All Forum Posts by: Kevin McGuire

I'm pretty conservative, so I can't advise on what you should do, but here's how I'd think about it:

1: I'd never withdraw from a tax deferred account to invest in a taxable asset. Tax deferred compounding is a huge long term advantage but requires patience.

2: Once I have my tax strategy in place, I consider balancing my overall portfolio with different asset types representing different risk/return characteristics.

3: I then consider judicious use leverage since leverage increases risk but of course also increases potential returns (and, potential loses!).

4: I try to avoid thinking I can time the market. To @Paul Vail's comments, I try to avoid framing the problem as "stocks are down so I don't want to sell any". The best technique I know to combat sunk cost bias is to say, "Knowing what I know today, how would I deploy my capital in the most tax and cost efficient manner?". 

If I couldn't invest in real estate without withdrawing from a tax deferred account then I'd wait. I'd maximize the tax deferred accounts first, then accumulate cash to invest. I might borrow against something to get the down payment (e.g. HELOC) but I'd need to have confidence that I had either enough after tax income or access to leverage to manage unexpected REI costs (repairs, maintenance, property tax increase, vacancy) but I'd be cautious with this approach since adding debt increases personal risk.

@Dmitriy Fomichenko that's a great strategy. Nice blog post. Wouldn't you need to ensure that any cashflow goes back into the IRA?

@Larry W mullen it sounds like you're thinking of trading off tax deferred stocks for non-tax deferred real estate. In some ways real estate is tax deferred since you don't pay capital gains until you sell (and there's 1031 exchanges) but the cashflow has tax exposure. I guess if the cashflow equals your 401K distributions then it nets the same. I am not an accountant though.

I'd also consider diversification and liquidity. For diversification, I have real estate, stocks & bonds. These three are somewhat uncorrelated so that diversification helps even out returns in the long run (stocks may be down but real estate up or vise versa). For liquidity, stocks and bonds help: the problem with real estate is that it's highly illiquid; you can't sell just part of it and selling takes time. That illiquidity increases risk. That risk is increased the shorter your investment horizon, which I mention since you're at an age where you can take distributions. Personally I mitigate that risk through stocks & bonds, and I'd not make the move you're considering without that backup.

Here's something I invest in, Sailport Waterfront Suites: from the outside it's a hotel (you can find them on TripAdvisor) but the units are all individually owned as condos. You put your unit in the rental pool and a professional management company takes care of everything: advertising, booking it, collecting the fees, cleaning, ... every month I get a check and otherwise I don't think about it. Now and then there's capital projects, for example they want to upgrade all the furniture and you have to pay for that but they do the selection and installation. Recently I needed a new HVAC but the onsite management connected me with a contractor so pretty easy.

You can also stay in it.

The management company Provident has other properties which I assume work the same way.

Of course, they take a good chunk of the revenue, but that's just how it works. My ROI has been perfectly fine and it's required almost zero work and that's what I care about.

PM me if you want more details.

There's an adage I heard on one of the BP podcasts, "Live where you want to live, invest where it makes sense". So kudos to you for considering investing out of town. My one piece of advice is to find a good property manager; you need boots on the ground if you can't easily swing by your unit to check on it. 

Since you can invest anywhere, here's a recent blog post with a list of potential places: Top 10 Real Estate Markets for Cash Flow in 2022

There's also this book, Long-Distance Real Estate Investing (I've not read it, I just know of it's existence).

Finally, BiggerPockets has an agent matching system where you can find investor friendly agents in a given locale, Find an Agent

To echo the previous replies, assuming the numbers work (and they may work just as well for a different property type), the risk is that your business is now dependent on the reasonableness of another individual. For example, what happens if the roof needs to be replaced by the other side doesn't want to? Personally I'd not take that risk, I either want to own it outright or be part of a well managed condominium.

I also use QBO. 
Additionally I use Trello but to coordinate with my property manager ala Kanban style. I don’t use any other property  management software but I only have 11 doors. 

I find the absence of a time machine to be one of the most vexing aspects of investing :)

But seriously, it doesn't matter what things were worth, only what they're worth today and their future expected risk adjusted returns. The investor psychology here is kind of fascinating. Eyeballing the S&P chart, we're back to around the same value as of 12/17/2020. If we had been trading flat since then would we be as bummed? If I think of the "money I've lost" with the market downturn, I'm really making a statement about an alternate world where I had sold all my stocks at the high. But I didn't. Basically none of us did, that's why it was at a high. In truth I never had those gains since I never captured them. So the line of reasoning only fills me with regret. And that regret is dangerous because it induces sunk cost bias. 

I feel it too! Around December of last year I was thinking I should reduce my stock exposure, pay down debt, have more reserves. I knew that the market was crazy and felt overvalued. The problem is that I've felt that way at various points for the last five years and I know if I had done so five years ago I would've missed out on market gains; I'd be further behind than I am today. However, just as I didn't capture the gains at the high and so I was never "that rich", I've not captured the recent market loses so I'm also not "that poor" by comparison. Since I don't need to access my investments right now, at a practical level the only thing that's changed is some numbers in a spreadsheet and my anxiety level.

The way out of sunk cost bias is to say, each day, "Taxes and trading costs / commissions aside, if I was sitting on all cash today, what would I do?". That psychological trick helps to zero out mental time travel. Personally, I would probably end up with a portfolio about the same as what I have today. Each day as an investor we need to analyze what our best moves are.

Since I believe in the efficient market hypothesis and don't believe in market timing, my only move is to stick to my strategy. I may rebalance a little, the execution of which would look like selling some real estate to buy stocks. That thought scares me but that's what the math tells me I should do. I think it was Warren Buffet (or Albert Einstein or Mark Twain, all clever things seem to be attributed to one of those three) who said something along the lines of, "The stock market is the only market where buyers want to buy more when things are more expensive and avoid buying when things are on sale". We should do what we always should be doing: forget about the past and search for value.

All that aside, I do feel bad for those who are retired because withdrawing during a downmarket increases longevity risk due to sequence of returns. Hopefully they've constructed a balanced portfolio with reserves to wait it out.

As for the crypto bros, I'm less sympathetic since I always felt that the intrinsic value of crypto was $0.

@Nick Vazquez yes I think you’re right about it needing to be month to month, I just assumed that was already the case (that the original poster didn’t extend a lease where they were so under water from the start)

What @Chris Baxter and @Nick Vazquez correctly captures the rules.
@Jamie Blair raises a good point: if it's a SFH and you sell it, the buyer may be purchasing for their own residence in which case they can evict the tenant. The tenant may be willing to pay more rent to avoid this possibility, since they'd have to move AND they'll end up paying market rent anyways. Maybe you can offer them a rent which makes you cashflow neutral but still a bit below market and they avoid a move, arguably a good deal for the tenant versus the alternative. The tenant and landlord can always agree to a rent increase different than the Ontario provided cap. I think there's a special form for that.

To add to the comments above, you first need to determine whether the economics meet your criteria and comfort level. Can you afford to buy and can continue to pay the mortgage if you have an employment gap, can you fund repairs, etc? Beyond that, you're really asking a market timing question. Is this a better or worse time to buy than in say a year or two? Who knows! There are too many different forces at play: rising interest rates push prices down, low inventory pushes prices up. Certainly renting has the lower economic risk versus buying so it may come down to your risk tolerance. 

For the general rent vs. buy pros/cons, this video nicely lays out the factors.