Do I need to be talked off the RE ledge?

[tmitchell]

Help me out here. Today is my first week of officially not having a job. Yay! I’ve admitted recently that I got a bit nervous landing the plane, so this question might just be part of that process, or maybe FOMO in the midst of a crazy market.

I can’t stop thinking I should add some kind of passive real estate to my portfolio (which is all 60/40 passive index). I was planning to eventually buy a house but for a number of reasons that’s looking like a future play, so I’m sitting on 250k in cash.

My career was intense and I was always on the road so I never got into the RE game. But now I have time to study and think about getting a SFH rental out of state. I would definitely hire a manager if I did that because I don’t really want to be a landlord on call.

There are other options like Fundrise or maybe a warehouse, etc…but it all seems way more complicated than my lazy portfolio.

So I guess my question is: am I barking up the wrong tree at this stage in the game? Or are there good reasons to add RE now (like at least having my own place to live if the world goes to hell)? Or maybe I am just tweaking because I’m fresh off the boat?

Appreciate your thoughts!

 

[ERD50]

The problem I see with RE investments at this scale, is such a total lack of diversification.

I buy ETFs/funds of hundreds/thousands of investments to spread the risk. It is not a good idea to have funds with specific investment risk like this. Unless you get lucky.

-ERD50

 

[rodi]

I notice you mention out of state. That's smart since, IIRC, you're in CA - land of overinflated, overpriced real estate. (I say that as a resident and owner.)

I personally would not be comfortable buying a rental someplace I couldn't deal with it without travel. My husband had a rental in Philly when we moved to CA. It was a PITA even though we had a pretty good management company. But part of that is probably because he's a DIY type and when stuff needed repairing he was worried it wouldn't be done right, and we were being overcharged. He was very relieved when he sold it.

 

[Magus]

Fundrise - look it up.

 

[Magus]

The problem I see with RE investments at this scale, is such a total lack of diversification.

I buy ETFs/funds of hundreds/thousands of investments to spread the risk. It is not a good idea to have funds with specific investment risk like this. Unless you get lucky.

-ERD50

Rent prices have only had 2 down years in 70+, both very small and short drops. Housing, especially rentals, is much more stable than stocks and in the current interest rate AND inflation environment I like much much better than bonds for income and inflation protection.

 

[Dash man]

Real Estate is local and markets vary wildly across the country. I’ve had rentals in another state (900 miles away) and wouldn’t recommend it. I was happy to get rid of it even though I had a great property manager. We did well with our local rentals, but am happy to be done except for a seasonal weekly beach rental.
If you don’t want to be a landlord, don’t be. Invest in a REIT.

 

[HI Bill]

As a former out-of-state landlord, there are a few risks that real estate poses:

Finding quality renters
Keeping the unit rented 100% of the time
Repairs and maintenance (difficult when out of state...need good handy man, plumber, electrician, etc.)
Tenant damage
Tenant lack of yard maintenance
When you're tired of being a landlord, you'll want to sell and will have to pay taxes on the depreciation you claimed along the way.
Given the purchase price, rent, taxes, management fees, repairs, etc., will you have a positive cash flow that justifies the $250K investment?

I bought a Maui condo, and rented it out for a year. The renter ended up getting a divorce, and couldn't pay the rent. He never maintained the yard, per the rental agreement, and he broke a mirrored closet door . Given that he didn't pay the last month's rent, I was on the hook for all of these. I ended up selling the condo shortly thereafter, at a very slight profit. But the hassle, worry, and risk of it all was just too much for me. YMMV.

 

[Jerry1]

You just retired. Give it a year and see if you still feel the same way. Find something else to do with your time. If you feel like you should get into real estate right now, look into something like a REIT. I know nothing about them but my point is, find a passive investment vehicle if you want some real estate in you portfolio right now. Start living your retirement life.

 

[captain3d]

Spend some time on BiggerPockets and listen to 20+ of their podcasts then see if you like the idea.

