Diversifying $575k of Stock

[Account Closed]

Hi All,

I'm currently sitting on ≈$575k of stock, virtually my only personal assets, and realize that I must diversify whether through real estate or other means. I've been interested in real estate investing for about 6 years and have a strong understanding of the local market. However, I started a small business a couple of years back and, while it is profitable, it has not yet provided enough income to secure a serious home loan. I expect to pay myself $60k-$80k this year, which will be about double what I paid myself last year. I am currently renting at $700/month.

The local real estate market has been growing rapidly over the past 10 years  (see Bozeman, MT). The median home price was $223,500 in 2011, $472,950 in 2020, and jumped to $535,000 as of June 2021 due to the onset of the pandemic and people fleeing cities for mountain towns. The cheapest homes in town are ≈$350k, however, there are surrounding towns with homes right around $300k or less. Meanwhile, other parts of the state are much more affordable albeit with much weaker rental markets.

How would people suggest that I move forward? It seems to me that my options are as follows:

1. Pay cash now for a $250k-$300k home in the surrounding area, collect rental income with possibility to live at the home myself with roommates.

2. Pay $125k-$225k cash for real estate elsewhere in the state and try to crack the rental market.

3. Pay far less cash for a rental property out of state and deal with the associated challenges.

4. Any of the above, but rather than pay cash wait to receive my tax returns next spring and secure a loan. Which, could open up the possibility of buying locally.

5. Invest in an REIT.

Right now, my feeling is that it may be best to either pay cash elsewhere in the state to keep less than 40% of my net worth in real estate, or to wait until next year when I should be able to secure a loan. With this said, with current trends, it seems very possible that prices will continue to sky rocket locally as well as in the surrounding areas.

Any advice would be very much appreciated.

[Taylor L.]

Don't tell the internet how much money you have :)

If your goals are maximizing return, then buying a property unlevered is going to produce pretty lackluster returns. Debt is very cheap right now, but I understand you may not be able to qualify. REITs do have some advantages, but most folks around these parts will consider them more like a stock than real estate. You do not get pass through losses, for one. For two, you have no control. However, the 75-75-90 and liquidity are nice features.

I would recommend taking ~$50 and buying a few BP real estate books, particularly the books on long-distance investing and @Brian Burke's book on passive investing. Read, read, read.

I suggest that because I sense that more education would benefit you, particularly if you're considering investing from a distance on your own. Long-distance investing books will start preparing you to do that if you choose to go that route.

You may also consider syndications because syndication General Partners handle all of the financing. Limited Partners are not on the hook for the loan and do not need to qualify for the debt. Brian's book will teach you all about that.