Author Topic: Does real estate work equally well as stock for early retirement?  (Read 4341 times)

moneymanagermom

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My husband and I have almost 1 million in real estate assets and very little in stock.  It seems MMM talks mostly about stock dividend (much less about real estate). Would you consider that portfolio to be equal? We have income from two rental properties that have appreciated nicely.  We couldn't currently live off the monthly income of those two properties however.

Interested in your thoughts! Thanks!

MrMonkeyMoustache

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Re: Does real estate work equally well as stock for early retirement?
« Reply #1 on: January 04, 2017, 03:23:10 PM »
JMO, but if you're looking at it from an investment perspective, it's not even close. You will not get a pre-inflation average return of 7% or so in real estate.

Not a fan of real estate at all. Curious to hear other opinions.

Retire-Canada

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Re: Does real estate work equally well as stock for early retirement?
« Reply #2 on: January 04, 2017, 03:33:33 PM »
My husband and I have almost 1 million in real estate assets and very little in stock.  It seems MMM talks mostly about stock dividend (much less about real estate). Would you consider that portfolio to be equal? We have income from two rental properties that have appreciated nicely.  We couldn't currently live off the monthly income of those two properties however.

Interested in your thoughts! Thanks!

MMM does not talk about stock dividends mostly, but he does like stocks. He is counting on withdrawing 4% of the initial portfolio value adjusted for inflation for the span of his life.

Can you get $40K/yr adjusted income each year for inflation from your $1M real estate reliably after all expenses?

ketchup

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Re: Does real estate work equally well as stock for early retirement?
« Reply #3 on: January 04, 2017, 03:42:57 PM »
As always, "it depends."  What kind of cashflow and IRR do you get from your rental properties?

MMM has owned real estate investments in the past.  He doesn't bring it up too much on the blog probably because it's a much bigger topic than stocks ("Just throw it into VTSAX" is a lot simpler than explaining the nuances of real estate).

moneymanagermom

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Re: Does real estate work equally well as stock for early retirement?
« Reply #4 on: January 04, 2017, 04:22:48 PM »
Thanks for the contributions. We currently have cash flow of $1,978 per month total. Once they're paid off (22 years or sooner) we'd bring in $5,700 per month (at today's rental rate). Sorry, I don't know what the IRR is. We're currently debating...pay off those two homes aggressively or buy another investment property. 

We are quite happy with real estate (knock on wood- haven't been burned yet) and stocks feel riskier to us, but I often question that when I'm hunting around this blog.

Catbert

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Re: Does real estate work equally well as stock for early retirement?
« Reply #5 on: January 04, 2017, 04:27:51 PM »
There are two potential problems with real estate generating your retirement income:

-lack of diversity compared to a broad stock market mutual fund.  1M of real estate in my HCOL area would get you 2-3 condos at most.  Easy for one to become vacant, get trashed or overall area market to go down and your income to be gutted for a year.

-Difficulty in selling and inability to sell partial investments.  Mutual funds sell at the click of a mouse while you know what it takes to sell a property.  If you need 20K it's easy to sell a portion of your 1M mutual fund.  But you can't sell 2% of your rental unit(s).

If you've held your rental properties for a long time you can figure out how much income you can get as a minimum and on average in a year.  Is that enough to live on?  Is it 4% of the value?  You may find that a mix of mutual funds and real estate will work better when you start taking money out.

Retire-Canada

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Re: Does real estate work equally well as stock for early retirement?
« Reply #6 on: January 04, 2017, 04:35:00 PM »
Thanks for the contributions. We currently have cash flow of $1,978 per month total. Once they're paid off (22 years or sooner) we'd bring in $5,700 per month (at today's rental rate). Sorry, I don't know what the IRR is. We're currently debating...pay off those two homes aggressively or buy another investment property. 

So $2K/month income = investments of ~$600K. That assumes you are including long-term maintenance costs and vacancy expenses in that $2K. If you are not the equivalent investment value is worse.

Just to clarify when you say you have a $1M in real estate assets does that mean $1M in equity and then mortgages or is that $1M in homes values made up of both equity and mortgage?

arebelspy

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Re: Does real estate work equally well as stock for early retirement?
« Reply #7 on: January 04, 2017, 04:35:23 PM »
I did an hour+ long podcast on this exact topic: Real Estate vs. Stocks (specifically index funds) for early retirement, and talked about the pros and cons of real estate for early retirement.

https://radicalpersonalfinance.com/78/

There's a LOT of content in there, but if you're really interested in learning about the topic, I think it's worth your time to listen, rather than just read one paragraph replies in a forum thread that don't begin to cover everything (not that the podcast does, but it's much more thorough).

The first, and most important question, is: is the real estate a good investment?  If it is, it's great for retirement (for a few reasons, which make it better than stocks, IMO)!  If it's not, dump it.
« Last Edit: January 04, 2017, 04:36:57 PM by arebelspy »
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Fishindude

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Re: Does real estate work equally well as stock for early retirement?
« Reply #8 on: January 04, 2017, 04:59:11 PM »
I trust real estate ahead of stocks and have three times more invested in real estate than I do in the market.  With real estate you have some control over the outcome via your efforts.  In the stock market I feel like I am blindly trusting with no guarantee.

