VTSAX / Rental property / J.L. Collins and THANK YOU

[jedithunder]

I am interested in purchasing a rental property but doubt that it is a worthwhile investment versus sticking the money into vtsax. I have been reading a lot of J.L. Collins recently. Could anyone recommend either an online tool or a spreadsheet? I would love some way of looking at what vtsax would be worth (in theory) after ten years versus the total cost of the ownership of the rental house using the expected average cost of repairs, taxes, my time. thank you

[clarkfan1979]

I have listened to a few interviews of J.L. Collins talk about his first real estate purchase. He admits he didn't do any due diligence when he bought. He self admits that he fell victim to social pressure and bought because everyone else was telling him to buy something.

I like real estate because it fits my personality and also fits into my lifestyle. Real estate can be higher returns, but to get those higher returns it typically requires time and leverage (25% down payments). It's also an apples to oranges comparison which makes it difficult.

I bought a rental in May 2007 for 182K. I house hacked it for 4 years and refinanced it three times. For a better comparison, I am going to remove the house hack and assume I never did a cash-out re-fi. I'm also going to change my initial investment from 20% down to 25% down, which is an extra 9K.

The original investment was 59K (45K down, 4K closing costs and 10K of rehab). It's now worth about 460K. Over the past 14 years,
ballpark cash flow (after vacancy & repairs) would be around 100K and principle paydown around 40K.

If I sold for 460K, deduct 7% for realtor fees/closing costs, I would be left with 428K. With 105K left on the mortgage, the remaining balance would be 323K. Add 100K for rent and I'm left with 423K. After 14 years, my 59K turned into 423K, my calculation is 15.1%/year. 

For the S & P 500, it was 1500 in May 2007. Today it's 4538. Based on my math, the S & P 500 has done 8.25% since May 2007. Add 2% for dividends and you get 10.25%.

So the comparison becomes 15.1% to 10.25%. However, I used returns from rental #1 to scale into 3 additional properties. This is what makes it an apples to oranges comparison. 

In reality, my initial investment of 50K in May 2007 turned into about 1 million today. It should be higher than 1 million, but we started spending about $1,000/month of rent cash flow on living expenses when my wife quit her full-time job (46.5 hours/week) in May 2015 and switched to part-time (10 hours/week).

If you compare one rental to VTSAX, it's probably a tie. Because VTSAX is passive, VTSAX wins. However, if you are willing to scale and go up to 3-5 rentals with leverage (25% down payments), the rentals are going to be a much higher return, even if you pay for property management.

For couples making 150K/year or more, it probably doesn't make much sense to mess with rentals. To start, live on half and put the rest into VTSAX. Focus on your career and raises.

However, for me, I am a community college professor that makes 54K/year. My wife makes 12K/year working part-time. Focusing on my career is not going to lead to any pay increases. Pay increases are determined by state level funding, not performance. I do my job and I do a great job. However, my extra focus goes toward running my real estate rentals because that is where I will see my net worth increase.

[Dicey]

Interesting timing on your question. I think you'll enjoy Jim's new book.

https://jlcollinsnh.com/2021/11/22/the-new-book-is-out/

[pnw_guy]

I have listened to a few interviews of J.L. Collins talk about his first real estate purchase. He admits he didn't do any due diligence when he bought. He self admits that he fell victim to social pressure and bought because everyone else was telling him to buy something.

I like real estate because it fits my personality and also fits into my lifestyle. Real estate can be higher returns, but to get those higher returns it typically requires time and leverage (25% down payments). It's also an apples to oranges comparison which makes it difficult.

I bought a rental in May 2007 for 182K. I house hacked it for 4 years and refinanced it three times. For a better comparison, I am going to remove the house hack and assume I never did a cash-out re-fi. I'm also going to change my initial investment from 20% down to 25% down, which is an extra 9K.

The original investment was 59K (45K down, 4K closing costs and 10K of rehab). It's now worth about 460K. Over the past 14 years,
ballpark cash flow (after vacancy & repairs) would be around 100K and principle paydown around 40K.

If I sold for 460K, deduct 7% for realtor fees/closing costs, I would be left with 428K. With 105K left on the mortgage, the remaining balance would be 323K. Add 100K for rent and I'm left with 423K. After 14 years, my 59K turned into 423K, my calculation is 15.1%/year. 

