Property investing can enhance retirement

Chris Stephens

Time is not as consistent as it appears. When you first get out of school, land your first job as an adult, and start a family, you see a long working life ahead that seems to stretch forever. You stay busy with family, children and work.

Then before you know it, your kids are out of school and off on their own. As you look ahead, the end of your working days seem much closer than they used to.

You realize that you will want to retire someday, and you begin to wonder how you are going to fund retirement.

While there is Social Security, you are going to find it very difficult to live on that income alone and maintain any semblance of your current lifestyle.

What do you do? Obviously, you save as much as you can. You want to save at a high rate of return, so you increase your savings as much as possible yet avoid excessive risk.

You also want to start saving as soon as you can so your savings have as much time as possible to grow.

Here is a rule of thumb. Money invested at a 7 percent rate of return will double in 10 years. Money invested at 10 percent rate of return doubles in seven years.

For example $10,000 at 7 percent in 10 years will grow to $19,671 and in 30 years will grow to $76,122.

At 10 percent interest, the money will grow in just seven years to $19,487 and in 30 years to $174,494 -- nearly $100,000 more. The higher rate of return really pays over the long term.

With today's low interest rates, however, people are happy if they can get 5 percent or 6 percent returns. Those returns are not going to get you to where you want to be. Real estate typically pays higher rates of returns than securities. This is for several reasons.

You borrow most of the money to buy real estate. As long as the real estate generates a higher return than the cost of the borrowed money, you make money on the borrowed money as well as the real estate.

When you sell the real estate, you get back the money you put in, plus the debt has been paid down so you get that money too. Plus you get the appreciation in the property value. Those factors push up real estate rate of returns.

So if you want to get a higher return, look at real estate. But like anything else, there are trade-offs.

Real estate takes a lump of cash to get started. Coming up with this cash may be beyond the ability of most people. So you either have to save like crazy to get the down payment or partner with others to pool your resources. Partnerships have their own dynamics and can range from great to disastrous.

Small real estate investments such as homes and duplexes are hands-on investments.

You have to do all the work of managing the property -- finding tenants, collecting rents, handling repairs and so forth. So, small investments take time and effort.

Real estate is not liquid: You cannot convert real estate properties quickly to cash.

With stock investments, you just tell your stock broker to sell. Real estate takes time to sell and needs to be looked at as a long-term investment.

Real estate, like the economy, has cycles, and you need to time when you get in. The real estate cycle is typically about seven years. You have to look at the market with a degree of common sense and avoid getting in when a market is going nuts.

Be patient and watch the market until the cycle is in your favor.

While you wait, you can add to your savings for the down payment. Then buy when the time is right at much more attractive prices.

The key is time. The more time you have, the more your investment can grow. The old saying "buy a lot when you are young" holds a lot of truth.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His column appears every month in the Daily News.