Too risk averse for real estate?
I have a close to $900k saved up in an index fund. I want to change my investing strategy from passive to more hands on. If I continue my current investment strategy, it would take me another 15-20 years before I reach 2 million assuming I keep the same stressful job and live as frugally. I have friends who don't work day jobs or live frugally while making way better returns through real estate, which is what got me interested in the first place. 

The problem for me is, I am scared of debt. I recently finished paying off my student loans and car loans and have a kid. It makes my stomach turn thinking about going back into debt. I wanted to save up around $1.2mm to buy a property outright to avoid debt but a lot of wealthy investors I know and trust are telling me how bad that idea is. 

I personally don't know if I can handle the stress. I keep asking myself "what if the market goes down and I lose tenants?" "what if the interest rates go up?", "what if I can't afford the mortgage/taxes/maintenance in a vacancy", "what if I get sued?".

I see a lot of investors who don't seem to care about this and take as much debt as they can. Especially developers who I know, they are comfortable taking on $10+ million loans for different projects at the same time. I just don't understand how they don't shutter at the amount of debt they have.

Can someone talk me through this? Or should I just stick with passive low risk investing or buy a property outright?
[{"id": "expnhid", "text": "Just start with smaller deals, theres no need to go all in right off the bat. Maybe start with single family homes and talk with a local wholesaler and tell them what you\u2019re looking for.", "replies": [{"id": "ey2q73c", "text": "I like properties that have commercial space on the ground floor and small residential units above, on high traffic thoroughfares. You can go as small or as big as you want to. I did it slowly because I don't like debt, and while I could have been bigger if I had leveraged, life is pretty stress-free without it. I don't give a shit if a nasty recession comes along, as it sooner or later will. It's pretty easy if you have the money: as they say,\"Location! Location! Location!\" Put some footwork into it and try walking into mom'n'pop businesses where they live in or rent out the upper level(s) and ask, \"Have you ever thought about selling?\" Strangers walk in and ask me all the time, but it's like, \"Fuck you\" (but politely, and hey it's real fun saying 'no' repeatedly to multinational corporations...ahhhh, it's the small things in life).", "replies": [], "depth": 2}], "depth": 1}, {"id": "expo8bd", "text": "A lot of new real estate investors you talk to, listen to on podcasts, read about here have not gone through a cycle. They probably haven\u2019t stress tested their investment with a 25% decrease in rent, significant downtime between leases, high vacancy etc. Most of what you see are people buying investment properties to flip, or BRRRRRR making a couple hundred bucks a month when all goes right.\n\nReal estate is cyclical. There will be a down market. Investors will get punished, especially those who are over levered and do not have financial resources to carry the loan/asset. Capex bombs will happen (roof, ac, other major systems/structural items). Most investors you read about today are not budgeting reserves- they probably don\u2019t even know to do it.\n\nReal estate is active management. It takes time to screen tenants, to deal with problems and it takes capital. Do not dump all your eggs into one basket. You can use leverage but do so modestly if you want to sleep well at night - target a 1.5-2.0x coverage ratio on the debt payments so you have plenty of margin if you hit a soft market.\n\nReal estate investing is not a get rich quick type of investment. It takes patience, time and capital.", "replies": [{"id": "exqm1eu", "text": "Just curious how you came to 25% rental reduction in your stress test model.", "replies": [{"id": "exraox2", "text": "I\u2019ve seen effective rents drop that much over cycles and supply shocks. Class A apartment operators start offering 4, 6, 8 weeks free and sucks the tenant base out of the market", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "expp400", "text": "A) start smaller\n\nB) debt secured to real estate is a little easier to stomach because the property has inherent value. You\u2019re gonna put 20-25% down, that\u2019s your buffer against the debt. It\u2019s gonna take a lot for your property\u2019s value to go down that amount. Obviously it\u2019s possible, but what if you put 30-50% down, how often will that happen. \n\nSure you can still lose money, but it\u2019s not exactly a straight money losing operation like credit card or paying back student loans that you can\u2019t sell off at any point. \n\nYou need the debt to maximize your return on equity like your friends are doing to make more money than the stock market. Cap rates are low right now, so buying in cash to collect a 5-7% cap makes no sense to me when that equals long term index average, and you\u2019d pay taxes on your gains to make all that money available to buy in cash.", "replies": [], "depth": 1}, {"id": "expt6ga", "text": "There is nothing wrong with buying without