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25 and trying to figure out which direction to take...
Old 10-05-2008, 12:55 AM   #1
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25 and trying to figure out which direction to take...

I have recently started "settling down" and thinking about the future. Unfortunately for me, I am far from well informed on investing for the future/retirement. I currently have a meager 401k through my employer of ~$10k. I am looking to start putting money towards investments and my future instead of going out on the town several times a week. I have been thinking a great deal about purchasing at least one house in the near future. The plan would just be to rent it to cover the mortgage. My thinking is the price for houses are super low right now in a particular part town around here with only upside in the future.
I guess I'm looking for advice from those with experience with this type of thing. I have $2000-$2500 extra per month to put away towards some time of retirement fund. Should I purchase a few houses and sit on them for a few years in a part of the state that should easily increase in value in the upcoming years? What kind of investment type should I be looking into? I play around with stocks but don't know enough about the process to be serious with it. Basically any help on what direction to take would be greatly appreciated at this point.

Thanks in advance!
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Old 10-05-2008, 01:45 AM   #2
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I will play the devil's advocate here.

First I get worried when I hear things like "My thinking is the price for houses are super low right now in a particular part town around here with only upside in the future" and "Should I purchase a few houses and sit on them for a few years in a part of the state that should easily increase in value in the upcoming years?"

How many people gambled and lost because they thought that there could only be an upside potential in the housing market? The housing market is for sure cheaper than it was 2 years ago, but is it really cheap? Do you have first hand knowledge of your local RE market to be so certain that it is cheap? If it is that cheap, why aren't people buying? Could it be because people expect the market to get even cheaper? It doesn't mean that you shouldn't invest in the real estate market, but you should definitely understand the risks before jumping in.

Second, how would you purchase these houses? Do you have at least a 20% downpayment? From the information you provided, you don't seem to have much cash available. Do you have an excellent FICO score? With the current credit crisis, those are prerequisites to getting a mortgage. And even then, it might not be easy.
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Old 10-05-2008, 01:55 AM   #3
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Originally Posted by FIREdreamer View Post
I will play the devil's advocate here.

First I get worried when I hear things like "My thinking is the price for houses are super low right now in a particular part town around here with only upside in the future" and "Should I purchase a few houses and sit on them for a few years in a part of the state that should easily increase in value in the upcoming years?"

How many people gambled and lost because they thought that there could only be an upside potential in the housing market? The housing market is for sure cheaper than it was 2 years ago, but is it really cheap? Do you have first hand knowledge of your local RE market to be so certain that it is cheap? If it is that cheap, why aren't people buying? Could it be because people expect the market to get even cheaper? It doesn't mean that you shouldn't invest in the real estate market, but you should definitely understand the risks before jumping in.

Second, how would you purchase these houses? Do you have at least a 20% downpayment? From the information you provided, you don't seem to have much cash available. Do you have an excellent FICO score? With the current credit crisis, those are prerequisites to getting a mortgage. And even then, it might not be easy.
I understand what you are saying about the RE market and such. My thoughts on the particular market I am referring to are the comparison to houses in about any direction from these. The widening of the highway into the greater Phoenix area from this area is only going to make it an option for those that cannot afford to purchase closer into the metro area. The comparable houses ~10-15 miles closer are $100K-$150k more. What is the worst that could happen if I have renters covering the mortgage for nearly the entire time I own the house/s? Sure it may be a bit tough to get multiple mortgages at the current time with how things are. I am in the process of getting at least one though and have been approved and all for that one no problem. I'm just waiting to find one I can settle on. I have some cash available ($20k in bank and $5k to play around with in etrade right now) I understand the housing purchase may be a gamble. I feel with the current conditions and the comparisons it's a little less risky gamble. Am I not in a position (having several years to invest) to take a bigger gamble at this point?

What would you suggest then if not looking at the housing market as an option? I have $2000-$2500 sitting around each month. What would you suggest doing with this?
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Old 10-05-2008, 03:11 AM   #4
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Welcome to the board, Perd.

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What would you suggest then if not looking at the housing market as an option? I have $2000-$2500 sitting around each month. What would you suggest doing with this?
First, park your bucks in the nearest money-market account and back away slowly with both hands in the air.

