Before you start acting like an old person screaming get off my lawn or why in the world would you do that, context is crucial here. A few months ago my wife and I were running a house hack investment property where we lived in part of the House and rented out the basement on Airbnb in order to reduce the mortgage payment.
We have been doing this for years and it is an incredible way to reduce your housing expenses by at least 30 to even 70% or more.
As my wife and I were looking at the expenses and potentially turning this into a full time rental property the numbers didn’t make sense at all. In order for us to cash flow, we would have to be matching the top market rents in our area with less features than other houses nearby.
We would also have to sink at least $25,000 in order to get it up to the same quality as other properties in our neighborhood. After all expenses were made, that would give us the opportunity to make similar market rents as everyone else.
Everything went perfectly, we might be able to cash flow anywhere between $300 to $500 dollars a month. I say that lightly because if anyone has owned a rental property long enough, unexpected expenses are bound to happen. For example the other property we own in Texas recently went through an HVAC repair where we had to buy a brand new air conditioning unit which was around $7000.
Based on our current cash flow per month, it would take us three years to become cash flow positive again.
Throw in the fact that we had tenant turnover and needed to find another tenant to start renting from us, there was three months of vacancy. That now puts us at four years of income before we are cash flow positive on our rental property in Texas.
So again, after doing all the math, my wife and I decided that it is very difficult to be cash flowing positive in an already expensive market where everything has to go perfectly for years in order to turn a profit.
Not only that, our mortgage payment has risen over $500 in a matter of eight months due to property taxes and various expenses that inevitably happen as your homeowner.
So if you’re following along, there are a ton of risks associated with us to even begin to be cash flow positive whereas if you were to do something extremely simple like put money into an index fund yes you might lose some of your money if the market goes down but historically the market has averaged 8% returns adjusted for inflation year over year.
Simply put, by shifting our focus from an already expensive real estate market and consolidating into index funds primarily this is not only simplified our lifestyle and headaches this is also guaranteed that we will achieve 8% annual returns year over year especially when looking at a 10 year plus time horizon.
I believe most people expecting to live off of their investment income should be looking at at least a 10 year time horizon anyway so you have to ask yourself, which of the two paths are more likely to guarantee you having more money in 10 years.
I truly believe your chances of success investing in solely index funds are primarily higher comparatively to real estate where there are a lot more unexpected expenses along the way.
What’s The Headache Factor?
Over the years the longer we’ve held on to our real estate rental property, the more headaches weave endured. The really interesting thing is we really don’t have that many complaints because we have a property manager who overseas most of the day to day responsibilities.
However, any time there is a repair that comes up especially if it’s over $250, we get an email on what we would want to do. Also, anytime there’s a vacancy, they will call us and ask about the potential tenant and if we would like to proceed working with them or not.
For example, the past year when we had a vacancy for three months, every single day I spent thinking about the property and how we were losing money. I wouldn’t really consider that passive.
While I understand that is the purpose of real estate investing that you will have vacancies that is often the part that not many people talk about. After experiencing it first hand, I will tell you with full confidence that moving forward a very large portion of our net worth will be concentrated on index funds.
There are far too many headaches even with a property management company involved that it is a much better use of your finances to invest in index funds. If you are going to look at a 10 year time horizon of which path will likely yield higher returns I’d bet money that index funds will outperform real estate if you take the average of 500 rental properties and the S&P 500 index fund.
While I’m sure you could find a few big winners when real estate investing and your property appreciates 30% in one year or something incredible like that. I would prefer not to spend a single second concerned about the fact that I’m not earning money over the long term.
If you have a major repair coming up with a property or some unexpected expense that you need to take care of with your real estate business, you need to pull from profits to cover that. In many cases simplicity is best which is a great segway for the next section.
Simplicity
I truly do not think there is anything more simple than the S&P 500 index fund. Owning all 500 of the countries highest performing, financially solid, and longest lasting companies all in one fund could not be simpler.
The beauty of this simple investing strategy by simply putting money into an index fund is it truly is a set it and forget it strategy.
Once you purchase an index fund your money will do the work for you and over a long enough., especially if you dollar cost average, you have an extremely high likelihood of succeeding.
Over the last 100 years, the S and P 500 has given an after inflation return of roughly 7 per cent. The beauty of this is that there are no major fees, no vacancies, no calls to vet out potential tenants, no employees calling in sick, and no random calls at 2:00 AM in the morning because of some unexpected emergency.
Index funds are comprised of highly stable companies that have proven a successful track record year after year.
If there has been a steady decline of performance and another company has proven that they are qualified to be included in the index fund the poor performing company gets replaced by the better performing company.
The nice thing is you don’t have to guess on what companies will perform well overtime. If you look back 30 years most of the companies in the S and P 500 index are wildly different than they are today.