I have owned out of state rentals since 2008. Never seen them in real life. Happy with the results despite the inevitable kitchen fire or flood that some one else has to fix. I only deal with monthly statement tracking and get approx 20% returns.

Having said all of that by age 65 I do not want to own them and will be happy in indexes

 

[luckydude]

Help me out here. Today is my first week of officially not having a job. Yay! I’ve admitted recently that I got a bit nervous landing the plane, so this question might just be part of that process, or maybe FOMO in the midst of a crazy market.

I can’t stop thinking I should add some kind of passive real estate to my portfolio (which is all 60/40 passive index). I was planning to eventually buy a house but for a number of reasons that’s looking like a future play, so I’m sitting on 250k in cash.

My career was intense and I was always on the road so I never got into the RE game. But now I have time to study and think about getting a SFH rental out of state. I would definitely hire a manager if I did that because I don’t really want to be a landlord on call.

There are other options like Fundrise or maybe a warehouse, etc…but it all seems way more complicated than my lazy portfolio.

So I guess my question is: am I barking up the wrong tree at this stage in the game? Or are there good reasons to add RE now (like at least having my own place to live if the world goes to hell)? Or maybe I am just tweaking because I’m fresh off the boat?

Appreciate your thoughts!

Sounds like the $250k is burning a hole in your pocket.

You have just FIREd in an uncertain macro-economic climate (stock market correction, high inflation, supply chain issues, potential Fed rate hikes, etc.). Why rush into anything at all?

Cash is king right now (high inflation rate notwithstanding). Sit tight for now, and your substantial cash cushion will allow you to take advantage of plenty of investment opportunities in the coming months as various parts of the economy sort themselves out. Take your time to learn about rental RE and other investment vehicles to get into the RE space. If you're so inclined, look for houses that may satisfy your criteria for an ideal home for retirement. And if the market really tanks, forget about RE and swoop in and scoop up some equities on the cheap. Be patient and don't rush into anything. You've got plenty of time to find the right opportunity.

 

[Sunset]

OP - No, don't create work for yourself.

I'm thinking because you live in CA, you think houses will all go up in value, but CA is a rare place. Here our house is finally above our purchase price after ~20 yrs !
Literally if we sold it today, we would walk away with what we paid - zero profit.

I also have a rental and I'm wanting to sell my rental as I've done it for 20 yrs and it causes too much stress.

Landlords are not in control of the tenant, the city, the neighbors who may suddenly cause issues to the tenant, or the crazy guys that the came around one night and threw a rock through the front picture window and threw paint on the tenants car and my rental house !!

When I sell my rental, the money will go into VTI or SCHD or QQQ or all 3 and it will be relaxing.

 

[DrRoy]

I've read other posts about rental property. It seems like having a good or bad experience comes down to the tenants that you get. If a bad one, it's a money pit. I never wanted to roll the dice on it.

 

[FLSUnFIRE]

Friends and acquaintances I have with "passive" rental properties sure spend a lot of time and energy being "passive." Even with a property manager, you need to manage your manager.


I get it and feel some of the same feelings you have but I think personally owned investment property is best bought 10-20 years ago! If I were to buy an investment property, it would be local and I'd go in with one of my long-time acquaintances (no good friends) that have been doing it successfully for years if the right opportunity came up so I could learn from/leverage their experience. Mentally, my residence is an income property as I will definitely rent it out for positive cash flow when I move (not currently planned but if i find Ms Right or decide I want a less urban lifestyle).

 

[rwdflynavy]

I've been a landlord. Didn't like it.

My VTSAX is very well behaved, never has to be evicted. I'll stick with it.

 

[Badger]

I've read other posts about rental property. It seems like having a good or bad experience comes down to the tenants that you get. If a bad one, it's a money pit. I never wanted to roll the dice on it.

