I want to get in RE but...

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I want to get in RE but...

Ryan A.
Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes

Hi Everyone,

I’ve been lurking for a few months now and this is my first post here after trying to get a lay of the land. Apolgies if it’s long, just a lot on my mind.

About me:

- Live in the East Bay Area

- Wife and I are both 27 and make good money for our age I believe ($315k combined) with room to increase it in the coming years. Hoping that doesn’t come across as bragging, just want to be honest.

- Want to buy a house in either the East Bay or Sac in 2-3 years.

Now to my question:

- After all expenses and maxing out our Roth 401k’s, we currently still have ~$7,500 left over to save for our downpayment which is great, but fast forward 3 years down the road after we hopefully own a home, where should that extra money go? Either RE or mutual/index fund.

- I really would like to get into REI, but I'm having a hard time wrapping my head around taking on a lot of debt and potential worry when owning multiple homes and not just taking the 7-10% return over a 25-30 year period in the mutual/index funds.

- I'm also in the Bay Area so REI is tough from what I've read on here and at this point I don't feel comfortable investing out of state since I'd like to have a little more control and visibility into my properties. This could be my naivety talking here.

- I feel like if I were able to max out two 401k's (mine and the wife's) and then add another $7k each month towards, we'll be sitting pretty 25-30 years down the road and we wouldn't need to take on the risk of REI.

Would love any help or first hand experience if there’s anyone out there that has had a decision like this before!

Thanks ahead of time,

RA

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Account Closed
Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes
6y

If you’re able to invest $7k/month in the stock market plus maxing out 401ks, that’s basically $115k+/year you’re able to throw at the S&P. You’ll definitely have over $10M in 25-30 years, which would be great. And you wouldn’t have to lift a finger really.

But.... you might have $50M in Bay Area real estate by then. 

Tough choice, but if I were you, I’d buy apartments over houses. And keep the 401Ks as an insurance policy. 

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  • Ryan A.
    OP
    Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes
    6y
    Originally posted by @Jim K.:
    Originally posted by @Ryan A.:
    Originally posted by @Jaspreet Baveja:

    @Ryan A. - I am in the East Bay (same city as you) and Kudos for your earnings, planning and goals! I would say REI is definitely something you should add to your portfolio! Now, whether you want to buy and hold in the Bay Area, Out of State (for actual cashflow), or house hack - totally up to you! However, if you want to be more passive in your approach, you should STRONGLY consider the Private Lending space. Especially if you are able to get a free consultation with a lawyer to review the documents, go through a reputable Title Company, vet the borrower and have fully drawn up document packages! This is what I do now and have had tremendous success over the past 2 to 3 years! There's also syndications (especially for an Accredited Investor) on CrowdStreet and such platforms as well. Let someone else do it with your money, and if you want to, jump into it yourself as well! Best of luck and feel free to reach out if you ever want to chat / meet (when the insanity ends)!

    Hey neighbor! Private lending is interesting for sure. Never heard of it. Where did you start when getting into REI?

    I found this property earlier today in Sacramento and got it to cash flow ~$800/month after all expenses and a 9% CoC return. Am I missing something on why people who live in the Bay Area are investing OOS so much?

    If I were you I would sit down with my wife for a long talk, then move into the absolute cheapest one-bedroom apartment on a bus line that goes past your place of work that I could find. I would sell whatever I was driving and invest in a $5K Toyota or Honda gas-sipper as a family car and for your wife to drive to work. I would establish an initial annual budget of $30K above and beyond what I paid for rent and gas, with an aim of driving that down to $25K in two years.  All my money would go into broad-based index funds through every tax-advantaged savings vehicle I could utilize or create. I would spend five years in that apartment, and in that time learn everything I could about personal finance and real estate in a subspecialty that I found interesting.

    Five years later I would reassess with at least a million dollars put away for retirement and how to spend my money wisely for the benefit of my family fully figured out.

