Unexpected windfall...maybe time to become a landlord?

[Roland of Gilead]

I have a tiny trading account that I have been dinking around with for several years, doing about 10% to 20% return a year (sometimes beating S&P500 some years losing to it).  It was mostly for fun.

Until now.

There is a company I have been following for a long time, Endocyte.  I think I may have posted about it a few times in threads on here.

Because they were trading near 1/3 of cash in July and August, I had been sinking a lot of money into the stock, buying and selling it for pennies in my Wells Fargo account since I get 100 free trades a year.   We are talking about buying 5000 shares for $1.21 and selling them a few days later for $1.28.  Small time stuff.

On September 28 I had 45,000 shares.  I was overexposed, but on Sept 29 I sold off 5,000 shares I had purchased for $1.37 for $1.42.   I bragged to my wife we just made $200 :-)

Monday morning we wake up and I make coffee, do my usual stock check, and do a double take.  Endocyte is $2.80 a share.  I flip out.  I start searching what is going on and it climbs to $3.10 a share.  I sell 10,000 shares, keeping 30,000.   The next day Endocyte hits $6.10 a share.  I sell 2000 more but this puts us past what we need for ACA MAGI so I do not sell any more.   Endocyte hits a high of 6.50 this week but ends the week around 5.75.   My account has $27,000 of realized gains and over $120,000 of unrealized gains.  In the space of a couple of days.  This was a trading account worth about $50,000 last week.

So now we are thinking maybe we should use this money to buy a rental house, even though I have been anti-rental in the past.  I don't know...just excited to have such a nice week and thinking of diversifying from the stock market (most of our money is in index funds).  This is sort of like found money.

[FINate]

Congratulations on the windfall!

It sounds like you're already aware of this, but it's important to remind yourself that this was pure dumb luck and not due to any skill or insight on your part. Like you said, it's found money. Why is that important? Because you should resist the urge to double down or further speculate with the proceeds.

In other words, nothing about this should change your investing strategy. If you were previously negative on real estate, the windfall alone should have zero influence on this. If you were already thinking about getting into the landlording business, and you have the time and willingness to put into it, then sure go for it. Otherwise, just count yourself as lucky, celebrate with a nice dinner, and fold your profits into your total stock market index fund.

[Roland of Gilead]

Oh, it is total dumb luck.  It is amazing how protective of the money I get.  I didn't even take my wife's suggestion to buy a Papa Murphy's take and bake in celebration today because they are $10 only on Tuesday. 

I just keep seeing how successful so many Mustachians are with their rentals, including Arebelspy who has his shit so together it is as dense as osmium.

[tralfamadorian]

So now we are thinking maybe we should use this money to buy a rental house, even though I have been anti-rental in the past...

Congratulations! 

I'm very pro-investment property so for me, the answer would be an easy yes.  But if you've been anti-rental in the past, has anything changed for you either than you have free money to spend? 

[Roland of Gilead]

The thing that changed is that this money (if the gains hold up long enough for me to sell without a lot of taxes) was not really part of my retirement SWR calculations and so we could diversify into real estate and not get hurt if it didn't work out.

Before, if we sunk money into a property and had disaster, it might really hurt our long term retirement.

Just thinking around it.   I do like fixing up houses, just not sure about the whole tenant thing.  I keeping thinking if I can find someone like ourselves to rent to (no kids, 820 credit rating, neat)

[lbmustache]

Just thinking around it.   I do like fixing up houses, just not sure about the whole tenant thing.  I keeping thinking if I can find someone like ourselves to rent to (no kids, 820 credit rating, neat)

This should be relatively easy (imo) depending on two things:

1) What the rental market is like. Are there a lot of vacant properties, do places rent quickly, etc.

2) Your place is nice enough to be worthwhile to someone with those qualities you listed. I would describe myself as mirroring your reqs exactly, but I'll only rent places where there's a sense of "pride of ownership." No places where things are run down, falling apart, MIA landlord, etc. (Of course, this varies by individual, this is just my perspective)

[frugaliknowit]

Congratulations on your windfall!!  Awesome!!

