In How to Retire on $1 Million or Less we discussed the 4% rule and whether or not it is a worthwhile guide for withdrawing assets in retirement.
I also noted that people who have other sources of retirement income don’t need to rely on drawing down assets as much as those who don’t.
What are those potential sources? I’m glad you asked! 馃檪
In this post I’ll detail ten of the most popular ways to generate retirement income including my thoughts on the value of each.
I’ve divided them into two groups — ones that I either use or most likely will use and ones that I’m aware of but not that interested in.
My Personal Favorites
Here are the five retirement income options I use/like…
Real Estate
How could I not start with real estate? My real estate holdings make up the majority of my retirement income. For $600k invested I generate $60k in income a year. Not bad, right?
Though the properties are 1,200 miles from where I now live, they are a cinch to manage. I spend maybe two hours a month reviewing the financials. The reason things are so smooth is that I have a professional management firm handling all the details. Easy peasy for sure.
Of course I bought at the right time and had a great mentor help me, so things worked out well. So well in fact that I’m building up cash now because eventually the market will cool off and there will be another buying opportunity — and I might want more places. 馃檪
I realize that owning real estate is not for everyone, but I would say it’s suitable for more than are giving it a shot. That said, many drawbacks keep people away: the “hassle factor”, lack of knowledge, owning illiquid assets, potential time issues, and more. I get it. I deal with the same challenges. That’s why I may not buy any more places and instead consider a close alternative…
Real Estate Crowdfunding
Similar to peer-to-peer investing (which we’ll get to in a minute), real estate crowdfunding matches borrowers (people with real estate projects) and lenders/investors (people who want to invest in real estate for the income but don’t want to own places) for a win-win combination.
I’ve been watching several other bloggers experiment in this area and I may take the plunge myself. The returns seem good (in the 10% range) so what’s not to love?
Obviously this would be a generally risky investment but could also be a decent income producer. So I’m interested for sure but just not ready to take the plunge yet. I’ll keep you posted if I make an investment.
Anyone else trying real estate crowdfunding? I’d be interested in hearing your perspective.
Peer-to-Peer Lending
I have had a love/hate up/down relationship with peer-to-peer lending. Things started out great, then tanked with Lending Club’s problems, and now appear to have leveled off at an acceptable range (around 7% return).
At this point my plan is to draw down Lending Club’s investments to $50k and pump up Prosper’s to $50k, so I have $100k invested between the two of them. Once I get there, I think I’ll be happy with both the amount invested as well as the returns.
For me, this is a good source of income that adds another revenue stream and gives me some income diversification. It’s not going to make or break my finances, but an extra $7,000 for $100k invested is not bad.
BTW, I do like both Lending Club and Prosper and overall have had good experiences with each.
FYI, Lending Club is currently offering a couple promotions similar to ones I have taken advantage of in the past. Some options:
- Up to 100,000 United MileagePlus miles for investing with a Lending Club Individual Investor account
- No fees for the first year when you open an IRA
Dividends
There’s a wide range of options for making money from dividends. Here are a few I’ve considered/used:
- Dividend investing. This is simply buying individual stocks that have appreciation potential but also churn off a decent dividend (like 3% to 4%). I’ve considered this option in the past but 1) I’m not an individual stock buyer and 2) managing a boatload of stocks sounds like a nightmare (been there, done that).
- Dividend funds. I’ve thought about moving some of my Vanguard assets into dividend funds. I could get about 3% here but would be giving up some growth. I think there’s a better option…
- Dividends from growth assets. Right now I’m invested heavily in a Vanguard total US index fund. It’s mostly a growth fund but also churns off almost 2% in dividends. This earns me an extra $10k per year (just from my taxable account — I get nothing from my retirement accounts) which is a nice amount for me.
Side Hustle or Business Owner
I like this option better than getting a part-time job (see below) because 1) it’s more flexible (at least often it is), 2) there’s a larger upside potential, and 3) it’s more interesting to me.