    But I'm not you. I honestly suspect you don't really know why you want to do this. I think you vaguely believe that having more money will help you live better, be happier, solve many of your problems, add value to your life. Of and by itself, money will not do that. That's the ugly surprise waiting for a lot of wannabe wealthy people out there.

    The wife and I are already doing your recommendations to an extent: 1.) We have done apartment living for years and are honestly just kind of over it so we decided to move into the far-East Bay Area to get more bang for our buck. Also, in the Bay Area, finding a 1bd1ba apartment that is safe, near BART, and not a piece of junk is going to run you a minimum of ~$2,500/month 2.) we have two cars worth less than $10k that are fully owned by us). 3.) Annually, outside of rent and gas, we spend about $2k/month. 

    We are currently in the process of saving for a downpayment on a home, so that will be our next biggest expense. I imagine this will take us about 2.5-3 years at the minimum. This is also assuming we want to pu 20% down on something worth $1M+.

    Sure, to an extent, I believe money will solve/prevent some issues in the future should we face them (look at the world right now). However, the reason I'm considering real estate is that I enjoy spending time doing this stuff (I'm a numbers guy) and a good chunk of my other form of investing (401k's) won't be available until I'm 59.5, so I'd like to have some sort of cash flow before then outside of my W2 job.

    0Reply
  • Fernando Figueroa
    Investor · Miami, FL · Member since 2016 · 47 posts · 47 votes
    6y
    I'd definitively buy in the midwest. I don't believe in the East/West coast anymore after so many years doing business all over the country.

    Originally posted by @Ryan A.:

    Hi Everyone,

    I’ve been lurking for a few months now and this is my first post here after trying to get a lay of the land. Apolgies if it’s long, just a lot on my mind.

    About me:

    - Live in the East Bay Area

    - Wife and I are both 27 and make good money for our age I believe ($315k combined) with room to increase it in the coming years. Hoping that doesn’t come across as bragging, just want to be honest.

    - Want to buy a house in either the East Bay or Sac in 2-3 years.

    Now to my question:

    - After all expenses and maxing out our Roth 401k’s, we currently still have ~$7,500 left over to save for our downpayment which is great, but fast forward 3 years down the road after we hopefully own a home, where should that extra money go? Either RE or mutual/index fund.

    - I really would like to get into REI, but I'm having a hard time wrapping my head around taking on a lot of debt and potential worry when owning multiple homes and not just taking the 7-10% return over a 25-30 year period in the mutual/index funds.

    - I'm also in the Bay Area so REI is tough from what I've read on here and at this point I don't feel comfortable investing out of state since I'd like to have a little more control and visibility into my properties. This could be my naivety talking here.

    - I feel like if I were able to max out two 401k's (mine and the wife's) and then add another $7k each month towards, we'll be sitting pretty 25-30 years down the road and we wouldn't need to take on the risk of REI.

    Would love any help or first hand experience if there’s anyone out there that has had a decision like this before!

    Thanks ahead of time,

    RA

    0Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    6y

    You personally sound like a person who would be better off not being directly involved in real estate.  Maybe invest in stocks, bonds, REITs, whatever your interest.

    Real estate does take time to really do it well.  Paying a property manager or contractor to do the work just creates more work for you to manage and cuts into the profit.  Also in CA there are a lot of laws that favor the renter.  If you do decide later to sell the property and the renter wants to stay in the property you are required to pay them quite well to leave and that cuts into the profit too. Look into the rent control laws before investing in an area.   CA is a very unique place to have rentals and not an easy one to profit on throughout the entire cycle -purchase-rent-manage-sell.

    Your income is high enough that you are likely accustomed to a pretty nice life.  When you have children, you will be paying a hefty price for child care and for their activities, especially in the bay area.  So that extra money each month may not be something you want to plan on using for a house or apartment payment for the next 20-30 years.  

