One of my favorite things about my job is that I get to meet so many different people, but I have a special soft spot for people who are nearing retirement or are already retired. This can be a daunting period of life and I find joy in helping them to make investment decisions that will bring peace-of-mind and financial assistance during this phase of life.
I recently met a retired couple in their early eighties, who had just sold their family home and downsized to a small apartment and were trying to figure out what to do with the remaining cash from the sale. Now, you may be reading this and think that you are not at this stage of life and so this article is not relevant to you. But, if you are lucky, you too may one day get to retirement age and be faced with this decision, or you may have parents or grandparents who are at, or will soon be at this stage, and hopefully you will remember this advice.
At the time we spoke, this couple’s remaining cash from the sale of their house, approximately J$25 million was sitting in a bank account. I advised them that a bank account should only be a temporary home for the funds since savings in a bank account are losing money due to inflation and bank charges, and if those savings are in Jamaica dollars you also have to contend with devaluation. If they left the funds in the bank account and lived from those savings, they would likely outlive the money.
The couple had already reached this realization on their own, that they could not survive on the funds if they left them in a bank account. They knew that they needed to invest the money to generate income to supplement their pension for the remainder of their years. The question was: invest it in what?
I was quite surprised when the husband told me that they were considering investing the J$25 million in a rental apartment. I certainly understood the appeal of buying an apartment and renting it to earn monthly income, but I did not think it was the right solution for this couple for several reasons. Could they and should they take on the responsibility and hassle of being landlords at their age and stage? The couple’s children and grandchildren all live overseas and so they have no relatives who could manage the property on their behalf.
The responsibilities and hassles of being a landlord include- finding a suitable, reliable tenant to ensure a steady stream of income. Sadly, there may be periods of time when the property is vacant, or they could end up with a nightmare tenant who does not pay the rent or damages the property. I am sure you have heard how difficult and stressful it can be to evict an unruly tenant! Even if they ended up with a dream tenant, they would still have to deal with periodic issues and property repairs when they arise. Even brand-new properties will have issues from time to time and your tenants are going to expect you to fix things.
Sadly, they would be unlikely to find an apartment in the sought after area of Kingston & St. Andrew for J$25 million, especially since they would also need to pay closing costs. But if they were able to find a property, there are other recurring expenses that they need to take into consideration to determine what their true potential monthly income would be, before deciding to invest in real estate. These additional recurring expenses include maintenance costs, repair costs, property insurance and taxes.
A better investment option for this couple would be to purchase US dollar bonds. Bonds work like real estate as they generate predictable steady income (interest instead of rent) but with less hassle- you buy the bond and enjoy the interest without having to deal with tenants and repairs. You could also secure your income for a lot longer with a bond by investing in one that matures in the year 2050, for example, whereas you are unlikely to find a tenant who is willing to sign a lease for longer than two years. Bonds also offer similar or even higher returns than real estate and can be sold quickly if you need cash, unlike a property which can take a few months to be sold and would incur closing costs.
I was able to show this couple an example of a diversified US dollar bond portfolio that we could help them construct, using the US$ equivalent of the J$25 million that they wanted to spend. This portfolio would generate an interest income of US$11,075 per year, which at the time I met with them was equivalent to approximately J$1.68 million per year or J$140,000 per month, which is more than the rent that they would have gotten in the unlikely event that they were able to find a property for J$25 million, including closing costs. And the beauty of this bond portfolio was that the bonds were all long-dated bonds and so the income would be generated for over ten years and when the bonds mature the investor gets back their principal and can reinvest it for another ten years if they need to.
I am not saying that real estate is not a good addition to a well-balanced investment portfolio. Investors who have the money, expertise and time to deal with property maintenance, tenant selection and servicing, and the capital to cover the acquisition costs could consider investing in real estate once they have carefully assessed the pros and cons. I am just saying that US dollar bonds could be a better alternative to real estate depending on one’s age and stage of life. Steady predictable income with far less hassle!
Toni-Ann Neita-Elliott, CFP is the AVP Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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