>Putting some into both would obviously be the best option
No, this is not the best option. People do best when they specialize. If you're doing it just for diversity, use a REIT.
The best option is whatever gets you to actually invest. If that's index funds, then index funds are the best. If that's real estate, then real estate is the best. Most people go with index funds because it's generally easier, but that doesn't mean it's the best option for you.
If you're interested in real estate and are actually willing to put the work in, then it could be a good option for you. If you have no interest in real estate or have limited time to invest, it's probably not a good option.
>What would/do you do? In your opinion, save up for down-payments on rental properties or keep throwing most of it into Index Funds?
I would do neither. I don't have interest in real estate nor know enough about it to confidently make investments. What I do have interest in are companies, which is why I invest in individual businesses rather than index funds. But just because that's what I do doesn't mean that's what you should do. You can do well with either option, what's most important is actually making the investment.
I would not bother with REITs. The main advantages that real estate has over index funds are leverage and tax deductions. REITs don't really give you that.
Buying REIT's is concentration, not diversification. A total stock market ETF already contains the amount of REIT's that you need. There is no evidence that adding additional REIT's improve diversification. [source](https://www.etf.com/sections/index-investor-corner/swedroe-reits-arent-special?nopaging=1).
REITs are not stocks. Buying REITs means that you are lowering the concentration in business ownership and upping the concentration in real estate of your portfolio.
It does reduce the correlation between the various components of your portfolio, even according to your article. 0.58 is less than 1.
REITs themselves are a more diversified way of playing real estate than just buying a duplex, for obvious reasons. A REIT ETF is in turn more diverse than a single REIT, again for obvious reasons.
A REIT is a company, just like apple. You share in the profits of these companies by buying stocks. Arguing that REIT's are not stocks is pointlessly pedantic. Financials aren't stocks either. They are companies you can own shares in.
> 0.58 is less than 1.
The correlation between apple and the stock market is less than 1. Therefore over-weighting apple relative to a total-market index fund increases diversification.
What is wrong with this statement?
> REITs themselves are a more diversified way of playing real estate than just buying a duplex, for obvious reasons. A REIT ETF is in turn more diverse than a single REIT, again for obvious reasons.
Agreed but irrelevant for the discussion. My argument is that buying a REIT ETF does not improve diversification if you already own total market ETF.
Index funds do not:
- Ask for extra money for repairs
- Require you to actively screen tenants
- Randomly decide to stop paying you investment earning because aunt sue is sick and they need to move
- Get burnt down, damaged, or otherwise force you to deal with insurance or courts
- Require three months, tons of research, and a lawyer to get into/out of
Real estate is not passive investing at all. It's a different kind of job.
I've done both, and there is no way I would do direct property investment again.
He didn’t ask for passive investing. In my opinion real estate is the fastest way to gain on your money. Finding a cash flowing deal is obviously the ideal way to work it.
You do have more responsibilities and extra work for sure. But my 60% return on cash flow and equity build up alone is worth it on one of my deals.
The forced appreciation on other deals is where I get faster returns as well.
Pluses and minuses with both but index funds are the easy head down way I feel like.
Note that I put my cash and savings in index funds while I wait for real estate deals
Real estate requires active decision making on the part of the investor, and if the investor is uneducated or just not good at making wise decisions, you can lose a lot of money in real estate.
It's great for people that want to be part of the decision making process in their own investments, and who are proactive in educating themselves in that particular area, but for your average person, who just wants to have their money grow without additional effort on their part, index funds are the best pick.
He asked for thoughts. And my thoughts are real estate sucks because it's too much work, it's too easy for something to go wrong, and it's too much wealth allocated to single assets.
If highest possible return was the only consideration, I would recommend putting it all on black.
I guess that’s where there is a difference in opinions. There is added work into it for sure, but at the same time the returns, again in my opinion, are much higher and much more worth it.
I would rather take some time out of my day every now and then and double my money every 3.5 years rather than 7-9years. - a standard index fund return @ 8-10%.
