Author Topic: Would you rather have 1 Million in Real Estate or 1 mill. in stocks during FIRE  (Read 3779 times)

andysandp

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Would you rather have Real Estate valued at 1 million dollars giving $50,000 in Net Rent or 1 Million in stocks using the 4% rule during FIRE?

I know in some areas you should get more then $50,000 in Net Rent, but this is Boston where you get low rental yields.  Boston has been historically stable even during 2008 crash.

Please note Net Rent is Rent after all Expenses including Management Fees and CAP EX.  Let's say Depreciation starts now at 1 million.

1 million in stocks should give you $40,000 for the first year and then you increase it each year with inflation.

Thoughts?

« Last Edit: March 22, 2018, 11:26:35 AM by andysandp »

trollwithamustache

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Its also worth saying real estate isn't truly passive income. You need to find decent tenants, the sewer line plugs you or your plumber needs to be out there ASAP ect. 

If you are an experienced real estate guy, this is stuff you are good at doing. If you are not, real estate can come with an expensive learning curve.

Stocks you can stick it all in VTSAX and not have to do anything.

MustacheAndaHalf

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The original post mixes returns and a need for money.  The real estate investment gives 5% now, and the stock investment probably has higher returns than that - maybe 7%.  Regardless of which one you pick, you want $40,000 per year to live on (the 4% withdrawal rate).

A second problem for the real estate investment is what you do with the extra $10,000 income you don't need to live on.  You can't buy another property with it, and if you invest in the stock market then you're not really separating the two possibilities very clearly.

AlexK

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Stocks! I have this exact issue, slowly been selling real estate and putting it into stocks. I like that with stocks you cal sell a small amount. When you sell a property that has appreciated it is a huge tax event.

trollwithamustache

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The original post mixes returns and a need for money.  The real estate investment gives 5% now, and the stock investment probably has higher returns than that - maybe 7%.  Regardless of which one you pick, you want $40,000 per year to live on (the 4% withdrawal rate).

A second problem for the real estate investment is what you do with the extra $10,000 income you don't need to live on.  You can't buy another property with it, and if you invest in the stock market then you're not really separating the two possibilities very clearly.

to be fair, you can borrow against a house. So if OP has a HELOC he has the flexibility.  I believe there can be tax advantages to depreciating Real estate too... so that can boost ones effective return.  That's all part of being a knowledgeable real estate guy.

Tabaxus

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Stocks.  No doubt.  Too much time and brainpower necessary to deal with real estate.

Letj

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It depends on what you mean but $1,000,000 in real estate; leveraged or not?  Yes, I will opt for $1,000,000 in leveraged real estate thatís generating $50K net because I can use my $1,000,000 cash and invest in stock market. I own rental properties which I bought, fixed up and cashed out so I donít have any of my initial investment tied up. Itís the best if both worlds.

gerardc

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It depends on what you mean but $1,000,000 in real estate; leveraged or not?  Yes, I will opt for $1,000,000 in leveraged real estate thatís generating $50K net because I can use my $1,000,000 cash and invest in stock market. I own rental properties which I bought, fixed up and cashed out so I donít have any of my initial investment tied up. Itís the best if both worlds.

So leverage, use rent to lower/eliminate mortgage payments, sell once mortgage all paid off, then buy stocks. Is this usually better, worse, or about the same as simply investing the down payment straight away? I assume more variance, depending on the value your real estate turns out.

Letj

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It depends on what you mean but $1,000,000 in real estate; leveraged or not?  Yes, I will opt for $1,000,000 in leveraged real estate thatís generating $50K net because I can use my $1,000,000 cash and invest in stock market. I own rental properties which I bought, fixed up and cashed out so I donít have any of my initial investment tied up. Itís the best if both worlds.

