Where does Real Estate Investing fit into Investment Order?

[MountainLakeMama]

I realize this is different for everyone, but where does investing in real estate fit into the "Investment Order" sticky thread at the top of this forum for YOU? What has to be in place before you buy your first rental property?

Edited to add link:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

[tawyer]

Down at the bottom, after I'm retired, lol.

[EvenSteven]

In a way, at #2. I invest in a total market fund in my 401k, and that has REITs included in it, so I am investing in real estate as early as step #2.

[Aegishjalmur]

I realize this is different for everyone, but where does investing in real estate fit into the "Investment Order" sticky thread at the top of this forum for YOU? What has to be in place before you buy your first rental property?

Edited to add link:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

After investing in cryptocurrency and slightly before burying gold coins in coffee cans in the back yard.

[SwordGuy]

I think it depends on your income, savings rate, skills and willingness to get dirty and the real estate market.

For us, getting 4 rental properties was a real FIRE accelerant. 

We were able to get our first three in the $45-50K range (including renovation costs with sweat equity) and turned them into $80-90K properties that brought us $15k (total) in profit per year.

Using the 4% rule, that $15,000 in income would have taken a stock/bond market portfolio of $375,000 whereas we were able to get there for about $150k and we had a real estate portfolio worth about $240,000.  We acquired these properties over only a few years so market growth wouldn't compare to the returns we got in that short a time.  We got a 4th property a few years later for a decent price but not a great one, cost us about another $75k to get a $5k annual income.

There's no way on earth we could expect to duplicate those results in today's crazy real estate market.   We didn't buy at the bottom of the market but we bought close enough that there were still very good deals to be found.

We were both handy at home repairs and were willing to put in the hours to make it happen.   Other folks (like Arebelspy) have followed a different real estate strategy.   His is a great one, ours was better for our situation.  Less return, but way less risk was better for us because we're both older and we have a mentally handicapped daughter.  We're not young enough to start over if things went really bad. 

 Done right, real estate investing can work out really well for you.    Done poorly, well, it can go wrong, just like anything else in life.

[Metalcat]

This will really depend on the person.

I have friends who are almost entirely invested in real estate, meanwhile I have exactly ZERO interest in owning any real estate beyond my little apartment.

Real estate is a different creature and more akin to buying a business than investing in the markets, so it doesn't have a place in the investing order, it's more on the business side than the investments side.

[Paper Chaser]

I don't think traditional real estate investment (landlording, flipping, land speculation, etc) has a specific spot in the investment order. A big reason the investment order works is because index funds exist to mitigate risk. That's why pouring money into stock investments at any time makes sense. With an index fund it doesn't really matter if the market is high or low because you're buying small pieces of the winners and the losers at the same time, and historically there have been more winners than losers so you're likely to come out ahead.

But that thinking changes if everyone could only invest in individual companies. Then, you'd obviously need to be wary of buying stock in the wrong company at the wrong time. It wouldn't make sense to adopt a strategy that had you buying the same individual stock all the time, regardless of the stock price or situation. Buying an investment property is a lot like buying an individual stock. All of your risk for that amount of money depends on the performance of a single asset relative to the time of purchase. There are times when it just doesn't make much financial sense to buy an individual asset. The things that make RE investment work are the ability for the investor to spot market inefficiencies (recognizing "good deals") and add value on their own (sweat equity). Sometimes there just aren't many opportunities for decent performing investments due to the market.

If you want a lower risk RE investment option that could be bought anytime then REITs are basically index funds that hold RE. That could fit into the investment order in the same places that stock investment would. But you really don't get the advantages of market inefficiencies or adding sweat equity, so they seem to exist primarily for diversification to me.

[MountainLakeMama]

Thank you for all the thoughtful replies! I really appreciate all of the insight!

[ChpBstrd]

Buying RE to rent is more like purchasing a business than investing by clicking a button. So the question is kind of like "where does buying a franchise fit into the investment order recommendation?" It's apples to oranges.

Some folks go all-in on RE, and that is probably the quickest way to exit one's 9-5 job forever. But they are trading the 9-5 for the irregular obligations of running a small business, even if they hire a PM. Someone who FIREs on investments alone, OTOH, is truly passive and free of work obligations. Between these extremes are folks like yourself, who take a hybrid approach mixing active and passive investments.

Because physical RE can only be purchased in big chunks, hybrid investors will need to sell some of their passive investments during some periods of time so that they can make a large down payment (usually 25% of the value), plus closing costs, plus setting aside a repair budget and working capital. Then, presumably, when they have enough RE, they return to their regularly scheduled investment order. To illustrate, suppose an investor saves up $100k in their taxable + Roth accounts using the standard investment order. Then they stop investing per the standard investment order, and in fact sell assets to make a $125k down payment plus costs to set up a small RE business. With that done, they return to the standard investment order the following year. They may choose to repeat the process to grow the RE portfolio in the future. At some point, most landlords get tired of the part-time job and liquidate their RE to buy passive investments again.

[Radagast]

We have two houses, each with two units (one a true duplex, the other has an inlaw suite). In both cases, we spent about 20% more than we otherwise would, but the rent paid for nearly all (duplex) or 2/3 (inlaw suite) the mortgage, which made both a better choice than either renting or buying the less expensive house we would have otherwise pursued.

However, this method of real estate procurement causes me to regard it as expense reduction, and not really an investment, so I don't really put it in the investment order in my mind. I am merely able to live rent and mortgage free while buying back 3% more of my houses each year at no extra cost.

Otherwise, you'd have to make an accurate estimate of the rate of return of your property relative to the rate of return of whatever stocks or bonds you would have bought, after adjusting for the effects of all taxes. It sounds hard, but ball park guesses should be good enough and entirely achievable.