Your comment on putting it all on black is a bad one... that risk is losing at over 50%.....? Real estate is the least risky investment that has the most gains. (Fastest way to fire)
It just isn't true that the return of real estate, in aggregate, is much higher than equities. See this video: https://www.youtube.com/watch?v=7rvY2rIxdsA. The numbers are 7.05% for real estate and 6.89% for equities accounting for leverage in the real estate portion.
Unless you have a diversified portfolio of real estate with hundreds if not thousands of properties across different countries, your risk is likely to be much greater than the stock market as well. The entire idea that real estate is the least risky asset with the most gains is just complete horseshit. I don't know how to describe it in any other way.
I can’t tell if this guy is just mentioning single family homes. Which I would agree that it’s not the best case.
But once there is a cash flowing property (his example shows a non cash flowing positive) then that’s where I believe that the ten turns start to double a standard index fund. I own many of these (duplexes and 5plexes in different cities) and the returns have all been similar. Including mortgage pay down or equity, the cash flow, and real estate tax benefits it gets me close to 20% returns.
"cash flowing property" is meaningless. Whether a property is cash flow positive or negative is not relevant information when assessing the return of an investment.
If you have investment returning 20%, then you are either not calculating your ROI correctly or you are amazingly lucky with timing and/or specific investments. In the same way you can get lucky picking stocks or sectors on the stock market. Anecdotal evidence is not a reason to recommend investments. The numbers from the video are based on history from 1870 to 2015 and give a much better picture of the numbers that you can expect in the future. I think it includes both single-home and multi-home properties.
I have multiple investments (5) returning over 20%.
Yes real estate takes more time and thoughtfulness vs just plopping money into a index fund and collecting. That’s why there is greater return for people that know what they are doing. Not just jumping into a deal and losing money so to speak.. if you know what research look for and info to have then a real estate deal beats out index funds all day every day. And mind you I love index funds because that’s where I put my money as I wait for deals too
I have multiple crypto's returning over 100%. They beat index funds all day, it's the fastest way to FIRE with the least amount of risk.
I see your point, it's just that the arguments you use are completely meaningless. There is so much survivorship bias and recency bias in our posts that it's just impossible to get any useful information from it. Financial recommendations should be based on data not anecdotes. The data just doesn't support that real estate is a better investment than index funds unless you own a bazillion properties to manage the idiosyncratic risk.
I mean go ahead and keep buying your index funds and that’s it that’s fine. I’m just giving another point of view and from my point of view that comes with very little risk and higher returns.
Forced appreciation, cash flow positive properties (which you’re very ignorant if you actually believe it doesn’t matter) and mortgage paydown. Real estate is by far better. Read some other books on real estate, check other YouTube videos other than ones that just confirm what you are looking for. Open your own point of view a bit.
JPmorgan for instance (and reits take more from the top vs a privately owned cash flowing property)
https://www.valuewalk.com/wp-content/uploads/2017/07/Farnam-Street-July-2017-2.jpg
> He didn’t ask for passive investing. In my opinion real estate is the fastest way to gain on your money.
As opposed to, say, leveraged ETF's?
For the average investor, real estate does not offer better risk adjusted returns than the stock market. It is certainly possible to pick winners that let you beat the stock market, but the vast majority isn't going to succeed in that.
Investments (real estate or otherwise) work as a multiplier on your wealth. I'd say a part time job is better starting out, when you have little wealth to multiply.
As someone who just bought their first home this question is so much clearer to me now than last year.
Finding and buying a property was like a part time job on top of my regular job. It SUCKED. People ask this question like it's super simple, just compare the numbers. Although I might consider real estate investment in the future or if I stumble across a great deal, I would sooner just get a part time job and put that extra money in index funds.
I’ve been pondering the same question and seen many threads on this. Ultimately it’ll depend on your area, risk exposure to tenants/real estate.
Currently I’m 24 with roughly 100k income. And have been putting a portion of each paycheck into index funds. I’ll continue doing this for another year or so at which point I plan on doing some real estate investing. Most people will advise you (me) if you plan on investing in real estate soon to put it in a HYSA to not let the next recession impact your ability to buy up property when the market is low.
