Chugging along or grind harder

[stacheasaurus]

Life Situation:
 Single, 27M, Philadelphia, work in manufacturing

Gross Salary/Wages:
88,000 salary, approx 15,000 bonus = approx 103,000/yr

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc. -
15% to 401k approx 15,000

Other Ordinary Income:
None

Qualified Dividends & Long Term Capital Gains:
Small reinvested gains in taxable investment account

Rental Income, Actual Expenses, and Depreciation:
None

Adjusted Gross Income:
approx 90,000

Taxes:
approx 22% federal, approx 6% state/local

Current expenses:
TOTAL - 2380/month, target 28,000/yr

• Rent - 1150
• Utilities - 100
• renters insurance - 25
• groceries - 200
• Dine out/bars- 250
• gym- 40
• Cosmetic products - 45
• Car payment- 0, paid off
• Car insurance - 100
• gas - 20, don't drive much
• Public transport - 200
• ubers/other transport - 50

[li] Vacations - 200/mo average over year
[/li][/list]



Assets:
TOTAL - 213,000

• Car - 8,000
• 401k - 50,000
• Cash- 50,000
• IRA - 30,000
• Taxable accounts - 75,000

Liabilities:
 No debt!


Specific Question(s):
Looking for advice on where to go next.  I am pretty comfortable in my situation, and thinking about starting in real estate with buying a duplex and living in one while renting the other.  Or, buying an investment property while renting, and adding value between tenants.

[ice1717]

Your choice is between investing some amount of your extra income into the market or investing in income generating income properties.  Both are fundamentally solid choices and neither is a slam dunk to out pace the other. 

Not sure if this helps, but here are the questions I ask myself about buying rentals:
- Do I want to pick up the added time commitment to be a landlord?
- Do I want that added time commitment to be providing customer service on other people's schedule?
- Do I want to invest the time in learning enough about buying and selling income properties to ensure I make good decisions on properties to buy, improvements to make, etc.?
- Am I seriously concerned about portfolio diversification if I invest in just VTSAX or equivalent portfolio?

For me the answers are No, No, No, and No.  I like the lazy approach to growing my FI nest and prefer to use my currently limited free time to do what I want instead of working more hours dealing with people.  I'm married with young kids, so your life situation is different than mine. 

[Freedomin5]

Good job! You’re doing well.

Assuming you continue maxing out your retirement accounts, I think either of your options are fine. It really depends on what you want to learn next. If you want to learn about landlording, then a duplex is a good choice. If you want to learn about rehabbing a house, a fixer upper is a good choice. Or how about combining the two by buying a duplex that needs a bit of work?

[mtnrider]

Looking for advice on where to go next.  I am pretty comfortable in my situation, and thinking about starting in real estate with buying a duplex and living in one while renting the other.  Or, buying an investment property while renting, and adding value between tenants.

I'd look at the bigger picture.  Where do you want to end up?  Do you want to have a family eventually?  How early do you want to retire?  What do you want to do afterward?

If you want a family, that's an expensive, although a worthwhile goal.  You might want to be flexible, so you can move someplace good for raising kids, or close to parents.  This probably means looking at stock instead of rental property.  Like Ice said, VTSAX is a popular approach for an investment vehicle if you're not getting into renting.

Read up about running renting in your state before you start down that path.  It can be great when you have good tenants, but nerve wracking and a lot of lost profit to have bad tenants.  Unless you hire a management company, owning rental units can be a lot of work.

If you think you won't be retiring for a long while, and that you'd eventually get a higher salary, you should seriously think about a Roth IRA to diversify your future tax liabilities.

But mostly keep on keepin' on. 

[former player]

You are doing very well: good income, substantial assets, no debt.  Congratulations.

At 27 your life is likely still in flux: many things can change, including your job, location and social status.  Property is a significant tie and rental property in particular is not a "set it and forget it" proposition: there is a reason why property management is a viable commercial proposition.  If you are proposing to own rental property you will have to put your own time and effort into it (yes, even if you reduce your returns by having commercial management you still need to manage that relationship) so the question is: is that where in an ideal world you would be investing your personal time and effort?  If yes, and you can't see any chance that you will be moving away from your current area, then maybe think about property investment.  If the physical repair of property and managing the personal and financial relationships involved is not your thing, then put the money in index funds and direct your time and effort to activities which suit you better.

(I do have rental property, but I am older, FIREd, and settled in my locality for the rest of my life.  Rentals at an earlier age, when work took up a large part of my time and pretty much all my intellectual and interpersonal effort, would have been a mistake.)4

[Rdy2Fire]

Agree with others as you're young a lot could change, you're doing great, I'd invest in something more liquid then physical i.e markets vs property. I think former player hit the nail on the head on that part

[Ben Kurtz]

It looks like you have unused tax-advantaged space you could be filling -- the 401k limit for employee contributions is now $19,000 per year (it looks like you are only contributing $15,000 this year), and it's not clear whether you have contributed to an IRA this year.  At a 28% marginal tax rate I wouldn't be too quick to dismiss a deductible IRA, but you may decide to go Roth and I wouldn't argue with that.  I'd suggest taking full advantage of those tax-advantaged opportunities before purchasing real estate.

If you reach the point of buying real estate, I'd lean more towards buying something you live in for your first property, rather than a separate investment residential property.  Either a duplex, or perhaps a fixer-upper that you buy, upgrade (including a bit of your own sweat equity), live in, and then sell after 3-5 years while taking advantage of the primary residence capital gains tax exemption.  But as others have pointed out, you really need to be sure that you have roots in the area and want to stay put, and have enough time and capacity on your hands, to undertake the responsibilities of being a property owner.  It's not something to be taken lightly.  Maybe you'll meeet a girl in next year and decide to get married and move back to her hometown -- managing residential property at a distance is time consuming and costly, while selling so soon after buying means you'll get hosed on transaction costs. 

A real estate investor can also invest in commercial and retail properties, which have very different management requirements than residential investment properties. But those kinds of properties are not much discussed on this board, I think largely due to the fact that the minimum investment size is generally much larger than what most ordinary working people accumulate to invest in a single property.

[stacheasaurus]

Looking for advice on where to go next.  I am pretty comfortable in my situation, and thinking about starting in real estate with buying a duplex and living in one while renting the other.  Or, buying an investment property while renting, and adding value between tenants.

If you think you won't be retiring for a long while, and that you'd eventually get a higher salary, you should seriously think about a Roth IRA to diversify your future tax liabilities.

But mostly keep on keepin' on.

Thanks for the advice!  I do have a Roth IRA max'd out every year, but it was not clear in the original post. 

in general, I agree I have space in my 401k to reduce tax liability, but the plan was to build some cash reserves to pay for a home in the next 2 years.  Based on the thread, everyone is pointing that if I go real estate, it's smarter for somewhere I live first, rather than rental right off the bat.

Appreciate all the responses!