debt. You should ignore all those people. \n\nIt will be way way safer and you will still make a ton of money.", "replies": [], "depth": 1}, {"id": "exq4hha", "text": "You may want to talk to a financial planner\n\nI have an income producing duplex and it is great. Every month, someone helps me pay my mortgage and I am living cheaper through tax deductions and write offs than if I rented. Each year my rental income goes up while my mortgage stays the same. \n\nDuplexes are also cheaper than houses in many areas. I like being a good little property manager, fixing things that are broken and making sure everything is in tip top shape for my tenants. \n\nI also work in real estate, so I have access to things that most people do not. \n\nYour mortgage is a tax deduction and is capped. Your mortgage is not capped for your rental property. Mortgage rates are very low and in many cases it would be foolish of me to pay it off early since I can almost get more on a risk free cash deposit. \n\nDo you like fixing things? Are you handy? Does the prospect of unclogging a toilet on the weekend bother you? You can put in a lot of sweat equity to significantly improve things and you can save money by going to home depot and fixing it yourself. \n\nIf you are not handy, if you don't feel comfortable dealing with people who owe you money, if you don't want to live in a duplex and are fine renting, then you can still invest in real estate through Real Estate REITS. They offer big dividends compared to most other types of stocks. They are more liquid than properties. \n\nYou can borrow against your 401K to purchase an income producing asset that you can live in. Then you are not going into debt per se, since you owe that money to yourself. It will allow you to contribute more than the 18K limit to a IRA, since they interest payments you make to yourself are not capped, and you get some tangible bonus from that money you socked away each paycheck. \n\nDo your due dilligence, and stop comparing yourself to others. It will only lead to regret and misfortune. You are doing great champ, no amount of money is worth a crappy job in this tight job market.", "replies": [{"id": "exrg08n", "text": "Particularly like this \"Do your due diligence, and stop comparing yourself to others.\"", "replies": [], "depth": 2}, {"id": "exrtw4z", "text": "Amen. Great comment. I\u2019m supposed to close today on a duplex in SoCal where I\u2019ll live in one unit and rent out the other. It\u2019ll lower my \u201crent\u201d plus the other tenant will be paying a portion of my mortgage, and once I move out in 12 months it should have some positive cash flow. Upside would be a cash out refi but even if that doesn\u2019t work I still see it as a win to own real estate in this location long term and have someone else pay my mortgage. Don\u2019t need the cash flow now anyway but will be nice to have a paid off asset throwing off a lot of cash monthly in 20-30 years. Certainly not for everyone though.", "replies": [{"id": "exrv0de", "text": "Well congratz. *knock on wood*\n\nI use the forms from this group for the lease agreement, pre-inspection walkthrough ect. www.aoausa.com\n\nSo Cal can be tough, since your unit may be under rent control, but then again all of California may be going that way soon too. \n\nAnd hopefully your unit comes with good tenants. Many of the units I looked at had terrible tenants who were there for years that were paying well below market rent. \n\nI figure I will buy another unit in a couple of years and be like a hermit crab going to bigger and bigger places.", "replies": [{"id": "exrzs2n", "text": "Thanks for the info and advice. It\u2019s rent controlled but both units are delivered vacant so we get to set rents at market.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "exq5vnc", "text": "&gt;I have friends who don't work day jobs\n\nWhat do they do? Just manage their properties?", "replies": [], "depth": 1}, {"id": "exq80w2", "text": "Actually the proper amount of debt increases your cash on cash return.  Debt on real estate is different than other kinds of unsecured debt.  If you would like to discuss it further let me know, Ozzie Crisalli, Syracuserealtygroup.com  315-410-0373", "replies": [], "depth": 1}, {"id": "exqftgp", "text": "Just so you know, what they are referring to is \"positive leverage\".  Simply put, this means if you are making 5% unlevered and a bank is willing to lend you 70% of the purchase price at 3%, you'll really end up making something around 7% on your cash.  \n\nThis is definitely the predominant strategy among real estate investors and for good reason.  However, as others have said, you need to be smart about it.  Make sure you are building reserves each month for replacements and vacancy.  Make sure you understand what occupancy can get to before you are negative cash flow. Understand what debt service coverage ratio is and where you feel comfortable.", "replies": [], "depth": 1}, {"id": "exqim9c", "text": "What index fund is going to take 15-20 years to turn 900k into 2m?