At the risk of preaching to the choir, I'll assume that you haven't yet completed the below steps. If you're partway through the process then just ignore the steps you've already taken care of and carry on from your present location.

After you temporarily stash your savings, begin by educating yourself and making a long-term investment plan. If you haven't already read them then I'd recommend starting with Bernstein's "Four Pillars" and "The Boglehead's Guide". There are a number of other books recommended in this thread: FIRE Recommended Reading List but start with those two. We'll get back to the list in a bit.

When you're reading about asset allocation and investment risks, think about your tolerance. You're young and your portfolio can recover from the worst bear markets, let alone from this one. However you also have to find a level of volatility that lets you sleep comfortably at night, or else you'll bail whenever the market burps. Everyone has their own comfort level, so try to find yours as you read those books. Maybe you'll be the landlord from hell, but you want to avoid being the landlord in hell.

Read more books from the above-mentioned list until you feel you have a handle on asset allocation and on selecting low-expense funds. Pick your asset allocation (perhaps 60% stocks, 10% bonds, 10% cash, 20% real estate) and decide what low-expense funds you want to use (index mutual funds or ETFs). Don't agonize too much over the perfect portfolio design or the ultimate fund, but you'll also get a number of suggestions from the board's other posters. Maybe you want to allocate a percentage of your current savings for a down payment on a personal residence in addition to your investment home(s).

If you haven't already, then set aside a few thousand bucks in a CD or a money market for an emergency fund-- whatever's the barebones minimum you need to live on for 3-6 months of a job search. Pick your 401(k) asset allocation, your IRA allocation, and the allocation of your taxable funds. Max out your 401(k) (at least to the employer match if not to the limit) and your IRA, then put the rest into your taxable funds.

Once you have your portfolio plan up and running, go back and read Bob Clyatt's "Work Less, Live More" and decide what type of ER goal you want to set. Maybe landlord fits well with your lifestyle, but maybe you'll decide you want to travel the world too.

If after completing all of the above steps you're still interested in landlording, then I'd recommend reading (1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and (2) Landlording by Leigh Robinson (7th edition or later).

The current real estate downturn will give you at least another year of great bargains, but I suspect that in most areas of the country you'll have up to 10 years to take advantage of ever-lower prices. I've been through one of those decades in Hawaii and IMO hardly any area is immune. Very few areas have reverted to their long-term average prices, let alone sunk into bargain territory. Your challenge is cash flow-- very few real estate books cover surviving the new tenant who becomes an unemployed squatter trashing the place, or the glut of rental homes that just don't rent during a recession. Or the highways that don't get built because the city/county is facing bankruptcy from lower tax revenues, underfunded pension plans, and soaring civil-service retiree healthcare expenses. Not that this necessarily applies to the Phoenix area. Not yet anyway.

Please keep in mind that this is the sort of advice that will set you up for the maximum employer's contributions to your accounts along with the compounding of your tax-deferred savings. If you get wiped out by a real-estate meteor then you'll be able to fall back on this safety net. But if you feel that you can't afford to invest the time in education, planning, and safety nets then I'm not going to try to change your mind. The board has plenty of experienced landlords (and some not-so-experienced ones, too). Hopefully you'll find their advice-- and their caution-- to be of use to your own career.
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Old 10-05-2008, 11:19 PM   #5
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What would you suggest then if not looking at the housing market as an option? I have $2000-$2500 sitting around each month. What would you suggest doing with this?
I agree with FiREDreamer on this one. If you buy property, you should only do so IMO if you can get a positive cash flow that gives you a decent return. The way to calculate these returns is described in numerous books you can buy online or get at your local library.

Essentially you take annual rent - annual expenses and divide that by the upfront investment you are making...being sure to include the opportunity cost of any downpayment. If that is not more than a return you're willing to accept (for me it would have to be 15% or more), then don't buy.

An alternative would be to purchase a duplex and live in one unit while renting the other. Stil you should do the analysis.

At your young age, investing in equities would be a better idea IMO, by dollar cost averaging into an index fund such as the S&P.

Good luck.

