Smartest place to keep my money?

15 Replies

Hello, I'm looking for some advice on my situation as a 28 year old. My real estate goal is to buy enough cash flowing rental properties to retire early and I should need about 10-12 to reach this goal. My short term goal is to save up $100k to have some capital to work with and piece of mind. I currently have 2 SFRs.

I'm a W2 employee that makes good money. I take the full 6% company match on my 401k but nothing more. I have employee stock program that I contribute 4% to that lets me purchase stock twice a year at a 15% discount of the lowest stock price in the previous 6 months. 

As I am working towards my saving goal, should I also be maxing out a Roth IRA or SDIRA? Or should I just keep that money in a savings account to purchase my next properties? Any advice would be appreciated.

@Johnny Thompson You're on the right path. Would urge you to continue doing what you're doing and max out your tax deferral (IRA) and tax exempt (Roth) account on top of the company match. The discount on the stock program could be good or bad depending on the company. That's a decision you'll have to take for yourself.

At this stage of your life/career, your best bet is to maximize your savings into liquid assets (ETFs should be you go to option - Vanguard, Fidelity or Blackrock). Once you reach your short-term goals - $100-150K liquid assets - you can then start looking at other areas. 

If you already have 2 SFRs, you should also try to see how you can leverage the equity built in those properties (assuming this is separate than your existing assets) to eventually buy more properties. Focus on quality not quantity - buying 50 Class A/B+ doors is better than 100 Class C/D doors.

Someone smarter then me explain why maxing out the stock purchase (15% off lowest price) wouldn't be the go to move?

I get there's some likely restrictions on timing and tax implications, but seems as close to a sure thing as you can get in the investment world.

What am I missing?

@Matt K. You're assuming that the company is a good long-term investment. Good, even great, companies are often not the best investments. 

Also, there is a massive risk around concentrating your finances with one company. In all likelihood, an individual will only get fired if the company isn't doing well. Guess when that usually happens? When the stock price is down. Therefore, if you've invested - even at 15% discount - within the company, everything - financial, professional and income - takes a hit at the same time. 

Notable examples of folks being burned buying company stock at a discount include, but limited to, Enron, Worldcom, Lehman Brothers, GM and a whole host of other companies.

Having worked in finance for a long time, I can tell you that no company is doing you a favor by letting you buy their stock (discounted or otherwise). If anything the continuous flow of orders from "loyal" employees actually helps the stock price by providing artificial demand bereft of analytical rationale.

In an open, competitive market an investor should invest where their capital has the highest rate of (potential) growth. This might be the company an investor works in OR (in all likelihood) this might be other 000s of companies. 

Alternatively, the investor could save themselves the hassle (and heartburn) and invest in the S&P 500 index. Go to sleep, get up in 20 years and be rich! :)

P.S. There are no sure things, the same say was there are no free lunches.

@Johnny Thompson congrats on getting this far. 

I'll agree with @Omar Khan about the IRA, but traditional vs Roth comes down to a tax rate question.

What are your goals for the $100k. Sit on it until you get all of it and then buy more SFRs, use it for down payments, dry powder for opportunities that may come along, diversify your portfolio? 

That will drive what to do with the cash. For the first three options you want something with low volatility that will beat inflation, so TIPS or a money market. The last one, I'd go with Omar's suggestion. You can't beat Vanguard's VOO.

@Matt K. would you buy Enron at 15% off any price? I wouldn't. It all depends on what the company is, the strike price, and the vesting schedule. If the company is intrinsically worth $50/share, but trades at $100, then buying it at $85 is still over paying. I highly doubt Johnny make an arbitrage play with the stock either. 

Originally posted by @Bill F. :

@Johnny Thompson congrats on getting this far. 

I'll agree with @Omar Khan about the IRA, but traditional vs Roth comes down to a tax rate question.

What are your goals for the $100k. Sit on it until you get all of it and then buy more SFRs, use it for down payments, dry powder for opportunities that may come along, diversify your portfolio? 

That will drive what to do with the cash. For the first three options you want something with low volatility that will beat inflation, so TIPS or a money market. The last one, I'd go with Omar's suggestion. You can't beat Vanguard's VOO. 

@Matt K. would you buy Enron at 15% off any price? I wouldn't. It all depends on what the company is, the strike price, and the vesting schedule. If the company is intrinsically worth $50/share, but trades at $100, then buying it at $85 is still over paying. I highly doubt Johnny make an arbitrage play with the stock either. 

 lol @ arbitrage play. Good one! Forgot to add that :)

I should clairfy this would be a short term play to hit his goal of 100k faster, not a long term buy and hold. I have no idea what the hold time of stock purchase is but aren't some companies fairly short?

15+% is a healthy boost to hitting that savings goal.

Originally posted by @Omar Khan :
Originally posted by @Bill F.:

@Johnny Thompson congrats on getting this far. 

I'll agree with @Omar Khan about the IRA, but traditional vs Roth comes down to a tax rate question.