+1 I also had a few friends and a brother that had rentals. All with sad stories. The brother was in the same town and was handling it himself. He did what he thought was a good vetting of a family of four (both children were in school and the husband had a decent income). After about a year they moved out in the middle of the night with a couple of months rent due.
I thought he got off easy. I never would have rented in the first place. Too much trouble. I would rather cut back on my annual spending and eat beans and biscuits.


Cheers!

 

[Optionality]

Will echo the general sentiment here. For various reasons, mostly involving my wife's family members in some capacity, we have owned rentals. In theory, the rather stable returns are nice, although the risk of catastrophic damage (we had that happen), tenants stealing everything down to the washing machine cable (yes), flooding, costs of recarpeting, etc. etc., it was a lot of work for not all that much money.


A management company is a must if you are not nearby. But in that case, you will pay a fee that eats pretty heavily in your returns and pay top dollar for every small repair.

 

[mrfeh]

I view real estate as an unnecessary complication of my portfolio.

I have no doubt it works out very well for some people, but I don't need it; don't want to deal with it.

I'll stick with equities and fixed income.

 

[HawkeyeNFO]

I am glad I got out of the landlording business back in 2015. Especially given that the state and county (Montgomery County, MD) heavily favored tenants over the landlords on just about all of their policies and laws. Even moreso during Covid.

 

[tmitchell]

You just retired. Give it a year and see if you still feel the same way. Find something else to do with your time. If you feel like you should get into real estate right now, look into something like a REIT. I know nothing about them but my point is, find a passive investment vehicle if you want some real estate in you portfolio right now. Start living your retirement life.

Thanks everyone. Some really great points here to ponder. Especially yours Jerry1! I need to chill.

So hard shifting from earning/investing to chilling and spending!

 

[ExFlyBoy5]

All I will say is that my DW is in the R/E rental/management/marketing/underwriting business and has been doing this for about 15 years. She is involved in markets in over 20 states and 1000s of houses and oversees 100+ agents. This includes homes that have single dwelling owners as well as several investors (small and large). She knows this business very, VERY well. With her knowledge and insight we have decided that we DO NOT and WILL NOT physically invest in R/E anywhere. No way, no how.

As Jerry1 mentioned, there are a lot of ways to invest in R/E without the headache and REITs are a great way to do this. Also, if you are an accredited investor, there are some interesting opportunities out there that could be relatively entertaining.

 

[tmitchell]

All I will say is that my DW is in the R/E rental/management/marketing/underwriting business and has been doing this for about 15 years. She is involved in markets in over 20 states and 1000s of houses and oversees 100+ agents. This includes homes that have single dwelling owners as well as several investors (small and large). She knows this business very, VERY well. With her knowledge and insight we have decided that we DO NOT and WILL NOT physically invest in R/E anywhere. No way, no how.

As Jerry1 mentioned, there are a lot of ways to invest in R/E without the headache and REITs are a great way to do this. Also, if you are an accredited investor, there are some interesting opportunities out there that could be relatively entertaining.

Really happy to hear this from some one with core knowledge, thanks.

In terms of the accredited route are you talking, like, hard lending etc?

 

[Winemaker]

I have been a landlord since 1999, buying a duplex for DD and friend while in college. It opened my eyes to what a carefully purchased property could do in terms of cash flow and wealth. I was working 60+hours a week.
Two years later, there was a property advertised in local paper for a 4 unit townhouse style apartment building. Modeling my costs, I purchased the second property, BIG step for me and DW. A lot of work in between tenants, but totally manageable. The money invested, did not affect the money we ate and paid the bills with. BIG difference. When you need money to pay bills, and eat, you take the first person that waves fresh, green cash under your nose. When you pick a stock, you do due diligence, when picking a tenant, you do the same. I was a supervisor in over 10 industrial coal mines, supervising over 5500 men and women. I am a pretty good judge of character and work habits, I have only been burned 5 times in 23 years, for what I would have spent in fresh grapes in one season. Like any investment, you need to do your due diligence, and invest the money where you see fit. These two rentals I have, are a proverbial goldmine. It ain't for everyone, but everyone is different.

