Should I Invest in REITS? (Money Q&A)

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1:31Learn more at Accenture.com slash Spotify. On this episode of the Personal Finance Podcast, should I invest in REITs on this money Q &A?

1:59what's up everybody and welcome to the personal finance podcast i'm your host andrew founder of mastermoney.co and today on the personal finance podcast we're going to be talking through six of your questions on this money Q &A. If you guys have any questions, just join the Master Money newsletter. You go to mastermoney.co slash newsletter. And any of those newsletter issues that come out every single week, you can ask a question based on those newsletters. Now, don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever podcast player you love listening to this podcast on. And if you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player.

2:40Now today, we're going to be diving into six of your questions. The first one is going to be, should I buy Vanguard's VNQ REIT for easy real estate investing instead of using Fundrise? Question two is, should I invest extra cash, pay off my boat in car loans, or tackle my 8 % rental mortgages first? Question three is, how do I save money for my kids if I don't want a 529 and I want them to have the ability to use that money for anything, not just college. Question four, is tax loss harvesting worth it for regular index fund investors or should I just keep dollar cost averaging? Question five is, should I buy finance books now to learn more or wait until my emergency fund investments are set up?

3:18And then question six is, I open brokerage accounts in my name for my kids. How do I transfer these to them after without selling anything? So these are six fantastic questions pumped about this episode because we have a lot to get into. So without further ado, let's get into it. The first question is, hi, Andrew. I've been listening for a long time and I love the show. I hear your advice on Fundrise for real estate investing, but I have my accounts at Vanguard and I'm not interested in opening another platform. What's your opinion on investing in the Vanguard REIT, VNQ, to get real estate exposure without becoming a landlord?

3:51So this is a wonderful question. And for anyone out there who is listening, who wants to simplify their finances, I like the way your thought process is because simplifying your finances is a huge key to being able to build wealth over time. And so that's really what you want here. And if you have Vanguard and you just want to have a Vanguard account, more power to you. There is nothing wrong with that whatsoever. So I'm going to kind of explain VNQ. And when I get into this, I'm also going to kind of analyze it here live on the show. If you go to Vanguard's website, if you want to look at VNQ for yourself, if you're not driving or anything like that, if you go to investor.vanguard.com, you can look at ETFs in their profiles.

4:29I do this a lot on some of the YouTube videos that I do as well, is we kind of go through and dive into some of these perspectives to see, you know, does this make a lot of sense to invest in over time? So I'm going to show you how I'm going to analyze this to see if VNQ is even something. And I'm going to do this live. I haven't looked at it pre-show. I'm actually pulling it up now. And I'm going to do this live to show you how I would think about this. So if you're looking at REITs, Vanguard has fantastic REITs. I already know that, you know, just from researching in the past. And VNQ is no exception, because if you look at this, it has an expense ratio of 0.13%.

4:59Now, the difference between REITs like Vanguard and then REITs with something like Fundrise is Fundrise is private real estate investments. So if you're looking to invest in private real estate investments, Fundrise may be the way to go. They also now, Fundrise also has private venture investments, which I think is a really, really cool thing that I've been looking more into, is you can invest in venture capital stuff. So you can invest in stuff like OpenAI, for example, through Fundrise. And you can do this right now. You can literally go and invest in something like that or Anthropic, which is the Claude.ai, which is a tool I love using all the time.

5:32You can invest in things like Canva or other stuff. But when it comes to investing in REITs, they are two separate, very different things. One is private and then one is public. So Vanguard's is a more public asset. And so when we look at VNQ, we're going to look at a number of things here. First is the cost. 0.13 % on the expense ratio at the time of recording this is very, very low. Now, what it does is it holds dozens of publicly traded REITs, so Real Estate Investment Trust. So if you don't know what a REIT is, it stands for Real Estate Investment Trust, and it is a way for you to get real estate exposure without having to be a landlord or fix toilets.

6:07We've done an entire episode on REITs if you haven't heard that one. Now, companies that own or manage real estates like apartments or offices or malls or data descenders or storage facilities. Those are what you are buying when it comes to REITs. So a lot of REITs have big, huge buildings. When you see these massive apartment complexes getting built, a lot of times REITs are going to end up owning those over time. And so you buy it just like a stock or ETF in your Vanguard account, which makes it super simple to invest in real estate without having to ever lift a finger. If you want that real estate exposure, it is a very easy way to get it done.

6:40Now, how does it give you real estate exposure? Well, REITs pay out most of their profits as dividends. And so VNQ can provide regular income plus long-term growth, and it's liquid. So with real estate, when you own a property, you have to wait a certain period of time to be able to sell that property. Sometimes it could be a year or two years. If you're trying to sell your house right now at the time of recording this, it is very difficult to sell a property quickly because of interest rates. So you don't have the impact as much when it comes to REITs because it is very liquid. And you don't get tenant calls, you don't get calls for repairs or property taxes that you have to handle yourself.