So leverage, use rent to lower/eliminate mortgage payments, sell once mortgage all paid off, then buy stocks. Is this usually better, worse, or about the same as simply investing the down payment straight away? I assume more variance, depending on the value your real estate turns out.
It depends of course on what the market is doing at the time; investing the down payment right away and assuming you have a 20 year mortgage your investment could grow quite a bit and so can your real estate asset or NOT. Personally, I do not use net income from my rentals to pay down the mortgage. I invest in the stock market, acquire more real estate, lifestyle enhancement, whatever. My plan is to sell when Iíve had enough of being a landlord.

Finances_With_Purpose

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Answer: no.  I want some of both. 

As others mentioned, RE isn't passive, it's active.  So that limits how much I want, but I still want some.

Why?  They face such different risks and rewards.  RE has certain tax advantages and inherent stability.  But stock appreciation has others.  Dividends, 401ks, etc. that you can use with equities.  I'd like a little of all of the above, so I can distribute my risks - and my rewards.  Who knows: in ten years, RE might be an amazing investment because property taxes are abolished or we've had massive migration and demands on housing.  Or maybe it'll be the other way around, and capital gains on equities will be untaxed, whereas RE depreciation has been eliminated, or property taxes have soared.  I don't know which it will be, but I'd like to have some in each basket so I can catch whichever gain is happening. 

The risks work that way too: your neighbor might make a real estate investment near-worthless.  Imagine building a duplex right before a lumber mill and a garbage dump move in.  Oops.  But stocks/equities have equally real and large risks.  Anyone ever bank at MF Global?  (Or in Greece?)  Do business with Enron?  Remember Lehman Bros.?  All it takes is a little internal corporate fraud or awful management to wipe you out completely, let alone the gyrations of the market.  I'd like to have some risk from each pile if I can.

There's no one right answer to such a broad question...except that it is always better to diversify.

MaikoTsumi

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You ask would you rather then you want us to stick to crappy Boston returns on real estate.  I'd rather have my current rate of return and make $150,000-$200,000 per year. I'm not going to play in your market and I'd rather do real estate.  I do both, however.

MaikoTsumi

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I'm making the assumption that I physically have $1 million invested. Cash on cash return.

Editing again.  Reread your question and its valued at $1 million in real estate. That's not much in real estate at all, really.
« Last Edit: March 23, 2018, 08:06:30 AM by MaikoTsumi »

andysandp

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You ask would you rather then you want us to stick to crappy Boston returns on real estate.  I'd rather have my current rate of return and make $150,000-$200,000 per year. I'm not going to play in your market and I'd rather do real estate.  I do both, however.

Are you saying if I invest 1 million cash in your area, I can get $150,000-$200,000 Net Rent after all Expenses including Cap Ex?

Where is this place?!

MaikoTsumi

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You ask would you rather then you want us to stick to crappy Boston returns on real estate.  I'd rather have my current rate of return and make $150,000-$200,000 per year. I'm not going to play in your market and I'd rather do real estate.  I do both, however.

Are you saying if I invest 1 million cash in your area, I can get $150,000-$200,000 Net Rent after all Expenses including Cap Ex?

Where is this place?!

At 20% down, that would be about $5 million in property.  Assuming I stuck to SFR's, that would be 50-60 doors. Multifamily would multiply the doors, but my cash on cash would probably go down.  I'm in the south, low cost of living, more stable pricing, not a place for appreciation plays.
« Last Edit: March 23, 2018, 08:24:01 AM by MaikoTsumi »

andysandp

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You ask would you rather then you want us to stick to crappy Boston returns on real estate.  I'd rather have my current rate of return and make $150,000-$200,000 per year. I'm not going to play in your market and I'd rather do real estate.  I do both, however.

Are you saying if I invest 1 million cash in your area, I can get $150,000-$200,000 Net Rent after all Expenses including Cap Ex?

Where is this place?!

At 20% down, that would be about $5 million in property.  Assuming I stuck to SFR's, that would be 50-60 doors. Multifamily would multiply the doors, but my cash on cash would probably go down.  I'm in the south, low cost of living, more stable pricing, not a place for appreciation plays.

