{"id":143042,"date":"2022-05-12T09:21:49","date_gmt":"2022-05-12T15:21:49","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=143042"},"modified":"2023-11-07T13:41:39","modified_gmt":"2023-11-07T20:41:39","slug":"high-inflation-bonds-and-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/high-inflation-bonds-and-real-estate","title":{"rendered":"With High Inflation, Should You Consider Passive Real Estate Investing Over Stocks and Bonds?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC4718234751&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">A few decades ago, Treasury bonds paid over 15% interest. Today, you\u2019re lucky if you can get 2-3%.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Yet bonds remain a core tenet of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/retirement-savings\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">retirement planning<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;orthodoxy. Try telling an investment advisor that you don\u2019t want any bonds in your portfolio and they\u2019ll burst a blood vessel.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I admit freely, though, that I don\u2019t invest in bonds at all. Nor do I plan to start as I get older.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Instead, I fill that niche in my portfolio with private notes and a combination of investments that include crowdfunded passive real estate investments and rental properties.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Why Inflation Wrecks Your Bond Returns<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Most bonds pay a fixed interest rate. You earn interest payments until the bond matures, then you get your original investment back.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Imagine buying a one-year Treasury bill (short-term bond) that pays 2% interest. At the end of that year, you\u2019ll end up with your original principal plus 2%.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But if inflation rages at 8.5% as it has over the last year, you\u2019ve effectively lost 6.5% on your investment. Sure, you earned 2% interest, but you lost 8.5% in purchasing power.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Granted, you can buy bonds that pay 10%, 15%, or 20% interest. But they come with a high risk of default, defeating the entire purpose of bonds for most investors.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Role of Bonds in Your Portfolio<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Bonds offer several types of protection for investors as they near retirement.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">To begin with, bonds come with far less volatility than stocks.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/stock-market-crash\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Stock markets are prone to sudden lurches<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and drops, which is fine for workers who can buy in at a discount, but retirees typically sell off their stocks to cover their living expenses. Retirees have to sell more of them when stocks slide in value to cover their bills and empty their nest eggs faster.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And while bonds may fluctuate in value on the secondary market, retirees can buy and hold them for consistent&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/biggerpockets-podcast-458-tamar-hermes\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">passive income<\/span><\/a><span data-preserver-spaces=\"true\">. Income that retirees can rely on month in and month out.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Finally, bonds offer diversification from the stock market. The stock market may crash, but bonds often go up in value when it does. The lack of correlation between&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/bonds-stocks-real-estate-best-investment-performance\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">stocks and bonds<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;makes them useful hedges against each other.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Can Real Estate Replace Bonds in Your Portfolio?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The more you know about real estate investing, the lower your real estate investment risk. But even so, you have several options that don\u2019t require any knowledge, skill, or labor on your part.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is great because older workers are particularly behind the curve on retirement savings. According to a study by Clever Real Estate, the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/listwithclever.com\/research\/baby-boomer-retirement-savings-by-generation\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">average baby boomer has just 30% of the recommended retirement savings<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;\u2014 and not much time to catch up.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That means they\u2019re going to need a helping hand from higher returns on their investments rather than relying on low-yield bonds to get them to the finish line.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate investments come in many flavors, so here are how several broad categories stack up as bond replacements.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Direct Ownership<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">You can buy income properties directly, of course. They generate ongoing&nbsp;cash flow, don\u2019t require you to sell off any assets to keep collecting and allow owners to adjust rents for inflation.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Nor are you limited to vanilla rental properties. You can also create passive income with mobile homes,&nbsp;mobile home parks,&nbsp;self-storage, and every other niche under the sun.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But direct ownership comes with its downsides too. It takes labor and skill to find good deals. Each property requires a hefty down payment, making it hard to diversify among your real estate investments. Properties also require ongoing management, from repairs to&nbsp;evictions&nbsp;to filling vacancies.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, while properties do offer passive income, diversification from the stock market, and more stable prices and rents, they come with risk and work for the average inexperienced investor. That makes them a practical replacement for bonds, but only for experienced investors.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Crowdfunded Property Loans<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">You can invest money toward hard money loans secured against real estate in today&#8217;s world. Some platforms let you do so with as little as $1.