Here’s an email I received from a reader looking for some suggestions:
Hi! I am interested in advice on investing in mutual funds, index funds and real estate.
Our goal is to be FI/RE by 50. Our ages are 34 (me) and 33 (husband) right now.
Background Information (before raises in March)…
My husband and I will be 100% debt free as of November 30th. We will be saving our 6 month emergency fund – $15k by February 2018.
- We take home $100k after taxes
- We live on $27,564k a year (very low cost of living in Southwest Michigan)
- We tithe/give – $13.5k a year
Our company matches our 401k contributions at 5%. Starting January we will put in 5% because they match 100% on the first 3% of pay and 50% on the next 2% of pay plus give an automatic company contribution of 3% of our base pay before taxes to our 401(k) as well, so we get an 8% match each.
It can get complicated but what that works out to is:
Wife
- $375 from my paycheck as a contribution to 401k (5% contribution)
- From the company – a match of $225 (100% match on first 3% of pay) + $75 (50% match on next 2% of pay) + $225 (the automatic company contribution of 3% of my paycheck)
- Grand total each month to 401k from me and the company match: $900
Husband
- $177.5 from his paycheck as a contribution to 401k (5% contribution)
- From the company – a match of $106.5 (3% at 100% match) + $71 (2% at 50% match) + 106.5 (the automatic company contribution of 3% of his paycheck)
- Grand total each month to 401k from him and the company match: $461.50
We contribute $6,630/year and the company contributes $9,708 for a total of $16,338 to our 401(k)s.
We want to open up a 2 Roth IRAs next year and contribute the $11k.
That brings the annual investing total (us and our employer) to $27,338 before growth.
Looking at:
- what we live on: $27,564 (includes date night and personal spending money)
- what we give: $13,500
- what we will personally invest (not counting our match): $17,630
That brings our annual spending/investing/giving to: $58,694
We still have $41,306 to invest, take vacation, have fun.
By the way, my husband’s salary is likely to go up $10k next year with a promotion. In 2019 based on our career trajectories, once my husband completes his MBA his salary will increase another $50k and my salary will increase $30k as I’m likely to be promoted that year as well. So we’ll have more money coming in with the same expenses (our rent stays flat year over year). We’re not looking to purchase a house anytime soon.
We want to get into real estate. However, until we have enough money saved to purchase something cash we want our money to grow.
We went through Dave Ramsey’s FPU and will have completed Baby Steps 1-3 and be on Baby Steps 4 & 6 (I can’t have kids).
What are the best options when looking at investing money to grow for real estate purchases and what is a smart amount to set aside for vacations?
What is your advice for her?
Lena | Design Your Dollar says
Wow! Congratulations on your current financial status and your career trajectory. Being able to live on only <$30k and tithe and have a tremendous surplus to invest, that’s wonderful.
My husband and I are also in our early-mid 30s and invest in real estate. I park my money into a fund called American Home Preservation with a 12% return. In case I cannot find a deal or am waiting the growth of my fund to put into the next deal, I’m getting a return in real estate.
AHP is a company that buys distressed mortgage notes from big banks, works with the home owner on new payment terms that affordable to them, and makes a great return for the company and it’s investors. They do file with SEC and of course there are risks since it is not FDIC insured.
But I’d rather my money be working for me at all times than earning a 1.25% in a savings account.
As for travel, have you heard about travel hacking? We are a family of 5 and take 3-4 vacations a year on next to nothing because I really love the hobby of “earning” travel miles via credit cards. You can probably just google the term and tons will pop up.
JeffK says
Wow, great job, guys! You are crushing it.
As a CPA, I would definitely strongly urge you to maximize your tax-advantaged accounts before doing anything else with the excess.
In terms of how much you should spend on vacations and fun, I would tell you to determine how much money you’ll need for a comfortable ER using a tool like Chris Hogan’s RI Quotient (since you’re already familiar with the R Ramsey products). Once you’re contributing at least enough to make it likely to achieve your target, the rest is discretionary. It’s your life, not a dress rehearsal.
Bottom line, your hard work is paying off, and you should be in great shape regardless of what you decide to do. Have fun, and good luck!
Chris @ Duke of Dollars says
Agreed! We like utilizing tax-advantaged accounts too!
Bernz JP says
I do like the idea of saving 5% of your money on what I would call a mini-retirement vacation every year. You’re doing great as far as your 401k contribution but make sure to learn where your 401k money is invested. Have you thought about investing in the stock market for diversification? If you have access to your 401k, that will be a good start to learn more about the stock market and index funds. With regards to real estate, if you plan on staying where you are currently living, yes, you can start investing now, but I’d rather wait until your husband is done with his MBA. Managing a real estate investment is not always as easy as it sounds. Time and energy are needed.