I was talking about 1 million cash giving me $50,000 net rent with NO loans.  During FIRE I don't want any dept or leverage so this wouldn't work.

TheAnonOne

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You ask would you rather then you want us to stick to crappy Boston returns on real estate.  I'd rather have my current rate of return and make $150,000-$200,000 per year. I'm not going to play in your market and I'd rather do real estate.  I do both, however.

Are you saying if I invest 1 million cash in your area, I can get $150,000-$200,000 Net Rent after all Expenses including Cap Ex?

Where is this place?!

At 20% down, that would be about $5 million in property.  Assuming I stuck to SFR's, that would be 50-60 doors. Multifamily would multiply the doors, but my cash on cash would probably go down.  I'm in the south, low cost of living, more stable pricing, not a place for appreciation plays.

I was talking about 1 million cash giving me $50,000 net rent with NO loans.  During FIRE I don't want any dept or leverage so this wouldn't work.

60 "doors" would require a management company I would think? The law of large numbers would basically allow something to happen nearly every week!


waltworks

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I was talking about 1 million cash giving me $50,000 net rent with NO loans.  During FIRE I don't want any dept or leverage so this wouldn't work.

Why not? The big advantage of real estate (other than the granular nature of the local markets that let you find great properties with hard work/luck) is that there's super cheap leverage available.

If you're going to do RE, it's *almost* always a stupid idea to just pay cash for everything (except where that gives you a competitive advantage in purchasing - but even then you can pull cash out and finance the properties later). Comparing unleveraged RE in Boston (gah!) to stocks is going to result in stocks winning every time. Comparing leveraged RE in the midwest (or somewhere else where the numbers make sense) that you spent time and effort finding is going to result in RE winning.

If you've got a cool million and you don't especially like leverage or debt or effort (which is fine), then just dump the money in the stock market.

-Walt

JLee

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I was talking about 1 million cash giving me $50,000 net rent with NO loans.  During FIRE I don't want any dept or leverage so this wouldn't work.

Why not? The big advantage of real estate (other than the granular nature of the local markets that let you find great properties with hard work/luck) is that there's super cheap leverage available.

If you're going to do RE, it's *almost* always a stupid idea to just pay cash for everything (except where that gives you a competitive advantage in purchasing - but even then you can pull cash out and finance the properties later). Comparing unleveraged RE in Boston (gah!) to stocks is going to result in stocks winning every time. Comparing leveraged RE in the midwest (or somewhere else where the numbers make sense) that you spent time and effort finding is going to result in RE winning.

If you've got a cool million and you don't especially like leverage or debt or effort (which is fine), then just dump the money in the stock market.

-Walt

Leveraging debt and effort to manage a rental empire sounds a lot like work to me. ;)

MaikoTsumi

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60 "doors" would require a management company I would think? The law of large numbers would basically allow something to happen nearly every week!

     Yeah, but that only costs a couple of points. That many would give some negotiating room or a base to grow your own management company.  My 50-60 number also indicates my preferred type of properties in 100-120k range.  More aggressive investors would be buying lower priced homes. Maybe 2-3 homes at 600-750 a month vs my 1100-1350 target.  I like to rent to people who could buy my homes but like to rent.
Anyway, this is all hypothetical.  Once I hit 15-20, I'll be at my target and stop acquiring. 

waltworks

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I had a VERY small "empire" consisting of 4 houses at one point, and you'd be surprised at how little work it is overall. If you are buying slum housing and dealing with crack addict tenants or something, I could see the hassles adding up fast. But I had houses rented to middle class professionals and graduate students and people like that, which I had done all my due diligence on before buying. I also very carefully selected tenants in stable positions who stuck around, in all but one case, for the entire time I owned the property.

So there's a bunch of up front work (probably a full 40 hour work week per property when all is said and done), but if you do that well, the ongoing work is negligible - it ended up being *maybe* 4 hours of work a month for me. Many months it's zero, and occasionally you get a washer-blew-up day and spend all day fixing the problem.

