My first investment-Real Estate vs. Stocks

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My first investment-Real Estate vs. Stocks

Dan Giungi
Newington, CT · Member since 2016 · 9 posts · 2 votes

Hi! I'm hoping there's a few people on here that can give me a little guidance. I'm 26 and just starting to seriously look into real estate investing as a vehicle to become financially independent and fund my retirement. However, there's a few different factors in play and I'm trying to figure out exactly how to strike a balance between them. I'll give a brief background below to provide some context.

Through the course of my work I've worked with a number of landlord, real estate investment and property management groups, so I have a strong working knowledge of the fundamentals and I know it's not as easy as many beginners might think. However, the idea of building my own business through real estate and becoming financially independent is intriguing and what I've always wanted to do.

I've been saving money in a standard savings account that accrues minimal compounding interest. 

I don't have stocks or bonds. However, in another year I'll be vested in a pension through my employer and they will make automatic contributions without a required matching contribution from me. 

I have enough money in my savings account at this point to make between a 10-20% down payment on an investment property with enough left over for a substantial reserve fund.

This is my dilemma: I'm stressing out about not having any money invested in stocks and feel like I might be missing out on compounding interest. Should I take part of the money in my savings account and invest in stocks, then build my savings back up to make a down payment on an investment property? Or should I stay the course, hold steady and purchase a quality investment property with a strong ROI and then begin investing in stocks while building equity in the property so I can use a home equity loan in the future to acquire another property. 

Any advice or experience would be greatly appreciated, thanks in advance!

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Daniel P Willis
Investor · Rexburg idaho · Member since 2016 · 68 posts · 18 votes
9y

@Dan Giungi  I think that that is an excellent question, but I think you're looking at it from the wrong point of view.  Investing in stocks and investing in real estate have two different goals. With stocks the bulk of your wealth is built through capital appreciation as the stocks that you have purchased grow in value so that they can be sold at a later date, yes there are dividends associated with  stocks however these dividends are usually in the lower percentage yield around 2 to 3%. Another thing to keep in mind is that dividends are not guaranteed, though you can find companies such as Disney that have reliably Paid dividends over a long period of time such as 30 years. 

            Real estate can be used to gain wealth in different ways, you have of course flipping a house or property, but you have rental income which is a passive flow of income that comes from renting the real estate property you own.  That passive income is similar to dividends in the essence that you receive money from money that you've invested but different in the yield you should see from your investment, were dividends would yield somewhere around 2 to 3%, on average a rental property you could yield anywhere from 8 to 20% and higher depending on your area and the way you leverage funding.  There are of course so many different examples that you could fill a book, or many,  but the main point that I'm trying to make is that I would sit down and think about what your goal is for the money that you have set aside. Do you want that money to gain in appreciation or do you want that money to bring in a passive flow of income, yes both real estate and stocks will do both however  stocks are more geared towards appreciation whereas real estate in terms of renting is more geared towards passive income. So if you want a passive flow of income I would consider coming up with a solid real estate plan and going from there, if you'd like to see your money gain an appreciation then I would consider coming up with a solid investment plan  in regards to the stock market with stocks and bonds in similar investments like that. Hopefully this has been helpful, good luck and keep us posted on what you decide and if you have any questions!

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    10y

    Dan,

    Use the money for a down payment on a property with a strong ROI. when the company starts the plan for you, usually they match what you put in. up to a certain amount. If they are going to be contributing even if you do not put anything in like you said, i would still contribute at that time, a certain percentage of your paycheck. Hopefully the property will make you enough that the amount you have taken out of the paycheck you will not notice a difference. don't forget the money that comes out of your paycheck towards your 401k or whatever vehicle, is before taxes, so you will not be taxed on that amount until you retire and start pulling it out.

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  • Daniel P Willis
    Investor · Rexburg idaho · Member since 2016 · 68 posts · 18 votes
    9y

    @Dan Giungi  I think that that is an excellent question, but I think you're looking at it from the wrong point of view.  Investing in stocks and investing in real estate have two different goals. With stocks the bulk of your wealth is built through capital appreciation as the stocks that you have purchased grow in value so that they can be sold at a later date, yes there are dividends associated with  stocks however these dividends are usually in the lower percentage yield around 2 to 3%. Another thing to keep in mind is that dividends are not guaranteed, though you can find companies such as Disney that have reliably Paid dividends over a long period of time such as 30 years. 