Dave
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Old 10-08-2008, 01:04 AM   #6
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At your young age, investing in equities would be a better idea IMO, by dollar cost averaging into an index fund such as the S&P.

Good luck.

Dave
Are you able to elaborate on this for those of us that are not so knowledgeable about these things? How would I actually go about doing this?

Thanks!
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Old 10-08-2008, 01:18 AM   #7
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Are you able to elaborate on this for those of us that are not so knowledgeable about these things? How would I actually go about doing this?

Thanks!
I just started doing this by opening a Vanguard account, putting the initial minimum into their S&P index fund ($3,000), and every month I'm going to put and additional $XXX into it. I'm doing this for multiple mutual funds through Vanguard. I believe dollar cost averaging is where you spread your investments out over time instead of buying it all at once, or trying to time the market.
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Old 10-08-2008, 01:22 AM   #8
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I just started doing this by opening a Vanguard account, putting the initial minimum into their S&P index fund ($3,000), and every month I'm going to put and additional $XXX into it. I'm doing this for multiple mutual funds through Vanguard. I believe dollar cost averaging is where you spread your investments out over time instead of buying it all at once, or trying to time the market.
Yes, I've got the dollar cost averaging down, but am unclear on how I actually go about doing the entire process. This isn't something I can do through either my E*Trade or Scottrade account. Right? I need to do it through my Fidelity or ING?
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Old 10-08-2008, 11:17 PM   #9
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Vanguard is a company all in it's own...so youd open a vanguard account. Or just do the same in Fidelity's total stock market index, s&P fund, or whatever...it's really all the same at this level...Fidelity vs. Vanguard is like splitting hairs
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Old 10-09-2008, 11:10 AM   #10
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I have been thinking a great deal about purchasing at least one house in the near future. The plan would just be to rent it to cover the mortgage. My thinking is the price for houses are super low right now in a particular part town around here with only upside in the future.... Should I purchase a few houses and sit on them for a few years in a part of the state that should easily increase in value in the upcoming years?
Personally I wouldn't buy heavily-leveraged multiple homes in the hope of flipping them for a 'sure-thing' profit. That sort of gamble hasn't worked well over the past couple of years. But that's just my opinion, and I don't know what the future holds. Your plan might work, only time will tell.

More to the point: you may have heard that there is a global liquidity crisis and banks are increasingly reluctant to advance large sums for just about any purpose, let alone real estate speculation. I suspect that a 25-year-old with (apparently) limited assets may have difficulty qualifying for multiple mortgages. Who knows though, go try one or two local banks and see for yourself.

The good news is that the get-rich-quick-from-no-money-down-real-estate pitchman are currently having trouble filling seats at their seminars, so you can probably get a discount rate. Also, copies of their books will be available cheap at many garage sales!
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Old 10-09-2008, 12:30 PM   #11
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Vanguard is a company all in it's own...so youd open a vanguard account. Or just do the same in Fidelity's total stock market index, s&P fund, or whatever...it's really all the same at this level...Fidelity vs. Vanguard is like splitting hairs
I understand Vanguard is just a different company than Fidelity and so on.

I'm just trying to understand, Do I just call up one of them and say "I'd like to put $1000 per month towards...." Towards what? I tell them I want dollar cost averaging for S&P 500 or what is it exactly I tell them when I speak with them? I'm completely uninformed on this subject and until I have time to read/learn about the subject I need to do something with the $. It's not as simple as putting $XXXX per month into VFINX in my E*Trade account right?

Thanks so far and for anyone that could help even more to clarify for me!
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Old 10-09-2008, 12:47 PM   #12
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It's not as simple as putting $XXXX per month into VFINX in my E*Trade account right?
It has been that simple for me with Vanguard.
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Old 10-09-2008, 10:25 PM   #13
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goto vanguard.com and read around a bit...research the funds til you find the one you like


then, call vanguard and speak to an adviser. tell them your intentions and goals. they should help you get set up

it really IS as simple as saying "I want to put xxx per month into VFINX after I contribute this $xxxxx I have. Can you help me please" they'll square you away...just give em a call

then, online, you can contribute as often as you like, either manually or automatically. again, an adviser at vanguard can walk you through it the first time so you can figure it out


does that answer your ??
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