I wouldn't buy a rental just as "a place to put the windfall"...You need to ask yourself whether you want to be a landlord.  It's not the only way to make a buck.  If you DO want to be a landlord, the money is made "ON THE BUY".  You need to find something below market to earn a great rate of return.  This can take a lot of time and work.  Do you have the time and patience?

You don't need to buy real estate to diversify.  You can just make your index fund portfolio MORE DIVERSE.

[FINate]

The thing that changed is that this money (if the gains hold up long enough for me to sell without a lot of taxes) was not really part of my retirement SWR calculations and so we could diversify into real estate and not get hurt if it didn't work out.

Before, if we sunk money into a property and had disaster, it might really hurt our long term retirement.

Just thinking around it.   I do like fixing up houses, just not sure about the whole tenant thing.  I keeping thinking if I can find someone like ourselves to rent to (no kids, 820 credit rating, neat)

Money is money is money, regardless of source. Evaluate investment property independent of emotions associated with a windfall (decreased risk aversion is emotional), and compare it to putting that money to use in your existing investment strategy and what this can do for your long term retirement plans. If you were already thinking about diversifying into RE (there are other options to diversify, btw), or if you think you now need to diversify with the additional funds, then ok. But don't conflate the excitement of found money with making dispassionate decisions for retirement.

I have nothing against investment property. I have one that's doing quite well, as to others on this board (as you mentioned). But it is work, and not without substantial risk, and you need to be willing to really commit to the long term (10 years or more). You have to be sure you want the headache and can stomach the ups and downs in the RE and rental markets -- amazing how quickly people can sour on RE when the market is declining and/or don't have the means to ride out a decline in rents (potential to be cash flow negative) and selling in a down market or riding out low rents can wipe you out rather quickly.

[Roland of Gilead]

Congratulations on your windfall!!  Awesome!!

I wouldn't buy a rental just as "a place to put the windfall"...You need to ask yourself whether you want to be a landlord.  It's not the only way to make a buck.  If you DO want to be a landlord, the money is made "ON THE BUY".  You need to find something below market to earn a great rate of return.  This can take a lot of time and work.  Do you have the time and patience?

You don't need to buy real estate to diversify.  You can just make your index fund portfolio MORE DIVERSE.

So if in my area houses are selling for $100k to $150k and the same houses are renting for $600 a month, it is just a big no?   How do I convince someone to sell me a house for $60k so I can make this 1% rule work?

It isn't even that this is a super hot area.  I don't know why the rents are so low here.  We are renting here for the winter and paying $500!

[FINate]

So if in my area houses are selling for $100k to $150k and the same houses are renting for $600 a month, it is just a big no?   How do I convince someone to sell me a house for $60k so I can make this 1% rule work?

It isn't even that this is a super hot area.  I don't know why the rents are so low here.  We are renting here for the winter and paying $500!

In your judgement the rents are low there, yet you want to invest in a rental? I don't get it. What's the ROI after expenses (insurance, mortgage, maintenance, vacancies, property taxes, etc.)? I don't have any other info, no idea what your locale is, but suspect you can do better investing in something else.

[ender]

So if in my area houses are selling for $100k to $150k and the same houses are renting for $600 a month, it is just a big no?   How do I convince someone to sell me a house for $60k so I can make this 1% rule work?

It isn't even that this is a super hot area.  I don't know why the rents are so low here.  We are renting here for the winter and paying $500!

Pretty much "no" then yeah.

I mean, a $150k mortgage with 1.2% property taxes is $700+ a month meaning your return would be negative (obviously you could pay cash in your situation).

But even if you paid cash for a $150k place, your return on $600/month rent, zero maintenance expenses, zero vacancies, no insurance, no owner paid utilities, and 1% property tax only is 3.8%. Put even optimistic numbers into maintenance, insurance, and vacancies and there's not a chance that it's profitable.

[Roland of Gilead]

Really starting to sound like I should just continue to invest in small biotech companies that I research lol.

[ender]

You can always diversify into something more stable than stock index funds too.

Depending on how much your total net worth is relative to your spending this can provide psychological benefit. IE if you have $1M in stock index funds and another $400k extra, spend $40k/year, putting the extra into more stable investments will reduce your overall expected net worth but also reduce risk. Since in this situation you'd have the 4% rule covered by your $1M in index funds the extra returns aren't "needed" and losing them is a tradeoff for an insurance of sorts.

