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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
To become a landlord when you retire, you may have missed the boat on that. Do you have any real estate background? No. Have you ever been a landlord? No.
Mike:Then why are you doing something that's gonna buy into an illiquid asset in a neighborhood that you don't know in a market you've never had to deal with? Welcome to the Retire On Time podcast. I'm Mike Decker here with David Fransen. This show is all about getting into the nitty gritty of your questions. As always, text your questions to (913) 363-1234, and we'll feature them on the show.
Mike:Just remember, this is not financial advice. This is for your education. David, what do we got?
David:Hey, Mike. What are different ways you can generate income from real estate without being a landlord?
Mike:So for the uninitiated, the I don't know. A PC way to say this. The the untouched, the the those who have not had to deal with being a landlord.
David:Okay. Yeah.
Mike:It can be hell when you first start being a landlord. But if you're your twenties or thirties, you can deal with it and you learn. In my opinion, you don't want to start that learning process that refiners fires of being a landlord when you retire.
David:Mhmm.
Mike:Yeah. Too often, I've heard people say, hey. I've met these guys. It's there's a great deal. We're gonna we're gonna get some vacation rentals here, and they're gonna manipulate our taxes this way and that way.
Mike:And I said, do you have any real estate background? No. Have you ever been a landlord? No. Then why are you doing something that's gonna buy into an illiquid asset in a neighborhood that you don't know, in a market you've never had to deal with, and you don't but they say it's great.
Mike:I'm sure they do. They're also selling you this idea. K? In my mind, real estate is not when you and I've I've seen this happen. It's not when you take your million dollar portfolio and you sell 700,000 of it in your IRA, pay all the taxes to buy a couple of cheap rentals in Oklahoma or wherever.
Mike:Don't do that. Not financial advice. But there's I can't see. Why would you pay $700,000 in income tax to buy a couple of properties? Let's just leave that part where it Alright.
Mike:But to become a landlord when you retire, you may have missed the boat on that. There's this thing called the Dunning Kruger effect, and it's why those who lack knowledge, they overestimate expectations or their own abilities because they don't know the right questions to ask. This is a clear and classic example of the Dunning Kruger effect at play or in play, whatever the right way to say that is. So the last part of that question without becoming a landlord is very insightful. They probably realize this either too late or just in time.
David:Okay.
Mike:So how do you become how do you enter into the real estate market without becoming a landlord?
David:Well, the first question maybe is why do you wanna get into the real estate market? If never been in it, why get in it in the first place? Diversification. Okay.
Mike:So you don't need this, but if you're doing a more traditional portfolio, live off of the dividends, live off of the growth kind of strategy so basically, if you've completely ignored my book and you're still going down the path of retirement planning, or that you're more comfortable with taking risk. Both can exist. JPMorgan had some interesting research that was published a few years ago that showed if you take your eightytwenty, sixtyforty, fortysixty stock bond fund portfolio and you compare it to putting 30% into alternatives, mostly, let's say, real estate, but there's some other things in the private credit, private equity, but mostly real estate, that your average growth can increase, or historically, it has increased. We don't wanna promise future performance by past performance. But your your overall growth could increase and your volatility, the ups and downs, the roller coaster, that roller coaster can decrease.
Mike:Oh. So that's not a bad deal. Yeah. Because of that, I think more and more people have become interested in real estate. Now real estate's tricky because you have less liquidity inherently from real estate.
David:And so what does that mean exactly? So you you you buy this asset, which is the the property or the the whatever?
Mike:Yeah. You buy a house, can you just sell it tomorrow on the open market? Like, no, you have to find an agent, you have to prep it, you have
David:to Right.
Mike:There's closing costs. Real estate's a harder asset to move.
David:It could take like weeks or months
Mike:Yeah.
David:In other words. Okay.
Mike:Or if you live in Prairie Village where I live, it's you put on the market, you get 10 bids over asking price. Alright. But that will change. Yeah. Every market will change.
Mike:The real estate market though is an independent market among the other different markets. So let's just clarify the different markets.
David:Okay.
Mike:You've got your Fed market. I call it the Fed market because it's whatever the Fed rate does affects these rates.
David:Mhmm.
Mike:Okay? So think of CD rates, short term fixed interest, or the cash market. So think of your high yield savings. That's what I call the Fed market.
David:Okay.
Mike:Those are my terms. It's it's easier for me to explain it this way.
David:Alright.
Mike:Then you've got the bond market. The bond market or the debt market, which is one of the largest markets, that is based on basically, like, think of the ten year treasury or a thirty year treasury, which is a wild thing they even do that, but they do that. Think of corporate bonds, whether they're investment grade or junk bonds. K? That's the debt market.