For the S & P 500, it was 1500 in May 2007. Today it's 4538. Based on my math, the S & P 500 has done 8.25% since May 2007. Add 2% for dividends and you get 10.25%.

So the comparison becomes 15.1% to 10.25%. However, I used returns from rental #1 to scale into 3 additional properties. This is what makes it an apples to oranges comparison. 

In reality, my initial investment of 50K in May 2007 turned into about 1 million today. It should be higher than 1 million, but we started spending about $1,000/month of rent cash flow on living expenses when my wife quit her full-time job (46.5 hours/week) in May 2015 and switched to part-time (10 hours/week).

If you compare one rental to VTSAX, it's probably a tie. Because VTSAX is passive, VTSAX wins. However, if you are willing to scale and go up to 3-5 rentals with leverage (25% down payments), the rentals are going to be a much higher return, even if you pay for property management.

For couples making 150K/year or more, it probably doesn't make much sense to mess with rentals. To start, live on half and put the rest into VTSAX. Focus on your career and raises.

However, for me, I am a community college professor that makes 54K/year. My wife makes 12K/year working part-time. Focusing on my career is not going to lead to any pay increases. Pay increases are determined by state level funding, not performance. I do my job and I do a great job. However, my extra focus goes toward running my real estate rentals because that is where I will see my net worth increase.

Thanks for telling your story! Very interesting!

The only thing I don't quite agree with or understand is how the advice should change for high income couples. We make well over $150K as a couple. We think real estate makes sense because there's a lot of money we have on hand to invest that can't be fit into tax advantaged accounts.

[waltworks]

Housing and stocks have both been on a 15 year tear, so you'll find plenty of people to argue either case because they did well.

That said, I like this investment property calculator:
https://www.calculator.net/rental-property-calculator.html

Of course, like any investment calculator, it's going to spit out numbers that reflect your assumptions, and your actual expenses/income are unlikely to be smooth from year to year. You'll need a new roof or have a problem tenant that has to be evicted eventually, and you'll also have years where nothing breaks.

If you input some boring "1% rule" numbers ($100k house, 25% down @4.5%, 10% vacancy, 10% management fee, some normal tax/insurance numbers, $100/mo of maintenance) you'll notice that your return ends up being around 11% - similar to the historical return of the stock market. Funny, that.

-W

[clarkfan1979]

I have listened to a few interviews of J.L. Collins talk about his first real estate purchase. He admits he didn't do any due diligence when he bought. He self admits that he fell victim to social pressure and bought because everyone else was telling him to buy something.

I like real estate because it fits my personality and also fits into my lifestyle. Real estate can be higher returns, but to get those higher returns it typically requires time and leverage (25% down payments). It's also an apples to oranges comparison which makes it difficult.

I bought a rental in May 2007 for 182K. I house hacked it for 4 years and refinanced it three times. For a better comparison, I am going to remove the house hack and assume I never did a cash-out re-fi. I'm also going to change my initial investment from 20% down to 25% down, which is an extra 9K.

The original investment was 59K (45K down, 4K closing costs and 10K of rehab). It's now worth about 460K. Over the past 14 years,
ballpark cash flow (after vacancy & repairs) would be around 100K and principle paydown around 40K.

If I sold for 460K, deduct 7% for realtor fees/closing costs, I would be left with 428K. With 105K left on the mortgage, the remaining balance would be 323K. Add 100K for rent and I'm left with 423K. After 14 years, my 59K turned into 423K, my calculation is 15.1%/year. 

For the S & P 500, it was 1500 in May 2007. Today it's 4538. Based on my math, the S & P 500 has done 8.25% since May 2007. Add 2% for dividends and you get 10.25%.

So the comparison becomes 15.1% to 10.25%. However, I used returns from rental #1 to scale into 3 additional properties. This is what makes it an apples to oranges comparison. 

In reality, my initial investment of 50K in May 2007 turned into about 1 million today. It should be higher than 1 million, but we started spending about $1,000/month of rent cash flow on living expenses when my wife quit her full-time job (46.5 hours/week) in May 2015 and switched to part-time (10 hours/week).

If you compare one rental to VTSAX, it's probably a tie. Because VTSAX is passive, VTSAX wins. However, if you are willing to scale and go up to 3-5 rentals with leverage (25% down payments), the rentals are going to be a much higher return, even if you pay for property management.

