Should I Invest in Real Estate or the Stock Market?

Summary

Ramsey Everyday Millionaires: Should I Invest in Real Estate or the Stock Market?

Release Date: January 29, 2025

Introduction

In this episode of Ramsey Everyday Millionaires, hosted by the Ramsey Network, the focus centers on a pivotal financial decision: choosing between investing in real estate or the stock market. Amy, a 55-year-old real estate broker, seeks guidance on optimizing her investment strategy to build and preserve her wealth as she approaches retirement. The discussion is led by key hosts Rachel Cruze and Dr. John Delony, with additional insights from George Kamel and Jade Warshaw.

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Amy's Financial Overview

Amy presents a well-established real estate portfolio, owning two properties:

1. Island Condo: Currently valued at $700,000 with an outstanding mortgage of $400,000. This property serves as her primary residence, incurring monthly payments of $4,500, including HOA fees.

2. Airbnb Property: Valued at $650,000 with no outstanding mortgage, this property generates approximately $50,000 annually.

Additionally, Amy has $200,000 in cash from recent renovations and anticipates a $300,000 profit from selling her island condo, totaling a potential $500,000 in liquid assets. Her liabilities include a new Infiniti, recently purchased for $70,000 with monthly payments of $1,300, and existing retirement accounts comprising a $70,000 IRA and a $20,000 Fidelity brokerage account.

Notable Quote:

Amy (00:24): "I’m a single woman, 55 years old. If I did this move and my condo actually sold and I got into the house, I have a half a million. The only other debt I have is my car..."

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Investment Options Discussed

1. Real Estate Investments

Given Amy's extensive background in real estate, Rachel Cruze acknowledges her expertise and interest in continuing to invest in property. She emphasizes the benefits of leveraging Amy's knowledge to further expand her real estate portfolio.

Notable Quote:

Rachel (03:40): "I love the idea that you like real estate... I think it's a great way to invest. So I would take some of [the funds] and I would probably max out a Roth IRA every year."

2. Stock Market Investments

Rachel advocates for diversification into the stock market, particularly through mutual funds, to mitigate risks associated with single-stock investments. She highlights the historical average returns of 10-13%, noting the market's robust performance in the past year.

Notable Quote:

Rachel (04:51): "There are ways that actually have way less risk and you still get a great rate of return on average anywhere from 10 to... this past year the market did incredible."

3. Retirement Planning

The discussion shifts to retirement strategies, with Rachel recommending maximizing contributions to tax-advantaged accounts such as Roth IRAs and exploring options like SEP IRAs or individual 401(k)s, especially since Amy owns her brokerage business.

Notable Quote:

Rachel (05:42): "I would look into a couple individual 401K. Yeah, I would look into a couple of options just to put some money in from a retirement standpoint because that is going to have more tax advantages."

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Strategic Recommendations

1. Diversification of Investments

Rachel advises Amy to diversify her $500,000 cash reserve by allocating a portion to real estate and another to the stock market. This balanced approach leverages Amy's real estate acumen while introducing her to the stability and growth potential of mutual funds.

2. Maximizing Retirement Contributions

Maximizing contributions to Roth IRAs and other retirement accounts is emphasized to benefit from tax advantages and compound growth over time.

3. Engaging with SmartVestor Pros

Both Rachel and Dr. John Delony recommend consulting with a SmartVestor professional to tailor a long-term investment strategy aligned with Amy's retirement goals and risk tolerance.

Notable Quote:

Rachel (06:34): "A smartvestor pro can sit down and really help look at all of this with you as well and just kind of your long term plan of retirement, long term goals..."

4. Utilizing Investment Calculators

Amy is encouraged to use Ramsey’s investment calculators available at ramseysolutions.com to model different investment scenarios, helping her visualize potential growth from both real estate and stock market investments.

Notable Quote:

Rachel (07:28): "If you go to ramseysolutions.com our investment calculators there and plug in some of the numbers..."