7:13So if someone says, I want real estate in my portfolio, but I don't want to be a landlord or open another account, REITs are a great way to go out and do this. Now, let's take a look at V &Q here for a second. I'm going to kind of analyze this a little bit more. So the year to date returns are 2.81%. Now, what I like to do when it comes to this is a lot of times I like to analyze it against something like VOO. So VOO is the S &P 500. And I like to look at both just to see, hey, what would the return be if I just kept it with the S &P 500? So year-to-date returns on the S &P 500 at the time I'm recording this is 7.08%.

7:49Even through all that tariff stuff, it is still up 7.8%. And VNQ is up 2.81%. Now, what VNQ invests in is stocks issued by real estate investment trusts, companies that purchase office buildings, hotels, and other real property. Now, the goal is to closely track the return of the US Investable Market Real Estate Index and offers high potential for investment income and some growth. Now, let's analyze this really quick and see what we got going on here. So it's been around since 2004, which I like. If you look at the inception date of the NQ, it's been around since 2004. And so that's a good sign because we can get the data for it for a longer period of time.

8:27I like stuff that's been around at least for a decade or longer typically. And it's sort of something to definitely look into. The minimum investment is$1 through Vanguard. And at the time recording this, they have the market price, which is irrelevant to me. So let's look at the returns over the course of the last couple of years. So year to date, it's 2.01 % at the time recording this. The one-year returns, though, are 10.41 % for V &Q, and the benchmark is 10.4%. The three-year returns are 3.54%, the five-year are 6.5%, and the 10-year are 5.9%. And so since inception, it has had a 7.3 % return.

9:06Now let's look at VOO for a second, okay? Just to compare. So VOO over the course of 10 years has had 13.6 % returns, whereas the REIT, VNQ has had 5.93%. And since inception, VOO has had 14.55%, whereas VNQ has had half that. So 7.43%. And so sure, they are totally different assets. They are totally different asset classes, but you can see the drastic differences between something like the S &P 500 and something like real estate historically. Now, that doesn't mean that this is going to happen in the future, but historically, that is what we are looking at here. So if you want real estate exposure, it is definitely something that will have, at least historically, lower returns than what has happened over the course of its lifetime than the S &P 500.

9:53That doesn't mean you shouldn't invest in it whatsoever. That just means it is information that we want to think about as we look through this. Okay. Now VNQ holds 158 different stocks in its portfolio. And one thing I like to look at a lot is I like to look at some of the distribution of what is inside of this ETFs. And so this is actually very interesting because it tells you what are the holdings in this ETFs and how is it weighted? So VNQ, which I like a lot, holds 13 % healthcare REITs. You know why I like healthcare REITs? Because healthcare is not going anywhere. In fact, healthcare is going up long-term.

10:26And so I like when they hold a large portion of healthcare REITs, meaning companies that own hospitals, for example, companies that own doctor's offices. Those I absolutely love. They also own 13 % retail REITs. So retail locations, things like where your local grocery store is, your Walmart or your Target, they own retail REITs. They own telecom tower REITs. 11.5 % is in a telecom tower REIT. And it owns data center REITs. So data centers, if you don't know right now, or a very highly desired piece of real estate because a lot of different companies need bigger data centers and there's not enough of them out there.

11:01And so these data centers are big, big money for a lot of people in the real estate industry. So I like to see that. You know what else I also like to see is that there is low percentages in things like hotels and resorts because those are not recession-proof, don't like those businesses at all. There are low percentages in things like timber and single-family residential REITs, self-storage REITs is 6.4%. Real estate operating companies is only 0.10. percent. And that's a totally different business than real estate. So I like how this is kind of structured. And for me personally, if I was looking through this, I would say to myself, okay, well, it holds a decent holding here.

11:33Now let's look at the dividends because dividends matter a lot when it comes to REITs. And so right now at the time I'm recording this, the dividend per share is 0.867 as of right now at the time I'm recording this. So that is decent. And that is around where some people want to be. And so I would kind of read through this stuff and say, okay, pretty interesting. I think there are some things that you can look at here. And then you would look up ratings. So I'd go look up some ratings at somewhere like Morningstar or some other places. Vanguard obviously rates it on a risk reward scale out of four, which is a pretty good risk reward rating.

12:04And I would go look up some ratings. So if you go to Morningstar.com, they have this as a silver medalist and it has a three star rating. So if you look at something like VLO, for example, just to compare the differences between what they rate that versus this, VLO is gold star and it is five stars. It is the cream of the crop, the top that you can get there. So it's just looking and comparing those two things and thinking through, does this make sense for me now? Is there anything wrong with investing in this compared to something like Fundrise? Not at all. Vanguard has some of the best funds out there when it comes to some of this stuff.

