The concept still holds. Last dollar out, first dollar in. Meaning you get tax deduction now at your highest, marginal tax bracket. Later when you retire, your income starts at $0 each year, which means you get to fill up all the lower brackets first.

Tax rates are a risk. As somebody else mentioned, you can adjust to those changes over time. Traditional vs Roth isn't a 30 year commitment. We get to choose each year and manage our finances which is great.

Of course. But, again, one size does not fit all. For those with pensions, a Roth is probably better. When I retire, my pension and social security will replace more than 100% of my salary. I also have a significantly younger partner. With the Roth, I don't have to do minimum required distributions at 70, so the money can continue to grow tax free for her.

Age: 26, in the U.S.

$ for investing: 150k, can expect to add 50k/year to it as well

Debts: None, probably won't need to support a family for at least 5 years or so either

Risk tolerance: Very high

What to do?


Any input is greatly appreciated.

Start buying property

In what way? I was under the impression that buying property takes a lot of time and industry knowledge -- I have some of the former but none of the latter.

It does, but if you really want to grow your wealth and you have the time to learn about it you can easily get to a point where you can retire by 40 if you're already making that much money.

If not, and that's not something that interest you, you've got other options that I can get into but you're in a great position

I could potentially be interested. I believe I have four options at my disposal in terms of real estate:

A) Buy a duplex or something and rent it out. This one worries me because I don't know a lot about regulations, ROIs and industry nuances. Also I feel like doing it on such a small scale is pretty 0ev because you end up having to pay for managers, maintenance, etc. and it'd be better to have a dozen or so properties.

B) Buy a crappy foreclosure house, employ a contractor who creates more value than he charges, and hope to sell at a very high price

C) Buy / mortgage my own house and stop dumping money into renting an apartment (which I'm currently doing)

D) Some combination of B + C. Buy a cheap dump, fix it up, and then live there 2 years or something as my primary residence to avoid taxes on the capital gains that I get from selling out. Perhaps airbnb out the basement as well?


I know you aren't highly incentivized to help a stranger on the internet, but if you feel like elaborating then please, type your heart out — I'm all ears!

Option A isn't as bad as you think especially if you can get a triplex or fourplex (this will also depend a lot of where you live). You could theoretically buy your first property using an FHA loan which will let you put 3.5 percent down if you have good enough credit. Live in one unit and rent the other 2/3 and you're essentially gaining equity and living for free or substantially less than what you're paying now.

You put 50k into a down payment into something like that and you'd have 100k left over for investing in the stock market if you wish. And getting 50k a year you could easily buy 2-3 cash flowing properties each year and start building up a nice portfolio. Again all this relies on the ability to put in the time and resources into being able to find good deals.
If you're not actually interested in doing the dirty work, you could finance or partner with someone doing deals like this who need the capital.

Foreclosures are also an option since you have a lot of cash and usually you need to buy in cash to get one. The problem with this option is that you'd be putting all your capital into one property and if it goes south you'd be losing money. Leverage is your friend.

You also could buy your own house and stop throwing away money renting but you're going to be paying much more per month on a house between your mortgage payments, property taxes, and other expenses. I'd highly recommend looking into either getting a duplex/triplex/quad or buying a house and getting some room mates to help you build equity. And you'd still have plenty left over for stocks. All about diversity

PM if you have any other questions

I'm sceptical of the property advice:
-It's not very liquid
-In addition to contributing capital, you also need to contribute labor in terms of the hassle of managing it
-Looking at future population growth, it seems likely that we'll have significantly less of it in all Western countries, and thus, future property is not going to have as much demand growth since WW2

Am I missing something? I'm certainly not an expert, and am making this post out of ignorance and an attempt to learn, rather than trying to make a deep/critical point.

Imo: you can target a certain age category, not necessarily the entire population. Look at the age distribution graph of your area. E.g. if it has a sharp peak at ages 45-49, and you're going to hold a property for about 20 years, then it makes sense to buy something that's good for retirees (i.e. suburban or even rural) because there will be more retirees in 20 years than now (even accounting for the death rates, which will be decreasing due to the medical progress). Or, if there was a peak of births in the 2000s, it makes sense to buy a small urban property that's not in demand now (thus cheap) but will be in 10 years when those folks grow up.

You're right it's not liquid, but say over a period of 10 years (OP could do this faster just being incredibly conservative) you're able to find 20 properties that will cash flow $200 per month. You're generating an extra 50k per year in passive investing or a dividend assuming you have a good property manager. That doesn't even take into account the equity you're building in these properties and simply assumes a buy and hold until you're old. By the time he's 55, these properties will be generating $200 + mortgage that you no longer have to pay and he will have millions in equity. This could also be achieved even if he put half his money in the market and half into real estate which is what I would suggest.

And it can be as passive an investment as you make it, obviously the more time you put in yourself the lower your expenses will be but there's nothing wrong with hiring a solid property manager to take care of everything for you if you can find a great deal.

I did this with a duplex. Not enough down payment for a 3/4 unit but that would be an even better option.

My current/first set of tenants are paying 69% of the mortgage and my unit is 150sqft bigger, has a fireplace, etc... Rent will go up and my mortgage APR/payment will go down when I dump the FHA mortgage insurance.

