If you took a poll of investors in their 50’s and asked them where they invest their money, I’m guessing the great portion of them would claim to have stashed their wealth in products offered by Wall Street. It’s what many of them grew up being exposed to all these years. It’s what that investment representative told them at the last cocktail party, or what they learned from the one who tried to ‘pitch them’ while standing at their doorstep in the sweltering summer heat.
As a Real Estate Investor in my Early 50’s (though I started in my 30’s) I think about the positive impact Real Estate Investing has had on my career and I’ve decided anyone in their 50’s could do this.
Here are the top 5 reasons why 50 year olds might want to consider real estate investing.
Investing in Real Estate at 50 is contrary to what the media preaches, and outside of some late night infomercial, you rarely hear the benefits of owning cash-flowing real estate.
Thats where the open-minded, ‘forge my own destiny’ 50 something discovers real estate investing and never looks back.
1. Typically, 50 year olds are at the higher end of the income spectrum, so tax depreciation is key.
If you’re a 50+ year old W2 Employee, who has been working for the last 30 years and have no ‘business’ to use as a tax benefit, you’re most likely in the 30+ percent tax bracket. So, for the first 160 days of each calendar year, you work to fund the government. A noble and worthy investment, to say the least!
But, Investing in Real Estate can help lower your tax burden, here’s how:
Investing in Real Estate offers a tri-fecta of benefits.
- Depreciation- Here is a great site to illustrate the power of rental property depreciation. Essentially on a $200,000 rental property investment, with a recovery period of 27.5 years, you get to take $7272.73 per year off of your taxable income. So, if you made $50,000, you would only be taxed on $42,727.27.
- Asset Appreciation- this is a moving target and with the current Inflation rate at 8.5% it’s nearly impossible to quantify what the rate of home appreciation will be in the years to come. However, In this post from Ramsey Solutions, which is a media outlet for the Dave Ramsey Empire, they see appreciation in 2022 at 5.7%. So the $200,000 single family investment property you’ve been eying, will be worth $211, 400 next year.
- Outsourcing your debt. Yes, you get to ‘outsource’ the repayment of your debt to a willing third party. This accomplice is referred to as; ‘Your Tenant’, and you should shake their hand, and say thank you! If structured correctly this tenant pays your mortgage, interest, insurance, and taxes. According to Investopedia, a good rule of thumb for single family homes is to set your rent price at 1% of the cost to purchase the house. So a $200,000 home would yield $2000 per month in rent.
2. Real Estate Investing in your 50’s may give you a purpose when you retire.
I hear stories and see retirees in my own life and sometimes they struggle to find a purpose. It sounds great to not have a daily obligation, but it gets boring, and unfulfilling. Now, many of them volunteer, join a church, play golf and travel. But, these are temporary, what are you going to do with the remaining 90% of your time?
Well, having a rental property, or even better 20 properties, provides a sense of obligation; because something may need fixing, grass needs to be cut, and gutters need cleaning. Of course you can hire this out, but this cuts into your profit, and takes away your obligation.
Knowing that you are helping someone and providing them with a nice place to live can be very gratifying. You should want to do what you can to maintain its appearance and stay in good working order.
3. 50 Year old’s are generally more financially savvy and make good Real Estate Investors.
Generally speaking, a 50 year old has learned to understand debt, has a knowledge of what goes into the cost of property upkeep, and knows the ins and outs of insurance and taxes. This is valuable information for owning a rental property.
Investing in real estate at 50+ may require a retraining of the mind where you start to look at debt as an asset rather than a liability. Many 50+ year olds were likely taught to stay out of debt at an early age, and that all debt is bad debt. So education is key, and if you could find a mentor to guide you that would be ideal. There are lots of Facebook Groups for Real Estate Investors, like this one and plenty of folks on biggerpockets.com offering mentoring or partnership deals.
Here are 10 Real Estate Terms a new investor, Yes even 50 year olds, would want to understand;
- Capitalization Rate- A term used to describe the rental rate when compared to the properties current market value.
- Amortization Schedule– the visual representation of how your monthly payment is applied over time. It shows the payoff period, how much is allocated to interest and how much is allocated to principal.
- Debt to income ratio-A financial measurement banks will use to evaluate risk, before giving an individual a loan. It measures the amount of debt a borrower has, compared to his/her monthly income. Banks want to make sure you can service the debt, and the potential rental income from the investment they seek, is not part of the evaluation.
- Hard Money Loan-A financing alternative to a bank loan. Hard Money can be funds from a family member, a friend, or a group of investors. They are typically quicker to fund, but often times have higher rates.