\n\nIf you did nothing for 12 years and didn't add a cent, and hit a 7% return on avg, youd have 2M.", "replies": [{"id": "exsej96", "text": "That's the geometric mean return, but there have also been 20 year intervals with ~0% real returns. It may well take 15+ years for 900k to turn into 2MM.", "replies": [], "depth": 2}], "depth": 1}, {"id": "exqrf9b", "text": "Wait for the coming recession to tank prices than buy, rent and wait. Redfin has relatively accurate data for average home prices in all US metro areas as well as historical prices. It\u2019s a pretty safe bet. Biggerpockets.com is your friend for guidance", "replies": [], "depth": 1}, {"id": "exr7uuq", "text": "Dude. If you don't like the issues your stating, I would echo what a few others are saying. You're and Accredited Investor.  Look into private equity real estate  funds, or risker GP funds. They should help mitigate risk, but even the best ones didn't do great during the recession. Happy to go further into this if you want more info. I'm in pere myself. But.... Use your wealth to your advantage", "replies": [{"id": "exrqaij", "text": "Came here to say this. Direct investment is not for the faint of heart. Stuff goes wrong all the time.\n\nBut finding a GP fund can be a great way to learn and be a little closer to a specific investment. Many of these funds will accept a $50k buy-in.", "replies": [], "depth": 2}], "depth": 1}, {"id": "exrbb8v", "text": "You could get a great NNN Single tenant tenant deal for 1-2 million. If you're worried about debt then find someone else also looking for deals and do a deal w them. Preferably someone who has done a few deals before. Or try to find someone who will seller finance.", "replies": [], "depth": 1}, {"id": "exrursd", "text": "Just keep some cushion, always have a margin of safety. Invest like an engineer.", "replies": [{"id": "exsemed", "text": "&gt;  Invest like an engineer.\n\nI've not heard this before, but it brought a smile to my face. Definitely agree!", "replies": [], "depth": 2}], "depth": 1}, {"id": "exs6qmy", "text": "IMO if you want less risk, buy a commercial or industrial property.  Depending on your locale, typically thee tenant pays for all maintenance, repairs, fees, taxes etc.  The leases are usually 5+ years which should mean less vacancy periods, and typically have more clauses on place to protect and indemnify you against pretty much anything that could happen.", "replies": [], "depth": 1}, {"id": "exsfiod", "text": "How do you have $900k if you \"just finished paying off\" student loan and car loans while having a debt allergy? \n\nStarting with a healthy fear of debt is a good thing - you shouldn't get debt before you understand it and want it. Now you just need to learn why real estate people love debt so much. \n\nI would start smaller, and wait until you're really confident to do major asset allocation shifts. \n\nReal estate is the best asset class for FIRE seekers, by far, but it isn't as easy as VTSAX... most things in life aren't, especially the best things.", "replies": [], "depth": 1}, {"id": "exuoddz", "text": "I would profer to invest my money in VID App, it is already up 16k% since the beginning of Token sale and it still rising  and rising  https://1milperday.com/historic", "replies": [], "depth": 1}, {"id": "exvwofg", "text": "Always leverage non recourse. I\u2019m afraid you may be late to the party. Stick with the index funds if you\u2019re concerned.", "replies": [], "depth": 1}, {"id": "ey2zdi6", "text": "You don't need to start on the active side doing the whole game by yourself, see if you can participate in a deal with one your more experienced friends.   You get some exposure to the upside and limited downside", "replies": [], "depth": 1}, {"id": "ey897zc", "text": "Variety is the spice of life. As an experienced market investor you understand that diversification essential to a well balanced portfolio. Real estate is just one more aspect to that diversification. There are the sub-sectors to the real estate industry to familiarize yourself with: residential (single fam and multi-fam), office (divided by classes A, B, C, and special use), retail (neighborhood strip centers, power centers/big box, malls, convenience centers, lifestyle centers), and industrial (graded by use- heavy, light, incubator, flex).\n\n\nUnderstanding these area may help you build your confidence in understanding market cycles, how they effect different sectors, and what you'd like to own. Talk to people in the industry in your market area if you want to invest regionally. If you are more comfortable with something that feels like the index funds you currently have, consider researching and investing in a REIT. \n\n\nI deal with older investors who are the opposite of you in that they are majority staked in real estate because they lived through so many market cycles that it has informed their opinion of the stock market as too risky. Similarly, your understanding of real estate investment was probably informed by living through this last economic downturn and how it hammered certain real estate markets. When examining your risk aversion to real estate, think about what you can stomach and why. This will help you dip your toe in and hopefully show you increased stability through diversification if your investment dollars.", "replies": [], "depth": 1}, {"id": "eyk26qs", "text": "I just put $800k down on a $3.2MM apt complex. I think what makes real estate great is the fact that you can use leverage.", "replies": [], "depth": 1}]