Author Topic: arebelspy (or other RE gurus) - I have a question just for funsies.  (Read 3945 times)

yandz

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I know you are an RE master. I know it greatly accelerated your path to FI. etc. I know. etc.  I am not asking if you would have taken a different path.

But...now that you are there:

If you could wave a magic FIRE Fairy wand today and swap out your entire RE portfolio with an "equivalent" (and I will let you define in your own mind what that means to you because I know it isn't that clean) equities+bonds portfolio, would you do it?  Why or why not?

Thanks for playing my hypothetical, not that productive, thought experiment game.

Bearded Man

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #1 on: June 26, 2015, 07:20:31 PM »
Personally I wouldn't. The tax benefits, high CoC returns, tax free income due to expense deductions, principal pay down, appreciation (in my area it's huge) are just too good to pass up. Frankly IME RE investing is better for FIRE than index investing, as it requires less capital for higher return, and you get tax benefits to boot.

My returns in RE just from cash flow alone are far higher than I could safely get in the market. Add to that appreciation and such and it's ridiculous. And one day the mortgages are paid off and my income increases that much more. And I don't need to worry about stock dips, running out of money, etc.

That said, part of my strategy will involve having several hundred thousand in index funds that I could live off alone OR...use on occasion for emergencies. Since my rental income far exceeds my expenses in retirement, even this is overkill. But I like safety. Plus there is nothing wrong with working for a few more years at my income, it's a huge opportunity cost for me to stop working, so I might as well get money while I can.

If I get to the point where I can't get a job or have my desired target savings, I will likely stop working. That said, with a career change I could see myself working to 45, which I would consider to be a reasonable time to retire as well, since I would have worked a long time at that point. Currently 33 planning on retiring at 40.
« Last Edit: June 26, 2015, 07:27:46 PM by Bearded Man »

yandz

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #2 on: June 28, 2015, 07:53:28 PM »
Thanks for your perspective, Bearded Man.  I am always interested in the thought processes that direct path decisions. I know many of the reasons why people pursue RE to begin with, but thought it would be an interesting thought experiment to hear whether and why folks continue to favor it.


arebelspy

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #3 on: June 28, 2015, 08:48:57 PM »
No, for one main reason: Stability of income causing much less sequence of returns risk.  This, in turn, allows me to FIRE at a much lower asset value (and higher WR--even though nothing is being withdrawn).  I.e. I can FIRE much sooner.  If I traded that into an equity portfolio (which I could, by selling), I'd have to keep working longer to have enough to lower that to a reasonable SWR due to the higher volatility.  So unless I can trade it into a portfolio worth substantially more than my RE holdings, it wouldn't be worth it (say, someone was willing to give me 1.5MM for 1MM worth of real estate--it wouldn't be worth trading 1MM of RE for 1MM of stocks/bonds).

I touched quite a bit more on this when discussing the pros/cons of index investing versus real estate investing on one of the Radical Personal Finance Podcast episodes I was on.

It's a ridiculously fast path to FIRE for two reasons.  First, you earn money fast, have lots of opportunities to add value, can leverage prudently and easily, etc.  In other words, it makes you money fast.

That's the less important reason though.  It lets you FIRE at a lower asset value due to the higher returns (assuming you bought right, not bought something that has terrible returns).  That's the real trick that lets you FIRE so much quicker.

So it's not just that I recommend it for getting to FIRE because it makes you money quickly, but it literally lets you FIRE with less.  f you traded that into equities, you'd no longer be FI at a reasonable WR.

Did that make sense?  :)

Great question!
« Last Edit: June 28, 2015, 08:52:34 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

AlexK

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #4 on: June 28, 2015, 09:05:31 PM »
I plan to sell some rental properties when the time is right and convert to stocks. One property I have is worth $240k and rents for only $1225. So the cash flow return is only 5%. However the appreciation over just the past year has been 20%. So overall this house has been great for my net worth but since it is turning into a very low yield rental I plan on dumping it while the market is high. I am waiting until I retire so the tax hit won't be as bad.

Tesla is building a 6500 employee battery factory nearby so that has boosted the prices in my market. It has had the effect of lowering the rental yields. Perhaps it will raise the rents when the factory opens but hasn't yet.

I certainly don't regret using real estate to become wealthy but it has it's ups and downs. An example of a down is in January a 4-plex of mine had it's gas shut off by the fire department because they said the gas line (which had been working fine for 38 years) was undersized. 1 month and $5k later the tenants had gas again. Lost a tenant over that. Mailbox money every month continues to amaze me though.




JLR

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #5 on: June 28, 2015, 10:06:48 PM »
Thanks for the clear explanation.

Another Reader

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #6 on: June 28, 2015, 10:37:19 PM »
I own equities, but the stable income, leverage and tax advantages favor real estate.  Equities comprise less than 20 percent of my net worth right now.  I think bonds are almost always mispriced for their risk, so the only bonds I own are in a retirement account that is invested in Vanguard Wellington fund.  I would never want to be in the position of only owning paper assets.

I'm a huge believer in buying assets on sale.  As the income comes in, it is allocated to purchasing whatever is the best value.  If nothing represents good value, cash accumulates until something makes sense or I use it to pay down a mortgage.


Ricky

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #7 on: June 28, 2015, 11:12:21 PM »
Owning real estate is a different mindset than equities. It's a business. Yes, it can be fairly passive (never completely), or it can consume you. It just depends on how you run your business. The only real estate that are strictly "investors" are people that own REITs and crowdfunding, or some other type of private money or note invesring. If you own a price of property then you're a small business owner too.

I think if you go in with a business mindset then you will create a great passive income stream. You screen your tenants well, prevent problems before they happen, have a network of people you can call, etc. if you just throw everything together and hope for the best then you're better off owning equities.

arebelspy

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #8 on: June 29, 2015, 07:56:03 AM »
Owning real estate is a different mindset than equities. It's a business. Yes, it can be fairly passive (never completely), or it can consume you. It just depends on how you run your business. The only real estate that are strictly "investors" are people that own REITs and crowdfunding, or some other type of private money or note invesring. If you own a price of property then you're a small business owner too.

I think if you go in with a business mindset then you will create a great passive income stream. You screen your tenants well, prevent problems before they happen, have a network of people you can call, etc. if you just throw everything together and hope for the best then you're better off owning equities.

Great post, totally agree.

And I'd add a caveat to the last sentence that buying right helps forgive a lot of mistakes, and buying wrong, no matter how great a lot of your other setup is, might be insurmountable.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

yandz

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Re: arebelspy (or other RE gurus) - I have a question just for funsies.
« Reply #9 on: June 29, 2015, 09:32:31 AM »
I really appreciate the insight and discussion here. 

In the last year since "discovering" FIRE, I have gone from "don't want to mess with purchasing/owning a rental" to "maybe I should suck it up and do it." It still feels intimidating to me - possible steep learning curve with potentially costly mistakes.  We are very lucky in that we are both relatively high earners, so the "acceleration of FIRE" factor wasn't enough to win me over since I feel like we are already fast-tracked (about 5.5 years out from a 4% SWR, not sure we would stop working then). But as I have been learning more, seems like some of the other benefits might pull me toward RE or at least to diversity in that direction...