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Real Estate or Index Funds?
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There is no answer to your query.
It's all guesswork. It's just opinion. Everybody has one!
No one can predict future - anyone who says they can has way too big an ego.
Personally, I am probably 60% real estate 40% stock market.
Is my nest egg optimized? I have no idea - ask me in 10 to 15 years.
In my experience, the most important thing to create financial security is to invest the money not spend it. The not spending it the investing of it is more important that what you invest in.
Just my opinion.
You are in a good position - diversify don't go for the grand slam keep hitting base hits and all will work out.
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- Tax Strategist, Financial Planner and Real Estate Investor
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@Michael Street
Get professional help. Hire a financial planner to run some scenarios and create a plan for you.
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If your happy with 7-8% returns and then pay high tax on any gain you get then by all means invest in funds .
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@Michael Street There are several good points made above from @Arn Cenedella and @Dennis M..
There's no perfect solution and hindsight is always 20/20. If you want to lower your taxes and diversify across asset classes (like @Chad Carson mentions in his book) then it sounds like you should pick up a few properties but if you want to remain liquid then stocks may be the best answer.
Note: unless you use some sort of tax advantaged account, you'll pay capital gains on the stocks.
Best of luck!
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I appreciate the responses thus far.
Question, Won't we pay capital gains when we sell the property? We will not be holding these forever, just a while.
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@Michael Street
Yes you will pay taxes on the gain from real estate profits, too.
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@Arn Cenedella
The problem will all these future projections is that they require assumptions to be made about the future.
If you assume RE will go up 10% a year and stocks 8%, RE will be the answer.
If you assume the converse, funds will be the answer.
I have never placed much faith in future projections.
Depending on what assumptions, you make you can create any answer you want.
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@Michael Street
Do both. If you qualify and you're not already, I'd encourage you to invest in a ROTH IRA (I've used Vanguard with VFIAX index funds that I love!). I believe the max you can contribute now is $6-$7K/yr.
The nice thing with a Roth is the contributions are after-tax, so the funds can be withdrawn penalty free at any time since you've already paid taxes on them (NOTE: you cannot withdrawn any earnings/interest or will be subjects to taxes/penalties).
I've even used the funds once (including interest earned) to temporarily fund a REI deal. At that time, I was not penalized since I returned the all of the funds to the account within 60 days (after my cash-out refi). It was great for that particular BRRRR strategy!
Just my two cents. I am not a CPA or giving you any tax advice, just sharing my experience.
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I echo Mr. Hampton's insight. Nobody has the same situation. Get a scenario analysis from a Financial Advisor.
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You will get disbelief from this audience because most successful REI's make stock market returns look like a savings account. 30% will happen easily here (often with leverage). But my wife did 30% in her self directed IRA last year so I get that it's more of a choice than we will let on around these parts. If you have large capital needs once you are over the bridge, I'd be concerned about index funds or buy and hold rentals as it seems like safeguarding your capital might be a bigger priority than you are giving credence to. If you don't need to have access to that capital, then your real estate consideration should include holding those homes for longer. Selling income producing assets at the beginning of retirement seems to be a bad precedent, especially ones that do well with inflation.
I'd diversify by going with the real estate approach if I was in your position as your current retirement plan is heavily reliant on the stock market. Network with on the ground real estate investors and you'll see that real estate offers a greater return than the market (At the very least equal).
And a toast to the @Michael Street, a self responsible gentlemen who will be vacating a job to an incoming college grad before he's 100 without the need for assistance from the American taxpayer!
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@Michael Street as others have pointed out, there's not enough information in your post to determine what the best course of action is for you. Asking the question "do I invest in the market or do I invest in real estate?" is like asking "do I wear a shirt or do I wear pants?" They're completely different. The stock market is a purely passive investment. Real Estate Investing is a small business. My question is do you want to be a real estate small business owner?
Side Note: You mention SIMPLE IRA and Private IRA. Are the "private IRAs" Roth accounts? If you're planning on any sort of early retirement I would encourage you to study up on how Roth accounts work. I believe Paula pant has some info on that.
I'm bias of course, but I'd encourage you to have some sort of professional evaluate your plan.
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If you're very averse to having debt you're on the hook for, consider real estate syndications. Investors earn their return passively and do not have to take out debt.
In comparing SFRs to Index funds, you're comparing an active business to a passive investment. It may be more apt to look at other real estate asset classes.
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Thanks to everyone that has responded. We really do appreciate it.
So to clear up some things that may not be so clear:
Our Private IRA's are Roth IRA's. The intention is to not touch these until 59.5 or later.
if we go the direction of real estate then we would be doing the long term buy and hold plan, 20 or so years I imagine but who know what will happen in that time
I am also seeing some common threads.
1) Have a pro eval the plan and scenarios. - Will do. Need to locate one that is familiar with both strategies.
2) Real estate is heavily favored over stock. This was expected since this a real estate forum. I posted here for exactly that reason to get feed back from informed people.