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  • Primary Residence and RE Investment

    Apologies if this would be better categorized elsewhere. I'm about 1.5 years out of training and have money saved up for a primary home purchase. I live in the bay area (VHCOLA) and entry price for a 3bed 2 bath in a borderline decent area is 1.2-1.5 mil. For reference, we're both 34 and household income is between 500-700k depending on how many extra shifts I pick up. Presently we have 300K in various tax deferred and taxable account, as well as 200k in student loans at the ridiculously low interest rate of 0.2% that will be paid off over the next 4 years.

    My wife and I have recently gotten interested in RE investment for the reason many of you are (portfolio diversification, cash flow, tax purposes, alternative income stream, etc). My problem is that it seems like buying a 1.5 million dollar primary residence would already be a VERY significant amount of real estate exposure.

    The alternative option would seem to be to rent and invest in real estate elsewhere. Is there anyone out there who owns a very expensive primary residence and is further investing in real estate? Seems like this would be a lot of exposure to one asset class.

  • #2
    The house you live in isn’t an investment. It’s a cost.

    I didn’t feel comfortable in direct ownership of rental properties until after I maxed out my 401k, CBP, HSA, Roth IRAs.

    It will be very hard to achieve positive cash flow in a VHCOL area. My advice would be to look somewhere else. For your first property, aim small, miss small. Stick with the 1% rule for your first property and it will limit downside (monthly rent equals 1% of property price).

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    • #3
      Of total net worth, direct real estate ownership represents 50%. That includes primary and four other residential properties.

      we built the portfolio rather quickly concurrently with a stock portfolio by leveraging the purchases and allowing for a negative cashflow that was balanced out by the depreciation since we were able to claim real estate prof status so end of the year it would be balanced. We used that as our marker for real estate progress.

      We paid down mortgages on the investment properties to maintain a 50% balance as much as possible and that gradually turned the properties into cash generating in addition to continued depreciation.

      As you pointed out. Direct real estate had two very large pitfalls. Focal investment and hard asset subject to disasters natural or manmade. If investing in VHCOL house. Think individual stocks. Can be amazon or apple or tesla. Or can be enron.

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      • #4
        Would consider the home a part of your investments in this particular case (VHCOL area) and branch out out to a well-diversified equity fund portfolio, rebalanced annually. What you are proposing is scary to me. But that’s just me and I’m not your advisor (and not into the current doctor-as-REmogul/REP fad).
        Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          I'm arguably less interested in being a REmogal or achieving REP status than my wife is. I'd rather put more into a diversified equity portfolio and continue my day job because I like being a doctor and I don't really want to take on another job.

          For multiple reasons though, my wife (non physician) is now considering transitioning careers and the idea of cashflow RE seems to have really piqued her interest. I've just been trying to run the numbers to see if we can purchase a very expensive primary residence, max out 401k's, roth, MBDR etc and build her RE empire.

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          • #6
            OP - you absolutely can. The key factor is she wants to do this for HER career and interest in being a landlord and prof real estate. It makes good sense like the private SBO physician having the SO as the office manager.

            Just keep a balance and don't put all the eggs into a single basket. A house you live in most likely isn't the best investment house (at least in purpose of returns).

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            • #7
              As a later career physician, we have a large tax deferred account balance, a large taxable account balance, but we also have a significant direct ownership real estate portfolio in several states. The stock market is great for simplicity, but cash flow from dividends on stocks is quite limited. The real estate portfolio downside is the extra work required, but on the upside, it cash flows plenty of ongoing monthly income, and there are 4 major components of return. There is the cash on cash return, the mortgage pay down supported by rental income, the appreciation, and then the tax advantages.

              I really like the diversification we have with direct real estate ownership as another branch of our asset diversification. The cash flow each month has been a financial game changer. But just the same, you need to have the skills to run the numbers on any proposed investment, before you decide to move forward. Otherwise you can make very expensive investments in bad deals and lose a ton of money. Good deals are much easier to find in moderately priced areas.

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              • #8
                You can do it if your wife is motivated. Family member just bought first property: three unit building with sufficient cash flow from two units to cover the cost of his mortgage. The rest is positive cash. The issues are time, interest, and money.