Chadnudj says
1. Per Bogleheads, your next step is to max out your contributions to those 401ks (the limit for 2018 is $18.5k in your own contributions. That will eat up roughly $24k (since you’re each currently contributing $6.5k or so).
2. That leaves you with $17k or so. Now, if you really wanted to take that money and invest in real estate, you could just bank it until you had enough for a sweet 20% down payment on a place, rinse and repeat until you build your empire.
3. My recommendation, though, would be to avoid real estate (just a personal preference) and invest that in taxable accounts in the Boglehead 3-Fund portfolio (Vanguard Total Stock, Total International Stock, and Total Bond) at an asset mix that works for you. Or, if you’re interested in real estate, why not buy a solid REIT fund (like the Vanguard REIT Index Fund, VGSLX)? That way you get exposure to real estate without the pain-in-the-ass factor of tenants, maintenance, etc.
Definitely, though, your next step is maxing those 401ks, though — that’s a no-brainer in terms of reducing your tax liability and putting your money to work for you long term, and it’s something you EASILY can afford to do.
Mike at Balanced Dividends says
I’m not certain if you’re eventually looking to get into real estate for your primary residence and/or investment properties, but you could consider REITs if you’r looking for real estate exposure sooner than later.
There are pros/cons to both direct real estate ownership and REITs, but publicly or exchange-traded REITs, whether individual securities or via a REIT fund or index, typically offer lower costs and greater access/liquidity than owning physical real estate.
Related: https://www.balanceddividends.com/landless-landlording-how-and-why-we-use-reits/
There are now also crowd funding real estate services for REITs as well as individual properties. So a few options exist for you to consider.
Ultimately, it depends on what you’re looking to accomplish, your timeline, your risk tolerance, etc.
Turning Point Money says
To plan for investing your cash in non-retirement accounts, I think you need to understand when you plan on accessing the money to buy a rental property. If you are going to purchase a rental property within 5 years, I would not invest the money very aggressively. If you have a longer duration, I would tip the scale more to common stocks.
Instead of investing in physical real estate have you looked at alternatives like a REIT? I can attest, once you get your MBA and you start getting the promotions, free time really disappears. Your company will likely give you more and more responsibility and this puts a pinch on you work/life balance. Having time to manage a physical property may become a major drag.
Jason@WinningPersonalFinance says
I’d concur with those above who say that he next step is to max out your 401(k)s.
I also want to point out that real estate is not passive investing like buying stocks. You have to find tenants, make repairs etc. It’s great in theory but it’s not for everybody. Do you have skills that make being a landlord a good fit?
Either way, I’d suggest you try and find local real estate investors groups that share ideas. If you can’t find any, start asking realtors about them. Nobody wants you to start buying investment properties more than they do.
Bernie Johnson says
Unless I missed it, you do not mention your total net worth as of today. If you are serious about retirement at a specific point in the future, you need to simply use online calculators to determine how much you will need to save to reach your goal. You will need to factor in inflation and life expectancy and other misc. factors.
I personally prefer the simplicity of index funds, so I can’t offer advice on real estate. Real estate requires more “maintenance & oversight.”
As for vacation, do not underestimate the importance of vacations. We can’t foresee our future health situation. Traveling and spending quality time together is precious. You may even want to sit down and develop a bucket list and work from there.
Sometimes we get tunnel vision and forget to sit back to determine what we really want. Many people say they want to be wealthy, but they don’t truly understand why. It may be for the sense of freedom, it may be for the desire to travel, it could be to be able to spend more time and money contributing to a cause. Determine what your underlying motivations/desires are and use this information to further guide your way forward.
P.S. I haven’t seen it mentioned recently, but the book The Simple Path to Wealth is another great resource. It’s simple and easy to read. It doesn’t have a lot of additional information, but it does provide a nice overview of the subject matter.
BJ
Chris @ Duke of Dollars says
Index funds for the win! Great recommendation.
Chris @ Duke of Dollars says
Hi there,
Awesome job on making the commitment to reaching FIRE, and also on the promotions – sounds like you all are very ambition and smart!
I’m unsure if this would be considered self-promotion, so if it is, ESI you’re welcome to remove it.
I wanted to link you to our roadmap on the steps to take for FIRE, since it would be just reposting the same steps in this comment otherwise: https://www.dukeofdollars.com/kingdom-roadmap/
My big recommendation to you would be for investing into Index Funds and REITs, gives you some of your Real Estate interest and your Investing interest in an easy and diverse way.
Jason says
Per the question:
Real estate gets great returns because of leverage. If you pay cash for real estate the return is not as good. I would know, I own many units.
I can tell you like the D Ramsey approach as I follow him as well. If you STILL want to do real estate as well as semi follow his teaching then do “Balance Sheet Neutral” transactions.
