Bonds vs Real Estate: Choosing the Right Investment for Retirees

The Big Picture On Bonds vs Real Estate Investment for Retirement

• • Low Treasury bond returns make them less suitable for retirement income.
  • Real estate offers stable income and low risk, serving as a bond alternative for retirees.
  • Retirees can invest in real estate through REITs, rental properties, and syndications.

The year I was born (1981), US Treasury bonds paid over 15% interest. Times sure have changed.

Today, you can expect a ~4% interest rate from long-term Treasury bonds, which raises questions and suspicions about the traditional investing advice to roll your stock investments over to bonds as you near retirement.

In today’s economy, inflation runs higher than the interest on treasury bonds. Investors lose money on their bonds!

That, in turn, raises another question: What else could I invest in besides bonds for a stable retirement income? Consider real estate investments for retirement instead.

What Is the Purpose of Bonds in Your Portfolio?

As investors approach retirement, bonds have historically served as a counterweight to stocks.

For all their advantages, stocks come with one enormous disadvantage: volatility. When you first retire, you face sequence risk: the risk of a stock market crash early in your retirement, before your stock portfolio has compounded enough to withstand a deep drop.

Here’s how bonds protect you from sequence risk and their role in your retirement portfolio.

1. Low Risk

Bonds are interest-only debts. When you buy a bond, the issuer (the borrower) agrees to pay you interest at a set rate for a certain period. The bond matures at the end of that period, and you get your principal investment back.

Bonds come with two risks. First, and most relevantly to retirees, the bond issuer could default. That rarely happens, at least outside of the junk bond market. The other risk is that interest rates rise, so the value of your existing bonds goes down on the secondary market. But this risk doesn’t apply to retirees simply looking for ongoing interest income rather than looking to trade bonds.

The low risk of bond default counterbalances the real risk of stock market corrections and crashes. Retirees can lean on their bond income if the stock market crashes and (hopefully) avoid selling while stock prices are low.

Comparing Key Characteristics of Stocks and Bonds

Here’s a quick comparison between stocks and bonds for a clearer picture. 

Take note, however, that these can change due to numerous factors. 

2. Low Correlation with Stocks

Bonds provide investors with diversification. Bond returns have a low correlation with stock returns: they rarely crash simultaneously with stock markets. Bond prices usually rise when stocks crash, as investors flee stocks for the safety of bonds.

Once again, this protects retirees from a stock market crash risk.

3. Stable Income

In the absence of a paycheck, retirees need passive income to live on. Interest payments from bonds can provide that steady income.

The same can’t be said for stocks. Not all stocks pay dividends, and even those that do can change their dividend payment anytime. They could lower or eliminate their dividend, leaving retirees without income.

Of course, retirees could sell their stocks to generate income, but that reduces their net worth. Personally, I don’t like the idea of selling off my nest egg, following safe withdrawal rates such as the 4% Rule.

I like ongoing income, so my net worth will continue to grow until I die, at which point my children can inherit my assets.

Downsides to Consider with Bonds

The current 10-year Treasury bond rates, hovering around 4.28% annually, might look tempting after years of rock-bottom yields. These numbers can only be deceiving, however.

The truth is, inflation often takes a big bite out of real returns—and often pushes them into the red when subtracted from nominal yields. The most recent Consumer Price Index (CPI) inflation rate was 3.0% over the last 12 months. If you earned 4.28% interest on Treasury bonds, your inflation adjusted return was just 1.28%. 

Of course, inflation-protected options like I-bonds and TIPS exist; however, they tend to underperform when inflation isn’t running hot.

Another factor that poses a headache for retirees is the interest rates. If rates climb, the value of existing bonds can take a hit, potentially leaving retirees in a pickle if they need to sell before maturity. Even top-tier bonds—though unlikely to default—aren’t bulletproof against inflation and interest rate curveballs. 

All these can challenge the notion that bonds are the safest harbor for retirement savings.

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Can Real Estate Fill the Role of Bonds in Your Portfolio?

The short answer: yes, if you know what you’re doing. Which, of course, not everyone does.

