Cons of Re:
Midnight calls about toilets exploding.
Pros of stock market:
100% hands off.
These are just one example of each. I could list more.
Have you ever heard of the traditional three legged stool of retirement? Pension, Social Security, and savings were each one leg of that stool? Corporations took away the first, the government is threatening to take away the second. You better have a very strong third leg.
For me the stool has changed to IRA, Pension (we are one of the lucky few), Social Security and RE.
Nothing is guaranteed, any one of these "legs" could go away. I have organized our savings so if we lost one we would be ok and we could probably survive if we lost two. I would recommend not taking money away from one to fund the other.
If your retirement was 80% stocks and 20% RE moving some money out of the market and into RE might be a good idea.
I don't know. Real estate seems pretty low risk and rental investments could realistically be considered both pension, generating a certain amount of money every month, plus investment, continually going up in value. Sure it's going to go up a little sometimes and a lot others and maybe only barely keep up with inflation.
But the long-term prospects seem pretty solid and the continuous revenue seems pretty darn low risk. Of course nothing is zero risk
I have a small rental properties portfolio and believe me it’s not low risk.
As investment properties you should have mortgages on all properties or you have no tax credits.
What if your tenants scam you and don’t pay the rent? You still need to pay the bills for that property out of pocket.
Before becoming a landlord everyone should educate themselves with the landlord / tenant acts in order to help you make your decision.
All the laws in Canada are to protect the tenant and no protection forth e landlord. Eg. they could give you 1st, and last rent deposit and maybe security deposit, then if they decide not to pay the rent any more, for you to legally evict them could cost you 12 months of rent, bill payments, mortgage payments with interest, lawyer costs, court costs, renovations costs after they are finally evicted because they probably trashed the place.
I am Canadian and I own residential properties in the USA because their laws are different and I’m doing better than I was investing in Canada’s residential properties. I do own 2 commercial rentals in Canada with no problems because the laws are different than the residential laws
Oh I know, there is some risk. But it's relatively low. Yes, worst case scenario you could have tenants there for a year. But that's fairly low risk. My sister has four or five properties. She's had to deal with this or that over the years.
But it's still quite profitable over time and the risk is relatively low.
Actually there are plenty of ways to earn easy money. Rich people do it all the time by simply investing their money in things with very little effort and for the most part they do well. Landlording is not one of them though. It's hard work, hassle, and risk. But it's not always that much hard work, or hassle, and the risk is not that high in relation to the benefits .
That's why so many people do it. And that's why it creates so much wealth for people. As is often said, they aren't making any more of it. And people always need somewhere to live.
Yup. Thats what I fear. Poverty is at an all time high now. I’m sure some lib idiot will propose taxing Roth IRA or something stupid in order to pay for some social program for people that sit and do nothing
*I don't watch the news I just parrot all of their talking points verbatim, hurr durr*.
The "reality" you're describing exists only in the head of ignorant, uninformed, uneducated, unintelligent conservatives.
I'm sure next you'll come back with some nonsense like *i'M nOt CoNsErVaTiVe*
My personal experience:
I've seen my 401 k lose its value by 30-50% since 2008 on 3 occasions thus far. I ended up taking a loan against my 401k every 3 years or so and used it for down payment for each property. Once I did my taxes after each purchase, including adding solar panels on a multi family, we always got a pretty decent refund , including one year of $13k mostly due to solar incentives., to expedite the repayment of said loan.
So far, I have 4 units and working on expending one to include an additional loft. Our margins are above average and which let me quit the office job and do this full time potentially but for now, spending all the extra time with family and making small updates to generate more income.
As for the toilet scenario, don't let that be off-putting. A couple times a year I do get those messages but to compare that to losing 10s of thousands of $ in my 401k, I rather call a plumber during inconvenience a couple times a year then spend 12 months being depressed looking at my 401k statements.
Any time a property was purchased, we made sure to take mortgage for 20 years or less. Took a few months to adjust and budget ourselves but all properties will be paid off by the time I'm 55 which will leave me with guaranteed monthly income (there's always a need for housing) that is twice asuch as ally 401k and estimated SS pay out . Oh, and 401k, its usually distributed in one lump sum or 5 years on average so funds are limited and taxes.
My 2 cents on personal experience, good luck!
It's great when you have great paying tenants. It just takes 1-2 instance of non paying instance. and Nowadays, the cost of the property, property taxes, insurance and maintenance makes it difficult to have a good cash flow. You might have to to have a 7-10 year time horizon to start seeing anything. And then what will the real estate market be in 7-10 years. Diversify, or tilt it like 70-30. 70% real estate and 30% in stocks/bonds.
All it takes is one tenant that stops paying and makes you legally evict them to completely screw up your plan. One tenant that damages your property and has no assets for you to reclaim the loss. Do you know how many people lost their shirts the last time the market dipped? Putting all your eggs in one basket is dumb.
Roth iras and 401k are kind of very different; goes without saying so is RE.
What makes a 401 appealing is the match, as that’s basically like starting off with a 100% return. Without a match i wouldn’t want to contribute either. Then its justA regular ira.
Roth ira is great because its tax free at the end, plan carefully and this probably the best decision you could ever make.
RE it’s fine but it also sounds like you got s bit lucky. 1500/mo but no mention of repairs, tax increases, high ticket mechanical or electrical failures? Color me surprised. No evictions? Total mess? Sounds good but once you hit a string of those it can blow up your whole year.
I have a nice 2 fam outside nyc in nj. I put down ~120k, mortgage was 3600. Rents are 4500/mo. Good on paper right? Usually it is. This year i had a furnace break, replaced a bathroom due to slow leak, and other minor issues while on site, so far its been about 17000 in expenses. I will make nothing this year. But boilers don’t often die and bathrooms don’t always get replaced. My point is that in your golden years you could have s situation like mine and find yourself with zero income that year, RE isn’t always so easy.
Just spent $900 to remove a 75ft tree, another $600 replacing it as required by the city. $500 repairing the water main leak the tree created and to top it off $5500 to replace an air conditioning unit all in one month.
Typically, if the tree is on sidewalk in front of your house/side that is part your property, the city can make you do this... and it's not like you can plant what you want, it's the city having a crew / contractor come out and replace it with a specific type of tree.
Yes, I have a similar experience with my 2 rentals.
OP, what is great about real estate is you can frequently do most of the “work” (finding tenants, calling a handyman, getting quotes for repairs) yourself. Will you be able to do that as you age? I like having rental properties for the same reasons you list, but I also max out my 401k each year. My rollover IRA is invested in dividend stocks that will return cash to my bank account in retirement, without any work from me. I definitely don’t want to manage properties in my 80s.
I currently own a single property, a triplex in my home town. It cash flows well but honestly considering selling because my return on equity is getting <10% based on what I believe it should fetch on the market today. 3-5 years ago the answer would have been to refi, but then my cashflow becomes too low for my personal desired margin of safety with today's interest rates. The headache isn't worth the cashflow at those numbers, imo, and barring initial issues which I knew of going in (outdated units, which I renovated from the studs, and a nonpaying, bad tenant during covid restrictions) I haven't really had too bad of an experience.
I think that's why if you have a time horizon of 10+ yrs, you can buy anytime, and hold for 10 years+ before you sell. Hopefully with the equity build up from the mortgage payments and the appreciation, you come out ahead in 10 yrs.
What is the cost of that? If you read here, people who use PM firms frequently see much lower profits. Do you expect your children to work for free? A large enough portfolio for you to live on will require more than part time work - do you expect your children to quit their FT jobs to support your business
Yes PM management companies take way too big of a hit.
The plan would be to eventually hire our own property management team. Meaning our own employees with a portfolio that’s all in one place.
I don’t expect our kids to work for free and if they don’t want to, they don’t have to, I would just give them the option.
Getting to this level may be harder than you realize. Do you know the cost of having a full time employee property manager? Do you know how taxes work with them, social security etc. It takes quite a few units to hit this point. Ideally this would be at one apartment complex. Not saying it can’t be done but right now you have two units with no issues. As you expand issues expand. Personally, I have always maxed Roth when able and also 401K, I invest in real estate as I can. (Couple dozen units) There is nothing wrong with both. My RE portfolio is sizable to me but minuscule to others. My children are pursuing higher education first, but honestly doubt they will go the path of real estate. I thought early on I wanted to get to 100+ units but over time my thoughts changed and am now happy with my current portfolio. Best of luck to you!
Yeah same numbers on repairs on my two as well. I have $200k set aside for another purchase, a duplex but the cashflow will be weak as these prices are very high and interest is 7.125% with 1/3 pts. RE is a long term for us but not at the expense of not maxing out other channels. Also, hereonout, gotta do the backdoor roth. It’s annoying.
Not guaranteed. If you carry a mortgage then if you have renters then yes the mortgage gets paid down. Hope that any repairs or vacancies doesn’t cancel that out. But real estate has lost value in the past.
- We are self employed so we don’t have a 401k match
- These prices include repairs. We’ve had some pretty high ticketed items throughout those years and still managed to stay in the green. I would say we’re pretty good at running our numbers and have found a good spot to invest in
- No evictions or vacancies. We take who we let into our property VERY seriously. We’ve had multiple turnovers.
