Step 6 of Personal Finance Club?

Investing
#1

Step 6 of the personal finance club suggests to do the following:

  • Pay off mortgage
  • Taxable brokerage
  • Investment real estate

Would it be acceptable to put money in the VNQ (Vanguard Real Estate ETF) instead of putting money in physical real estate? I would like to diversify with real estate because I am already doing the early mortgage and taxable brokerage account.

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#2

I definitely wouldn’t blame you if you did that. Physical real estate can be a pain in the ass with a huge learning curve. And VNQ will likely do great if you buy and hold for long periods. You can certainly live a long, healthy and wealthy life without ever owning physical real estate. THAT said, here are some reasons why you might want to consider it:

  • Critics of REITs and highly tradeable real estate ETFs like VNQ argue that because they’re so liquid, they correlate extremely closely to the stock market. So it might not provide much of the diversification you’re looking for.
  • Physical real estate can often provide stronger cash flow than the dividends kicked off by VNQ.
  • Physical real estate gives the option of leveraging. i.e. put down 30% and borrow 70% to buy an investment property. That can amplify gains (and can also bankrupt you if it goes badly, so leverage wisely).
  • Physical real estate is something that you can potentially use yourself. Whether you live in half of a duplex, or occasionally use a vacation home you rent out. You definitely can’t live in VNQ!
#3

Great ideas Jeremy,

Thank you for your response. I think I will focus on paying off my mortgage first, I hate being under debt and definitely don’t want to have 2 mortgages. If I play my cards right, maybe I can pay off my mortgage pretty fast and then think about getting a rental property.

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#4

I LIKE THAT STRATEGY. Doesn’t hurt to have zero mortgage payment and your entire income to plow into investing. Sounds like a future millionaire to me (if you’re not one yet)

#5

No I am not, but hopefully one day. Thank you for the kind words.

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