    0Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    6y

    315k in combined HH looks good, it adds to roughly 25% of the average home price in the area. The average home will cost you 1.4M. That’s a good thing. If I were you, I would first take the step of becoming a home owner. See how that plays out and then take the ball forward to RE Investments. Personally I think asset ownership in the Bay Area is highly rewarding, it has been historically at least.

    0Reply
  • Account Closed
    Investor · Phoenix, AZ · Member since 2015 · 31 posts · 21 votes
    6y

    OOS could be a good way to split the difference. Plenty of meat and potatoes markets in the Midwest and the Southeast. Find a good market and do some research. It doesn't have to be a perfect market. As a matter of fact, don't look for the perfect market, it doesn't exist. With your income, you would minimize the need to leverage in the the 50k-200k range, which covers a big chunk of the country.

    0Reply
  • Ryan A.
    OP
    Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes
    6y
    Originally posted by @Steve Kontos:

    @Ryan A.

    Purchasing a single family house to live in is a liability (at least until you pay the mortgage down and can leverage it to buy investment properties).  I highly recommend investing in multi-family properties that will generate you an added stream of income.  Spend the next several years building this foundation until you are at the point that at least SOME of your future mortgage payment on a house you live in is covered by your cash flowing investments.  We're not even talking about other ways you can use leverage to purchase as well.

    Sorry this is a loaded topic but hopefully this was helpful.  Best of luck!

    I've never thought about going the REI route before buying your primary residence. Is this what you did? At what point do you stop investing in homes that cash flow and buy your own?

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    6y

    What I find is people are willing to deal with more risk from an investment the more they understand what they are investing in. You may look at stocks as less risky because you know and understand them more than real estate at this time. That may change once you get more familiar with real estate or it may solidify your current thinking. 

    0Reply
  • Teresa Thomas
    New to Real Estate · Madison, WI · Member since 2020 · 28 posts · 21 votes
    6y

    @Ryan A.

    You might want to think about getting in tax-free environments such as Roth IRAs and whole life insurance with cash value policies instead of tax-deferred 401ks. You are going to lose so much money when it comes to withdrawals in the future if you stick with 401ks. Next, yes- I would definitely use what is left to either house hack or save up to buy your first investment rental where you can then also take advantage of the tax codes.

    0Reply
  • Thomas Greer
    Real Estate Consultant · Member since 2020 · 80 posts · 102 votes
    6y

    Congrats on having a problem most would enjoy.  There are some great responses, but I will add my two cents:

    There are some fundamentals of investing that are tried and true and you should adhere to.  Namely portfolio diversification, balance sheet and risk management.  Make sure you are diversified across asset types and return profiles.  Don't get overextended and know your ability and appetite for risk.

    I think most financial decisions should be made on a financial basis.  Create a spreadsheet or use tools available online.  Plan out what you feel are realistic returns on your investment options.  Be honest (assuming everything is going to be a home run is not helpful) and realize there is no free lunch.  The likelihood of higher returns is directly correlated w/ increased risk.  You can increase returns through active strategies and expertise (as opposed to passive) but there is a trade-off w/ time and ability.  (In general) it is just as hard work to "make a killing" in real estate as stocks, as commodities as a bond trader as...  If anything, would argue direct equity real estate investing may have greater potential but w/ the trade-off of more "work".

    Also, if you have the RE bug, you may want to whet your appetite with some of the many forms of RE investing - REITS, partnerships, passive equity, lend, crowd investing - outside of direct equity ownership.

    All the best! 

    0Reply
  • Matthew Terry
    Rental Property Investor · Mesa, AZ · Member since 2019 · 138 posts · 144 votes
    6y

    I invest in Fundrise, but otherwise most syndication deals are only for accredited investors and I don't make the cut quite yet. You do since you make north of $300K with your wife. You can average 8-10% in cash paid monthly and then another 5-10% IRR after 5 or so years when the property sells. All you do is sit back and watch the checks roll in. The most time intensive part is doing the research and due diligence to pick a company with tons of experience and high success rate.