                Perhaps suggest to your wife that she look for professional opportunities as a property manager. Better to learn that way than invest significantly yourselves before you have the knowledge. Although I concede managing properties is a lot less attractive a proposition when you don’t own them.

                But before you do anything, get educated. Read some of the real estate books at this link: https://www.whitecoatinvestor.com/be...ors/#mortgages
                I’m less excited about this path, but you may even consider a course or two. I think WCI affiliate PIMD has one.

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                • #9
                  Originally posted by lidocation View Post
                  I'm arguably less interested in being a REmogal or achieving REP status than my wife is. I'd rather put more into a diversified equity portfolio and continue my day job because I like being a doctor and I don't really want to take on another job.

                  For multiple reasons though, my wife (non physician) is now considering transitioning careers and the idea of cashflow RE seems to have really piqued her interest. I've just been trying to run the numbers to see if we can purchase a very expensive primary residence, max out 401k's, roth, MBDR etc and build her RE empire.
                  Please don’t take this offensively. If your wife wants to be a RE professional, she needs to run the numbers. It is a business that needs to stand on it’s own. How much does it contribute to your mutual benefit? The idea is appealing but ALL aspects of her business require money. Downpayment from joint assets and from lenders. Has she asked for a sum for the first investment? When she does, then it’s family decision. It is going to be extremely difficult to justify RE professional status on properties in a VHCOL area.
                  “To qualify as a ‘Professional’ for tax purposes, a taxpayer, or their spouse, must meet a two-part test: (1) the taxpayer must spend the majority of his or her time in real property businesses, and (2) the taxpayer must spend 750 hours or more in the real property business and rentals in which he or she materially participates.”

                  That is a big hurdle to achieve on individual properties. She also needs to understand the legal structures and asset protection needed. The bank financing etc. This is her business but your cash investment in her interest.

                  You want to be a physician and she can do anything she wants. This is not a knock. It’s that the typical path is passive investing, not a career change. She needs to run the numbers and see if she likes being a landlord. That isn’t a career switch. I don’t think this is an asset allocation decision, I think it is an occupation choice with capital invested. Nothing personal, just business. Real estate is a lot of work and she might do well.

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                  • #10
                    "She needs to run the numbers and see if she likes being a landlord. That isn’t a career switch. I don’t think this is an asset allocation decision, I think it is an occupation choice with capital invested. Nothing personal, just business. Real estate is a lot of work and she might do well."

                    I think that is a fair point and is precisely the reason I'm less personally inclined. Wife seems more motivated though, so I don't have as much issue providing seed capital to build and grow her business if she is so inclined.

                    More to the original point though, I've been trying to make sense of her "RE Business interest" in the context of our overall financial portfolio. For the business purposes we wouldn't be investing in this area. Like everyone has noted, it's very difficult to make the investment numbers work in a VHCOLA.

                    Arguably it would be difficult to meet the material participation requirements for REPS when your investment properties require multiple hours of travel to be reached but even without REPS, the cash flow aspect of portfolio diversification has some appeal.

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                    • #11
                      "the cash flow aspect of portfolio diversification has some appeal."
                      Have her model it. Use the 1% rule for rents.
                      $1,000,000 of properties at 1% monthly rent is GROSS rents of $10,000 per month or $120,000 per year. Four properties or five? How much of the cash flow is going to be left? Cash flow is income, the diversification is in the assets really. The alternative cash flow is employment for income diversification. The challenge is to breakeven or better on cash flow until the properties pay for themselves. She will probably end up looking for some property management to avoid the travel, or not. 30% down and have a working capital reserve for her business. It is very possible, but not necessarily easy. If she made 10% positive cash flow how fulfilling would $12,000 per year feel? You think of it as real estate investment she should think of it as work. The allure of passive real estate investment fades when it comes down to primary income. Sweat equity is where most try to cut expenses (smart or not is irrelevant). Long distance isn't ideal and it does not sound like handyman is in the plan.

                      Not intended to discourage, but simply encourage her to have realistic expectations. My spouse would never put in that much work to satisfy my urge for real estate asset diversification. She would simply say, do it yourself, buy a REIT. Done.




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