The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: LearningMustachian72 on September 09, 2020, 10:30:23 PM
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Hey!
My wife works in the education system and we are currently maxing our her 457 ($19,000) and 403b ($19,000). We are also maxing our my 401k ($19,000) for a total of $57,000 annually.
Based on the lifestyle we want to live, that is essentially the max we can invest at this point.
I max out these as it helps with her student loan payments and forgiveness. I also like how it is passive and does not require effort.
My question is...should I be diversifying a bit more and investing in real estate? I like the idea of it but not sure I would appreciate the work or being on call as a landlord. What arguments could you make for investing in real estate? I live in Minneapolis and have seen prices booming since I entered the workforce, nearly 10 years ago. Will this keep up? Have the feeling that I am missing out.
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Hey!
My wife works in the education system and we are currently maxing our her 457 ($19,000) and 403b ($19,000). We are also maxing our my 401k ($19,000) for a total of $57,000 annually.
Based on the lifestyle we want to live, that is essentially the max we can invest at this point.
I max out these as it helps with her student loan payments and forgiveness. I also like how it is passive and does not require effort.
My question is...should I be diversifying a bit more and investing in real estate? I like the idea of it but not sure I would appreciate the work or being on call as a landlord. What arguments could you make for investing in real estate? I live in Minneapolis and have seen prices booming since I entered the workforce, nearly 10 years ago. Will this keep up? Have the feeling that I am missing out.
FOMO is not a good enough reason to alter your investment strategy.
One of the biggest advantages of real estate is that an individual can exert more control over their return by understanding local markets, finding good deals, and running the numbers to confirm the performance of said property investment ahead of time. With the right property, you can "know" with a reasonable certainty that your investment will perform in a given way each month thanks to rent payments coming in. Any appreciation on top of that rental income should be considered gravy. If you buy a property and rely on appreciation to work out in your favor for your investment returns, you're giving up that critical control and basically just gambling and hoping that the market in the area works in your favor. Appreciation is not in your control. Just because properties have appreciated a lot recently does not mean they will do any such thing moving forward. Tons of people, especially in HCOL areas, have investment properties with poor monthly cash returns and they rely on the general real estate market to increase the value of their property. For many, it works out. For others, it does not. The big thing is, that you don't really know going in if you'll be one of the lucky ones or not the way that you'd know within reason if a property will provide a healthy return on rents alone.
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I'm heavily invested in real estate and don't find it to be too much extra work. It's a significant part of our retirement income and we're glad to have it.
There are many different things that could be called "real estate investments". Most commonly when one thinks about real estate they think about single family rentals, which is certainly an option, but there are many other types of real estate investments that can provide a decent return, and some require a bit less work.
You are doing a good job with your market investments and it is probably prudent to start looking at diversifying your portfolio. Real estate is an excellent way to accomplish this. Start building a fund of cash for this purpose and begin studying what type of real estate deals are out there. Analyzing deals is usually pretty simple math. Once you find something that interests you, begin picking it apart and studying the deal(s), then pull the trigger on something when you are confident and ready.
Good luck !
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If you do not like the idea of repairs, you have two options. One, buy in a class "A" neighborhood. Your cash flow will be lower, but you can manage yourself with few problems. Two, buy in a "C" neighborhood and use property management to handle the repairs and vacancy.
If you are looking to avoid problems, do not buy in a class "C" neighborhood and self-manage. Some people do this and make great returns. However, they were aware of the headaches and have concluded that the higher return is worth the headaches.
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... probably prudent to start looking at diversifying your portfolio. Real estate is an excellent way to accomplish this.
I just want to highlight the goodness of the advice that @Fishindude shares (see above).
Obviously, obviously, one needs to be super-cautious about becoming an active investor. But the data really seem to support the positive impact of investing in real estate and then also of adding real estate to your portfolio.
There was a great working paper from some economists on this called "Rate of Return of Everything (https://www.frbsf.org/economic-research/files/wp2017-25.pdf)" that I've promoted and talked up in the past. That would be interesting, maybe... (TLDR summary: Real estate returns historically best equities mostly due to their lower volatility.)
I probably went on and on and on too long, but I fell down the rabbit hole in my blog post "Lessons from the Rate of Return of Everything (https://evergreensmallbusiness.com/rate-of-return-on-everything-paper/)" and you might be interested in skimming the very brief discussion there about how to construct a portfolio that includes both equities and real estate. (TLDR summary: You can add a lot of real estate to your portfolio but the trick is geographically diversifying.)
Full disclosure: At this point, other than personally used real estate and REITs (as per David Swensen asset allocation formula), I hold no real estate in my portfolio. We do work with many many active real estate investors in our CPA firm.
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I have thought about it too but I'm also not into doing a lot of repairs and headaches for tenants but I'm willing to do it for my own place. Having said that, in my area rents are going up 5-10% per year which is the main reason I dipped in. I wanted more long term stability on pricing (though I still have a maintenance unknown in there).
For me I wouldn't want to the rental to be too far to see my property and nothing here comes close to the 1% rule so many properties are just betting on appreciation here. At least based on what I see hit the MLS.
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I have thought about it too but I'm also not into doing a lot of repairs and headaches for tenants but I'm willing to do it for my own place. Having said that, in my area rents are going up 5-10% per year which is the main reason I dipped in. I wanted more long term stability on pricing (though I still have a maintenance unknown in there).
For me I wouldn't want to the rental to be too far to see my property and nothing here comes close to the 1% rule so many properties are just betting on appreciation here. At least based on what I see hit the MLS.
Rather than residential, you could consider owning a commercial building. It's not uncommon to lock in tenants for 5-10-15 year triple net leases where they take care of all maintenance and upkeep, and you can even build in little rent increases later in the lease.