The idea here is that you create or buy a business that makes money, as simple as that. You could develop your own business or buy into an existing one (as a minority partner most likely). I’ve thought of both and may eventually do the latter since returns can be pretty good, but for now I’m focused on building this blog as my side hustle. It’s fun, challenging, and has the potential to provide a good amount of extra income. Plus, if I’m successful I can sell a ton of “How to Make a Fortune at Blogging” eBooks. 馃檪
Of course success does not come overnight so I’m going to have to stick with it for some time.
But in the meantime I enjoy it and it doesn’t take me too much time, so why not give it a try?
Other Viable Options
This section has some additional ideas for making retirement income. I’m not too fond of any of them, but some reading might appreciate them. Either way, they at least deserve to be in the conversation.
REITs
Real estate investment trusts (REITs) are mutual funds that buy real estate. Vanguard’s main REIT currently yields 2%-4%. I’m not a big fan of REITs as I think they are more susceptible to market swings than owning individual places. I know that seems counter-intuitive, but as long as you have a decent number of units, I’d prefer direct ownership or crowdfunding when it comes to real estate.
CDs/Savings
I personally don’t like CDs these days as they lock you in for basically no return (a five-year CD may earn you 2%).
I keep my cash in a “high-yield” savings account which gets me 1%. It’s not great but it’s better than nothing and gives me complete access to the money whenever needed.
Bonds
I have bonds in my portfolio as a hedge against a downturn, but I’m not too hip on them as an income investment. My main concern is that interest rates will go up at some point and kill bonds.
Sure, I could do a bond ladder which protects against that mostly, but they just don’t excite me. So I’ll take a pass.
Part-time Job
Many people work in retirement and hopefully find a job that they enjoy as well as pays some bills. For instance, you may only need half of what you previously made so instead of working at soul-sucking XYZ Corp you can work at your favorite non-profit and earn a decent enough income while also doing something you feel good about.
I don’t think I could pull it off after being retired this long. I’d have to get up and be somewhere at a specific time. Oh the horror!!!!
Plus the hourly pay for something like this is usually pretty low so I can’t see it being worth the trade-off for me. Thankfully, I have the options above.
Annuities
Are annuities a good or bad idea? I’ll admit that I don’t know much about them other than: 1) they are very complicated, 2) they can be very expensive, and 3) if you don’t know what you are doing, you can get killed with one.
Look at those three again. Do you want to be part of an investment that has that baggage? I know I don’t.
Ok, so that’s my list. Any comments on it? Or perhaps something to add?
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.
I started recently with real estate crowdfunding. Currentlly about 10k invested in groundfloor. None of my loans have come due yet, so ill know more probably around october, but it seems like it might be a good way to diversify your holdings a little bit.
aw, just curious how your real estate crowdfunding investment is going.
While not technically income that kicks off spending cash on a regular basis, I would say that appreciation of your stock investments would be a source of “income”. It’s not steady or scheduled like a dividend, however.
Stocks or funds are sold in order to use the cash for spending. Growth vs Dividends is always at play. I don’t know why you can’t have a dividend fund that also grows. It is too hard to manage individual stocks.
FWIW, I think a simple annuity with a highly reputable/established company can make sense for some investors, particularly if they don’t want to worry about withdrawal rates/prefer to just get a steady check every month. But, again, the key is to keep it simple (single premium immediate annuity seems to be the simplest), as the so-called added “bells and whistles” are what ends up costing you. I’d suggest considering an annuity to guarantee income to cover rock-bottom expenses (under the Bogleheads idea of “once you’ve won the game, quit playing”), but beyond that it’s not really an investment so much as an insurance policy (guaranteeing you X per month for life).
However, if you’re in a position where you have plenty to live on without even touching principal (or in fact all of the interest, and thus you actually are ADDING to your assets), then you probably don’t need an annuity.
