Doing fine w/ stocks, hoping to do better w/ REI - how to start?

Question

Hey I'm pretty new to the BP forums and the BP podcast. My wife and I are learning a lot about REI lately, mostly syndications, although we do own a couple of rentals (4-plex and duplex) that we've had for some time and that do fine for us. Right now we're teetering on the edge of becoming seriously invested in some new deal, likely a syndication, but we are getting started late (in our late 40's) and are feeling the need to go big - like by taking money from our stock portfolio (currently about $1.5M). It feels crazy to remove money that is currently doing about 24% and put it into real estate, and I know there are a thousand variables that could affect this specific decision, so I'm asking if anyone has any general input, or if they've been in the same situation.

Thanks In Advance,

Cole

Eric Hajdu · Answer

Hey Cole, I can relate to your post and find myself in a very similar situation, married, living in Brooklyn, two kids, one of which is a teenager, and two NYC rental properties. I also am on the cusp of doing a bigger deal, most likely a multi family in a Class A Brooklyn neighborhood, but I would suggest that you don't empty your brokerage account to fund more real estate. I work in the Stock market and get this question frequently, I tell people to consider their net worth as a whole and find some balance between your equities and real estate. Meaning if you have a $1.5 mil brokerage account, probably would make sense to not have more than $2 million in real estate equity. Just my opinion, and the way I attempt to keep a balanced barbell on my overall financial strategy, good luck!

Jonathan Greene · Answer

Syndications are really just another way of doing stocks since you are only minutely sharing in the deal so you have to decide if you want to become more invested in real estate investing or earn on the stocks. I leave around the same amount in index funds all the time and use other money or line of credit for deals. I don't like removing a big chunk to do a deal unless I know I can replace it when I refi back. The real question for you is, why have you guys been getting so into real estate. Is it to make more money than the 24% or to diversify an already nice portfolio. I like to have a diverse portfolio of assets that include real estate, stocks, bonds, startup seed, etc.

Alexander Szikla · Answer

Hi Cole, The 24% returns generated by the stock market are atypical and will not last. The market's historical return with dividends is ~10.8%. With leverage you can achieve significantly better cash on cash returns and once you take into account appreciation, principal paydown and tax benefits real estate becomes a no brainer. Do you own your home in NYC? If not, consider a house hack via FHA. The down payments would be even lower (3.5% to 5%) with high lending limits and fantastic tax benefits on capital gains. Plus, you would still have plenty of money left over to invest in a syndication!If you can get a 4 unit and a basement, that would be ideal and create major cash flow and equity creation, plus you can not worry about a property manager and boost your yield.Personally, I am very bullish on New York and NYC itself. Sure it suffered due to COVID, but you want to buy when there is distress. I think all the folks who moved away are already getting bored and already coming back. Plus, the vaccine is getting rolled out which will curb the spread tremendously. Now is the time to buy.Cap rates came all the way down to 3% (or below!) during the "boom" times but COVID has loosened everything up and now 5% can be had in Manhattan, 6%-7% in Brooklyn and even 8% in the Bronx. Nationwide rates hit a low of 2.7% - so there has really never been a better time "spread" wise.Moreover, the FED has printed so much money (~25% of all dollars in existence were created during COVID). This has been reflected in real estate nationwide except NYC which is a laggard. We know inflation is skyrocketing and RE has taken off, New York is a matter of time. Get on the rocket before it takes off. Long term, I think NYC will come back as it always has time and time again. I am also a great believer in investing when there is distress and deploying capital when you can.If you are looking for yield in the short run, Manhattan may not be for you. However, it is certainly the most attractive it has been in years from a cash flow perspective. If you are seeking out asset accumulation and equity appreciation over the long term then there are certainly fortunes to be made. And there is still plenty of cash flow opportunities in the outer boroughs if you buy right!

