Exposure to real estate makes fantastic sense for people in or approaching retirement for one basic reason: Income. Retirees need income, and real estate generates it – reliably, month in and month out.

Meanwhile, Real Estate IRAs also provides the potential for tax-free and tax-deferred growth in rental income over time, capital appreciation, and tangibility.

A bond issuer can go bankrupt, and the stock and bonds can fall to zero. Not so with a house. No matter what happens, if you have the home properly insured, the house can’t fall to zero. You’ll still have a house no matter what – and that’s worth something.

Let’s boil things down to what retirees need:

• Income. This almost goes without saying. But income in other investments is very tough to come by. Interest rates are extremely low, and according to Bankrate.com the average yield available in a 1 year bank CD is a miserable 0.28 percent at press time. That’s not enough to live on, except for the megawealthy. And the megawealthy didn’t get there by investing at 0.28 percent!

Real estate has a proven track record of generating rental income for the property owner. In fact, that’s the whole reason they build apartments. But you can get rental income from farmland, resort properties, single family homes, commercial property and even raw timberland in some cases.

• Inflation protection. Inflation is an insidious and destructive force on retirement portfolios. Over time, it can devour the purchasing power of your retirement nest egg just as surely as a nest of termites can eventually devour a house. In fact, it probably won’t even take as long.

This is one of the advantages that tangible assets, including real estate, have over paper assets like bonds. Bonds become less valuable over time because of the effects of inflation. Likewise, their coupon yields become less valuable over time as well. A $1,000 bond with an 8 percent interest rate that kicks out $80 every six months – a fairly typical bond these days – doesn’t increase its payment when inflation heats up. Instead, bond buyers begin to bid down the price of the bond until the semi-annual payments represent an acceptable return on investment. This is good for future buyers – but does nothing for you whatsoever as the current bondholder.

With real estate, on the other hand, inflation may mean you can raise your rents in order to compensate.

• Capital appreciation. Chances are your home value will increase roughly with the rate if inflation, as a baseline. But there are other things that can cause the value of your home to go up as well: Local development, increased population, gentrification, a famous individual moving into the neighborhood attracting attention. There are lots of things that can cause the value of your home to increase over time – even as you are receiving rental income. Other income investments don’t expose you to the same kinds of opportunity, unless interest rates fall. But that’s nothing you can count on. Most of our clients are smart and experienced investors. It’s almost impossible to game interest rates. But lots of people can spot an up and coming neighborhood or development and invest profitably.

• Tax advantages. Outside of a Real Estate IRA, of course, rental income is taxable, net of expenses. But you can defer taxes on real estate nearly indefinitely via the use of the 1031 tax-free exchange. Inside of an IRA, the tax advantages are even better: There are no taxes on your own money invested traditional IRAs until you take income out in the form of a distribution. (You may face a tax on growth attributable to other people’s money, which you borrow to invest in your IRA, courtesy of the unrelated debt-financed income tax. But you’d have to pay that in a taxable account anyway.) Furthermore, there are no current year capital gains taxes in IRAs. You don’t have to worry about tax loss harvesting, because nothing will be generating taxes you have to offset by selling losses!

In the case of Roth IRAs, all income and all capital gains grow tax-free.

All in all, real estate is an excellent addition to nearly any retirement portfolio, because it’s such a natural fit for the real world cash-flow needs for so many retirees.

American IRA, LLC works with successful investors here in our home state of North Carolina and all over the country, by providing third-party administrative services to owners of real estate IRAs and other self-directed retirement accounts. Visit us online at www.americanIRA.com or call us today at 866-7500-IRA(472).