Let’s assume you’re over 50 and now a card carrying member of the AARP or even 60 plus and wanting to follow the dictates of the allocation computer models. The first thing you should do is politely ignore these and better yet, run away!
Over the years we’ve seen real estate and stock market cycles that don’t always correlate well with each other.
You don’t need me to tell you real estate prices nationally dropped significantly and in many areas are still declining.
In your IRA, 401K plan or just for yourself you may purchase real estate. Retirement accounts such as IRAs and 401Ks are subject to certain rules but you may own real estate under certain restrictions. One website with explanations we can’t verify as either correct or current is at this website. Once again you would need to consult with your own CPA as to current rules and law.
Let’s even assume the home is unrented for 3 months each year which over the life of the investment and mortgage is most likely a worst case scenario. This would take the cash-flow (not including taxes, fees and maintenance) to $9000 or a little over 7% which is still beating the bond yield at 3.50%. It’s unlikely the property would become vacant for more than 3 months per year but the mortgage and expenses are low owing to the large down payment making it such a circumstance manageable.
There are closing costs to consider and if you can, have the motivated seller pay some or all these expenses.
But, real estate prices are still falling and may continue to do so won’t they? That’s true and quite possible overall but some regions are stabilizing. Even in stable areas the supply of listings makes for good opportunities. And, perhaps the lion’s share of price drops has already occurred. Over the next 15 years prices might actually appreciate as they’ve done in the past. Rents can always increase as they are throughout much of the country today. This is another reason to choose properties well located near schools, hospitals and other amenities. It would help if employment conditions are relatively superior with a large stable employer nearby.
But my bond is safe and I’ll get my money back at maturity won’t I? Depending on the credit rating and quality of the investment sure you will. What will be the value of the dollar then? Real estate can appreciate with inflation and I always operate under the assumption that authorities will choose inflation versus deflation if they’re able to do so. Besides, as I mentioned previously, high levels of inflation can occur (and are already by many measures like food and energy) making the yield from the bond providing less and less purchasing power.
And remember, bond prices can fall substantially before maturity. And, if they were still down at maturity you would know the value of dollars received at maturity would be lacking in purchasing power.
The positives are greatly increased yield, and as the mortgage maturity nears the property becomes gradually free and clear. It may be worth substantially more than the proceeds from the bond in current dollars. Finally rents can increase over time increasing the yield.
With many well-maintained, contemporary, turn-key properties in good communities with excellent locations available at fair prices and with excellent interest rate terms, why not take what the market’s giving you?