Invest in real estate or employee stock purchase plan?

Question

I'm looking for some advice. I'm saving up money to buy our first planned rental or flip (haven't decided). However, I work for a Fortune 500 company that has a pretty good employee stock purchase plan also. My question is, should I take  the money that I'm saving and invest in my ESOP instead?

For more details in the ESOP, I can take up to $20,000 of my paychecks per year (maximum $5,000 per quarter) at a 15% discount of the lesser of opening or closing price for the quarter. The stock price has been rising steadily/slowly the last year and I feel somewhat confident it will at least stay flat. I have to hold the stock for a minimum of 1 year. I'm already investing in it, but only at $650/quarter.

For real estate, we're not complete novices, we have 1 accidental rental when we moved that cash flows nicely, and would like to invest in more deals. We live on the outskirts of Orlando, in the Clermont area, and would be looking for fixer upper under $150k. At current savings rate, we probably have enough for down payment at 20%, rehab, and holding costs in 6 months to a year.

Thanks,

Laura

Carl Leonard · Answer

Quite true.  I was not aware of ESOPs before.  Looks like they are really designed as a retirement savings like a 401k.  Companies use them because they can actually borrow the money.  Then there is the 10% off the top penalty that seems like it applies for early distributions.

There are possible pitfalls here.  I'm thinking that this may be CPA territory and the particulars of the ESOP plan may make a large difference.

Nick B. · Answer

Depends on the plan. Mine has no restrictions for holding period.

Carl Leonard · Answer

It's basically free money.  It's only tied up for three months and you will make a minimum of %15 with zero risk if you can sell immediately.  As far as I can see it is a no brainer.

I'm doing the same, but my employers ESPP plan is similiar to NickB's but the limit only 10% of pretax income and the period is six months.  It's been a good way to save for me.  I sure wish I could put more in it too.

Nick B. · Answer

I invest in both ESPP and RE and I use proceeds from the stock sale to invest in RE. However, my ESPP is different. Its discount is 15% of the lowest closing price of the last day of the offering period (Jun 30 and Dec 31) in the last 2 years period. With the stock having doubled in the last 2 years the effective discount was over 50% last June and December. It got reduced now because 2 years window moved forward but I still expect 30% this June. The stock is sellable the next day after the purchase date, so no real risk there. I always sell on the next day after the purchase. My only complaint is that pesky limit of $21500/year. I wish there was no limit at all.

Michael H. · Answer

I don't think you should invest more than five percent per year of your yearly salary into company stock. It is very risky to buy a lot of company stock. If there is a major problem at your company, there is a good chance you won't know until it is too late. Before the recession hit people at financial firms were putting a huge chunk of their money in company stock. When the recession hit, they lost everything (the stock tanked and they lost their job). Even if you see it coming, you have to wait a year to sell. There is no guarantee that the stock will continue to go up. And this is coming from a guy that loves the stock market (love REI too).

Just my two cents.

Ian McKeown · Answer

Can you loan yourself the money out of the fund and do the house too?  Sounds like you should talk to a financial planner and/or an accountant.

Will Chamberlin · Answer

If you are already going to have enough to invest in 6 months to a year, why not max out the stock purchase and make a quick 15%+ each quarter until you are ready to buy. Another consideration is that I believe this would count as reserves by your bank so overall better than just having it in a savings account somewhere.

Jay Hinrichs · Answer

this is a real estate site.. most feedback will probably be slanted that way.