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Buy rental property or invest in mutual fund?

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simpleguy
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Buy rental property or invest in mutual fund?  Reply with quote  

Hello All,
Should I buy a rental property at current (high) market value or should I invest in mutual funds via taxable brokerage account?

Rental options: for last 9 months, I have been shopping for my second rental property (have been waiting 8 mo. for a short sale to go through, no deal yet) but home prices in Atlanta have sky rocketed in last few months, therefore there are no "deals" to be had. Prices are almost at 2006 level and I rather not to buy investment property at top of the boom (low supply). I have $40k cash sitting and waiting to be used for 25% down payment on a rental property.

Investment options: My wife and I (early 30s) are contributing 6% of our income towards 401k, enough to max out employer's match. We max out our Roth IRAs at $5,5k per year. Total retirement savings equal to 15% of our income. I would like to save some money in pre-retirement account (like taxable brokerage acct.) just in case we decide to retire in our fifties, before we can withdraw from our retirement accounts.

Case study: Let's say I buy $160k rental property using my $40k as a 25% down payment. I would take out 30 year fixed loan which would be paid off in 20 years with prepaying a bit each month. In 20 years, with 2% appreciation, the property value should be $240k. If I invest initial $40k in a mutual fund, say T. Rowe Price Mid-Cap Growth (RPMGX), with 9% return, the investment would also turn out to be $240k.

Pros and Cons: Real estate might be more stable investment in the long run, but it requires constant maintenance and attention. Investment on the other hand is more volatile and fragile, but it requires no extra expense throughout the years. What do you think is better investment for $40k at this time?
Post Fri Jun 14, 2013 6:10 pm
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Radix3d
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American stocks are a bit expensive right now in my opinion. According to the website I'm looking at the SP500 has a p/e of 18.8 which is hardly ideal. But nobody says you can't invest in emerging market stocks. Turkey for example is probably pretty cheap right now. You could also invest in dividend stocks and you'd have a more realistic idea of what your returns might be. I'd say 9% returns are unrealistic, but I may be wrong.

I'd say the real advantage of real estate right now is low cost of borrowing money, not the actual price of the property.
Post Fri Jun 14, 2013 11:15 pm
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oldguy
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If you, your wife, & your employer are putting $22,000/yr into your investments - and you use an 11%/yr index fund, that will be about $1.5M in 20 yrs, and $4.8M in 30 yrs.

I like to think of our investing as 'family wealth' rather than 'retirement' - the tax status of your accounts isn't nearly as important as the amount - ie, $5M is $5M whether it is in a post-tax account, a pre-tax account, or a taxable account. And the key is using 11%/yr growth in all accounts. I use all 3 account types, US Tax Code has changed drastically in my lifetime and will probbly change a lot in yours - you don't want to reach 65 and learn that all of your money is in the wrong tax status. I agree that most people need to pay more attn to their taxable account - you need pre-59 1/2 dollars for a fall-back EF, rental houses, a small business, kid's college funds, etc.

A mix of real estate and stocks is a very solid diversification, do both if you can. As for prepaying the mortgages - we do the opposite, I refi whenever one of the houses has equity and use that cash as seed money for the market. If you put $40k into a $160k house (4:1 leverage) you'll see your $40k double in just a few yrs as the house grows to $200k - but then it will slow way down as you lose leverage - so refi, get the leverage back, and double it again - plus have the $40k growing in stocks (hopefully doubling about every 7 years).

