All Forum Posts by: Paul Vail

Quote from @Bill B.:

@Paul Vail I bought my first Ibonds ever a few months ago after seeing a YouTube video showing 9% returns. I do dislike any paper trail or statements though. It’s a little scary sending $10k off to a website with the hope of getting more back later. Even if it is a government run system. 

Ps. One of the under appreciated benefits of real estate is that unlike retirement accounts you don’t have to make withdrawals and worry about running out. I never thought of this until I quit working and stopped making deposits. I couldn’t even imagine trying to retire on a million in my retirement account with a decreasing balance every year. Hoping not to outlive my money. I’ve never taken any “cash” out of a retirement account or even a regular brokerage account. ‘That’s not what those accounts are for” I’ve been told my whole life. Almost everyday I appreciate that I plan to never withdraw a dollar. 

I hear you about paperless purchases. Been doing it for many years now with treasuries, but the first time was a little spooky, so I did a trial of a $50 E-bond (when they still existed). As my wife and I got closer to realizing we were financially comfortable, we started shifting to our desired cash % I-bonds. I've use CDs for 'local' cash parking/emergency funds and teaching acquaintances how to build a CD ladder, but shifting to I-bonds for the bulk of our cash component - less interest rate chasing effort. I can buy one personally, buy another for my business, and a third for a revocable living trust each year (max=$10k). So can the wife, and each kid.

As for withdrawals from balanced diverse equity/bond investment accounts, Bengen's popular 4% rule with the Monti Carlo math doesn't lie: for nearly everyone, withdrawing 4% annually should allow the nest egg to live out >30yrs under most all 'worse-case' financial climates. It assumes all dividends and growth of the account is reinvested. His model really allowed for 5%, but the more conservative number appeals to my nature. There are a lot of ways to manipulate (and measure) the math. I'll often pop VTTSX or VTI/AGG into the online calculators or spreadsheets to test. That million you speak of should last essentially forever at a 3% draw, or at least the next 3 decades at 4 or 5%. $33,000 is a bit of beer money... The statistical odds are one's nest egg will grow, not die -- depending on one's spend habits.

The downside? Under the above models I suggest, the balance should not decrease, but does it increase in step with inflation? For most models and my lifestyle, absolutely. I'll give a link to play with below:

https://www.retirementsimulati...

[I'll use $1mil as current savings, no additional deposits, a starting age of 59, a retirement age of 60, asset allocation of 50/30/20 stock/bond/cash, $40k/yr withdrawal, 7% market, 3% bond, 2% cash returns, a 50% chance of a market crash in 5 years, and inflation at 5% (because the FED is dreaming if they think they can get it back down to 2% with 50 years of tax-cut-n-spend and tax-n-spend 2-party politics).] I have no illusions that I can live to 100, but I might make 90 if the healthcare industry doesn't bleed me dry. I stand a 94% chance of not running out of money. Those are pretty decent odds. I don't add in social security when I'm 70 -- that's icing on the cake and outside my planning parameters.

The beauty of real estate and my attraction to it as a 'late comer' after running my own business and trying the 'retirement side gig' for a while is precisely what you suggest -- what if a RE portfolio would net that $33k in beer money instead? What happens to that cool million nest egg? It just grows, one has absolutely no stress. If the stock/bond market falls to pieces for 3 decades, you still have beer with RE. If the real estate market falls to crap, you still have some of that million in paper. Sure, the two categories are intractably linked and don't move fully independent, but still - backup plans. Always have plan B along with plan A. Positive cash flow, growing assets, multiple categories.

Quote from @Bill B.:

@Paul Vail

If you go 30 years with the real estate only appreciating 2.5% per year that means the $500k property is now $1 million, on top of the more than $1million in rental income ( $35k in the worst year #1 times 30 years ) so you have $2million compared to that $589k. Plus. Within 10 years you could pull out your original $100k and do it again. Or put it in that Roth. 

Real estate wins for 2 reasons. The leverage 5X’s your returns. And it’s impossible for the real estate to stay at 8%. It has to keep climbing as interest decreases and rent increases. As an added benefit. It’s putting that $35k per year in your pocket, not locking it up your Roth account. So if you didn’t need the cashflow (since obviously the Roth doesn’t have any cashflow for the entire 30 years) you could buy another property every 3 years with the cashflow. So you could easily turn your $100k in to 10 properties worth between $500k and $million each in 30 years. 

Ps. A real life example is without trying I invested $308k in to real estate over the last 5-11 years and it’s worth a little over $3.6million while brining in a little over $180k/year in cashflow. Equivalent to $103k becoming $1.2million in 11 years and cash flowing $60k/year. It darn well better double if not quadruple in the next 19 years. So my estimate is $100k will become $2.4m- $4.8million while cash flowing between $120-$240k per year in 30 years total. This is 99% hands off investing before BP, before all the free webinars, just buy and hold. I could certainly do some cashout refis and probably double these numbers, but I hit my goal and just started to coast. Life is short. And while the odds are you’ll be alive a year from now, it’s not guaranteed. 

