Stock Market vs. Real Estate Exposure

[Isaac Hayes]

I have a sizable amount of value invested in low cost index funds in a brokerage account. I’m battling between two possible next steps in buying my first investment property.

Option 1: Liquidate 100% of the portfolio and purchase a 4-plex. The advantage here is that I will have most of my capital invested in real estate, which I believe has higher returns than the stock market. This will also only require one loan, which will give me more ability to purchase additional homes down the road with traditional financing.

Option 2: Liquidate 50% of the portfolio and buy a duplex, while keeping the other 50% invested in the brokerage account. The advantage here is that I can invest in a smaller deal than option one, learn the process of buying real estate, and proceed to purchase a second duplex shortly after. The downside here is that this will require two loans, which will decrease my ability to purchase additional homes down the road with traditional financing. I will also have more exposure to potential capital investment requirements than option 1 (two roofs, etc.).

In both cases, I will have appropriate cash reserves for the real estate and a personal emergency cash reserve.

I am leaning toward selecting option 1 since, if the deal is a good deal, I should be able to make first timer mistakes with the property still cash flowing. Which option would you choose? Why?

[Joe Villeneuve]

Percentages lie to you...especially when you use them to analyze REI.

A 15% average return in the SM < a 5% annual return from REI...assuming you start out with the exact same amount of cash.