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Why a portfolio of rentals is less risky than your 401k

April 28, 2012

I ran across this article on Hedging the 7 Big Retirement Risks. Val and I consider our rentals a major part of our retirement strategy – so I found it quite interesting to compare these 7 big risk of traditional retirement portfolios to that of a portfolio of rental properties.

Here are the 7 Big Risks highlighted in the article. I then compare these risks with those of a rental property portfolio.

  • Longevity Risks. This is the risk of outliving your money. As people continue to live longer this is the biggest fear in the ‘build a balance and then hurry and die before your run out of money’ mentality. With a portfolio of rentals you essentially have a monthly stream of income each month vs spending down from a large balance.
  • Inflation. With a retirement portfolio inflation eats away at your purchasing power. With a portfolio of rental properties inflation is working for you not against you.  You get increased rents and an increase in property values with inflation.
  • Stock Market. Even with diversification you are still exposed to global market risk. The nice thing about a portfolio of rental properties – the rent is still due on the first no matter what the market is doing.
  • Re-investment Risk. The risk here is as your cds come up for renewal you have to reinvest them at the then current rates. Rental property returns are much more consistent and there is no need to move in and out of investments – just keep collecting the rent.
  • Sequence of Returns. This is essentially the risk of retiring and starting to draw down your portfolio right as the market takes a downturn. Here again rentals are not driven by the market.
  • Fraud. This risk is more than just avoiding the Bernie Madoff’s that are out there. The fees that some of these financial planners lock retirees into should be criminal as well. With rental properties you control your destiny.
  • Taxes. With a market portfolio you really need a financial planner to help you navigate through all the tax implications. On the rental portfolio side, there are many deductions available that make taxes an advantage – not a risk.

Another big risk is the Risk of Loss. The stock market could easily result in a loss of principle to your portfolio. With real estate there is an inexpensive way to protect against this – Insurance. If one of your properties burns to the ground then you are covered with your insurance. Good luck with insurance against loss in the market.

The biggest advantage that a portfolio of rentals provides vs a market driven portfolio is the ability to leverage. With the power of leverage, you can get to a sizable portfolio of rentals far quicker than you can build a balance in your 401k.

Hedging 7 Big Retirement Risks

From → General

  1. I really think inflation is a key component to my rental portfolio. I see so many people talk about cash on cash return, buying with equity or banking on appreciation. However, I really think locking in a 5-7% interest rate for 30 years is amazing. I don’t think people really understand how inflation silently steals wealth from the common man. Sometimes loans (like in today’s market) can be as much of the “deal” as the property itself.

    Thanks for posting!

  2. Arthur,

    We are due for some inflation. These mortgage rates are amazing. The only reason I am not completely leveraging out right now is the rates are supposed to stay this low for at least a year and sounds like 2 years. We recently got one owner financing deal and I am going to continue to look for others. This allows me to keep my ammo (available credit) so to speak for other properties.

    Thanks for your support,

  3. Great points on rentals being less risky, and inflation working with you when you own rentals.

  4. That is a good tip particularly to those new
    to the blogosphere. Simple but very precise information… Appreciate your sharing this one.
    A must read post!

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