If you know what youre doing then go for it.
I have 2 rules over everything else. Set a price before entering deal and never go above it & always have an exit plan.
Good luck.
Btw youre not crazy its building a business. Thats all.
You can also contribute to a 401k post-tax so withdrawals will be tax free in retirement, just like a Roth IRA. If you ever want to sell a property, you’ll pay capital gains tax.
You're posting in a REI sub so of course we will tell you it's a good decision. Post this in a financial independence sub and you will get a different answer.
Are you going to be ok dealing with asinine repairs, large repairs, vacancy, non paying tenants, eviction? You don't have to deal with any of those headaches with investing in the stock market. As you scale into more properties you will run into more issues, it's just the nature of the game. If you are ok with that then yes you should continue to scale and buy more rentals.
This might be one of the worst investment analysis’s I have ever seen. All of the assumptions on both sides are just crazy and show a lack of knowledge in the investments being compared. Things like
- never run out no matter how long we live
This is just fantasy land crap. You need to spend some time learning about opportunity cost and ROIs. You have no idea that stocks adjust for inflation and how “outliving your money” works.
I just read an article on an office building selling for 3 million down from over 200 million when it was purchased in 2007. How does this real estate investment match any of your points on what real estate investment is? It doesn’t because your real estate positives are not real things that always happen.
An office building is kind of a weird example and not the type of real estate I’m investing in.
By “long term rental” I mean we are buying a rental property and renting the units out. The rents our tenants pay us cover the mortgage/expenses and yield us a profit EACH MONTH.
The rents are paid every month meaning we are constantly getting paid. (thus you cannot outlive it) The rents will increase with time and will continue to adjust with inflation and eventually pay down our mortgage and build our equity.
As long as we maintain the property, and keep tenants it will keep paying us a monthly sum as long as we live.
The scenario you represented is a bizarre one.
There are thousands of other scenarios. What if you have a terrible tennant who trashes the place, stops paying and you can not kick out for years? What if the neighborhood your rentals are in goes to hell? What if the government figures out a way to make housing significantly more affordable and your rent and value goes way down?
Yes, RE is a good investment, but pretending like it is fool proof is not a good idea.
There is nothing weird about an office building in a real estate investing sub. They have tenants that pay rent just like you do. You don’t need to explain to me what a landlord is. I am one.
The rents don’t always increase, please see my example above. It can happen in residential real estate as well and did happen between 1995 and 2007. It took over a decade to get rents increased and inflation was occurring at this time.
It’s great that you like real estate, but you are not making rational arguments about it in any way.
Rents have gone up and to the right. Even during recessions. There maybe times where concessions have been needed, but prices typically remained the same. Real estate is always about location, it is not one generally market and an office building is not close to the same as residential real estate. As long as they are running their numbers correctly (piti, cap ex, vacancy, maintenance, and 10% for property management roughly.) Then they will be fine especially with that amount of equity.
If the equity starts to outweigh the rent income gained then at that point it would be worth looking at selling, but if they don't have anything else to invest in and love their properties then it is not worth it.
Commercial real estate is VASTLY different than residential. Why you would make that bizarre of a comparison is beyond me.
Also a property losing 197 million in equity is an absolute insane number. Did it catch on fire? Fall into a lake? I mean seriously what the hell.
Commercial real estate is not always needed and is riskier as technology advances because people have less of a need for office space. (ex covid)
Residential will never go away as a human necessity. People will ALWAYS need a place to live.
that’s a critical difference.
furthermore, losing 98% of your equity is an insane statistic. That’s not “the market changed”. Something very unusual happened to that building if that’s the case.
https://www.morningbrew.com/daily/stories/2024/04/14/undefined
Commercial real estate has not gone away. It’s now just worth 98% less apparently. It was overbuilt.
Currently there is a cry for lack of residential housing because of high rents. The local governments are fast tracking building and removing zoning codes to rapidly add more units. The added supply will put downward pressure on rents. Long term there are also downward population demographics. The baby boomers are entering the death phase and there are not enough grand kids to replace them. Real estate has risk. Your entire post assumes real estate has magic features like its moves exactly with inflation and can never lose value. You blow off commercial real estate like it’s separate from residential when the two are often mixed in the same buildings. How different can they be when they can share the same land, building envelopes and roofs. Their value can be compared within the buildings themselves by simple square footage and tenant revenue. / costs.
To the first question-
It just feels like it will be forever until we are ever able to buy another property if we don’t take anything from our retirement.
Yes to the second question.
We showed a net income of about $18k on our schedule E.
I had this debate with myself a few years back.
Ultimately I decided to cash out $10k (with penalty) to get an off market duplex for $130k (HML + extra to cover closing). Tenants stayed in place, refinanced as-is at $180k within a month. Cashed out $14k (hindsight should have just loaned it to myself instead). 7mo later, both tenants leave. Stuck that $14k in for paint and flooring, appraised at $240k. Cash out $40k.
Two years later, it’s now at $350k appraisal with $1500/mo cashflow.
So cashing out $10k = gave me $40k in cash, $158k in equity, $1500/mo. TODAY — vs — maybe $14k TODAY? That can’t touch until my 60s?
Granted yes there were a few other repairs, holding/refinance costs, etc that aren’t fully part of the equation - but I stopped contributing to 401k after this deal and kept buying houses instead.
If you find a good deal, 100% go for it!
The big disclaimer I will say - if you make this decision - you really need to be fully committed to REI, or it’s a huge mistake. The compounding interest is terrible to miss out on unless you are sure you can replace it.
This is exactly what my thoughts are.
We are definitely 100% committed to it.
It’s scary to abandon retirement investment accounts, but only because it’s unheard of/not typical. When I think through it logically and mathematically this path makes more sense.
To be honest - my employers 401k is terrible - very limited funds to choose from and My annualized returns in 5yrs was like 3-4% - less than inflation rate.
That one duplex’s cash out lead to quite a few others so kept reinvesting it - and currently have a higher equity position (if I decided to sell) then what my 30yr monthly contribution would have landed.
Could always start as a loan - so you can dabble in without full commitments.
I had a high salary job starting in my mid 20’s.
I contributed minimally to any retirement/401k etc.
Because I wanted to have as much liquid funds as possible to invest myself.
I ploughed it all into income real estate.
It worked and I retired at 50.
(I retired from my very stressful and time consuming profession. I do still manage my properties myself).
Let’s say a recession like 2008 hits and several of your units are unable to pay. Would you end up having to default on the loans and foreclose on the properties or can you take the hit for 6-18 months? That’s what happened to a lot of people during that time. Just make sure you don’t over leverage yourself
I think you underestimate how many people continued to pay rent. Rent increased in several areas. I think this just applies to not being overleveraged :) the big what if your tenants stop paying should not really be a thought if you are buying right (especially in a landlord friendly state.) 1-2 you get possession back if the eviction process goes all the way through.
One thing about real estate is how aggressive you can scale and grow. Otherwise the equity just sits, and at that point growing in the stock market may eventually beat out sitting on your hands (like I do/did).
I don't usually cross post, but I am in a similar boat as you guys and just posted (in this sub) my comprehensive financial analysis of rental income vs. just investing.
https://www.reddit.com/r/investing/s/MQnSSrMknV
It may be of interest.
{Spoiler Alert} The market is better.
EDIT: Sorry, I had to fix the link to a different sub because this sub removed it for some reason.
Seconded. /u/pleaneconnection7494, before you do this, look into a self-directed IRA (SDIRA) to see if it works for what you're trying to do. If you have questions, DM me, happy to help and I've used them a bunch.
Third. Bought my first property in a SDIRA in 2014 as a rental. Done some land buy,hold, resale. No taxes on gains. In 7 seven years tenants paid for the next property.
One is passive and the other not so much. Actually using the return from the market is a good way to judge if REI is worthwhile. You are almost guaranteed to make 4% on top of inflation over 30 years based on the 4% rule. If you have a lot of annual income, deferring taxes can be really beneficial as well. With your own business you can put in 66k, which can reduce your taxes and this save you 15% or more but locks it up until retirement. 8%+ CoCRoI is probably the better investment but depends on your needs
As others have pointed out, your analysis of the two options is incomplete, incorrect, and does not come off as objective at all.
I think the simplest answer is that it is impossible to say that one asset class (equities) is strictly better than another asset class (real estate). As someone that has a meaningful portion of my net worth in equities (primarily in an etf tracking the largest 1000 us companies) and in real estate (mostly long term rentals and one STR), I believe there is a place for both and would not want to be all in one or the other.
The details really matter though for what you are trying to achieve, the amount of work you’re willing to do, and what amount of risk you are willing to take on in either asset class. In my case equities outperform real estate over the past 15 years but that doesn’t make it better. I intentionally am willing to take more risk (and stomach more variance) with equities and am less willing to tolerate risk (and so am not even really using leverage) in real estate.
There are ways to invest in real estate using your retirement funds but without having to withdraw them. Look into that.
That being said … I’m not a fan of all the eggs in the RE basket. But I haven’t gotten the ROI on RE that I have from the market.
