buying a rental property vs investing more in stocks

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vanpan
Posts: 4
Joined: Thu Aug 03, 2017 5:52 pm

buying a rental property vs investing more in stocks

Post by vanpan » Sat Aug 12, 2017 1:39 pm

Confused about buying a rental property vs investing more money in stocks.
Living in the SF bay area - being cash flow positive on a rental property is not possible given current prices, nor is it my aim.

Current situation :
Wife and me in early 30'S

Income
Me and the wife make base salary: 200K + 100K a year
Bonus - I get one which is roughly 30K year
RSU's - Roughly 100K of RSU a year

Assets
Current home value is : 1.2M ( have a loan of 340k left on it at 2%)
Current mortgage: 1500 a month + I put 500 towards pricipal
We max out 401k - current worth of 401K is 300K
Our taxable accounts have 400K in stock
100K in a savings account @ 1%
60K in a FD at 4% ( vests in early 2018)

Expenses / Savings
Roughly 7K a month ( school for kid + mortgage + other expenses, no car loans or any other loans)
Save roughly 6.5K a month in our taxable account buying FTSAX

Now I got a gift from my parents - 300K cash. Given we save every month in stocks, I am tempted to get real estate. Here are my options .....

Thinking of buying a property roughly 950K. I will put 350K down and take a loan for 600K. Roughly all expenses for the property will be about 4500 a month ( mortgage + insurance + hoa + property tax). The property is in a highly rentable area ( best schools, walking distance to apple campus etc). I should easily be able to get 3500 a month. Conservatively i will loose 1K a month on this. However, rents will probably rise in the future ( long term 10-year the horizon) and property values in the bay area keep increasing and rarely decline. If I do buy this property, I will reduce my monthly savings to taxable account to 5.5K instead of 6.5K. I may get some additional tax savings, but I am not considering it and keeping the math simple.

My other option is to divide the 300K into 10K chunks and invest it over a 30 month period. For the next 30 months, i will invest 16.5 K every month.

I don't want to keep it as cash, nor time the market.

Should I buy the property or keep adding to my taxable account or any other options?

CppCoder
Posts: 508
Joined: Sat Jan 23, 2016 9:16 pm

Re: buying a rental property vs investing more in stocks

Post by CppCoder » Sat Aug 12, 2017 1:46 pm

Do you want to be a landlord? Do you want to take a cash flow loss every month to convert some money into illiquid equity and give some money to a bank? Are you sure that you will have no ongoing maintenance expenses? Are you sure you can keep the apartment occupied all the time? Are you sure real estate will never lose money? I, personally, would stay away from the real estate investment. I always end up answering no to my first question, independent of the financial calculus.

Nate79
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Location: Portland, OR

Re: buying a rental property vs investing more in stocks

Post by Nate79 » Sat Aug 12, 2017 2:23 pm

If you want a guaranteed loss every month I'll send you my address and you can mail me a check. I'll even say thank you which is more than you are getting out of this deal.

Can you not find a rental property in any reasonable distance that is an actual good investment?

JGoneRiding
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Joined: Tue Jul 15, 2014 3:26 pm

Re: buying a rental property vs investing more in stocks

Post by JGoneRiding » Sat Aug 12, 2017 4:00 pm

I like real estate but I don't speculate. Buying a property that can't cash flow hoping for appreciation is a bad idea .

Jim21713
Posts: 6
Joined: Thu May 04, 2017 11:23 pm

Re: buying a rental property vs investing more in stocks

Post by Jim21713 » Sat Aug 12, 2017 4:06 pm

Never buy real estate hoping for appreciation. If you are going to buy real estate it must have a positive cash flow.

