Posted on 08/11/2020 7:39:43 AM PDT by SeekAndFind
FIRE (Financial Independence, Retire Early), a flourishing lifestyle movement, has crept its way into mainstream culture throughout the past decade. As we've seen the pandemic spark a renewed push for people to create more autonomy in their lives, there is continued debate about the most sensible way to invest if FIRE is your goal. Real estate proponents advocate for potentially robust monthly cash flow, price appreciation, and tax advantages, whereas index fund adherents cite minimal expenses, a lack of constant oversight, and efficient trading as reasons to invest. In reality, there are benefits to both strategies, which might lead you to consider a hybrid approach.
You'll hear FIRE proponents across the internet lauding the benefits of real estate investing, and in the right circumstances, you should listen. The benefits of direct investing in real estate are well documented: you'll receive stable monthly cash flow in the form of rent payments and will benefit from potential price appreciation of the property if you hold it long enough. In most cases you will need to take out a mortgage on the home and as the landlord, you are now responsible for maintenance, lock-outs, and taxes. The idea is to become "cash-flow positive"; that is, your monthly rent receipt on the property exceeds your monthly obligations to lenders and government entities.
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The true benefits of direct real estate investing accrue once you've built a portfolio of properties that can provide significant positive monthly cash flow as a reliable source of income. This cash flow can either be reinvested into other properties, spent on regular obligations, or invested in other financial instruments. Additionally, you will, in all likelihood, benefit from price appreciation on the properties over time, allowing you to greatly increase your on-paper net worth. Once you've paid off the mortgages, you'll only be required to pay your taxes and keep the properties in working condition – from there, your path to FIRE will be significantly shortened.
There are many risks, however, with using real estate alone as a path to financial freedom. First, many real estate investors would agree that property management is a job in itself – the process of finding tenants who are able to pay rent every month, especially during a global health crisis, is understandably quite challenging. If the time commitment is too much, you always have the option of investing indirectly in real estate with REITs (Real Estate Investment Trusts). Second, if you own a property in a high cost of living area, down payments can run in to the several-hundred-thousand-dollar range, making owning several properties or even one property a privilege reserved for only the very wealthy.
In addition, real estate can suffer from illiquidity issues – in other words, you may not be able to sell your rental when you want, which of course will be when you need the cash most. It's important to distinguish that the process of buying an investment property is not the same as buying a primary residence – the initial decision-making process, as well as the end goals, are significantly different.
Index funds are investment vehicles designed to provide diversified exposure to world stock indices, specific sectors, or focused themes. Some generate periodic dividends (usually quarterly), and most broad market indices have demonstrated measured but meaningful growth over the past century. The subtle beauty of index fund investing lies in its passive nature – once you've selected a few funds that match your risk tolerance and asset allocation needs, there really isn't much more to it. Your focus can move away from investing and on to life's more important concerns: your career, your family, and whatever else to which you want to dedicate precious time.
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A primary difference between index funds and real estate is rooted in monthly cash flow. Investing in real estate has the potential to generate more stable cash flow on average. Speaking literally, this refers to more cash being paid directly to your bank account every month. The primary gains that accumulate to index fund investors are in the form of price appreciation, which comes as result of the market slowly churning up over time. Index fund investors often enjoy quick payouts from cash dividend payments, but they tend to be relatively small in nature when compared to rent receipts.
Many of the discussions in personal finance are focused on choices around investment vehicles and the relative merits of each. In the pursuit of building a complete portfolio that captures the maximum potential benefits available while also addressing identifiable risks, it seems prudent that both index funds and real estate should be included. This tends to become more achievable if you live in an area with low cost of living and have the time to manage real property while allowing your index investments to grow simultaneously. Regardless of where you live, a reasonable capital allocation that includes a variety of investments addressing different needs will supercharge your path to financial independence.
Do you live in a Republican or Democrat run state?
"On average, bear markets have lasted 14 months in the period since World War II...The longest was a 61-month bear market that ended in March 1942 and cut the index by 60%."
https://apnews.com/84ee301c404539d8731da34128330752
How would this work during hyper inflation?
Any other suggestions for hyper inflation?
Real estate is a solid business for experts.
It is a high risk disaster for everyone else.
RE: Any other suggestions for hyper inflation?
Anybody notice how precious metals like Gold and Silver have been on a tear the last 3 months?
It is because of EXPECTATIONS OF INFLATION with Government spending and spending and the Fed printing money because of this pandemic. There’s your answer right there.
Hyper inflation tips.
Stock up on durable goods—i.e., hoard as much as you can store.
Learn a skill that the world can’t do without, so you can barter if necessary. That would include most blue collar trades and health care skills.
I prefer to own quality REITs with decent yields.
When we were younger we invested in BOTH stocks and RE. The RE did a lot better than the stocks because we could put sweat equity into it. We did all the maintenance, management, selection, market surveys, etc. And upgrades, we did a lot of upgrades.
Go ahead, tell me how you do that with a REIT. Do you head over to their apartment and offer to cut the grass? How about change out the dishwashers?
Now that we have to hire those things done for us -- both age and number of properties have increased, returns are about the same as REITs, but that big early boost to returns was a huge benefit.
These days stock portfolio is about equal to RE portfolio, but there is great wisdom in investing in BOTH.
If you are retired and taking out money to live on, the possibility of depleting your investment account accelerates during long recovery periods.
These are the two longest recovery periods on record: 17 & 26 years.
Match your investment strategy to your skills.
Being a property manager is a skill. You can pay someone else, if doing so leaves the net income where you want it.
If you have never been an active investor making your own investments at time of early retirement, it could be too late to acquire those skills for yourself. Instead, shop for a good investment house that is not going to rob you in fees and transaction churning costs. Be sure they clearly understand your goals, stated as degree of maintaining or growing capital and level of annual income desired. Make them explain clearly how the options they pick, or change to, will do that. When economic conditions are changing, discuss with them what if anything they are doing in response to that. Don’t be a totally silent investor. The more questions you ask, the more you will understand what they are doing. Be satisfied or change investment houses.
Rental property... yeah, right... this reminds me of those "learn how to trade options" ads. Bigger Fool ping.
I have 20 residential rental properties, all rented and all tenants paying. Keys are, of course, location and renting only to good tenants.
Red state and the area I live in is 80% Trump.
RE: I have 20 residential rental properties, all rented and all tenants paying. Keys are, of course, location and renting only to good tenants.
Well, if your rentals are all paid for ( i.e. no mortgage ), you’re all set financially then.
Screening potentially good tenants is the challenge. You must be a very good judge of character....
That’s why you can be a landlord.
Here in NY the renter is King.
“Keys are, of course, location and renting only to good tenants.”
I do anal background and credit checks. Weeds out 95% of losers. I am amazed at how many landlords do neither.
“ I do anal background and credit checks.
Sounds intensive!
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