I like your blog. You don’t mention much about your wife. Did / does she work? Or does she help keep expenses low? Just curious. Also, your kids- how did choices of schools, scholastic grades / scholarships, etc. contribute to your financial picture/ And most importantly, did they complain along the way or support it 馃檪
Again, great blog though
I actually mention my wife and kids relatively often, you just have to read all the posts completely. 馃槈
They are sprinkled here and there throughout posts, but since the blog is about money they only show up when appropriate.
My wife hasn’t worked outside the house since the mid-90’s. She homeschooled our kids. And yes, she keeps expenses very low. She’s the defense to my offense (from MND).
As for the kids, school, etc. check out my college category here:
https://esimoney.com/category/college/
Good read. I’m in your camp on the Real estate side, and it’s my primary source until other investments mature at 59.5 yrs old. I recently retired at 51 yrs old. I got into real estate about 8-9 yrs ago, and was able to relatively quickly build a plus six figure annual income. Where else can you do that and shelter a significant portion from taxes so quickly? Will begin Roth conversions this year on my 401k’s, and should be able to convert a significant portion of those funds at a lower tax basis (since a large portion of my annual income is sheltered by depreciation). It’s a fantastic way to retire early and convert tax deferred money at a lower tax rate, assuming you can build up the real estate income stream to live on. I keep looking at other options like dividends, P2P, and crowd funding, but I just can’t seem to justify the higher risk verses ROI on P2P or crowd funding. And the lower ROI with dividends prevents me from diversifying into dividends. I’ll likely continue to invest accumulated funds into Vanguard index funds and buying real estate. I can diversify sufficiently in both of these means. Best of luck. Thanks again for another good read. Cheers!
100% agree and am doing the same.
Hard to beat the returns with RE when you take into account the tax savings.
Good Morning Thom,
I’m new on this site, 53 and looking to start using real estate for passive income opportunities. Looking for a mentor and you’ve been successful. Congrats, if you see this I would appreciate an email and your thought.
Rich
While I agree crowdfunding real estate investing has a relatively good upside, you usually lose a good amount to the managing company. I would suggest becoming a direct private money investor backing fix and flip investors like myself. I generally start offering 2 points plus 12% so the returns make sense for the first few flips. I live in northern Virginia and the returns on flips can be astronomical so I would love to discuss more if you or anyone else is interested. The loans in this kind of deal generally close out in 4-6 months so you can quickly reinvest.
Hi Kevin,
I’m interested in hearing more. Do you have an email I can contact?
Yes would absolutely love to discuss. Email is [email protected]. I also have lots of other investor friends who are always looking for lenders too so your money can be consistently moving
Kevin — If you’re ok with the contact, just email me and I can give you Dennis’ email.
Real estate seems like a strong income producer, but the hassle factor has always kept me from diving in. If there is another crash and properties are cheap, then I may consider delving in. For now, index funds are my focus.
Index funds are high also. Spend some time on ZeroHedge.com and you’ll see interesting stuff. I have been investing since high school and this market looks frothy and never goes down.
Great point on starting your own business.
The business wealth equation is “Wealth = Net Profit + Asset Value, where Net Profit = Units Sold x Unit Profit and Asset Value = Net Profit x Industry Multiple”
If you can build something yourself, you can create wealth very fast.
I like this list, especially for early retirees that want to keep busy and earn some extra income on the side. I think the side hustle and part time job categories are pretty much a ‘catch-all’ for anything you want to do to earn a little extra money. A few of them definitely require a little up front investment (real estate being the biggest one), but the payoff can be a nice way to earn some passive income! Thanks for the great ideas!
REIT can be quite fruitful if it is the right time. I did some individual stocks about a 1 1/2 years ago that were good dividend payers but the prices skyrocketed out of sight. I figure people we getting into them for there dividend. I sold them after realizing appreciation of 9,11, 14,15, to 20% in less than I year. I felt a bubble coming on so yes they are volatile.
