Debt free, but how should I invest the money?

[averagejoe]

My wife and I are mid 30's, debt free, and we have a rent free apartment as part of her compensation. We only make roughly 90k annually combined. Our 401k's are also low, combined at 50k. We live fairly humbly, and are interested real estate investments.

Seeking insight from those who may have ideas on how, or in what to invest.

Also need advice on Roth IRA.

Thank you!


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[Senator]

Max out your 401Ks. It will be tax-deferred, and might get a match. Use a market based S&P fund.

Max out your HSA, if you have one. Then, never take any money out. It is deducted right from the top line income, and you do not even pay FICA on it. And, currently there is no time limit to spend it. Take it out when you are 65 if you want to reimburse yourself from 2015 expenses. Invest it in S&P investments.

Contribute to a Roth IRA. Do the max every year. S&P 500 investments.

Then, go crazy with the rest!

You could invest in a rental, but that is a much larger discussion than a single post.

 

[Animorph]

Are you looking primarily for stock/bond or real estate advice?


401k's and Roth accounts are great if they offer you good investments (low cost, broad index funds) and you won't need the money until after age 59.5 . Be sure to get any company match available to you. If your taxes are higher now than you expect to pay in retirement, then tax deductible contributions to the 401k are probably best. If your taxes are low now, a Roth account lets you save more after-tax value than a traditional IRA or 401k. It is good to have a combination of the two so that when you start withdrawing you can fill the lower tax bracket(s) with taxable retirement account withdrawals and use the Roth to fill in the rest of your expense needs. But it's all just tax planning, and very much specific to your circumstances.


I'm not a real estate investor. As for stocks, a simple target date retirement fund (with low expenses) or "lazy" portfolio is a great start. At your age bonds are somewhat optional, depending on how comfortable you are with market downturns. For equities, some combination of a Total US Stock Market index fund and an All World ex-US index fund (70%/30% for example) is a simple place to start.

 

[NgineER]

Max out your 401Ks. It will be tax-deferred, and might get a match. Use a market based S&P fund.

Max out your HSA, if you have one. Then, never take any money out. It is deducted right from the top line income, and you do not even pay FICA on it. And, currently there is no time limit to spend it. Take it out when you are 65 if you want to reimburse yourself from 2015 expenses. Invest it in S&P investments.

Contribute to a Roth IRA. Do the max every year. S&P 500 investments.

Then, go crazy with the rest!

You could invest in a rental, but that is a much larger discussion than a single post.

Do what senator says, but I'd do a traditional 401(k) into the 15% tax bracket and then do the rest as Roth 401(k), invest in Roth IRA and HSA. save for emergency fund and then get going for 25% down on a rental.

 

[pb4uski]

I like the above... but you're probably still in the 15% tax bracket (which would be $95,500 in 2015 for MFJ with standard deduction) so I would max out HSA if you qualify for one and make 401k contributions only to the extent to maximize any match, then max out Roth and then save taxable after that.

If you must do investment real estate, invest in a REIT or commercial property and save yourself from the hassle of residential rental real estate.

 

[Moneytree52]

Multi-unit residential real estate is the shortcut to early retirement. You truly can buy just one large enough property and 95% retire within 12 months. There are still ways to do this with little or no money down. Of course, if you have savings, 20 to 30% down is still the traditional way.

Multiple units is the key, ideally over 30. This spreads the vacancy and damage risk over much larger income, and allows you to hire a manager to handle the day to day duties. You then just manage your manager.

[MOD EDIT]

Good luck!

 

[okie]

DW and I are both in our low 30s with no debt. Will have what's left of our mortgage (50k) paid off by February of 15'. We max out our iras each year for the tax benefits and I agree with the others on maxing out all tht you can. The only reason I am chiming in is we have a rental property. The only reason we have it is because it's paid for. I once had a rental that I had a mortgage on and when it was all said and done I maybe made $50 a month. I eventually sold it because I hated the issues and problems that came along with being a landlord while only making $50 a month. Obviously there are those that see a light at the end of the tunnel where the tenants make the payments over 15-30 years and then it's paid for. That was not for me. I either want to own it outright or not have it at all. Our rental now tastes a lot better because it's 100% income. I net $1000 a month on a $92,000 house.

