My wife and I recently closed on a house in Omaha, NE at $155,000 using a conventional loan. Since the closing/move, I've read a few books including "Set for Life". So as it stands now we are planning on saving $1,500/mo towards making our first investment towards wealth in 2021. Assuming we stay on track, we should have a savings of $24,000 by January 1st, 2021.
My question is, what is the best next step to gain early financial freedom? I know investing in an index fund while continuing to add savings would appreciate quickly, but I also know to jumping into REI will fast forward that process dramatically. I'm just unsure what would be the best way to go about that, practically.
If you had $24,000 in savings, at a savings rate of $1,500/mo, already owned a home and are trying to become financially free... What would you do?
@Jeremy Morton the wealth you accumulate through index funds will be a much slower process versus investing in real estate. If you practice the BRRR method you can refinance each investment property and grow your wealth much faster.
@Nate O. Good note. I think the next wise step from where we are now would be to BRRRR with a multi unit. What are the advantages and disadvantages of using an FHA loan for a smaller down payment vs. taking longer to save 20%?
@Jeremy Morton I wouldn't over think it. I would suggest getting into a multi unit with an FHA loan since you can get into this property with a much lower down payment. The other tenant or tenants will be helping you pay down your mortgage and then after a couple of years you can move out and Walah! you have a multiunit property that is paying for itself and you can start the whole process over again.
@Jeremy Morton In my opinion stocks should always be a part of your strategy (whether through index funds, mutual funds, individual stocks, whatever) but look at those as long term investments and consider funds that pay dividends. However, I think in your younger years (prior to 50) you should put most of your money into real estate as it will grow your wealth much faster.
Once again this is just my opinion and my strategy. Go over what you think works best with you and what your goals are!
@Nate O. Sounds very ideal! Thanks for the pro tip
I like the idea of investing more in real estate while young. I think the plan right now is to keep that my focus for now, and as my portfolio grows start looking into more intentional diversifying stocks.
Be aware that index funds are generally for long term hold and slow but steady (ish, subject to market volatility) growth through compounding interest. Traditionally the market as a whole grows about 7-8% per year on average. There will be periods where the bottom drops out though and all you incur are losses.
From the reading and financial education I've taken on, finding low cost index funds are a good place to park money that you don't plan on using for 20-30 years. Key takeaway being LOW COST - you want to pay 0.2% or less in a Management Expense Ratio (MER). Also, avoid individual stocks. They are much more risky and leave you less diversified and thus more greatly exposed to risk in those industries/companies.
Everything I've learned backs up the philosophy that having real estate properties in your portfolio help accelerate your financial goals tremendously. Keep saving (that's rule #1) and diversify between real estate and tucking away long-term savings in index funds. Good luck and good on you for thinking about this early in life!
@Jeremy Morton have you considered house hacking? If you purchase a duplex and live in one side you reduce your housing costs. This money can then be added to your savings rate.
This is what I did. I had a sfh. Moved into a duplex and rented out the house and the other side of the duplex. Now I have three duplexes, live for free and have $2600 in cash flow. (Along with no rent/mortgage)
This is enough to cover my living expenses so now my W2 income is 100% saving rate. (Saving =investing)
Yes that would be very ideal! Big thing right now is convincing the Mrs. to buy into that plan haha
@Jeremy Morton I am currently heavily real estate but over time I will diversify back to likely more 50/50 real estate and the rest broad stock market investments that I will let ride for 30 years.
If I were you I would do something like that but also invest in the market. You don’t want to be overly weighted one asset class.
In real estate I am finding the returns are greater when things go well and much worse (negative) when things don’t. Over time it averages out but I’m just saying that’s been my experience
@Jeremy Morton I came to bigger pockets by the way of the FIRE strategy/the Mr. Money Mustache philosophy—I’m a big fan of vanguard and indexes generally.
I'm just starting on my REI journey, but you can definitely increase the velocity of your money MUCH more quickly with REI than with indexes (thanks to refinancing strategies). That said, I still invest in indexes with part of every paycheck. Whether that is ‘optimal' idk.
If you lower your cost of living enough it’s definitely possible to retire early on indexes via the ‘safe withdrawal rate’.
Invest in rentals in your local area. Buy then spend time-saving for a down payment then buy again. Do this for 10yrs. Boom there you go. No one wants to get rich the slow way everyone is trying to speed the process. Slow and methodical is the way to win the game. For me, index vs real estate comes down to control. I have zero control in stocks. I have much more control with real estate.
@Frank Wong very well said. Appreciate it Frank
I would suggest starting a business. That is where the money is made. Then, deploy those funds back into the business, real estate and the market.
I don't feel that stocks and direct owned real estate are alternatives for the same goals. One is very passive and the other is active (like a tiny business). Your goals will need to include how active you want to be in the strategy. There are tons of FI'ers who have no interest in sourcing or managing real estate...they follow some version of the 4% rule and use index funds to meet their goals.
@Jeremy Morton Congratulations on getting your first property. I am also in the Omaha market and when started out I bought a house a year, for three years moved into it then rented out the previous one. So it was fairly easy to pick up some rentals to start. I did it this way because at the time I didn't have as much income and the banks were easier to work with when I was buying as an owner occupant, I also got a better rates. This was before I was married so my two roommates would just move with me to the next house it worked great. (I think you said you are married so this plan may not work as well). Real estate should yield better returns, you also have leverage which will expedite the process to FI (when used correctly) plus when you buy hopefully you are buying at some sort of discount. My personal strategy is to be in both. Index funds are much easier to liquidate if necessary, they are also much easier to buy and they wont call if the toilet breaks. I think both have their place and both are good for different reasons. Maybe see what you can do to grow the gap between your income and expenses so that $1,500 can turn into $1,800, then $2,000 plus. The higher that number is the shorter your path to FI will be.
@Chris Egan solid to see someone else from the big O. Yeah, I’m figuring the next big thing is to reduce how much money I spend on our mortgage, which leads to the idea of house hacking. I’m actually in the process of getting licensed as a real estate salesperson. Seems that would help me better understand our market and it would be an awesome opportunity to explore as profession in general.
@Jeremy Morton I will share my newbie experience and if it helps, great! I am closing on my first house next month. It is a duplex that I used an FHA for. I will live in one side and rent out the other. Their are rules and criteria you have to meet for FHA but if you qaulify it is a great way to start. Its quicker than saving ALOT of money at once. If you think my newbie POV could help anymore...just ask.
@Bryan Cavellier what market did you buy your duplex and live in? i'm looking to do the same thing for my first rental.
@Paulina Lagudi Syracuse NY... But same goes for Rotchester/Binghamton NY if your in that area.
@Bryan Cavellier oh ok cool. I live in the Los Angeles, CA area specifically Glendale/Burbank.