Duplexes as a Bond Alternative?

I was talking to one of my friends the other day who is involved as an investment advisor. He was describing to me the difficulty that baby boomers are going to face when they retire, because the traditional bond market is facing an interest-rate increase.

When interest rates go up, bond mutual funds go down.

Most people don’t know that the portion of their portfolio that’s exposed to bonds will actually decrease when or if interest rates increase.  

Stocks, Bonds, and Real Estate

Most retirees will use bonds or dividend paying investments as a way to reduce volatility in their portfolio when it comes time to draw cash from their assets. The idea is that you don’t want highly fluctuating stocks to be bought and sold in order to draw income. My friend was telling me that most investors will put their money into short-term bonds or cash alternatives the closer they get to retirement.

Most people might have heard that you should take your age and subtract it from 100 to discover what mix of stocks and bonds you might want to have. For example, at age 30, I might want 70% stock and 30% bond, cash, and alternatives. If you are 60, you might want 60% of your assets to be in bonds and cash, with a declining amount in risk your stocks.

This is not investment advice, so don’t make any decisions based on what I’m writing.The principle is that when it is time to retire, you want cash rather than stocks.

However, people often forget that real estate investments can kick out a tremendous amount of cash.

We are starting to see more and more baby boomers take some of their cash, positions, and non-qualified savings and use them as large down payments into rental real estate. What they’re trying to do is diversify their investments rather than invest in more of the same stock and bond mix.

We’ve heard it said that it’s a bad idea to put all of your eggs into the same basket, but we also recommend carrying more than just one basket.

It might be a good idea to be diversified between the stock market, real estate, and your own business.

Rental real estate can be attractive because it can provide a consistent cash flow in a tax-advantaged way. The net income you receive from rental real estate is passive income which has many tax advantages.

Not only is the net income tax advantaged, but you can also depreciate a portion of the property, write off all expenses relevant to the property, and create businesses to serve the property as you enter retirement.

That brings us to this idea that a duplex can be a tremendous investment for people that are starting to enter retirement. Taking their non-qualified dollars and making large down payment on property is a good idea when you’re going to hold onto that property for cash flow. But investing in real estate is also full of unknown costs, hard work, and risk.

In our personal experience and professional opinion, we believe that a well strategized and executed real estate investment can provide a great cash flow, the possibility of appreciation, and a leveraged asset that can lead to multiple holdings.

So if you are approaching retirement and you’re trying to figure out how do you create cash flow in a consistent manner, maybe you should take a peek at creating a portfolio in real estate and sit down with us to discover if a duplex might be a good solution.

We are starting to see lots of baby boomers sitting down with their financial planners only to discover that they have to withdraw a high percentage of their portfolio in order to provide the income that they need. One of the ways that financial planner suggest a retiree might reduce the risk of running out of money is to purchase a pension style annuity.

Rather than looking at an annuity which will be taxed as income, we think that people should at least explore what it would be like to take that money and invested into rental real estate.

In fact, when you do the math on most pension style annuity payouts, you’ll see that they are a very low payout option. The benefit is that the annuity will pay out as long as the insurance company that backs it can make its promises, but the cash handed over for the annuity is almost always taken off the table and it leaves the retiree with very few options.

Buying a duplex instead of an annuity might be a good idea and we would love to sit down with you and show you some of the options you might have when it comes to not only retirement cash flow but a living situation as well.

Rather than purchase a home or rent, a retiree could buy a duplex that provides a living situation with extremely low expenses.