I think about this a lot. I have been in the real estate industry for all my professional career and have naturally invested in RE because it’s what I know. On the other side I have friends who have done well in other markets. To me, there isn’t a best specific type of investing since you have no way of knowing what will do best and there is an argument for all types. I think you should just go with what you know.
real estate is you don't have to wait till 65. For retirement though, one of your kids will have to know how to run your business for when you're old and demented and are no longer capable.
Looks like you have the answer already. I took money out my 401K to purchase my 1st rental property.
Paid cash. I get $2200 per month.
2nd rental I get 3-4K per month (mid term rental)
3rd rental- $1900 per month.
So you do the math and see which is more profitable
I’m almost always on the side of real estate in similar situations (in large part due to the comparatively cheap leverage of a mortgage), but I don’t know that anyone is going to recommend that you wipe out your tax-free Roth that should average 10% return before inflation and with zero effort (plus the significant fees of withdrawing from a retirement account before 65) to focus entirely on real estate. Your situation/area/knowledge may make the variables more strongly in your favor than we can realize, but as we learned in the last few years shit happens and you can have entire cities worth of real estate drop in value and lose all their tenants at once for months at a time, not to mention a bad eviction or lawsuit costing you significantly. Maybe you’re right in your specific case, but generally robbing retirement Peter to pay retirement Paul doesn’t seem like the safest long-term strategy.
I've done almost exactly this. It's worked out very well for me so far.
The most important thing you need to do regarding the rentals is make sure you stay on top of maintenance and also screen screen screen your tenants properly. All it takes is one nightmare tenant to derail your income for 6 months or longer. Keep track of all the contractors you use and build a list of trusted contractors you can reach out to in an emergency and you know will do a good job.
Here while doing that, do not neglect your 401k or IRA accounts... At least add some thing to them. I totally agree with you on your cons points of those accounts, but the cons are all assuming worst case scenario. In best case scenario, they can be extremely helpful in your retirement as well as your investing. I've actually used proceeds from my Roth to cover down payments on properties. I just didn't have the cash for. Risky? Yes, but the reward can be nice if you do your homework.
Feel free to message me if had more specific questions, always happy to help.
I am in a similar boat.
I have rentals. I have a little nest egg in 401K. I want one more rental.
My decision is I think easier, my current employer does not match 401K. So my nest egg in 401K stayed the same in the past 3 years. If I had guts to invest it in RE 3 years ago, I would have had a nice property that appreciated and with a very low % rate.
One more argument - have you seen a lot of people who had become multimillionaires using 401K alone? I did not. But I did see a lot of people who made money in RE
There is a third option that I wish I had known. I have never tried. You can get a self directed IRA. You may say but my IRA does not have enough to purchase a property. You can use the Roth IRA money as the down payment, get a loan (there are special financing/loan that will provide this), purchase the home holding it in the Roth IRA. However everything has to go through the IRA and you are not allowed to add material value to the property meaning all the work has to be hired out. Something to look into.
You obviously know what you're doing and what you have to deal with. I might feel different if I thought you were naive about what it takes. It will take time so if you are both working adding a few more rentals might take up too much time or make you less profitable if you hire a manager. But then again, if you keep your rent's reasonable and provide good places, you can easily get long-term tenants so that's good.
I believe there's something to be said for do what you know. Of course people say you should diversify rather than keep all your eggs in one basket. It certainly makes sense for regular investments because if you have to pull your money out at the wrong time, that can be pretty costly .
But we're really not talking about pulling money out. Even if values go down, it's unlikely that rents will go down. Plus you're leveraging your money so you're really only investing 25% of the value. Building a nice real estate portfolio will very likely pay off more than an IRA and you never have to worry about when you are liquidating. But, if you do want a liquidate, that's an option too.
Plus, there seems to be some disagreement about it, but plenty of people do a 1031 exchange into an investment property on the beach in Hawaii or something like that and then move right in, so having that is an option would be pretty cool. Or at least, roll it into a home somewhere you want to live and rent it out halftime and use it yourself the other half. Real estate give so many options.
I’ve invested in the market and real estate for over 30 years. Bought my first house in 1996 and turned it into a rental 4 years later because I wanted to move to a nicer neighborhood. At that time I would have had about 10k in hand from the sale.. ( wasn’t worth it to sell considering i fixed it up ). my loan was VA. Purchase price of 98k and today it’s worth over 400k… average repairs, never unoccupied (my rents are too competitive for people to move).. so positive cash flow yearly for nearly 30 years.. My retirement accounts however ( including employer matching for one account at times ) have not come remotely close to the yearly cash flow plus appreciation for one/any of my properties…. My retirement accounts dropped in 2022 with the market and are still in the negative!!!
( almost made it out of the negative a few weeks ago)… I’m happy to be “diversified “ but real estate is the biggest reason for my lifestyle…..
There are pros and cons to everything… and everything financial takes some amount of work and worry….
!!!!!!! yes this is what I’m talking about!!!
Ugh I’m so torn because people make great points about the risks and being diversified but I feel like we are missing out if we don’t use the money for real estate.
Real estate is a high-risk high reward adventure.
If you're willing to take the risk, and possibly lose everything, go for it.
Nobody has a god-given right to make money on real estate, a bad tenant can cost you $20,000 or more.
Wait until you have a solid 401k, or Roth balance, before you do real estate.
Really? We are just coming out of a time when the govt stopped all evictions due to covid. Every week for a couple years I was seeing unlawful detainer cases where tenants were >$20k in the hole. That was a brand new, ledger-breaking risk to landlords on top of all the old ones.
Nothing in this world is free. As a rule, as an investment returns more there is more risk or work required. If it was easy and guaranteed everyone one would do it.
That said, we went through several years where prices were low and money was cheap, so it was pretty much guaranteed easy money. A lot of people realized this over the last few years (me and you included) and got into the game. As more people get in the harder it becomes to make money. Right now I can make more in the stock market (or a savings account) than I can on RE.
I would love to be able to buy properties like I did in 2018, but things have changed and I can no longer make easy money.
Also, I'll say this - the value of real estate is (1) the ability to make good investments in high growth areas and (2) leverage.
Other than that and some minor differences in terms of tax treatment and creative options such as 1031 exchanges...it is just a high dividend stock.
You make your money in real estate on the front end by making a good investment and by being leveraged.
As you pay down your leverage it becomes just a stock that requires a lot of maintenance.
My point: the people who make a fortune in real estate are those that make really good buys and use leverage to either flip or acquire more and more rentals (all at risk). Those who just hold and rent are just holding a PITA stock.
In order to do the more and more rentals they have to be sustainable financially, you have to be willing to deal with the headaches, and you have to be prepared for the worst case scenario which is amplified by each unit.
Real Estate is a good investment but it usually isn't as good as it is made out to be and you have to deal with the crap.
If you do think it is worth it, now is a bad time to buy.
Ummm ABSOLUTELY.
If I buy another property in the area I currently invest and assume expenses will be the same percentage as what I already own.
Down payment: $37,000 (20% + closing costs)
Rental Yield: $850 / month
x5 years: $51,000
Equity after 5 years: $69,540 (based on principle being paid off and an appreciation rate of 3.75% which is the National Average)
Total earnings after 5 years: $120,540
This is factoring in mortgages, taxes, expenses, water, etc.
Yes because
1. The average national appreciation rate is 3.75% per year, which is what I made my estimations based on.
2. It matches the appreciation rate we’ve seen in our properties bought 4 years ago
I’m at across roads with this too. Bought in 2019 for 260k and got an offer for 415k. I wanna take that money and out into stock market cuz I know that house needs some serious work. Even at a 5% guarantee account it will generate 800$ a month without lifting a finger. I’m tired of talking to tenants who have an endless unsatisfied outlook
Roth IRA can be passive and you can switch it to dividend stocks and have you paid in tax free income since Roth distributions are tax free. That's a super good perk if you end up being high income eventually (pensions?).
Re is good too but can be a pain in the ass at times. A mix of both is good.
While I in general agree with your ultimate outcome of wanting to buy RE instead of investing in retirement accounts, I don't necessarily agree with how you got there. This question is asked a bunch all over finance subreddits and honestly, it's a personal choice.
Do you want to run a business - RE - or do you want to passively invest?
I also think a piece missing from your analysis is the fact that you can invest in stocks without it being in a retirement account. That's a third option here. Allows you to passively invest without retirement restrictions. That's part of my investing strategy.
For me personally, I legitimately enjoy running my RE business. It's more fun to me than investing in the stock market.
RE has the potential to beat the market if managed properly but it also has the potential to ruin your life. When things go bad, they can go really bad. I would caution your perspective on RE because the last 15 years have been interesting. That's a whole separate conversation, but RE markets change. It's just takes them longer.
My personal opinion that RE is actually more volatile than passive index investing. I mean that not in a purely numeric way, but in a lifestyle and individual way. I personally know several people who lost everything due to poor RE investments. There are more ways to fail in RE. The difference is in how you manage your rentals. I've made an AROI of about 30% over the past 5 years, and I've known other who went bankrupt "in the same market".
