It is still a single investment risk. Yours might have turned out because of appreciation. You probably also had the luxury of being in a good real estate market with good turnover of property. As a retirement asset, it depends on how much liquidity you have elsewhere. If you are looking for higher returns and are will to take on more risk, I think there are better vehicles than single home rentals unless you have the capital to own multiple properties to spread the risk.
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There are a lot of very smart people working at hedge funds and institutions who have already priced in interest rate risk. Laddering does not necessarily mean you have lower interest rates at the short end. It depends on the where the yield curve is. By fixating on the highest yielding bonds today, and if they are longer term, you are increasing interest rate risk in your portfolio. You can believe that since you are holding to maturity that there is no principal risk, but the fact is your 5 year bond at 4.5% is worth less if rates move higher (and more if they move lower). I would not discount inflationary risk over the next 5 years with the tariffs and tax cuts, and things we cannot even see at this time. If you are trying to maximize returns and have a 5 year or more time horizon, equities are probably a better place to be. The whole point of the fixed income portion of your portfolio is to reduce risk and investment volatility.
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Sometimes the money just isn’t worth it. My Dad had rental units and it seemed like bad things always happened at one of the properties late at night or on a holiday. Dad missed my high school graduation because of a flood in one of the apartments. I got over it, but at the time it seemed like a big deal.
We rented our vacation place for a month a few years ago and used a realtor (friend of a friend) who said she would vet the renters so we wouldn’t get wedding parties or other rowdy groups. She persuaded us to allow pets with an extra damage deposit. A group of families rented both our main house and the guest house. We had our cleaning crew go in and clean two times during the time the renters were there. When the renters left, the realtor called and said everything was fine—very messy but no issues. The cleaning crew was scheduled to came the next morning. In the interim, a friend of ours called and asked if his nephew and new wife (they were on their honeymoon) could stay at our place for a night–we’re on an island and ferries were canceled for the day and they couldn’t find another place to stay.
When they went to the house they found dog feces in the dining room as well as in two upstairs bed rooms. Apparently, the renters lied and had two dogs (this was a report from the cleaning crew after the fact). The newly weds took pictures and sent them to us right away. They also cleaned up the messes. That event soured us on renting and ruined our relationship with the realtor. Life is too short and we just don’t want to deal with messes like this.
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I lived in a medium sized midwestern city in the 1980’s. A GM plant near me announced it was closing and overnight, home prices in my city dropped between 18-25% depending on where, which school system, etc. A year later I had to sell my house (job related) and move to the East Coast. Two different realtors told me “I’ve never heard of home prices going down, they only go up”. (it was relevant because they couldn’t fathom why I didn’t have a bigger down payment even though I was in the process of selling a house– a MUCH nicer house than anything could afford in the town I was looking in).
The moving truck brought my stuff East and we unloaded in late October 1987 (to a rental). The drivers spent the afternoon listening to the radio as commentator after commentator described “First comes the market meltdown and then comes the housing price plunge”. And within weeks, the prices of the houses I had looked at (before signing a lease for a rental) were down anywhere from 10-30%. The realtors in town all insisted it was “a temporary correction”, but if YOU’RE the person who needs to sell during a temporary correction, a 24% hit in home value could really impact your pocketbook. And the temporary correction lasted at least 4 years– and for high end homes, longer than that.
Then– once everyone forgot that prices go down as well as up, came the Financial Crisis. And woe to the two income families where one party worked at Bear Stearns and the other worked at Lehman. Or woe to anyone- because prices plunged overnight, and began to recover around 2013. Again- temporary, except if you need the cash- assisted living or whatever.
So I am in awe of any small time investor who has only had positive returns on residential real estate. Timing is everything, and having seen parents and in-laws go from healthy to almost incapacitated overnight, I’m not interested in having my retirement tied up in real estate. But I admire anyone who has figured it out!!!
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Yes, lest anyone thinks I am advocating for real estate to be one’s primary investment vehicle, nothing could be further from the truth. We own three investment properties (the two rentals and I also own the SFH that my parents live in) and in total they are only 20% of our retirement portfolio. The stock market has been very kind to us but I sleep better at night knowing that some of our higher return/risk based investments will never be worth zero (As is theoretically possible with any of our securities).
And again, as with any investment, if there is a chance you would be forced to sell in a down market, you can’t afford RE. As long as that is not the case, a single expensive event will not wipe out your returns over the life of the (relatively small) investment.
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There is a HUGE difference in considering risk and returns on a primary home that you might be forced to sell because of job or family issues and an investment property that was purchased with the ability to ride out market ups and downs.
RE investing is DEFINITELY not for folks who have concerns about potential short term losses.
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If the future federal funds rate always matches market expectations, laddered bonds that include many durations should have roughly the same return as a single bond, with a single duration (there is a small premium for increased duration). In the more likely scenario that the future fed rate over next x years does not exactly match current market expectations, then laddering reduces the risk of getting stuck with a subpar rate.
