Why Is Income-Producing Real Estate a Better Investment in Turbulent Times?
Over the past three months, we have witnessed the Dow Jones Industrial Average fall nearly 10 percent while the S&P 500 has fallen nearly 12 percent over the same period of time. If you had $500,000 in your retirement account and had it invested in these two relatively safe indexes, your retirement wealth would have dropped by $50,000 to $60,000, which would represent a year’s worth of income if you were entering retirement. That’s an incredible hit on your personal financial wealth!
Because of the volatility in the stock market, some brainiacs came up with a way to measure the volatility called the VIX. The VIX is a number derived from the prices of options premium in the S&P 500 index, which is the index comprising 500 large cap stocks. It measures the expectation of market volatility and is sometimes called the “Fear Index.” As of this writing, the VIX is at 27.20 compared to a VIX of 15.34 three months ago. As the VIX rises, so does the perceived risk of investing in the stock market.
If the stock market is such a good place to invest your retirement income, why does it have a volatility index? In my opinion, why would you trust putting your hard-earned retirement money in a class of investments that measures the perceived risk on a daily basis? I do believe having a “Fear Index” for the stock market is well-placed. Recently, a friend of mine was lamenting the fact that she and her husband had been forced to postpone their retirement by several years because of their investments in the stock market.
For me, a better investment choice is investing in income-producing real estate. Real estate does not have a “Fear Index.” When you own a real estate investment that generates income, your tenant or tenants pay the operating expenses of the property. They even pay down your mortgage. Over a period of years, the mortgage gets paid off and most of the income goes to you. As long as you maintain the property, it continues to provide income year-after-year. I know this investment strategy works. I know several friends living comfortably on the income their real estate investments are producing.
One of the big advantages touted by stock brokers and financial planners about the stock market is the fact that stocks are more liquid that real estate, meaning they can be bought and sold and converted to cash in a matter of days. This “big advantage” is also one of the stock markets biggest weaknesses for investors. When the stock market is performing well, everyone is contented and happy but when the stock market is performing poorly and prices are falling dramatically, everyone gets nervous and wants to sell their stocks before they lose everything.
One of the big disadvantages touted by stock brokers and financial planners about the real estate market is the fact that it is illiquid, meaning that it takes a long time to sell the asset and convert it to cash. This perceived “disadvantage” is actually an advantage when it comes to saving for retirement. Rather than always reacting to the volatile ups and downs of the stock market, real estate investors ride through these sometimes irrational cycles which allows their investments to continue to appreciate and pay down debt over a long period of time. So, the “big advantage” of liquidity in the stock market is actually a detriment to building long-term wealth and the “big disadvantage” of illiquidity in the real estate market is actually a benefit to building long-term wealth. If you want to truly build wealth for retirement, go with the investment that doesn’t measure its volatility with a daily “VIX” index. Go with income-producing real estate!
ABOUT THE AUTHOR
Ken has been in the real estate business for over 40 years and has personally overseen the development and management of over $350 million worth of assets. Ken holds a B.S. degree in Accounting from Brigham Young University, a MBA from the University of Utah. Licensed real estate broker since 1976. He holds the following designations: CCIM, CPM, CRS,CCA. Served as the president of the Utah Apartment Association.