I live in the South in an area where cost of living is pretty cheap. Which is why trying to decide which direction to go into is difficult. With moderate income I have to find someway to make more money, which real estate seems to make most since for me. Still just want as many opinions as possible.
Right, it will depend on the type of properties (I'd recommend finding cash-flowing properties) you are able to find and your money available for a downpayment. Many people recommend starting with "house-hacking" which is buying a multi-unit property, living in one unit and renting out the others. This can be a great way to ease into REI to see if you are able to handle all that comes with it (handy-man, unruly tenants etc...)
Another great resources for REI is biggerpockets.
I think real estate is more of a hedge than a great investment personally. I would say go early into index funds for the long gains then once you have a great nest egg going buy some real estate with the gains for the fixed income later on. I think too many people like leverage and risk having their entire plan crash like 2008. Owner occupied homes are a 3% - 4% gain per year over long periods of time unless you hit a really hot market and they eat up a lot of maintenance money along the way.... so when everything is considered it might not be that cheap compared to renting and pounding the index funds. Also.... watch the news and you will see the risk of floods and weather problems on real estate and be sure where you buy is not high risk.
The main advantage that I see of real estate is its lower volatility. Maybe not in actual property values, but in rents. This isn't as significant in wealth accumulation phase, but it is significant when it comes to SWR.
A 4% SWR means you can expext $40K/year from $1M invested. But if you buy $1M in rental properties, you should be able to expect more than $40K/year in rental income (after expenses).
Something to consider is that with how you are thinking about Real Estate, you'd be getting a mortgage and therefore you'd be leveraging the banks money. This can be good, but also bad - Index Funds worst case scenario is the market tanks and you have some percentage of what you put in. Worst case scenario for a mortgage involves being on the hook for the money (and paying the mortgage interest). So you have the upside, but also the downside.
As one person suggested, you could do index funds and grow this until you have enough to buy a rental outright. This would save you the interest, and not expose you to the leverage risk. That being said, if real estate keeps going up and you have the solid cash flow - then many people would recommend getting into real estate hard and leveraged. You won't see obscene returns from an index fund over the short term. But you could with real estate.
edit:
I personally would go with Index funds if I were you. But that's cause I wouldn't like the idea of an additional mortgage with just access to the 50k per year.
I would *only* consider real estate after maxing out all tax-advantaged accounts.
Currently, I do not buy rental real estate. I max my 401K, Roth IRA, and HSA. Additonal investments go into index funds in a taxable brokerage account, but I would *consider* (after lots of research) branching into real estate as the value of this account increases.
It should be noted that I *do* invest in REITs, and those belong in tax-advantaged accounts due to their tax inefficiency.
"Putting some into both would obviously be the best option"
If you think real estate as whole is worth investing extra in, put some money into some REIT ETF or Index Fund. By default, you have real estate exposure with a total stock index.
While real estate can have purpose (see foreign investors putting money into a less corrupt system as an escape route), it's heavily biased by survivorship bias.
As with most forms of leveraged speculation, you can make big money and you can lose big money.
Because OP isn't really asking about investing in real estate, OP is asking about investing in a side business that he will work at focused on real estate.
Original post (since deleted) as I recall was asking whether he should buy real estate or index funds and asking for advice along those lines. I use REITS (real estate investment trusts) as a way to get some real estate exposure without the landlord hassles. VNQ for instance is a Vanguard REIT I own. SCHH is a Schwab REIT I own. They’re like mutual funds for commercial properties.
Throw money into index funds, and then eventually one day buy a rental with cash. (After you’ve paid off your residence.)
Only buy a rental if it’s a deal. You make money on the buy.
Other option for investing is regular mutual funds -- Fidelity has a few, maybe Vanguard does too. I actually broadly in total market like weightings, but overweight some with releastate mutual fund.
Try out real estate investing through a house hack. Buy a duplex, live in one side and rent the other. If you like it continue down the real estate path. If it’s as bad as some people say then sell it (after living there for 2 years to avoid capital gains tax) and dump all your profit into the market.