 

[NgineER]

I have 12 units (5 properties) , local, within 2 miles from my house. It’s been a great investment, 2 gut renovations, two partial renovations and one with nothing done to it yet.

I would not be comfortable doing out of state rentals because I would not have any control over tenants. All tenants we have chosen have been great. One inherited tenant has been terrible, but I can’t get rid of her yet.

Even though it has been great for us, you are at a stage where you’ve won the game. Invest the money wisely instead and don’t take on the learning curve of becoming a landlord at this stage in your life.

 

[Koolau]

As a former out-of-state landlord, there are a few risks that real estate poses:

Finding quality renters
Keeping the unit rented 100% of the time
Repairs and maintenance (difficult when out of state...need good handy man, plumber, electrician, etc.)
Tenant damage
Tenant lack of yard maintenance
When you're tired of being a landlord, you'll want to sell and will have to pay taxes on the depreciation you claimed along the way.
Given the purchase price, rent, taxes, management fees, repairs, etc., will you have a positive cash flow that justifies the $250K investment?

I bought a Maui condo, and rented it out for a year. The renter ended up getting a divorce, and couldn't pay the rent. He never maintained the yard, per the rental agreement, and he broke a mirrored closet door . Given that he didn't pay the last month's rent, I was on the hook for all of these. I ended up selling the condo shortly thereafter, at a very slight profit. But the hassle, worry, and risk of it all was just too much for me. YMMV.

I don't think you mentioned that local or state authorities can declare (as they did here during Covid) that landlords/owners can not evict anyone even though the renter has no intention of paying rent. Of course, owners still had to pay their taxes, mortgages, etc. but YMMV.

 

[clifp]

I think Jerry1 advice to give yourself some time is excellent.

I think HI Bill comments about the pitfalls of out of state real estate are also valid.

But, I'll make the case why it may be a good thing for you both psychologically, as well as financially.

I'm on year 23 of early retirement (at 39). I've done travel, volunteering, activities, chatting on message boards. It turns out I'm actually pretty good at investing and making money. I know I'm not the only old-timer on the forum who is. Being decent at making/saving money is pretty much a requirement for early retirement. I also find it intellectually stimulating. Beside real estate investing, I've also enjoyed Angel investing in startups. For me, RE investing, has made me feel productive, and I've certainly learned a lot.

Now don't get me wrong, financially the easiest and one of best thing you could have done in the last decade and arguably the century is put your money in Vanguard Total Stock Market and forget it. But A, that is boring as hell and B. Index funding investing is no longer a secret only understood by Bogleheads. Over the last 1,000 years following the herd has not been the path to riches. So I'm skeptical this is going to end well.

I have just over 1/2 my money in stocks, and bit of cash. But every time there is a new high, or another S&P 20% year. I shake my head and say this bubble is going to burst. I think we will see at least a 50% and possibly 75% drop in the value of both stocks and bonds. (This is only a 6% interest rate for Treasury bills). Now, if that will be next year, 5 years, or 50 years from now, I've given up predicting. I'm quite confident any timing prediction I make will be wrong. I think the next big bear market will also reduce the overheated real estate price on the West Coast, NYC, etc. and my hometown of Honolulu.

The one asset I don't think is overpriced is real estate in many areas of the heartland/flyover states.
Last week I bought a house in Kansas City, Mo suburb. Built in 1945, 3 bedroom, one bath, 1000 square feet, it is on 1/3 of an acre, it needs a lot of work Any guesses on what I paid?.

I will say once that it is fixed up, houses like it go for $100k and more importantly rent for 1,000/month. Which is still the 1% rule for real estate. They very much cashflow positive, especially if you borrow cheap money on your CA property.

Price appreciation has been historically inflation over the last 20 years, but with working remotely becoming a think, a decent chance we will much higher price appreciation.
A couple make $10/hour (40K total) can afford to live, there and so can a full Amazon worker making $15/hour. So while the value may drop during a bear market, rents won't drop much.

That's my bull case for out of state real estate.