Thank you!  This is where the numbers get interesting -- and better address the OP's question.  We are assuming real estate will continue to appreciate (after this bubble pops) and a number of other issues (tax code doesn't change), but those same assumptions are as iffy with the paper investments.  Both strategies have strengths -- so it's a matter of what the OP (or any investor) is interested in pursuing.   However, I do beg to differ -- real estate investing requires work no different than paper -- one has to learn what each tool does, what is involved in making it work, what can go wrong, what one's lifestyle and mentality can support.    Personally, I'd tell you to do both -- invest in a Roth if you qualify, a SEPIRA or 401k-ish depending on your work, AND RE.   And if you want to be really contrarian, look up I-bonds for parking cash >1yr long-term, too.

Quote from @Brian Lenzer:

Is home insurance and property taxes considered part of the mortgage? I am wondering because I am trying to calculate NOI and hence cap rates, so I want to make sure I am using the proper standards. Thanks in advance!

Property insurance and taxes are usually bound into the mortgage within the escrow math, so they sometimes get overlooked.   So yes, you are paying the insurance and taxes, as you would any other gross operating expenses (mgmt fees, maintenance, legal fees, utilities that the tenants don't cover or within an empty unit).    Net Operating Income = Gross Income - (all of the aforementioned costs + whatever I left out).  

Quote from @Bill B.:

In stocks you have $8k minus taxes (even if it’s in a 401k you pay taxes when you withdraw the money.) so you net $6,400.

If the $100k were fed into a Roth, we'd have to assume the investor is <50 yrs old and this is after-tax money.  As they asked for a 30yr time horizon, we'll assume they are 30.  At that age under present rules, they can plop $6k/yr into a tax-free Roth.   So that is `16 full years at $6k/yr, plus in year 17 they toss in the final $4k.  At the end of 30 years, they have ~$589k in the Roth.   All of that tax-free, inheritable, with no RMDs.

 I would like to see the math on the RE.  As others have noted, we don't know all of the ancillary costs, write-offs, how much is expected to go into maintenance/upkeep, taxes, rent opportunities, appreciation and so forth.   

Quote from @Greg Scott:

I've invested in over 50 properties since 2007, both single family and apartments.  Every single one has done better than 8% annualized returns.  Wall Street has brainwashed us to think that 8% is good.

You have had admirable returns. You've also put some work into the effort. Some folks have very different lives for a variety of reasons, so they have chosen W2 jobs or otherwise have not plunged deep into real estate. In that context, 'paper' investing can be the most attractive or only real choice for them. A 401k/403/TSP, or a SEPIRA or a Roth may be the only practical options. Heck, a 20 yr old kid with no college can work a retail job, throw $5k into a Roth with VTI (7% ROI) every year for 10 years, and do nothing more and end up with $2.3mil tax-free in 6 decades (or $4.6mil if she does $5k every year to the end of the period). Sure, it's nearly end-of-life, but that's a tremendous return through the power of compounding. So, neither one's choice of work nor choice of investing is fruitless -- and not everyone is cut out for real estate.

Quote from @Alex Breshears:

Quote from @Paul Vail:

Quote from @Alex Breshears:

Hi Katrina! Like others have mentioned, it is going to really be a matter of how active/passive you want to be, and also what timeline you would like access to the capital again. For example, unless you buy a deal with some equity, your 10% to 25% equity downpayment is likely locked in the property for at least a few years. I personally really enjoy private lending, and it would be easy to get $700 a month of an interest only payment coming in each month. There are markets where that amount could be a 1st position loan.  I have a book that was just published by BiggerPockets about private lending in case you are interested to learn more, but also feel free to send me a message. Always happy to chat about private lending as a strategy. 

Hi Alex,   do you folks have a basic pricing sheet for your loan services?

Hi Paul! Great question! Since we are lending out our own capital it really depends on the deal, the borrower, etc. We can give ranges but not specifics until we know what we are lending on and how. For example, we do 2nd liens - that is perceived to be a riskier loan - so it would command a higher interest rate. Now compare that to someone who has a property they own free and clear and just want a first lien for 30% LTV. That is a much different picture than someone who would be at a combined loan to value of 75% with a 2nd lien, versus a 1st lien at a very low loan to value. Also - true private lenders won't lend in several states, we generally are hyper local and lend either in our own backyard or in a market we know well in another part of the country. There is a push in the hard money space to rebrand themselves as private lenders, but they are in fact still hard money lenders. The reason this makes a difference as a borrower is that the whole loan process is totally different. Private lenders like myself are more relationship based. We are going to want to know what you have done, we want to know you as a person, most of the time we don't even check credit scores. We want to invest with people we know, like and trust. Now compare that to the typical hard money lender experience where there are formal applications, possibly credit pulls, maybe formal appraisals required, minimum credit scores, minimum borrower experience, minimum capital reserve requirements etc etc. Hard money and private money are not the same, but they are two different tools in your tool belt to have in real estate to get the job done. Like everything else they have their own pros and cons, so I always advocate thinking about your funding sources and then finding deals that fit that criteria. If you work the equation backwards, leverage will find you!