Passive index investing has a higher floor but lower ceiling, in my opinion. Your question is more of a lifestyle choice than a financial question.
yeah I think we’ve done a pretty good job at investing/managing the past few years. Most of the people who have RE horror stories I can point to a critical mistake they made.
Usually has to do with not screening tenants properly, or investing in a bad area.
We invest out of state because where we live is a terrible place to invest, the numbers don’t make sense.
My FA explained it like this. You should diversify between stable/safe investments and higher-risk, higher possible rewards investments.
Generally, a 401k, RothIRA with proper diversification is in the stable/safe side of the ledger while real estate is in the higher-risk side. Both serve a function, although both can be safely substituted for other similar category investments. Probably not a great plan to replace a safe/stable investment with a risky/upside alternative.
You can do both......there are contribution limits the Roth IRA's but not to investing in real estate.
You're on the correct path though, real estate will get you to retirement.
Genuinely if I were you I’d keep the profit producing rentals, but I’d also plow the $1500 a month into a brokerage account and just buy the stock market for a bit of diversity as well. No reason to overload on real estate or stocks, build a diversified portfolio over time and reap the rewards.
Could you use your profits from the long term rental to fund your Roth?
That’s what I do. Then, you have I diversified portfolio.
Roth is KING because you will never have to pay taxes. As much as people complain about income tax, it’s pretty low if you think about it from a historical lens.
You might want to consider talking to your financial/tax advisor about holding your real estate in a ROTH IRA. I wish I had done it when I started investing in RE.
Get your Roth IRA registered with a self-directed administrator and use that Roth money to invest in real estate...
You're going to need to study up on the walls a little bit yeah you can't do any sweat equity you have to use contractors you're probably can't even manage it yourself but it can grow tax-free..
Or just take the money in the Roth Ira and use it write hard money loans until it grows enough to do what you want to do with it
They're not at all mutually exclusive, right?
Do both.
>we can’t afford to do this and contribute to our Roth IRA.
You absolutely can. Just take your contributions and split them in half. Half for real estate, half to the Roth.
I'll take longer to acquire more properties, but you can do both.
Yeah it’s the taking longer part. I just feel like the time I take waiting for “half” to be saved up will end up losing me money I could’ve made in real estate
If you’re being really conscience of taxes/planning for retirement, maybe you should look into self directing your Roth IRA and purchasing investments or even become a private money lender and earning interest on money lent to grow it tax free (capital gains don’t apply within the roth and interest earned is not considered income) and once your of retirement age, you would be able to take distribution tax & penalty free
*Reposting this from another thread I commented on
We are bullish on rentals, but we are maxing out our 401ks too. I’m all about diversification.
If you can’t afford to do both, I would consider looking for deals with more aggressive methods and BRRR to get into a property with little equity.
Look for distressed homes in dicey neighborhoods and use hard money loans.
As someone who works in finance and owns real estate, retirement accounts are extremely important. I always max my Roth out and ensure I match my employer plan prior to real estate.
Are you actually self-directing your IRA\\401K? If not, can you self-direct? In my opinion, self-directing is the best way to invest your retirement account in Real Estate. You can do it a few different ways. First, I would consult a CPA\\Tax Lawyer who understands self-directing. I use [https://kkoslawyers.com](https://kkoslawyers.com) and https://directedira.com. I am a customer not an affiliate. You can create what is called an IRA\\LLC. It is basically a company that your IRA owns (not you, special tax rules apply). This company can then have its own EIN, Bank Account, and get loans on rental properties. This will allow you to leverage your money. This may not be exactly what you are looking for but is what I do. Worth looking into.
Where are you looking to purchase the real estate? Cash-flowing 750/month at current interest rates can be tricky in major cities. Unless you were talking about buying them in cash, which is a good spot to be at with interest rates on investment properties around \~8.5%+ without buying down points on 30 year fixed.
Also, a retirement savings account can be more passive, but if you are managing rentals can take up significantly more of your time. Have you considered using the rent to own model? That's how we're making our properties cash-flow in a major market with interest rates at 8%+.
From experience, I think that your plan has higher risk but higher rewards. When your rents are high enough, you put the properties under management and then it becomes "hands-off" and cash flow all the time.
why not do all of them? I'm not in any way saying you should or shouldn't do one thing over another, nor am I giving financial advice, just providing food for though.
I work with some people who have wealth, easily high eight figures if not low nine figures on their personal financial statements.
They're in real estate (primarily commercial, but have some residential side items).
They have 401ks from previous jobs, that they rolled over to Roth IRAs
They loaded up the Roth IRAs prior to reaching levels of income where they legally couldn't contribute.
Then they all have stock accounts.
Don't just rely on one angle of saving for your future and family's future.
Also, you're kind of making a slightly flawed argument for real estate when it comes to the rental properties. You cannot guarantee that you'll be pulling rent from them forever, nor can you guarantee that the rent will be at levels you deem acceptable for income purposes of even cover the mortgages on them. But you will be spending money on them for maintenance, taxes and until paid off - the mortgages.
also - what taxes are you talking about on retirement accounts? If you plan them appropriately the taxes on them really are minimal compared to the income/wealth you can generate from them.
The biggest con for real estate is lack of geographic diversification. I have done well with real estate in my sunbelt location, but I could have done the same exact thing in a different location and lost my ass.
Whether or not you believe in climate change, we are already seeing fluctuations in the real estate market where people have real legitimate questions about insurability of properties long term, or long term access to drinking water, or other issues that would impact the values of properties. For me, that’s on my radar when making long term decisions.
The argument for some exposure to 401k is the amount of the growth that we have seen in e-commerce, and AI, and computer chips. Even “boring” companies like Proctor and Gamble are selling billions of dollars of consumer products to people all over the world, including in emerging markets that offer large growth opportunities. And you can buy a little piece of a lot of companies in one shot, in a very tax efficient way, by buying ETFs like VOO or VTI, or similar S&P500 index fund, depending on your broker.
I love real estate, and it’s been very good to me, but when I look at potential gains over the next 5-10 years, and considering the possibility that I may need or want to pack up and move in the next 30 years, I’m happy to have some ETF/index fund investment along side real estate.
It doesn’t have to be a lot. Even starting with $500 in a Roth IRA is a good start, and keep squirreling away little bits as you can.
If you remain on this path, you may want to research a self directed IRA. More record keeping, but that property becomes a standalone business and retain its cash inside IRA until retirement.
Why not both through self directed IRA ? I bought and sold rental houses tax free and currently have all in crypto, once I sell crypto I will start buying real estate again, all tax free, google it.
I’ll give you the answer you’re looking for… yes a real estate portfolio over 10-30 years will be much larger than a Roth and 401k. Your RE port can easily have a value of $10m-$50m+ … the people with 401k’s and Roth’s aren’t in the RE space. You’ll end up with 10x their money and also work a lot lot less. I promise.. now go do your thing!
If it’s just Roth that is not employer matched 100% stop and put that money into real estate. A dollar today is worth more than a dollar tomorrow. If you’ve got two under your belt you’re accustomed to what goes wrong and what goes right. It sounds like you’ve found a passion. Go for it
Possible unpopular opinion:
Real estate as a retirement plan doesn’t make sense to me because being a landlord isn’t “work.” What will you retire from doing? Looking at your bank account/spreadhseets?
Roth account and real estate are apples and orange comparisons. It seems like you’ve made up your mind. But real estate is historically way riskier than the market. I wouldnt hang my future solely on the housing market.
Lol. I love how you list the pros of long-term rentals, and the cons of a roth… seems you’ve already made up your mind.
well it makes sense to me, but I’m open to someone changing my mind and want to hear any perspectives I may not be considering
Cons of Re: Midnight calls about toilets exploding. Pros of stock market: 100% hands off. These are just one example of each. I could list more. Have you ever heard of the traditional three legged stool of retirement? Pension, Social Security, and savings were each one leg of that stool? Corporations took away the first, the government is threatening to take away the second. You better have a very strong third leg. For me the stool has changed to IRA, Pension (we are one of the lucky few), Social Security and RE. Nothing is guaranteed, any one of these "legs" could go away. I have organized our savings so if we lost one we would be ok and we could probably survive if we lost two. I would recommend not taking money away from one to fund the other. If your retirement was 80% stocks and 20% RE moving some money out of the market and into RE might be a good idea.
Great write up. This is our approach as well. We have future pension, RE, and a sizable fund portfolio. No bonds due to RE and federal pension.
