I’ve heard so many different opinions and paths when it comes to diversification in finances. So people believe real estate is the best way to make money and invest, and that’s all they do.
However, some people have their 401k's, IRA's and own a diverse stock portfolio in addition to real estate.
I feel that if I where to utilize some of my IRA money I could sky rocket my real estate portfolio. Yet I'm fearful of doing that and becoming less diversified.
What are some thoughts for me on diversification? Should I utilize some retirement accounts to propel my real estate career? Is it worth it? How are you diversified?
Knowledge and diversification are inversely related. The more knowledge you have about an investment alternative, the less diversity you need (and vice versa). It's analogous to your W-2 or your business...little diversity but lots of knowledge helps mitigate risk.
I used to max out retirement plans but as I gained real estate knowledge and generated higher returns, I began allocating more capital to real estate. I still take advantage of the match and carry index funds.
For me I do think that owning some of both is best for diversification and a "sleep at night" feeling, but beyond that I've found that learning, reading about, and investing in both real estate AND stocks has helped me as I've noticed some of the concepts carry over between the two.
- valuing stock ownership as owning a piece of that business just like owning and running a building is like owning a business
- learning about the importance of return on equity
- discounting the value of cash flow over time for both an apartment buildings and a stock.
- how house flipping in akin to day trading and what the consequences of those are especially when it comes to taxes. And the potential for loss.
- how buying a property in a great location in the middle of a growing city is akin to buying a business with a sustainable competitive advance (a moat)
From a learning perspective I think investors who are strictly one or the other, real estate or stocks, do themselves a bit of a disservice.
However full disclosure I am 80% real estate 20% stocks. RE has been much better as it has the added ways to make money that stocks don't really offer.
One advantage of real estate is that there is more direct control over the outcome. I don't think I would recommend using already existing retirement funds for real estate, but I think it would be safe to use future funds that may have gone into those accounts to build your real estate investment portfolio. I'm pretty cynical of the stock market but do hold equities in retirement accounts (with some trepidation)
@Jess White I don't know that I'm one of "the best real estate investors" but I am invested in both.
@Mike Dymski I really like that answer when it comes to knowledge, makes perfect sense.
@Nicholas Lohr I think the 80/20 ratio is a pretty good number. I might just adapt the same.
I love the control aspect of REI over the stock market. However, there's still a part of me that would feel like I'm missing out if I wasn't at least somewhat vested in the market.
@Teri S. What percentage would you say you are in the market vs real estate? I’d like to get a good gauge from everyone.
I have 70/20/10 split. 70% in real estate, 20% in stocks, 10% in cash all times. I trade the futures market and hold short term position 1-14 days. I can tell you that investing in stocks is 10x harder than investing in RE. You hit it on the head. The main thing is control.
For the most part, if you know what you are doing in real estate you can control the outcome. In stocks, you can do everything correctly and still lose money. You have zero control over what the markets will do. Most people who invest in stocks have no game plan they just buy hold and pray. Number 1 thing for both investments to survive long term is Risk Management.
An investment is simply an action or process performed to achieve a profit or material result. An investor thinks long term and utilizes different or multiple asset classes for gain.
I think securities have a place in most investors' portfolio as well as real estate. Ratios will vary depending on ones' comfort level, knowledge/expertise and time horizon.
Mine varies a little but is seriously skewed towards real estate. It has simply outperformed everything else and has been my focus for 18 years. I was 95% equities, 5% collectibles when I started investing in real estate though.
Do what you are good at, what you know and what you can best control. It may be RE, buying businesses, lending, stocks, index mutual funds or what have you.
Broad-market index buying takes the least amount of knowledge and offers the least amount of control IMO. I actually don't use the term 'index investing'. Index buying. Investing to me is more on purpose, underwritten and controlled.
@Jess White I'd say about 30% in stocks
@Jess White my fiancé and I may have an unpopular investing journey. We are heavily invested in stocks and just got started in real estate. Right now about 67% in stocks and 33% in real estate. We just bought our first house May 16th!! So from here we are looking to grow our real estate portfolio.
Going to sleep every day and waking up, we make $30,000+ in a year from dividends alone. From this point on, if we reinvest our dividends, we’ll add $1,000+ to our yearly dividend/cash flow thanks to compounding. We don’t have to lift a finger. TRADING stocks is difficult, yes. I feel like that is a buy, pray, and sell strategy. But as a buy and hold investor, you can ride out the volatility that the market brings (as long as you know what you are buying). IMO, if you want to get started on stocks the right way, Motley Fool is the BP of stock investing. They also have great podcasts and the CEO thinks about stocks/investing like no one I know.
Stocks have found a place in my overall investment portfolio.
Now with real estate, we also have done a very unpopular opinion: Buying a house all cash in CA. Expected gross cashflow is $1,800~2,000. And while most people want to get into multi-family, I want to keep it simple and own SFR. Simplicity and peace of mind are top of my list. We plan to use a heloc/cash out refi to buy our next property while trying to stay at 50% leverage or less.
So at the point I’m at now, we don’t have to put in more money into our stock portfolio for it to grow. We are focusing on real estate now. Stocks and real estate have consistently been top performers over the years. I don’t know why to most people it’s “stocks vs real estate”. Just wanted to share some insight from the other prospective. I truly believe in the power of real estate for F.I but stocks have also played a big role. Good luck with your journey and do whatever is most comfortable. When there’s a will there’s a way.
All of my investors are savvy and accredited. Real Estate is one branch of their portfolio so yes, they have money in the market. I work with them and their Financial advisors to diversify. I never intend to have them take money out of the market to invest with me. The money they invest with me is sitting around in cash or a self-directed IRA.
Originally posted by @John Teachout :
I don't think I would recommend using already existing retirement funds for real estate, but I think it would be safe to use future funds that may have gone into those accounts to build your real estate investment portfolio.
About two years ago I began rolling funds from a brokerage IRA to a Solo 401K (similar to a self directed IRA). I started slow, but as I learned more about real esate investing and uncertainty about the market has continued to grow, I've moved more and more from the stock market. My retirement funds are about 50% in syndications - some of which are in what I feel to be recession resistant asset classes such as moble home communities, self storage facilities and senior housing. The other approx 50% portion of my solo 401K is invested in notes with good equity protection.
Other than my children's 529 plans, I have very little remaining in the stock market, or any type of "Wall Street" investment for that matter.
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