I recently started listening to Side Hustle Nation and Side hustle school. I am learning things that will help me in the future. I am also listening to ETSY podcast on ETSY shop owners and what they do and how they run there ETSY shops.
Great list! We are just starting out with real estate – the hope is to build it to the point we can retire on the income generated. We still have quite a ways to go, but I’m happy we are at least getting a start.
I’ll be interested to see if you pursue the real estate crowdfunding. I’ve done some basic reading on the topic and it’s intriguing.
ESI,
I was thinking about your real estate investments and trying to peel back the onion as they say and get to the heart of the matter. Feel free to let me know where I am going wrong or have made an assumption you don’t share.
First, why would the real estate investments be an exception to the 4% rule? Doesn’t taking 10% out endanger the long term viability?
Next, it is generally accepted that the stock market provides the best gain over the long term. So would your real estate money be better off in the S&P 500 or the total market fund you mentioned?
I think that maybe the answer to the above questions is that you have picked some winners in terms of properties. Not unlike picking winners from individual stocks.
Finally, you bought the real estate after the last downturn in 2008 if I understand correctly. The entire economy and investment world has pretty much been on a solid upswing since then. How do you expect the inevitable downturn to affect the real estate investments? In particular, do you think the income side will be affected or perhaps just the principal side (i.e. the worth of the properties)? Also, do you think it is a necessary component that someone invest during a downturn in order to achieve returns like you have?
You mentioned socking away some cash for the next downturn in order to buy. What happens to your returns if you included that cash in the basket of money invested in real estate to properly account for the opportunity cost of leaving that money in cash? What about the cash you used in 2008, was it sitting on the sidelines before that?
Thanks,
Ray
I’m not sure what you mean about RE and the 4% rule. Can you be a bit more specific?
“Next, it is generally accepted that the stock market provides the best gain over the long term. So would your real estate money be better off in the S&P 500 or the total market fund you mentioned?”
There are lots of hidden assumptions in this, namely:
1. “It is generally accepted that the stock market provides the best gain over the long term.” Is that true? I know a lot of real estate investor who would argue with that — especially if you can buy when RE prices are low — which is easier to estimate than when stock prices have bottomed out.
2. The stock market provides very little INCOME. Real estate provides 10% income. I need income. See where this is going?
3. I’m not sure how the properties will perform in a downturn, but since I have many margins of safety (see this: https://esimoney.com/key-early-retirement-margin-safety/) it doesn’t really matter.
4. People can make money on RE at any time, it’s just easier if the prices are lower. This varies by many factors including which market you’re in.
5. Not sure about the cash question. It doesn’t really matter as I have, again, lots of margin. But going back and saying coulda/shoulda isn’t really that useful IMO. It’s like the article that was going around last week that said you’d be a multi-gazillionaire if you bought 10K shares of Amazon whem it was formed. The past is past and is no predictor of the future.
Why are you asking? It seems like there’s a hidden question or point of view that I might be missing.
The 4% rule I am referring to is the idea that one can draw down 4% of the total from a nest egg and be confidant that it will last 30 years or so. This includes raises for inflation. (IIRC this is based on using historical stock market data and may not really apply to this particular investment.)
In terms of needing income and so avoiding the stock market – except for tax purposes, there is no practical difference between income and principal gain in terms of the stick market because it is so liquid. If you have to sell some shares to cover your income for the year it is no big deal. All IMHO of course, I’m not living it yet so I could be wrong.
Re the cash question – you mentioned you are socking away cash in order to buy more RE during the next downturn. I’m trying to compare the RE investment performance vs the stock market. I’m assuming you wouldn’t wait to invest the money in the stock market if you had decided to go in that direction instead. So shouldn’t you consider the opportunity cost of the money when calculating the return from the RE investment?
Maybe a concrete example would help. Say you have $500K in cash right now to invest. You decide to wait until the next RE downturn before investing the money in RE. Suppose in two years the expected downturn happens and you invest and earn 10% over the next eight years, so $400K. But really it took 10 years to earn the $400K, so the actual rate of return is not 10% but 6%. (Of course there is also the appreciation of the RE assets to consider when comparing this to other investments.)
