Investor · Wilkes Barre, PA · Member since 2016 · 54 posts · 10 votes
I would love to hear some advice and thoughts about diversifying my investments by selling stock to buy houses cash to rent out. It sounds good in theory. I will own the home free and clear and generate immediate cash flow.
I talked to a friend of mine who's strategy is to pay cash for single-family homes and rent them out aiming for a 12% return before expenses. For example, if he pays $100,000 for a single family home he expects to rent it for $1000 per month. He owns 14 homes this way.
I have limited experience. We have flipped eight homes in just over two years. We've done well doing this. I'm definitely looking to create some passive income and a little more freedom in my life.
Investor · Pleasanton, CA · Member since 2016 · 11 posts · 5 votes
10y
I'll play the contrarian here.
Sound diversification helps manage returns in all economic climates and across different asset classes.
You can leverage your money more with real estate. But stocks have their benefits as well.
However what's your specific plan? Why are you investing? What's your definition of success? Are you aiming for cash flow or appreciation or both? How much time and spare money do you have? What's your time frame to retirement? What are the tax implications of your strategy?
All these are factors to consider.
Before you go cashing out of stocks remember that they are easy to manage. Seldom do you need to come up with 450 cash for a new oven just because you own shares in GE. Not the same with real estate. You won't ever pay a handy man to update your S and P 500 index fund.
You can buy and hold for long term with good results in the stock market as well as real estate. It all returns to your plan, and your goals.
Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
10y
Why not just take out some money from the stocks and leverage that money with financing? You could be a lot more efficient that way, unless you have a good reason to buy cash (like purchasing deals that require all cash).
I'd do it though. The stock market looks shaky at best right now.
Investor · Pleasanton, CA · Member since 2016 · 11 posts · 5 votes
10y
I'll play the contrarian here.
Sound diversification helps manage returns in all economic climates and across different asset classes.
You can leverage your money more with real estate. But stocks have their benefits as well.
However what's your specific plan? Why are you investing? What's your definition of success? Are you aiming for cash flow or appreciation or both? How much time and spare money do you have? What's your time frame to retirement? What are the tax implications of your strategy?
All these are factors to consider.
Before you go cashing out of stocks remember that they are easy to manage. Seldom do you need to come up with 450 cash for a new oven just because you own shares in GE. Not the same with real estate. You won't ever pay a handy man to update your S and P 500 index fund.
You can buy and hold for long term with good results in the stock market as well as real estate. It all returns to your plan, and your goals.
Investor · Wilkes Barre, PA · Member since 2016 · 54 posts · 10 votes
10y
Hey Anthony. Thank you for your reply. Maybe you can explain what you mean by leveraging that money for financing. Not sure if I know exactly what you mean. Are you talking about lending that money to other investors?
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
10y
Hi Carl,
Really awesome that you're thinking about how to maximize the income generation power of your wealth.
What Anthony means by leverage is buying a house with a loan attached to it. The equivalent in stock investing would be buying on margin. It allows you to buy more houses with your available funds and as long as the rate of return from your income homes is higher than the interest rate on the loan, you bank the difference and significantly increase your total project IRR.
You mentioned two primary points in your posts as to why you would want to switch from stocks to real estate that I would like to emphasize: Passive Income and Diversification.
Real estate can definitely trump stocks as a generator of passive income. When comparing the rate of return on rental homes vs dividend stocks or bonds, there isn't really a competition. Though to be as blunt as possible, there is really no such thing as passive income. Buying houses will buy you all the headaches associated with being a landlord. Even hiring professional management will not free you from having to do some work for your rentals.
For diversification, I'd be wary of thinking this way. Studies have shown that the stock market and real estate correlate with each other much more than they have in the past. Diversification only works when two assets aren't correlated.
At the end of the day, you're just shifting assets around to maximize income. Your experience flipping makes the idea of buying rentals instead of stocks make way more sense than your average salaryman with no real estate experience. Keep careful tabs on your closing cost estimates (both buying and selling! always have an exit strategy!) and weigh that against the expected increase in return.
Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
10y
Leveraging is using other people's money to buy...
For instance you have $100,000 to buy realestate. You can buy 1 home for $100,000 free and clear and you have one home. Are you can use leveraging to buy, same $100,000, but now use 25% for down payment, ($25,000) and get a mortgage for the remaining $75000. You can now buy 4 homes with the same $100,000.
Used those numbers for ease of math, but you get the jest.
Hey Anthony. Thank you for your reply. Maybe you can explain what you mean by leveraging that money for financing. Not sure if I know exactly what you mean. Are you talking about lending that money to other investors?
Hey Carl,
Sorry I missed this. By leveraging I meant using bank financing or alternative financing to purchase the property. That way you can use other people's money to build your wealth.
Thanks everyone for clarifying before I could get to it!
@Carl M. Welcome to BP @Carl M. !! This is absolutely a great place to get solid RE advice! Diversifying your investments is always a good idea and using RE is a great tool to allow you to do it too!!
As for the leverage question, (atleast how its being used here) it basically means a bank loan. Maybe not a bank, maybe a 'private funding source' like family or friends, but basically its using money that isn't yours to maximize the potential return on your initial capital investment.
So, as stated above, a good example is instead of using $100k on one house, you'd buy 4 houses ($100k/each) using $25k down. Depending on the mortgage (leverage) you were paying, you can calculate the CF on those four houses.
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
10y
Hello and welcome to BP! Real estate is a good place to diversify. Just remember that you will owe some tax money on selling you stocks. Rental properties is a good way to go long term. Just make sure they look good on paper and have cash flow. It is a bunch about location too and the right class and neighberhood. Good luck to you!