A Beginner's Guide To Real Estate Investing In Retirement (Worth It?)

Welcome back to the Early Retirement Podcast. I'm your host, Ari  and today we are going to be talking about real estate and the stock market. And this comes from a listener question named Jack who asked me. Ari, love the podcast and appreciate your information on the show. You're welcome. And he says, What should I think about when it comes to real estate or the stock market?

I love the idea of a passive investment and real estate just sounds less risky. I've read articles and it sounds like the smartest people in the world use real estate. Although I have a friend who's extremely wealthy and he shares that real estate is not worth the time and headache, even if it. That you can get more return.

What are your thoughts on real estate versus the stock market? So thank you for your question. I will answer that in today's episode. Once again, if you're listening to this going, I have a question for you, you can submit that on my website early retirement podcast.com, and you can click on the submit your question and I'll look to answer it in a future episode.

And I do respond to everyone. So in case you see I don't get a response or if I don't choose that question. , I promise there is a reason for it. Either I've done an episode on it already that addresses it, or I just feel that it's not most applicable to the whole group, and I will send you individual resources that I think will help.

I wanna help as many people as possible know when they are in a position to retire early Now. The first thing that I'm gonna talk about when it comes to real estate versus the stock market might be a non-traditional thought. So there's rates of return and there's real estate and there's the time and effort that goes into it.

And there's tax benefits with real estate, and then there's the stock market and investing in it, which sometimes is like, what am I only inv? What am I even investing in? Because the stock market is so big and I'm not watching the companies every day, I'm. So the real estate versus stock market conversation, that there's never gonna be an exact right or wrong because we don't know what either are going to do.

So number one is don't beat yourself up over, oh my gosh, you know, what should I do moving forward? They're both good investments and most people don't even get there. So the fact that you're not just hoard all of your assets. Wonderful. So make sure. Give yourself a small pat on the back already. The now going off of that, let's talk about what are the, the non-traditional differences between them.

And here's what I'd say with, and this is my personal opinion, and then I'll of course layer in client's thoughts as well. So you guys can see all of the whole picture. It's never my job to tell you what to do. It is my job to be your guide. So you can say, Ari helpful, but doesn't resonate with me. In that case, we won, um, an example of this.

I have a brother and my brother, um, he's known as the college soccer guy on TikTok. He's a professional soccer player. He helps people play college soccer and he tells them, my job is to help you find your dream school. And if that dream school involves you not playing college soccer, but it's your dream school, after going through the process, well then I've done my job.

Because you've found that dream school. College soccer, which I played, can greatly help for you get into school. It can be a wonderful experience, but he doesn't say, I want you to go to this school because they have a great soccer team, but a terrible education. And all of a sudden they're now not really getting to do what they want, which is a successful college experience.

So, quick example, just what's successful to you with real estate in the stock market is different than me and different than my clients, what I will say. Is real estate can be a wonderful investment if the stock market scares you. What I would. Put on top of that, and I paused there slightly. Um, is that if you can properly educate yourself, I think the stock market can be a wonderful investment.

Here's what I like to think through. Here's the framework. With real estate, you can get a much higher return than the stock market. But the risk that you're taking is that that home doesn't burn down. Now you might have insurance, so then you might be covered on that end. Wonderful. But let's take a big step back and say, should I just invest in more rental properties?

Well, rental properties can yield an amazing return over time. The question I would ask yourself is, what do you want to do in retirement? If I could say, Prospect, let's just call you John. Um, John, if you could go ahead and get a, a rental real estate properties and you have no stock market investments and you're able to get 15% year over year and meet and meet your needs of your retirement expenses, cuz you've done an analysis but it's gonna.

Costs you 10 to 20 hours of your week because things are breaking. And although you have a property manager, stuff comes up and there's just time and headache. And when you're taking a trip, maybe nothing comes up. But maybe at the back of your head you're thinking, what if that one thing comes up and now the tenant is doing this or that one tenant leaves and there's just time and energy going into managing that.

You might be listening to this going, Ari, it's, I, I hear what you're saying, but I will gladly take a 15% return on that. And when it comes to real estate, by the way, There's return of the income from the property, almost think of that like a dividend. Then on top of that, there's the return of capital appreciation, just the property growing.

