What would you do? Invest or Save

Question

Hey BP,

I'm curious on what advice you would have for a friend of mine.

What would you do in his shoes? Either RE focused or Stocks

Assumptions:

1) $50k in an indexed fund for Savings/Safety/Retirement

2) $30k in more aggressive stocks or available for down payment on potential properties

3) House Hacking primary residence currently Mortgage $2200, tenants pay $1500 abt monthly.

4) Stable income of above $100k annually at day job

5) Mid 20s age. Single

Ronald Allen Barney · Answer

Sounds to me like he's got an 80k cash position he can put into a deal up to about $380k (could be a duplex in a midwestern B area). I wouldn't sit on stocks, that's the Wolf of Wall street snorting your retirement in nose candy.

Bill F. · Answer

@Derek Schetselaar What are your friend's knowledge skills and abilities and when compared to the knowledge skills and abilities required of the various RE niches available to him, does he posses a competitive advantage? Hate to break it to you, but there is no one sized fits all answer. For your friend, RE investing may be a ticket to wealth, but for others it may be a way to drastically under perform their potential. A bunch of strangers on the internet can't do the thinking required to figure out the opportunity cost for him.

Bradley Dosch · Answer

That's certainly a great way to do it! Thanks for sharing your experience Jacob

Jacob Karasch · Answer

Those stats aren't too different from my own, so I would probably do what I'm doing now: BRRRR.Buy off-market deals with hard-money or private money. Use another loan to fund the renovation. (I've used private, 401k, etc) Then place a tenant and refinance with a bank after renovation. Having the $30k (and $50k as backup) available incase you have renovation surprises or you aren't able to pull 100% of cash back out. I would never BRRRR with OPM without having some liquidity available for surprises. Also, you'll want some cash reserves for landlording. Earning $100k W2 and only paying $700/mo for a primary should create a pretty good savings rate to help recover from hiccups.At this point I have 4 units rented (1 duplex, 2 SFR), my primary and I'm under contract on another off-market for my next BRRRR.

Bradley Dosch · Answer

It sounds like your friend has got it going on, not too much to change. If he wants to invest in RE, I think that could propel him to FIRE sooner but also index funds are great. The only thing I'd do differently is move out of the first house hack, keep it as a rental, and buy another house hack.

Jacob Karasch · Answer

I did this and I would do it differently if I could go back. I was house hacking a SFR like this, then I bought a duplex on the MLS to house hack. Then I BRRRRed myself into a primary residence. If I could go back, I would BRRRR into a house hack.Buy an off-market deal. Renovate it. Move In (with roommates). Refinance. Repeat. (I guess that would be BRMIRR)The two big benefits of doing it this way is he gets his cash back in the refinance so he doesn't have to wait to go do another one and when you buy off-market, the valuation is way lower and the taxes are way cheaper on the property.

Eddie Torres · Answer

@Derek Schetselaar I'd always invest in real estate over anything else. Stocks are too risky imo. With real estate, at least your money (home value) at minimum will be growing along with inflation and the tax benefits are nice. But I'd also still keep some stocks if you can. That keeps you diversified.

Ronald Allen Barney · Answer

If I found a duplex+ going for 380k or less and the cash on cash ROI for the scenario looked good (classic investment due diligence on whatever deal I find), I would sell off the stocks, both indexed and aggressive, go to a lender with that cash position and bank statements and tax returns, get qualified, and make an offer.

Derek Schetselaar · Answer

@Bill F. Solid points. My friend working the real estate business actually on the lending side, so the knowledge front is actually pretty well taken care of. The issue I believe is he doesn't feel super confident in fixing up properties or a lot of risk. (hence the indexed funds) I would say knowing him, the advantage would be the knowledge base, connections from being in the industry, mentor who owns 10 single family homes, but the disadvantage being that they don't know anything about fixing up homes, brrrr, analyzing deals etc. Does that help?

Derek Schetselaar · Answer

Yeah I agree that real estate should be prioritized for sure. The appreciation, tax benefits, and other people paying down your loan is great. I also agree that individual stocks can be risky, but indexed funds/ETFs I don't think are that risky. I think you can make an argument that an investment property with potential repairs, tenant issues, etc can be a riskier endeavor. Although, also usually much more profitable than 7% usually.