Real Estate Investing - Actual Property vs an Index fund

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jbsmith05
Posts: 182
Joined: Fri Apr 01, 2016 2:01 pm

Real Estate Investing - Actual Property vs an Index fund

Post by jbsmith05 » Mon Apr 08, 2019 8:37 pm

I've been thinking of investing in real estate, actually 2 of my friends have been asking me to go 1/2 or 1/3 (depending) on actual properties. Sometimes we flip sometimes we (read they at this point) rent them. Between the 3 of us we actually have the skills (all have mentored under a licensed tradesman) to renovate homes, minus the part where we need licenses (we'd outsource where necessary) - we also are all above average in investing knowledge with varying risk tolerances however.

I've not gotten onto the train yet due to the initial outlay of cash to buy the property, yet they have been quite successful in their endeavors over the past 5 years in renting/flipping.

I'm wondering for those that have done this how would you compare it to investing in funds? Are there funds that can give you a similar return (or loss, yep I get the volatility) without the need for the large initial outlay of cash. Or do they not even relate - then the question is how did you determine to jump in

Nissanzx1
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by Nissanzx1 » Mon Apr 08, 2019 8:51 pm

I only have 2 rental properties. I think it’s either in your blood or it’s not. Nothing wrong with you if it’s not. Nothing wrong with sticking your cash in index funds or even a few REIT’s.

We paid cash for our two properties (combined value only about $110K). $1350/mo rents for the pair. I sure wouldn’t do it with mortgages. Lots and lots of risk there if you get a bad tenant. I also wouldn’t consider for one second a partnership. For one thing, there isn’t enough money to split especially when you are picking value properties.

I’m moderately handy, was actually painting and installing new windows in one tonight. I think you must know yourself. Either you don’t mind this type of work, or you hate it. If you pay someone to do everything, you’ll find you won’t make as much as you want.

One needed a $5200 roof last week, the other a complete $5200 HVAC this week. You have to have money to play this game. I personally absolutely love it.

Topic Author
jbsmith05
Posts: 182
Joined: Fri Apr 01, 2016 2:01 pm

Re: Real Estate Investing - Actual Property vs an Index fund

Post by jbsmith05 » Mon Apr 08, 2019 8:56 pm

Nissanzx1 wrote:
Mon Apr 08, 2019 8:51 pm
I only have 2 rental properties. I think it’s either in your blood or it’s not. Nothing wrong with you if it’s not. Nothing wrong with sticking your cash in index funds or even a few REIT’s.

We paid cash for our two properties (combined value only about $110K). $1350/mo rents for the pair. I sure wouldn’t do it with mortgages. Lots and lots of risk there if you get a bad tenant. I also wouldn’t consider for one second a partnership. For one thing, there isn’t enough money to split especially when you are picking value properties.

I’m moderately handy, was actually painting and installing new windows in one tonight. I think you must know yourself. Either you don’t mind this type of work, or you hate it. If you pay someone to do everything, you’ll find you won’t make as much as you want.

One needed a $5200 roof last week, the other a complete $5200 HVAC this week. You have to have money to play this game. I personally absolutely love it.
Good advise - while I completely trust the 2 in terms of partnership part of the reason I haven't done it is due to the partnership - you just never know.

I love doing the maintenance work where I can - that's where I spend most of my free time - heck just last week I was replacing the heating element in the dryer instead of just buying a new one like many people do (2hrs work and $27 bucks later it's brand new). So that part doesn't phase me.

But knowing thyself is probably the best advise - right now I'm leaning toward just funds - not sold on a REIT yet though. Thinking right now I don't have the cash or risk tolerance to put up $ that would be better saved for things like college, etc - without going the mortgage route, which of as you say adds even more risk.

Nissanzx1
Posts: 605
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by Nissanzx1 » Mon Apr 08, 2019 9:07 pm

jbsmith05 wrote:
Mon Apr 08, 2019 8:56 pm
Nissanzx1 wrote:
Mon Apr 08, 2019 8:51 pm
I only have 2 rental properties. I think it’s either in your blood or it’s not. Nothing wrong with you if it’s not. Nothing wrong with sticking your cash in index funds or even a few REIT’s.

We paid cash for our two properties (combined value only about $110K). $1350/mo rents for the pair. I sure wouldn’t do it with mortgages. Lots and lots of risk there if you get a bad tenant. I also wouldn’t consider for one second a partnership. For one thing, there isn’t enough money to split especially when you are picking value properties.

I’m moderately handy, was actually painting and installing new windows in one tonight. I think you must know yourself. Either you don’t mind this type of work, or you hate it. If you pay someone to do everything, you’ll find you won’t make as much as you want.

One needed a $5200 roof last week, the other a complete $5200 HVAC this week. You have to have money to play this game. I personally absolutely love it.
Good advise - while I completely trust the 2 in terms of partnership part of the reason I haven't done it is due to the partnership - you just never know.

