Quote from @K S.:
Quote from @Robert Payne:
There is also a point at which the income from REI doesn't make sense to chase. The juice isn't worth the squeeze, so to speak. so yes, if you have a large enough lump sum, you likely have other ways to spend your time making money that makes letting the investment be truly passive makes more sense. Most people starting out in REI are excited that they can receive outsized returns with leverage because they are starting with less capital.
A couple more counter points though. These figures assume no reinvestment of capital from the cashflow of your real estate, but does assume compounding the gains from the stocks. even if you just put the monthly gains into the S&P 500 you are going to see a significant increase in the end gains. It also assumes rents don't go up once in 16 years. if you have an average increase of 2%, which is a very conservative estimate, this will also increase the return.
If I had $400k to start, I would still buy RE. If I had $2 million, Then I would stick it in a safe boring investment that I could scrape the gains from, like S&P or TBills.
True, if you're manageing it, it's not passive.
Also true that i never though of, with an all cash deal, you can reinvest the cashflow into the S&P or whatever you want. I didn't account for that. But if you had a mortgage, I wouldn't have any cashflow to do that. That makes me wonder if one has the capital, if it would be better to purchase the properties in cash and invest the $765/month in my case into the S&P 500 over purchasing 5 SFH homes with no cashflow.
I think we said 5 properties = $1,000,000
S&P 500 = 500,000 but with the additional $765/month invested, that would be an additional $350,000 + 500,000 = 850,000.
So if I'm doing this correctly, a single family home paid in cash while reinvesting the cashflow of ~$765/month into the S&P 500 would net 850,000 vs 1,000,000 for 5 properties.
Maybe I'm busting another myth here and leverage isn't as great as we though when you can literally reinvest the extra casfhlow from a SFH into the market and come out to 85% of the 5 property returns.
If correct, this changes my strategy in real time as I've only been saving my cashflow for more property which is a huge loss in opportunity costs as the build up takes years while making no interest at all. Now I can just leverage all the free and clear properties cash flow into the S&P 500 and create the ultimate diversified maintenance free portfolio.
Robert Payne, you deserve the most useful post award.
You got to think more so with the times not just at one point in time, but how it evolves. I'll get a little more personal with mine, and yes its completely opinionated.
Investing with full leverage in 08-22 with rates, you could yield better with your side cash. Investing with less leverage in 2023-fwd, you can yield more by getting out of the 8% mortgage payment and being less leveraged, and actually owning debt. No one knows where the future holds and this operates so you have to read and react.
For example, I went into 2023 thinking 1 house per quarter. Family considerations made me move REI to #1, by a distance. So now it's 9-15 properties(12 on avg) in 8-10 areas by EOY 2024. By the mid point of Q2(think May), started realizing rates are staying higher for longer. What's the best course of action; less leverage & owning debt. So scaled back to say 6-10 properties in 5-7 areas, and said okay, I will be either a) be less leveraged or b)deploy less total capital and keep leverage out of it in REI, and take that extra cash I was going to use and actually buy debt. Yes, performing debt that gets you 6, 7, 8%. I took about 80% of that capital and bought notes, and 20% and bought t-bills. So now I have less houses, all paid off, obviously good cash flow, and have about 30% of the original capital making me 7-8%. That's how I sit in Dec 2023 with mortgages at 7-8% for investors.
Go back to your 2012 example. Say you had $200k in 2012. If you paid all cash for a house in 2012, you'd have good cash flow but you'd be better of 25%($50k) down and putting cash in another house(or 2) or anything that gets you some money. Your RTP is strong enough to support just a 25% downpayment, today it's likely closer to 40%. Why? Cause debt is so costly, so literally telling you less leverage to keep this investment sustainable. However, leverage is a beautiful thing if done correctly so it's not going full Dave Ramsey by paying all cash but balancing it can be really where things get right.
Investing in the S&P gets you (very) little dividends. You're literally 100% betting on the american top 500 and appreciation; almost zero cash flow in this. The reason Warren makes money from stocks is cause he doesn't own a passive index, as much as he contests it's best for us to own, he owns large quantities of shares that pay him significant amount of dividends at a capital gains tax rate. There is a huge difference. I don't consider myself an equity expert, but I rather invest passively in that so owning funds is more practical to me.
Now, as things move I will adjust. Basically, I am a firm believer that leverage is great but dangerous to certain degrees. I know a host of REI will disagree with me, but I am more about behavior than math. I am willing to take risk, but at my discretion. If I was totally risk averse, I would have put 100% of capital in T-Bills. If/as rates come down, I take some of the houses and move it to a 20-40% LTV. Take that cash and invest it somewhere else, as those notes mature and give less of a yield if fed fund go down, I am now bid for more houses or other investments as I cash-out refi mine. I, personally, will like to keep all mine 20-40% LTV or fully paid off. It's more of my risk tolerance. Now if the housing market crashes, everyone will say being so unlevered now you can't pull money out. That's fine, there's sustainable cash flow from the hard assets & notes that I now can also be a bidder if there's a crash. You want to be on both sides(buying into the assets and capable seller/transfer of equity) as the economy moves.