Pretty significant tax advantages too.

Iwreckshop - Thanks for the replies. I was gonna PM you but it seems some other people are interested so I'll respond here.

How +EV is a property manager? I've always thought hiring middlemen was a pretty bad idea. Correct me if I'm wrong here, but I think hiring a property manager would be more cost efficient if I owned multiple properties.

Some difficulties I see with renting out a duplex are: I might not always have tenants every month, I might have to spend money and time evicting poor tenants, I might have to spend money fixing damages and wear and tear, I might get ripped off when purchasing, I might undersell when selling, I still have to pay property tax etc.

(I don't mean to be overly cynical here! Just trying to think of all the variables...)

I would be buying in the CT / Mass / RI area if that helps give you an idea of what I'd be dealing with in terms of property value, market profitability, tax laws etc.

One thing I worry about is this: If it's easy and profitable enough to just buy and rent out property, I would imagine a lot of other guys / groups with more money and knowledge than me would already be doing it. Thus, I would inherently have a lower expectation in the market since I am not up to snuff with the competition. I could potentially miss good deals on houses since I don't know how to spot a winner when I see one, and therefore all the properties I'd be buying would be the runts of the litter.

The idea of living in a place that I also rent out could be a really good idea. I do know a good amount of guys who could potentially want to rent out a cheap bedroom from a chill and flexibile landlord in my area. Maybe I could buy a 3 BR house for myself and rent out the bedrooms or something.

In your opinion, are there any potential financial advantages to partnering up with someone by the way? I do know a guy who has a similar amount of available capital as me in my area — who is also an extremely hard worker — and has expressed interest in teaming up on a housing project. Would two people, and double the bankroll, be worth it even though the profit is halved?

And, lastly, regarding the market: Since I am a newbie with no expert market knowledge, to my knowledge the best strategy available to me is to buy a bunch of low cost Vanguard ETFs and let them sit for a long while. Is that correct? Is there another investment strategy I can employ that would have a higher expected return, even if it comes with higher risk? As said, I am not very risk averse. I am mostly looking to maximize the ROI on my bankroll and learn a lot about new industries.

You hit on a lot of good points there. Typically it's better to manage yourself as a property manager will take 8-12% of your bottom line, but again that takes time and can be a pain in the ass having tenants bothering you at 12pm at night or about small stuff they should be taking care of.

You always need to factor in your vacancy rates into your cash flow statement but if you spend time on the front end getting a good location where rent % is high in the area (college town is a good example) and you're good at marketing then it shouldn't be a huge concern. You're also going to be factoring capex and common maintenance into your cash flow analysis as well (for example set aside a certain percentage of rent you're getting each month to cover those expenses) when they come up. Property tax goes into that equation as well. So once you evaluate a deal you should be cash flowing after all expenses.

Rent
(Mortgage)
(Insurance)
(Capex)
(Common maintenance)
(Vacancy rate)
-------------
Profit

If you can find a deal that will get you profit after all expenses you've got yourself a great deal. Not familiar at all with those markets as I'm down south unfortunately.

That's true, if it's easy in theory a lot of people would do it. However, in order to find good deals and execute and figure out how to analyze and execute on deals takes a lot of work. Starting out it would be best to find a mentor and someone who's in the game and done it before and get them to help you with your first deal or two.

Yes that sounds like an incredible idea, you have the capital to do it and could always sell or rent out that house if say in 2-3 years you want to move out or get married or change jobs etc.

Yes there are a ton especially if they're hard working and motivated. 300k instead of 150k will be able to hell you scale and diversify much more quickly. If you only have 2 properties by yourself and 1 goes bad early on that's gonna hurt a lot more than having 4 and 1 going bad. For now, if you're interested I would start reading and learning though. Cash flow quadrant and rich dad poor dad are great books for which a little bit of my mindset comes from in regards to this if you haven't read those already.

If you're going for risk there are much riskier plays than just putting in an ETF and letting it ride at 6% until you retire. But I really wouldn't advise doing anything super crazy like options and derivatives without any knowledge. It's just gambling.

A riskier portfolio could be something like 25% S&P etf, 25% industry specific ETF or mutual fund, and 50% in a few blue chips or mid cap stocks you like. They key is low cost funds to max your returns

fyp

Age: 34
Location: San Francisco
Occupation: Entry level engineer
Checking account:9k
Live bankroll:11k
Monthly income at job: 4k after taxes
Monthly income at poker: 3k min after taxes
Debt: 50k student loans
Helping long time girlfriend with her dental school debt also. She pays it all now, but the idea is that once I start making as much money as her, we can wipe out the debt together and maybe buy a house.

Risk tolerance: high

Pay off your debt first, guaranteed returns

Paying off her loans before you are married is not advised, unless you are 100% sure. Even then, I don't advise.

Being sure has nothing to do with it. Wait until you are married for at least 35 years first.

Look at the rate you are paying on your debt, before deciding if its best to clear it first or not

Yea there's three options?

Pay minimum and go on forgiveness plan

Pay maximum and get it paid off fast but be cash poor

Something in between

We've known each other since 1996 and she was there for me financially when I had nothing. Going against her family and friends' urges. I love her so much. We're in it together with or without marriage.

If you owe someone, you owe them.