LarryAllen
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Joined: Fri Apr 22, 2016 9:41 am
Location: State of Confusion

Re: buying a rental property vs investing more in stocks

Post by LarryAllen » Sat Aug 12, 2017 4:10 pm

I would buy 3 rental properties in nice neighborhood in Memphis, KC, Indy, etc.... Gross rents will be about $3,300 a month. The great thing about diversifying on days when the stock market is down you at least know some of your assets aren't changing in value that day.

denovo
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Re: buying a rental property vs investing more in stocks

Post by denovo » Sat Aug 12, 2017 4:42 pm

LarryAllen wrote:
Sat Aug 12, 2017 4:10 pm
I would buy 3 rental properties in nice neighborhood in Memphis, KC, Indy, etc.... Gross rents will be about $3,300 a month. The great thing about diversifying on days when the stock market is down you at least know some of your assets aren't changing in value that day.
OP lives in NorCal. He'd lose a ton of money on management fees. Long-distance landlording never works out.

Goal33
Posts: 463
Joined: Sun Apr 12, 2015 12:30 pm

Re: buying a rental property vs investing more in stocks

Post by Goal33 » Sat Aug 12, 2017 4:55 pm

Pay off your house. Will leave you more room to buy stocks with your cash flow. Will reduce your family expenses by around 25%.
A man with one watch always knows what time it is; a man with two watches is never sure.

LarryAllen
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Location: State of Confusion

Re: buying a rental property vs investing more in stocks

Post by LarryAllen » Sat Aug 12, 2017 5:21 pm

denovo wrote:
Sat Aug 12, 2017 4:42 pm
LarryAllen wrote:
Sat Aug 12, 2017 4:10 pm
I would buy 3 rental properties in nice neighborhood in Memphis, KC, Indy, etc.... Gross rents will be about $3,300 a month. The great thing about diversifying on days when the stock market is down you at least know some of your assets aren't changing in value that day.
OP lives in NorCal. He'd lose a ton of money on management fees. Long-distance landlording never works out.
Huh. Has worked out great for my family for over 20 years so it seems like until you actually do it you shouldn't be a naysayer, eh!?

Tamarind
Posts: 578
Joined: Mon Nov 02, 2015 2:38 pm

Re: buying a rental property vs investing more in stocks

Post by Tamarind » Sat Aug 12, 2017 5:22 pm

Taxable or more prepayments on your own mortgage. Next time you are tempted, imagine that you are buying in late 2006.

WhyNotUs
Posts: 1073
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Re: buying a rental property vs investing more in stocks

Post by WhyNotUs » Sat Aug 12, 2017 5:31 pm

JGoneRiding wrote:
Sat Aug 12, 2017 4:00 pm
I like real estate but I don't speculate. Buying a property that can't cash flow hoping for appreciation is a bad idea .
+1
I own the next hot stock- VTSAX

denovo
Posts: 3329
Joined: Sun Oct 13, 2013 1:04 pm

Re: buying a rental property vs investing more in stocks

Post by denovo » Sat Aug 12, 2017 6:14 pm

LarryAllen wrote:
Sat Aug 12, 2017 5:21 pm
denovo wrote:
Sat Aug 12, 2017 4:42 pm
LarryAllen wrote:
Sat Aug 12, 2017 4:10 pm
I would buy 3 rental properties in nice neighborhood in Memphis, KC, Indy, etc.... Gross rents will be about $3,300 a month. The great thing about diversifying on days when the stock market is down you at least know some of your assets aren't changing in value that day.
OP lives in NorCal. He'd lose a ton of money on management fees. Long-distance landlording never works out.
Huh. Has worked out great for my family for over 20 years so it seems like until you actually do it you shouldn't be a naysayer, eh!?
What percent of your gross rent goes to management fees?

harrychan
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Location: Pasadena

Re: buying a rental property vs investing more in stocks

Post by harrychan » Sat Aug 12, 2017 7:04 pm

Numbers don't work out in your situation in my view. It's too much eggs in one basket and too many things can go wrong (deadbeat renter, earthquake, tech crash). I love me some investment property but only if you can afford to pay cash and not flinch. Otherwise, you can get much better return with $350k.
This is not legal or certified financial advice but you know that already.