So what we do is we look at a real estate investment and this is what I do with my clients and we go, what's the dividend? So what's the income coming? And then on top of that, what is the capital appreciation? But then there's expenses along. There's depreciation along the way, so there's these different factors that come into it, and you can say, great.

Does it make more sense to go with real estate or does it make more sense to go with the stock market? Sometimes it's a blend of the two, but real estate can be a wonderful investment if you retire and go, Hey, I actually want to do something. I enjoy managing it. I understand real estate. I have an expertise in it.

I've been doing it for a long time. On the other hand, the reason that. Personally prefer the stock market isn't because I believe I can beat real estate on a return basis. Over time, what I've identified is my greatest asset. What I enjoy the most is my time playing soccer time with my family, time spent on the business, time spent on growing the podcast and YouTube channel and.

That's where I feel my greatest yield on return will be. Therefore, I don't want to have an asset that might produce more return, but takes more of my time. The, the stock market on average produces a 10% return. Now, not in any given year, of course, especially not last year, but that's the historical.

Average of the s and p 500. So with real estate, what we want to do is go, if we could guarantee more than 10% and you're happy to take on the time and energy involved in managing it, then it could be a great investment. But let's assume you have a property, and I'll see this. Honestly, probably 60 to 65% of the time, and they'll say, Ari, I'm gonna go with real estate.

It just makes more sense to me over the stock market. The stock market scares me, which another conversation can be done on educating the differences and, and why. But what I would say is, If that real estate, if between the dividend and capital appreciation of that real estate investment doesn't outweigh the 10% or doesn't exceed the 10%, there is no situation where I would recommend investing in real estate because now you're not getting the 10%, which you could have got fully passively with the stock market.

Now, when I say fully passively, you do go through ups and downs. It's not 10% every single year. It's of course an average. So understanding. As I see it, you could take that 10% fully passively, of course not in any given year, but in average, and I would rather see you take that as opposed to real estate where even though there's all of these different considerations that go into it, if the time and energy that you have to put into it doesn't yield.

That greater than 10%. Well, all of a sudden, real estate just doesn't make sense. It's only when it's above that 10% where I'll go. Okay. It makes sense to certainly consider this, but let's go into a, a few numbers here just so you can see more about this. Um, my clients, and before I go into the numbers, excuse me.

Getting ahead of myself already. It's just real estate, stock market, exciting stuff. As you can tell. I love this stuff and um, I know you all do too, which is of course why you listen to the podcast. So glad that it's been helpful. I really do feel like it's a conversation as opposed to me just talking one way, even though of course I am, which felt really weird at first when I started doing the podcast, but have been more comfortable with it and hope it's been helpful.

So thank you for all of your feedback. I have clients.  managed real estate for 20 years and they retired and they thought that they didn't wanna manage it and they said, you know what, Ari? I sold my real estate investments and I found that I actually enjoyed managing it. I like talking to tenants and it just gave me a sense of purpose, and they might even take that, even if it yields a lower return.

So there's that argument. Then there's also clients I have who managed it for 20, 30 plus years. They retired and they said, I still am gonna manage it. And they said, Ari, that's the last thing I wanted to think about in, in fact, I thought it was something I enjoyed, but I found, oh my gosh, it takes a whole lot more time than I even considered, and I just wanna do more of what I want to do.

So, real estate can be a great investment, but once again, the point of proper planning is not to yield the highest return. It's to get the most return on your dollars, which sometimes can be more time. So let's talk about a few numbers.  and these numbers were created by someone known as Roberts Schiller, who he created an index of US home prices going all the way back until 1890.

Here are the numbers, and what it says is from 1890 to 2022, the US housing market is up, excuse me, a total of 122%. That's 0.6% per year over inflation. Not a great return. Now if you're in a certain area, for example, my parents, they bought their home in Malibu, California in 1996, and when they bought it, they had spent just about $700,000.

it's now worth an excess of $6 million. So they are in a comfortable home, but once again, they talk to me all the time, of course, being in personal finance about how it's been a wonderful investment and they've got to live in the home, which many people don't. Factor into that first thing of capital, you know, dividends on top of capital appreciation.

