Active investing in Real Estate vs. Small Cap Stocks

[Justin Cook]

Hi Bigger Pockets community!

I just created an account and would love to get your advice on where I should focus investing.

Background on me: I'm 25 years old and have been living/working in San Jose for 5 years. All my investing up to this point has been in index funds in 401k / Roth IRA. But now I have ~$50k in cash saved up (plus another $25-$50k per year of my income) that I want to put into an active investing strategy. The two main ideas that I'm considering for an active strategy are real estate and small cap investing, each of which has it's own pros and cons.

Real estate: Pros - opportunity to buy below fair value due to market inefficiency, ability to control/influence many aspects of investment performance, cheap leverage available via financing, ability to save on rent via house hacking. Cons - my market (San Jose / south bay area) has high barriers to entry and may not be possible to cash flow in (may have to rely on appreciation for a good return), I am not handy or interested in doing any rehab or maintenance on properties myself.

Small cap stocks: Pros - also opportunity to buy below fair value due to market inefficiency, highly passive / low-touch once purchased, low barriers to entry (can invest small amounts). Cons - leverage too expensive to make sense, no ability to house-hack my way out of rent, little/no ability to control/influence investment performance after buying stock.

Any advice on whether any of these ideas are not accurate, or if I'm missing any major considerations? What is your advice to someone in my shoes?

Thanks!

-Justin

[Account Closed]

Congratulations on having started early! I think doing both is a great idea. You already have been investing in stock for the last 5 years - perhaps now save for a down payment & then house hack since you are open to that idea. Buy a property where you can house hack not just for a short time but also after you are married and have kids. In short for the entire term of the loan (30 years).  

And in the meanwhile continue 401K thru' your company. I feel ~40-50% of you mortgage only (not property taxes) can be paid by the tenants.

Edit: Here is my math 

- $0.8M loan on a $1M house, 

- total cost of loan ~$1.4M over the term (30 years)

- rent, $1500 per month with 2% rent increase 

- your rental income will be $0.7M which will pay off 50% of your total loan cost