Cashing out equity investments for real estate?

Cashing out equity investments for real estate?

Cambridge, MA · Member since 2016 · 16 posts · 8 votes

I'm sure many people have struggled with this question before me- should I cash out my more traditional investments in stocks/bonds in order to expedite my ability to buy property? Personally, I've been investing (in the market) for years and have a mix of equity investments in various forms and then retirement accounts which have funds I would not touch since that would of course incur a penalty. I have always been in the mindset of investing free cash to have it do work in the market since it's better than collecting dust in a savings account. While that is sound if you are not planning to use the funds in the immediate future, it puts a squeeze on cash reserves to use towards other investments.

In terms of funds to my name, if I were to cash out a solid portion my equity investments, I would be be able to fund an initial purchase into real estate. However I'm struggling with pulling the trigger on that and am leaning towards (the admittedly safer route) building up cash from my w2 job, leaving the equity investments to grow and moving into real estate once I've built up the cash to do so. 

For context if it helps- as far as the real estate route I would be looking to purchase a multi family home, live in one unit and rent out the others. Ideally I would like to invest relatively close to the city of Boston. That being said, in the interest of getting started sooner than later (again because of the high prices in this area) I would certainly consider investing out of state where there is job and population growth. 

I'd love to hear from any investors who have had similar dilemmas, anything that helped you make a decision and of course how it has worked for you since then. 

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Accountant · Baltimore, MD · Member since 2016 · 74 posts · 29 votes
10y
Nadav Swarttz I would be happy to swap stories as I go along - maybe we can learn from each other. I just missed out on a property last fall, so I left the $$ invested but it's been up and down with the market. So last week it was up and I said to myself 'this is a sign...sell!' This week I talk to the lender about preapproval and then I move on to finding a property.
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  • Investor · Deridder, LA · Member since 2014 · 298 posts · 185 votes
    10y

    While I can't tell you what the right answer is for your scenario, I can offer some advice.

    Why not think of your investments as a portfolio real estate included.  Real estate is a third class...  Example portfolio might be:

    Stock 60 % - Equity for Growth 

    Bond 30% - Offers stability and income

    Real Estate 10% - Bit of a mix for income and growth. 

    You could adjust the portfolio to your risk tolerance and goals.  For example if your looking for income now hold more bonds and real estate.

    The trick is your real estate allocation could be in the form of REITS or actual real estate.   The good thing is you can put small amounts of capital into the market to grow at say 6 to 7 % between real estate deals.

    You might have a 200 portfolio that looks like so.

    Stocks 50% - 100k

    Real Estate 50% - 100k with leverage controlling 1M in real estate.

    Point being I would and do use both.   I use the market to accelerate savings and putting parked capital to work while saving for the next investment. 

    Note I would only cash out the portion allocated for real estate unless a deal came across my desk that was just too good to pass up and had the potential to drastically improve the returns on that capital. 

    Hope this helps.

  • Cambridge, MA · Member since 2016 · 16 posts · 8 votes
    10y

    Hi Jeff, 

    That was awesome- thank you for commenting. That's a great perspective and viewpoint to take. Looking at it the same way as a stock in terms of the percentages in a portfolio minimizes the stark difference between real estate and equities and puts in perspective as another investment one way or another. 

    That definitely helps!

  • Investor · NY · Member since 2014 · 67 posts · 24 votes
    10y

    Hi Nadav - I agree with @Jeff V. - there is no right answer to this question. Your long-term strategy should include multiple asset class (stocks, bonds, RE, etc.) and time is your friend in each.  If you were "underweight" stocks for a brief period because you found a great multi-family deal, that's fine. 

    As you mentioned a penalty for withdrawing from retirement accounts, you may want to consider what could be done via a self-directed IRA that allows you to buy direct RE. This could make sense for you now / in the future.