This is done by having the cash to pay for the property & you get a mortgage for it but keep your cash/investments on hand to cover the costs should you have to pay off the entire mortgage or have a large repair. That way you eliminate the risk.
(In your low cost area you should be able to buy a 1Br Condo for 30k and rent it for $450-500 a month.)
-Invest the Money in any number of high yield savings accounts to save up for down payments. If you invest in the market you run the risk of a downturn and not having enough $ for when an opportunity presents itself.
ThinkingAhead says
“Real estate gets great returns because of leverage. If you pay cash for real estate the return is not as good. I would know, I own many units.”
Unfortunately, making this comparison is unwise. You’re comparing leveraged returns to unleveraged returns, and obviously, they aren’t the same.
If you compare your return on a house that you only put a 20% downpayment on, then compare that return to a index fund or REIT where you only paid 20% for it (margin investing). That would be an apples to apples comparison, since you are comparing two equally leveraged entities.
jason says
Any REIT’s available to retail investors do not generate enough return to compensate for using leverage.
I just ran the numbers on “O”
Even Buying that REIT on margin would lose the investor $ every month.
Apex says
This statement about is apples to apples comparisons and similar risk profiles is completely false.
You cannot compare buying real estate on leverage to buying stocks on leverage because stocks do not have cash flow.
Real Estate on leverage has rental income that can keep the property afloat when the value of the underlying asset drops. When the value of an asset bought on margin drops you get a margin call and you have three days to add cash or they liquidate your position and you lose large sums of money or potentially all of your principal. The risk is massive when buying stocks on margin and minimal when buying a real hard asset if it is properly leverage so that it still provides reasonable cash flow.
Sean @ FrugalMoneyMan says
I would definitely begin to fully max out your 401k’s as the next step. You can never control what the stock market is going to do, but you can control the taxes/fees on your invested money. Take advantage of every tax-free growth/tax-deferred retirement account you can! Those taxes and fees can erode potentially hundreds of thousands of dollars over the course of decades.
In regards to real estate…I will admit, I am very novice in real estate! I don’t own any real estate nor do I own any Real Estate Investment Trust (REIT). I will say this though…My fiancée and I are fairly young (24 & 25) and we will be starting to save and aggressively fund our starter home fund this year. We are also taking Dave Ramsey’s approach in attempting to buy our starter home in CASH. We will be moving down south to be able to afford this goal. How we will fund that purchase is through both a high yield savings account and the stock market. We will be placing 90% of our money into a 1.25% yield savings account and then 10% (a 3-5k/year) into the Vanguard Total Stock Market Index Fund within our taxable brokerage account.
I am sure there are more experienced real estate buffs out here that can help more!
Good luck in your future real estate goals!
Alex says
Have you considered purchasing a duplex and living in one side/renting out the other? This could be a way to dip your toes in the water of real estate investment while simultaneously building equity in a new asset class & hedging against inflation. If your cost of living is already that low, I’d assume that you could find a decent property in your area with a mortgage payment that would roughly equate to your current rent. From personal experience, its a lot easier to rent your first unit on a property you know well, so living in the same building may reduce some of the initial complexities of being a landlord.
As an aside, I would agree with others that have encouraged maxing out your 401k. Take the tax benefit, which will also increase as your income rises.
Life’s a beach says
Max out 401K and get cashed-up in taxable accounts in preparation for the inevitable downturn. You’ll be able to purchase shares and/or property in the not too distant future for me h less than today.
rcz58z says
I think you should BOTH max out your 401k’s. You should also check to see if either company allows Health Savings Plan and max those out as well.. Fund IRA to the max, then save the rest for when the housing market takes a dump, you would be ready to pounce on your first rental.. (this is assuming your home is paid off).
SavvyFinancialLatina says
I would, also, suggest maxing out tax advantaged accounts first (HSA, 401K, then IRAs). After maxing out tax advantaged accounts, then, start a taxable brokerage account. I would invest in an S&P 500 fund. Best thing I did was maxing out tax advantaged accounts.
MI32 says
Can you purchase a Duplex or Triplex and live in one of the units. It is easy to learn how to manage real estate if you live in it for two years and manage tennants….how I got my start
Apex says
I am a bit surprised by the number of comments here suggesting buying a REIT to get real estate exposure as a replacement for actually owning and operating real estate.
Unfortunately too many people think that is one of many ways to get in on the benefits of owning real estate. It isn’t. A REIT is just a stock in a different industry. Its like saying buy Microsoft to get exposure to computers or buy Ford to get exposure to the auto industry.
I don’t want exposure to an industry or an asset class and neither do you. You want control over an asset that you can manage and operate for greater than average returns (even if you are hiring someone else to manage it, you still manage them and that gives you control).
