Which investment strategy would produce a higher and more reliable income in retirement, buying rental properties or maxing out my retirement accounts?
What are the pros and cons of each?
Details:
- I am single, 48 years old, with no kids
- I have about $500,000 in my 401(k) and other accounts
- I contribute 43k/yr to these accounts (90% stocks, 10% bonds)
- I make 78k/yr
- My goal is to retire by age 55, with at least 1m saved
- I will receive a partial pension at age 62 from my employer (about 15k/yr.)
- I live in Brooklyn, NY, and I'm considering buying rental houses in Massachusetts
Any thoughts and suggestions are highly appreciated
Thanks
You are very heavily weighted towards stocks for your age - what are you going to do if the market takes a 40% dive a year into your retirement, and doesn't recover for 5-7 further years?
Stocks are unlikely to return more than 5% long-term from here, so quality rental real estate in good areas yielding 4-4.5% net of everything, plus modest appreciation to keep up with inflation, is IMO an excellent alternative for you - you're likely to make about what you would in stocks with much lower risk, and far more than in bonds for modestly greater risk.
Owning a rental four hours away from you is hardly impossible, especially once you're retired, but it can be a hassle. You will likely need property management so be sure it's worthwhile.
When I get closer to my actual retirement date, I will surely modify my portfolio. But, I don't yet know when that date will be exactly. It can be as early as age 50 or as late as 62. It's not written in stone. That's why I opted for an aggressive portfolio. Worst case scenario, I can always work longer if my investments take a dive. So far, that strategy has paid off. I mean, had I gone conservative, I would have left some phenomenal stock market gains on the table during the last 5 years. Going forward, I'll maintain the same aggressive strategy, despite predictions of financial gloom and doom, because the reality is that the stock market will often defy predictions. No one knows what it's going to do. People have claimed armageddon is imminent since 2009.
I agree that it makes sense for me to diversify into rental properties, at least from a purely financial perspective. But, one of the main issues is time. I only have 2 days off every week to fix up my property in order to prepare it for rental. It's kind of unrealistic to expect me to drive 8 hours r/t to do construction after working all week. But, even if I could do this nonstop, it would take many months to do significant work at that rate. Sure, I could hire a contractor, but that will run into potentially tens of thousands of dollars, which may render the investment not worthwhile.
There are also many other variables to consider.
What if I get bad tenants that trash my property, which took me months to build?
What if it takes forever to find a suitable tenant?
How long will it take to evict a bad tenant in Massachusetts? How much will this cost?
Will a good property management company take care of everything, including repairs? How much will this cost? Will dealing with the property management company be almost as much of a hassle as the tenants themselves?
What about unexpected expenses?
I know I sound fussy, but I have to weigh these realities against my current hands-off stock market investing approach.