Mike:The debt market is independent of the Fed market, though they do often influence each other, but they are technically different. Then you have the stock market, the equities market. You buy into a stock. Mhmm. You you own part of a company.
Mike:If the company is profitable, hopefully, your stock price will go up. That's what's supposed to happen at least long term. And then you might get some dividends. You're investing in companies. You've got the insurance market.
Mike:So the insurance market more is a marketplace of products.
David:Okay.
Mike:K? So term life insurance is a product. Annuities are a product. Life insurance is a product. Long term care insurance is a product.
Mike:So depending on the purpose of your money, some of those products may be suitable for what you want your money to do for you. I don't spend every month money on term life insurance hoping I die. No. I spend the money that in case I were to die, the risk of my death has been transferred to an insurance company. And they're saying, he's a pretty healthy guy.
Mike:He's probably gonna live a while. Right? So do you but that is a different market for your purpose for the purpose of your money.
David:Mhmm.
Mike:Now let's let's keep going. There's the private market, private equity, private credit. That's not the publicly traded stock market. That's an alternative way into investing in companies and or into debt. So you've got all these different markets here.
Mike:Real estate is just one of the many markets.
David:Alright.
Mike:It moves independently of all of the other markets.
David:Mhmm.
Mike:Are you with me so far? Yep. K. With the real estate market, we're dealing with actual assets. They're they can be tricky to get into.
Mike:In that, you really have a couple, I would say, three, four different ways you can invest that are common. I'm not saying these are all the ways. I'm saying these are more common ways. So you've got REITs, real estate investment trusts. There are publicly traded REITs where redemption's pretty quick.
Mike:They're gonna have to have more cash on hand because if you redeem, if you want your money back, they have to be able to pay
David:it up. Alright.
Mike:Or you have privately traded REITs. Privately traded REITs restrict liquidity but have more cash, in essence, working towards your investment goal of of cash flowing, of paying income. Are you with me so far on that? REITs. Yeah.
Mike:Real estate investment trusts.
David:Okay.
Mike:Then you have something like a Delaware statutory trust. So where a REIT is a company where you pool together a bunch of homes and a business is over it, a Delaware statutory trust is fractional ownership of the actual property.
David:Okay.
Mike:It's similar except that the DST, Delaware statutory trust, qualifies for ten thirty one exchange. So if you have rental properties, you can do a ten thirty one exchange and have all of your assets go to the DST without paying capital gains tax or depreciation recapture tax. That's another conversation for another question for another time. But you can, in theory, buy a DST for cash. I don't know why you would.
Mike:There's better real estate options out there, but you could do that as well. So DST.
David:So you can't ten thirty one into a REIT. Did I get that right?
Mike:Can't. Okay. But and whoever invented tax code really gets an award for marketing.
David:Uh-huh.
Mike:You could do a seven twenty one up REIT. Oh. So yeah.
David:Okay.
Mike:Not ten thirty one, seven twenty one as if that was intuitive. Yeah. But so seven twenty one basically says you're gonna take your property, not sell it, but you're going to move it into the corporation of the REIT Oh. And then you get operating partnerships as units, so you're you're a part owner of the business. So you never sold it, so you never realized a gain.
Mike:You just moved it into a REIT or a trust or something that allowed that to happen.
David:And then you get cash flow coming in from it.
Mike:Yep. That's called a seven twenty one UPREIT.
David:Okay.
Mike:But if you already have a property, you might do that, whether it's, you know, a shopping mall or apartment complex or a single family unit, whatever it is. There there are ways to do that. So you got REITs. You've got DSTs. You've got the UPREITs.
Mike:There's another way that you can get money into there. But that doesn't really answer the question. The the another one, real quick, is qualified opportunity zones. So a depressed part of the states, you can invest in that for some tax advantages. It's higher risk.
Mike:Maybe it works out, maybe it doesn't work out. That's another way to have exposure to real estate, but that's higher risk real estate.
David:Mhmm.
Mike:And then the last one, which I I think is slightly more common, it's the private placement of preferred stock.
David:Yeah. I don't tell us what that means.
Mike:So instead of a REIT situation, k, a REIT's where you're you're in a trust, you're you're part ownership of this real estate investment trust, you could do a publicly traded company, but you're able to buy a preferred share as opposed to a public share. Oh. So public share is, you know, after expenses, all the crap going on, if there's excess money, it it's gonna pay the dividend. A preferred share means you're gonna get something, you know, you you have your preferred position is preferred or advantageous that you're gonna get paid first
David:Okay.
Mike:Before the common shoulder. Talk about like hierarchical, you know, status, you know. Right. You've got the untouchables here, then you've got your middle class here, whatever. Like, that's ridiculous.
