In 1981, US Treasury bonds paid over 15% interest. Today they pay under 2% interest.

Perpetual low interest rates have become the new normal in the 21st Century. That makes it far harder to retire on bond income than it once was, as lower returns mean you have to save more money for retirement.

Increasingly, investors have started wondering: Could real estate serve the same role in my portfolio as bonds, but earn higher returns?

Before you dump all your bonds and start buying up rental properties, make sure you understand exactly what that role is — and all your options for filling it with real estate investments.

The Role of Bonds in Retirement

Historically, bonds counterbalance stocks in your retirement portfolio. They do so in three important ways.

Steady Income

Bonds pay set interest for a predetermined period of time. In other words, they pay predictable fixed income that retirees can rely on to pay their bills.

There’s nothing predictable about stocks however. Even those that pay dividends can change those dividends at any time. So, bonds serve as a steady source of retirees’ passive income.

Low Risk

Bonds come with less volatility and risk than stocks. If you don’t plan on selling them, they only come with one risk: that the borrower defaults and stops paying.

For government bonds and established corporate bonds, that risk remains low.

So, even as the stocks in their portfolios fluctuate in value, retirees can typically rely on their bonds as a low-risk, low-return anchor in their portfolio.

Diversification: Low Correlation to Stocks

Your mother always told you not to put all your eggs in one basket — a lesson particularly crucial for retirement planning. You don’t want a shock to one sector or asset class to gut your portfolio and leave you penniless.

Historically, bond prices tend to move in the opposite direction of stock prices. When the stock market crashes, investors often flee to the safety of bonds. Put another way, they have low historical correlation, which offers protection against crashes.

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Can Real Estate Fill the Same Niche?

Some types of real estate investments can generate steady income, with low correlation to stock markets. The real question lies with risk.

One joint study called “The Rate of Return on Everything” by several US and German universities and Germany’s central bank found that over 145 years, real estate offered similar returns as stocks, but with half the risk. However they primarily looked at residential rental properties, which take time, labor, and skill to invest in with low risk and high returns.

On the opposite end of the spectrum lie publicly-traded REITs. They’re extremely liquid and passive, but they come with high volatility and correlation to stocks, as they trade on public stock exchanges. Read: higher risk than bonds, with little diversification safety.

While no real estate investment will ever be as safe as a US Treasury bond, you can many times the returns while spreading the risk across a wide range of real estate investments. And the more you know about different types of real estate investments, the better you can protect against risk.

Real Estate Investing Options for Retirement

As you explore real estate investing options for your retirement portfolio, start with the following, which are available to the average middle-class American.

Private REITs

While publicly-traded REITs come with too much volatility to stand in for bonds, they aren’t your only option for passive funds that own real estate.

Try private real estate crowdfunded REITs such as Fundrise, Streitwise, and Diversifund. They each invest differently; for example, Fundrise primarily invests in apartment buildings and loans secured by real estate, while Streitwise invests in commercial real estate.

These funds are not very liquid — you must typically commit money for at least five years or face a penalty to sell early. But that also makes them stable, unlike publicly-traded REITs.

These investments make an easy, completely passive way to earn ongoing income, similar to bonds.

Crowdfunded Loans

As an alternative real estate crowdfunding model, you can put money toward individual loans secured by real estate, rather than a pooled fund.

My favorite of these is GroundFloor, which lets you invest as little as $10 toward their loans. They issue fix-and-flip loans to real estate investors, so the loans typically last less than one year. You can view their current loans at any given time, to see how much interest each one pays, the risk grade, the property address, and the borrower’s details. Note that unlike some real estate crowdfunding platforms, GroundFloor allows non-accredited investors.

As a hard money lender, GroundFloor typically only lends 60-75% of the property’s value. So if the borrower defaults, they simply foreclose and sell the property for the full amount owed.

Private Notes

Ranking higher on the difficulty scale, you can lend money directly to real estate investors without an investment platform like GroundFloor.

It requires you to know and trust individual investors enough to lend them money. You must also decide if you want to require them to sign a deed of trust to secure the loan with a lien against the property, so you can foreclose on it if they default.

I currently have some money lent out to private investors I know and trust. They pay the high interest like clockwork, but my only real security is my trust for them as both honest individuals and skilled real estate investors.

Rental Properties

Not only can they provide strong retirement income, rental properties can help you retire early.

They offer protection against inflation, tax benefits, and ongoing income. Income that you can predict as a long-term average using a rental property calculator, even though month-to-month cash flow will vary.

You can also boost your cash-on-cash returns by leveraging other people’s money to cover most of the purchase price.

Still, rental properties take knowledge and skill to invest in, and cavalier novices often lose their shirt by underestimating expenses or failing to manage their properties well. Which raises another downside: it takes not only labor to find good deals, but it also takes labor to manage properties on an ongoing basis.

House Hacking

One way to ease your way into rental investing is by house hacking a multifamily property.

It works like this: you buy a property with two-to-four units (the maximum allowed by conventional mortgages), move into one unit, and rent out the other(s). The rent from the neighboring units covers your monthly mortgage payment, plus hopefully some of your maintenance and repair costs.

Which means you score free housing. That not only helps you save and invest more money for retirement while you’re working, but also keeps your living expenses low in retirement.

Land Notes

The least conventional option, land investing is surprisingly easy to learn. It doesn’t require managing tenants or contractors, nor repairs or maintenance.

You can buy parcels for under $1,000, and either flip them immediately or seller-finance them for ongoing income for years to come. If the borrower defaults, you don’t need to go through the lengthy, expensive foreclosure process like you do with residential properties. You can simply reclaim the property and sell it all over again.

Read up on land investing before committing however, as it comes with its own risks and rewards.

Sample Retirement Portfolio

Rather than eliminating bonds entirely, consider simply shrinking their allocation in your portfolio. That could mean 60% stocks, 20% bonds, and 20% real estate, or even 10% bonds and 30% real estate, to earn higher returns from your retirement portfolio.

Among your bond investments, explore tax-free municipal bonds. The tax savings helps you keep more of the returns, which raises the effective rate of return on relatively safe investments.

A sample retirement portfolio might look like this:

Stocks: 60% of your total portfolio. Of your stocks, two-thirds might be US stocks (evenly split among large-, mid-, and small cap index funds), and the remaining third split between developed economies and emerging markets.

Real Estate: 25% of your total portfolio. Some of this went toward a down payment on a house hacking property, some toward private REITs, and some toward crowdfunded loans. If you get sick of living in a multifamily property, you can always move out and keep it as a rental property.

Bonds: 15% of your total portfolio, all held in a diverse mix of tax-free municipal bonds.

Only you know your own risk tolerance. Stick with an asset allocation that lets you sleep at night, balancing acceptable risk with sufficiently high returns to keep your portfolio afloat.

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