Non traditional investing. Should I?

[TexasHusker]

$60,000 invested for 20 years @ 10% is worth $403,650. That's a return of $343,650.

Oops I got my columns mixed up. You're correct, though only partially. It's worth $366,954. You made $336,954 on your investment of $30,000. The other $30,000 was the employer match, which you don't get on the real estate.

If you are going to tack on the 21st year and bump your balance on the mutual fund to $403,650, do so on the house, too. You now have ANOTHER $28,932 income, BUT $10,500 in expenses, BUT another $3741 in tax savings. And the house is now worth $7,000 more. Net gain for the 21st year? About another $30,000.

Of course, a 10% annual yield for 20 years on a mutual fund is highly unlikely (how many are out there? I haven't checked lately and the better question is, how many are in your company's plan?). Additionally, most employers aren't matching 100% of more than a few $ thousand. So it's not really a fair comparison. I'm figuring the MOST LIBERAL numbers on the 401K/match side, and THE MOST CONSERVATIVE on the real estate side. Yet real estate STILL WINS. Even a ho-hum real estate investment wins.

Hopefully you see my point - the "employer match" isn't all it's cracked up to be. If it's working for you though, by all means keep doing it.

[corn18]

The total annual return over a 20 year period for the S&P 500 hits 10% on a regular basis.

I challenge your assumptions. $1,500 rent on a $150,000 home. 3% annual increase in house value. 3% annual increase in rent. And where did you account for the transaction costs of buying and selling the house?

[sv2007]

Another issue with the rental above is the lack of management fees. Your 401k will not call you up at the middle of the night to have you drive over to reset the house fuse box.

Also, when comparing 401k against that rental, you can effectively add the $ you'd normally have to pay tax into the initial investment amount. Sure, you'd pay tax later, but you've got more initial $ working for you and (for most people) tax bracket in retirement should be lower because their income is lower.

Marginal tax rate of 25% is not realistic for many working people. 40% is generally more acceptable. you'll find the higher the marginal tax rate, the better 401k will be.

Plus, I've lived in TX for a few years. Property tax there alone is about 3% (you've got to add the mandatory ISD tax, etc. that most other states lump into the property tax). Residential rentals are a tough return compared to a lot of other things.

[TexasHusker]

Another issue with the rental above is the lack of management fees. Your 401k will not call you up at the middle of the night to have you drive over to reset the house fuse box.

Also, when comparing 401k against that rental, you can effectively add the $ you'd normally have to pay tax into the initial investment amount. Sure, you'd pay tax later, but you've got more initial $ working for you and (for most people) tax bracket in retirement should be lower because their income is lower.

Marginal tax rate of 25% is not realistic for many working people. 40% is generally more acceptable. you'll find the higher the marginal tax rate, the better 401k will be.

Plus, I've lived in TX for a few years. Property tax there alone is about 3% (you've got to add the mandatory ISD tax, etc. that most other states lump into the property tax). Residential rentals are a tough return compared to a lot of other things.

I've owned rental houses since 2015 and have been "called in the middle of the night" exactly zero times. But my 401K sure kept me up many nights!

I'll match my personal rental returns against ANY mutual fund out there over 10 years.

[TexasHusker]

The total annual return over a 20 year period for the S&P 500 hits 10% on a regular basis.

I challenge your assumptions. $1,500 rent on a $150,000 home. 3% annual increase in house value. 3% annual increase in rent. And where did you account for the transaction costs of buying and selling the house?

If your S&P index fund is trending at 10%, I think it's pretty safe to assume that housing and everything else is going up 3%.

You can't have a solid stock market - with 10% wealth being created per year by an index fund of all things - without some inflation to go with it. That just doesn't happen.

The example I used is on a house that I bought in 2006 for $150,000. I just sold it, but those numbers are pretty darn close to how it went. The differences are: my rent started at around $1400 but finished at around $2675. My loan was 4.5%. My expenses including taxes ran around $6000 annually. My income was MUCH greater, because the house was only vacant for 4 months out of the 10 years - not 20.

Your transaction fees to buy and sell a house are a couple $ grand, unless you use a realtor to sell it.

Here is the point:

We are assuming that an employer matches you 100% on your $30K, you get 10% annual return on your mutual fund, and it STILL doesn't beat a decent real estate buy.

My cap rate averaged 11.5% or so - there are lots of real estate deals - albeit more aggressive - at 13-15%.

[corn18]

I've owned rental houses since 2015 and have been "called in the middle of the night" exactly zero times. But my 401K sure kept me up many nights!

I'll match my personal rental returns against ANY mutual fund out there over 10 years.

I'm glad you've done well for a year. Many people in real estate are right now. Would love to talk to the guy that bought in 2007 and listen to his story of excellent returns:



vs. the guy that invested in this garbage:



Notice any difference in the two graphs? I see risk vs. return. The guy that invested in the S&P 500 in 1998 hasn't made a dime. But it's a lot less volatile than the RE market during that time. The guy that invested in RE in 1998 came out a little bit ahead. If you can time the market perfectly, you can make way more money in RE than timing the S&P. Let me know how that works out for you.

[TexasHusker]

I'm not into timing real estate. I bought two houses when the boom was going parabolic, and it will be a while before I they are worth as much as I gave, but they are still excellent investments because I'm making from 9 to 11 percent annual yield with the income.

Other than the few years when things went crazy parabolic, real estate has been a steady boat.

