Gut check my reasons for NOT getting started with REI. [Seattle]

[Aengus McMillin]

Hi, so I am a new BP member, and I have been listening to some of the podcasts, reading the educational materials, and checking out the forum for the last few days. I'm interested in REI, but I'm not sure there would be much benefit for somebody in my (admittedly quite fortunate) position.

I'm 23, I live in Seattle, and I work as a software developer for one of the big tech companies in the area. I make a fairly solid six figures in salary + stock and have been able to save/invest 50-60% of that for a few years now. Although I don't necessarily want to retire right away, I want to reach financial independence, hence the high savings rate, my portfolio is already at around 250k and I should be able to hit my target number within about 7 years. I have been thinking of real estate investing as a way to leverage my position and grow it faster, but my concern is that the effort required to get much in the way of wins in the Seattle market just wouldn't be worth it compared to simply letting my portfolio grow using Bogleheads style index fund investing.

The Seattle market has really high prices right now, so the 2% rule would be crazy to achieve, and even the 1% rule would be incredibly rare, i would likely be looking at closer to .5%. So cash flow likely would not be great in the short term. I have been thinking about appreciation as a route to profit, but concerns about a possible correction make that approach concerning. Alternatively I could try and find places out of the city/state, but I don't really drive, so the scope of places I could look at would be a bit smaller, and there would be additional effort dealing with renters out of area and it would guarantee that I would need to get a property manager.

Does it seem like there would be a good path forward for investing in Seattle, should I consider trying to partner with someone who can visit places in person and try and invest out of area, or should I likely just keep on my current path and stay the course on index funds?

Currently leaning towards staying out of REI for now, and possibly try to get into it after a correction, but wanted to get a gut check from people who know much more than I do.

Thanks!

Aengus 

[Tyler Mullen]

@Aengus McMillin

You have articulated your feeling about fear of overpaying, or buying something that doesn't cashflow now.  Perhaps take a longer view and consider all the aspects of property that would work in your favor.  Day 1 cashflow is not the whole story.

What are your risks if you DON'T buy?  Risk is uncertainty.  What will your rent be in 2020?  2025?  If you buy on a 30 yr fixed you could answer that question, which eliminates that risk.

Same holds for investment property.  You buy on a fixed payment but there are many ways you make money, and what you make can go up while you payment is fixed:

Yes the value could go down, just like the stock market could. That can't be the only consideration, I don't believe all the other REI taking place in Seattle is irrational. It could go down or... or it could keep going up, in my neighborhood the average annual return for ten years has been 15%.

Improve the property and the value goes up. (You cant put a new roof on a stock)

Inflation and or property improvement justifies increasing the rents over time.

Your rental income (and possibly w2 income) could be offset by depreciation.  Something you'd probably be interested in as a high wage Seattle tech employee.

Run the property better, get better tenents, cut expenses, NOI goes up.

Leverage.  You can invest $250k in stocks and make 3% dividend income, or use $250k to buy a $500k property, then you collect rent on the value of $500k, not just the $250k.

King County and certain cities therein have limited development for decades.  This is causing a flood of demand now due to the massive success of key businesses based here.

My advice is to do both.

You also said you lean towards passive investing, maybe you need to REI passively instead, that might make your perception of the risks change too.