I've got a $400,000 commercial property that has been kicking out $4000 per month free and clear after expenses for the last sixteen years, and it's leased for another 4 years.   That's a consistent 12% return and it still has good resale value if I ever unload it.

moneymanagermom

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Re: Does real estate work equally well as stock for early retirement?
« Reply #9 on: January 04, 2017, 05:10:04 PM »
Thank you all. I will check out that podcast. I would qualify both rentals as very good investments at the moment- stable tenants for 4+ years, rent increases of 5% each year (though, I don't assume that will continue).

I hadn't intended to get in the weeds on the particulars of the rentals, but I suppose that's inevitable...perhaps this will help make more sense-

Total value of 3 properties (2 rentals, 1 primary residence that we are willing to part with so I am including it)
1,992,000

total owed on all three properties
990,000

Current cash flow: 1,998
cash flow w/o mortgages: 5,700


Bicycle_B

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Re: Does real estate work equally well as stock for early retirement?
« Reply #10 on: January 05, 2017, 11:09:13 AM »
Not a real estate expert here, but it's hard to understand the return on your investments since your home is "included here".  For clarity, it might be wise to separate the income properties from the home in your calculations.  If you leave a paid-off home, for example, you will incur rent.  The cost/value proposition in selling your home and replacing it with stock is different from the proposition of selling your rental properties and replacing them with stock.

Cwadda

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Re: Does real estate work equally well as stock for early retirement?
« Reply #11 on: January 05, 2017, 11:23:01 AM »
I'm doing both real estate and VTSAX.

For any investment, if you know what you're doing then I think you'll be fine. And throwing money into VTSAX is knowing what you're doing IMO. Basically paying .05% expense ratios in a passively managed fund for great returns.

Have you considered using a Home Equity Line of Credit to get yet another property?

prognastat

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Re: Does real estate work equally well as stock for early retirement?
« Reply #12 on: January 05, 2017, 11:44:35 AM »
I only invest and don't keep real estate.

My main 2 reasons:
1. Since you are invested in a very limited set of things with real estate(unless you have a crazy amount of real estate) if something goes severely wrong with any of them, it burns down, gets flooded, hit by a hurrican/tornado, earthquakes etc then it has a mayor impact on your earnings. Now the market can crash for stocks(although so can a real estate market where your property is), however if just 1 individual stock in my mutual funds tanks then it barely has an effect on me.
2. It requires far more work to manage real estate than a mutual fund. Mutual Fund requires almost 0 work. Now for real estate you would have to get a annual return of about 7% plus expenses plus a reasonable amount to cover the amount of hours you worked on collecting rent, repairs and maintenance.

This doesn't mean you can't come out ahead in real estate, but in my opinion it is far more work and far riskier.

Turnbull

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Re: Does real estate work equally well as stock for early retirement?
« Reply #13 on: January 05, 2017, 12:23:39 PM »
You will not get a pre-inflation average return of 7% or so in real estate.




We make 20%+ on our two duplexes after payments and the 50% rule (including management expenses), not to mention the tax advantages of depreciating the asset. We've owned up to 15 doors at one time and I would never buy an investment property if the return was as measly as 7%. Yes, rentals are more trouble than setting up a checking account draft to VTSAX but the returns can be much better because they are more work. The best situation in my opinion is to have both rentals and be adding to the index funds at all times.

You can also take advantage of the inefficiency of a local real estate market in ways you cannot in the stock market. We bought one of our duplexes a few years ago for 90k from a non-Mustachian who was having some serious money issues. He was glad for us to take it off his hands. We have someone interested in it now for 130k but we probably will not sell just because we like that steady money coming in every month.

Real estate isn't the only answer, but it's too good to dismiss completely.

Enigma

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Re: Does real estate work equally well as stock for early retirement?
« Reply #14 on: January 05, 2017, 12:44:30 PM »
Total value of 3 properties (2 rentals, 1 primary residence that we are willing to part with so I am including it)
1,992,000
total owed on all three properties
990,000

Current cash flow: 1,998
cash flow w/o mortgages: 5,700

Your capitalization rate needs to be clearly identified before moving further.

Capitalization Rate = Net Operating Income / Current Market Value

Cap Rate = (5700x12 - repairs/expenses) / 1,992,000
Cap Rate = (68,400 - Estimating 0k?) / 1,992,000
Cap Rate = 68,400/ 1,992,000
Cap Rate = 3.4%

(Pretty low in my opinion....  my Cap rate on my rental properties tends to be around 10%+)

Blindsquirrel

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Re: Does real estate work equally well as stock for early retirement?
« Reply #15 on: January 07, 2017, 08:40:04 PM »
   Arebelspy did it. You can also use RE to be FI. It is not rocket surgery but it does take some work. Different strokes for different folks.

SwordGuy

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Re: Does real estate work equally well as stock for early retirement?
« Reply #16 on: January 07, 2017, 09:23:25 PM »
I love rental properties.

$45,000 in stock produces $1,800 a year at the 4% SWR and will sell for $45,000.

$45,000 in a single-family home in my market produces $4,800 a year in profit (i.e., after taxes, expenses and repairs/vacancy set-asides).  And if I sell it I will put $75,000 in my pocket after the realtor takes their 6%.

Yeah, I put more work into finding and fixing up the property.   (Significantly more work!)
And I spend an hour or two a couple of times a year dealing with issues that crop up.  The property management company deals with the rest.

And if I know I might need some ready cash for something, I can prepare for that and set up a HELOC on the property.

There are also downsides, but real estate has a lot of upside compared to stocks.