I have about between $200,000-$300,000 in my bank account. I am renting now in Minnesota and have never bought a house before, but I am debating if I should I use most of the money to invest in stocks or buy a rental property. My planning was buying a multi-family property that needs to be flipped maybe with two to three units in Chicago, fix it with my friend who is a general contractor and then rent it out. Ideally, I want to fix up the basement and live in the basement while renting out other two units above the ground. Then, I want to use my first property as a collateral and buy a second property with the loans. But the property prices have gone up a lot recently and I do not know if Chicago is a good city to buy a rental property because of its high property tax rates. I am not also sure if I am getting a good deal for the run-down property because I do not know how much it is going to cost to fix everything. Alternatively, I could keep renting for myself and invest most of the money in stocks? But if I want to get serious in real estate investing, where do I go from here? Should I look into other cities with lower tax rates and higher projected appreciation even though my close general contractor friend lives in Chicago? Decent multi-family properties in a good neighborhood in Chicago ranges from $200,000-$350,000. Do I really need to spend all of my money to buy one property in a good neighborhood and rely on it for my income or buy a cheap property in a bad neighborhood and invest rest of the money in stocks? (P.S. I can't take out any loan for my first property because I don't have job now and I just want to retire with the money now)
Hey @Donggie Hong believe it or not there are lenders that will lend even if you do not have a W2 income or any income for that matter. Most of these lenders want the borrower to own at least one property before lending to them however. You would be looking at 5%-6% interest here. You would also have to watch the prepayment penalties on these long term loans. Perhaps some fix and flip money would be a good fit if you are considering flipping and are unable to get a traditional mortgage atm. Fix and flip mortgage rates are even higher and often experience based. Meaning you will pay a higher than average interest rate on your first flip.
@Donggie Hong I feel like you should be looking at this a bit differently. Instead of looking at a 2 unit, why not partner up on a 6 unit or something like that? Make sure your JV partnership makes sense and that your partner is bringing value. For instance, why not have a partner help you get the loan while you bring the capital so that you can get more leverage? More units equals more cash flow at a very simplistic level.
Chicago is definitely a great market, but I would also think through why you are choosing Chicago if you don't live here. The advantages here are the great building stock and the plentiful multifamily inventory. The downsides are obviously the taxes, etc.
I agree with @John Warren . I think a JV partnership would be a great option if you could find someone with experience in the market you are looking at. Start trying to get involved in local meetups. You will find many like minded people who could add value.
@Donggie Hong bank to the question about stock market vs real estate, we tell our clients not to put everything in real estate, be sure you have money diversified. Real estate is solid, but as we have seen in the last year anything can happen so having several revenue steams is best.
@Jason Shackleton Thank you for the info. But if I buy my first property with all cash, maybe I could use it as a collateral and get better interested rate percentage and no prepayment penalties?
@John Warren I wanted to do it in Chicago because my close friend is a general contractor and maybe I could get some help from him if I want to flip a house... Where can I look into more about joint ventures for owning an investment property? But my first goal would be buying a house for myself so that I would not pay rent anymore? That was why I was looking into multi-family properties since I can rent out one unit and live in the other.
@Jackson Babcock Thank you for the suggestion, Jackson.
@Amber Gonion Thank you for your advice, Amber. I would have invested in my first house in MN if my friend who fixes houses lived in MN. But he lives in Chicago, so that is why I am planning to move from MN to Chicago.
I agree with @Amber Gonion that diversification is important. However, I also know plenty of people who only invest in real estate because it is what they have experience with. I like @John Warren 's advice to JV. I think that will be the best way for you to shorten your learning curve and grow your portfolio more quickly than if you were on your own.
@Donggie Hong - Sounds like you have a pretty good foundation to dive into real estate investing, that's awesome!
My personal opinion is to invest in a market you know well and an area with a solid team or competitive advantage. Having a solid contractor that you can trust is definitely one of the most challenging parts of real estate investing.
Prices are going up but that's really everywhere throughout the country, not just Chicago. Additionally, property taxes are high, however, there are definitely still deals out there so if the numbers work, the numbers work.
Regarding investing in stocks vs real estate - I sold all my stocks to focus solely on real estate. I'd much rather bet on myself than another company and really take full ownership of my future. Plus trying to figure out stocks and real estate at the same time is nuts lol. Either one is extremely challenging to understand on their own.
@Donggie Hong few thoughts.
No matter if its stocks or real estate, I'd work on converting my fiat currency to real assets ASAP. Here the preference would go towards the asset that's productive and allows your to leverage, so real estate.
However when the rubber hits the road, understand stocks can be 100% passive, while RE is anything but, so get to know yourself well and try to understand how hands on you're comfortable being over the long term with your portfolio.
