Ask the grumpies: Other options for investing besides landlording

Leah asks:

We’re debating becoming landlords in order to intelligently use a “big” (relatively speaking) pile of cash we’ve saved by investing in real estate. What are our other options for investing money wisely but still having access to that money if needed? We’d ultimately like to have a house for ourselves to live in.

Landlording sucks so badly.  Club Thrifty and Planting Our Pennies are probably better people to ask about real estate investing.  It’s not the worst idea in the world to buy a place, rent it out, and then live in it later.  But…  Yeah, we know nothing about real estate investing except that landlording can be horrifically stressful, even with a property manager.  We would never do it.

Personally I’m a big fan of the stock market for long term investing, specifically index funds.  Yes, they can lose value, but so can real estate!  If you’re not putting money in Roth IRAs, you should start (because you can take out the principal).  If you already are, then Vanguard S&P 500 is good.

If you’re looking for more short-term options, there’s the standard assortment of stuff that doesn’t currently have great returns.  You know, your CDs/term shares, your money market funds, your savings accounts.

You asked this question so long ago, you’ve probably come up with your own answer– what did you decide on?

Grumpy Nation, what should we have advised?


13 Responses to “Ask the grumpies: Other options for investing besides landlording”

  1. ralucacoldea Says:

    I agree, if you want the money in 5 years, then you should value the access to money much more than the return. So CDs savings accounts.
    If you want to go and become a landlord, then please think of it as a business and check this blog out:
    Buying a house is not for the faint of heart, but some people can make it work. As long as your math is all right, you should be ok, as with any other business proposition.

  2. Engineer Cents (@engineercents) Says:

    Buying a sound property for landlording is very different the buying a sound property for living in. I wouldn’t go into the market trying to look for a house that fits both sets of criteria. I agree with the advice above. Short term, shoot for CDs. Long term, index funds.

  3. hollyatclubthrifty Says:

    I am an index fund investor for the reasons you mentioned. I like to buy for the long-term and not panic about the ups and downs. I don’t think anyone can really go wrong with that strategy if they’re in it for the long haul. With that being said, I’m glad we bought rental properties to diversify. I like having investments that aren’t tied to the stock market in any way, too.

    But, what you say is true. Being a landlord can be stressful! It really depends on the tenants you end up with. We have wonderful tenants now and I hope they never move. Our longest-term tenants haven’t gotten a rent increase since they moved in in 2010. I may never raise their rent! I think that’s the key – finding good tenants and holding on to them. Turnover and dealing with all of that is what is killer.

    It also helps to have a pile of cash for repairs and upgrades. We had to replace an air conditioner this summer at one of our rentals, and ended up replacing the furnace as well since both units were more than 20 years old. That was $4,500 – you have to be prepared to fork over that kind of money any time.

    • chacha1 Says:

      Maintenance – so often overlooked by amateur landlords. I live in a commercially-managed building, and they just had to get an emergency after-hours plumbing call and follow-up daytime call due to the 60-yr-old drains failing. I am pretty sure those two calls came to well over $1000, in our market.

  4. Mrs PoP Says:

    WRT real estate, I’d say don’t assume it’s automatically a good investment or a safe place to store some cash. Also, for us, buying a house to live in long term was a very different purchase than buying a rental or other property as an investment. In our area at current prices, places we’d want to live would NOT be good investment properties. Your area might be very different, but we’ve been out of the real estate game for about 4 years now since prices started to climb and the ROI/debt exposure levels started to get beyond our comfort levels.

    If you want the $ in 5 years, I’d probably go equity/bond index fund mix at a ratio you’re comfortable with. If you really want real estate exposure since you’re mentally ear-marking this money as a future down payment (I’ve run into people that insist on having RE exposure even as renters) and want to hedge against rising real estate prices, you might consider buying a residential REIT fund (there are ETFs for some of these) with some of the money. But know this is higher risk and I liken it more to buying a single stock than buying a diversified index fund.

  5. Rosa Says:

    So many of my friends have had serious issues landlording. One is in a feud with her management company right this minute, actually. I think I’d rather get a regular second job than be a landlord.

    Index funds are the best. That’s why they make such boring advice – everyone knows that’s the default.

  6. Linda Says:

    And here’s the other side: since I can’t seem to afford to buy in my new location, I’m really dependent on good landlords. For now all is well since I know (and am closely related to) my landlord, but I’m dreading having to find a new place in a year or two. Earning the trust of a landlord can be difficult, especially if the landlord is hearing about how awful tenants usually are, or the landlord has experienced a bad tenant once.