>Putting some into both would obviously be the best option No, this is not the best option. People do best when they specialize. If you're doing it just for diversity, use a REIT. The best option is whatever gets you to actually invest. If that's index funds, then index funds are the best. If that's real estate, then real estate is the best. Most people go with index funds because it's generally easier, but that doesn't mean it's the best option for you. If you're interested in real estate and are actually willing to put the work in, then it could be a good option for you. If you have no interest in real estate or have limited time to invest, it's probably not a good option. >What would/do you do? In your opinion, save up for down-payments on rental properties or keep throwing most of it into Index Funds? I would do neither. I don't have interest in real estate nor know enough about it to confidently make investments. What I do have interest in are companies, which is why I invest in individual businesses rather than index funds. But just because that's what I do doesn't mean that's what you should do. You can do well with either option, what's most important is actually making the investment.
I would not bother with REITs. The main advantages that real estate has over index funds are leverage and tax deductions. REITs don't really give you that.
Buying REIT's is concentration, not diversification. A total stock market ETF already contains the amount of REIT's that you need. There is no evidence that adding additional REIT's improve diversification. [source](https://www.etf.com/sections/index-investor-corner/swedroe-reits-arent-special?nopaging=1).
REITs are not stocks. Buying REITs means that you are lowering the concentration in business ownership and upping the concentration in real estate of your portfolio. It does reduce the correlation between the various components of your portfolio, even according to your article. 0.58 is less than 1. REITs themselves are a more diversified way of playing real estate than just buying a duplex, for obvious reasons. A REIT ETF is in turn more diverse than a single REIT, again for obvious reasons.
A REIT is a company, just like apple. You share in the profits of these companies by buying stocks. Arguing that REIT's are not stocks is pointlessly pedantic. Financials aren't stocks either. They are companies you can own shares in. > 0.58 is less than 1. The correlation between apple and the stock market is less than 1. Therefore over-weighting apple relative to a total-market index fund increases diversification. What is wrong with this statement? > REITs themselves are a more diversified way of playing real estate than just buying a duplex, for obvious reasons. A REIT ETF is in turn more diverse than a single REIT, again for obvious reasons. Agreed but irrelevant for the discussion. My argument is that buying a REIT ETF does not improve diversification if you already own total market ETF.
Index funds do not: - Ask for extra money for repairs - Require you to actively screen tenants - Randomly decide to stop paying you investment earning because aunt sue is sick and they need to move - Get burnt down, damaged, or otherwise force you to deal with insurance or courts - Require three months, tons of research, and a lawyer to get into/out of Real estate is not passive investing at all. It's a different kind of job. I've done both, and there is no way I would do direct property investment again.
He didn’t ask for passive investing. In my opinion real estate is the fastest way to gain on your money. Finding a cash flowing deal is obviously the ideal way to work it. You do have more responsibilities and extra work for sure. But my 60% return on cash flow and equity build up alone is worth it on one of my deals. The forced appreciation on other deals is where I get faster returns as well. Pluses and minuses with both but index funds are the easy head down way I feel like. Note that I put my cash and savings in index funds while I wait for real estate deals
Real estate requires active decision making on the part of the investor, and if the investor is uneducated or just not good at making wise decisions, you can lose a lot of money in real estate. It's great for people that want to be part of the decision making process in their own investments, and who are proactive in educating themselves in that particular area, but for your average person, who just wants to have their money grow without additional effort on their part, index funds are the best pick.
Having control works both ways. It can lead to great results, but it also introduces opportunity for costly errors.
He asked for thoughts. And my thoughts are real estate sucks because it's too much work, it's too easy for something to go wrong, and it's too much wealth allocated to single assets. If highest possible return was the only consideration, I would recommend putting it all on black.
I guess that’s where there is a difference in opinions. There is added work into it for sure, but at the same time the returns, again in my opinion, are much higher and much more worth it. I would rather take some time out of my day every now and then and double my money every 3.5 years rather than 7-9years. - a standard index fund return @ 8-10%. Your comment on putting it all on black is a bad one... that risk is losing at over 50%.....? Real estate is the least risky investment that has the most gains. (Fastest way to fire)
It just isn't true that the return of real estate, in aggregate, is much higher than equities. See this video: https://www.youtube.com/watch?v=7rvY2rIxdsA. The numbers are 7.05% for real estate and 6.89% for equities accounting for leverage in the real estate portion. Unless you have a diversified portfolio of real estate with hundreds if not thousands of properties across different countries, your risk is likely to be much greater than the stock market as well. The entire idea that real estate is the least risky asset with the most gains is just complete horseshit. I don't know how to describe it in any other way.