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Long-Term Projections and Conclusion

Dr. John Delony provides a forward-looking perspective, suggesting that Amy’s $500,000 could potentially grow to approximately $1.3 million in a decade through strategic investments and consistent income allocation. This projection assumes reinvestment strategies and steady income growth, underpinning the importance of a disciplined investment approach.

Notable Quote:

John (06:49): "A lump sum is going to double every seven years... In 10 years... you’re going to have around 1.3."

Final Takeaway

Amy is positioned to make a well-informed decision by balancing her proven success in real estate with the growth potential of the stock market. By diversifying her investments, maximizing retirement contributions, and leveraging professional financial advice, Amy can confidently transition her wealth-building strategy to align with her retirement objectives.

Closing Remark from Dave Ramsey:

Dave (07:54): "Everyday millionaires need help with your investments? Connect with a Smartvestor pro at ramseysolutions.com."

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This episode underscores the importance of diversification, strategic retirement planning, and professional consultation in making informed investment decisions. Whether leaning towards real estate or the stock market, the key lies in aligning investments with personal expertise, risk tolerance, and long-term financial goals.

Transcript

[Amy]

Foreign.

[Dave]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor all right, let's go.

[Rachel]

To Anna Marie island in Florida and let's talk to Amy. Hey, Amy, welcome to the show.

[Amy]

Hi. How are you guys?

[Rachel]

We're doing great. How can we help?

[Amy]

So I'm a little confused as to where to go. I own two properties. One of them is on the island and that property I owe about 400,000 on. It's worth 700,000. My, my monthly payment with HOA and everything is 4,500. I own another property just over the bridge. It's a bicycle ride to the beach. That is an Airbnb property I've been making about 50,000 a year on. But I don't owe anything on that property that is worth about 650,000. What I am thinking of doing is selling my property on the island. I'm kind of tired of the HOA stuff and actually I'm in the process after Hurricane Milton, renovating my Airbnb property right now. And I'm thinking I want to move into it.

[Rachel]

Wow.

[Amy]

Thinking of selling condo on the island and moving into the house just over the bridge. Then I'll have no house debt. I have 200,000 in cash after the renovation left over. And then if I sold the condo, I would make 300,000 profit off of that. So I'd have a half a million. The only other debt I have is my car, which I just bought in. I know that. Well, it's kind of against Dave's rules. I know, but I bought, just bought a new Infinity, Iowa. 70,000 on that. So that's a 13amonth payment. I have a 70,000 IRA, a $20,000 fidelity account.

[John]

So what's wrong with, what's wrong with doing this deal and moving into the rb, Airbnb and selling the one on the island? What's wrong with that?

[Amy]

It's not what's wrong with it. I think that's, I think that's a smart decision. The question I have for you guys is. So I'm a real estate broker. I've done real estate, you know, renovations, flip building all my life. I'm a single woman, 55 years old. If I did this move and my condo actually sold and I got into the house, I have a half, half a million and I need to know what to do with it because I'm most likely to want to buy real estate and fix it and do all that. But. And I'm not knowledgeable at all about the stock market. I'm trying to just wrap my brain around all of it and learn because I'm getting to the age where I want the money to work for me instead of me working the money, you know?

[Rachel]

Yeah, for sure.

[John]

Yeah.

[Rachel]

How old are you?

[Amy]

I'm 55.

[Rachel]

Okay. And what do you do for a. For a job? Are you working?

[Amy]

Real estate broker.

[Rachel]

Oh, that's right. You said that. I'm sorry. How much do you make a year doing that?

[Amy]

Well, that's. That varies quite a lot, but anything from 100 grand to 300 grand a year.

[Rachel]

Okay. And then your primary residence, where you live now, what is the situation there?

[Amy]

So the condo on the island is. We. I owe.

[Rachel]

Was that. Is that where you're living? Is that condo?

[Amy]

It's been my primary residence.

[Rachel]

Oh, it has? Okay. I'm sorry. I gotcha. Okay, perfect, Perfect.

[Amy]

I'm in there now renovating it, but I'm thinking about moving here.