There’s no reason to guess, there’s no reason to stress out over getting the highest potential returns that you can. Save yourself the stress of trying to get an extra one to 4% returns and simply just by the index and by the market so if the market does well, so do you.
Your time is so much better spent focusing on higher income producing activities than stressing about tiny gains that you likely won’t make anyway.
Historically people that tried to beat the market lose 99 per cent of the time anyway.
Go outside and do some gardening while your investment returns do the work for you over time.
Diversification
This is a common phrase You’ll hear when investing. Don’t put your eggs all in one basket they say. The same is true with real estate.
You buy two single family homes and there is a vacancy for three months the only sorts of income you have is from the other real estate property so you have essentially lost 50 per cent of your total income for a few months. That’s not fun!
With index funds, you have exposure to hundreds if not thousands of different companies so if one or even 10 companies are having a terrible year, you likely won’t even notice.
Especially if other companies are having their best year, You’ll likely still come out far ahead even if some companies are struggling.
That’s the beauty of the index naturally, over time your returns go up. My absolute favorite thing about index funds is that instead of trying to find the needle in the haystack, you just buy the haystack.
Why would you even consider trying to gamble on whether or not something will go up in value over time the science is there and the math is clearly there To show that there are very few investments at all that the average person can make that can outperform the index.
Believe me, I’ve tried starting multiple businesses, running Airbnb properties, vending machine businesses, Amazon FBA, You name it, I’ve likely tried it.
After running the numbers and actual expenses eriod not a single one of the businesses that I’ve tried would have consistently outperformed the index. Isn’t that crazy?
You grind and hustle so much to try to get an extra 10 per cent or even 20 per cent returns, and many cases all you get is more stress and less money.
So I’m telling you for the sake of saving you thousands of dollars, please keep your life simple and diversify accordingly with index funds. Your future self will thank you.
Compounding Growth
This is where the real magic of index funds kicks in.
Let me ask you, would you rather have a $1,000,000 right now or a penny that doubles in value every day for 30 days?
If you do the math, the penny is the clear choice. At the end of thirty days you would have $5,368,709.12!
That is where the power of compounding kicks in. Start earning more in interest than your annual contributions, compounding gets incredibly fun. Essentially, you will make more money on your money than you could possibly spend based on your average annual expenses.
That’s why compounding is so incredible because year one you might put in $1000 year two it might be $1080 and then within 30 years that $1000 contribution will turn into $20,000 if you just let it grow. Let Your money work for you, not the other way around!
Risk Averse Growth
The older I’ve gotten the more of a priority I’ve placed on Risk averse growth.
Naturally there is a saying that high risk equals higher board. That might be true but if you’re looking at a way to seemingly guarantee success you should look to find something that has very low risk and still hide reward.
For example, if you buy $100,000 worth of Treasury bills, which are known to be one of the safest and most secure investments you can make because it is backed by the US government the chances of you losing money is extremely low.
Whereas with something like cryptocurrency you might earn $500,000 on a $100,000 investment and then in six seconds the total investment might be worth $20,000.
I don’t know about you but I value sleep too much to stress over what might potentially be a 5X return overnight for the chance to lose everything that I put in that same day.
For most people around the world it’s safe to say that the juice isn’t worth the squeeze and you’re better off finding safe and successful investment opportunities that you can bet on winning overtime.
Low Investing Buy-in
One of the absolute best parts about an index fund is that you can invest with as little as $1.
It’s rare to find opportunities out there where you need under $1000 to get started and that’s personally why I really like index funds not only for the low cost to get involved, but also the seemingly zero maintenance involved in maintaining and growing your investment.
For example, my wife and I bought a property a few years ago for $200,000 where we needed to bring 3.5% down as well as another 3.5% for various costs.
Our all in Real Estate investment to jut get the property was roughly $15,000. From that point forward, there were renovations required to get the property up to our standard like replacing a window ac unit floors, the fence, ventilation system in the attic, and paint jobs throughout the house.
To date we are all in on the property well over $40,000 in all expenses and mortgage payments.
We currently earn roughly $400 a month in cash flow which is fantastic but comparatively to our index fund portfolio if I were to put that same $40,000 into an index fund, We would have over $64,000.
Now of course everyone needs a place to stay which is not the argument I’m making here. I’m simply making a point that real estate isn’t and should not be your only focus of investing for early retirement.
You should and might even heavily consider making index funds a large majority of your net worth as there are very few things in life as simple and predictable as index fund returns over the long term.
So before you think about buying another rental property for 5 to even 20% or more down, heavily consider the opportunity costs and what it would do for your money 20 years from now.
That’s all I’ve got thank you so much for Reading and if you are considering getting started investing into index funds and Treasury bills as well as other various investments I would heavily consider setting up a Schwab account as they are far and away my favorite way to do banking.
