Invest in mutual funds or in real estate ?

Question

Answer

Real estate has better returns, but is more hassle.

Answer

@Rob Smith - all great points above.One thing that I didn't see mentioned is becoming a private lender for real estate investors.IMHO - this is the fastest way to grow you limited seed funds.You can easily charge 1-5 points PLUS 12-15% APR for short term loans that are secured by real estate.I personally use a handful of private lenders to fund my wholesale business [I don't do assignments, I close on each property before reselling].I never pay more than 65% LTV and give the lender a Promissory Note along with a Mortgage. In addition, they are listed as "additional insured" on the insurance policy that each property gets. This makes it very secure [more than wall street] for them.All of my lenders enjoy strong double digit annual returns and only spend a few hours a year [making wire transfers] to realize this profit.Yes, I am biased when it comes to RE or Wall Street - but ponder this and you'll see why: We all know bankers are some of the most penny pinching individuals on the planet, right? Go to your favorite bank and ask them for a loan like this: "Mr. Banker, I want to get a loan to buy 1000 shares of Vanguard MF - will you help me? Of course the answer will be NO. Then ask them partner with you on some REI and magically the answer is YES. So...if the cheapest, penny pinching people on the planet won't help you invest in Wall Street - why would you want to be??I hope that helps.

Answer

Hi JakeLots of opinions here, all valid. If I could, I would state that you are wanting your 40k to create for you what most people are looking for - financial freedom. The question you really are asking is - 'how can I become financially free using this 40k I have worked for so hard?'That requires a more complex answer.I can't give you an answer, but I can tell you about assets. The key to wealth, in my experience, is in acquiring assets. That doesn't mean that you cannot acquire mutual funds, as many REI people would have you believe. Mutual funds are assets, as much as real estate. Intangible though they may be, barring something catastrophic they certainly hold value and can increase your personal net worth substantially.I would encourage you to consider the following question - 'how can i get people to pay my bills for me?' When people pay your bills, whether through rent or a business you own, you can reinvest your hard earned money into - you guessed it - acquiring more assets. Monopoly taught us a valuable lesson we took for granted in terms of green and red houses and hotels, but the real key to the 'real' game is to change your perspective from being an earning employee to an entrepreneurial acquirer of assets - through your lifetime, and ideally, onto your heirs lifetime(s).Focus on asset accumulation, whatever the vehicle or vehicle(s), and you will see a vast horizon beyond your current 40k mental construct. It isn't a question of real estate vs. mutual funds, it is a question of 'how do I get more?'Hope this helps.rf

Answer

Rob, What you should invest in is a personal preference. If you go to your financial adviser he will most defiantly tell you mutual funds because they can make money off of it. Advisors will almost never tell you real estate because there is no way for them to benefit. I would say buy a rental and use to cash to reinvest and buy more rentals so by the time you retire you will have a nice money making machine assembled. Real estate is multi dimensional asset class that makes you moneys in many different ways while you hold the property. It is also great for tax purposes. You have to understand though, its not completely passive. You will have many more head aches with real estate, but its all part of the experience. You need to ask your self if your ok with a more high maintenance investment. Even if you have a property manager, you will still have to manage your manager. In my opinion, its worth it. As far as a market is concerned, the more boring the better. Cali and New York City are good examples of terrible places for buy and hold. Why would you buy a house for $1 Mil that rents for $3500 when you can deploy that same 1 mil and buy 10 houses for $100k each that rent for $1k per home. You can find a lot of good markets in the midwest. Indiana, Tennessee, Ohio, etc. The second biggest determining factor would be a great property manager. The property manager you pick will be everything when investing at a distance. They will make or break your investment.

Answer

If you are debating between out of state rentals and mutual funds, buy the mutual funds (total stock market index w/ ultra low fees). I'd buy my primary residence locally, rent rooms, and eventually turn it into a rental before I'd do either of those, though. If you already own your primary, consider turning it into a rental (if it will cash flow) and buying the next to move into & fix ... repeat as necessary.

Answer

I love real estate. (Obviously) but if you choose to go the mutual fund route, investigate Vanguard Index Funds. Warren Buffett recommends them, too.

Answer

Why not diversify and invest in both?The best place to invest I think is always within a 90 minute radius of where ever you are located.

Answer

Really Jake? What experience is this based off of? How many rental properties have you purchased and held in Cali or New York? You aught not be bad mouthing markets in which you have no experience ... I don't bad mouth Indiana, Tennessee, or Ohio. Trying to do it from thousands of miles away only compounds problems ... great cash flow for his contractors, realtors, and property managers, but not so much for him. Focusing on cash flow only is very narrow minded and short sited in my opinion ... it is only a small part of the total investment return if you are in a desirable RE market. I've got the consistent long-term returns to back that statement up, and no, it isn't speculation or luck, it is a lot of hard work to buy it right, fix it right, rent it right, and eventually sell it right. Good returns can be made in any market in the USA if you are local, aren't afraid of hard work, open minded enough to see the opportunities, flexible and brave enough to seize them.

Answer

Real estate has the potential to significantly outperform or underperform a mutual fund, the real question is how much effort are you prepared to put into it? If you're looking to just make one decision now, and never think about it again for 20 years, real estate is probably not what you're looking for.

Answer

I would restate @Brian Mathews statement and say real estate has the potential of better returns. There are people, this very moment, that are losing money from real estate month after month. And not only does real estate have more hassle, the potential for greater returns also means greater risk. If you put 40k into some no load index funds you can only lose 40k. You invest in real estate and you have an infinate potential for loss.on the flip side, 40k in mutual funds/index funds will take much longer than 15-20 years to produce any reasonable income. I agree with both of @Russell Brazil 's points. Whether it be stocks or real estate you have the best chance of success when investing in what you know. Local markets are what you know. I think out of state as a first attempt at RE investing is pretty risky.