For couples making 150K/year or more, it probably doesn't make much sense to mess with rentals. To start, live on half and put the rest into VTSAX. Focus on your career and raises.

However, for me, I am a community college professor that makes 54K/year. My wife makes 12K/year working part-time. Focusing on my career is not going to lead to any pay increases. Pay increases are determined by state level funding, not performance. I do my job and I do a great job. However, my extra focus goes toward running my real estate rentals because that is where I will see my net worth increase.

Thanks for telling your story! Very interesting!

The only thing I don't quite agree with or understand is how the advice should change for high income couples. We make well over $150K as a couple. We think real estate makes sense because there's a lot of money we have on hand to invest that can't be fit into tax advantaged accounts.

I don't know your story. My assumptions are below. 

When people are high income earners through their W-2, their job usually requires a high amount of time and energy. They also have the opportunity to make even more money with raises.

If someone wants a higher return than the S & P 500, it's most likely going to require time and energy. It's very possible to be successful with real estate, but it could be at the expense of their W-2. Let's say someone has an equal amount invested in real estate and VTSAX. In a normal year, the real estate makes an extra 10K more than VTSAX. That's a win. However, is it possible that they lost 20K of opportunity cost at their W-2 job, mostly because they only put in the minimum amount of hours?

The blog targets people who want to accumulate 1-3 million and be FI. If a couple is making 200K/year, the easiest path is save 50-75% and invest in VTSAX. Real estate returns typically get better over time with practice and economies of scale. Real estate is a great play for someone trying to accumulate over 10 million. However, for a couple making 200K/year and trying to get to 3 million to be FI, real estate is somewhat of an unnecessary step. 

I've seen smart people lose money in real estate because they didn't have enough time to focus on it. Even for myself, my least optimal years were when I was busy with my W-2. Maybe a compromise would be to do a live-in flip and move every 2-3 years. Take the tax free profit and put it into VTSAX or maybe a larger flip as you get more comfortable with repairs.   

That's my two cents.

[pnw_guy]

I have listened to a few interviews of J.L. Collins talk about his first real estate purchase. He admits he didn't do any due diligence when he bought. He self admits that he fell victim to social pressure and bought because everyone else was telling him to buy something.

I like real estate because it fits my personality and also fits into my lifestyle. Real estate can be higher returns, but to get those higher returns it typically requires time and leverage (25% down payments). It's also an apples to oranges comparison which makes it difficult.

I bought a rental in May 2007 for 182K. I house hacked it for 4 years and refinanced it three times. For a better comparison, I am going to remove the house hack and assume I never did a cash-out re-fi. I'm also going to change my initial investment from 20% down to 25% down, which is an extra 9K.

The original investment was 59K (45K down, 4K closing costs and 10K of rehab). It's now worth about 460K. Over the past 14 years,
ballpark cash flow (after vacancy & repairs) would be around 100K and principle paydown around 40K.

If I sold for 460K, deduct 7% for realtor fees/closing costs, I would be left with 428K. With 105K left on the mortgage, the remaining balance would be 323K. Add 100K for rent and I'm left with 423K. After 14 years, my 59K turned into 423K, my calculation is 15.1%/year. 

For the S & P 500, it was 1500 in May 2007. Today it's 4538. Based on my math, the S & P 500 has done 8.25% since May 2007. Add 2% for dividends and you get 10.25%.

So the comparison becomes 15.1% to 10.25%. However, I used returns from rental #1 to scale into 3 additional properties. This is what makes it an apples to oranges comparison. 

In reality, my initial investment of 50K in May 2007 turned into about 1 million today. It should be higher than 1 million, but we started spending about $1,000/month of rent cash flow on living expenses when my wife quit her full-time job (46.5 hours/week) in May 2015 and switched to part-time (10 hours/week).

If you compare one rental to VTSAX, it's probably a tie. Because VTSAX is passive, VTSAX wins. However, if you are willing to scale and go up to 3-5 rentals with leverage (25% down payments), the rentals are going to be a much higher return, even if you pay for property management.

For couples making 150K/year or more, it probably doesn't make much sense to mess with rentals. To start, live on half and put the rest into VTSAX. Focus on your career and raises.

