With a hot housing market, these are good times for real estate professionals.
Demand for second homes more than doubled during the pandemic, according to economists at the national real estate brokerage Redfin. Housing prices in many metropolitan areas across the country have jumped significantly, reaching record levels.
I have witnessed the rise in prices from my own experience. I recently returned from a family vacation in the North Carolina mountains, where many homes are now selling for double or triple what they did just a couple of years ago.
As a result, anyone who works in real estate is likely to have experienced a dramatic increase in income over the past 12-18 months. Agents scan listings faster, earn high commissions, and move on to the next trade. As for real estate investors, they see price tags skyrocket and homes are sold at a premium.
Danger for real estate professionals
With all this money flying around, real estate people need to take action now to diversify their assets. And that means investing in assets other than property. Failure to do so can be costly.
I’ve seen this error before. Back in 2008, during the Great Recession, a client’s family member nearly fell belly after the property market crashed. She owned a real estate brokerage and several real estate properties.
After the recession, it took her over ten years to recover. She had no money or other investments besides real estate. Faced with rising costs, she was unable to recoup her property.
Fortunately, she is now making money again. Unfortunately, it’s all too easy for her and other people in the real estate industry to simply reinvest their profits in what they know. But this is a bad strategy.
For older professionals approaching retirement age, the importance of a diversified liquid portfolio is even greater. It is good to have rental income, but consider how much capital you have invested in this property. You cannot buy stock retirement products in your property unless you take on a debt to the property, which ties your hands even more.
We know that real estate has business cycles and will eventually cool down. So now is the time for real estate professionals to diversify by taking the following four financial steps:
Create an emergency fund
Since real estate is cyclical and many real estate professionals have incomes that rise and fall rapidly, they should create an emergency fund that will cover the costs in about 12 months. Since the income of a real estate agent or investor is less predictable than many other professions, this 12-month reserve is roughly double the amount recommended for a paid job.
Carrying money in a retirement account
Self-employed or small real estate business owners who anticipate another year or two of strong returns should consider setting aside some of that money in a tax-deferred retirement account.
It’s time to save thousands of dollars before taxes. At a minimum, these people can consider funding a 401 (k) retirement plan by depositing money that allows their employee and employer status to contribute up to $ 58,000 per year, or $ 64,500 for those over 50. There are many types of retirement accounts, including individual 401 (k) s, SIMPLE IRA, and SEP IRA, so talk to your tax advisor before setting up one.
Open a brokerage account (or increase the one you already have)
Real estate professionals should also consider opening or making contributions to an existing taxable brokerage account. These accounts have no age or deposit restrictions, allowing a person to use that money when the economy starts to cool and their business slows down. They can also withdraw funds at retirement, which are taxed at lower capital gains tax rates than deferred taxes on retirement accounts, which are taxed at higher regular income tax rates. Since this type of account may require withdrawals earlier than a tax-deferred retirement account, consider having more bonds or other conservative investments in your brokerage account.
Keep your lifestyle in check
When money is flowing, many real estate professionals may be tempted to buy luxury items – a new car or a pool for their home. And once a person begins to get used to a larger and more expensive lifestyle, it becomes more difficult to curtail it. Less spending on excess will make it easier to change your lifestyle when the market changes.
Even now, with the market and the economy buzzing, take your time to build a storehouse and plan for the future. While we all want the good times to last, it is likely that the economy will eventually slow down and the booming housing market will stabilize. When this happens, it is important to have enough income and savings to weather any downturn.