[pbkmaine]

Really starting to sound like I should just continue to invest in small biotech companies that I research lol.

Sell it when the tax situation is right. Take your gains and put them in an index fund. Take your original invested amount and continue to trade it.

[tralfamadorian]

So if in my area houses are selling for $100k to $150k and the same houses are renting for $600 a month, it is just a big no?   How do I convince someone to sell me a house for $60k so I can make this 1% rule work?

Yes, it would be possible to purchase properties under market value with some research, due diligence and a thick skin for the many no's you would receive.  You are in a great situation where you can make cash offers and close as soon as title/inspection clears.  Then you can turn around and immediately do a delayed financing mortgage for up to ~70-80% of assessed value or 100% of your purchase price including as closing costs and fees (see "delayed financing exemption" https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html), whichever is lower.  So if you do your numbers right, you can end up with a house(s) that make a profit in which you have invested $0.

However, $600/mo is tough no matter how much you pay for the house.  CapEx and repairs would take up a much larger percentage of your rents.  I'm not saying that people don't invest in this rent range and do well, just that it's not an easy area to start with.  So, throw away the 1% rule and run the actual numbers.  Rent vs PITI, management, vacancy, repairs and capex.  Then pick your minimum profitability- it can be a number, like $200/mo, or a percentage, like 12% cash on cash return. 

Do you have ties with any other areas with higher rents that you know well (hometown, alma mater, etc)?   

[AccidentalMiser]

Or you could just hold it until it gets back to $1.50.  What you're doing isn't investing, it's gambling.  This is especially true if you had to do research after the fact to find out why it went to $6.  I'm not opposed to gambling in the market, I've done it lots of times but don't pretend it's something it isn't.

If you don't know you want to be a landlord, you don't.  If places sell for $100-150k and rent for $600, there's not enough upside for your risk.

I'm a landlord and I hate it.  I've always hated it.  I will continue to hate it.  Thus, I'm not the best person to give advice.

I'm a big fan of Jim Collins' approach to investing.  jlcollinsnh.com

[Roland of Gilead]

I do contend it was not exactly gambling because I had followed the company for years and knew their cash burn and drug line.  I bought big because they were trading at nearly 1/3 of their cash on hand and were lowering their cash burn to just 4% of cash on hand per quarter.   So it was a multi year lottery ticket with a chance to win each month and a 2020 expiration date.  I didn't *need* to know if a company would buy them or if their drug would suddenly work or if they would acquire or partner.  All I needed to know was $10 bills were being sold for $3.50 and did not seem to be counterfeit.

Edit:  But the good point here is it takes work and a lot of luck to find a company as the above.  I do not know of another deal out there right now like this.   It does sound like I would also be gambling if I went into landlording without knowing my market or expected return.

[SwordGuy]

You need to read the books on the sticky thread on the real estate folder.   

There is no such thing as a "1% RULE". 

It's a rough guideline.

It is not adequate to use to determine whether to invest in a particular property.   It's good enough to decide NOT to invest in a property.

Then you'll know how to determine the potential profitability of a property BEFORE you invest.

And how to structure a deal to get a better return on your investment.

It's all about the numbers.

[Bicycle_B]

Roland, congratulations on your success in stock research. Until you explained your reasons for making the original purchase, I had supposed you somehow stumbled into the uptick phase of someone's pump and dump scheme. 

With the volatility involved, I personally would just sell the stock, pay the necessary tax and count myself lucky to have such a clear win.  Unless you have reason to believe its "true value" is much higher.  Basically my uninformed calculation is that the risk of the surge deflating is more than 15% tax rate, so take the money and run!

I agree with the others who say don't invest in real estate just because you have new money.  Not educated enough in the matter to evaluate your area, but have seen many cases where it's harder to get out of real estate than stock.  If you're looking for adventure/experience/experimentation, find or structure deals that allow you to invest minimal amounts and have limited liability, maybe?  (I tend to think that some of the people rah-rah about real estate discount how valuable it's been to pick up property after a historic crash. I'm not expert, though).