However, for me, I am a community college professor that makes 54K/year. My wife makes 12K/year working part-time. Focusing on my career is not going to lead to any pay increases. Pay increases are determined by state level funding, not performance. I do my job and I do a great job. However, my extra focus goes toward running my real estate rentals because that is where I will see my net worth increase.

Thanks for telling your story! Very interesting!

The only thing I don't quite agree with or understand is how the advice should change for high income couples. We make well over $150K as a couple. We think real estate makes sense because there's a lot of money we have on hand to invest that can't be fit into tax advantaged accounts.

I don't know your story. My assumptions are below. 

When people are high income earners through their W-2, their job usually requires a high amount of time and energy. They also have the opportunity to make even more money with raises.

If someone wants a higher return than the S & P 500, it's most likely going to require time and energy. It's very possible to be successful with real estate, but it could be at the expense of their W-2. Let's say someone has an equal amount invested in real estate and VTSAX. In a normal year, the real estate makes an extra 10K more than VTSAX. That's a win. However, is it possible that they lost 20K of opportunity cost at their W-2 job, mostly because they only put in the minimum amount of hours?

The blog targets people who want to accumulate 1-3 million and be FI. If a couple is making 200K/year, the easiest path is save 50-75% and invest in VTSAX. Real estate returns typically get better over time with practice and economies of scale. Real estate is a great play for someone trying to accumulate over 10 million. However, for a couple making 200K/year and trying to get to 3 million to be FI, real estate is somewhat of an unnecessary step. 

I've seen smart people lose money in real estate because they didn't have enough time to focus on it. Even for myself, my least optimal years were when I was busy with my W-2. Maybe a compromise would be to do a live-in flip and move every 2-3 years. Take the tax free profit and put it into VTSAX or maybe a larger flip as you get more comfortable with repairs.   

That's my two cents.

Thanks for elaborating on your thinking. I'll share my own story and some of my own below.

I started in the tech industry 2 years ago and made about $160K in a high cost of living area (Seattle). To you point about the value of focusing on career growth, now I currently make a bit north of $300K per year in my early 30's. We were late to start saving (due to doing a PhD) but have accumulated a $600K portfolio. We keep our expenses down, with our biggest expense being a single family home (nothing fancy but pretty expensive in such a HCOL area). However, the crazy market appreciation in the past few years has made me feel less bad about that purchase.

The question we're figuring out now is how we're going to hit FIRE and beyond. Ideally, I'd love to hit fat FIRE in order to give us some extra spending potential and the ability to leave a legacy, which could be easily trimmed if we needed to. Again, we're frugal and I'm sure that we can always trim our expenses. The problem as I see it is even if we save an extremely high amount (e.g., $200K per year) and put it into index funds, by our 40's we are only going to be in the 3+ million range. That's a ton of money for sure, but I intuitively felt like it was going to be more given such a high savings rate. The problem is that I've been following the reading of Jack Bogle and others and assuming that returns will be paltry in the future - maybe 4 or 5%.

Which brings me to real estate, which has seemed appealing mostly because of the ability to use a responsible amount of leverage. Plus, there's only so much that can be fit into tax advantaged accounts. If we put $200K into real estate for the next 15 years - we're thinking of multifamily and hiring property management companies - I think we could do much better than in the index fund approach. Plus, we'd get tax advantages all along the way. Thus, it's been something we've been seriously considering.

[waltworks]

I'd look at the demographics of the US before I went whole-hog into multifamily investments that you plan to hold for long periods of time.

-W

[Paper Chaser]

$600k seed + 200k annual investment @ 5% return = 3.5 million in 10 years

But you don't have to spend all of that. Adding no additional money to that, and pulling $80k/yr out in spending, an account that large still sees massive growth, even if gains are only 5% long term:

https://www.bankrate.com/calculators/savings/savings-withdrawal-calculator-tool.aspx

10 years after you stop investing and start spending down, your balance would be $4.7 mil
20 years after you stop investing and start spending down, your balance would be $6.7 mil
30 years after you stop investing and start spending down, your balance would be $10 mil
40 years after you stop investing and start spending down, your balance would be $15.3 mil
50 years after you stop investing and start spending down, your balance would be $24.1 mil

And those values assume historically lower returns of 5%. Even seeing average returns of 7% would bump those numbers up significantly. Spend less than $80k annually, and it gets better still.

