3 Ways Real Estate Investments Fit in Your Financial Plan

As you plan for your retirement years, or even if you are looking for ways to make work optional younger in life, real estate investments are likely an avenue you've considered. For many, real estate plays a significant role in achieving personal goals and can be a crucial component of one's comprehensive financial plan.

It has been evident to Spokane's residents this year how the local market possesses some specific reasons to invest in real estate. But looking beyond general proximity to Spokane's currently hot market climate, there are three enduring ways that directly-held real estate investments can benefit your overall financial plan.

1. Real estate investments can diversify your net worth

Your net worth is a usual financial calculation that consists of adding up the total value of all of your assets and then subtracting out the sum of your liabilities. The result represents your net worth and is one of the fundamental metrics of a financial plan.

While the value of your net worth itself is significant, the variety of assets it comprises is equally crucial. A net worth statement that includes a range of asset classes will typically be powerful – more capable of weathering economic and market downturns – than having all assets lumped in one specific investment type. This concept of diversification between asset classes is a highly utilized strategy to reduce risk. It allows the portfolio as a whole to grow while protecting net worth against vital losses in one specific asset class.

financial plan real estate

With this in mind, let's consider the holdings typically available to a 401k plan participant. The 401k plan, after all, is the most widely used retirement savings vehicle and is often available to corporate employees and small business owners. The strategy will offer a handful of investment options at different risk levels allowing you to build an investment portfolio primarily of stocks and bonds. While some 401k plans do provide a specialty investment option for a mutual fund REIT (which allows you to invest your retirement dollars into a pooled account with other real estate investors), the average 401k plan does not have real estate as an investment option.

Since 401k plans are regularly one of the enormous wealth accumulation tools on a retiree's net worth statement, purchasing and managing directly-held real estate investments can make a great compliment to your 401k. It can solve the problem of being overly concentrated in the stock market and can help add diversification to your investment portfolio.

2. Real estate investments can provide you a fixed income

One of the massive changes to your financial life when transitioning to retirement is replacing the steady flow of paychecks you received while working. No longer will you earn that direct deposit on the 1st and the 15th of each month from your employer, and many retirees prefer to seek options that can replace this income with a similar payment stream.

The most common replacement for your paycheck will be your monthly social security benefit. It becomes available from 62 years but at your discretion may be delayed until age 70. That said, more often than not, this monthly payment will not fully cover your living expenses, and you may need to create additional income streams to fill the gap. While some individuals may feel comfortable employing their 401k savings for this purpose, there are plenty of reasons why being conservative about retirement account disbursements can pay off in the long run.

Enter rental real estate. Rental real estate can provide a consistent monthly income stream to supplement your social security payments in retirement. This income strategy can feel like a very natural fit in retirement because the cadence of monthly rental payments lines up nicely with most retiree's cash flow needs. Having your standard monthly living expenses covered by fixed income sources allow other assets like retirement accounts invested in the stock market to grow over time and instead be used for larger one-time payments as they arise.

cash flow money

3. Real estate investments can provide tax benefits

Rental real estate income is reported annually on your income tax return under the Schedule E. This form reports information about your investment property to the IRS and includes the address, property type, rents received, and related expenses. The calculation of the final income or loss for the year is at the bottom of the form. If you made a profit, it flows through as taxable income on your 1040 tax return document.

One of the tremendous advantages of directly-held real estate investments is the ability to write off your associated expenses. A few examples of expenditures you can commonly deduct include:

  • Advertising
  • Insurance
  • Management Fees
  • Repairs
  • Taxes
  • Utilities

As if the above list wasn't good enough on its own, there is still another tool for using your real estate property to lower your tax burden: depreciation. The IRS allows you to write off your property's cost basis (frequently the amount you paid for the property) over time. Since you can only depreciate the cost of the building and not the land itself, you will need to designate these costs separately. Typically, residential investment property cost basis can be depreciated over 27.5 years and can have a meaningful impact on the taxes owed on your rental income each year. We always recommend that you consult your tax advisor before making any decisions around the tax consequences of your directly-held real estate investments, as things can quickly become complex.

neighborhood homes


Directly-held real estate investments are a unique asset class and come with their own set of financial characteristics that make it an opportunity worth considering in your retirement plan. While we do not believe real estate investments make sense for everyone's situation, they do have a handful of distinct benefits that make the topic worth broaching in your financial plan.

Written by: Jordan Curnutt, CFP®

Jordan Curnutt CFP® is a partner at Quantum Financial Planning and a Spokane Financial Advisor for those approaching retirement, as well as Top Producing Real Estate Professionals. Jordan applies a structured process designed for financial planning, including cash management, rental real estate modeling, investment management, and tax considerations.

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