[Rachel]

Yeah, that's great. That's great. Okay. So the $500,000 cash, I mean, what I would do honestly with it is I would take some of it. I would diversify it. And I love the idea that you like real estate, and maybe because I come from a real estate family, but I think it's a great. I think it's a great option to have, especially if you know what you're doing and a lot of people don't, but you do because you live in this world and it's great. It's a great way to invest. So I would take some am and I would probably max out a Roth IRA every year. I would make that part of my rhythm. I think it's $7,000 per year that you can do. So I would allocate some money to make sure that you had the cash flow, and that can come out of just your income that you're making anyways. It doesn't have to come out of this 500,000. So. Yeah, so that would be a thing. That would be something I would do, and then I would still, you know, I think your. Your ira. Do you have any other retirement investing? Do you, like, within your brokerage, any kind of 401k or anything?

[Amy]

I've always felt like I do better with real estate than I do with, like, have always scared me. You know, it's always sure.

[Rachel]

Well. And so let me tell you this. There is a level of risk that I wouldn't take in the stock market when you think about single stocks. And there's ways to do it, that's risky. And then ways that actually have way less risk and you still get a great rate of return on average anywhere from 10 to, I mean 12, 13%. I mean this past year the market did incredible. So it was even more than that. But doing mutual funds, investing in mutual funds, which is going to be 90 to 200 stock within a fund, so no single stock investing all of that. So really you limit your risk when you spread your money around. And so that, that would be the bet that I would do. I would do anything I could to do some tax favored plans in retirement. So that would be your Roth ira. Um, yeah. Within your brokerage, I don't know if you're, if, if you do you own the brokerage or you work for someone.

[Amy]

I own the brokerage.

[Rachel]

You do. I would look into it like A, a SEP. I mean I would look into a couple individual 401K. Yeah, I would look into a couple of options just to put some money in from a retirement standpoint because that is going to be, it's going to have more tax advantages than just going into the market on your own personally. So I would, I would allocate some money for that. I would look around. I mean I don't know what real estate is going for in your area, but I mean if you can find something and pay cash for it and have another rental property to the side, I mean I think that's, I think that's a great option as well. So yeah, there's a, there's nothing, you know, you can't, I wouldn't say do anything completely wrong unless you took all this money and just like blew it or put it all in like one single stock or something. But I think real estate and some in retirement would be great. But I would also recommend sitting down with one of our smartvestor pros. We actually just met one and the last break that's here from Seattle.

[John]

Yeah.

[Rachel]

And a smartvestor pro can sit down and really help look at all of this with you as well and just kind of your long term plan of retirement, long term goals that you may have and be able to let this money work for you in that way as well.

[John]

Yeah, I think that you're doing well. The thought I keep having is, you know a lump sum is going to double every seven years. So let's say you sold the house on the island, you got the 300k. Let's say you dropped that in the bank and then you invested the cash that you have into real estate. I mean, if you do that and you continue to add 15 of your income every single month, I mean in 10 years, I mean you're going to be looking pretty good. You're going to have around 1.3. And that's just assuming, you know, you're kind of midway at that midway point in your income. It's not assuming for the months that you're making 300 or the years that you're making 300 and above. So you have a really great horizon on this and way to go. Good job.

[Rachel]

Yeah, that would be some good numbers to kind of play with. If you go to ramseysolutions.com our investment calculators there and plug in some of the numbers and just say, what if I just invested, you know, all this 500,000 in a mutual fund because if it doubled, you know, every seven years is kind of the rule of seven. That could be exciting to you. And it may be less work and headache as real estate, but if real estate's something you love too, maybe you take some of this and buy a paid for property.

[Dave]

Thanks for tuning in to Ramsey. Everyday millionaires need help with your investments? Connect with a Smartvestor pro at ramseysolutions. Com Smartvestor or click the link in the show notes. Ramsey Solutions is a paid non client promoter of participating pros. Learn more at ramseysolutions. Com Smartvestor.