There's a point where you working another year to add another 200k to the pot only makes 90 year old you wealthier in ways that don't really matter. You're very likely to have enough money to have a great, lengthy retirement and still leave a nest egg if you want to.

If you're trying to retire as soon as humanly possible, then it might be worth considering other asset classes for alternative income streams. If you're trying to build wealth well into 8 figures (instead of 7 to low 8 figures) then maybe it's worth chasing other options down. Could also just be more hassle than it's worth though too. What's 'enough' for you, and what do you want your life to be like now and moving forward?

[turtlefire]

Real estate, in general, provides a better return per unit of risk than stocks, bonds, etc. There are times when the real estate market is "overpriced", but that usually isn't the case. How you tell that is by figuring out the cap rate and subtracting the 10-year treasury bond return, if it's positive then real estate is underpriced and vice versa. As well, J.L. Collins usually says something isn't good because of his personal experience or anecdotal evidence at best. I like the guy, and his book, but remember that it is incredibly simplified and actual real-life planning is complex. As well, the increased return from real estate is from the ability to leverage semi-safely.

[Car Jack]

Sometimes, with the right property, purchased well with an exceptionally high rent from existing, long term tenants, real estate can work well.  And it can exceed market investments.

BUT

Even with a property manager (who will cost you money), problems will come back to you and cost you money.  Our tenants had a septic tank backup problem.  The manager took care of it but not before calling me to ok the fix and of course the cost was out of my pocket.  Come tax time, it's harder and/or more costly to do taxes.  I pay a CPA to do mine and every schedule they have to fill out costs a minimum of $75.  When a tenant leaves, breaking the lease and disappearing, you're out the rent and perhaps other things.  I lucked out somewhat when my tenants skipped out.  They kept the garage door opener but left their nice picnic table.  The boyfriend stopped by to pick up the table and I told him that if he came back with the opener, he could have the table.  He did and got the table.  Oh, and the tenant left with an empty oil tank.  I had filled it completely at the start of the lease for my first tenant and this was the second.  This one said "the first tenant gave me the oil".  I thought about saying "how about I give your car to my friend?".  In the end, I just let it go and kept their security deposit but since they didn't pay the last month's rent, I lost money.

I do no real estate renting now.  I find that selling tradelines makes me more money by far than renting my house ever did, at $1000 a month.  On top of that, the time to add/drop authorized users is on average 5 minutes for each action.  And if I have to cease doing it, I don't have to evict tenants and sell a house.  I simply send an email to the tradeline company.  I'm not a heavy hitter tradeline guy either.  I'm likely middle of the road, pulling in something north of $10k a year.  For a year of renting my house, I pulled in less rent than that and of course had to pay the manager 10%.

[Healthie]

I was leaning into buying a rental in my area - 2-suite houses with a 3 up 2 down set up are 400k-450k and rent for around $2800/mo.

I used the spreadsheet on the stickied thread of evaluating a rental property - it would take about 7 years to break-even, cashflow-wise.

Now, granted: increasing real estate price is a thing. re-financing and leveraging your cash to buy property/invest is a thing. I'm sure there is a way sophisticated investors calculate this into rental properties consideration. Personally, I'm not interested in buying something cash flow negative and throwing my paycheques into it. In addition, I won't be managing the property; not interested & won't live in the city in 8 months.

I took my refinance money and decided on VEQT. I'll be keeping my house because I bought 3 years ago for 200k; it's assessed around 300k, and I reckon I could get 2k in rent from it; which makes it a fairly decent rental for a canadian city. I have a full-time job and I'm not interested in switching to landlording properties.

[pnw_guy]

I'd look at the demographics of the US before I went whole-hog into multifamily investments that you plan to hold for long periods of time.

-W

What's your read of the situation? That multifamily is on the way out due to stagnating population growth?

[waltworks]

I'd look at the demographics of the US before I went whole-hog into multifamily investments that you plan to hold for long periods of time.

-W

What's your read of the situation? That multifamily is on the way out due to stagnating population growth?

My read, which is worth what you're paying for it, is that in the 20+ year timeframe, demographics will make housing in *most* places in the US a depreciating asset - a renter's paradise and owner's nightmare. A big change in immigration law and/or changes in family formation could change that but I consider both to be unlikely.