Real estate investments can earn you ongoing income with low risk and low correlation to the stock market. So, they can serve the same purpose as bonds in your retirement portfolio at a higher return. One study reviewing all asset classes for the last 145 years found that rental properties offered higher returns than stocks, with far lower risk.

Still, some types of real estate investments require work on your part. You could invest in publicly traded REITs, bought and sold on stock exchanges, and are just as passive as stocks, but they tend to share a high correlation with stock markets. That gives them little diversification value.

However, there are many types of real estate investments, each with pros and cons. Real estate will never be completely risk-free like Treasury bonds, but it can offer strong returns at low risk, especially if you diversify.

Ways to Invest in Real Estate as an Alternative to Bonds

The permanent environment of low interest rates in the 21st century has made bonds unappealing and real estate far more appealing. Investors can use leverage to buy real estate with other people’s money at low interest.

Or not — many of the real estate investing options below don’t involve leverage at all.

Consider the following ways to invest in real estate as options to replace bonds in your investment portfolio.

1. Crowdfunded Private REITs

Publicly traded REITs have several downsides beyond their high correlation with stock markets. They’re volatile, with prices bouncing up and down similarly to stocks. However, the SEC also requires them to distribute at least 90% of their profits to shareholders as dividends. That gives them high dividend yields but makes it hard for REITs to invest money in new properties to grow their share price.

Private, crowdfunded REITs such as Fundrise, Streitwise, and Diversyfund don’t have the same restriction. They can grow the value of their fund share prices by reinvesting profits into new properties.

Even so, many still offer high dividend yields that rival or beat public REITs. Fundrise pays dividend yields in the 4-7% range, while Streitwise pays dividends in the 8-9% range. I have money invested in both and have been happy with the returns thus far.

Crowdfunded REITs represent one of the easiest and most passive ways to invest in real estate. There are no mailings or labor to find good deals on properties and no tenant screening or rent collection hassles; just buy shares and sit back.

2. Crowdfunded Investment Property Loans

Hard money lenders issue short-term loans to investors who fix and flip properties or refinance them after renovating them (the BRRRR method). But where do hard money lenders get their funds to lend?

From you, in some cases. For example, GroundFloor lends short-term investment property loans for buying and renovating, and they raise the money from retail investors like you and me. I have money invested in GroundFloor myself.

You can pick and choose which loans you want to fund and lend as little as $10 per loan. Anyone with $10 can invest in real estate, at least indirectly, through property-secured loans.

If the borrower defaults, the lender forecloses, and you get your money back that way. Since hard money lenders fund at a relatively low LTV, that provides strong protection against default.

3. Rental Properties

You can also buy rental properties, of course.

Direct real estate investing comes with plenty of advantages. You can leverage other people’s money by using an investment property loan to fund 75-80% of the cost. Investors get spectacular tax benefits, from rental property tax deductions to property depreciation. And rental income in retirement doesn’t expire or diminish — quite the opposite. Rental cash flow rises over time as rents rise and provide a hedge against inflation.

Is rental income good for retirement? Absolutely, but it does come with a few caveats. As noted above, buying and managing rental properties takes work. Even if you hire a property manager, you must still manage the manager.

Rental income is predictable as a long-term average, so you can forecast returns with a rental income calculator. But monthly net rental cash flow varies wildly as you experience vacancies, turnover, or repairs. That means retirees must budget accordingly with an emergency fund and not depend on a steady paycheck from every monthly property.

4. House Hacking

Want free housing? Explore options for house hacking or finding ways for other people to cover your housing expenses.

The traditional model involved multifamily house hacking:

• • Typically, buying a duplex or triplex
  • Moving into one unit
  • Renting out the neighboring unit(s)

The rents from your neighbors cover your mortgage payment and, ideally, your maintenance costs.

But that’s not the only way to house hack. You can also bring in housemates, rent rooms or units on Airbnb, or rent storage space on Neighbor.com. Deni found a unique way to house hack by hosting a foreign exchange student.

By eliminating—or at least greatly reducing—your housing payment, you don’t require nearly as much passive income from your investments to live on in retirement.