Alex, thank you for a thoughtful and well-considered answer.  I greatly appreciate you sharing your model.

@David Dachtera - great post!  I shared similar ideas with my coworkers at my last job -- so many had never considered the topic.  Perhaps add in:

Do you have all of your financial and legal documents easily accessible in a safe location? Consider storing copies of important legal information (birth certificates, social security cards, passports, property titles, other legal docs such as that will), financial company names/contact info/account #s list, and logins or credentials for all accounts, passwords, inventories of valuables for insurance, serial numbers, maybe a video copy of the contents of your home and property, and full recent backups of your electronic resources such as computer data in a secure and fire-proof place (noted in your will or trust documents). Where? A safety deposit box at your credit union, or with your attorney, or a fire safe at home (available from Lowes Home Improvement and other sources) are all solid options.

Quote from @Jesse Goswick:

thank you for the information I appreciate you, I will absolutely give them a call again first and I going to reach out to a few local CPAs to get the most accurate answer.

Jesse, if you feel like it isn't sharing too much personal information, please return here and teach the rest of us what you learn.  Thank you!

Quote from @Carlos Ptriawan:

Yes it's 1:1 ... of course long term will be fine but that's not the point haha :) my point is I can have a much better return in my own personal broker account because I can do whatever I want, because I'm the money manager, it's that simple.

I'm having a wee bit of trouble following along with the logic.  Maybe if I write it out a bit, I can see this more clearly.

If the 401k allows one to pick a target date fund, say VTTSX, there are three components to our gains: the annual yield (1.9%), the Fund gains (performance, ~7.68% yoy for the years it has been in existence) , and your match (100% per contribution from the get-go).  There is also the expense ration (0.08%) in terms of cost.  And the employer offers a 1:1 match.  As long as one remains employed, the employer picks up the tab for the account services and all other fees involved.  Perhaps the contribution is every payday and pay is based on a two-week interval, hence 26 pay periods.  401ks are taken out of paychecks as pretax deductions, so no taxes are involved until distributions are taken (presumably in retirement after 59-1/2).   Let's pretend that the contribution is $100/paycheck.  Simple gain % are usually calculated as Net Gain or Loss = G =((final value - initial value)/initial value) x 100.

So we hit GO and work for our company to start off the year.  At the end of Year 1 [Y1 for short], we have contributed $2600 (Y1=pay periods x contribution amt).  Our company has matched our contribution, so there's another $2600 from matching funds.  Avoiding the complexity of per-paycheck compounding of gains, we can simplify with end-of-year math.  This artificially depresses actual compounding, so my end results will likely be LOWER than real gains.  Y1 Total is $5200 without any share appreciation or dividend reinvested gains applied.  %Gain, Y1 = ((5200-2600)/2600)x100 = 100%.  I'm not a greedy fellow -- for me, 100% gain for year 1 falls in the not bad category.

Ah, but Year 2 gets more complicated.  Here, we can apply the yields we left off of Y1 to the Y1 total PLUS repeating the initial numbers of Y1 for Y2.   Cool -- end of Y2 numbers translates into Y1 EndOfYear growth + Y1 EndOfYear Total + Year2 EndOfYear Total, or:

[Y1EOYgrowth=((Annual Yield + Average Performance - Expense Ratio)/100) x Y1] + [Y1EOYtotal] + [Y2EOYtotal]

and if we fill in the blanks, we get [(7.68+1.9-0.08)/100 x $5200] + [$5200] + [5200], or $494+$5200+$5200, or $10894.

We are out-of-paycheck $5200 over two years and we have $10894 to show for it.  Plug THAT into our %Gain calculation, 109.5% gain.  I think if we rinse/repeat this process another few years or better yet, decades as we remain employed at this job, we can predict the %gain will rise as all compounding tends to do.  That's a lot of free money.

Sure, I made a whole lot of assumptions about the market (and the investor behavior to not try to time the market), but overall I am more likely to be right than wrong.  Compare this to the $2600 invested on one's own per year.  We first have to deal with after-tax dollars, so that's $2600 - taxes and minus M1's fees, low as they are.

https://finance.yahoo.com/quot...

Quote from @Carlos Ptriawan:

Wathing 401k value dropped is not fun, because you know it will drop but you can't do anything LOL....but well 50% of that is not even my money.

Not sure I follow on the meaning of the 50% not your money bit -- so I'll guess that you get a 1:1 match on the 401k?   Free money!   If my guess is accurate, that's outstanding!  Up to what % of contributions does your employer match?   [and of course it IS your money, so I respect you aren't thrilled watching paper losses from November highs]

Folks -- ANY match is well worth taking to its fullest.  That's an instant raise, and with most programs, the match is vested instantly. 

Sure, the 401k is probably down from November -- what isn't?  But what is it compared to November 2020, or 2018, or 2010?   The point being that people are horrible at risk assessment, and prone to be stirred by the financial news cycle (that survives on clickbait and nothing else). If a properly diversified equities investment is left alone, it will generally do very well in the long-term.  Any short-term sawtoothing isn't really assessing an investment asset properly.