                Real estate can be used to gain wealth in different ways, you have of course flipping a house or property, but you have rental income which is a passive flow of income that comes from renting the real estate property you own.  That passive income is similar to dividends in the essence that you receive money from money that you've invested but different in the yield you should see from your investment, were dividends would yield somewhere around 2 to 3%, on average a rental property you could yield anywhere from 8 to 20% and higher depending on your area and the way you leverage funding.  There are of course so many different examples that you could fill a book, or many,  but the main point that I'm trying to make is that I would sit down and think about what your goal is for the money that you have set aside. Do you want that money to gain in appreciation or do you want that money to bring in a passive flow of income, yes both real estate and stocks will do both however  stocks are more geared towards appreciation whereas real estate in terms of renting is more geared towards passive income. So if you want a passive flow of income I would consider coming up with a solid real estate plan and going from there, if you'd like to see your money gain an appreciation then I would consider coming up with a solid investment plan  in regards to the stock market with stocks and bonds in similar investments like that. Hopefully this has been helpful, good luck and keep us posted on what you decide and if you have any questions!

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  • Rosston Smith
    Investor · Warner Robins, GA · Member since 2015 · 1k+ posts · 490 votes
    9y

    Do real estate. Investing in stocks is more difficult and requires more involvement. 

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  • Matt B.
    Investor · Bethlehem, PA · Member since 2016 · 229 posts · 122 votes
    9y

    invest your pretax income in stocks and mutual funds through your retirement plan (401k), invest your post tax cash into properties for cash flow. That's what I do. 

    You should know that stocks currently trade 20-30x their next year projected earnings. Seems over inflated to me. Get ready for another correction soon. 

    Also, you should consider the fact that you can't buy 100k worth of stocks with 20k. But you can buy 100k worth of real estate with 20k. 

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  • Dan Giungi
    OP
    Newington, CT · Member since 2016 · 9 posts · 2 votes
    9y

    Thanks for all your input, much appreciated. I'm currently looking at a duplex in an area that has a low vacancy rate and is known for attracting higher quality tenants. The duplex is FSBO and they are asking $340,000.

    This is significantly more than I initially considered spending. However, both units are currently occupied and the leases expire in May. I did some quick math. I would be able to collect enough rent to cover the mortgage in full and get a small amount of cash on cash return. I would set aside any revenue from the property to bolster my reserve fund. 

    Once the leases expire, my plan is to rent the larger unit and move into the smaller unit. I would get a roommate and charge them enough rent to cover the remainder of the mortgage not covered by the larger unit. Even if the property ceased to cash flow at this point, I would be able to live for free and save more money at a faster rate for my next property. 

    Do you think this would be a good first step? 

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  • Account Closed
    Dordrecht, Zuid Holland · Member since 2016 · 27 posts · 4 votes
    9y

    Hi Dan, it could be a good start I think since you would be able to live rent free and start paying off the mortgage on this first property and / or start saving for buying another one. And you have to live somewhere right. 

    Also you can learn the ropes. Only downside or maybe is the proximity to the renter.

    Stocks is a whole different ballgame. I started in stocks and have a simple strategy which works well. And I am now looking to get into real estate. As diversification and as a way to get a more steady monthly cash flow. For stocks I buy for the long term,  dividend paying stocks and sell call options for extra income. Before I buy a stock I mostly first sell a put option. dividends I reinvested and this is now going to my first real estate project. So my advice is do both. If you have not as much experience do some research on ETF's , low cost and easy to maintain. Don't try to predict the market. Just follow a simple strategy that suits you. 

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  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    9y

    @Dan Giungi 

    I would suggest starting a Roth IRA to go along with your pension plan. My employer also offers a pension, which is great, but it will hardly offer me the kind of retirement with which I dream.

    Since you are 26, you have 30-40 more years for the investment to grow. Since you have saved enough to put a 25% down payment on a $340,000 property, the small bite to your savings from the Roth will be almost unnoticed.

    Also you can withdraw the contributions you made to your Roth without penalty in the future if you decide to use that money to invest in RE.

    I personally have my TSP (equivalent to 401K), pension, Roth IRA, and I invest in real estate.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y

    I think you have much more control (for lack of a better term) in real estate than the stock market and the ability to apply leverage and have multiple income streams create a more broad and profitable vehicle in my opinion but you could also state with some accuracy that I have bias.

    That said, I would be more concerned with your second post. You state the income would cover the mortgage with a small amount left over. That small amount likely won cover operating expenses and capital expenses. Be sure you account for all expenses (those that occur monthly and those that are guesstimated over a period of life span. Ignore them at your peril.

