This answer is obviously different for everyone…but I would suggest 75% or higher. There simply is no other investment that is setup for the type of ease and returns and tax breaks that real estate is…especially if your goal s passive income. (If your goal isn’t passive income…why not??)
Lets say you’re torn on putting money into real estate vs the market. How much do you have? 50k? Great.
So now with your 50k (25% down on the property) you are expecting annual growth (lets say again 7%) on $250k. So to recap, we put the same amount of money in, but in optionA we collect 7% of $50k and in optionB we collect 7% of $250K.
But wait, there’s more!
The bank was kind enough to loan you that extra 200k, but they don’t care who makes the payments for it, so you find a renter to “housesit” while you’re away and they actually pay the mortgage/bank for you. The payments, the interest on the loan, everything. How generous.
You know who else has faith in you as an investor? Uncle Sam. In fact, he’s so excited about your real estate venture that he’s going to let you write off the interest. Yep, the same interest your tenant already paid on your behalf…now that’s generous!! You know what else he’ll let you write off? Just about everything… repairs, upgrades, updates, the management team you hire to find good tenants and handle repairs while your out looking for your next investment (or y’know, enjoying life). What a great uncle sam is.
At the end of each year you want to make sure you’re dong everything you can do, because your goal (like everyone else’s, is to retire early)… so you’re proactive.
Market- Your advisor has some good suggestions and moves your money around for only a small fee.
- update - 7% of 50k investment (plus growth achieved).
Real Estate- You send a letter to your tenant letting them know that rents are increasing. It’s only a couple hundred bucks a month, but that goes straight into your pocket and you save it for a nice trip at the end of the year to celebrate your successful venture. You earned it!
- update - 7% of 250k investment (plus growth achieved) and a small monthly income that grows year after year. Passive Income!
So lets say we get a few years down the road and both of your investments have grown that 7% year over year… are you gonna pull the money out of either? Not likely, we’re in this for the long game!!
Market- you call your advisor and tell him that you’ve been thrilled things are going so well and you want to ramp up! You’ve been working hard at your job to keep the money coming in, and want to do what you can to make your investment grow faster so you don’t have to work 40 more years.
He suggests you work harder at the job and offers to pull money out of your check every month. He also has some good suggestions and moves your money around for only a small fee.
- update - 7% of 50k investment (plus growth achieved).
Real Estate- You call you bank and tell them the same story. “What? you’ve had a job this whole time, you’re making more money than before (rental increases), AND your property has gained in value?? Good for you!”
In fact, they’re so proud of you that they will lend you more money for second property…but this time instead of making you show up with a $50k down payment, they’ll simply pull some equity out of your first investment. Lets say you’re not yet ready to jump to a duplex or larger investment… so its just another $250k rental for now.
- update - 7% of 500k investment (plus growth achieved).
Do these two curves seem like they’re on the same trajectory?
They aren’t. Our banking and tax systems are simply setup to afford growth and success in real estate.
We now have:
An investment in the market of $50k value (plus growth) growing at 7% a year plus whatever monthly payments you can afford to subtract from your month salary each month to make it grow more rapidly.
Real estate investments of $500k (plus growth) growing at 7% a year that is also sending us a monthly income that grows year after year (or allows you to trade up to a higher and higher number of properties/investments).
Lets talk about long game… 10, 20, 30years down the road. You’re approaching middle age (or past it, who cares…its none of my business), you’re getting tired of that job and looking for other options. Maybe you’ve been dreaming of a big trip, maybe you’ve got a business idea or maybe you just want to stop working and retire early.
Market - Your agent breaks the news that you can’t really access your account until you’re 59.5 (unless by then the fed have moved that line further back to help the economy). You insist its your money, so they allow you to withdraw part of it, snack a 10% penalty on you and charge you income taxes. Enjoy your trip/business venture/retirement.
Real estate - You’ve been increasing rents year after year and the checks from tenants by now likely matches or surpass your paycheck from work, so you’ve already been thinking a LOT about just giving up the job… but maybe you want more money coming in or cash in hand for those other ideas.
It’s your house (though oddly you haven’t been paying for it) so you can sell it any time you want… no fees included.
Don’t want to pay income taxes on it, well there’s already tax incentives to help with that as well… you look into a 1031exchange to get into a larger property that pays you even more monthly income (without the job), or maybe you decide to move into the house for 2 years so that you can sell it outright… but now tax free.
Im not suggesting you shouldn’t (also) invest in the market, just pointing out that the two systems aren’t exactly equitable.
Go ahead and place a call into your financial advisor/brker suggesting that you give him 25% and he add the other 75%. While you’re at it also suggest that instead of him drawing out of your paycheck every month that he send you one…
Just don’t hold your breath. ;)
Bryan Danger, freedom seeker, life hacker, small home designer, vanlifer