That said, I sold all of them as of last year and put the money in the market, because RE prices were through the roof and I got lazy.

-W

MaikoTsumi

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Leveraging debt and effort to manage a rental empire sounds a lot like work to me. ;)

Depends on the type of properties you invest in.  Shortest term tenant I've ever had stayed 2 years.  I have 2 that are heading to 5 years.  Maintenance happens, but it's fairly manageable.  I had 3 turnover this past year, but it's hasn't been too bad. If I had some multi-family, I would be putting it under management. 

Mighty-Dollar

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Stocks, although I'd sell some and get the proceeds into bonds. Can be sold in blocks spread out over many years to lower taxes. Stocks are are also taxed at a lower rate. And stocks simply provide a higher annualized ROI historically.

Slow2FIRE

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You ask would you rather then you want us to stick to crappy Boston returns on real estate.  I'd rather have my current rate of return and make $150,000-$200,000 per year. I'm not going to play in your market and I'd rather do real estate.  I do both, however.

Are you saying if I invest 1 million cash in your area, I can get $150,000-$200,000 Net Rent after all Expenses including Cap Ex?

Where is this place?!

At 20% down, that would be about $5 million in property.  Assuming I stuck to SFR's, that would be 50-60 doors. Multifamily would multiply the doors, but my cash on cash would probably go down.  I'm in the south, low cost of living, more stable pricing, not a place for appreciation plays.

So...once you get past 4 properties you are still able to do 20% down?  What about past 10 properties?  Do portfolio loans accept 20% down on new properties or commercial loans allow that?  Plus, from what I have heard and read, commercial loans often can be callable in most states putting such an empire at significant risk if a major employer moves out of town or during a recession.

Edited to add:  I simply have never heard or read of investors easily doing 20% down on more than 10 near simultaneous loans (and usually not more than 4 loans at 20% with loans 5-10 requiring 25% or more).
« Last Edit: March 23, 2018, 05:48:51 PM by Slow2FIRE »

MaikoTsumi

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So...once you get past 4 properties you are still able to do 20% down?  What about past 10 properties?  Do portfolio loans accept 20% down on new properties or commercial loans allow that?  Plus, from what I have heard and read, commercial loans often can be callable in most states putting such an empire at significant risk if a major employer moves out of town or during a recession.

Edited to add:  I simply have never heard or read of investors easily doing 20% down on more than 10 near simultaneous loans (and usually not more than 4 loans at 20% with loans 5-10 requiring 25% or more).

I have a small local bank that I do business with.  I actually only paid 10% down on my first two properties with them, but they changed the policy to 20%.  They are on 6/1 arms, so there's some extra cost in the future.  They may change what they are willing to do in house in the future, but I talked to the GM and he's been very supportive.

Slow2FIRE

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So...once you get past 4 properties you are still able to do 20% down?  What about past 10 properties?  Do portfolio loans accept 20% down on new properties or commercial loans allow that?  Plus, from what I have heard and read, commercial loans often can be callable in most states putting such an empire at significant risk if a major employer moves out of town or during a recession.

Edited to add:  I simply have never heard or read of investors easily doing 20% down on more than 10 near simultaneous loans (and usually not more than 4 loans at 20% with loans 5-10 requiring 25% or more).

I have a small local bank that I do business with.  I actually only paid 10% down on my first two properties with them, but they changed the policy to 20%.  They are on 6/1 arms, so there's some extra cost in the future.  They may change what they are willing to do in house in the future, but I talked to the GM and he's been very supportive.

Right, I agree that the first 4 houses can be done affordably - but for the sake of the hypothetical argument and putting $1,000,000 to work on $5,000,000 of SFR properties valued at $100K-$150K each.

(honestly, if I were to put $1,000,000 to work as a real estate investor I'd be looking into a small apartment complex and hire a manager and maintenance person...but really nothing prevents you from using leverage with equities either).