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  • Tim O'Chenko
    Real Estate Agent · Venice, FL · Member since 2016 · 2 posts · 0 votes
    9y

    Hi Dan. This is a great post & many astute responses. I personally struggled with this issue myself at your age when I first started investing in real estate, so I'll briefly share my take on this issue. I was initially heavily committed to traditional investing. I still think investing in the market can be and still is a sound and rewarding option for many, but there's just nothing like else real estate to grow wealth and establish cash flow or income. Now after over 16 Years of real estate investing I would advise you to go all in towards real estate at this stage and keep your stock market dabbling to a minimum. If your employer offers matching of contributions then I would contribute exactly the minimum amount necessary to receive that awesome matching benefit because that's free money. But then I wouldnt invest a single penny over the matching threshold and funnel everything else into real estate. The popular investment culture over sells the market as an arena for investment structures such as the IRA, 401ks, etc and it's peddled as conventional wisdom. This is decent advice for every day folks who choose to live paycheck to paycheck, or who can't summon the will power to save or invest, let alone take the risks of starting their own business. Obviously you have a higher vision for your own future just like everyone else here. It all comes down to cash flow. As others have responded, real estate benefits from healthier margins than other investment or business models. Once you sit down and do the math you just can't deny that the advantages of real estate investing outpace playing the stock market. As my real estate portfolio expanded and matured I eventually started shuffling more funds into retirement accounts as now I have more disposable income (which is the direct result of wealth created from the cash flow from my previous real estate investlents started years ago). You always have the option of returning to stocks and other investment vehicles to diversify your wealth after you've grown your real estate holdings. In the early growth stages it makes more sense to channel precious limited resources to your real estate.

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  • Marcus Johnson
    Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
    9y
    Why not do both, but it scares me when you say investing in stocks. Stocks are individual investments in one company. If that company had a bad year you can lose a lot of money and get worried and sell at a loss. If you invest in index funds or the S&P 500 historically your returns will be 11% and it doesn't take any work all you do is just do automatic deposits into your vanguard index funds and watch it grow over time. If these are Roth IRAs when you retire there are no minimum required distribution's and all of your earnings or text free. Since this is a real estate for him you probably won't get this advice. I myself have Real Estate buy and holds that cash flow each month I have 401(k)s and I have Roth IRAs. I am well diversified so that the market does go down in one area the other areas can handle the load. Good luck
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  • Nathan B.
    MO · Member since 2015 · 8 posts · 0 votes
    9y

    i would build income through the real estate, Flipping or renting.  Then, you can take your profits to invest into the stock market.  

    Its a win/win situation.  Over time you will be able to compound your real estate portfolio and stock portfolio.  

    This is just in my opinion.  You will see growth a lot faster through real estate in theory than buying and holding stocks.  The real estate can fuel a lot of compounding to your stock portfolio. 

    Though, look into a hard money lender.  All you need is like 10% down and you could easily get funded for purchase and rehab money to flip a house, or rental.

    They dont report to your credit, if you somehow mess up and lose money on the investment.  They just take the property, and you lose the 5-10%. 

    Idk your real estate knowledge/background. Learn about how the closing works. Learn about REO properties. Learn how permits work in general.. (such as. Get a demo permit. Always getting an architecture to draw up plans. So, you can submit them to city hall. This allows you to properly tear down walls, and rebuild to the plans approved by an architect. So, added dimensions will be correct for a future sale. Framing, electrical, hvac, plumbing drawings and permits are also required, if you open the walls and touch and move the 'subject at hand'. however the trades will draw up the permits and submit them. They are liable if there is an electrical fire and etc.. and, they all need to get a "close inspection" before drywalk covers up their work. Then, sometimes you need a drywall inspection before the mud is applied. You need footings and deck inspections too, if you redo or build these things. Kinda is included in the framing inspection.

    *if you dont properly follow permits and code of your township.  They can make you re-open up the drywall and redo the work again."

    Becareful with and always clean up lead paint, and other hazerdous materials e.g.  if you scrap lead paint off a building.  Epa can come by and citation you, if the area worked on is bigger than a 20ft sq area.. fees, license would be required if caught, etc.. 

    Then, on top of that you need to understand construction, if u do a lot of the work yourself.  

    Learn about basics of a room to be a room.. such as a bedroom.  Needs to be at least 10x10, one closet and one window to become a bedroom.   To have a bedroom in a basement, usually will require the same conditions plus the egress window, if window will be at ground level... 

    It becomes simple over time, but the physical labor is the hardest.

    gl seems like you are on your way.

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  • Jody Davis
    Investor · West Point, MS · Member since 2015 · 19 posts · 3 votes
    9y

    @Dan Giungi  One thing to keep in mind is that if you go with a full brokerage (Edward Jones, etc.) you will be able to borrow against the assets in your account.  It is typically 50% of the market value but could be even less.  This is the best strategy to get the best of both worlds.  Keep in mind, this is on margin, so if the value of the stocks tumbles, you will be required to put up an additional amount of money to not have the securities sold.  The best policy is to always stay well under the 50% that you could borrow up to.

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