Author Topic: Invest in stock market first, rental houses first, or concurrently?  (Read 1231 times)

pnw_guy

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I'm about 10+ years away from FI and am trying to decide the order in which I should invest in different asset classes. I know that I'm (obviously) going to invest in the stock market by purchasing a total stock market index fund, but I also know that I'd like to diversify with rental properties (Note: I'm not looking for reasons to avoid rentals if you're that type of person!).

Should I invest in equities over the next couple of years before turning my attention to acquiring rental houses? My intuition is that this should work well because the number one thing that predicts success in the stock market is time in the market. Or, should I invest in rental houses first before turning my attention towards pumping money into the market? This might be an ideal strategy because it leaves time for principal paydown before retirement. Or as a third option, should I invest in both concurrently (i.e., there's no benefit of investing in equities or rental houses first).

I'm leaning towards the concurrent option, but am option to analyses showing that investing in one asset class before the other is preferable.

waltworks

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #1 on: November 28, 2020, 10:30:34 AM »
You will need to find some decent rental RE to purchase first.

RE is not like stocks. You can't (ok, REITs, sorta) just buy a bunch of random pieces of property and expect to do well. RE is (at least at the beginning) a full time job, and then it's running a part-time business. You make your money by finding really good deals and doing a lot of work up front.

If you want set/forget, just buy index funds. If you want to do RE, start reading and researching and set yourself up to be ready to pull the trigger (this could mean having some extra downpayment cash around, having your credit score up nice and high, making sure your debt/income ratio will let you qualify for a mortgage, etc).

There are not a lot of markets in the US where I would buy residential RE right now, though.

-W

pnw_guy

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #2 on: November 28, 2020, 10:35:05 AM »
You will need to find some decent rental RE to purchase first.

RE is not like stocks. You can't (ok, REITs, sorta) just buy a bunch of random pieces of property and expect to do well. RE is (at least at the beginning) a full time job, and then it's running a part-time business. You make your money by finding really good deals and doing a lot of work up front.

If you want set/forget, just buy index funds. If you want to do RE, start reading and researching and set yourself up to be ready to pull the trigger (this could mean having some extra downpayment cash around, having your credit score up nice and high, making sure your debt/income ratio will let you qualify for a mortgage, etc).

There are not a lot of markets in the US where I would buy residential RE right now, though.

-W

Yep, I'm aware of the differences between stocks and RE. I've also done quite a bit of reading about RE investing. However, one thing that I haven't read about it how to balance a portfolio with both stocks and RE and I'm specifically wondering now about whether it's better to focus on one or the other during my investing career.
« Last Edit: November 28, 2020, 10:37:18 AM by pnw_guy »

Financial.Velociraptor

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #3 on: November 28, 2020, 10:57:22 AM »
If I was a RE type of guy, I think I'd do both in your shoes.  If you are going to finance your RE, you might want to consider a larger than normal bond allocation.  Mortgages are basically 30 year bonds that you are short in the market.  That is, you are doing leveraged investing.  If you were going to do leveraged stock market investing, you wouldn't pick the riskiest asset classes (assuming you were rational). 

I have toyed with getting some rentals on the east side of Houston where prices are cheap and gentrification is just getting started.  A 1500 sq foot home in the Channelview subdivision goes for about 85k for example.  Rents are in the 1000 range and growing. 

waltworks

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #4 on: November 28, 2020, 11:59:35 AM »
Yep, I'm aware of the differences between stocks and RE. I've also done quite a bit of reading about RE investing. However, one thing that I haven't read about it how to balance a portfolio with both stocks and RE and I'm specifically wondering now about whether it's better to focus on one or the other during my investing career.

Depends on the deals you can find on RE, stock prices, and your personal preference. You can do 100% of either one, you can split it up, etc.

For a small-time individual investor, RE is *in theory* a faster way to FI because of the leverage available. There is of course risk associated with that and if there aren't any good RE deals available to you, then it's moot.

I would not sit in cash waiting for a RE crash, if that's your question. Put your money to work. You can always sell stock to buy RE, and vise versa.

-W

Radagast

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #5 on: November 28, 2020, 12:05:52 PM »
It is easier to get started with stocks, and with tax advantages and employer matches probably better return on your money. If maxing out your 401k gets an employer match then obviously that is a better return. If maxing out 401k's and IRA's and HSA's can reduce your taxable income by enough to drop from a 22% tax bracket to 12% or 10%, or get a saver's credit, then work on that first probably. Or at least do the math to be sure.