StealthRabbit
Posts: 7
Joined: Sat Jun 13, 2009 1:25 am

Re: buying a rental property vs investing more in stocks

Post by StealthRabbit » Sat Aug 12, 2017 8:27 pm

harrychan wrote:
Sat Aug 12, 2017 7:04 pm
Numbers don't work out in your situation in my view. It's too much eggs in one basket and too many things can go wrong (deadbeat renter, earthquake, tech crash). I love me some investment property but only if you can afford to pay cash and not flinch. Otherwise, you can get much better return with $350k.
Yes, your specific proposal = too risky / costly, but... Investment RE can be another great tool in your portfolio.

I average 13% net (rents only, appreciation is a bonus) on 10+ props, 6 are 2500 miles away. (mgmt fee 6% on 4 of those but they get 30% better rents than I can get.)

1) know your market and props.
2) capital cost< 100x monthly rents (1m property must yield $10k/mo gross rents)
3) don't rent any thing that has a bed! ( I prefer commercial props)
4) don't buy anything you can't sell tomorrow for 110% more.
5) buy only unique props -ez to resell. (I buy view / props in the path of progress.)
6) being in an income tax free domicile is a plus.

Whatever you choose for investments.... Know and enjoy your stuff.
Don't love it.?... Don't waste your time. Don't risk your $$$. But... Start early on creating an inflation protected income stream. (of some type )

Jack FFR1846
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Joined: Tue Dec 31, 2013 7:05 am

Re: buying a rental property vs investing more in stocks

Post by Jack FFR1846 » Sat Aug 12, 2017 8:58 pm

TSM never calls me at 3 in the morning because the toilet's plugged.

Just sayin'
Bogle: Smart Beta is stupid

LarryAllen
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Joined: Fri Apr 22, 2016 9:41 am
Location: State of Confusion

Re: buying a rental property vs investing more in stocks

Post by LarryAllen » Sat Aug 12, 2017 9:34 pm

denovo wrote:
Sat Aug 12, 2017 6:14 pm
LarryAllen wrote:
Sat Aug 12, 2017 5:21 pm
denovo wrote:
Sat Aug 12, 2017 4:42 pm
LarryAllen wrote:
Sat Aug 12, 2017 4:10 pm
I would buy 3 rental properties in nice neighborhood in Memphis, KC, Indy, etc.... Gross rents will be about $3,300 a month. The great thing about diversifying on days when the stock market is down you at least know some of your assets aren't changing in value that day.
OP lives in NorCal. He'd lose a ton of money on management fees. Long-distance landlording never works out.
Huh. Has worked out great for my family for over 20 years so it seems like until you actually do it you shouldn't be a naysayer, eh!?
What percent of your gross rent goes to management fees?

Between 6 and 10% in different cities with 8% being the most common. That's cheap for not being responsible for managing the properties in my opinion.

denovo
Posts: 3329
Joined: Sun Oct 13, 2013 1:04 pm

Re: buying a rental property vs investing more in stocks

Post by denovo » Mon Aug 14, 2017 3:41 am

LarryAllen wrote:
Sat Aug 12, 2017 9:34 pm
denovo wrote:
Sat Aug 12, 2017 6:14 pm
LarryAllen wrote:
Sat Aug 12, 2017 5:21 pm
denovo wrote:
Sat Aug 12, 2017 4:42 pm
LarryAllen wrote:
Sat Aug 12, 2017 4:10 pm
I would buy 3 rental properties in nice neighborhood in Memphis, KC, Indy, etc.... Gross rents will be about $3,300 a month. The great thing about diversifying on days when the stock market is down you at least know some of your assets aren't changing in value that day.
OP lives in NorCal. He'd lose a ton of money on management fees. Long-distance landlording never works out.
Huh. Has worked out great for my family for over 20 years so it seems like until you actually do it you shouldn't be a naysayer, eh!?
What percent of your gross rent goes to management fees?

Between 6 and 10% in different cities with 8% being the most common. That's cheap for not being responsible for managing the properties in my opinion.