12:36So if you do your research and look into this, it's solid choice for anybody who wants to have some real estate exposure. And looking into REITs is a huge, huge thing. And if simplicity and convenience is your priority, there's nothing wrong with V &Q. whatsoever. So the other key things to know is that it pays out dividends that can be taxed at your ordinary income rate if it's held in a taxable account. So holding something like this in like a Roth IRA or a traditional IRA can be tax smart. I would talk to your CPA about that. And it won't exactly match fund rise returns on diversification into private projects.

13:07But for most investors, it is plenty, and I mean plenty, of real estate exposure. We talk through all the things and all the projects that it works in. Love that about it. So great thought there. I hope this analysis wasn't overkill, but I wanted to kind of show you how I think about this stuff and how I look at it. So just let me know if you have any other questions. And if you like me breaking it down deeper like that, let me know as well. All right. The next one is, hey, Andrew, I'm 36. Longtime listener. Thank you for all the lessons. I own my home outright paid off. Amazing. But I do have rental properties with mortgages.

13:38One reset to 8 % interest and the others will soon. I also have a boat with$2 ,500 left at 9.5 % interest, and I just got a new car. I owe you $30 ,000 on that at 4.74%. My question is, with my extra cash flow, should I focus on investing in index fund, paying off the boat or car, or aggressively paying down the rental properties? So wonderful, wonderful question. And first of all, let's celebrate that paid off home. That is a great, great accomplishment. That is absolutely huge. And it frees up cash flow that gives you a solid foundation that most people don't reach until their 50s or even later.

14:13So absolutely amazing that you were doing that in the way that you're thinking about this. I also love that you have rental properties. I think that's absolutely amazing. And some of these properties look like that you are doing some cool stuff with them. So really excited to kind of dive into this. Now, let's look at your debts in order by interest rate. Okay. First, let's look at your boat. So you have a boat at$2 ,500 left at a 9.5 % interest rate. This is high interest in my opinion. Anything above a 6 % interest rate, in my opinion, is pretty high. The car is at 4.74%, and it's$30 ,000 borrowed.

14:43So it's at moderate interest. It has a lower interest rate for what we typically see nowadays. Great rate on that. And then you have the rentals, and some are going to reset to 8 % high for mortgages. So the rentals I actually separate out from your personal finances because I see those as a business. And so if you have these rental properties, we're going to separate those out and think about those different, and we'll talk about that here in a second. So first of all, before investing, the boat needs to get paid off is my opinion. So A, it's a small balance. You can actually snowball this thing and get the boat paid off at$2 ,500 at that 9.5 % interest rate.

15:13That would come first. And then once that boat is paid off, then I would start to look at some other things. First, then I'd probably go start investing in index funds. Why? How did I come to that conclusion? Because if you look at the car, the car interest rate is 4.74%. You can make those minimum payments and kind of move on. The rentals are something we're going to talk about here in a second. So let's think about this for a second. If you are cash flowing on your properties, meaning you're making enough that makes sense for you on those properties, and they are also covering the new interest rate, then I think it works for you.

15:46If they are not cash flowing anymore because of the new interest rate, then we need to reevaluate owning those rental properties. Because if they do not cash flow, what is the purpose of owning them? Unless you bought them for appreciation, which is a risky play. hey, the only reason why I personally buy real estate is for cash flow. But if you bought them for a different reason, then maybe you can hold on to them. If they do not cash flow anymore, because of that interest rate, then there's two things you can do. One is you can sell one of them off, take the equity and pay off some of the other ones, or you can sit there and sell a couple of them.

16:17Secondarily, though, if they do cash flow, then you just hold on to the rental properties and let them cash flow while they pay the higher interest rate. And so it's kind of deciding, running the numbers again on your rental properties with the new interest rate and deciding if they work. Now we have a rental property calculator. If you want one, I think we have it linked up down below in the show notes, but I would definitely look at those rates. Secondarily though, with those 8 % interest rates, I would shop those because right now interest rates should be a little lower for a lot of people.

16:43I know it's a rental, so it's a little tougher, but if you can shop it and find a lower interest rate, it may be worth your time. And maybe you can package or bundle them together as well. That may be something that you can do and be able to make it make sense. Now, the way to make it make sense is to ensure that your closing costs do not cost more than what you are saving when it comes to refinancing. That is the big key there. And then C is evaluating that car loan. I think the car loan is completely reasonable. That is a great rate, probably because you got a new car. So this is kind of the there's no urgent payoff on the car loan.

17:14Currently, I would be investing those dollars instead if it were me. And so that is something I would not think about, you know, paying off too, too fast as time goes on. And And then after covering some of those high interest debts, then I would start to automate into some of the investments that you're interested in. So if it's index funds, that's great. If it's more real estate, that's great. But starting to automate and dollar cost average into those is going to be really, really big. If you don't have any index funds yet, diversifying into them would be great. But making sure you also have that emergency fund in place with the 136 method is huge.