A good approach might be to place most of your money in an index fund, which is quite liquid, while taking chunks out to "play with" and learn the RE game. I like your idea of house hacking a distressed multi fam in Chicago, sounds like in adventure, if you don't have thick skin now you will develop it. This would allow you to diversify while gauging your affinity for RE. If you end up hating it, you can simply keep your one asset and let that balance your predominately stock portfolio. If you love it, you can transition more into RE as this ultimately is the more profitable asset class.
I trade stocks, flagged as ptd and I make way more trading but it's also more risky.
that said... I'm taking trading money and investing into spec home new construction and sub division development. In the end I think it will be far more profitable just takes a ton of money to get started.
@Jonathan Klemm Thank you for your ideas and suggestions, Jonathan. Yes, I agree that I should be professional in one area even if I decided to invest in both real estates and stocks. I guess my friend can help me with flipping a house, but it seems like he is always busy and I am not sure if he will have time to help me out lol.
@Jeffrey Donis Thank you, Jeffrey. I will look into JV more.
@Noah Chappell Hey Noah, thank you for your suggestions. Many investors say that it is ok to buy stocks now, but I think the stock market will crash at some point.. Buying index funds now when they are breaking the all-time high makes me feel uneasy because it could take many years to recover from where I started if it crashes. Also there is a tax implication if I take out the funds from stocks too early or too much.
But yeah, I think it would be great to at least own one property that generate rental incomes. The problem is I might not have much to invest in stocks after doing that. I guess both are long-term games, where you need to wait 5-10 years to realize your gains.
@Bill William I am not sure about the terms, but yes trading a lot to gain a short-term gain is risky in stocks.
@Donggie Hong - That's a valid concern if your friend is slammed and doesn't have the time to help you. That being the case my answer might be slightly different.
Do you have a good network in Minnesota that you could lean on?
@Jonathan Klemm No, not at all..
@Donggie Hong Volatility, measured by the ratio termed "Beta" is extremely higher in the equities markets compared to multifamily investing. Good news with paper assets like stocks are that they are liquid. However, the returns you get in multifamily syndication are going to be 4X to 5X higher than S&P 500 for many reasons. You get less liquidity in multifamily but a much higher return. Most stock brokers quote equities returns BEFORE brokerage fees which is something important to know. You may want to consider putting some money into multifamily syndication. There is less volatility in multifamily than single family. In a downturn, single family tends to loose value but MF doesn't. That's not true everywhere. But it's a high level anecdote.
My choice would be to invest as a limited partner with an established, experienced, and knowledgeable commercial syndicator. Chances are your returns will beat the stock market by a considerable amount and your learning curve will escalate substantially.
With most syndicators, you will get all of the ideal benefits of real estate investing: Income, depreciation, equity, appreciation, and leverage. With stocks, you'll lose a good portion of your earnings to taxes but with real estate, the depreciation will limit or even eliminate your tax liabilities. There is no equity, appreciation, or leverage.
As a limited partner, you will have zero tenant and other landlord headaches. Depending on the deal, you could be earning returns from day one with a substantial IRR payout within three to five years. With the right syndicator, you could be looking a 1.8 to 2 fold multiplier, so close to 400,000 to 600,000 in three to four years - all that as a passive investor while watching and learning from the Master.
@Donggie Hong Remember you need money for the rehab as well as living expenses during the rehab. I'd buy in your local market, around 200k or atleast in a cheaper market than Chicago. Join meetups in the area, find friend or mentor that can guide you to trustworthy contractors and get started.
@Donggie Hong maybe consider calling your local merchant cash advance company and ask if they are taking partners/participants. I parked my real estate reserves there and receive monthly checks for that money since September 2020.
@Donggie Hong They are both viable strategies with their pros and cons. I personally would do both in order to diversify your portfolio. That way you insulate yourself from different market segment downturns. If you can come up with a percentage split and hold to it, that will make future decisions a little easier as you have a plan to guide you.
@Donggie Hong Invest where it makes sense. Invest widely for diversification and higher return or "don't put your eggs in one basket", is a similar message. I personally took much of my capital out of stocks. I am not fond of the volatility, lack of control and lack of understanding on what drives stock up or down regardless of company performance.
I choose to diversify in real estate. Multiple properties, multiple markets and multiple asset types. Understand you can be well diversified in real estate by diversifying across these sectors. It's important also to note, the more cash flowing assets you can invest into with the same amount of capital, taking advantage of leverage, the better your return will be. One of the magics of real estate, leverage. The more you can use it to your advantage, the more quickly stocks doesn't pair up.