What about the fact that you get memories in this home as well? You can't live inside your stock market investment. So for them, on paper, for my parents, they realized this home was a wonderful investment. Um, there's a crazy story on how they got that home in Malibu at that price. There was actually someone living next door to them who was very loud, rambunctious, if you will.

And I'll a few words, I'll leave out there. It was the reason no one else wanted to buy it. And my dad is a hardcore surfer and he just said, I don't care. I wanna live in Malibu because I wanna surf. And my wife, my, my dad's wife, excuse me, my mom. Was saying, oh my gosh, what are we getting ourselves into?

And it turned out to be wonderful. So they were very fortunate in that situation. However, we ran the numbers and they would've yielded more dollars. Even being in this home that appreciated wildly being in Malibu, California at an opportune time going with the stock market. But you wouldn't have got to live inside it.

So they'll say, Ari, I know your thoughts on real estate, but it's been wonderful. And then my dad says, Ari, it's been wonderful because I haven't had to manage it. My mom's been doing most of the work when the siding is coming down, when all of a sudden the home that you bought yes, in a nice area needs a lot of work.

So some people really enjoy that work, others don't. So too much of a tangent there. Um, but let's go back to the numbers here, which is from 1890 to 2022, US Housing market up about 122%. So 0.6% every.  over the rate of inflation. The majority of that return has come the past three decades. By the way, this is a national average, so if you're in California or you're in North Carolina or in Hawaii, it's likely much higher.

It's just that this is the average now in the last 30 years. So ju, let's just call it, since 1989, it's now up more than 70%, which is more than 1.6 per. Over inflation. So if you invested in real estate ac, according with these numbers, 1.6% per year above inflation is what you would receive with real estate.

Of course, going vary property to property. Now some people are gonna look at these numbers and go, Ari, that is just terrible.  and they wouldn't be wrong. The stock market's long-term return over the rate of inflation is like six to 7% per year, so certainly more attractive. How could housing be so much lower?

Well, beating the rate of inflation is important, but you're holding onto a fixed rate debt in the form of a mortgage now it provides a roof over your head. So I really do like that. Too many people in my opinion, just look at real estate stock market and go, Ari, it doesn't beat the 10% you talk about. So I'm not doing real estate.

No real estate plays a role. . I don't personally invest in it. My clients invest in it passively through a REIT through real estate like investments because I like it as an asset class. But most of my clients don't wanna spend their time managing properties, especially if you don't need the return. It's one thing if you need to yield a certain return.

It's another thing if you wanna do as good as you possibly can, which as I believe it is going to be through the stock market. Now, please note here, um, Example, let's say that you bought a home 10 years ago for $300,000 and you put 10% down, so 30,000, and now you sell the home for $500,000. What would your return be on investment?

Well, you made a $200,000 gain on the purchase price, cuz you put 300 and then it went to 500, right? So, Shouldn't it be a 67% return? That's what the math would say, but you have to take into account leverage because that's where real estate really gets amplified. You only personally put $30,000 down. You didn't put 300 down all at once.

So your return was more like six x. Well, not exactly. Each month you pay your mortgage. So home insurance, property taxes. , but then of course there's things like upkeep and maintenance and landscaping, and you probably bought furniture and decorated, and there's just stuff that adds up. Now, some of those costs are regardless of where you live, but.

Let's also not forget about closing costs and then a realtor fee, and then movers. And there's just stuff that people often don't consider when it comes to planning for these differences. There's also the fact, let's not forget, you have to live somewhere. So yes, there's this, these expenses, but you also are gonna have to live somewhere.

So does your net. Mortgage payment really outweigh what you have paid in rent. After all of these considerations, no one's gonna know exactly what their full, actual, all in cost of owning a home. Because owning a home is a form of consumption in of itself. Plus there's the emotional tie of these financial assets and, and things like that.