I know it's not the same thing exactly, but keep in mind on Bogleheads, we consider active management a rip-off and active funds are charging like 2.5-3 percent on average. You're losing 8 percent of your gross rents off the top before paying out any expenses. I consider aggressive rental screening and monitoring of repairman to be the crux of landlording. If you're going to farm everything out, what's the point of being a landlord. Just invest in an REIT at that point.

msk
Posts: 430
Joined: Mon Aug 15, 2016 10:40 am

Re: buying a rental property vs investing more in stocks

Post by msk » Mon Aug 14, 2017 4:25 am

Obviously the OP is a believer in capital appreciation for his local area. If he believes that a $950k home can, say, double within two or three years, then all talk as regards renting out at negative net income gets blotted out. Ask the happy owners during past years in any RE-hot city worldwide. But, frankly, this is speculation. You may be right, and laugh in a couple of years' time, or you may be wrong. No sensible arithmetic is relevant. Speculation also works with empty building lots. These require nil management and no plumber crises in the middle of the night. Just note that ALL speculation is market timing, so pretending not to wish to market-time stocks sounds a bit weak. Personally, I would pay off the mortgage on the home (2% mortgage does not sit well when OP has $100k cash earning 1%) and just lump sum any balance, including the $100k cash, into a stock ETF. VT would be my choice, diversified worldwide. Initiate "margin" on the brokerage account to cater for possible cash emergencies in future. Alternatively a home equity line of credit arrangement can also serve the same purpose if it can be made available at nil cost. Overall, I find brokerage margin more convenient, and cheaper if you are at the right brokerage (margin loans at Interactive Brokers charge 2.66% last time I looked).

Tamarind
Posts: 578
Joined: Mon Nov 02, 2015 2:38 pm

Re: buying a rental property vs investing more in stocks

Post by Tamarind » Mon Aug 14, 2017 6:17 am

OP reads to me less like someone with a passion for landlording or even RE speculation, and more like someone with more cash than they know what to do with. Great problem to have, but if someone gave me $300k my response would not be to take on a part time job or $600k in debt.

There are much simpler solutions, including knocking out a big chunk of the mortgage and adding to taxable investments. If the OP refrains from leveraged speculation they are well on the way to FI whenever they please.

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knpstr
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Location: Michigan

Re: buying a rental property vs investing more in stocks

Post by knpstr » Mon Aug 14, 2017 6:49 am

vanpan wrote:
Sat Aug 12, 2017 1:39 pm
Confused about buying a rental property vs investing more money in stocks.
Living in the SF bay area - being cash flow positive on a rental property is not possible given current prices, nor is it my aim.
I would NOT buy a cash flow negative property. If you want to speculate with appreciation, I'd advise to stay in the stock market.
:beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

jlcnuke
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Re: buying a rental property vs investing more in stocks

Post by jlcnuke » Mon Aug 14, 2017 7:07 am

vanpan wrote:
Sat Aug 12, 2017 1:39 pm

Assets
Current home value is : 1.2M ( have a loan of 340k left on it at 2%)
Current mortgage: 1500 a month + I put 500 towards pricipal
We max out 401k - current worth of 401K is 300K
Our taxable accounts have 400K in stock
100K in a savings account @ 1%
60K in a FD at 4% ( vests in early 2018)
You currently have $860k invested in the market. You currently have $860k in real estate equity. Thus, your current net worth is 50% stocks (presumably diversified across multiple industries, multiple market capitalization, and across every state and multiple countries) and the other 50% is in real estate (in one specific neighborhood, in one specific city, in one specific state).

Now, you've come into $300k and you'd like to further pin-hole your assets into real estate, in the same specific market, exposing your net worth to even more risk as a local market downturn would cause massive damage to your total net worth, and you'd like to do so by leveraging additional debt and guaranteeing yourself a negative cash flow (i.e. losing money) for some number of years on the "hope and dream" that maybe your expensive cost of living area will become much more expensive instead of the other way around??? You could just put the money on "black" in Vegas if you truly want to just risk it and your net worth on a gamble...