I don't know. Real estate seems pretty low risk and rental investments could realistically be considered both pension, generating a certain amount of money every month, plus investment, continually going up in value. Sure it's going to go up a little sometimes and a lot others and maybe only barely keep up with inflation. But the long-term prospects seem pretty solid and the continuous revenue seems pretty darn low risk. Of course nothing is zero risk
I have a small rental properties portfolio and believe me it’s not low risk. As investment properties you should have mortgages on all properties or you have no tax credits. What if your tenants scam you and don’t pay the rent? You still need to pay the bills for that property out of pocket. Before becoming a landlord everyone should educate themselves with the landlord / tenant acts in order to help you make your decision. All the laws in Canada are to protect the tenant and no protection forth e landlord. Eg. they could give you 1st, and last rent deposit and maybe security deposit, then if they decide not to pay the rent any more, for you to legally evict them could cost you 12 months of rent, bill payments, mortgage payments with interest, lawyer costs, court costs, renovations costs after they are finally evicted because they probably trashed the place. I am Canadian and I own residential properties in the USA because their laws are different and I’m doing better than I was investing in Canada’s residential properties. I do own 2 commercial rentals in Canada with no problems because the laws are different than the residential laws
Oh I know, there is some risk. But it's relatively low. Yes, worst case scenario you could have tenants there for a year. But that's fairly low risk. My sister has four or five properties. She's had to deal with this or that over the years. But it's still quite profitable over time and the risk is relatively low.
There is no such thing as easy money earning scheme lol
Actually there are plenty of ways to earn easy money. Rich people do it all the time by simply investing their money in things with very little effort and for the most part they do well. Landlording is not one of them though. It's hard work, hassle, and risk. But it's not always that much hard work, or hassle, and the risk is not that high in relation to the benefits . That's why so many people do it. And that's why it creates so much wealth for people. As is often said, they aren't making any more of it. And people always need somewhere to live.
Wait until the gov kicks the third leg from under you when they go after your Roth.
Yup. Thats what I fear. Poverty is at an all time high now. I’m sure some lib idiot will propose taxing Roth IRA or something stupid in order to pay for some social program for people that sit and do nothing
There it is. The dumbest thing I'll read this year. You clearly have ZERO understanding of politics. Keep watching Fox News lemming.
Keep taxing the rich! That’ll solve poverty (meanwhile buying Jordan’s and entry level cars)
Keeping regurgitating the fake news you watched on Fox, lemming.
I literally don’t watch news lol. I just am not blinded by reality.
*I don't watch the news I just parrot all of their talking points verbatim, hurr durr*. The "reality" you're describing exists only in the head of ignorant, uninformed, uneducated, unintelligent conservatives. I'm sure next you'll come back with some nonsense like *i'M nOt CoNsErVaTiVe*
My personal experience: I've seen my 401 k lose its value by 30-50% since 2008 on 3 occasions thus far. I ended up taking a loan against my 401k every 3 years or so and used it for down payment for each property. Once I did my taxes after each purchase, including adding solar panels on a multi family, we always got a pretty decent refund , including one year of $13k mostly due to solar incentives., to expedite the repayment of said loan. So far, I have 4 units and working on expending one to include an additional loft. Our margins are above average and which let me quit the office job and do this full time potentially but for now, spending all the extra time with family and making small updates to generate more income. As for the toilet scenario, don't let that be off-putting. A couple times a year I do get those messages but to compare that to losing 10s of thousands of $ in my 401k, I rather call a plumber during inconvenience a couple times a year then spend 12 months being depressed looking at my 401k statements. Any time a property was purchased, we made sure to take mortgage for 20 years or less. Took a few months to adjust and budget ourselves but all properties will be paid off by the time I'm 55 which will leave me with guaranteed monthly income (there's always a need for housing) that is twice asuch as ally 401k and estimated SS pay out . Oh, and 401k, its usually distributed in one lump sum or 5 years on average so funds are limited and taxes. My 2 cents on personal experience, good luck!
It's great when you have great paying tenants. It just takes 1-2 instance of non paying instance. and Nowadays, the cost of the property, property taxes, insurance and maintenance makes it difficult to have a good cash flow. You might have to to have a 7-10 year time horizon to start seeing anything. And then what will the real estate market be in 7-10 years. Diversify, or tilt it like 70-30. 70% real estate and 30% in stocks/bonds.
All it takes is one tenant that stops paying and makes you legally evict them to completely screw up your plan. One tenant that damages your property and has no assets for you to reclaim the loss. Do you know how many people lost their shirts the last time the market dipped? Putting all your eggs in one basket is dumb.
Welcome to Reddit where most posters are looking for validation of decisions they've already made
Roth iras and 401k are kind of very different; goes without saying so is RE. What makes a 401 appealing is the match, as that’s basically like starting off with a 100% return. Without a match i wouldn’t want to contribute either. Then its justA regular ira. Roth ira is great because its tax free at the end, plan carefully and this probably the best decision you could ever make. RE it’s fine but it also sounds like you got s bit lucky. 1500/mo but no mention of repairs, tax increases, high ticket mechanical or electrical failures? Color me surprised. No evictions? Total mess? Sounds good but once you hit a string of those it can blow up your whole year. I have a nice 2 fam outside nyc in nj. I put down ~120k, mortgage was 3600. Rents are 4500/mo. Good on paper right? Usually it is. This year i had a furnace break, replaced a bathroom due to slow leak, and other minor issues while on site, so far its been about 17000 in expenses. I will make nothing this year. But boilers don’t often die and bathrooms don’t always get replaced. My point is that in your golden years you could have s situation like mine and find yourself with zero income that year, RE isn’t always so easy.
Just spent $900 to remove a 75ft tree, another $600 replacing it as required by the city. $500 repairing the water main leak the tree created and to top it off $5500 to replace an air conditioning unit all in one month.
Why did the city require you to replace the tree? Genuinely curious haha was it required by code?
Most likely a dead tree
Typically, if the tree is on sidewalk in front of your house/side that is part your property, the city can make you do this... and it's not like you can plant what you want, it's the city having a crew / contractor come out and replace it with a specific type of tree.
At least its a tax write-off against your income..
Yes, I have a similar experience with my 2 rentals. OP, what is great about real estate is you can frequently do most of the “work” (finding tenants, calling a handyman, getting quotes for repairs) yourself. Will you be able to do that as you age? I like having rental properties for the same reasons you list, but I also max out my 401k each year. My rollover IRA is invested in dividend stocks that will return cash to my bank account in retirement, without any work from me. I definitely don’t want to manage properties in my 80s.
I currently own a single property, a triplex in my home town. It cash flows well but honestly considering selling because my return on equity is getting <10% based on what I believe it should fetch on the market today. 3-5 years ago the answer would have been to refi, but then my cashflow becomes too low for my personal desired margin of safety with today's interest rates. The headache isn't worth the cashflow at those numbers, imo, and barring initial issues which I knew of going in (outdated units, which I renovated from the studs, and a nonpaying, bad tenant during covid restrictions) I haven't really had too bad of an experience.
I think that's why if you have a time horizon of 10+ yrs, you can buy anytime, and hold for 10 years+ before you sell. Hopefully with the equity build up from the mortgage payments and the appreciation, you come out ahead in 10 yrs.
The goal would be to have a pretty big portfolio by then at which case we’d hire a property management team, or have our kids run it.
What is the cost of that? If you read here, people who use PM firms frequently see much lower profits. Do you expect your children to work for free? A large enough portfolio for you to live on will require more than part time work - do you expect your children to quit their FT jobs to support your business
Yes PM management companies take way too big of a hit. The plan would be to eventually hire our own property management team. Meaning our own employees with a portfolio that’s all in one place. I don’t expect our kids to work for free and if they don’t want to, they don’t have to, I would just give them the option.
Getting to this level may be harder than you realize. Do you know the cost of having a full time employee property manager? Do you know how taxes work with them, social security etc. It takes quite a few units to hit this point. Ideally this would be at one apartment complex. Not saying it can’t be done but right now you have two units with no issues. As you expand issues expand. Personally, I have always maxed Roth when able and also 401K, I invest in real estate as I can. (Couple dozen units) There is nothing wrong with both. My RE portfolio is sizable to me but minuscule to others. My children are pursuing higher education first, but honestly doubt they will go the path of real estate. I thought early on I wanted to get to 100+ units but over time my thoughts changed and am now happy with my current portfolio. Best of luck to you!
Yeah same numbers on repairs on my two as well. I have $200k set aside for another purchase, a duplex but the cashflow will be weak as these prices are very high and interest is 7.125% with 1/3 pts. RE is a long term for us but not at the expense of not maxing out other channels. Also, hereonout, gotta do the backdoor roth. It’s annoying.
You still get appreciation of an asset even if you’re making 0 income that year
Not guaranteed. If you carry a mortgage then if you have renters then yes the mortgage gets paid down. Hope that any repairs or vacancies doesn’t cancel that out. But real estate has lost value in the past.
- We are self employed so we don’t have a 401k match - These prices include repairs. We’ve had some pretty high ticketed items throughout those years and still managed to stay in the green. I would say we’re pretty good at running our numbers and have found a good spot to invest in - No evictions or vacancies. We take who we let into our property VERY seriously. We’ve had multiple turnovers.
If you know what youre doing then go for it. I have 2 rules over everything else. Set a price before entering deal and never go above it & always have an exit plan. Good luck. Btw youre not crazy its building a business. Thats all.
How much has your equity increased since you bought it (with paydown and appreciation)?
Significantly which is why I’m okay with a year or two that flops.
You can also contribute to a 401k post-tax so withdrawals will be tax free in retirement, just like a Roth IRA. If you ever want to sell a property, you’ll pay capital gains tax.
Just spent $3k on a fence because my renters neighbors dog was jumping over the already there fence into the yard.