Sorry, I realize this line of questioning may come off as aggressive or agenda-laden, but really it’s just the the line of thought that occurred to me as I read the article and thought about actually investing in real estate in the way you have. I’m not trying to suggest you shouldn’t have made the investment or have otherwise made a mistake. I think in RE you have found a good investment that works well for you and is providing diversity to your portfolio.
Here’s the difference between RE, the stock market, and the 4% rule (FYI, I know what the rule is, just didn’t know what you were getting at):
*If you need $60k per year and have RE worth $600k earning 10%, you’re covered. After 30 years, you’ve had your $60k each year and still have your $600k (plus any appreciation).
*With a 4% draw down, you have much less than $600k left in 30 years, maybe nothing. You also have to factor in sequence of returns which can be a killer early on in retirement if the market goes south.
As for the cash issue, I think it’s fine to calculate it any way you like as long as it helps you meet your objectives. It’s not all about the best return (actually time in market is far more valuable than return rate). It’s about what you want to accomplish, what you feel comfortable with, and what sort of life you want to live.
For instance, it you go strictly by the numbers, few people would have a reason to pay off a mortgage these days. And yet many do since they don’t want the debt for any number of reasons.
Another example is net worth. Some include home equity, some don’t. Some include future liabilities (like college), some don’t.
So calculate the numbers however you think is best given your specific plans and goals. Honestly, there are so many moving parts, assumptions, goals, etc. that there’s never going to be a “right” answer. Yes, you can look back 10 years and say, “If we had done this we could have made more”, but what use is that? It has zero impact on what may happen in the future. The best decision for one decade may be the worst one for the next.
If you are looking at RE I’d suggest you start with what your goals are. This will tell you if it’s a fit for you or not. For me, I wanted high income producing assets since I wanted to retire early and it’s easier to retire with assets churning off 10% than by withdrawing 4% of assets. (BTW, my RE is up about 50% in appreciation as well, which I don’t count.)
>*If you need $60k per year and have RE worth $600k earning 10%, you鈥檙e covered. After 30 years, you鈥檝e had your $60k each year and still have your $600k (plus any appreciation).
>*With a 4% draw down, you have much less than $600k left in 30 years, maybe nothing. You also have to factor in sequence of returns which can be a killer early on in retirement if the market goes south.
I think the contrast between these two statements is what led me to comment. The conventional wisdom for retirement is the 4% rule. Given the drawbacks you have outlined above, why isn’t the conventional wisdom to invest in RE which yields a 10% return plus appreciation?
I think the reasons are that a) it’s not so easy to find RE which yields that return, b) you invested at a unique time in the market (or, if not unique, once-in-a-lifetime rare), c) you haven’t accounted for the possibility of downturns leading to reduced income from the RE assets.
I would agree with A and B (and they are related). I’d also say that investing in RE is more complicated, requires more time, and takes a specialized knowledge. Many people simply don’t want to deal with these issues.
I don’t think a downturn will hurt the income of my properties much. I bought them at a bad time and earned a decent return then, so if things got as bad as they were in 2010, then my rents could go back to those levels — which is fine for me. Not sure it could get much worse.
I could lose in the value of the properties though. That’s where I think the biggest hit would occur. Again, not a big deal for me as I wouldn’t be looking to sell anyway.
OK, thanks for humoring me and my aggressive questions, ESI.
All it takes is a few months without a renter and the return drops. We had a rental without a renter for 3 months. That was $4,500 lost.
Few things here:
1. If you buy the right places, you reduce your amount of vacancies.
2. This is why it’s best to have multiple units (I have 14). If one goes down, it’s not a killer.
3. You have to bake the “cost” of vacancies into your financials. I get 10% back but that’s with one months per place being vacant built in — which is way more than I actually experience.