As an example, following the COVID stock market crash in March 2020, many investors were scared of the stock market and wanted to switch from equity to fixed income. At the time, the fed rate was 0%, as it had been for better part of 11 years since the Global Financial Crisis and market expected low fed rate to persist, so 10-year treasury bonds only yielded ~0.7%. If an investor bought a 10-year treasury bond and held to maturity, they’d lock in this ~0.7%/year, and many investors were okay with doing so at the time. CDs, banks, and other fixed income products also payed <1%, and at least the treasury product was more tax favorable. 0.7% was also higher than the ~0.0% for short duration. However, if the investor instead had a treasury ladder that included some shorter durations, then the shorter duration portions could be updated to lock in the far higher than expected bond rates that occurred throughout 2022, with increasing inflation and corresponding fed rate increases.
Shorter duration fixed income performs better if future fed rate increases higher than current market expectations, like 2022. Longer duration performs better if fed rate decreases beyond below market expectations which has been common during 1980s/1990s/2000s A ladder or bond fund often includes a variety of durations, hedges against either scenario, rather than putting all eggs in a single duration basket.
The graph below shows current market expectations of future fed rate, and how that expectation has changed from start of year. If you know whether the future fed rate is going to be lower/higher than the graphed blue curve, then choose the corresponding duration that maximizes return during those years. If you don’t know the future better than the market, then mixed duration can mitigate this risk. Laddering can also reduce risk of the investor’s duration prior to selling differing from expectations. The investor may initially plan to hold the bond to the x year maturity, then something comes up and they need to withdraw early by selling on secondary market when bond price may have loss (2022).
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I get it. Short term rentals are a WHOLE different ballgame.
I believe we have mitigated our renter related risk by only owning SFHs in modest middle class neighborhoods, setting rent below market value, requiring a high credit score (650) and solid rental history/references, approving nearly every tenant request for repairs and improvements and making SURE our tenants know we understand that our properties are their HOME and that we want to know about every little thing that needs attention (so that there is never a long list of updates that needs to be done between renters).
We give them gifts at Christmas and flowers of their choosing for the yard in the spring. Basically we try to have a mindset that we want our rentals to be sound investments but we do not need to squeeze every penny we can out of our tenants/properties in slum-lord fashion. This strategy has worked very well for us and I believe that it can for most investors who are careful about location and who can afford to weather market volatility.
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And very low interest rates.
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At market prices. Not in reality. Unless you own a bind fund, the market price isn’t relevant. I own some in the 70s - bcuz I bought when I could only get 3.25 at 100 but inevitably they will pay at 100 I’m still glad I bought them - one can’t predict the future.
I understand interest rate risk but when you take less today, you are diminishing today’s cash flow so you are losing while to wait to see if you can gain.
Hedge funds / institutions have access to other tools OP have. She’s simply looking to maximize a cash flow, as most securely as she can - and looking at ways to do so.
If future fed rate exactly matches expectations, you are decreasing return in current year, in exchange for increased return in a future year. Using some specific numbers, the earlier treasury yield curve graph suggests the market following expectations for future fed rate:
Current = 4.33%
1 Year in Future = 2.92%
2 Years in Future = 2.84%
3 Years in Future = 3.03%
4 Years in Future = 3.21%
5 Years in Future = 3.39%
If you were to buy a short-term treasury bill, you could get a 4.x% return at present, with a substantially higher yield than longer 1-5 year terms during the 2025 calendar year. However, the cash flow would drop substantially in 2026+ calendar years when you renew the short-term bond, if fed rate drop follows market expectations. Your cash flow in 2026+ calendar years, would be higher, if you instead bought a 5-year bond at 3.6%. Note that the 3.6% rate for 5-year is higher than expected market fed rate during years 1-5 listed above.
If you instead mean buying bonds with a larger 20-30 year term, which also currently has 4.x% rate, then market expects fed rate to be higher than current 4.x% in distant future. However, distant future predictions are especially imprecise, so there is a good amount of risk of a loss if not held to maturity, and I expect most retired persons do not plan on holding 30 year bonds to maturity. Either way, there are advantages to not always choosing the duration that has highest rate.
You get your max rate today at 20-30 years - I just bought a 4 sub 88 last week E Peoria Illinois - A+ on its own and AA with insurance. My current yield is 4.8 my YTC and YTM are much higher
Few bonds last to maturity. So they are paying off early anyway in most cases. Thats why when you read prospectuses, many are refunding bonds.
But OP is seeking to maximize current income. Not game for maybe more or maybe not. They need to pay bills now.
Ok done on this one. OP has enough perspectives.
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Nice summary on rental property purchasing
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My earlier post mentioned treasury bonds, which are not callable. I suspect you are referring to long term municipal bonds, which often are callable, as you note. They may pay a premium yield for potential callable financial penalty to the investor.
In the first post of this thread, the OP mentions wanting “a variety of income streams in retirement”. Retirement presumably includes future years, as well as current year; considering income stream in both.
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I decided to talk to my dad about the $2,700 AC repair. He sounded sharp and we had a good conversation. He agreed we should get a couple of more quotes, and ask if a couple of steps can be taken first before completing the entire list. I told him I would take care of small repair authorizations in the future, but I will call him about bigger ones. He thanked me for calling. I’m glad he’s doing well enough I can consult with him. It’s weird controlling money that’s not mine.
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