Check out the Nasdaq charts in 1999 and early 2000.

Bubbles happen.

Keep doing your index fund.

[corn18]

I'm not into timing real estate. I bought two houses when the boom was going parabolic, and it will be a while before I they are worth as much as I gave, but they are still excellent investments because I'm making from 9 to 11 percent annual yield with the income.

Other than the few years when things went crazy parabolic, real estate has been a steady boat.

Check out the Nasdaq charts in 1999 and early 2000.

Bubbles happen.

The S&P 500 since 2009 has made 16% annual total return.

[sv2007]

I've owned rental houses since 2015 and have been "called in the middle of the night" exactly zero times. But my 401K sure kept me up many nights!

I'll match my personal rental returns against ANY mutual fund out there over 10 years.

Since 2015?

So only 1 year experience? How many units? You need a bit more experience, then you'll see why residential rentals may not be a great investment.

Having owned rentals since 2002, I'll tell you a few things:

1. If you don't use a management company, you will get that call.

2. If RE prices go high, your appreciation is locked unless you sell; then you'll have to buy new rentals at high prices; i.e. you can't rebalance/diversify easily.

3. A lot of landlords actually sell at the worst time in RE markets because those are also the times when they've got no tenants, think 2008. How many tenants can pay high rent?

4. I had to pay a lot of taxes last year because I sold some rentals and aren't doing any 1031 exchanges, i.e. leaving the rental business is expensive more than just RE broker fees.

Just a few things to keep in mind.
Now, I'm down to 1 rental. As soon at that tenant moves out, I'll be selling that place too.

[TexasHusker]

Since 2015?

So only 1 year experience? How many units? You need a bit more experience, then you'll see why residential rentals may not be a great investment.

Having owned rentals since 2002, I'll tell you a few things:

1. If you don't use a management company, you will get that call.

2. If RE prices go high, your appreciation is locked unless you sell; then you'll have to buy new rentals at high prices; i.e. you can't rebalance/diversify easily.

3. A lot of landlords actually sell at the worst time in RE markets because those are also the times when they've got no tenants, think 2008. How many tenants can pay high rent?

4. I had to pay a lot of taxes last year because I sold some rentals and aren't doing any 1031 exchanges, i.e. leaving the rental business is expensive more than just RE broker fees.

Just a few things to keep in mind.
Now, I'm down to 1 rental. As soon at that tenant moves out, I'll be selling that place too.

2005. Typo.

[TexasHusker]

The S&P 500 since 2009 has made 16% annual total return.

We are nearing the end of an extended bull market in equities. Let's see where we sit in 2 years.

And if you have enjoyed a 16% annual return since 2009, you are WAY ahead of the averages and should get it now and count your lucky stars.

[97guns]

my market timing was dictated by affordability, in 2007/2006 i was not able to invest because i couldnt afford it, numbers didnt work and real estate investing hadnt crossed my mind, i was pretty happy drawing over 5% interest on my money. when 2009 hit is when affordability for me came into the picture, with that the numbers improved and interest rates fell, real estate investing was simply a default for me to move my money out of interest accounts and into something to make more money

[TexasHusker]

my market timing was dictated by affordability, in 2007/2006 i was not able to invest because i couldnt afford it, numbers didnt work and real estate investing hadnt crossed my mind, i was pretty happy drawing over 5% interest on my money. when 2009 hit is when affordability for me came into the picture, with that the numbers improved and interest rates fell, real estate investing was simply a default for me to move my money out of interest accounts and into something to make more money

how have you done?

[97guns]

ive done very well, nothing close to your income but its more monthly income that i need, its actually the most income ive ever had and i dont have to work at all for it. the naysayers always will tell me about calls in the middle of the night, busted water heaters at 2am, and other potential hazards with real estate investing but truth be told i havnt lifted a finger with reguards to this investment for a good 3 years, the only time i put in work is once a month looking at my bank account and year end taxes

[TexasHusker]

Funny story about how one thing morphs into another...

I bought a vacation home as a vacation rental back in 2005. The first year it did $18,000, and then it gradually grew - last year it did $37K.

I listed it on VRBO and rented it myself so there were no management fees.

Well, my next door neighbor then asked me if I would rent HIS cabin out for a fee, and I said "sure why not."

Then I bought another for myself in 2010. It does about $30K.

Then in early 2011 a lady I knew out there that worked for a management co. got laid off and I called her and said "hey let's start our own mgt. co...I'll pay you EXACTLY what you were making before AND pay you $1000 cash for every property you bring on to our company.

So in 2011, we had 7 properties under our mgt, including my 2.

In 2016, we now have 30 properties under management; I bought 2 more for myself in 2014. Those two do about $48K.

So I'm now clearing $100K +/- annual profit from the mgt. co., and clearing probably another $50K off of my cabins after all expenses. I had an offer from a couple to buy the management co. for $500K but I declined - I would have to turn right around and find $100K a year with the $500K, not an easy thing to do.

All from buying one cabin (that I paid $100k too much for) back in 2005 for $240,000. (market crashed in 2008-09) My total personal investment in all of this - including 4 cabins, business losses, renovations, etc., are in the $500,000 range. Two of my cabins are financed; the other two are clear.

The end game is hopefully in 20 years or so...I've got $1.5 - 2 million in cabin value, $1 million or more in company value. Plus I have some really nice places to stay when I want to go fly fishing!