New Investor: Where to hold my money?

Question

I am just getting started in real estate investing. I am reaching out for advice on what to do with my money while I am saving up to buy my first property. Currently, I have most of it invested in a Vanguard S&P 500 ETF with the rest in a high yield savings account. Is there a better option?

Also, I invested a relatively large portion of my paycheck (14%) into my employee provided 401k. My company matches up to 5%. Do you think I could use this money more effectively?

Mario I Fernandez · Answer

Hey Eddie,

I am not a CPA but I think your strategy is good. If your end goal is to invest in real estate don't put that money in high-risk markets. Keep saving and you will reach your goal.

Also, 401K allows you to borrow that money without penalties if it is for a downpayment on a house.

Ray Hage · Answer

I am investor as well in RE and stock market with most of the money in the former. I used to work a corp job and had the option to put money into a 401k but I decided to diversify into RE. If you are paying rent, you at least should get a primary home. So here is my advice based on a small amount of info (don't know your family situation, financials, educational background, long term goals, etc)...

If you are planning to buy your first property soon, you will probably want to be in a high yield savings account till you are ready to purchase the property. Having it in the S&P is a bit risky. It is not unheard for the market to drop 5-10% over a month or two. That would delay your purchase.

The money going into your 401k is great for your retirement but it will extend your timeline for a property. 5% match is awesome! If you are paying rent right now, you are throwing away a good bit of money. If you can purchase a house or multifamily, you should be able to offset your costs with rental income.

Doug Smith · Answer

You're doing great. The money you put in your 401K is not only deferring taxes (saving you 15%-36% depending upon your tax bracket), but you're getting that free 5% boost from your employer. It's hard to beat that. The only issue with that comes into play if the dollar tanks and inflation rises significantly. I'm a weirdo in that I skewed heavily into the real estate sector to hedge against inflation. The US Government is going to continue spending like crazy thereby devaluing the dollar and driving up inflation.

Now to preparing for a loan. A lender is going to want to see two months worth of bank or brokerage statements showing that you had that money "seasoned" for two money or they can trace any large deposits to a legitimate activity...like a work bonus or property sale. Don't take the money out of the trackable banking/brokerage system in favor of doing something that can't provide a paper trail like sticking it in your mattress. Make sure any down payment you have has a paper trail.

Welcome to the real estate investing world. I'm sure you'll do very well!

Aj Parikh · Answer

Hi Eddie, I am a huge fan of out of state investing and Long Distance Real Estate Investing was one of the first books I read before I built my portfolio in Cleveland. One of the strategies I used was working with a couple of turnkey companies and getting started in a mid-west market. I would love to connect and help out so feel free to reach out.

New Investor: Where to hold my money?

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