LarryAllen
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Location: State of Confusion

Re: buying a rental property vs investing more in stocks

Post by LarryAllen » Mon Aug 14, 2017 8:20 am

denovo wrote:
Mon Aug 14, 2017 3:41 am
LarryAllen wrote:
Sat Aug 12, 2017 9:34 pm
denovo wrote:
Sat Aug 12, 2017 6:14 pm
LarryAllen wrote:
Sat Aug 12, 2017 5:21 pm
denovo wrote:
Sat Aug 12, 2017 4:42 pm


OP lives in NorCal. He'd lose a ton of money on management fees. Long-distance landlording never works out.
Huh. Has worked out great for my family for over 20 years so it seems like until you actually do it you shouldn't be a naysayer, eh!?
What percent of your gross rent goes to management fees?

Between 6 and 10% in different cities with 8% being the most common. That's cheap for not being responsible for managing the properties in my opinion.

I know it's not the same thing exactly, but keep in mind on Bogleheads, we consider active management a rip-off and active funds are charging like 2.5-3 percent on average. You're losing 8 percent of your gross rents off the top before paying out any expenses. I consider aggressive rental screening and monitoring of repairman to be the crux of landlording. If you're going to farm everything out, what's the point of being a landlord. Just invest in an REIT at that point.
I think it's apples and oranges on the first part. Managing 30 rental properties would be a part time job which I am not looking for. Plus, I like geographic diversification so they are around the country. Not practical to be the manager with the route I have taken. Your point of going to a REIT is valid and I have considered it but I enjoy my limited involvement which enables me to find what I think are good deals to buy and also managing the property managers when I want to. With a REIT I wouldn't have that.

sharukh
Posts: 68
Joined: Mon Jun 20, 2016 10:19 am

Re: buying a rental property vs investing more in stocks

Post by sharukh » Tue Aug 15, 2017 12:54 pm

Things to consider:
1. I see from the OP, You dont have kids yet, your time will be fully accounted for when they show up.
2. How about getting more intrests, like play Tennis, learn to sail, ski, karate , guitar, cooking, baking etc...

I dont see you have earning,spending,saving problem. You are good financially. I guess adding more interests to your life is better choice, I believe.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: buying a rental property vs investing more in stocks

Post by Valuethinker » Tue Aug 15, 2017 5:18 pm

vanpan wrote:
Sat Aug 12, 2017 1:39 pm
Confused about buying a rental property vs investing more money in stocks.
Living in the SF bay area - being cash flow positive on a rental property is not possible given current prices, nor is it my aim.

Current situation :
Wife and me in early 30'S

Income
Me and the wife make base salary: 200K + 100K a year
Bonus - I get one which is roughly 30K year
RSU's - Roughly 100K of RSU a year

Assets
Current home value is : 1.2M ( have a loan of 340k left on it at 2%)
Current mortgage: 1500 a month + I put 500 towards pricipal
We max out 401k - current worth of 401K is 300K
Our taxable accounts have 400K in stock
100K in a savings account @ 1%
60K in a FD at 4% ( vests in early 2018)

Expenses / Savings
Roughly 7K a month ( school for kid + mortgage + other expenses, no car loans or any other loans)
Save roughly 6.5K a month in our taxable account buying FTSAX

Now I got a gift from my parents - 300K cash. Given we save every month in stocks, I am tempted to get real estate. Here are my options .....

Thinking of buying a property roughly 950K. I will put 350K down and take a loan for 600K. Roughly all expenses for the property will be about 4500 a month ( mortgage + insurance + hoa + property tax). The property is in a highly rentable area ( best schools, walking distance to apple campus etc). I should easily be able to get 3500 a month. Conservatively i will loose 1K a month on this. However, rents will probably rise in the future ( long term 10-year the horizon) and property values in the bay area keep increasing and rarely decline. If I do buy this property, I will reduce my monthly savings to taxable account to 5.5K instead of 6.5K. I may get some additional tax savings, but I am not considering it and keeping the math simple.