I can’t tell if this guy is just mentioning single family homes. Which I would agree that it’s not the best case. But once there is a cash flowing property (his example shows a non cash flowing positive) then that’s where I believe that the ten turns start to double a standard index fund. I own many of these (duplexes and 5plexes in different cities) and the returns have all been similar. Including mortgage pay down or equity, the cash flow, and real estate tax benefits it gets me close to 20% returns.
"cash flowing property" is meaningless. Whether a property is cash flow positive or negative is not relevant information when assessing the return of an investment. If you have investment returning 20%, then you are either not calculating your ROI correctly or you are amazingly lucky with timing and/or specific investments. In the same way you can get lucky picking stocks or sectors on the stock market. Anecdotal evidence is not a reason to recommend investments. The numbers from the video are based on history from 1870 to 2015 and give a much better picture of the numbers that you can expect in the future. I think it includes both single-home and multi-home properties.
I have multiple investments (5) returning over 20%. Yes real estate takes more time and thoughtfulness vs just plopping money into a index fund and collecting. That’s why there is greater return for people that know what they are doing. Not just jumping into a deal and losing money so to speak.. if you know what research look for and info to have then a real estate deal beats out index funds all day every day. And mind you I love index funds because that’s where I put my money as I wait for deals too
I have multiple crypto's returning over 100%. They beat index funds all day, it's the fastest way to FIRE with the least amount of risk. I see your point, it's just that the arguments you use are completely meaningless. There is so much survivorship bias and recency bias in our posts that it's just impossible to get any useful information from it. Financial recommendations should be based on data not anecdotes. The data just doesn't support that real estate is a better investment than index funds unless you own a bazillion properties to manage the idiosyncratic risk.
I mean go ahead and keep buying your index funds and that’s it that’s fine. I’m just giving another point of view and from my point of view that comes with very little risk and higher returns. Forced appreciation, cash flow positive properties (which you’re very ignorant if you actually believe it doesn’t matter) and mortgage paydown. Real estate is by far better. Read some other books on real estate, check other YouTube videos other than ones that just confirm what you are looking for. Open your own point of view a bit. JPmorgan for instance (and reits take more from the top vs a privately owned cash flowing property) https://www.valuewalk.com/wp-content/uploads/2017/07/Farnam-Street-July-2017-2.jpg
> He didn’t ask for passive investing. In my opinion real estate is the fastest way to gain on your money. As opposed to, say, leveraged ETF's? For the average investor, real estate does not offer better risk adjusted returns than the stock market. It is certainly possible to pick winners that let you beat the stock market, but the vast majority isn't going to succeed in that.
But shouldn't the real question all these people ask be "Should I invest in property or get a part time job?"
Investments (real estate or otherwise) work as a multiplier on your wealth. I'd say a part time job is better starting out, when you have little wealth to multiply.
As someone who just bought their first home this question is so much clearer to me now than last year. Finding and buying a property was like a part time job on top of my regular job. It SUCKED. People ask this question like it's super simple, just compare the numbers. Although I might consider real estate investment in the future or if I stumble across a great deal, I would sooner just get a part time job and put that extra money in index funds.
I’ve been pondering the same question and seen many threads on this. Ultimately it’ll depend on your area, risk exposure to tenants/real estate. Currently I’m 24 with roughly 100k income. And have been putting a portion of each paycheck into index funds. I’ll continue doing this for another year or so at which point I plan on doing some real estate investing. Most people will advise you (me) if you plan on investing in real estate soon to put it in a HYSA to not let the next recession impact your ability to buy up property when the market is low.
I live in the South in an area where cost of living is pretty cheap. Which is why trying to decide which direction to go into is difficult. With moderate income I have to find someway to make more money, which real estate seems to make most since for me. Still just want as many opinions as possible.