4. You have to price the places right. If you’re too high, the place will sit empty.
5. My management firm has a pretty good grip on the going rates as they mange 3,000 units. I’ve never been more than two months with a place empty and it’s usually less than a month. That said, at least half of my tenants renew each year, so there’s zero vacancies from them.
Collecting dividends is retirement because companies pay dividends when you vacation Europe, when you hike in the mountains, when you sleep or when you are having nice bottle of wine with friends.
Collecting rent is a work. You just need few tenants that do not pay and you have evict by going through attorneys and courts. God forbid some child that gets lead poisoning in your rental 馃檪 and starts suing you and you will find out that instead of making 60k a year you are loosing money.
Are you retired?
“Next, it is generally accepted that the stock market provides the best gain over the long term.”
Is it? Accepted by whom? I get +20% Cash on Cash returns from my real estate. Is the stock market beating those long term?
I’m slowly pulling out of P2P lending. The ROI would tank when there is a recession, for sure. I think real estate crowdfunding is a much better way to invest. I have about 10k at RealtyShares now and I’ll try to increase it as fund permit.
Your rentals are doing really well. Congratulations.
Interesting. Maybe I need to reconsider…
ESI, I have been doing RE Crowdfunding for a few years. What i noticed is that demand is extreme. Deals are abundant but close out fast. Lately, i have been letting some wind down because i think valuations are getting retarded.
I have one crowd funding site that is insolvent. I got an email from a lawyer telling me this and asking me to sign a long document.
Another site has 4 out of my 5 loans in default but they are working on foreclosures to get our money back.
Also, given that billionaire investor Sam Zell is selling like crazy through a reit he manages ( EQC ), my belief is reconfirmed. I see deals that assume a 5.75% cap rate to buyer in few years.
I think commercial space is peaking.
Great list. The only addition I’d have is angel investing. Getting plugged into the local small business community can lead to interesting investment or advisory opportunities – someone with your business background would likely be a high-value-add investor.
It’s just a guideline. Nobody is forced to this. If your money grows at 5% and you take 4%, your money grows at 1%. Or take out 3% and maybe your money grows at 8%. It all depends on the amount saved and your expenses.
Thanks, ESI! This is a great overview for me to brainstorm income streams for when/if I can retire early. Do you have any other recommendations on how to get started with real estate investing? I read your article, but I don’t have $300k that I can easily tap into.
Good article ESI. I have done each of the above listed except for P2P. I’m slowly investing more into commercial real estate deals. These offerings can be found on crowdfunding platforms but over the past year, I’ve transitioned from investing through the platform to direct with sponsors. I have a mix of debt and equity diversified among sponsors, asset type and geographical location. Invested in funds and individual deals for diversification. So far these include multifamily, office bldg, hospitality (hotel), storage facility, and industrial flex. Now looking to diversify into mobile home parks, medical, and student housing. Sponsor quality is by far number one qualification since you are trusting them to underwrite and execute the plan. Pick quality specialists w/ good track records, good communication and conservative underwriting. Due diligence is a must. Speak w/ other investors that have invested with them. The site CrowdDD.com has been invaluable.
The good thing about these is you can easily invest with a self directed retirement vehicle like SD 401K or IRA.
I’m all for diversification of income even before retirement. I think everyone should have multiple streams and several side hustles. I don’t know how some people sleep well at night with only one breadwinner on one salary or where a couple works at the same company. That said, I think it’s important to balance your diversification with simplicity. Have you given thought to estate planning? If you should be incapacitated, or (god forbid) pass away, how easily can your wife step in to manage your affairs? That is one thing that troubles me about real estate. It is like a part time job, it isn’t that liquid, and there are tax consequences if you sell (hopefully your wife can find all your records going back to the beginning). Even if you don’t sell, how to divvy up RE between your heirs. I’ve seen too many family fights over what to do with RE investments that parents left to their kids, even investment that are cash-flow positive. On the other hand, I’ve never heard of anyone fighting over stock or cash inheritances. Just something to consider.
