or 10 years from retirement worries the nest egg will come up short, wants a boost over the finish line but already has a typical lineup of stocks and bonds.
So what else could fuel the afterburners? Would real estate do the job?
True believers recommend a range of possible real estate plays, from real estate investment trusts to rental-property purchases to shares in crowdfunding ventures that redo houses or buy commercial property. The risks and opportunities run the gamut.
"Among all the private investment opportunities, real estate typically outperforms other asset classes and is usually less volatile," said Brian Dally, CEO and co-founder of Groundfloor, a firm that lends investor money to house flippers and other developers. "In addition, people are familiar with the idea of homeownership, so real estate investing isn't overly complicated to comprehend."
"Real estate can be a great asset class and diversification tool," said Jeffrey Feinstein, a vice president with Lenox Advisors in New York City. "It's typically not directly correlated to the [other financial] markets and can provide income from rentals or refinancing. Hold period is around four to 10 years, so it can be looked at as a long-term, retirement-friendly strategy."
The median price of single-family homes hit $318,000 in the first quarter of 2018, up from $257,400 in the first quarter of 2007, overcoming the losses homeowners suffered in the Great Recession, according to Bureau of Census data.
Feinstein also noted that the investor must be willing to keep money tied up and be able to weather real estate dips — that median dropped to 208,400 in early 2009, for example. "You don't have access to the capital at all times, unlike a brokerage account, and there's often market risk you can't control," he said.
Here is an overview of the most common ways real estate can boost your retirement income.
The most straightforward way to fund retirement with real estate is to tap equity in a home that is all or mostly paid for. Downsizing means selling the current home to buy a cheaper one and pocketing the difference. Moving might also reduce property tax, maintenance and utility costs. For a couple filing a joint return, up to $500,000 in gains on a home sale are free of federal tax.
Currently, the Treasury Department is studying whether it can bypass congressional approval to index long-term capital gains to inflation. This means that the appreciation in an asset's price that could be attributed to inflation would not be taxed. Homeowners whose houses have surged in value over the years could benefit from such a tax cut.
"While there may be many reasons to consider downsizing your home, a reduction in expenses is usually the top of the list," said Kurt Rossi, CEO of Independent Wealth Management in Wall, New Jersey. "Downsizing proceeds may also allow you to pay down other debts, replenish cash reserves or even provide a much-needed boost to your retirement savings."
Homeowners can also tap equity with a home equity loan or cash-out refinancing, which is taking out a new mortgage for more than you owe on an older one. Both approaches typically require an income to qualify and require the homeowner to make monthly payments.
To escape that, the homeowner age 62 or older can get a reverse mortgage, borrowing against the equity in the home. Instead of payments, the interest charges are added to the loan balance and paid after the home is sold by the borrower or heirs. The lender cannot force a sale or call the loan so long as the property is kept up and taxes and insurance are paid, even if the debt grows greater than the home's value. The homeowner or heirs are never on the hook for more than the home fetches in a sale, so other assets are protected.
Proceeds can be taken as a lump sum, credit line or monthly payments and are guaranteed to continue for the borrower's life with no income tax. Older homeowners can borrow more than younger ones, since there's less time for the debt to grow to more than the home is worth.
But reverse mortgages can sometimes create trouble and might not be a good fit for everyone. Fees can be an obstacle, and interest, and interest on interest, can drain any equity that might otherwise be left to heirs. Also, the loan must be paid off if the borrower moves, even if it is to an assisted-living facility. As the mounting debt erodes equity, other options, such as downsizing, become less feasible. Many seniors have found themselves in trouble or at odds with children hoping for an inheritance, because they didn't understand these loans well enough.
Steve Irwin, the executive vice president of the National Reverse Mortgage Lenders Association, said U.S. homeowners 62 and over have $6.8 trillion in home equity that can help with retirement expenses. "The numbers tell a reassuring story about housing wealth in an era when large numbers of retirees and near-retirees fear running out of money before the end of their life," he said.
Publicly traded real estate investment trusts are like mutual funds that own commercial, residential or industrial property, or mortgage securities, instead of stocks and bonds. They pass to investors rental income, gains from properties that are sold, or payments received on loans in mortgage-backed securities.
REITS can produce capital gains, though steady dividend income is usually the main attraction. They avoid taxation at the corporate level by passing at least 90 percent of earnings to shareholders.
At the end of 2017, there were 220 "equity" REITS, and 41 mortgage REITs – with total assets of just over $1 trillion, according to NAREIT, the industry trade group.
