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Why you must use real estate to diversify your portfolio

December 12, 2010

Last week I wrote about diversifying your income with rental properties.  I also feel they should be used to diversify your retirement portfolio.  Pick up any investment book and it will probably talk about diversification of your portfolio.  It will go through all the choices:  stocks, bonds, mutual funds, internationals, small cap, large cap, precious metals, etc.”  Rental properties are seldom mentioned and they are a great diversification tool as they are not tied to the market, they adjust for inflation, and you can leverage.   I like real estate because your investment is a physical piece of property you can drive by and admire (or swear at) anytime you want.

There are lots of books written on “The Number”.  How much you need to retire, how long your money will last, at what age you should retire, and what % of your current income you will need in retirement.  I think they are going about it all wrong.  They want you to start at some balance and see what you can draw down each month.  Take the easy road and “build up” instead of “tear down”.   Think of your monthly expenses in retirement and just build up the income that you will need.   You should have some bucket of safe and secure funds coming in each month.  Start with these easy ones:  Social security, a pension (if you have one), annuities, etc.   Chances are this is not enough to live on.   Rental income can be that missing piece that will allow you to retire in comfort or even earlier than planned.  It’s a great form of monthly income that adjusts for inflation as you increase rents.

I hear many people say, “Rental properties are too risky – Just look at what has happened in real estate”.  To them I say the stock market is too risky, look at what has happened there.  It’s a matter of understanding risk and knowing how to manage it.  For those who do, you are going to be very happy with your return.

Related Post:

Use Real Estate to diversify your income

From → Planning

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