Yes, we are updating our estate plan this year.
RE isn’t like a part-time job if you have a great property management company like I do. I literally spend two hours a month looking over financials and that’s it.
You’ve never heard of anyone fighting over stock or cash? I certainly have!
Quick question for you, ESI – –
Currently, I have two homes (valued at $210K and $250K) – – One home is a rental and I still owe 109K (renter covers my monthly costs), and the other home is my primary home (zero balance), which I’m considering keeping as an additional rental, one day, down the road. In about three years, my wife and I plan to retire and build a home (valued at $650K) in a smaller town. Our home will be about 4 hours from each rental home – – – – Keep in mind, the real estate rental game is not new to me, but as I reach retirement age (age 65), do I continue to stay in the rental game, or do I cash out and put all my money down against the new home loan debt of $650K —– just not sure what to do – – Please think about this and give me your thoughts, ideas and/or answers. You view will be greatly appreciated. Oh, our official retirement date is: December 31, 2020 – –
That is a big, big question that has to do with so many factors that it’s impossible for anyone to answer.
I could answer it for myself, but I would need to know a LOT more about your situation before I could give any sort of reasonable answer.
If you want, you can send me a detailed write up by email and I’ll post it. Then you’ll get to hear from all the readers with many different thoughts/opinions. Could be helpful as you make your final decision.
OK – – send me your email address! What type of details do you need?
Here’s how to contact me:
https://esimoney.com/contact/
Imagine you were sitting down with a financial planner. Those are the sorts of details. What are your goals? What are all your assets? What do you need to earn in retirement? What’s your plan for doing so? What are the pros and cons of keeping the real estate? What are your personal preferences and “hassle factor” issues?
The more you share, the better and more accurate feedback you’ll get.
Just sent you an email — sent it before I read your response – –
I think these are great points. Something I am thinking a lot about. I have a fair amount of idle cash I would like to invest in Real Estate but nothing in the Bay Area comes close to making reasonable returns at this time.
I think you got very lucky and bought at a unique time as others have said, that will be the most difficult to replicate. I was able to pick up a second property at the bottom of the market and wish I had picked up a couple more.
My personal opinion is that there are a lot of people sitting on the sidelines with a lot of cash so I don’t see a market drop like we had in ’09 – ’10. I think you will see smaller peeks and valleys, as prices drop people will jump in, rinse and repeat, lots of peeks and valleys. I seriously doubt we will see greater than 10 – 15% drops in market value at any one time.
I like many peers would be happy losing my equity in current properties which is about $1.5M just to see more buying opportunities.
Would love to own multiple units and have thought about buying outside of the area in lower to moderate income areas but worry those markets tend to be hit the hardest while the bigger cities hang on.
I have several projects I am currently negotiating for multi-family deals. I’d love to discuss how we may be able to partner together on them. Please email me at [email protected] if you would like to know more. One deal in particular will be a home run if I can beat the other investors with an offer.
I seem to ebb and flow on the idea of owning rental real estate. As you point out in your real estate mentor post, I don’t want to deal with much hassle. So finding a good property management company would be a must. I’d prefer to not take on any debt, so we will likely wait until we sell our current home to downsize and see how much money is left over. The real estate crowdfunding also seems like an interesting option.
For now, our income approach is limited to growing out dividend stocks and funds in our brokerage accounts. Hopefully we can branch out into some other areas soon.
I love the idea of real estate for building wealth, but not to retire on. There are too many factors that could happen where you are not receiving income. Example could be not having a tenant. Now you may still be paying on the house but not receiving any income from it. I still prefer dividends for passive income but no way is probably best depending on an individuals situation. A hybrid approach might be nice to generate income from multiple sources. Same as diversification of a portfolio.
Can you offer some guidelines for determining whether you are suited to manage your own retirement account or hire a professional manager?