-W

[turtlefire]

I'd look at the demographics of the US before I went whole-hog into multifamily investments that you plan to hold for long periods of time.

-W

What's your read of the situation? That multifamily is on the way out due to stagnating population growth?

My read, which is worth what you're paying for it, is that in the 20+ year timeframe, demographics will make housing in *most* places in the US a depreciating asset - a renter's paradise and owner's nightmare. A big change in immigration law and/or changes in family formation could change that but I consider both to be unlikely.

-W

I disagree with this assertion, as the supply will likely not meet the demand for a very long time, and for supply to surpass demand is unlikely. That, and the positive growth in the U.S. from immigration, rising homeownership within the millennial population, and the decrease in construction companies able to develop goes completely against that.

[SeattleCPA]

I am interested in purchasing a rental property but doubt that it is a worthwhile investment versus sticking the money into vtsax. I have been reading a lot of J.L. Collins recently. Could anyone recommend either an online tool or a spreadsheet? I would love some way of looking at what vtsax would be worth (in theory) after ten years versus the total cost of the ownership of the rental house using the expected average cost of repairs, taxes, my time. thank you

You maybe want to look at the "Rate of Return on Everything" research which is available here: https://www.frbsf.org/economic-research/files/wp2017-25.pdf

I also discussed this research in blog posts here and charted a bunch of the data from the research here.

The upshot though: In most countries over most investment periods, rental research does really well. The other thing is, rental property "plays" really well with stocks in terms of portfolio construction.

I think the giant error that Jim makes is he ignores the imputed rent from ownership. I was not arguing with him, but here's a post that discusses the illogic of that "houses aren't investments" position: Are Houses Investments?

[SeattleCPA]

I have listened to a few interviews of J.L. Collins talk about his first real estate purchase. He admits he didn't do any due diligence when he bought. He self admits that he fell victim to social pressure and bought because everyone else was telling him to buy something.

I like real estate because it fits my personality and also fits into my lifestyle. Real estate can be higher returns, but to get those higher returns it typically requires time and leverage (25% down payments). It's also an apples to oranges comparison which makes it difficult.

I bought a rental in May 2007 for 182K. I house hacked it for 4 years and refinanced it three times. For a better comparison, I am going to remove the house hack and assume I never did a cash-out re-fi. I'm also going to change my initial investment from 20% down to 25% down, which is an extra 9K.

The original investment was 59K (45K down, 4K closing costs and 10K of rehab). It's now worth about 460K. Over the past 14 years,
ballpark cash flow (after vacancy & repairs) would be around 100K and principle paydown around 40K.

If I sold for 460K, deduct 7% for realtor fees/closing costs, I would be left with 428K. With 105K left on the mortgage, the remaining balance would be 323K. Add 100K for rent and I'm left with 423K. After 14 years, my 59K turned into 423K, my calculation is 15.1%/year. 

For the S & P 500, it was 1500 in May 2007. Today it's 4538. Based on my math, the S & P 500 has done 8.25% since May 2007. Add 2% for dividends and you get 10.25%.

So the comparison becomes 15.1% to 10.25%. However, I used returns from rental #1 to scale into 3 additional properties. This is what makes it an apples to oranges comparison. 

In reality, my initial investment of 50K in May 2007 turned into about 1 million today. It should be higher than 1 million, but we started spending about $1,000/month of rent cash flow on living expenses when my wife quit her full-time job (46.5 hours/week) in May 2015 and switched to part-time (10 hours/week).

If you compare one rental to VTSAX, it's probably a tie. Because VTSAX is passive, VTSAX wins. However, if you are willing to scale and go up to 3-5 rentals with leverage (25% down payments), the rentals are going to be a much higher return, even if you pay for property management.

For couples making 150K/year or more, it probably doesn't make much sense to mess with rentals. To start, live on half and put the rest into VTSAX. Focus on your career and raises.

However, for me, I am a community college professor that makes 54K/year. My wife makes 12K/year working part-time. Focusing on my career is not going to lead to any pay increases. Pay increases are determined by state level funding, not performance. I do my job and I do a great job. However, my extra focus goes toward running my real estate rentals because that is where I will see my net worth increase.