A REIT has no inherent benefit over buying any other kind of stock and none of the benefits of real estate investing. It does diversity your exposure to different asset classes but less so than being in a well diversified index fund.
If you buy a REIT you are now a stock picker of a single company whose business happens to be real estate. Do you want to be a stock picker? You could get a REIT index, but now you are an index picker. Should you also buy a bank index, an oil index, a health care index?
I think the problem that leads to suggestions to buy a REIT likely steams from a misunderstanding about why real estate is a beneficial investment. It has nothing to do with real estate at all. I will let you in on a secret. There is nothing special about real estate. You don’t make extra money in real estate because real estate is a superior asset class. If it was, shouldn’t everyone buy predominately real estate? You make extra money in real estate for one of 3 reasons. 1. Sometimes in some situations the ability to buy at a discount. 2. The ability to control the results of the asset through your own management, basically like a business. 3. The ability to use leverage in ways that are safe with properly purchased and operated real estate that are not safe with stocks. (See my response to a comment above for why that is true).
Here is what you get (or don’t get) with a REIT.
* In a REIT you don’t actually own real estate. What you do own is stock in a company whose business happens to be real estate. A single company. You are now a stock picker.
* You have no control over the quality of real estate assets purchased, over the management of those assets, or over the costs and expenses of operating those assets. There goes one of the benefits of investing in real estate.
* You have no control over the prices paid for assets (since REITS need billions of dollars of real estate assets to run their fund I think they often over pay for those assets buying assets that are already functioning at peak efficiency and paying top dollar with low cap rates in order to lock in mediocre safe returns). There goes a second benefit.
* You have no ability to hold REITs safely using leverage. There goes the third and most powerful benefit.
* When the stock market turns down the value of REIT stocks goes down. When the real estate market turns down the value of REIT stocks goes down. But if you own (even with leverage) cash flowing, functioning real estate property, your income changes very little (perhaps a slight reduction in rent if the real estate market turns down but typically not much). The value of the underlying assets will have gone down in a real estate down turn but that doesn’t matter if the property is still cash flowing.
I don’t know if real estate is right for you but unless you have significant cash on hand and want mediocre to average returns I have two pieces of advice for you. (By the way, there is nothing wrong with average returns. They are great once you are retired or if you are on the retire at 65 plan. They just don’t do a very good job of getting you to early financial freedom unless your income is really high).
1. Do not buy a REIT to get exposure to real estate. It is no better than any other stock for the reasons stated above.
2. Do not wait until you have all cash to buy your real estate. The returns on all cash real estate are generally not better than the returns in the stock market unless purchased at deep discounts like during the great recession. Leverage is the single most powerful and advantageous reason to invest in real estate. If you aren’t comfortable learning how to use leverage right then I would suggest skipping the real estate investment plan.
The suggestions above about house hacking with a duplex or triplex are a good way to get your feet wet. Many people have started that way. If you aren’t comfortable doing that (and there are many good reasons to avoid it like perhaps the places you can get a good duplex are not desirable for you to live or you don’t want to be a door knock away from your tenant, etc), then look into just buying a duplex or triplex and renting it out entirely. Get the down payment saved and buy it with a mortgage. Get started, get used to it, and get into the game. Sitting on the sidelines for 3-5 years trying to save up enough to buy in all cash isn’t the right answer to move you forward to early retirement. If you do that your path likely looks something like 1 house in 5 years, 2 in 9, 3 in 12, etc. That is not a recipe for early financial freedom. Cash real estate buying does not scale well at all unless you are already cash rich.
I will share my path to back up what I advocate regarding real estate growth through leverage.
I started purchasing real estate 9 years ago. I was 38 and had a net worth of a bit less than $900K with $100K liquid for investments. I purchased the first property with cash (since I had it) and ran it for a year to learn the ropes. I then leveraged it and leveraged my next purchases to purchase 4 more properties the second year. I continued that path for 9 years. I now have 25 properties. They are all leveraged, most at 75% LTV. 15 months ago I quit my 6 figure corporate job. My cash flow from these 25 properties is double the salary I left behind. My net worth has quadrupled.
Had I not used leverage I would own a handful of properties right now, my cash flow would be a small fraction of what it is, my net worth would be considerably smaller, and I would definitely still be working for corporate.
Jim Pettit says
Dear Apex –
Congratulations – You nailed it – !!! Yours was the best and most clear explanation of investing and especially on real estate investing including REIT’s I have ever read !! Thank you ! I concur !
Regards –
JP
Apex says
High Praise. Thanks Jim.
Raju gain says
Can you purchase a Duplex or Triplex and live in one of the units. It is easy to learn how to manage real estate if you live in it for two years and manage tennants….how I got my start