I love doing the maintenance work where I can - that's where I spend most of my free time - heck just last week I was replacing the heating element in the dryer instead of just buying a new one like many people do (2hrs work and $27 bucks later it's brand new). So that part doesn't phase me.

But knowing thyself is probably the best advise - right now I'm leaning toward just funds - not sold on a REIT yet though. Thinking right now I don't have the cash or risk tolerance to put up $ that would be better saved for things like college, etc - without going the mortgage route, which of as you say adds even more risk.
I’d start a “Rental House Fund” with an online savings account. Slowly but steadily put your extra money in there, $50 here, $200 there. It doesn’t take that long to add up. One day you’ll look up and you’ll have enough cash to buy a cheap property.

Watch for the Big stuff! Foundations, Sewer’s, HVAC, Roofs, Termites, basically anything really expensive. We looked for four months and toured probably 25 homes on the last search round. We put in something like 6 total offers. One $25,000 home needed a sewer line. Thank God we asked for inspection. Bid was $26,000! Had to tear up the street! Lol no thank you...

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curiouskitty
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by curiouskitty » Tue Apr 09, 2019 1:05 am

If you’re willing to wait five years to redeem, which seems reasonable with real estate, then I might also consider Fundrise. Fees are higher than my index funds (although much lower than a mortgage!) and returns have been good with no effort on my part. I think it’s a way to get more of the upside of ownership without the hassles.

riverguy
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by riverguy » Tue Apr 09, 2019 5:59 am

curiouskitty wrote:
Tue Apr 09, 2019 1:05 am
If you’re willing to wait five years to redeem, which seems reasonable with real estate, then I might also consider Fundrise. Fees are higher than my index funds (although much lower than a mortgage!) and returns have been good with no effort on my part. I think it’s a way to get more of the upside of ownership without the hassles.
Not even in the same ballpark as far as potential returns on a single property.

robphoto
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by robphoto » Tue Apr 09, 2019 6:31 am

Remember that flipping and renting are very different.

Flipping is more of a pure investment in a physical thing-- you find something which seems to be selling at a discount to its potential value, upgrade it, and hopefully sell at a profit.

Renting involves other people's lives (talking about residential now). You've got to know that when your tenant says they've lost their job, their child was just diagnosed with leukemia, and their car was wrecked, so they can't pay the rent, that you can proceed to have them removed without feeling guilty. If that's the case, there is good income potential; if you can't do that, you'll find yourself losing money, feeling terrible, or both.

I know I'm not cut out to be a landlord, though I don't think it's a bad profession.

GAAP
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by GAAP » Tue Apr 09, 2019 11:03 am

Physical property is subject to local conditions and most folks don't have anywhere near enough capital to diversify away from that fact. You could say that you're diversified all over town -- that wasn't enough to help the folks in Paradise, CA last year...

An index fund is simpler, far more diversified, requires less record-keeping and a lot less effort.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

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curiouskitty
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by curiouskitty » Sat Apr 13, 2019 1:33 pm

riverguy wrote:
Tue Apr 09, 2019 5:59 am
curiouskitty wrote:
Tue Apr 09, 2019 1:05 am
If you’re willing to wait five years to redeem, which seems reasonable with real estate, then I might also consider Fundrise. Fees are higher than my index funds (although much lower than a mortgage!) and returns have been good with no effort on my part. I think it’s a way to get more of the upside of ownership without the hassles.
Not even in the same ballpark as far as potential returns on a single property.
Spending lots of time renting it out short term or what? I've gotten 16% a year with no effort so I'm not complaining

dbr
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by dbr » Sat Apr 13, 2019 2:25 pm

You are proposing to join and operate a small business. That is totally not the same thing as investing money in an index fund.

Whether or not that small business makes sense in your case I could not say. There are certainly people for whom it does make sense. I guess one question is where are you going to find the time and energy to do the work, aka do you have another job beside this one?

smackboy1
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Re: Real Estate Investing - Actual Property vs an Index fund

Post by smackboy1 » Sun Apr 14, 2019 10:27 am

jbsmith05 wrote:
Mon Apr 08, 2019 8:37 pm
I've been thinking of investing in real estate, actually 2 of my friends have been asking me to go 1/2 or 1/3 (depending) on actual properties. Sometimes we flip sometimes we (read they at this point) rent them. . .

I'm wondering for those that have done this how would you compare it to investing in funds?
It's 2 entirely different things being compared. The "investment" is not equivalent and neither is the risk vs. reward calculus. The first is starting a small business partnership with all the associated up and downs and expenditure of hard work, money, time, skill, luck, stress etc.. Potential for high ROI but also losing a lot, including personal assets and friends. The second is passive; just spending money and somebody else takes care of the rest. Lower volatility and loss limited to initial investment (just money).

It's like comparing opening a restaurant vs. buying shares of Yum Brands (Pizza Hut, KFC, Taco Bell etc.).
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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