I’ve spent decades in real estate, including teaching wealth-building real estate continuing education classes to Realtors across six states. Yet in all that time, I can count on the fingers of one hand the times a real estate professional brought up their retirement plan.
Why is the silence so pervasive?
Is the real estate retirement gap caused by a lack of awareness, educational malpractice, low motivation or simply because, from a Realtor’s perspective, there just aren’t any suitable, affordable retirement plans?
Despite being in a communication-driven profession, real estate pros rarely seek or receive retirement planning advice from their brokerages, managing brokers or associates. This is surprising when you consider how many Realtors are surrounded by people who do have retirement plans: family, friends, clients and prospects. Even NAR, MLS and brokerage employees can enroll in structured plans like a 401(k) and pensions, plus Social Security with contributions by their employer.
Why is this lack of retirement knowledge so ubiquitous, and how did it start? Probably when agents (currently an estimated 87 percent) agreed to work as 1099 independent contractors and forfeited employer-paid contributions — the 6.2 percent Social Security tax that traditional employers pay on behalf of their employees.
Real estate agents get stuck paying a full 12.4 percent Social Security tax or $12,400 per $100,000 of taxable income.
Social Security: The only retirement plan
For many real estate professionals, Social Security is the only retirement plan they must fund. To mitigate the 12.4 percent tax bite, agents creatively write off business expenses, such as home office deductions, auto costs, etc., (if you can’t reduce the tax percentage, reduce the gross income). However, agents are, at the same time, dramatically decreasing future monthly Social Security payments.
Short-term tax relief has dramatic long-term consequences. A Realtor could receive significantly less from Social Security, a steep price to pay for minimizing taxes each year and failing to use saved taxes to implement a second retirement plan, ideally one that includes investment real estate.
A harsh reality
Without a backup retirement plan, many real estate pros face working well past retirement age or ending their career by accepting a lower standard of living. Top-producing agents aren’t immune; if they haven’t invested in rental properties during their prosperous careers, they, too, may come up short.
Even more daunting, Social Security and Medicare — once untouchable sacred cows — are now frequently the subject of fierce legislative debates, threatening reduced benefits and delayed eligibility.
The solution? Invest in what you know best
Realtors know real estate better than anyone. So why not use it to fund their own retirement?
One proven strategy is investing in income-producing rental properties and systematically using a tax tool like the 1031 Exchange to grow a portfolio’s wealth, create perpetual income and enhance tax efficiency.
For spurious reasons, Realtors resist using their home equity — or IRA and 401(k) reserves — to invest in rental real estate. They are unconvinced about the superiority of investment real estate and often opt to invest in Wall Street products they know little about. In the process, they pay commissions to someone else rather than earning them and relinquish control over their assets.
But with the right knowledge, real estate, coupled with 1031 Exchanging, a powerful, wealth-building asset, can outperform its competition.
The power of the 1031 Exchange
Established in 1921, the 1031 Exchange is one of the greatest tax tools ever legislated, and it’s available to all to use again and again.
“In America, there are two tax systems: one for the informed, and one for the uninformed. Both are legal.” — Justice Learned Hand
And Warren Buffett’s warning:
“If you don’t find a way to make money while you sleep, you’ll work until you die.”
Rental real estate should be looking increasingly attractive.
By systematically using a 1031 Exchange’s ability to preserve equity typically spent on capital gains taxes, additional cash is available to buy better and more expensive property. And by using mortgage leverage, an investor can:
- Eliminate capital gains taxes on profits realized
- Utilize depreciation to offset expenses and increase net revenues
- Increase rental income that is convertible into retirement income
- Build equity faster through appreciation and tenant-paid mortgage reductions
- Reinvest systematically into higher valued properties, every five to seven years
The beauty is that a real estate pro can start with a single-family home, move up to a duplex, then a fourplex and, eventually, an apartment complex. Over a career, this can transform a modest investment into millions in real estate wealth.
A win-win proposition is within reach
How much longer will you wait? NAR, brokerages and brokers have had decades to step up and provide serious retirement education. They have chosen not to.
Sales education is not the same thing. Making more sales and commissions is part of a retirement plan, but not all of it. It’s not how much you make; it’s how you invest for retirement with what you make.
Real estate agents can and should expand their real estate retirement repertoire, not only for their personal retirement future but to help their clients. You and your clients can retire younger and with perpetual income.
So, next time you’re chatting with someone, ask:
“What’s in your retirement portfolio? Maybe it should include real estate.”
Thomas Phelan is a Realtor and investment expert. You can email him at tom1031x@gmail.com