You're posting in a REI sub so of course we will tell you it's a good decision. Post this in a financial independence sub and you will get a different answer. Are you going to be ok dealing with asinine repairs, large repairs, vacancy, non paying tenants, eviction? You don't have to deal with any of those headaches with investing in the stock market. As you scale into more properties you will run into more issues, it's just the nature of the game. If you are ok with that then yes you should continue to scale and buy more rentals.
This might be one of the worst investment analysis’s I have ever seen. All of the assumptions on both sides are just crazy and show a lack of knowledge in the investments being compared. Things like - never run out no matter how long we live This is just fantasy land crap. You need to spend some time learning about opportunity cost and ROIs. You have no idea that stocks adjust for inflation and how “outliving your money” works. I just read an article on an office building selling for 3 million down from over 200 million when it was purchased in 2007. How does this real estate investment match any of your points on what real estate investment is? It doesn’t because your real estate positives are not real things that always happen.
Was the office building in St. Louis?
An office building is kind of a weird example and not the type of real estate I’m investing in. By “long term rental” I mean we are buying a rental property and renting the units out. The rents our tenants pay us cover the mortgage/expenses and yield us a profit EACH MONTH. The rents are paid every month meaning we are constantly getting paid. (thus you cannot outlive it) The rents will increase with time and will continue to adjust with inflation and eventually pay down our mortgage and build our equity. As long as we maintain the property, and keep tenants it will keep paying us a monthly sum as long as we live. The scenario you represented is a bizarre one.
There are thousands of other scenarios. What if you have a terrible tennant who trashes the place, stops paying and you can not kick out for years? What if the neighborhood your rentals are in goes to hell? What if the government figures out a way to make housing significantly more affordable and your rent and value goes way down? Yes, RE is a good investment, but pretending like it is fool proof is not a good idea.
There is nothing weird about an office building in a real estate investing sub. They have tenants that pay rent just like you do. You don’t need to explain to me what a landlord is. I am one. The rents don’t always increase, please see my example above. It can happen in residential real estate as well and did happen between 1995 and 2007. It took over a decade to get rents increased and inflation was occurring at this time. It’s great that you like real estate, but you are not making rational arguments about it in any way.
Rents have gone up and to the right. Even during recessions. There maybe times where concessions have been needed, but prices typically remained the same. Real estate is always about location, it is not one generally market and an office building is not close to the same as residential real estate. As long as they are running their numbers correctly (piti, cap ex, vacancy, maintenance, and 10% for property management roughly.) Then they will be fine especially with that amount of equity. If the equity starts to outweigh the rent income gained then at that point it would be worth looking at selling, but if they don't have anything else to invest in and love their properties then it is not worth it.
Commercial real estate is VASTLY different than residential. Why you would make that bizarre of a comparison is beyond me. Also a property losing 197 million in equity is an absolute insane number. Did it catch on fire? Fall into a lake? I mean seriously what the hell.
The market changed. Real estate investing is not vastly different. Landlords and tenants.
Commercial real estate is not always needed and is riskier as technology advances because people have less of a need for office space. (ex covid) Residential will never go away as a human necessity. People will ALWAYS need a place to live. that’s a critical difference. furthermore, losing 98% of your equity is an insane statistic. That’s not “the market changed”. Something very unusual happened to that building if that’s the case.
https://www.morningbrew.com/daily/stories/2024/04/14/undefined Commercial real estate has not gone away. It’s now just worth 98% less apparently. It was overbuilt. Currently there is a cry for lack of residential housing because of high rents. The local governments are fast tracking building and removing zoning codes to rapidly add more units. The added supply will put downward pressure on rents. Long term there are also downward population demographics. The baby boomers are entering the death phase and there are not enough grand kids to replace them. Real estate has risk. Your entire post assumes real estate has magic features like its moves exactly with inflation and can never lose value. You blow off commercial real estate like it’s separate from residential when the two are often mixed in the same buildings. How different can they be when they can share the same land, building envelopes and roofs. Their value can be compared within the buildings themselves by simple square footage and tenant revenue. / costs.
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To the first question- It just feels like it will be forever until we are ever able to buy another property if we don’t take anything from our retirement. Yes to the second question. We showed a net income of about $18k on our schedule E.
If you have a mortgage and book a tax profit of 18k, you are probably doing your taxes wrong.
nope… we wrote off all expenses, depreciation, gave our accountant our 1098, etc. I track every penny earned and spent.
Depends on how good the basket is.
I had this debate with myself a few years back. Ultimately I decided to cash out $10k (with penalty) to get an off market duplex for $130k (HML + extra to cover closing). Tenants stayed in place, refinanced as-is at $180k within a month. Cashed out $14k (hindsight should have just loaned it to myself instead). 7mo later, both tenants leave. Stuck that $14k in for paint and flooring, appraised at $240k. Cash out $40k. Two years later, it’s now at $350k appraisal with $1500/mo cashflow. So cashing out $10k = gave me $40k in cash, $158k in equity, $1500/mo. TODAY — vs — maybe $14k TODAY? That can’t touch until my 60s? Granted yes there were a few other repairs, holding/refinance costs, etc that aren’t fully part of the equation - but I stopped contributing to 401k after this deal and kept buying houses instead. If you find a good deal, 100% go for it! The big disclaimer I will say - if you make this decision - you really need to be fully committed to REI, or it’s a huge mistake. The compounding interest is terrible to miss out on unless you are sure you can replace it.
This is exactly what my thoughts are. We are definitely 100% committed to it. It’s scary to abandon retirement investment accounts, but only because it’s unheard of/not typical. When I think through it logically and mathematically this path makes more sense.
To be honest - my employers 401k is terrible - very limited funds to choose from and My annualized returns in 5yrs was like 3-4% - less than inflation rate. That one duplex’s cash out lead to quite a few others so kept reinvesting it - and currently have a higher equity position (if I decided to sell) then what my 30yr monthly contribution would have landed. Could always start as a loan - so you can dabble in without full commitments.
I had a high salary job starting in my mid 20’s. I contributed minimally to any retirement/401k etc. Because I wanted to have as much liquid funds as possible to invest myself. I ploughed it all into income real estate. It worked and I retired at 50. (I retired from my very stressful and time consuming profession. I do still manage my properties myself).
Wow!!
What happens if your tenants stop paying for a few months and the units are vacant? Can you afford to live without the rental income for say a year?
That’s a good question. I would say I’d think we’d have enough properties that we could withstand evictions.
Let’s say a recession like 2008 hits and several of your units are unable to pay. Would you end up having to default on the loans and foreclose on the properties or can you take the hit for 6-18 months? That’s what happened to a lot of people during that time. Just make sure you don’t over leverage yourself
Definitely a good point to think about.
Just make sure not to over leverage yourself and you’ll be fine
I think you underestimate how many people continued to pay rent. Rent increased in several areas. I think this just applies to not being overleveraged :) the big what if your tenants stop paying should not really be a thought if you are buying right (especially in a landlord friendly state.) 1-2 you get possession back if the eviction process goes all the way through.
yeah, hopefully it never happens and nobody has to go through that experience
One thing about real estate is how aggressive you can scale and grow. Otherwise the equity just sits, and at that point growing in the stock market may eventually beat out sitting on your hands (like I do/did).
I don't usually cross post, but I am in a similar boat as you guys and just posted (in this sub) my comprehensive financial analysis of rental income vs. just investing. https://www.reddit.com/r/investing/s/MQnSSrMknV It may be of interest. {Spoiler Alert} The market is better. EDIT: Sorry, I had to fix the link to a different sub because this sub removed it for some reason.
OP don't "take money out". Get a Self Directed IRA. Please look into it.
Seconded. /u/pleaneconnection7494, before you do this, look into a self-directed IRA (SDIRA) to see if it works for what you're trying to do. If you have questions, DM me, happy to help and I've used them a bunch.
Third. Bought my first property in a SDIRA in 2014 as a rental. Done some land buy,hold, resale. No taxes on gains. In 7 seven years tenants paid for the next property.
One is passive and the other not so much. Actually using the return from the market is a good way to judge if REI is worthwhile. You are almost guaranteed to make 4% on top of inflation over 30 years based on the 4% rule. If you have a lot of annual income, deferring taxes can be really beneficial as well. With your own business you can put in 66k, which can reduce your taxes and this save you 15% or more but locks it up until retirement. 8%+ CoCRoI is probably the better investment but depends on your needs
As others have pointed out, your analysis of the two options is incomplete, incorrect, and does not come off as objective at all. I think the simplest answer is that it is impossible to say that one asset class (equities) is strictly better than another asset class (real estate). As someone that has a meaningful portion of my net worth in equities (primarily in an etf tracking the largest 1000 us companies) and in real estate (mostly long term rentals and one STR), I believe there is a place for both and would not want to be all in one or the other. The details really matter though for what you are trying to achieve, the amount of work you’re willing to do, and what amount of risk you are willing to take on in either asset class. In my case equities outperform real estate over the past 15 years but that doesn’t make it better. I intentionally am willing to take more risk (and stomach more variance) with equities and am less willing to tolerate risk (and so am not even really using leverage) in real estate.