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.concreit.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Concreit&nbsp;<\/span><\/a><span data-preserver-spaces=\"true\">pays a 5.5% annual dividend, paid weekly, and you can withdraw your money at any time. The underlying investment is a pool of short-term loans secured by real property. You can invest in increments of $1.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Or consider&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.groundfloor.us\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Groundfloor<\/span><\/a><span data-preserver-spaces=\"true\">, which lets you pick and choose individual hard money loans to fund. You can put as little as $10 toward each loan, and the loans typically repay within 3-12 months. These loans pay between 6.5-14% in interest.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">These passive real estate investments require no skill or labor to invest, and they\u2019re secured with low-LTV loans. If the borrower defaults, the lender forecloses to recover your (and their) money.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Examples like these offer a viable alternative to bonds for the average investor. They come with low to moderate risk but pay moderate to high returns.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Best of all, they don\u2019t come with any&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/5-hardest-aspects-landlord\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">tenant management headaches<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Equity Crowdfunding<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Other crowdfunding platforms let you invest in pooled funds that own properties directly. Or, in some cases, a combination of equity and debt funds.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fundrise.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Fundrise&nbsp;<\/span><\/a><span data-preserver-spaces=\"true\">owns multifamily properties all over the country, along with debts secured against real estate.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/streitwise.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Streitwise&nbsp;<\/span><\/a><span data-preserver-spaces=\"true\">owns several large office complexes and pays an 8.4% annual dividend.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Other platforms let you buy fractional shares of individual rental properties. For instance,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/arrivedhomes.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Arrived Homes<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;enables you to purchase shares in rentals for as little as $100 per property. They handle acquisition and management (for a fee), leaving you with a fully passive real estate investment.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">They share little correlation with the stock market, generate ongoing income, and don\u2019t come with stocks\u2019 volatility. Again, these investments come with low to moderate risk but pay moderate to high returns. Last year, Fundrise averaged a 22.99% return across its assets, and you can invest with as little as $10.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What to Avoid<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Whatever their merits, publicly-traded REITs don\u2019t make a great bond replacement.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Because they trade on public stock exchanges, they share far too much correlation with stock markets. That removes their diversification value.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Also, public REITs offer little growth potential.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.fortunebuilders.com\/reit-investing\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">REITs fall under unique SEC rules<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that require them to pay out at least 90% of their profits each year to investors in dividends. While that sounds great on paper, it handcuffs their ability to reinvest profits into growing their portfolios.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And if their share prices fall, which happens all too often, so do their dividend payouts. That makes them unreliable sources of passive income.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I don\u2019t invest in bonds. Instead, I fill their niche in my portfolio with a combination of rental properties, real estate crowdfunding investments, and private notes.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">One criticism I sometimes hear from traditional investors is that bonds offer liquidity that real estate doesn\u2019t. While that\u2019s true, some real estate investments are much shorter-term than others. Rental properties and most real estate crowdfunding platforms come with a minimum time frame of five years or so, but real estate loans often come with time frames measured in months, not years. I can pull my money out of Concreit at any time with no penalty to my principal. Every week, I get repaid for Groundfloor loans I made a few months ago.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And, of course, stocks offer instant liquidity, should the need arise.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The traditional approach says bonds lower your risk. But they only reduce one type of risk: default. Meanwhile, they leave you completely vulnerable to the risk of inflation \u2014 as all too many investors are finding out firsthand today.&nbsp;<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A few decades ago, Treasury bonds paid over 15% interest. Today, you\u2019re lucky if you can get 2-3%.&nbsp; Yet bonds remain a core tenet of&nbsp;retirement planning&nbsp;orthodoxy. Try telling an investment [&hellip;]<\/p>\n","protected":false},"author":158586,"featured_media":143044,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7119,5524],"tags":[72,7331],"class_list":["post-143042","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-biggerpockets-daily","category-real-estate-investing-for-beginners","tag-bonds","tag-passive-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143042","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=143042"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143042\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/143044"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=143042"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=143042"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=143042"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}