- Equity- This is the goal every real estate investors seeks to gain in a property. It’s the amount you owe against the property compared to the amount you could sell the property for. If you owe $100,000 but you could sell it for $125,000 then you have a $25,000 equity position in the property.
- Buyers Market- this is where the buyer has the upper hand. Typically in a buyers market there is a lot of inventory and not a lot of buyers.
- Sellers Market- This is where the seller has the upper hand and is where there is a low housing inventory, and sellers markets often drive the price of the property up. This is the market we are experiencing right now, and often times this causes bidding wars. Here are the cities which are experiencing the most bidding war activity.
- Cash on Cash Return-This is the ratio of annual cash flow before tax, when compared to how much was initially invested in the property. So, if you invested $20,000 in a $100,000 property and it generates $1,000 month, then your cash on cash return would be 5%.
- Off-Market Property- This is a property not listed on the MLS, Zillow or any For Sale Platform and is considered ‘not for sale’. Investors are attracted to these properties because they may be able to get a better deal, because they can minimize fees to real estate agents.
- Rental Property Calculator-This is a tool used to evaluate the potential return on a given property. Investors use this to evaluate whether or not a property will be a good investment over the long term. Here is a great Rental Property Calculator.
4. Real Estate Investing is a great hedge against inflation and many 50 year olds remember real inflation in the 1970’s.
The hidden tax of inflation is ravaging the ‘Almighty Dollar’s’ buying power today. But, nearly 40 years ago, we experienced a similar phenomenon, which 50+ year olds might remember. Here are some of the circumstances (shown visually) going on in the late 1970’s that may make you appreciate the inflation we have today.
Since 1891, real estate values have appreciated 3.2% each year when unadjusted for inflation.
This means if you purchased a property today for $200,000, 10 years later the same property would be worth $270,948. If you financed that $200,000, on a 30-year mortgage with a down-payment of $30,000 you will have likely paid off $75,000 in the first 10 years of mortgage payments-all with ‘someone else’s money’.
You now owe $95,000 on an investment worth $270,948. This represents an equity position of $175,948 and a return on your investment of 17.05 % not even counting depreciation, and expense write-offs which greatly improves your Return on Investment metrics. It’s genius, and truth be told, the tax code was literally written for Real Estate Investing!
This is a great deal, but how is Real Estate Investing a great inflation hedge?
With Inflation, the buying power of the currency diminishes, which causes hard-asset prices such as real estate, to rise. This phenomenon is currently taking place in economies all over the world and is why housing prices seem so high. Securing a fixed mortgage over time for a real estate purchase is like borrowing Dollars and paying back Quarters.
5. Estate Planning with Real Estate is a great way to pass on wealth to your family.
There are several ways in which you can keep a rental property in your family at the time of death.
- First of all, you could add a child or children to the deed today, though this may not be practical for many. Also, this method may cause your heirs to be subject to gift taxes when they may not be in a position to pay.
- You could also set it up where the property went into a Revocable Living Trust and name a trustee. Upon the owners death, the Trust executes and the the trustee facilitates the wishes of the deceased. The benefit of using a Trust is that is can avoid the need for probate, which can often be costly and time consuming.
- Use a Qualified Personal Residence Trust QPRT. This allows the owner to move a property directly into a trust and still utilize the property. This minimizes the gift tax, but it must be fully transferred to the named descendant before the term of the QPRT expires.
If you’re interested in keeping your assets in the family then having a bullet-proof Estate Plan is essential. I would recommend contacting an attorney to have them advise you on how to structure a “Living Will” which allows you to define what your wishes are in the event you become incapacitated, and are unable to make your own decisions. Also, discuss with them whether a “Trust” or a “QPRT” or something similar is best for your particular situation. By doing these things it will save your family time and agony should something happen to you, and they will most certainly appreciate you for it.
So, even if you’re in your 50’s, consider Real Estate Investing, it’s been great for me. I’ve met many like-minded investors whose friendship and opinions I value the most. It will be a life-changing endeavor should you choose this path!
Jim started his real estate investing career in 2005 and enjoyed 3 good years before the Financial Crash of 2008. Jim’s been a steady equities investor for over 20 years, but really didn’t realize the power of dividends until 2015. Since then, he’s adopted an ‘if it doesn’t produce income, its not worth investing in” motto. Jim works in a sales and marketing position and has knowledge in SEO, Blog Writing, Website building, and growing a digital brand. If you’re looking to build your online presence, feel free to reach out to Jim.