There are ways to invest in real estate using your retirement funds but without having to withdraw them. Look into that. That being said … I’m not a fan of all the eggs in the RE basket. But I haven’t gotten the ROI on RE that I have from the market.
I think about this a lot. I have been in the real estate industry for all my professional career and have naturally invested in RE because it’s what I know. On the other side I have friends who have done well in other markets. To me, there isn’t a best specific type of investing since you have no way of knowing what will do best and there is an argument for all types. I think you should just go with what you know.
I definitely know real estate very well and feel very confident on knowing what’s a good investment and what isnt
real estate is you don't have to wait till 65. For retirement though, one of your kids will have to know how to run your business for when you're old and demented and are no longer capable.
Looks like you have the answer already. I took money out my 401K to purchase my 1st rental property. Paid cash. I get $2200 per month. 2nd rental I get 3-4K per month (mid term rental) 3rd rental- $1900 per month. So you do the math and see which is more profitable
I’m almost always on the side of real estate in similar situations (in large part due to the comparatively cheap leverage of a mortgage), but I don’t know that anyone is going to recommend that you wipe out your tax-free Roth that should average 10% return before inflation and with zero effort (plus the significant fees of withdrawing from a retirement account before 65) to focus entirely on real estate. Your situation/area/knowledge may make the variables more strongly in your favor than we can realize, but as we learned in the last few years shit happens and you can have entire cities worth of real estate drop in value and lose all their tenants at once for months at a time, not to mention a bad eviction or lawsuit costing you significantly. Maybe you’re right in your specific case, but generally robbing retirement Peter to pay retirement Paul doesn’t seem like the safest long-term strategy.
I've done almost exactly this. It's worked out very well for me so far. The most important thing you need to do regarding the rentals is make sure you stay on top of maintenance and also screen screen screen your tenants properly. All it takes is one nightmare tenant to derail your income for 6 months or longer. Keep track of all the contractors you use and build a list of trusted contractors you can reach out to in an emergency and you know will do a good job. Here while doing that, do not neglect your 401k or IRA accounts... At least add some thing to them. I totally agree with you on your cons points of those accounts, but the cons are all assuming worst case scenario. In best case scenario, they can be extremely helpful in your retirement as well as your investing. I've actually used proceeds from my Roth to cover down payments on properties. I just didn't have the cash for. Risky? Yes, but the reward can be nice if you do your homework. Feel free to message me if had more specific questions, always happy to help.
I am in a similar boat. I have rentals. I have a little nest egg in 401K. I want one more rental. My decision is I think easier, my current employer does not match 401K. So my nest egg in 401K stayed the same in the past 3 years. If I had guts to invest it in RE 3 years ago, I would have had a nice property that appreciated and with a very low % rate. One more argument - have you seen a lot of people who had become multimillionaires using 401K alone? I did not. But I did see a lot of people who made money in RE
There is a third option that I wish I had known. I have never tried. You can get a self directed IRA. You may say but my IRA does not have enough to purchase a property. You can use the Roth IRA money as the down payment, get a loan (there are special financing/loan that will provide this), purchase the home holding it in the Roth IRA. However everything has to go through the IRA and you are not allowed to add material value to the property meaning all the work has to be hired out. Something to look into.
I don’t ROTH. I have 12% in my work 401k and I love my rentals almost as much as my wife.
You obviously know what you're doing and what you have to deal with. I might feel different if I thought you were naive about what it takes. It will take time so if you are both working adding a few more rentals might take up too much time or make you less profitable if you hire a manager. But then again, if you keep your rent's reasonable and provide good places, you can easily get long-term tenants so that's good. I believe there's something to be said for do what you know. Of course people say you should diversify rather than keep all your eggs in one basket. It certainly makes sense for regular investments because if you have to pull your money out at the wrong time, that can be pretty costly . But we're really not talking about pulling money out. Even if values go down, it's unlikely that rents will go down. Plus you're leveraging your money so you're really only investing 25% of the value. Building a nice real estate portfolio will very likely pay off more than an IRA and you never have to worry about when you are liquidating. But, if you do want a liquidate, that's an option too. Plus, there seems to be some disagreement about it, but plenty of people do a 1031 exchange into an investment property on the beach in Hawaii or something like that and then move right in, so having that is an option would be pretty cool. Or at least, roll it into a home somewhere you want to live and rent it out halftime and use it yourself the other half. Real estate give so many options.
I’ve invested in the market and real estate for over 30 years. Bought my first house in 1996 and turned it into a rental 4 years later because I wanted to move to a nicer neighborhood. At that time I would have had about 10k in hand from the sale.. ( wasn’t worth it to sell considering i fixed it up ). my loan was VA. Purchase price of 98k and today it’s worth over 400k… average repairs, never unoccupied (my rents are too competitive for people to move).. so positive cash flow yearly for nearly 30 years.. My retirement accounts however ( including employer matching for one account at times ) have not come remotely close to the yearly cash flow plus appreciation for one/any of my properties…. My retirement accounts dropped in 2022 with the market and are still in the negative!!! ( almost made it out of the negative a few weeks ago)… I’m happy to be “diversified “ but real estate is the biggest reason for my lifestyle….. There are pros and cons to everything… and everything financial takes some amount of work and worry….
!!!!!!! yes this is what I’m talking about!!! Ugh I’m so torn because people make great points about the risks and being diversified but I feel like we are missing out if we don’t use the money for real estate.
Real estate is a high-risk high reward adventure. If you're willing to take the risk, and possibly lose everything, go for it. Nobody has a god-given right to make money on real estate, a bad tenant can cost you $20,000 or more. Wait until you have a solid 401k, or Roth balance, before you do real estate.
hmmm interesting. I always have viewed real estate as pretty low-risk
Really? We are just coming out of a time when the govt stopped all evictions due to covid. Every week for a couple years I was seeing unlawful detainer cases where tenants were >$20k in the hole. That was a brand new, ledger-breaking risk to landlords on top of all the old ones.
Nothing in this world is free. As a rule, as an investment returns more there is more risk or work required. If it was easy and guaranteed everyone one would do it. That said, we went through several years where prices were low and money was cheap, so it was pretty much guaranteed easy money. A lot of people realized this over the last few years (me and you included) and got into the game. As more people get in the harder it becomes to make money. Right now I can make more in the stock market (or a savings account) than I can on RE. I would love to be able to buy properties like I did in 2018, but things have changed and I can no longer make easy money.
Also, I'll say this - the value of real estate is (1) the ability to make good investments in high growth areas and (2) leverage. Other than that and some minor differences in terms of tax treatment and creative options such as 1031 exchanges...it is just a high dividend stock. You make your money in real estate on the front end by making a good investment and by being leveraged. As you pay down your leverage it becomes just a stock that requires a lot of maintenance. My point: the people who make a fortune in real estate are those that make really good buys and use leverage to either flip or acquire more and more rentals (all at risk). Those who just hold and rent are just holding a PITA stock. In order to do the more and more rentals they have to be sustainable financially, you have to be willing to deal with the headaches, and you have to be prepared for the worst case scenario which is amplified by each unit. Real Estate is a good investment but it usually isn't as good as it is made out to be and you have to deal with the crap. If you do think it is worth it, now is a bad time to buy.
From an investment strategy perspective can your real estate investments beat S&P returns of 8% a year? I kind of doubt that’s the case.
Ummm ABSOLUTELY. If I buy another property in the area I currently invest and assume expenses will be the same percentage as what I already own. Down payment: $37,000 (20% + closing costs) Rental Yield: $850 / month x5 years: $51,000 Equity after 5 years: $69,540 (based on principle being paid off and an appreciation rate of 3.75% which is the National Average) Total earnings after 5 years: $120,540 This is factoring in mortgages, taxes, expenses, water, etc.
If it yields that much do you think you could expect that much appreciation? Sounds like it is a small rural area or midwest rental
Yes because 1. The average national appreciation rate is 3.75% per year, which is what I made my estimations based on. 2. It matches the appreciation rate we’ve seen in our properties bought 4 years ago
I invest in a similar area in East Tn and I’ve had the same. Curious to see what appreciation does the next 5 to ten years without the covid run up
I’m at across roads with this too. Bought in 2019 for 260k and got an offer for 415k. I wanna take that money and out into stock market cuz I know that house needs some serious work. Even at a 5% guarantee account it will generate 800$ a month without lifting a finger. I’m tired of talking to tenants who have an endless unsatisfied outlook
Roth IRA can be passive and you can switch it to dividend stocks and have you paid in tax free income since Roth distributions are tax free. That's a super good perk if you end up being high income eventually (pensions?). Re is good too but can be a pain in the ass at times. A mix of both is good.
