Author Topic: Balancing Saving Via Index Funds/Saving for Rental Property  (Read 424 times)

ReadySetMillionaire

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Balancing Saving Via Index Funds/Saving for Rental Property
« on: August 31, 2020, 06:35:26 AM »
So as I indicated in my other thread, I am new to the idea of real estate investing.  The goal is to get a big apartment building and go from there.

A threshold question I have, however, is how to balance saving for this versus saving for retirement the traditional way. My goal has always been to stuff as much money in index funds as comfortably possible.

Saving for real estate obviously makes that calculation more nuanced. I struggle with how much is too much to take my foot off the gas when it comes to investing.

Should I completely stop investing to save for my down payment? Should I slow it down 50%?

How did you guys approach it when you became interested in adding rental properties as an income source?

Jon Bon

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #1 on: August 31, 2020, 08:42:02 AM »
Between this and your other post I think you should go either bigger or smaller.

Go bigger, get more professional help, get more economies of scale.

Go smaller, go residential, get better financing, learn on your own, make small mistakes.

Investing is investing, just because you buy an apartment building does not mean you are not investing. Its just a different kind with different pros and cons. I am in the opposite boat, I have too much in RE and not enough in the market.


Michael in ABQ

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #2 on: August 31, 2020, 10:16:45 AM »
I'm in a similar situation except I'm saving to purchase a business instead of real estate. I'm a big fan of real estate and worked in the commercial real estate industry for about a decade. The returns you can achieve when actively investing in real estate or a business are simply higher than you can achieve passively investing in the market. The risk is higher of course, but at least you'll have some control over it. You can decide which tenants to rent too. You can decide if you're going to renovate the property to increase the value. You can go unclog that toilet instead of hiring a plumber to do it for $100. With index funds all you can do is ride along with the market.

At this point with what I have in index funds and a military pension at age 60 I could probably stop contributing to the market and be able to retire comfortably at age 60. So I've decided to focus on piling up cash to buy a business and have reduced my other investments to 5% to get my 401k match. I contributed a bunch of money to my Roth accounts this year and realistically I'm not going to stop investing forever. Plus, this business could end up being a significant chunk of my wealth in retirement - and could be the vehicle to move my retirement date from 60 to sometime in my 40s (currently mid-30s).

ReadySetMillionaire

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #3 on: August 31, 2020, 10:19:14 AM »
Between this and your other post I think you should go either bigger or smaller.

Go bigger, get more professional help, get more economies of scale.

Go smaller, go residential, get better financing, learn on your own, make small mistakes.

Investing is investing, just because you buy an apartment building does not mean you are not investing. Its just a different kind with different pros and cons. I am in the opposite boat, I have too much in RE and not enough in the market.

My main goal is to pay off all personal debt by 40ish and then have an extremely low COL that can be paid for by several rentals.

Right now I have $200k in index funds (Iím 32). That would grow considerably if I didnít touch it for 30 years and used RE for early retirement cash flow as opposed to drawing from index funds.

And thatís basically what Iím trying to do. Create a RE portfolio that will get me roughly $2,500-3,000 cash flow per month. Iíd like to do that and save for that while investing in index funds. I just donít know what the right balance is.

physio

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #4 on: August 31, 2020, 07:06:14 PM »
I'm in the same boat ReadySet.  I got started in real estate a couple years ago with a SFR while maxing 401k and tIRA as a way to dip my toe in the water.  Similar to you as well I have a partner that we split 50-50 which has helped significantly.

Well, one led to a second and now we're closing on our third SFR.  Deals in my town have been pretty decent for homes (relatively low taxes, meeting 1% rule, etc) so I have recently dropped my 401 to to just the match for now so that I have more money to buy homes.

Similar to you I'm 31 with ~200k in retirement savings that I'm going to let compound while I build my RE portfolio.  I don't think I could have jumped at that from the beginning though and have only felt comfortable lowering my contributions after seeing the real estate returns thus far.

4 more years until PSLF has also kept me relatively conservative. 

I don't think there is a perfect formula. If you have a partner you trust and you're a disciplined saver, I currently lean towards RE now due to the control I have.

Telecaster

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #5 on: August 31, 2020, 08:14:16 PM »
And thatís basically what Iím trying to do. Create a RE portfolio that will get me roughly $2,500-3,000 cash flow per month. Iíd like to do that and save for that while investing in index funds. I just donít know what the right balance is.

Start looking for properties.  Online is fine for now.  Start making some calculations on how much return you'll get on your down payment.  Real estate is local.  An investment that makes no sense in one part of the country is a screaming bargain in another. 

Your goal is $2,500/month.  That's the equivalent of having $750,000 in investments (2500 x 12 = 30,000/year x 25 [4% rule]) = $750,000.   So that will get you calibrated. 


sammybiker

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #6 on: September 01, 2020, 04:38:23 AM »
@ReadySetMillionaire I think it depends on how quickly you want to get to fire.

$200k in index funds could be a heck of a lot of down payments for Ohio cash flow properties that may even get you to a very lean fire now (not that I would recommend it).

That said, I think leaving your index funds in place, maintaining contributions and utilizing credit as well as savings to get started in RE is the way to go.  This won't be starting in apt buildings but starting in SFR, where the learning curve is less steep and lending is plentiful.

I'm also with @Jon Bon and need to increase my market exposure vs real estate.

ReadySetMillionaire

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Re: Balancing Saving Via Index Funds/Saving for Rental Property
« Reply #7 on: September 01, 2020, 08:00:16 AM »
Thanks for all the replies.  I am definitely leaning towards pulling back on retirement savings just a tad.  The one thing I forgot to add is that I work for city government and they contribute a whopping 24% to retirement, so for me, that's $16k/year (I do not have to match; this is just automatically contributed).  I was also doing the full $19.5k to deferred comp and we already did the $12k for Roths this year.

Also, my wife works part time and makes about $45k/year; and I have my own solo practice, and after transitioning that from full time to part time, my income from this is about $4-5k per month.

The goal here is to have three really good sources of income until I'm 40ish -- city job ($66k/year -- decent job, relatively laid back, amazing benefits), solo practice ($50-60k/year -- love the autonomy, and can't beat a side hustle that bills at $200/hour), and the rental business. Then I can drop these off as I see fit. I really like the solo practice and I might turn that office into a three-part office -- headquarters for my solo practice, rental company, and possibly a mediation company.

My brain is complete mush, always looking from one thing to the next. But I like having options, and the rental property is a key component.

Meeting with my rental partner tomorrow morning.