That's why it's so difficult to. Apples to apples comparison of real estate versus the stock market. You don't simply buy a house from a broker and, and just pay all the expenses in one year, and you can just put line item by line item. Housing is complicated. Now this, call it mortgage. This is one of those things that when people say, Ari, what makes more sense?

Should I pay the mortgage down in full? Um, just have it outta my head when I retire, or should I pay the minimum and invest the rest? Well, it depends on your mortgage. And your comfort level, if your mortgage interest rate was 3% and we could guarantee to pay that 3% down, well, we'd look at that and go, if the stock market can guarantee eight, nine, 10% overtime, I'd rather see you pay the minimum and then just invest the rest on paper.

But once again, no one ever throws a party. When they see that their investments have gone up to three, $400,000, you just don't throw a party with your friends, but you will celebrate when you pay off your mortgage, you will feel a weight that's gone when you pay off your mortgage. So that's a quick sign note for those who are asked in the past, should I pay down on mortgage or should I invest?

Just a quick analysis there. But now let's just s. Real estate, stock market. What do you need to think about? What don't you need to think about in a big way? I look at planning is what don't you need to think about? Because the last thing I want is for you to spend a ton of time and energy on focus unnecessarily.

Overall. Rental can be a decent return on your investment if you find the right one. Um, if you have the ability to raise rent over time and your monthly payment is. Yeah, that's a nice inflation hedge. Um, plus you of course hope the home rises over time, but you have the risk of concentration, which is maybe you own just a few rental properties versus in the stock market you can own thousands of companies.

Now, the difference also with real estate is that you can get more of that return.  semi guaranteed, if you will, through those tenants payments year over year, whereas the stock market is gonna have a few really good years and a few really bad years. The other risk that people don't consider when it comes to rental properties is that they're illiquid.

So you do receive cash flows, you do get rental payments, but you have to net those out from all of the costs involved. And you can't just say all of a sudden there was a really tragic accident, or you wanna do one big thing or just something comes up and you need assets. You can't spend a home or trade it in as easily with stocks and bonds that of course you could tap into easily.

Um, but the number one thing for me is, The potential headache when you own a rental property, it involves finding tenants and fixing stuff when it breaks. And if you can't find renters for a few months, you now are taking on those costs. You could hire a management company, but then of course there's costs with that.

So I personally believe in simplifying retirement because it leads to. You having the ability to spend more time doing what it is you want to do, but we also have to look at, okay, what are the risks involved with the stock market? It's never just, okay, no, this is bad. Yes, this is good. It comes down to your comfort level because let's say you're investing in low cost ETFs and you don't have to worry about rental properties.

Okay, great. But now if we're just trading that risk for a scarier risk that causes you to lose sleep because you don't know how your investments are allocated, Well, now all of a sudden, um, you're gonna not feel so comfortable. So it comes down to your index funds, as I see it, are never gonna call you up in the middle of the night, and they're never gonna cause an issue with tenants.

However, what is gonna happen is that you're gonna go through ups and downs and that you might see your value down 20, 30% and go, wow, this is not a fun experience. I was not looking for this. What I would say though, is when it comes to, okay, what is the right mix, my overall opinion, Is that there's not a right or wrong, there are trade offs.

Now, I personally believe in the stock market, but I also believe in owning real estate investments passively where I fully own real estate. I believe it's a valuable asset class, but you don't actually own it in the sense of you touch it, you own it in the sense of. You own an ETF or a mutual fund that owns these real estate properties.

So that's how I personally invest in real estate. It's how most of my clients invest in real estate. Some people diversify and they have some rental properties and a portion in stock market that wonderful too. , not a right or wrong. Once again, when it comes to this. I just want you to know what are all the different factors and how you can think about it to maximize your retirement.

So that is it for today's episode. I hope it's been helpful if you're looking for a custom strategy so that you can retire early. Once again, I love helping people do this, so reach out to me or a member of my team and I'll see y'all next week. Thank you for listening to another episode of The Early Retirement Show.

If you have a question that you want answered in a future episode, you can always go to my. Early retirement podcast.com. That's early retirement podcast.com, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it, and share it with someone who you think would benefit from this information.

If there's anyone out there that you know, I certainly appreciate it and I will see you all each. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action.

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