Thanks for telling your story! Very interesting!

The only thing I don't quite agree with or understand is how the advice should change for high income couples. We make well over $150K as a couple. We think real estate makes sense because there's a lot of money we have on hand to invest that can't be fit into tax advantaged accounts.

@pnw_guy makes a really important point. You are pretty limited in terms of what you can shelter with defined contribution pension plans, which is what most folks have available.

In comparison, with real estate you can theoretically shelter all your business income and if married up to another $540,000 of income. Furthermore that income can be wages or portfolio income. (You can only shelter earned income with a pension plan.)

Many (most?) wealthy families know this. It's often one of the ways they save for retirement.

But middle-class folks can do this too. Just for the record...

[SeattleCPA]

If someone wants a higher return than the S & P 500, it's most likely going to require time and energy. It's very possible to be successful with real estate, but it could be at the expense of their W-2. Let's say someone has an equal amount invested in real estate and VTSAX. In a normal year, the real estate makes an extra 10K more than VTSAX. That's a win. However, is it possible that they lost 20K of opportunity cost at their W-2 job, mostly because they only put in the minimum amount of hours?

The blog targets people who want to accumulate 1-3 million and be FI. If a couple is making 200K/year, the easiest path is save 50-75% and invest in VTSAX. Real estate returns typically get better over time with practice and economies of scale. Real estate is a great play for someone trying to accumulate over 10 million. However, for a couple making 200K/year and trying to get to 3 million to be FI, real estate is somewhat of an unnecessary step. 

I've seen smart people lose money in real estate because they didn't have enough time to focus on it. Even for myself, my least optimal years were when I was busy with my W-2. Maybe a compromise would be to do a live-in flip and move every 2-3 years. Take the tax free profit and put it into VTSAX or maybe a larger flip as you get more comfortable with repairs.   

That's my two cents.

So, just to put an alternative point of view out there. What I've observed (as a CPA) are folks where one spouse earns a good income in a traditional high-wage job. And then the other spouse runs the family's real estate portfolio and in effect generates large tax deductions that shelter a big chunk of the W-2 earners taxable income.

E.g., W-2 spouse makes $300K a year and real estate spouse (due to depreciation) puts a tax deduction equal to -$150K a year onto return... and then couple in effect saves $150K into their real estate portfolio and pays income taxes on the first $150K they make... not the last $150K which would be pretty highly taxed.

And this scales obviously. If one spouse makes $1,000,000 and the other spouse loses $500,000, that's effectively like investing $500,000 pre-tax.

P.S. Totally acknowledge these married couples are combining two jobs. The W-2 person and the family's real estate portfolio manager.

[waltworks]

I'd look at the demographics of the US before I went whole-hog into multifamily investments that you plan to hold for long periods of time.

-W

What's your read of the situation? That multifamily is on the way out due to stagnating population growth?

My read, which is worth what you're paying for it, is that in the 20+ year timeframe, demographics will make housing in *most* places in the US a depreciating asset - a renter's paradise and owner's nightmare. A big change in immigration law and/or changes in family formation could change that but I consider both to be unlikely.

-W

I disagree with this assertion, as the supply will likely not meet the demand for a very long time, and for supply to surpass demand is unlikely. That, and the positive growth in the U.S. from immigration, rising homeownership within the millennial population, and the decrease in construction companies able to develop goes completely against that.

20 years from now Millennials are in their 50s and 60s, the housing demand from that generation is right now, not years out. Millennials (those few that have kids) will be downsizing in 20 years. The cohorts behind them are much smaller.

I mean, like I said, I have no crystal ball. But we look a lot like Japan 20-30 years ago demographically. There are an awful lot of places in Japan where houses are free these days (but the nearest groceries are 100km away because everything closed).

https://commons.wikimedia.org/wiki/File:USA2020dec1.png

That's almost a year old. It'll look even more grim in a few months when updated. Maybe we'll have a post-COVID baby boom, maybe the MAGA crowd will go for more legal immigration. But I wouldn't bet on either of those things and the rest of the world is having fewer kids too. We'll come to rue our restrictive immigration policies someday, but by then it'll be too late.

There are lots of upsides to this scenario, too - just not for RE prices. As an investor you should be thinking about demographics hard when you invest in RE.