17:42So at least having three months of expenses before you start investing is the other big key in your emergency fund. So just making sure that that is prioritized as well. So let me give you a quick action plan again, just to summarize. I pay off the boat today as fast as you can. Then I would review refinance options for the rentals. And if rates stay high, just make extra principal payments to reduce the 8 % loans faster. Then I would keep paying the car loan normally or slightly extra, not urgent whatsoever. And then I would invest any leftover cashflow into index funds every single month and protect your cash buffer as a landlord.

18:14Make sure you have that cash buffer in place. That is always, always, always really important. But number one is very simple. Boat needs to get paid off. Then you can go from there. So I hope this helps. You are doing amazing at 36. Keep optimizing and building that massive wealth. Love, love, love to see you guys investing in all these different areas. I think it is so incredibly powerful. So great job and keep up the good work. All right, the next question is, hey, Andrew, I love your podcast because your steps feel realistic for normal families. Thank you. And thank you so much for the kind words.

18:44Those always make my day. So thank you so much. I'm trying to save for my three kids. They're 13, 9, and 8. And I've hesitated with a 529 plan because what if they don't go to college? What if they get scholarships? Or what if they want to buy a car or a house instead? Their dad works a trade job making six figures with no degree. So I know college might not be for everyone. How do I save money for them that they can use for any big goal in life, not just college? I make about$50 ,000 and do this on my own, so it's small but important to me. What's the best alternative for minors besides a 529 plan?

19:16So there's a bunch of great alternatives here that we'll talk about right now. One thing I will say about the 529 plan is that it can be, there is a little loophole that just passed over the course of the last couple of years. And what you can do is save up to the$35 ,000 limit. Now, why is this$35 ,000 limit matter? Because you can start to invest in a 529 plan. If they don't go to college, you can roll up to$35 ,000 per child into their own custodial Roth IRA. And so this is something that helps you get money out of a 529 plan if they get scholarships or if they decide they don't want to go to college.

19:51Because again, you're right. College is not for everybody. And so that is a great way to be able to get some money out of a 529 plan if you still want to go that route and you like the benefits of it. But there are some other accounts that you can consider. One is a custodial Roth IRA. So the custodial Roth IRA is something where they have to have earned income before they can invest in that custodial Roth IRA. But if they do have earned income, you can contribute up to the amount that they earn. So if they earn$1 ,000 per year, you can put$1 ,000 into that custodial Roth IRA, and that will give them that tax-free growth and get them started at a very early age, which is really, really powerful.

20:28But secondarily, if you do not want to go that route because you don't want to lock their money up and you want them to be able to use it later on like it sounds like you do, then you can look at some other options. So the other couple options are, A, you can put it in a taxable brokerage account. I do this for my kids. So my kids' money goes into a taxable brokerage account when they get money for birthdays and or, and I also put$100 a month each child into these accounts. So when that money goes in there, what they do is that we invest it over time, and then we make them the beneficiaries. So the taxable brokerage account is in my name, and then they are the beneficiaries.

21:01So if I pass away, the account just gets handed down to them. We have a question about this in a second. And so that is kind of how we have that structured. but the reason why I do it this way is because I don't have to give it to them at a certain age and the restrictions of having to give them the money at a certain age is something I just never really loved where as with some of these other options I'll talk about you have to give it to them at a certain age that's just my personal preference I know I'm going to have to pay a little more in taxes for this situation but I am okay with that for the flexibility of a taxable brokerage account there are another couple of options like a UGMA or a UTMA and it depends, some of the rules depend on your state, but you own it as a custodian, but it legally belongs to your child.

21:43And then you invest the money in index funds or ETFs or keep some cash. And then when your child hits the age of maturity, which is depending on the state, it's either between age 18 and 21, the account becomes theirs and they can spend it on a car, a home, a business, anything they wanna do. And so the thing about the UGMA is that the money has to go to them at those certain ages. It is legally theirs no matter what when you start investing in it. Whereas with a taxable brokerage account, if you have a kid who goes off the rails or a kid who is out there just doing the wrong things, they are not making wise choices, that's something where you can't hold off the money from them.

22:17So that's why I like the taxable brokerage account is just because it gives you flexibility. And my thought process is always, hey, somebody might just get a little too wild for your boy. And so I want to make sure that I can hold that money a little bit longer. And there's a lot of other little nuances to it as well. Now, they are flexible because they can be used for college and or a house or a down payment, and you can invest it for growth, and you can control the money until they become adult, at least age 18 to 21. But they get full legal control between age 18 and 21. So that's why I never go UGMA or UTMA, just because of that one caveat.