What are your goals for the $100k. Sit on it until you get all of it and then buy more SFRs, use it for down payments, dry powder for opportunities that may come along, diversify your portfolio? 

That will drive what to do with the cash. For the first three options you want something with low volatility that will beat inflation, so TIPS or a money market. The last one, I'd go with Omar's suggestion. You can't beat Vanguard's VOO. 

@Matt K. would you buy Enron at 15% off any price? I wouldn't. It all depends on what the company is, the strike price, and the vesting schedule. If the company is intrinsically worth $50/share, but trades at $100, then buying it at $85 is still over paying. I highly doubt Johnny make an arbitrage play with the stock either. 

 lol @ arbitrage play. Good one! Forgot to add that :)

I got your back Omar!

Johnny, My spidey senses tell me that if your company is big enough to offer a discount employee share purchase plan someone in the finance department or the IB that took them public made sure the shares have to vest for a nice LONG time. Just a hunch.

If you scour the fine print and they don't make you vest then mortgage your rentals and pawn your golf clubs to buy all you can at the discount and sell sell sell! That will be the easiest 14%+ return you'll ever make.

Thank you @Bill F. and @Omar Khan

Bill- My goals for the $100k is the launch pad to fund the down payments for my 10-12 properties. That obviously won't be enough but it should get me a few. After I acquire 10-12, I'd like to use a debt snowball to pay them off. I understand that I could use leverage to acquire more properties but that is not extremely enticing for me. The vesting schedule is only 3 months. So as soon as shares are issued, I have to hold for 3 months then I can sell.

Omar- Contributing $5,500/yr will slow my progress to fund my initial 10 properties. Will I be able to pull money from my Roth if I continue to contribute?

Thanks for your guys help.

@Johnny Thompson 3 months is the shortest vesting period I have ever heard of. You should check and double-check with HR. If it is 3 months and your company isn't the next Bitcoin startup, then follow @Bill F. advice (you can be safe and go long put options to protect your downside). Beg, borrow, steal, sell - do whatever you can and start  purchasing company stock! Take us out for a nice steak dinner when you become rich in the next 6 months ;)

Your progress might be slower from a RE angle but not from an overall wealth angle. On average the S&P 500 / stock market grows at a multiple of real estate (as much as folks on these forums think otherwise). Real estate is a great addition to a portfolio but at your stage/level/income, you need liquidity more than anything. 

Consult with your CPA on the Roth question. Every situation is different and I don't want to offer generic advice.

@Matt K. On average vesting periods are between 3-5 years. This is to prevent people from being cute and playing this short, 15+% return game. There are no sure things nor free lunches. Folks at pay grades higher than your or mine (at least mine) are playing the game differently. Hence, the rules are designed to not be as easily "hacked".

@Omar Khan Yes I just got off the phone with HR and they told me 3 months as well. So I'll be issued stock in July for shares purchased Jan-June and I will be able to sell those shares in September. I can take a max of 10% of my paycheck but I'll have to pay taxes on the capital gains if I sell those right?

@Johnny Thompson yes, when you sell the shares, you'll pay short term capital gains at your marginal rate. 

If you are in the 25% bracket that means you'll net around 13%, assuming the shares don't go down in value.

Originally posted by @Matt K. :

Someone smarter then me explain why maxing out the stock purchase (15% off lowest price) wouldn't be the go to move?

I get there's some likely restrictions on timing and tax implications, but seems as close to a sure thing as you can get in the investment world.

What am I missing?

 It is pretty much go to like you said. ESPP is usually a no brainer and gives you a discount; but there is a delay in getting the stock and a holding period of 12 mos to get the lower tax rate. Some tech stocks have gone sideways for employees in that time period. Other than that it is the best real around.

Originally posted by @Johnny Thompson :

Hello, I'm looking for some advice on my situation as a 28 year old. My real estate goal is to buy enough cash flowing rental properties to retire early and I should need about 10-12 to reach this goal. My short term goal is to save up $100k to have some capital to work with and piece of mind. I currently have 2 SFRs. 

I'm a W2 employee that makes good money. I take the full 6% company match on my 401k but nothing more. I have employee stock program that I contribute 4% to that lets me purchase stock twice a year at a 15% discount of the lowest stock price in the previous 6 months. 

As I am working towards my saving goal, should I also be maxing out a Roth IRA or SDIRA? Or should I just keep that money in a savings account to purchase my next properties? Any advice would be appreciated.

 The first question is when are you planning on retiring?  Second question how much are you looking to cash flow per month.  Those answers will determine what you should be doing now.  The calculations are also impacted by your current income which impacts the tax benefits of your properties. 

@Johnny Thompson this was an awesome thread to read. Lots of good stuff here. Listen to @Omar Khan he’s good at what he does.

If I were you I would 1. Contribute to a Roth IRA and max it out if you can, same goes with 401k up to the match. After that I’d buy as much stock as you can at a discount and sell at 3 months.

If you still have left over money save that towards REI. If you can’t afford to do all that stuff then, I would not contribute to a Roth as much and stick that money towards REI