As for timing the market - whenever I tried to wait for house prices to come down so that I could buy another house, I ended up paying more a year or two later. Smae with stocks - when I wait for buying ops they never come. But what difference does it make? In 2043 the Dow should be about 175,000 - does it matter if you paid 15,000, 14,000, or 16,000 today? Same with houses - we have one rental that we bought in 1980 worth about $150k - does it matter whether I paid $35k, $40k, or $45k? Very Happy
Post Fri Jun 14, 2013 11:55 pm
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coaster
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A couple of very sound, wise, and well-thought opinions above; I endorse them and have nothing further to add. Smile

~Tim~
Post Sat Jun 15, 2013 5:45 am
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simpleguy
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Thank you all for your comments. I will continue to pursue the rental property purchase and invest few thousand just to get ball rolling. Thanks again!
Post Wed Jun 19, 2013 3:54 am
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simpleguy
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Choosing high return mutual funds  Reply with quote  

quote:
Originally posted by oldguy
If you, your wife, & your employer are putting $22,000/yr into your investments - and you use an 11%/yr index fund, that will be about $1.5M in 20 yrs, and $4.8M in 30 yrs. Very Happy


OldGuy, you always mention funds with 11% return. I don't see such performance in last 10 years, even when looking into performance since inception? So, I went on a quest to identify at least few of such funds. I used following criteria: above average to high risk (9%-11% return), tax-efficient (growth), 100% stock, Vanguard (since I have funds with them) index funds.
- VFINX 500 Index (7.5% 10yr, 10.8% since 1976)
- VIGRX Large Growth Index (7.3% 10yr, 8.6% since 1992)
- VMGIX Mid-Cap Growth Index (5% 5 yr, 7% since 2006)
- VISGX Small-Cap Growth Index (11% 10 yr, 8% since 1998)

What about these blend funds?
- VTSMX Total Stock Market Index Fund (7.9% 10yr)
- VGTSX Total International Stock Index Fund (8.3% 10yr)

I say I would allocate $40k as follows: 40/20/20/20 looking at first 4 funds above. Maybe blend in International Index fund too.
Which funds would you chose and how would you allocate them?
Post Wed Jun 19, 2013 5:44 am
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coaster
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Re: Choosing high return mutual funds  Reply with quote  

quote:
Originally posted by simpleguy
I don't see such performance in last 10 years....
- VFINX 500 Index (7.5% 10yr, 10.8% since 1976)

The last 10 years are considered an aberrant rolling 10-year period; going back to 1976 you basically hit 11%; yet both are data-mining; try going back 100 years and calculate 50 rolling 10-years periods every other year, then factor in inflation to each 10-year period for 50 data points, average those 50 data points, and then you'll have a number that's statistically significant. Smile

~Tim~
Post Wed Jun 19, 2013 1:26 pm
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oldguy
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We use the SP500 Index Fund VFIAX. And I had the VTSMX in my 401k before I retired, the 30-yr returns were almost identical - I would use either.

When you are making plans your 30-year investing, it is misleading to pick short blocks of time and try to extrapolate the result into a longterm plan.

If you look at 2000 to 2010 you'll see a negative return. If you look at the most recent 3 years you see a 15%/yr return. If you check the 18 years from 1981 to 1999 you see about 17%/yr. These 3 yr, 5 yr, 10 yr, 15 yr market 'runs' are often bracketed between negative corrections (political/economic changes in direction). The 'runs', and the corrections. are only visible and explanable in hindsite. That is why trying to time the market is futile in almost all cases, no one knows the future - and all of the predictive analysis is based on past actions. So it works well to invest for your working/investing lifetime (>30 years) and stick with the plan. (Not very exciting, becoming wealthy is boring & requires patience, lol)

Take a look at this site - try a few 30-yr blocks of time - usually you'll get about 11%/yr. The most recent 30-yrs, ending in May, is 10.65%/yr.

http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
Post Wed Jun 19, 2013 3:35 pm
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Anton Martin
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I do agree with what "oldguy" suggested, mixing investment with real estate and stocks will give diversification to your investments and can result in good outcome.
Post Thu Jun 20, 2013 9:11 am
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Vasu Dev
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Both are good to get good return of your investment.

for buy rental property you have to select location very wisely. you get good return of your investment if location is very good.

Mutual fund are based on stock market. it is also gives very good return of investment.

One more way to get best return of your investment. It is Digital currency or cryptocurrencies.
Post Mon Mar 12, 2018 7:30 pm
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