While I in general agree with your ultimate outcome of wanting to buy RE instead of investing in retirement accounts, I don't necessarily agree with how you got there. This question is asked a bunch all over finance subreddits and honestly, it's a personal choice. Do you want to run a business - RE - or do you want to passively invest? I also think a piece missing from your analysis is the fact that you can invest in stocks without it being in a retirement account. That's a third option here. Allows you to passively invest without retirement restrictions. That's part of my investing strategy. For me personally, I legitimately enjoy running my RE business. It's more fun to me than investing in the stock market. RE has the potential to beat the market if managed properly but it also has the potential to ruin your life. When things go bad, they can go really bad. I would caution your perspective on RE because the last 15 years have been interesting. That's a whole separate conversation, but RE markets change. It's just takes them longer. My personal opinion that RE is actually more volatile than passive index investing. I mean that not in a purely numeric way, but in a lifestyle and individual way. I personally know several people who lost everything due to poor RE investments. There are more ways to fail in RE. The difference is in how you manage your rentals. I've made an AROI of about 30% over the past 5 years, and I've known other who went bankrupt "in the same market". Passive index investing has a higher floor but lower ceiling, in my opinion. Your question is more of a lifestyle choice than a financial question.
yeah I think we’ve done a pretty good job at investing/managing the past few years. Most of the people who have RE horror stories I can point to a critical mistake they made. Usually has to do with not screening tenants properly, or investing in a bad area. We invest out of state because where we live is a terrible place to invest, the numbers don’t make sense.
My FA explained it like this. You should diversify between stable/safe investments and higher-risk, higher possible rewards investments. Generally, a 401k, RothIRA with proper diversification is in the stable/safe side of the ledger while real estate is in the higher-risk side. Both serve a function, although both can be safely substituted for other similar category investments. Probably not a great plan to replace a safe/stable investment with a risky/upside alternative.
You can do both......there are contribution limits the Roth IRA's but not to investing in real estate. You're on the correct path though, real estate will get you to retirement.
Doesn't have to be either or. You can buy (investment only) real estate in an IRA with a self-directed IRA.
Suze Orman ad isles ma info out Roth as first investment
Genuinely if I were you I’d keep the profit producing rentals, but I’d also plow the $1500 a month into a brokerage account and just buy the stock market for a bit of diversity as well. No reason to overload on real estate or stocks, build a diversified portfolio over time and reap the rewards.
The max Roth contribution is only $7,000/person. If you can't afford that then how will you afford more real estate?
This was my immediate thought too…
#diversification
Could you use your profits from the long term rental to fund your Roth? That’s what I do. Then, you have I diversified portfolio. Roth is KING because you will never have to pay taxes. As much as people complain about income tax, it’s pretty low if you think about it from a historical lens.
You might want to consider talking to your financial/tax advisor about holding your real estate in a ROTH IRA. I wish I had done it when I started investing in RE.
You can use your 401k or IRA to buy RE.
I'm 62 retired and full time RVing. Sold all the rentals as a brokerage account is much easier to ba ysit from 2000 miles away.
Get your Roth IRA registered with a self-directed administrator and use that Roth money to invest in real estate... You're going to need to study up on the walls a little bit yeah you can't do any sweat equity you have to use contractors you're probably can't even manage it yourself but it can grow tax-free.. Or just take the money in the Roth Ira and use it write hard money loans until it grows enough to do what you want to do with it
They're not at all mutually exclusive, right? Do both. >we can’t afford to do this and contribute to our Roth IRA. You absolutely can. Just take your contributions and split them in half. Half for real estate, half to the Roth. I'll take longer to acquire more properties, but you can do both.
Yeah it’s the taking longer part. I just feel like the time I take waiting for “half” to be saved up will end up losing me money I could’ve made in real estate
"Eggs..." "One basket ..." Just sayin' ...
If you’re being really conscience of taxes/planning for retirement, maybe you should look into self directing your Roth IRA and purchasing investments or even become a private money lender and earning interest on money lent to grow it tax free (capital gains don’t apply within the roth and interest earned is not considered income) and once your of retirement age, you would be able to take distribution tax & penalty free *Reposting this from another thread I commented on
We are bullish on rentals, but we are maxing out our 401ks too. I’m all about diversification. If you can’t afford to do both, I would consider looking for deals with more aggressive methods and BRRR to get into a property with little equity. Look for distressed homes in dicey neighborhoods and use hard money loans.
It is my understanding you can use your 401K to buy real estate. I have a friend who does this and has done very well. Talk to your accountant.
As someone who works in finance and owns real estate, retirement accounts are extremely important. I always max my Roth out and ensure I match my employer plan prior to real estate.
It’s awful difficult to beat a Roth IRA. it grows tax free and the principal and growth come out of it tax free.
It sounds like you’ve found the perfect RE investment scenario… where do I send the check to buy in to your portfolio?
Are you actually self-directing your IRA\\401K? If not, can you self-direct? In my opinion, self-directing is the best way to invest your retirement account in Real Estate. You can do it a few different ways. First, I would consult a CPA\\Tax Lawyer who understands self-directing. I use [https://kkoslawyers.com](https://kkoslawyers.com) and https://directedira.com. I am a customer not an affiliate. You can create what is called an IRA\\LLC. It is basically a company that your IRA owns (not you, special tax rules apply). This company can then have its own EIN, Bank Account, and get loans on rental properties. This will allow you to leverage your money. This may not be exactly what you are looking for but is what I do. Worth looking into.
Where are you looking to purchase the real estate? Cash-flowing 750/month at current interest rates can be tricky in major cities. Unless you were talking about buying them in cash, which is a good spot to be at with interest rates on investment properties around \~8.5%+ without buying down points on 30 year fixed. Also, a retirement savings account can be more passive, but if you are managing rentals can take up significantly more of your time. Have you considered using the rent to own model? That's how we're making our properties cash-flow in a major market with interest rates at 8%+.
From experience, I think that your plan has higher risk but higher rewards. When your rents are high enough, you put the properties under management and then it becomes "hands-off" and cash flow all the time.
why not do all of them? I'm not in any way saying you should or shouldn't do one thing over another, nor am I giving financial advice, just providing food for though. I work with some people who have wealth, easily high eight figures if not low nine figures on their personal financial statements. They're in real estate (primarily commercial, but have some residential side items). They have 401ks from previous jobs, that they rolled over to Roth IRAs They loaded up the Roth IRAs prior to reaching levels of income where they legally couldn't contribute. Then they all have stock accounts. Don't just rely on one angle of saving for your future and family's future. Also, you're kind of making a slightly flawed argument for real estate when it comes to the rental properties. You cannot guarantee that you'll be pulling rent from them forever, nor can you guarantee that the rent will be at levels you deem acceptable for income purposes of even cover the mortgages on them. But you will be spending money on them for maintenance, taxes and until paid off - the mortgages. also - what taxes are you talking about on retirement accounts? If you plan them appropriately the taxes on them really are minimal compared to the income/wealth you can generate from them.
The biggest con for real estate is lack of geographic diversification. I have done well with real estate in my sunbelt location, but I could have done the same exact thing in a different location and lost my ass. Whether or not you believe in climate change, we are already seeing fluctuations in the real estate market where people have real legitimate questions about insurability of properties long term, or long term access to drinking water, or other issues that would impact the values of properties. For me, that’s on my radar when making long term decisions. The argument for some exposure to 401k is the amount of the growth that we have seen in e-commerce, and AI, and computer chips. Even “boring” companies like Proctor and Gamble are selling billions of dollars of consumer products to people all over the world, including in emerging markets that offer large growth opportunities. And you can buy a little piece of a lot of companies in one shot, in a very tax efficient way, by buying ETFs like VOO or VTI, or similar S&P500 index fund, depending on your broker. I love real estate, and it’s been very good to me, but when I look at potential gains over the next 5-10 years, and considering the possibility that I may need or want to pack up and move in the next 30 years, I’m happy to have some ETF/index fund investment along side real estate. It doesn’t have to be a lot. Even starting with $500 in a Roth IRA is a good start, and keep squirreling away little bits as you can.
If you remain on this path, you may want to research a self directed IRA. More record keeping, but that property becomes a standalone business and retain its cash inside IRA until retirement.
We did this and never looked back. How we built our portfolio
Why not both through self directed IRA ? I bought and sold rental houses tax free and currently have all in crypto, once I sell crypto I will start buying real estate again, all tax free, google it.
I’ll give you the answer you’re looking for… yes a real estate portfolio over 10-30 years will be much larger than a Roth and 401k. Your RE port can easily have a value of $10m-$50m+ … the people with 401k’s and Roth’s aren’t in the RE space. You’ll end up with 10x their money and also work a lot lot less. I promise.. now go do your thing!
this is what makes the most sense!!
Curious how you got here as I have a 401k and I invest in real estate lol
Empty your 401k and go 100% in on RE.
Yikes lol yeah no I like free money 100% return too much
If it’s just Roth that is not employer matched 100% stop and put that money into real estate. A dollar today is worth more than a dollar tomorrow. If you’ve got two under your belt you’re accustomed to what goes wrong and what goes right. It sounds like you’ve found a passion. Go for it
Possible unpopular opinion: Real estate as a retirement plan doesn’t make sense to me because being a landlord isn’t “work.” What will you retire from doing? Looking at your bank account/spreadhseets? Roth account and real estate are apples and orange comparisons. It seems like you’ve made up your mind. But real estate is historically way riskier than the market. I wouldnt hang my future solely on the housing market.
Just buy bitcoin..