  • Accountant · Baltimore, MD · Member since 2016 · 74 posts · 29 votes
    10y

    @Nadav Swarttz I'm just starting out, so I'm no expert, but I cashed out a portion of my non-retirement funds to start investing. (I wouldn't touch my IRA/401k at this point.) They were from a settlement a few years ago and the stock market ride has been making me queasy. I'm going to start with one property and see how it goes. I'm looking out of state (NJ) because I can leverage my money much better (2-3 units vs 1) but your live in and rent strategy sounds solid, too. It was a scary decision to hit that "sell" button and commit, but I have decided I want to change the direction of my life and the only way to get there is to take the first step! That said, I have also ramped up my day job savings to combine with the cash flow and plow into new holdings. If all goes well, by summer I'll have my first success story and be thinking about #2.

    Best of luck, Tracey

  • Cambridge, MA · Member since 2016 · 16 posts · 8 votes
    10y
    Jason A. Thanks for the feedback- I think the point about being underweight in one of the investment classes to find a deal is a good point, you can always replenish those funds. Tracey Geary really appreciate you commenting since it sounds like you were going through a very similar situation. Hitting the sell button is definitely a tough thing to come to terms with but it sounds like once you made that decision things have been going smoothly. Would love to hear how your first RE investment goes as I'm also looking out of state for similar reasons.
  • Accountant · Baltimore, MD · Member since 2016 · 74 posts · 29 votes
    10y
    Nadav Swarttz I would be happy to swap stories as I go along - maybe we can learn from each other. I just missed out on a property last fall, so I left the $$ invested but it's been up and down with the market. So last week it was up and I said to myself 'this is a sign...sell!' This week I talk to the lender about preapproval and then I move on to finding a property.
  • Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
    10y
    Nadav Swarttz , if you want the best of both worlds, you could open an account like the one Merrill Lynch offers which will let you borrow at a low interest rate against the stocks in your account. You can use this for your RE investments. Note, you can only do this with non-retirement funds.
  • Cambridge, MA · Member since 2016 · 16 posts · 8 votes
    10y

    Hi Percy, 

    Thanks very much! I had never heard of that but will definitely look into it. Appreciate the insight!

  • Investor · Orange County, CA · Member since 2016 · 113 posts · 24 votes
    10y

    Hi @Nadav Swarttz, you've definitely come to the right place to seek advice, BP is amazing and has a ton of resources to help you with your question.  There are 2 names that come to mind that I think would be able to shed some light on this topic and be of great help to you, @Dmitriy Fomichenko and @Brian Eastman both have great knowledge in this area and can probably open your eyes to some great options for you.  All the best to you! 

  • Cambridge, MA · Member since 2016 · 16 posts · 8 votes
    10y

    @Glenn Tracy Thanks for reaching out! I'll look forward to seeing what those two have to say!

  • Rental Property Investor · Sugar Land, TX · Member since 2014 · 65 posts · 33 votes
    10y

    Nadav, 

    Both types of investments will serve you well whichever you pursue as long as you stay the course and continue investing.  The Bogleheads (Vanguard diehards) and Bigger Pockets crowd have plenty of millionaires among each of their ranks, and I'm sure each invest in both asset classes as well as others.  Not bad company.

    Find out what percentage of your assets you want in stocks/bond and what percentage in real estate and be conservative at first in your risk tolerance.  Real estate will require more of your time from a management standpoint but it can possibly accelerate your wealth building through the use of leverage.

    Pick up a copy of The Millionaire Mind by Thomas Stanley if you haven't read it already - he talks about the wealth building aspects of a sample of decamillionaires and most didn't build their fortune through publicly traded stocks but rather through their own companies (including real estate).

    Best wishes!

    Mike

  • Cambridge, MA · Member since 2016 · 16 posts · 8 votes
    10y

    @Michael Powell Thanks so much for reaching out- that is really interesting. I'm certainly going to check out the book and the businesses that those folks had started. Appreciate it! 

  • Bulawayo, Zimbabwe · Member since 2015 · 1k+ posts · 253 votes
    10y

    Hie @Nadav Swarttz

    Equity investments are long term too, just like real estate.selected well, they will pull their own weight and shine. saving up for that down payment when entering the property area would be ideal

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