[Roland of Gilead]

It was mostly the feeling of missing out on something since so many MMM followers seem to fund part of their retirement with real estate.

I do worry that the overall stock market is getting a bit toppy, especially to dump even more money into it right now.  The alternatives like short term bonds don't even keep up with inflation much less provide for a 4% SWR.

[AccidentalMiser]

I do contend it was not exactly gambling because I had followed the company for years and knew their cash burn and drug line.  I bought big because they were trading at nearly 1/3 of their cash on hand and were lowering their cash burn to just 4% of cash on hand per quarter.   So it was a multi year lottery ticket with a chance to win each month and a 2020 expiration date.  I didn't *need* to know if a company would buy them or if their drug would suddenly work or if they would acquire or partner.  All I needed to know was $10 bills were being sold for $3.50 and did not seem to be counterfeit.

Edit:  But the good point here is it takes work and a lot of luck to find a company as the above.  I do not know of another deal out there right now like this.   It does sound like I would also be gambling if I went into landlording without knowing my market or expected return.

Yea, fair enough.  If they're at a deep discount to cash, then I see your point there.

[Bicycle_B]

It was mostly the feeling of missing out on something since so many MMM followers seem to fund part of their retirement with real estate.

I do worry that the overall stock market is getting a bit toppy, especially to dump even more money into it right now.  The alternatives like short term bonds don't even keep up with inflation much less provide for a 4% SWR.

FOMO's a terrible investment strategy!  Back away from the cliffside, Roland.   
:)

I feel you re stock market valuations.  Fwiw, I used portfoliocharts.com to explore possible portfolios that are less reliant on US stock than my original portfolio.  Haven't changed much yet, but did move a little and may do more so.  Did increase international relative to US, and shift a little away from stock while retaining a substantial amount.

https://portfoliocharts.com/

I found it informative to use the calculators to explore portfolios that with non-US stocks, and non-stock investments.  Even weird stuff like cash, gold and commodities has been helpful in some combinations.  The portfolio examples are worth looking at.  My best (though probably useless) thought is to look for portfolios that would prosper relatively in an era that combines falling bond and stock prices with low inflation, yet produced decent results even in the data shown (which included bad times for stocks and bonds, but only in a high-inflation era).  It made me feel like there are a lot of choices that will work okay.  Diversification seems to have a lot of strengths if done with low costs.

Not an expert, though - just sharing thoughts.

[Kevin Aster Tin Obin]

If want to diversify into real estate but remain hands off, have read realtyshares.com might be worth a look..

[SimpleSpartan]

I'd go index funds and use it as a buffer come your retirement. For the simple fact that even if your heavily invested in mutual funds and can withdraw 3% its almost a guarantee you wont run out of money. Dump it all in and don't look back.

[sequoia]

Congratulations on your windfall!!  Awesome!!

I wouldn't buy a rental just as "a place to put the windfall"...You need to ask yourself whether you want to be a landlord.  It's not the only way to make a buck.  If you DO want to be a landlord, the money is made "ON THE BUY".  You need to find something below market to earn a great rate of return.  This can take a lot of time and work.  Do you have the time and patience?

You don't need to buy real estate to diversify.  You can just make your index fund portfolio MORE DIVERSE.

So if in my area houses are selling for $100k to $150k and the same houses are renting for $600 a month, it is just a big no?   How do I convince someone to sell me a house for $60k so I can make this 1% rule work?

It isn't even that this is a super hot area.  I don't know why the rents are so low here.  We are renting here for the winter and paying $500!

You will need to do some research about housing in your area, just like you did your research for your stocks. Some of our rentals were foreclosed property, so the price was lower but we had to put some work into it. We can hire someone to do the work, but then it will be more expensive.

If you do not want to be a landlord, you can always hire someone to manage it. Again do your research here. Does the number make sense for you?

[Dicey]

I was thinking this was fake until I saw who had posted it. Good on you, RoG!

Please allow me to put on my landlord hat to ask a few questions. Do you want to put as much time and research into the rental market as you do with your stocks? Do you want to add another layer of worry to your life? Is either of those is a no, just invest in the stock market. In fact if either of those is no, same answer.

You might want to just buy low cost ETF's instead of individual stocks if you really want to hit the Easy Button.