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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75701  
Subject: Re: Smart idea or Not? Date: 7/17/2012 5:31 PM
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Hi Petrus,

You don't say where *you* are currently located... but you sound amazingly similar to clients I have who've talked with me about precisely the exact same question (down to Palm Springs, no less.)

Here's my 2 cents (inflation adjusted);
Directly buying & holding residential real estate is *NOT* usually good to do on a long distance basis for a *long* list of reasons, most of which can be summed up to "lack of control."

Further, a place that is acceptable to you for your retirement residence may very likely well *NOT* be the best investment for rental purposes. Choosing a place you personally like as an ownership residence, and then renting it out, is usually ineffective and inefficient. The best rental returns are made on properties in areas that are economically attractive to renters, which tends to be culturally/economically quite diferent from what is attractive to owner occupants.

Real estate investment (especially on a direct ownership basis) is a *LONG TERM* play. It basically provides an income earning, tax-advantaged hard asset that grows at roughly the rate of long-term inflation, that provides your portfolio a safe leveragable foundation (which is why insurance companies and banks use commercial real estate for the same foundational collateral purpose.)

If your conscious intention is not actually to launch a real estate holding and direct landlording business, but you think you want to participate in the generic real estate markets, stay with REITs. There are a brazillian different flavors of REITs for you to consider & choose from... they don't have the same upsides, but they also have much less control risks.

If you want extreme safety that performs better than bonds alone, use a 2-leg reset indexing strategy; Buy a discounted or high yield bond position with only enough of your investable money so that it "blossoms" back to 100% of your original available capital each year (i.e. if you have $100,000, and can get a 4% safe yield, then buy $96,154 of that portfolio, to have it return to $100k in 12 months.) Then with the remaining "discount" money from the account, buy 1-year call option on the S&P500 "at the money," and simultaneously sell a 1-year call option as far out as possible so that the selling credit, minus the buying debit, equal the amount of leftover capital you had from the safe-side bond portfolio (approximately $3,850-ish.)

This will give you the downside security of the bonds, with the market growth (upside only) within a range from the floor of zero (or wherever they set the buy/long option) to a ceiling cap (wherever they set the sell/short option.)

Luck!
Dave Donhoff
Leverage Planner
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