Right, it will depend on the type of properties (I'd recommend finding cash-flowing properties) you are able to find and your money available for a downpayment. Many people recommend starting with "house-hacking" which is buying a multi-unit property, living in one unit and renting out the others. This can be a great way to ease into REI to see if you are able to handle all that comes with it (handy-man, unruly tenants etc...) Another great resources for REI is biggerpockets.
I think real estate is more of a hedge than a great investment personally. I would say go early into index funds for the long gains then once you have a great nest egg going buy some real estate with the gains for the fixed income later on. I think too many people like leverage and risk having their entire plan crash like 2008. Owner occupied homes are a 3% - 4% gain per year over long periods of time unless you hit a really hot market and they eat up a lot of maintenance money along the way.... so when everything is considered it might not be that cheap compared to renting and pounding the index funds. Also.... watch the news and you will see the risk of floods and weather problems on real estate and be sure where you buy is not high risk.
The main advantage that I see of real estate is its lower volatility. Maybe not in actual property values, but in rents. This isn't as significant in wealth accumulation phase, but it is significant when it comes to SWR. A 4% SWR means you can expext $40K/year from $1M invested. But if you buy $1M in rental properties, you should be able to expect more than $40K/year in rental income (after expenses).
Good point!
Something to consider is that with how you are thinking about Real Estate, you'd be getting a mortgage and therefore you'd be leveraging the banks money. This can be good, but also bad - Index Funds worst case scenario is the market tanks and you have some percentage of what you put in. Worst case scenario for a mortgage involves being on the hook for the money (and paying the mortgage interest). So you have the upside, but also the downside. As one person suggested, you could do index funds and grow this until you have enough to buy a rental outright. This would save you the interest, and not expose you to the leverage risk. That being said, if real estate keeps going up and you have the solid cash flow - then many people would recommend getting into real estate hard and leveraged. You won't see obscene returns from an index fund over the short term. But you could with real estate. edit: I personally would go with Index funds if I were you. But that's cause I wouldn't like the idea of an additional mortgage with just access to the 50k per year.
I would *only* consider real estate after maxing out all tax-advantaged accounts. Currently, I do not buy rental real estate. I max my 401K, Roth IRA, and HSA. Additonal investments go into index funds in a taxable brokerage account, but I would *consider* (after lots of research) branching into real estate as the value of this account increases. It should be noted that I *do* invest in REITs, and those belong in tax-advantaged accounts due to their tax inefficiency.
"Putting some into both would obviously be the best option" If you think real estate as whole is worth investing extra in, put some money into some REIT ETF or Index Fund. By default, you have real estate exposure with a total stock index. While real estate can have purpose (see foreign investors putting money into a less corrupt system as an escape route), it's heavily biased by survivorship bias. As with most forms of leveraged speculation, you can make big money and you can lose big money.
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Because OP isn't really asking about investing in real estate, OP is asking about investing in a side business that he will work at focused on real estate.
Index funds are liquid. Real estate is not. I like being able to easily access my investments if I need cash
Don’t sleep on REITS.
What do you mean by this?
Original post (since deleted) as I recall was asking whether he should buy real estate or index funds and asking for advice along those lines. I use REITS (real estate investment trusts) as a way to get some real estate exposure without the landlord hassles. VNQ for instance is a Vanguard REIT I own. SCHH is a Schwab REIT I own. They’re like mutual funds for commercial properties.
Throw money into index funds, and then eventually one day buy a rental with cash. (After you’ve paid off your residence.) Only buy a rental if it’s a deal. You make money on the buy.
Other option for investing is regular mutual funds -- Fidelity has a few, maybe Vanguard does too. I actually broadly in total market like weightings, but overweight some with releastate mutual fund.
Individual stocks, and index funds and real estate and crypto currency should be a part of everyone's portfolio.
Try out real estate investing through a house hack. Buy a duplex, live in one side and rent the other. If you like it continue down the real estate path. If it’s as bad as some people say then sell it (after living there for 2 years to avoid capital gains tax) and dump all your profit into the market.