My other option is to divide the 300K into 10K chunks and invest it over a 30 month period. For the next 30 months, i will invest 16.5 K every month.

I don't want to keep it as cash, nor time the market.

Should I buy the property or keep adding to my taxable account or any other options?
The last thing I would do with a huge percentage of my wealth in housing in a market dependent upon one industry, tech, is sink more equity into that.

London housing prices are similar and our economy is much more diversified (national capital) but quite dependent on the financial services industry.

I don't feel like concentrating my wealth even more in London real estate.

Cap rates on residential here are below 5 per cent. Are yours any better? And you have to take a true net rental income. No cheating.

42k rent on 950k feels like about 4.5 per cent. Is that hugely attractive?

Ps with that mortgage at 2 per cent I would not be in a hurry to pay it off.

RJNetworking
Posts: 11
Joined: Wed Dec 23, 2015 8:33 pm

Re: buying a rental property vs investing more in stocks

Post by RJNetworking » Tue Aug 15, 2017 6:59 pm

LarryAllen wrote:
Mon Aug 14, 2017 8:20 am
denovo wrote:
Mon Aug 14, 2017 3:41 am
LarryAllen wrote:
Sat Aug 12, 2017 9:34 pm
denovo wrote:
Sat Aug 12, 2017 6:14 pm
LarryAllen wrote:
Sat Aug 12, 2017 5:21 pm


Huh. Has worked out great for my family for over 20 years so it seems like until you actually do it you shouldn't be a naysayer, eh!?
What percent of your gross rent goes to management fees?

Between 6 and 10% in different cities with 8% being the most common. That's cheap for not being responsible for managing the properties in my opinion.

I know it's not the same thing exactly, but keep in mind on Bogleheads, we consider active management a rip-off and active funds are charging like 2.5-3 percent on average. You're losing 8 percent of your gross rents off the top before paying out any expenses. I consider aggressive rental screening and monitoring of repairman to be the crux of landlording. If you're going to farm everything out, what's the point of being a landlord. Just invest in an REIT at that point.
I think it's apples and oranges on the first part. Managing 30 rental properties would be a part time job which I am not looking for. Plus, I like geographic diversification so they are around the country. Not practical to be the manager with the route I have taken. Your point of going to a REIT is valid and I have considered it but I enjoy my limited involvement which enables me to find what I think are good deals to buy and also managing the property managers when I want to. With a REIT I wouldn't have that.
+1

JBTX
Posts: 967
Joined: Wed Jul 26, 2017 12:46 pm

Re: buying a rental property vs investing more in stocks

Post by JBTX » Tue Aug 15, 2017 8:10 pm

A friend of mine and former coworker (and probably similar financial situation) years ago decided to buy and rent out a beach condo off the Texas coast. He painstakingly researched which ones had good rental history. He made a conservative budget / plan that showed he would st a minimum break even cash flow wise. He researched the reservation websites to figure out how to make his property come to the top of the search lists. He negotiated the price to an acceptable level. He bought it and best I can tell he nets 15k or so cash flow a year. He decided not to outsource the actual reservation process because third parties doing it aren't cheap and they ultimately don't really care. So he spends several hours a week doing reservations and other administrative stuff. Makes one or two trips a year to the location.

Not a bad deal for $15k per year cash flow, but that is what it takes to do it right. It is an active investment. If you aren't up for that then don't bother. I'm certainly not up for it. While I'd love the cash flow in retirement of some rental properties not sure I want to be a landlord.

While it seems like buddy has a decent deal going he says he isn't up for doing it long term. There is definitely a hassle factor he looks forward to getting rid of.

runner540
Posts: 296
Joined: Sun Feb 26, 2017 5:43 pm

Re: buying a rental property vs investing more in stocks

Post by runner540 » Wed Aug 16, 2017 6:09 am

Agree that buying property because you "know" prices always go up is speculation.
What about a college savigs fund for your child?

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