Never become a landlord by default. Do it because your ready to do it and be prepared to deal with some BS every now and then. Good screening and legal docs for the written lease. Also, I will only rent out a place that I would be proud of and live in myself. No crap areas or tenants. My last two tenants have both been professionals that make over $100k a year both with good credit and references.

Last thing make sure that you either have an LLC and have a good umbrella policy in place. 1million is good. In case black mold grows somewhere in the house and you get sued because someone gets sick or worse, dies... They'll take all you've got in a settlement and more. If you have an umbrella policy you'll be covered. We pay $300-400 per year for a million dollar umbrella that covers our primary residence as well as our rental. Its also a write off on the rental.

Biggerpockets.com has a lot of good advice for real estate investing. Also start small to get you feet wet. Too big too fast has sunk many investors. I don't also don't want more than one rental at this stage of my life with work, kids, church etc we don't have a lot of spare time and I don't want to hire a manager to screw me over. Ideally id like 20 or so. But not with a busy family life.

 

[averagejoe]

Thank you all for the great input. We are each putting 20% into 401k (mine matches .05, hers matches .06). We put a higher % to compensate for not making a ton. We will start and fully fund an IRA in January. Any great companies you like? In my research, Vanguard, and a few online firms (scottrade etc) seems solid.

The vision with real estate is to start with a small residential, and expand into commercial property. Assuming we get the mortgage and insurance back in rent, we would also pay the mortgage monthly as if it were vacant. Taking the equity or profit from a sale and applying it to another property. Or is this method ill-advised? Someone mentioned forming an LLC...we had considered that, so thank you for the advice! I agree that applicant screening and qualification would be paramount, with strict parameters.

Thank you!

Aside from Roth and 401k, should we be in other forms of the market?




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[ronocnikral]

Multi-unit residential real estate is the shortcut to early retirement. You truly can buy just one large enough property and 95% retire within 12 months. There are still ways to do this with little or no money down. Of course, if you have savings, 20 to 30% down is still the traditional way.



Multiple units is the key, ideally over 30. This spreads the vacancy and damage risk over much larger income, and allows you to hire a manager to handle the day to day duties. You then just manage your manager.



[MOD EDIT]

Good luck!

Sounds like the dubbya word to me. But glad it works for you.

 

[NgineER]

Thank you all for the great input. We are each putting 20% into 401k (mine matches .05, hers matches .06). We put a higher % to compensate for not making a ton. We will start and fully fund an IRA in January. Any great companies you like? In my research, Vanguard, and a few online firms (scottrade etc) seems solid.

You can contribute to a 2014 Roth until April 2015, do that first and then start contributing on the 2015, you have until April 2016 to do so.

Vanguard is a great place for index investing.

 

[phil1ben]

You do not identify what area of the country you live in. However, here is a good way to get started. If you live near an area that people like to visit for weekends or on vacation, see if there is a small home you can purchase and rent out for vacation rentals through VRBO or Homeaway. It is very important to pick the right home. Keep in mind owning a vacation rental is not carefree. The benefit is that you will have tenants leaving each week so you can inspect, however, you will need to deal with numerous rental inquiries and must prepare the home each week for a new tenant. We have found the return to be very good PROVIDED YOU ARE IN THE RIGHT LOCATION AND HAVE THE RIGHT HOME. We have five of these near where our primary residence is and we self-manage them. I still work full-time and my wife manages the units as her job. It is a good way to get your feet wet if this is of interest to you. You might start by searching the above websites to see which vacation rentals are currently available in your area. There is a fair amount of work involved here but we are realizing 15% annual returns in each of the last five years and the properties have appreciated in value. Research this concept carefully before proceeding.

 

[2B]

My standard advice to people new to investing is to read two books. The first is Andrew Hallam's Millionaire Teacher. The second is William Bernstein's Investors Manifesto. Both will discuss index investing. Neither would point you towards real estate investing.

I've known several people that were big on rental units. It's a lot of work no matter how you do it. Multifamily properties can be lucrative but it's also a horrible place to learn on the job. You're making big investments with little experience. You don't know what you don't know and this will inevitably cost you big bucks. Real estate also comes with the added disadvantage of being non-geographically diversified. If your little section of the world collapses, so does your investment even if the rest of the country is doing well.

For equities, I am entirely in index funds with Vanguard except for some employment related index funds in company plans. I'll drain these ASAP after I retire.