    1Reply
  • Brady Salcido
    Rental Property Investor · Ventura, CA · Member since 2018 · 9 posts · 5 votes
    6y

    @Michael K Gallagher new here as well!

    Where would you recommend looking in the Midwest. I’m in the same position and have been looking at the Midwest for opportunity but not sure where to focus.

    Thanks!

    1Reply
  • Ryan A.
    OP
    Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes
    6y
    Originally posted by @Matthew Terry:

    I invest in Fundrise, but otherwise most syndication deals are only for accredited investors and I don't make the cut quite yet. You do since you make north of $300K with your wife. You can average 8-10% in cash paid monthly and then another 5-10% IRR after 5 or so years when the property sells. All you do is sit back and watch the checks roll in. The most time intensive part is doing the research and due diligence to pick a company with tons of experience and high success rate.

    I'll take a look at this. The syndication route might be the route I end up going down. From my initial research it seems to provide most of the benefits I'm targeting in an investment option. How has your experience been with Fundrise? What should I know if I want to throw a small sum at a project on there just to get my feet wet and see how it the process works?

    2Reply
  • Ryan A.
    OP
    Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes
    6y
    Originally posted by @Thomas Greer:

    Congrats on having a problem most would enjoy.  There are some great responses, but I will add my two cents:

    There are some fundamentals of investing that are tried and true and you should adhere to.  Namely portfolio diversification, balance sheet and risk management.  Make sure you are diversified across asset types and return profiles.  Don't get overextended and know your ability and appetite for risk.

    I think most financial decisions should be made on a financial basis.  Create a spreadsheet or use tools available online.  Plan out what you feel are realistic returns on your investment options.  Be honest (assuming everything is going to be a home run is not helpful) and realize there is no free lunch.  The likelihood of higher returns is directly correlated w/ increased risk.  You can increase returns through active strategies and expertise (as opposed to passive) but there is a trade-off w/ time and ability.  (In general) it is just as hard work to "make a killing" in real estate as stocks, as commodities as a bond trader as...  If anything, would argue direct equity real estate investing may have greater potential but w/ the trade-off of more "work".

    Also, if you have the RE bug, you may want to whet your appetite with some of the many forms of RE investing - REITS, partnerships, passive equity, lend, crowd investing - outside of direct equity ownership.

    All the best! 

    Thank you for the tips. Really appreciate it. Seems like a lot of people in this thread like syndications, so I may try that at first. I've learned about myself while responding to these comments and I think my strength's are related to research/learning/evaluating and not necessarily rehabbing properties/hard labor/design.

    0Reply
  • Ryan A.
    OP
    Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes
    6y
    Originally posted by @Teresa Thomas:

    @Ryan A.

    You might want to think about getting in tax-free environments such as Roth IRAs and whole life insurance with cash value policies instead of tax-deferred 401ks. You are going to lose so much money when it comes to withdrawals in the future if you stick with 401ks. Next, yes- I would definitely use what is left to either house hack or save up to buy your first investment rental where you can then also take advantage of the tax codes.

    My wife and I are currently maxing out both of our Roth 401k's, so the withdrawals will be tax free. 

    1Reply
  • Teresa Thomas
    New to Real Estate · Madison, WI · Member since 2020 · 28 posts · 21 votes
    6y

    Nice! Roth is the only way to go! 

    1Reply
  • Anthony Woods
    Rental Property Investor · Corona, CA · Member since 2015 · 46 posts · 8 votes
    6y

    There are syndications that do allow a small number of unaccredited investors, but with your combine income meets the qualification of accredited investor. So look around. I invite you to look at our website www.sunshinereit.com 

    0Reply
  • Anthony Woods
    Rental Property Investor · Corona, CA · Member since 2015 · 46 posts · 8 votes
    6y

    And convert your IRA to a self-directed one. This will allow you to you use those funds to invest in real estate structures offerings

    0Reply
  • Michael K GallagherBusiness Member
    Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Brady Salcido:

    @Michael K Gallagher new here as well!

