Is real estate a viable alternative to bonds for retirement income?



In 1981 g. US Treasury bonds paid more than 15% per annum. Today they pay at 2% per annum.

Perpetual low interest rates have become the new norm in the 21st century. This makes it much more difficult to retire with bond income than before, as lower yields mean you will have to save more money for retirement

Investors are increasingly asking the question: can real estate play the same role in my portfolio as bonds, but bring higher returns?

Before you dump all your bonds and start buying your rental properties, make sure you understand exactly what this role is – and all the possible options for filling it with real estate investments.

The Role of Bonds in Retirement

Historically, bonds balance the stocks in your retirement portfolio. They do this in three important ways.

Stable income

Bonds pay fixed interest for a predetermined period of time. In other words, they pay a predictable, fixed income that retirees can count on when paying their bills.

However, there is nothing predictable about stocks. Even those who pay dividends can change these dividends at any time. Thus, bonds serve as a constant source of income for retirees. passive income

Low risk

Bonds have less volatility and risk than stocks. If you do not plan to sell them, they are fraught with only one risk: the borrower will not fulfill his obligations and stop paying.

For government bonds and institutional corporate bonds, this risk remains low.

Thus, even if the value of the stocks in their portfolios fluctuates, retirees can usually rely on their bonds as the low-risk, low-return anchor in their portfolio.

Diversification: low correlation with stocks

Your mom always told you not to put all your eggs in one basket – a lesson that is especially important for retirement planning. You don’t want a shock to one sector or asset class to empty your portfolio and leave you penniless.

Historically, bond prices tend to move in the opposite direction from stock prices. When the stock market crashes, investors often flee bonds. In other words, they have a low historical correlation, which provides protection against failures.

Could real estate fill the same niche?

Certain types of real estate investments can generate stable returns with low correlation with stock markets. The real question is risk.

One collaborative study entitled “Profit rate for everythingSeveral universities in the US and Germany and the German central bank found that for 145 years, real estate generated the same returns as stocks, but with half the risk. However, they were primarily looking at rental housing, which takes time, labor, and skill to invest in with low risk and high returns.

At the opposite end of the spectrum are publicly traded REIT… They are extremely liquid and passive, but they are highly volatile and highly correlated with stocks because they are traded on public stock exchanges. Read: Higher Risk Than Bonds, With Little Diversification Security.

While no real estate investment will ever be as safe as US Treasury bonds, you can multiply their returns by spreading risk across a wide range. real estate investment… And the more you know about the different types of real estate investments, the better you can protect yourself from risks.

Real estate investment options for retirement

When exploring real estate investment options for your retirement portfolio, start with the following that are available to the average middle-class American.

Private REITs

While publicly traded REITs have too much volatility to replace bonds, they are not the only option for passive real estate funds.

Try private real estate crowdfunding REITs such as Fundrise, Streitwise and Diversifund. Each of them invests differently; for example, Fundrise mainly invests in apartment buildings and mortgages, while Streitwise invests in commercial real estate.

These funds are not very liquid – usually you have to invest money for at least five years, otherwise you will face a penalty for early sale. But it also makes them stable, unlike publicly traded REITs.

These investments represent a simple and completely passive way to generate constant income, similar to bonds.

Crowdfunding loans

As an alternative real estate crowdfunding model, you can invest in individual real estate loans rather than a pooled fund.

My favorite one is GroundFloor, which allows you to invest just $ 10 in their loans. They issue standing loans to real estate investors, so the loan term is usually less than one year. You can view their current loans at any given time to see how much interest each pays, the degree of risk, the address of the property, and the details of the borrower. Please note that unlike some real estate crowdfunding platforms, GroundFloor allows non-accredited investors

As a hard money lender, GroundFloor usually only lends 60-75% of the value of the property. Therefore, if the borrower does not fulfill his obligations, he simply forfeits the foreclosure and sells the property for the full amount of the debt.

Personal notes

With a higher rating on the difficulty scale, you can lend money directly to real estate investors without an investment platform like GroundFloor.

This requires you to know the individual investors and trust them enough to lend them money. You also need to decide if you want to require them to sign a fiduciary agreement to secure the loan with a pledge of the property so that you can foreclose it in the event of a default.

I currently have money lent to private investors whom I know and trust. They pay high interest like clockwork, but my only real security is that I trust them to both honest people and seasoned real estate investors.

Rental Property

They can not only provide high retirement income, but also rental properties can help you retire early

They offer protection against inflation, tax breaks, and recurring income. Income, which you can predict as a long term average using rental calculator, even though the monthly cash flow will change.

You can also increase your cash income by use of other people’s money to cover most of the purchase price.

However, renting real estate requires knowledge and skills to invest, and unceremonious newbies often lose their shirt to underestimating costs or not being able to manage their property well. This leads to another drawback: Finding good deals requires not only labor, but also constant property management.

Home burglary

One way to make your rental investment easier is to breaking into an apartment building

It works like this: you buy a property of two to four units (the maximum allowed by a regular mortgage), move into one apartment and rent out the other (s). The rent for the neighboring apartments covers your monthly mortgage payment, plus, hopefully, some of your maintenance and repair costs.

This means you get free housing. This will not only help you save and invest more money in retirement while working, but it will also lower your living expenses after retirement.

Earth notes

The least traditional option, investing in land, is surprisingly easy to learn. It requires neither tenant or contractor management nor repairs or maintenance.

You can buy packages for less than $ 1,000 and either flip them right away or fund them with a vendor for a steady income for years to come. If the borrower defaults on their obligations, you do not need to go through the long and expensive foreclosure process, as is the case with residential real estate. You can simply return the property and sell it over and over again.

Follow publications investing in land However, before making a deal, as it comes with its own risks and rewards.

Sample retirement portfolio

Rather than eliminating bonds entirely, consider simply cutting back on your portfolio. This could mean 60% stocks, 20% bonds and 20% real estate, or even 10% bonds and 30% real estate to get a higher return on your retirement portfolio.

Among your bond investments, research tax-free municipal bonds… Savings on taxes will help you save more profit, which will increase your effective rate of return for a relatively safe investment.

A sample retirement portfolio might look like this:

Promotions: 60% of your total portfolio. Two-thirds of your stocks can be US stocks (evenly divided into large, mid-cap, and small-cap stocks). index funds), and the remaining third is divided between developed countries and emerging markets.

The property: 25% of your total portfolio. Some of that money went to pay the home burglary down payment, some went to private REITs, and some went to loans funded by crowdfunding. If you are tired of living in an apartment building, you can always move out and leave it for rent.

Bonds: 15% of your portfolio, they are all stored in various combination of tax-free municipal bonds

Only you know your risk tolerance. Stick to an asset allocation that allows you to sleep at night, balancing acceptable risk with high enough returns to keep your portfolio afloat.

See more from Benzinga

© 2021 Benzinga does not provide investment advice. All rights reserved.


Source link