Beyond that initially stocks still make more sense because they are liquid: it's hard to sell half a house or even a whole house. I recommend continue to invest in your preferred stock/bond mix until you have enough for double a down payment, and then branch into real estate. An exception would be if you will be buying a multiunit place and living in one unit, then it might make sense to jump on that if it will reduce your living expenses.

pnw_guy

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #6 on: November 28, 2020, 04:19:16 PM »
It is easier to get started with stocks, and with tax advantages and employer matches probably better return on your money. If maxing out your 401k gets an employer match then obviously that is a better return. If maxing out 401k's and IRA's and HSA's can reduce your taxable income by enough to drop from a 22% tax bracket to 12% or 10%, or get a saver's credit, then work on that first probably. Or at least do the math to be sure.

Beyond that initially stocks still make more sense because they are liquid: it's hard to sell half a house or even a whole house. I recommend continue to invest in your preferred stock/bond mix until you have enough for double a down payment, and then branch into real estate. An exception would be if you will be buying a multiunit place and living in one unit, then it might make sense to jump on that if it will reduce your living expenses.

As some additional context, we're not starting out from zero. My wife and I currently have about 250K in retirement accounts and within the last year we've both started maxing out our 401K's, Roth IRA's (via a backdoor conversion), and HSA's. We've even started contributions via a mega backdoor Roth.

What we're really considering is whether we should divert that mega backdoor Roth money into real estate or continue pumping it into the market. The whole genesis for this post was the question of whether it makes sense to focus on different types of investments (e.g., equities or real estate) at different points in one's investing career.

dclarke1

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #7 on: November 28, 2020, 08:10:38 PM »
I do both and if I was starting again I would probably get a good property first. Stocks are a good thing to pump your property's cash flows into.

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #8 on: November 28, 2020, 08:17:20 PM »
If you find a good deal on a rental, jump on it.  Otherwise dump it in the market. 

You donít have to plan on how to do this.  Buy property if it makes sense. 


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pnw_guy

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #9 on: November 28, 2020, 08:40:45 PM »
If you find a good deal on a rental, jump on it.  Otherwise dump it in the market. 

You donít have to plan on how to do this.  Buy property if it makes sense. 


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Theoretically, this sounds fine. However, even for an affordable property of 200k, saving up the down payment for an investor loan will take some time (these loans usually require 25% to 30% down). Thus, we'd need to keep our money out of the market so we'd have the cash on hand to buy the right house if it came along.

ChpBstrd

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #10 on: November 28, 2020, 09:24:47 PM »
With RE, your initial return on your down payment is usually low, considering the trouble and risk. Like 5% is fairly par in LCOL areas. The magic happens as your rents rise while your payment stays the same. Ten years later youíre suddenly earning 15% on your down payment. Someday the property is paid off and the ROI goes to the moon. You hope.

Stocks, meanwhile pay a compound return that is highly variable. There is no mathematical way I can think of to compare the two returns because it all depends on the sequence of stock returns. Do you buy stocks right before a nasty correction or at the beginning of a ten year bull?

This makes concurrent seem like the most prudent plan, but also consider your next move. If stocks collapse, housing could do fine. If housing collapses, stocks will too (see 2008). Thus being heavy in RE might position you to sell the RE to rotate into suddenly cheap stocks, but being stock-heavy would leave you with fewer good options to exploit a stock crash.

Papa bear

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #11 on: November 29, 2020, 05:57:28 AM »
If you find a good deal on a rental, jump on it.  Otherwise dump it in the market. 

You donít have to plan on how to do this.  Buy property if it makes sense. 


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Theoretically, this sounds fine. However, even for an affordable property of 200k, saving up the down payment for an investor loan will take some time (these loans usually require 25% to 30% down). Thus, we'd need to keep our money out of the market so we'd have the cash on hand to buy the right house if it came along.
Go get a loan pre approval letter now.  If you find a place and make an offer and itís accepted, youíre going to have 60-90 days to finagle your cash/investments to get your down payment.  Unless youíre going to auction or making a cash offer, you have plenty of time to figure it out. 

Youíre just trading assets for assets.  Your risk is selling stock if the market is down and losing some principal. 


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Papa bear

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #12 on: November 29, 2020, 06:01:06 AM »
With RE, your initial return on your down payment is usually low, considering the trouble and risk. Like 5% is fairly par in LCOL areas. The magic happens as your rents rise while your payment stays the same. Ten years later youíre suddenly earning 15% on your down payment. Someday the property is paid off and the ROI goes to the moon. You hope.

Stocks, meanwhile pay a compound return that is highly variable. There is no mathematical way I can think of to compare the two returns because it all depends on the sequence of stock returns. Do you buy stocks right before a nasty correction or at the beginning of a ten year bull?