    I’ve been trying to think of something more constructive to do with the money received from the sale of my house in Chicago. So far most of it has been sitting in a savings account, which isn’t the best strategy for building wealth. I got some ideas from the financial advisor, but have been pretty lazy about following up on them. Honestly, I’m sort of glad I didn’t rush out and dump it all in index funds since I’d be a bit upset at this point with the losses. I do expect to become a property owner again some day, so I don’t want to lose any of that equity to market adjustments.

    • chacha1 Says:

      Buy into index funds now while the market is down a bit. Most analysts think this is just a normal correction + response to Chinese currency maneuvers.

      Real estate is no place to store money that you will need in liquid form in the foreseeable future.

  7. Leah Says:

    We actually haven’t figured anything out. I have yet to see any CDs in convenient enough to us places that pay any more than what we get in our savings account. I used to do the CD ladder thing all the time, but interest rates are so low that I don’t think that makes sense right now.

    We have no idea when we’ll need this money. I think us living at a boarding school is such a unique situation. For the foreseeable future, we won’t be moving off campus.

    Perhaps it’s time to think about stock market investing, but the potential tax issues have me nervous. We do all our own taxes. We already max out the Roth IRAs. Perhaps another possibility is to increase our 403(b) contributions, but also don’t want to tie up money and have to wait until retirement to get it out.

    If I knew someone who wanted to rent, would be a good tenant, and had no money for a house, that would make my decision easier. But I am nervous about landlording for all the reasons listed here. The main motivation to do it would be to have the benefit of someone else paying a mortgage for us.

    So, as you see, still stuck. At least we are working hard at saving well. I have half a mind to blow it all by taking a year leave of absence from our jobs to travel around the country/world, but I think that will have to wait until our kids are older.

    • Leigh Says:

      If you invest in tax-efficient index funds, the taxes are quite simple. Buying “Vanguard Total Stock Market Index Fund” will throw off around 2% a year in qualified dividends which are taxed at the long-term capital gains rate, either 0% if you’re in the 15% tax bracket or lower or 15% until you reach the 33% tax bracket: There are no purchase fees, no selling fees, and you can set up automatic investments too. I’ve found the taxes quite easy to do for the Vanguard total market stock index funds.

      If you’re in the 28% tax bracket, I would really consider maxing out your retirement, especially before investing outside of retirement accounts. If you’re under that, you could consider doing Roth as well in your 403(b) and then when you leave your job, you can roll the money to a Roth IRA and have easier access to it.

      • Leah Says:

        Thanks for the input. I’ll have to go read more, but this gives me a good start to know what to look at. We definitely don’t make enough to max out the 403(b) and still live comfortably.

        My other concern is liquidity. Our “big” pile is relatively speaking. So while I could be putting more into retirement, I think I’d be uncomfortable missing so much with take-home.

        Mostly, the debate is what to do with our savings account. We don’t subdivide into e-fund, vacation money, house money, etc. It’s just one large pile. We rarely dip into it (vacations are usually cash flow), but it’s nice to know it’s there if needed. I just feel like maybe I’m stupid for not making my money work more for me. I don’t like to bank hop, but we do have our money in a decently high savings rate.

  8. First Gen American Says:

    I don’t think there’s anything necessarily wrong with letting the cash sitting safely in savings until you’ve done your homework on options…or waiting for the right thing.

    Land lording can be okay if you buy in an area that’s desirable to live in. The apartments we had weren’t so bad to manage until the neighborhood went south and we couldn’t attract reliable tenants. Rental properties in many areas go through much bigger boom/bust periods and it is important to understand the supply demand in your area.

    There are places online (and I am sorry I don’t have the links anymore) where people post their small businesses for sale. For example, I was very surprised how at the payback time for vending machines was for example. (It was a year for the one I was looking at). There are some businesses like that one that do need skilled labor or a big outlay of time that have very good return on investment. Before my life situation changed, I was thinking of building up these kinds of side businesses as prep for semi retired living. I still want to do this but my timeline is delayed.

    • Leah Says:

      If we had more time, it would be interesting to do vending machines and such. Interesting that people sell small businesses. If I had more time, I’d do a side hustle with my photography, but time is also an issue. We’ve got a small kid, so spare time goes to her. But I’ll keep this in mind for someday in the future.

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