    Where would you recommend looking in the Midwest. I’m in the same position and have been looking at the Midwest for opportunity but not sure where to focus.

    Thanks!

    [email protected]614-362-2231
    0Reply
  • Michael K GallagherBusiness Member
    Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
    6y

    @Brady Salcido 

    I am located in central Ohio, so I'm a bit biased to that area, I am a big fan of the area for a couple of reasons. 1) There are major employers in the area that continue to expand. These include Abott labs, Honda, Facebook, Amazon, JP Morgan Chase, Nationwide, Root Insurance.....The list goes on. 2) Logistically you can get to, I think its 80ish% (don't quote me on that number), of the continental US within a 12 hour drive of Columbus, so it will remain a logistical hub. 3) Then there is also Ohio State or "THE" Ohio State as all the natives like to correct you...so that is an economic driver for sure.

    From a REI point of view I really like that the cost of either a Single Family home in the burbs, or a duplex 5 mins outside downtown is attainable, even for a "normal person" with a day job. As an example our current duplex was 100% flipped, like gutted to the studs and re-done flipped, about 2700sf total, and we paid $318K for it. I also like that there are a couple "trendy" areas, that are leading the charge in bringing people (like my wife and I) out of the burbs and back into the city. The city is also offering 10year, 100% tax abatement on most areas immediately outside of downtown (with a couple exceptions).

    I don't know areas like Cincinnati, or Cleveland as well, but again generally you will just find that your dollar is going to go a lot farther. I have heard good things about Indiana, and Kentucky as well.

    But if you have any questions, or just need some general guidance of where to start/look in the area, or really anything at all, don't hesitate to reach out. There are a couple of us on here that are on the ground and in the forums all the time that are big fans of the area, so even if it isn't me someone will chime in with some good opinions/info.

    [email protected]614-362-2231
    4Reply
  • Matthew Terry
    Rental Property Investor · Mesa, AZ · Member since 2019 · 138 posts · 144 votes
    6y

    @Ryan A.

    Fundrise has been great. I threw in $13K and selected an income fund and I made about 9.2% in 2019, paid quarterly. They have higher return programs for accredited investors. They do a fantastic job of explaining the reason and business model for every equity or debt deal they do and keep you updated on each one. Right now they are sitting on about $200M in cash and are playing defensively until they start seeing the lag of effect of COVID-19 put major downward pressure on property prices and construction projects that are incomplete and they will deploy that cash hoard (8-16 months). Fundrise is essentially a REIT, but they cut out several of the middle investors to make it more profitable for retail investors. The downside is that your capital is very illiquid, unlike a REIT, it takes a minimum of 60 days to sell shares and there is a penalty if you sell before 5 years. It is a middle-ground risk\reward between the stock market and syndication and they allow the average middle class the opportunity to have direct ownership over property and notes without much risk. You spread your risk with 140,000 other investors but make less. You can also invest in the company itself as their plan is to IPO one day.

    0Reply
  • Ryan A.
    OP
    Walnut Creek, CA · Member since 2020 · 23 posts · 8 votes
    6y
    Originally posted by @Anthony Woods:

    And convert your IRA to a self-directed one. This will allow you to you use those funds to invest in real estate structures offerings

    I really would prefer not to touch my Roth 401k until I retire. Want to have two different forms of retirement when the time comes (Roth 401k and REI).

    0Reply
  • Anthony Woods
    Rental Property Investor · Corona, CA · Member since 2015 · 46 posts · 8 votes
    6y

    You just convert an IRA to a self directed IRA. But you can passively invest without using IRA funds and still enjoy the income and tax benefits of the income producing real estate

    0Reply
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