Mike:But that's how stocks work.
David:Okay.
Mike:So this is private placement. You have to go through a financial adviser to get access to these sorts of things if they even offer it
David:Mhmm.
Mike:If they even know how to vet it, even if they have it as a part of their inventory. Many times, they'll say, well, buy this ETF with common stock exposure. Mhmm. This is different. I don't wanna quote specifics because offers can change over time, but here's usually what happens is you will buy shares of preferred stock through your financial adviser.
David:K.
Mike:Then you're gonna get a certain payout or assumed payout. These aren't guaranteed payouts. This is not an annuity. K? So as long as it's paying out, you have to pay you before the shareholders, it's supposed to pay at a certain rate.
Mike:And it might go for four or five years or so. K? And then you could redeem it. There are early redemption fees if you try to redeem early. So you wanna know your money's gonna stay there for a while.
Mike:If the company decides, they can call or take the shares and just give you the money back that you put in there, but that's kind of how it works.
David:Mhmm.
Mike:K? The value of the stocks won't go up. The payments just keep going out, so you have to deal with inflation. Maybe you buy into it, but you've got assets elsewhere to kind of hedge inflation or offset inflation. But that that is a more common way.
Mike:I would say the preferred stock option is the easiest one. The REIT is a more strategic one if you wanna get really dialed in on a specific type of real estate investment.
David:Mhmm.
Mike:DST and UPREITs are great if you have real estate but wanna leave the landlord business and go into a different side of of real estate exposure without the responsibilities. QOZs, qualified opportunity zones, they're just higher risk. You have to have a tax reason, and even then, you might not wanna do it for the risk that you you could be taking.
David:Mhmm.
Mike:But those are different ways you can invest in real estate. I typically will say, don't go all in on anything. Find balance. Yeah. If you don't like guaranteed income, which I don't blame you if you don't, This is a nice income stream way.
Mike:You're not you're not making income off the growth. You're doing a dividend income strategy.
David:Okay.
Mike:But you gotta make sure that this can handle inflation too, so be wary of that. But, yeah, these are different ways you can go about
David:Yeah. So so the answer is if you if you don't wanna be a landlord and and being a landlord means you're getting the call that the hot water heater is busted and it's there's water in the basement?
Mike:Yeah. It's snowmageddon and the heater's out and you gotta fix it.
David:Uh-huh.
Mike:And you're liable for if something goes wrong.
David:So so if if you if you're like, I don't wanna take those calls. I'm I'm done with that part of my life. You go to, like, the the REIT or the DST or some other way
Mike:Yeah.
David:Where you can still be in real estate but avoid those calls.
Mike:Or or if you worked all your life and you wanna have real estate exposure, there's a different way to get into it. Oh. You can have real estate as a part of your portfolio. No problem.
David:Mhmm.
Mike:It's just about balance, about expectations. And in regards to the landlord comment you had made Mhmm. Some people are built to be landlords. It gives them purpose. Just make sure your landlord in your properties Yeah.
Mike:Are paying well. You wanna make sure you have a positive net operating income.
David:Yeah. So write that down if you're watching this at home. Do I have a positive net operating income?
Mike:Yeah. After depreciation, after the expenses, after repairs, or you've delayed some repairs and you know they're coming Uh-huh. You wanna make sure that the property is still profitable on today's market value, not when you bought it.
David:And then and property taxes around the country have been rising too.
Mike:And landlord laws have been getting worse and worse and worse. So you just you gotta be very mindful of is it going in the right direction, and do you still want it? But some people are just built to be landlords. It gives them purpose. It's a reason to get up in the morning.
Mike:They love it. And for those people, say, consider keeping your property. Just make it make sure you keep raising the rent, you follow the laws Yeah. And and just keep tabs on it. Because you could just sell your property if it's going downhill and just become a landlord in another property.
Mike:Mhmm. I know that kinda feels like a divorce Mhmm. Because you get to know a property, you learn its quirks, you learn, you know, the the good, the bad, the ugly, but you can't control the neighborhood.
David:Mhmm.
Mike:So you might sell a rental property but still wanna be a landlord and buy another one. It's just you gotta think about your quality of life. Yeah. But, yeah, real estate as a part of a portfolio for some people makes a lot of sense. That's all the time we've got for today's show.
Mike:Don't forget to like and subscribe, whether it's on YouTube or wherever you get your podcasts. Last but not least, if you've got questions about your retirement, wanna schedule a call and chat with us, you can always go to retireontime.com and click the button at the very top, and we'll explore your options. You never know until you schedule. From all of us here at the Kedrick Wealth Studios, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next show.