Author Topic: Real Estate vs. Just investing in Index funds  (Read 11802 times)

Dsurf

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Real Estate vs. Just investing in Index funds
« on: April 23, 2015, 07:22:59 PM »
Hello,
I am a new investor trying to wrap my head around personal finance, money, all the nuances of allocation, asset classes etc. So far I have 100% of my money in my retirement (i401k and roth ira). Im going the index route with Vanguard. However, since I paid $14k in taxes and I could have possibly reduced some of that with mortgage interest. I started to consider buying a cheaper condo in Southern California. Although I dont think anything is cheap in San Diego at the moment.

With that being said, what I am confused about is Owning Rentals for Cash Flow vs Index Stocks. A friend of mine is acquiring real estate around the US and is currently cash flow positive $5k a month. He is using this strategy to lead a life free of the office. I am confused (the reason being - investing in stocks is new to me & so is investing in real estate.) I dont understand why someone would invest in stocks if you can build up a solid & possibly more secure cash in the bank if you can find the right property???

To me positive rental income is easy to understand. I can deposit it in the bank. Stocks I am a little bit confused as this the first year I am investing (around $50k in my retirement). I understand that stocks appreciate in value, and also pay dividends, but to live off of do you just draw down capital if say you made a 7% return on stocks? I guess that would be the same as getting a 7% return on real estate.

Can someone clarify my naive question?
Thank you

SaintM

  • Guest
Re: Real Estate vs. Just investing in Index funds
« Reply #1 on: April 23, 2015, 08:14:13 PM »
As someone that earns $4k/mo each on rentals and a dividend portfolio, I can confidently say DO NOT BUY either until you have a firm understanding of what you will be doing.  Get a book (or five) on each subject.  Read both positive and negative accounts of real estate and stock market investing.

I saw your other post about learning taxes.  Get books on taxes too, so you can learn how to save on income, property, sales, employment and other taxes.

In the IRS's world, there are 3 types of income:  earned income (your job--highest taxes), portfolio income (stocks/bonds--low to high taxes), and passive income (real estate--almost no income tax).

Dsurf

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: Real Estate vs. Just investing in Index funds
« Reply #2 on: April 23, 2015, 08:27:29 PM »
SaintMichael,
Thank you for answering both my questions. And yes reading is happening now. I have a few questions for you if you dont mind.

1. Do you select individual dividend stocks, or buy into a fund? Do you invest for dividends as an approach only? I was confused on cash flow with stocks.
2. How did you make the jump or feel confident to become a investor to make $4k a month. Right now if I got to $1k a month that would be a big deal, assuming I was able to be smart enough to make wise investment decisions.

There's just so much info out there that I get info overload. I ended up here from researching index investing and so far I have bought into this theory for equities. Real Estate is something that makes much more sense to me or I guess that would be tangible.


ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: Real Estate vs. Just investing in Index funds
« Reply #3 on: April 24, 2015, 04:33:02 AM »
SaintMichael,
Thank you for answering both my questions. And yes reading is happening now. I have a few questions for you if you dont mind.

1. Do you select individual dividend stocks, or buy into a fund? Do you invest for dividends as an approach only? I was confused on cash flow with stocks.
2. How did you make the jump or feel confident to become a investor to make $4k a month. Right now if I got to $1k a month that would be a big deal, assuming I was able to be smart enough to make wise investment decisions.

There's just so much info out there that I get info overload. I ended up here from researching index investing and so far I have bought into this theory for equities. Real Estate is something that makes much more sense to me or I guess that would be tangible.

I have lost thousands of dollars doing this. Don't do this. It makes no sense. Just buy index funds.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Real Estate vs. Just investing in Index funds
« Reply #4 on: April 24, 2015, 07:27:48 AM »
Go here and read to start learning about stock investing: http://jlcollinsnh.com/stock-series/

Go here and read to start learning about real estate investing: http://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-book-recommendations/

Don't do either yet (well, okay, you can follow JLCollins' stock advice now, and then stick with it until you know a lot more).

I was on a podcast on this topic, real estate vs. index funds here: http://radicalpersonalfinance.com/78/

Listening to it may answer some of your questions.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Real Estate vs. Just investing in Index funds
« Reply #5 on: April 24, 2015, 07:43:00 AM »
Generally speaking, real estate carries several drawbacks as compared to index funds. Some of those drawbacks are:

- Potential higher risk
- Lower liquidity (takes longer to sell and often requires selling at a discount)
- Higher overhead costs (maintenance, management, etc)
- Larger cash increments required to get started

In return for accepting those drawbacks, it is possible to earn leveraged returns much higher than the typical stock market performance, as well as gaining substantial tax advantages - a well-managed rental investment can spit out cash while still giving you a tax deduction. The tax code is built to delay taxable income almost indefinitely for a smart landlord, and in some cases provide lower tax rates (by essentially converting cash flow into capital gains). However, it also requires substantially more knowledge to ensure legal compliance, proper accounting, etc., and there are plenty of ways for it to go wrong.

Being a landlord (especially if you self-manage) requires a whole set of skills that are mostly gained through life experience. Experience with homeownership and home maintenance is big. Knowledge of accounting and tax principles is also important. Good negotiating skills can help avoid evictions and legal battles. In CA, the law is often on tenants' side and you need to know all the rules as a landlord to avoid liability. As you will see if you stick around, plenty of people here are in the business and will gladly share what they've learned. Look for some other threads on rentals and you'll see how many of us have learned the hard way what to do and not to do. Good luck!

Thedudeabides

  • Stubble
  • **
  • Posts: 242
Re: Real Estate vs. Just investing in Index funds
« Reply #6 on: April 25, 2015, 01:11:23 PM »


I was on a podcast on this topic, real estate vs. index funds here: http://radicalpersonalfinance.com/78/

Listening to it may answer some of your questions.


@arebelspy: just listed to the podcast and it was excellent.

Your point about how cash flowing real estate could potentially perform in a down market resonated with me.

Thanks for sharing your knowledge and experience!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Real Estate vs. Just investing in Index funds
« Reply #7 on: April 25, 2015, 01:27:07 PM »


I was on a podcast on this topic, real estate vs. index funds here: http://radicalpersonalfinance.com/78/

Listening to it may answer some of your questions.


@arebelspy: just listed to the podcast and it was excellent.

Your point about how cash flowing real estate could potentially perform in a down market resonated with me.

Thanks for sharing your knowledge and experience!

Sure!

The potential flip side to that is if real estate in the area you bought goes into a long, slow decline, where the prices and rents stay flat for a long time, which is a decrease in real wealth (due to inflation) while stocks have a long, slow climb up.

Buying right is important, obviously.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Thedudeabides

  • Stubble
  • **
  • Posts: 242
Re: Real Estate vs. Just investing in Index funds
« Reply #8 on: April 25, 2015, 01:39:52 PM »


Sure!

The potential flip side to that is if real estate in the area you bought goes into a long, slow decline, where the prices and rents stay flat for a long time, which is a decrease in real wealth (due to inflation) while stocks have a long, slow climb up.

Buying right is important, obviously.  :)

I think the lightbulb moment for me was understanding that there is another way to manage risk. I had previously thought that I would like to have a larger stock portfolio to mitigate the risk of a prolonged down market.

Your comment made me realize that there are other ways to mitigate this risk. I am now thinking that I'm going to begin on your recommended reading list.

Thanks for commenting on the flip side of the argument. I think this definitely emphasizes the importance of evaluating the deal carefully and purchasing at the right price, giving appropriate thought to a margin of safety.

Thanks again!