That’s a pretty broad question and depends on a ton of different circumstances.
Much of it boils down to what your abilities and knowledge are.
For instance, I have always managed my own finances, but then again I have 25 years of study in the personal finance space.
If you don’t feel qualified to do that, then you may need help.
But even if you do hire someone, educate yourself so you don’t get taken by them and understand their plans and recommendations.
Adding to what ESI already said, if you do hire someone, make sure you understand how they are being paid. Find out if they get commission on any of the transactions they are recommending – if so realize that they are not necessarily looking out for your best interests. Find out if the adviser is a fiduciary which means they have an obligation to work in your best interests. Even then, don’t take their word for it.
My current financial planner/manager is an honest fiduciary and takes much time to explain things very well to me. He researches fund managers and funds well. He regularly holds finance workshops in our church. He charges me a 1% fee for managing a $1.3M portfolio.
I feel that I understand finance fairy well. My shortcoming is that I do not know when to change my investments as the economy changes. I would be late in changing my game plan. I sometimes succumb to fear and sell when the markets drop.
ESI,
I’m new to your blog but enjoying it very much so far. Thanks for doing this. Do you have any views of closed-end funds for dividend income? My dad has been in one for as long as I can remember and he is very pleased with his investment, which has given him 10% quarterly without fail for many years. It is however a reasonably small portion of his portfolio so it isn’t his main source of retirement income. He gets more of his needs met with dividend income from equities and less from the closed-end fund.
As I toy with the idea of retiring in the near future, I am very attracted by the notion of closed-end funds. I am however cautious because they seem a bit too-good to be true. My dad’s particular investment is in a Gabelli fund, returning 10%, though there are a number of other fundss that return even higher amounts. Naturally, there is some risk seeking higher returns, but I haven’t found much to educate me further on the risk factors.
My basic understanding is this: closed-end funds offer value simply in the form of dividends. You buy into them directly in shares (as you would buy an equity) knowing that there will be minimal change in the value of the shares as the return is coming in dividends. Some closed-end funds trade at a slight discount to their underlying value, which is one hedge against risk as some share price increase is then possible, and other funds trade at a slight premium to their underlying valuation (likely due to high past performance).
The part of risk I do understand is the leverage factor the fund managers may use – which is to say if they borrow heavily to increase their investments and potential returns, and then interest rates rise, they get crunched if they are over-leveraged. So, investing in funds with a low/reasonable amount of leverage seems the wise choice. Where I’ve been able to find literally no information is how these funds might perform in a bear market. We’ve all ridden the bull for a number of years now, long enough that I am having difficulty determining if the fund managers are able to generate similarly good returns in a down market and what are the differing ways they invest in bear markets. My thinking is that understanding some of this will help me assess if there is additional risk I have’t identified.
I am attracted to the idea of closed-end funds as a very low-maintenance investment because after buying in (to funds with low / manageable rates of leverage) you really don’t have to do too much other than keep an eye to sufficient diversity – buying a few different funds in different sectors (energy, finance, tech, consumer goods, etc.).
In sum then, while a good number of these funds have returned 10%, 12% and even numbers in the high teens, I am wondering what I might be missing on the risk side. If they are that good as investments why would anyone do much else other than to invest in these and just cruise? Beating the markets average annual return of 11% or so is extremely hard for the average investor, which some of these funds do. If I can achieve steady 10 – 12% investment returns I may be in position to retire soon and would love to engineer some of this before actually making that leap from wage earner to retired income investor. I’ll greatly appreciate your views and any recommendations you may care to offer.
Lastly, I’ll put in the work, but do you have any tips on researching real estate investment data for the beginning real estate investor and how to find great management companies? Similar to what I am thinking about as a largely passive investor in closed-end funds, I like what you describe as two hours a month to get 10% on your real estate investments.
Greg
I do not have any opinions on closed-end funds.
As for the real estate info, I suggest checking out my real estate category of posts here:
https://esimoney.com/category/real-estate/