There are many retirees who have built up considerable wealth through real estate investment properties, but may now be growing tired of the landlord role which requires managing the day-to-day operations of tenants.
These same investors may be holding off from diversifying their assets away from real estate into a portfolio of stocks and bonds because they mistakenly believe that real estate is safer or that an investment portfolio may not be able to provide the same income they have received from the rental property. Without being fully aware of the benefits of diversification, they don't feel prepared enough to make what could be some much needed changes. The concept of a rental property is usually easy for most to grasp - you buy a house, condo or commercial property and receive a monthly payment from tenants giving you some cash flow to support your lifestyle or cover the costs of maintenance. Generally, you expect the price of the property to rise over time so that you can sell it for a profit. The same goals can be applied to an investment portfolio of stocks and bonds with some added benefits. In fact, in addition to earning a good income from dividend-paying stocks and interest-paying bonds, you can have the safety of better liquidity (meaning you can sell it quickly if needed) along with avoiding the headaches that come with the management of tenants. If you are highly concentrated in real estate, perhaps it's time to consider transitioning some of that equity into a portfolio that will be more easily managed as you grow older.
Making the decision to sell real estate holdings can be somewhat daunting and you may be accustomed to receiving a regular income from rental payments. The cash flow you can expect from an investment portfolio is comparable to the rental income from owning properties but also has the ability to provide extra lump sums of cash much easier should you need additional money for a trip or a new vehicle. This ability to access the money is a significant advantage of owning an investment portfolio opposed to real estate. It should only take a few days to raise cash if needed; whereas, real estate holdings can take months to liquidate and in most cases, you can't sell just part of the property. You can borrow against the property using a line of credit or mortgage but this adds extra interest costs that will still need to be paid off eventually.
The amount of dividends and interest received can vary depending on your allocation to stocks versus bonds and, in current market conditions, your portfolio should likely be more concentrated on equities. Many investors often ask what sort of income can they expect to receive monthly or annually. An example would be a $1-million dollar investment portfolio with 65 per cent in dividend-paying stocks and 35 per cent in fixed income; one could expect to receive $45,000 a year just from the cash flow generated by the portfolio. Keep in mind that dividends are also taxed more efficiently than rental income as well.
I understand that monthly income is as important as protecting capital to retirees. You've worked hard to accumulate your nest egg over the years and are not in a position to lose it. So if you are considering moving from a portfolio of real estate to one of stocks and bonds, make sure you are working with a qualified financial team.
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. There can be no assurance that any investment will meet its performance objectives. Lori can answer any questions at 604-915-LORI or lori.pinkowski@raymondjames.ca. You can also listen to her every Friday on CKNW at 5:35 p.m.