-W

[Skyhigh]

It seems like people really like to overthink things here. I get the impression that this forum is mostly populated with earn, save, spend, urban professional elites. It seems to have en effect upon what you are drawn to such as spreadsheet evaluations and projections. You are more comfortable with some obscure real estate investment trust than buying the home next door.

No one really knows what will happen in 20 years, but most likely real estate will have tripled if you live near the coast in the USA. Land is harder to find. Labor costs are shooting up. Material shortages show no sign of easing up. Building code changes continually make construction harder and more expensive every year.

Urban Growth restrictions have created artificial limitations to development yet the people keep coming. New home construction still hasn't recovered much since 2008. The demand is there but construction has not resumed for a f=variety of reasons. There are no guarantees in life but single family homes are a good investment in the USA.

[PDXTabs]

No one really knows what will happen in 20 years, but most likely real estate will have tripled if you live near the coast in the USA. Land is harder to find. Labor costs are shooting up. Material shortages show no sign of easing up. Building code changes continually make construction harder and more expensive every year.

I purchased a single family detached home on the west coast in March 2007 for $340k. It now has a Zestimate of $559k. Meanwhile the SP-500 is up 347% with dividends reinvested. Obviously that ignores the leverage that a 30 year mortgage affords but it also ignore the property taxes, maintenance, illiquidity, and transaction costs.

[pnw_guy]

No one really knows what will happen in 20 years, but most likely real estate will have tripled if you live near the coast in the USA. Land is harder to find. Labor costs are shooting up. Material shortages show no sign of easing up. Building code changes continually make construction harder and more expensive every year.

I purchased a single family detached home on the west coast in March 2007 for $340k. It now has a Zestimate of $559k. Meanwhile the SP-500 is up 347% with dividends reinvested. Obviously that ignores the leverage that a 30 year mortgage affords but it also ignore the property taxes, maintenance, illiquidity, and transaction costs.

Good demonstration that one only knows what to do with the luxury of hindsight. My take is to diversify with index funds (I know these already contain some RE) and RE. Most people's default for real estate exposure should be REITs. If you have more time for research and appetite for risk, go the syndication route. If you want the most control with the highest risk (and thus potential reward) buying single or multifamily homes directly makes sense

[SwordGuy]

There are gobs of resources listed in this subforum in a sticky thread.   Read them.

If you aren't willing to take the time to learn how to invest in real estate profitably, you probably shouldn't do it.   

It all depends on the numbers of the real estate properties you buy.   Those resources I mentioned will teach you how to run the numbers.

For us, real estate investing was a real FIRE accelerant.   It cost us about $225k to get 4 properties and get them rental ready.  They provide a profit of about $20k a year.  It would have taken us $500k in the stock market to get the same income using the 4% rule, so it was well worth the many weekends we spent looking for and  renovating those properties.

Then again, we bought at a great time to buy and in many markets, now is not the time to buy.

It just depends on the numbers.

[pnw_guy]

There are gobs of resources listed in this subforum in a sticky thread.   Read them.

If you aren't willing to take the time to learn how to invest in real estate profitably, you probably shouldn't do it.   

It all depends on the numbers of the real estate properties you buy.   Those resources I mentioned will teach you how to run the numbers.

For us, real estate investing was a real FIRE accelerant.   It cost us about $225k to get 4 properties and get them rental ready.  They provide a profit of about $20k a year.  It would have taken us $500k in the stock market to get the same income using the 4% rule, so it was well worth the many weekends we spent looking for and  renovating those properties.

Then again, we bought at a great time to buy and in many markets, now is not the time to buy.

It just depends on the numbers.

Agree with most of this. I'd just add that it always feels like a bad time to buy in the moment. Rarely is there clarity that makes an investment feel cheap. In talking to many many investors that bought after the 2008 crash, knowing that you bought at the right time only comes later.

So how do we know that RE isn't going to take off even further over the next 10 years? If so, maybe now is the right time to buy

We'll only know the answer looking backwards.

[Dicey]

It seems like people really like to overthink things here. I get the impression that this forum is mostly populated with earn, save, spend, urban professional elites. It seems to have en effect upon what you are drawn to such as spreadsheet evaluations and projections. You are more comfortable with some obscure real estate investment trust than buying the home next door.

File this under "Condescending Generalizations", please.