This makes concurrent seem like the most prudent plan, but also consider your next move. If stocks collapse, housing could do fine. If housing collapses, stocks will too (see 2008). Thus being heavy in RE might position you to sell the RE to rotate into suddenly cheap stocks, but being stock-heavy would leave you with fewer good options to exploit a stock crash.
If you stay close to the 1% rule for the rent to price, youíre probably looking at 15% cash on cash returns for year one. 

I like to look for closer to 20% after factoring in capital improvements to bring the property back to market rents.  OP shouldnít be buying a place if it only nets 5%.  Keep plugging money into market then. 


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theolympians

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #13 on: November 29, 2020, 10:58:17 AM »
I too live in the NW. A couple things to think about, that may have come up. RE is really expensive in most places now. That said, over time you should gain value, the only question is how much money you can put down to ensure rentals cover the mortgage.

Which brings to the second point. Many localities and having a moratorium on evictions due to the "covid crisis". I don't see those being lifted anytime soon....

ChpBstrd

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #14 on: November 29, 2020, 11:53:16 AM »
With RE, your initial return on your down payment is usually low, considering the trouble and risk. Like 5% is fairly par in LCOL areas. The magic happens as your rents rise while your payment stays the same. Ten years later youíre suddenly earning 15% on your down payment. Someday the property is paid off and the ROI goes to the moon. You hope.

Stocks, meanwhile pay a compound return that is highly variable. There is no mathematical way I can think of to compare the two returns because it all depends on the sequence of stock returns. Do you buy stocks right before a nasty correction or at the beginning of a ten year bull?

This makes concurrent seem like the most prudent plan, but also consider your next move. If stocks collapse, housing could do fine. If housing collapses, stocks will too (see 2008). Thus being heavy in RE might position you to sell the RE to rotate into suddenly cheap stocks, but being stock-heavy would leave you with fewer good options to exploit a stock crash.
If you stay close to the 1% rule for the rent to price, youíre probably looking at 15% cash on cash returns for year one. 

I like to look for closer to 20% after factoring in capital improvements to bring the property back to market rents.  OP shouldnít be buying a place if it only nets 5%.  Keep plugging money into market then. 


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5-6% initial yields are what I come up with every time I use the property evaluation spreadsheet to evaluate local duplexes or apartments in the C-D range in my LCOL area. Thatís factoring in a mortgage, insurance, and a budget for repairs/remods. Of course, D and F grade RE can have much higher yields if one is willing to deal with the headaches and sporadic income.

Papa bear

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #15 on: November 29, 2020, 02:11:21 PM »
With RE, your initial return on your down payment is usually low, considering the trouble and risk. Like 5% is fairly par in LCOL areas. The magic happens as your rents rise while your payment stays the same. Ten years later youíre suddenly earning 15% on your down payment. Someday the property is paid off and the ROI goes to the moon. You hope.

Stocks, meanwhile pay a compound return that is highly variable. There is no mathematical way I can think of to compare the two returns because it all depends on the sequence of stock returns. Do you buy stocks right before a nasty correction or at the beginning of a ten year bull?

This makes concurrent seem like the most prudent plan, but also consider your next move. If stocks collapse, housing could do fine. If housing collapses, stocks will too (see 2008). Thus being heavy in RE might position you to sell the RE to rotate into suddenly cheap stocks, but being stock-heavy would leave you with fewer good options to exploit a stock crash.
If you stay close to the 1% rule for the rent to price, youíre probably looking at 15% cash on cash returns for year one. 

I like to look for closer to 20% after factoring in capital improvements to bring the property back to market rents.  OP shouldnít be buying a place if it only nets 5%.  Keep plugging money into market then. 


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5-6% initial yields are what I come up with every time I use the property evaluation spreadsheet to evaluate local duplexes or apartments in the C-D range in my LCOL area. Thatís factoring in a mortgage, insurance, and a budget for repairs/remods. Of course, D and F grade RE can have much higher yields if one is willing to deal with the headaches and sporadic income.
Right now? Yeah. Yields are terrible.  But, I was still getting 15-20% as recently as mid 2018 in B area properties.   Havenít bought since because everything is stupid bubble expensive. 


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steevven1

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Re: Invest in stock market first, rental houses first, or concurrently?
« Reply #16 on: November 29, 2020, 10:31:33 PM »
In terms of volatility and return (without leverage), stocks and rental real estate are very similar.

The advantage to stocks early in the accumulation phase is liquidity -- the ability to change your mind or seize opportunities as they arise. It's tough to get cash out of a house fast if needed.

Once you have enough in your stock/bond portfolio to buy a rental property twice over (or more), pick one up and see how you like it. You'll still have liquid capital left over, and you won't feel "naked."