Frank Wong · Answer

I think at your age you need to be strategic with your investment and not take on too big of a risk. Buying your own rentals has worked so far and you want control of your money moving forward not less. If I were to invest in a syndication I would just do a REIT. If I needed my funds for whatever reason I can click on a mouse and my funds are ready. I have control.

Paul Moore · Answer

Hi @Cole Bennett you got some great advice here. I’ll just add a few thoughts. First, join The Real Estate Crowdfunding Review online community. They provide lots of ratings and reviews for a variety of syndicators. Second, get @Brian Burke’s BP book on vetting syndicators and deals: The Hands-Off Investor. I think you’ll find these two resources quite helpful before you invest. Good luck!

Account Closed · Answer

I look at my overall investments with asset allocation in mind. I have broadly 3 asset classes: Traditional (index funds, stocks), owned rental homes, and passive real estate (lending, private funds, syndications). In my case I have roughly 30% of my money in each asset class and try to not have more than 10% in any single investment. I also have a fairly hefty amount of cash (2 years expenses) You can decide what you are comfortable with and then re allocate from stocks to REI if you want to. I should mention that I am retired and using this portfolio to live off. You may have other considerations depending on stage of life.

Taylor L. · Answer

That REIT liquidity is a double-edged sword, though. Many publicly traded REITs took massive drops last year, and many investors panicked and sold, fearing the worst. Then many, but not all, of those REITs did recover in price to at least some degree. Direct real estate & syndication investors are unable to do the panic sale.With liquidity comes volatility, and many investors have a hard time stomaching that volatility. Commercial real estate is just not as volatile as REITs or traded securities, on average. Being fearful when others are greedy and greedy when others are fearful is actually very difficult. Even Warren Buffett did not succeed at that in 2020.Liquidity cuts both ways! One of the many reasons stock investors statistically do not beat the market in the long run. Psychology gets in the way.

Cole Bennett · Answer

Thanks, Frank. Definitely something to think about. We feel like we're getting started late in this but we're wanting to accelerate so that we can have some better retirement funds. That certainly comes with some risk. Trying to educate ourselves as much as possible before taking the leap, and we may still decide to go a less risky route. Thanks for your help!Cole

Cole Bennett · Answer

Hey Jonathan thanks for your advice! We certainly aren't counting on the stocks to continue at 24% and we recognize that we can't take money out of them without a hit on the taxes. From what we've learned, syndications are in essence RE but yes, without the active component that we've been used to with our 6 units (just dealt with the classic toilet leak yesterday!). But since syndications qualify as an RE investment in regards to taxes, you can take the advantages of bonus and deferred depreciation. And the numbers on returns range wildly from deal to deal, of course, but it seems safe to assume an annual return of 7%, with an overall equity multiple of 1.6 at the end of 6 years. I recently saw a track record from a company who (of the ~23 deals they had closed since beginning) averaged a 1.6 EM and a 19 month hold period. I haven't verified those numbers personally, but I know other people who trust this company (I'm new to BP so I'm trying not to be too specific and get banned for advertising). A 1.6 EM, even if factored every 2 years (and taking 25% out for taxes at every sale) turns a one-time investment of $200k into $8M over 20 years, and that is still blowing my mind. Other than all that, yes diversification is good, and we probably need more of it! Including startup seed investments, which we've looked into a little bit recently. And yes on the HELOC potential as well - I just wrote about considering that in my previous comment above. Thanks again for the great input! I'm getting lots of stuff to think about from these posts! Cole

Cole Bennett · Answer

That's great advice, Eric, thanks so much. Really helps hearing it from someone in such a similar situation. With our 2 properties in KY, we are on the cusp of doing a refi/cash-out where we will end up owning the smaller one (about $200k) outright, so one thing we're considering is taking that out in a HELOC to have ready if we need to invest quickly. Or we may put it into a syndication or fund - given that the interest rate makes sense to do so of course. I was gonna say that right now our barbell is pretty much all stocks, but now that I really think about it, it's probably 75% stocks and 25% RE - which isn't as bad as I thought. Definitely time to boost the RE side, though. Thanks again!