Some REITs pay pretty well. Ares Commercial Real Estate Corp. (ACRE), for example, yields just over 8 percent.
But as with many other fixed-income investments, REIT prices can fall when rising interest rates make older investments less generous than newer ones. While this can be offset as the REIT raises rents on tenants, and as newer mortgage securities offer higher yields, there may be a lag, and experts say these assets are best for investors who can wait out the downturns and are diversified with other types of assets like stocks and bonds.
"For a passive real estate investor, the best investment would be in a publicly traded REIT index or [REIT] mutual fund with low fees," says Jeremy Salzberg, a partner at Sugar Hill Capital Partners, a private equity real estate firm In New York City.
REITS are traded like stocks and therefore are very easy to buy and sell, a chief advantage over owning investment property directly. They are professionally managed, and since the fund owns numerous properties it is diversified. But you don't have the control you would by owning a property yourself.
Brian Finkelstein, CEO at Broad Financial in Monsey, New York, recommends buying REITS in tax-favored accounts like IRAs, ROTH IRAs or 401(k)s to avoid annual income tax on dividends that are reinvested, and he says REITS are not especially good for investors seeking long-term growth because REIT share prices generally don't grow very fast. Income-oriented investors can start receiving interest earnings right away, as payouts typically come every quarter.
Many advocates swear that owning investment property — a business, residential building or vacation rental — is the way to go. At the modest end, it could involve renting out a spare bedroom on Airbnb or buying a vacation rental or long-term rental. At the other extreme it could be the purchase of an apartment building.
Mark Painter, founder of EverGuide Financial Group in Berkeley Heights, New Jersey, said, "The best way to magnify real estate returns to boost your retirement is the use of income-oriented real estate and leverage. He recommends borrowing at least half the cost of the investment property. That would add some risk but double any profit on the amount invested.
Borrow half of a $500,000 purchase, for example, and a 10 percent gain in property value would be a 20 percent gain on your initial investment. But the same math means a 10 percent price decline would be a 20 percent loss of invested capital. And borrowing means shouldering loan payments, which can erode annual earnings and be tough on a retiree with limited income.
A good property, he said, would earn at least 6 percent a year on the investment, as rents and other income exceed costs like mortgage, maintenance and taxes. "Real estate is all about location, location, location, and if you can find a property that has good cash flow — at least 6 percent — then buying an individual property is the best bet and can help you weather any pitfalls that may face real estate as a whole."
Investors can avoid annual tax by setting up a limited liability company within a self-directed IRA, including a feature called checkbook control to streamline transactions, Finkelstein said. "That means that there is no middleman to go through in order to access your retirement funds," he says. "If you want to buy real estate with your IRA, just write a check to the seller. If you want to buy supplies for renovations, just write a check at your local hardware store. ... Having access to your self-directed IRA via a checking account allows you to effectively cut out the fees and the aggravation of third-party processing."
Among the chief benefits of direct ownership is having control. But that can also mean doing a lot of work and having many eggs in one basket.
In recent years a number of firms have started to offer investors chances to buy shares in specific real estate ventures, such as flipping individual homes or fixing up business space through crowdfunding platforms like Groundfloor, with a minimum investment of $10, or RealtyShares, with minimums as low as $5,000, depending on the project.
The investor can select from among a list of properties vetted by the investment firm, with estimated income and capital gains disclosed on the website but not guaranteed. It is an alternative to finding an investment property yourself, and the investor need only buy a small share of an individual project, making it possible to spread your money among various projects to reduce risk.
"Crowdfunding involves the pooling of funds by a group of investors into a real estate project," explains Ralph DiBugnara, president of Home Qualified, a website for real estate investors. "Investors earn money first through rental income and then ultimately when the property sells. Originally these platforms were only offered to experienced investors, now they have been expanded where anyone can get involved."
While REITS leave the property selection to the fund managers, crowdfunding allows investors to pick and choose themselves, he says. But he notes that crowdfunding investors are often required to commit their money for five years or longer, which could be a problem if a better investment came along or the market turned sour.
"It is very new and untested," DiBugnara says. "So we don't have a lot of historical data and it will be a while before investors can really analyze long term returns."
These platforms vary widely in how they screen potential investments, in terms like minimum investments and procedures for making withdrawals, so experts urge investors to look carefully at rules and track records, and to avoid putting too many eggs in one basket.
Correction: This story has been updated to reflect that a number of firms have started to offer investors chances to buy shares in specific real estate ventures, such as flipping individual homes or fixing up business space through crowdfunding platforms like Groundfloor, with a minimum investment of $10.