The Retirement Real Estate Portfolio: Why Less Is Sometimes More

coins lined up with miniature house

Many things come to mind as you approach retirement. There’s a lot to consider, from your monthly budget and expenses to your future goals. You could also be planning about the inevitable, which is having to leave your loved ones behind. However, one thing you shouldn’t have to worry about is your real estate portfolio.

Like any other aspect of your retirement planning, you should review your real estate portfolio periodically to ensure it still aligns with your goals. And as you get closer to retirement, you may want to consider downsizing your portfolio.

Why Downsizing Your Real Estate Portfolio Makes Sense

There are several reasons why downsizing your real estate portfolio can be a good idea in retirement. Here are some of the benefits of reducing your portfolio in retirement.

Simplify Your Life

When you have a smaller portfolio, you have fewer properties to manage. This can save you time and money, and it can reduce the stress in your life. With everything else you have going on in retirement, downsizing your portfolio can help make your life easier to manage.

If you have tenants, you will have fewer tenants to deal with. With vacation rentals, you will have fewer guests to deal with. And if you own investment properties, you get to minimize the number of investment properties you need to keep track of.

In addition, if you have a property management company, they will have fewer properties to manage. This can save you money on property management fees.

Reduce Your Expenses

Owning fewer properties means having fewer mortgages, property taxes, insurance premiums, and utility bills to pay. It also means having less need for expensive repairs and maintenance. Don’t forget about the costs of furniture and décor, too.

When you downsize your portfolio, you can save money on these expenses. In addition, if you’re renting out properties, you’ll have fewer tenants to collect rent from. This can reduce your income, but it can also reduce your expenses. And if you sell some of your properties, you may be able to use the money to pay off debt or finance other goals.

Free Up Cash

When you reduce the size of your portfolio, you may be able to generate some cash that you can then use for other purposes in retirement. For example, you could use the money to travel, make home improvements, or invest cash in a retirement account or another investment.

If you’re selling properties, you may be able to take advantage of the capital gains exclusion. This means you won’t have to pay taxes on up to $250,000 of your capital gains. For married couples, capital gains exclusion can be up to $500,000.

Remember, though, that you may have to pay taxes on any depreciation you’ve taken on the property. And if you’re selling a rental property, you may have to pay capital gains tax on the sale.

Reduce Your Risk

As you age, you must consider ways to reduce your exposure risk. For example, if you own rental property in an area prone to natural disasters like hurricanes or earthquakes, downsizing could help you sleep better at night knowing that you don’t have as much at stake should something happen. The same goes for any other type of property in a high-crime area.

Of course, you don’t have to sell your properties outright to reduce your risk exposure. You could exchange them for less risky investments, such as bonds or mutual funds. Or, you could keep the property but get rid of the mortgage by selling it to a tenant or family member.

Tips When Downsize Your Real Estate Portfolio

Suppose you’re thinking about downsizing your real estate portfolio in retirement. In that case, there are a few things you need to do to make sure it’s the right decision for you. The following are tips to help you downsize your portfolio:

Evaluate Your Needs

The first step is to evaluate your needs. Do you need the income from your properties? Do you need the cash flow to cover your expenses, or maybe you want the equity in your property to fund other goals?

Answering these questions will help you determine whether downsizing makes sense for you. For instance, if you need income from your properties to cover your expenses, selling them may not be the best idea. On the other hand, downsizing could be a good option if you have other sources of income and don’t need the cash flow from your properties.

a diorama of a house and money

Consider The Tax Implications

Before you make any decisions, consider the tax implications. If you sell a property, you may have to pay capital gains tax on the sale. Exchanging the property for another investment means you may have to pay taxes on the gain. And if you keep the property but get rid of the mortgage, you may have to pay taxes on any depreciation you’ve taken.

Be sure to speak with a tax advisor to understand the implications of downsizing your portfolio. They can help you determine whether it’s the best decision for you.

Weigh The Pros And Cons

After evaluating your needs and considering the tax implications, it’s time to weigh the pros and cons of downsizing your portfolio. Some pros include freeing up cash, reducing expenses, and reducing risk exposure. The cons include paying taxes on a property’s sale, losing income from the property, and finding a new place to live.

If you’re still on the fence, consider speaking with a financial advisor. They can help you determine whether downsizing your portfolio is your best decision.

Don’t Forget About Estate Planning

Whichever decision you make, don’t forget about estate planning. You’ll need to update your will and trusts if you have properties in different states. It also makes sense to reconsider and update your beneficiaries.

Be sure to speak with a reliable estate planning lawyer to help you make the best decisions for your situation. They can help you update your documents and ensure to carry out your wishes in case of your untimely death. The right one will have years of experience managing similar cases and know precisely what they need to do to protect your interests and those of your loved ones.

You may be wondering when the right time is to downsize your real estate portfolio. The answer is that there’s no one-size-fits-all answer. Ultimately, the decision is up to you. Just be sure to consider all your options and speak with the right experts before making any decisions. This will help you make the best decision for your situation.

About the Author

Share to

Scroll to Top