What Money to Use for First Investment Property (Buy&Hold)

Question

Hello BP community. I was hoping to get some different opinions for getting into real estate investing. Currently I purchase stocks at an 11% employee discount and its a relatively safe stock. It also pays dividends and they get re-invested. The longer I hold the stock, the more the dividends grow and get reinvested with a snowball effect. I contribute on a dollar cost average basis and has become a sort of forced savings account. All my extra cash goes into the company stocks and I don't save any substantial cash.

I'm not really sure on how to calculate the ROI of this type of investing, but the re-invested dividends produce about $300 per month (currently) and the amount increases about $10 per month on average. So in my mind that's like passive cashflow with out any headaches, but it doesn't have the other benefits that real estate has.

Another option would be opening up a HELOC on my primary residence and pay the interest until I can refi and payback the credit. And just use the stocks as a reserve.

Or a third option is transfer my traditional ira into a self directed ira and use that money. But the stock market has been hitting all time highs lately and I'm not sure I can hit those returns in this real estate market.

Any other ideas or different perspectives would be much appreciated.

Glenna Wood · Answer

Consider that owning stock in the company where you get your paycheck keeps a pile of your eggs all in one basket. I worked for a smaller tech firm in the '90s with a 15% discount stock plan where you were free to buy on Friday and sell on Monday. This sweet option  disappeared overnight when my division of the company was snapped up by a bigger firm.

If you stay in stocks, seriously consider investing in companies other than your own. My past 5 year stock ROI is 20%+ but some years I made way less and hunkered down in cash. It takes time to research so any investment outside of your current stock will take more of your time and effort. You mention an IRA. How are you investing that $$?

Stocks have no tax advantages. The passive loss rules for rental RE do let you offset some of your W2 income while offsetting most of the costs to own the RE and ideally while it is appreciating. This might fit your situation. But be prepared to have savings on hand for unexpected expenses if you own a rental. A caution for you since you state you aren't saving outside of your stock plan.

How to diversify across asset classes is always up for discussion and there is never one size fits all. And with RE there are many choices of investment types. In 40 years I've always been about half RE and half stock market. A big difference is liquidation. I can sell a little or all of my stock any time. Not possible with RE and the selling process costs you. The other is valuation. Stock prices get real time actual valuation. RE value is always someone's opinion until an actual buyer with real money is present.

Best wishes on your journey! And kudos for having the initiative to invest. So many people don't.

Taylor L. · Answer

Man, that discount! The big risk in getting massively invested in your employer is that you have not only your income, but a large percentage of your wealth tied to the performance of that one company. So not only are you banking on the performance of the market, but also the performance of your employer.

The market hitting all time highs means you're buying in at all time highs. Now, the term 'all time high' is overused in my opinion. History is absolutely filled with all time highs, which may have been scary at the time, but now look cheap. Right now you're buying in at all time highs.

The amazing performance of the stock market over the last couple of years only really applies to the shares you've already bought though! The shares you buy now are purchased with that past performance baked in, so any actual forward performance is completely unknown.

What you get by investing in real estate are diversification, control, and cash flow. Remember that stock dividends are not guaranteed and can be discontinued if the board deems that appropriate. Cash flow from real estate is much more in your control.

Aaron W. · Answer

@John Tobin With the stock market, it is great when things are going well and the stocks are at all-time highs. However, when things hit the fan, and it is inevitable, what do you do then? It is always wise to diversify your investments, even though you may get better returns by staying in one place.

While it's great to get your company stocks at a discount, should you be all in on one stock? One bad day could potentially tank a stock. Even if you continue investing in stocks, it would be a good idea to diversify into other stocks.

I used to have all my investments in the stock market as well and have been diversifying into real estate the past few years as a hedge against the other. While past performance is not a guarantee of future results, the stock market has averaged between 7%-8% returns and I would expect those same overall returns to continue in the future. So what does that mean for all the recent high returns in the stock market? We should expect the law of averages to eventually even things out.

Just my two cents. Best of luck!

John Tobin · Answer

Thanks for the replys.@Glenna Wood, I actually have an old IRA from a previous employer and a 401k with my current employer. The old IRA is just invested in some index funds, nothing special.

That's an interesting way to diversify your investing half in RE and half of stocks.

I have always been in the mindset to not have cash sitting idly by eroding from inflation so that's why I try to have all my money invested. But as I transition into real estate I guess I will need money in a savings account ready to go.

What Money to Use for First Investment Property (Buy&Hold)

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