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Want to compare investment property loans?

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

5. Private Notes

A “note” is the legal document you sign when you borrow money. For example, when you took out your last mortgage, the promissory note was the most crucial document you signed.

You can lend money privately to other real estate investors, having them sign a private note. You set the loan terms, including the interest rate, any fees, loan terms, and any other factors. For example, I lent money via a private note to a married couple that invests in real estate in Northeast Ohio, and they pay me 10% interest-only payments each quarter.

Beware, however, that lending money to other investors primarily comes down to trust. Unless you file a lien against their property, you have little recourse if they default on you. Only lend money to experienced investors you know well and trust implicitly to pay you back.

Get it right, and you can earn high returns entirely passively.

6. Land Notes

There’s a lot to love about land investing.

Land offers low risk and high returns. It also doesn’t necessarily require much cash to invest—I’ve bought parcels of land for under $1,000. Best of all, you don’t have to hassle with contractors or tenants, which means low stress and far fewer complications. There are no repairs or renovations, no chasing tenants for rent collection, and no property damage by uncaring renters.

For all that, land investing requires you to approach it like a business. You can eventually automate that business to run in the background with only an hour or so needed each week from you, but it takes time and labor to get to that point. Many retirees (and employees, for that matter) don’t want to launch a side hustle.

If you want to learn to earn high returns with few headaches and low risk, check out the REtipster land investing course.

7. Real Estate Syndications

Syndications offer another way to invest in real estate for high potential returns. But unlike land investing or rental properties, syndications are largely passive investments.

They work like this: an experienced real estate investor finds a (hopefully) great deal that costs more than they can afford to buy on their own. So, they bring in outside investors to partner with them on the deal in exchange for a deal-finder fee or bonus.

The outside investors—you and me—become partial property owners and share in its cash flow and profits upon sale. However, we surrender most management decisions to the syndicator, who found and continues to oversee the deal.

We get to invest fractionally in a large real estate project, such as an apartment building, that we would never be able to buy individually. And an experienced real estate investor does all the work for us.

Of course, no investment is perfect. To begin with, most syndication deals only allow accredited investors to participate. The SEC makes the regulation too onerous to enable retail investors to partner on these deals. Similarly, syndications typically require a high minimum investment, often in the $50,000-$100,000 range.

And like any managed investment, you trust the manager — in this case, the syndicator. You must do your due diligence on the property and the syndicator if you want peace of mind in your investments.

Check out Sam Wilson of Bricken Investment Group for an example of an experienced syndicator.

8. Clearing The Mortgage Debt

Eliminating mortgage debt can also be a smart move for retirees, as it delivers a guaranteed return matching the interest rate and often beats out what high-quality bonds offer in today’s market.

Also, retirees can breathe easier with lower monthly bills and more cash once the house is paid off. The strategy creates a “real estate bond” that frees up money that used to go towards mortgage payments.

Once the mortgage is clear, they can redirect those remaining funds into other investments or use them to increase their retirement income. Unlike regular bonds, this approach protects against inflation as property values climb over time.

In addition to the financial perks, the emotional boost of owning a home free and clear can be priceless for retirees—a solid foundation and peace of mind.

Final Thoughts About Comparing Bonds and Real Estate

Bonds pay too little interest in the modern economy to interest me. As an experienced real estate investor, I don’t need to settle for bonds’ low returns to achieve stable, diversified passive income.

It also doesn’t hurt that I’m pursuing financial independence at a young age. One of the hidden benefits of FIRE (Financial Independence, Retire Early) is that I can afford to take more risks in my investments because I’ll have plenty of options for active income long after reaching financial independence, unlike a 70-year-old retiree. I could always return to work if I ever got into real trouble after retiring at 40 or 45.

Even so, you can mitigate nearly all the risks of real estate investments—if you know what you’re doing. Learn how to invest in real estate, and you’ll never have to settle for 4% Treasury bonds again.♦

What are your plans for real estate investments in retirement? Do you plan to replace bonds with rental income in retirement? What are your concerns?

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