Stock Market vs Real Estate: Which Will 10X Your Money?

00:00:00.000 | Stocks versus real estate.

00:00:01.720 | What is the best way to build your wealth?

00:00:04.080 | Today, we are putting them head to head to find out.

00:00:07.120 | If you look at the past 150 years of data on an unlevered basis,

00:00:11.280 | stocks have definitely delivered the best nominal returns.

00:00:13.960 | It's really one of the fastest, easiest ways to get into investing.

00:00:17.840 | If you want to maximize your wealth, especially early in your career,

00:00:22.320 | real estate investing is by far the best way to do it.

00:00:25.120 | I'm Chris Hutchins, and this is All The Hacks, a show about upgrading your life,

00:00:28.920 | money and travel. Today, we have two of the biggest players in investing.

00:00:32.200 | Joining me in a head to head debate.

00:00:34.240 | We have Jason Moser and Matt Argesinger from The Motley Fool going up against

00:00:38.400 | Scott Trench and Dave Meyer from Bigger Pockets.

00:00:41.280 | I am excited to be your moderator to talk stocks versus real estate.

00:00:46.120 | Let's get into it.

00:00:47.040 | Welcome, everybody, I am so excited to be hosting this.

00:00:51.880 | Let's just kick it off right now.

00:00:53.600 | I want to jump to the Bigger Pockets team, the Motley Fool team.

00:00:57.000 | Thank you for being here.

00:00:58.640 | Can you guys just start on each side explaining to the audience

00:01:02.120 | what stock investing and real estate investing is?

00:01:04.440 | Maybe define it for people.

00:01:05.760 | Sure. So I'll start on that one.

00:01:07.360 | Real estate investing is the act of purchasing real estate investing.

00:01:10.600 | To me, the act of investing in real estate is purchasing real property,

00:01:14.280 | holding on to it and operating it at its highest and best use

00:01:18.120 | in order to generate cash flow and benefit from long term appreciation.

00:01:21.400 | You can also, in the act of doing that, experience tax benefits

00:01:25.120 | and amortization of debts of debt if it was used to finance the purchase.

00:01:29.280 | All right. I guess I'll do the stock side.

00:01:31.360 | That was nice and succinct.

00:01:33.280 | I will say I think it's easy to think of stock investing as

00:01:37.120 | trading a bunch of green and red numbers on a screen.

00:01:40.840 | Prices, ticker symbols, many of which we don't even understand,

00:01:44.600 | jumping around every day and in some days jumping around a lot.

00:01:47.680 | But I think the key thing to remember with stock

00:01:50.680 | investing is what those symbols and prices really are.

00:01:53.960 | They are pieces of real businesses.

00:01:55.920 | You as an investor, as a stock investor, can own pieces of real companies.

00:02:00.200 | Yes, you can own a piece of Apple.

00:02:02.240 | You can own a piece of Nike.

00:02:03.840 | If you want to invest in artificial intelligence,

00:02:05.720 | you can own a piece of Nvidia or Microsoft.

00:02:07.880 | So and by owning a pieces of those businesses via shares

00:02:11.600 | in your brokerage account, you are at least indirectly

00:02:14.920 | entitled to a portion, however small, of the profits generated by that business.

00:02:19.480 | In many cases, you're directly given a portion of those profits via dividends.

00:02:24.000 | Or cash payments directly to you in your brokerage account,

00:02:26.520 | usually on a quarterly basis.

00:02:28.440 | So you're not buying bits of data on a screen or random ticker symbols.

00:02:31.880 | You're buying equity in real companies that earn profits

00:02:34.480 | and hopefully grow over time. Awesome.

00:02:36.240 | All right. So so the goal here today is to have a fun and healthy

00:02:40.280 | spirited debate talking about these two areas.

00:02:43.040 | We both set out the outline of what they are.

00:02:45.200 | I'm going to give you guys each a minute.

00:02:47.080 | Either side go first on why you think your type of investing

00:02:51.960 | is the best way to build wealth.

00:02:53.720 | Well, I'll jump in in regard to stock investing, at least.

00:02:57.440 | I mean, there are a lot of benefits that really come from it.

00:03:00.120 | I mean, you look at things from capital appreciation, right?

00:03:03.800 | I mean, stocks, ultimately, they have the potential

00:03:06.440 | to increase in value over time, you know, as companies grow,

00:03:11.120 | as they improve, as they get better, as they do more things.

00:03:15.280 | That gives you the opportunity to to see the value

00:03:19.040 | and in the business that you're invested in, you know, continue to grow.

00:03:23.800 | You know, another thing that that stocks do a lot of well-established companies,

00:03:30.120 | they'll pay dividends in order to return value to shareholders.

00:03:34.480 | And so for you look at companies like Starbucks, for example,

00:03:38.040 | they they will continue to reward shareholders

00:03:42.520 | through holding those shares over long periods of time

00:03:45.360 | by returning cash to shareholders in the form of dividends.

00:03:49.480 | There's compounding, right?

00:03:52.400 | I think that's something that probably doesn't get enough attention.

00:03:56.800 | But the longer you own certain companies and that comes with dividends

00:04:01.360 | and also capital appreciation stocks go up in liquidity.

00:04:05.960 | I mean, hey, listen, I mean, if you if you own stocks, you can buy and sell.

00:04:09.840 | Right. That's a great thing.

00:04:11.680 | It's not so hard to buy and sell stocks, which is a nice part of it.

00:04:16.320 | And then obviously there's the diversification part of it. Right.

00:04:21.440 | Real estate is a great way to invest, but stocks are, too.

00:04:26.000 | And ultimately, what we what we believe

00:04:29.200 | the fool here is that you should own a little bit of a lot of this stuff.

00:04:33.760 | And so whether it's real estate or whether it's stocks,

00:04:37.880 | I mean, holding a lot of that stuff together makes a lot more sense.

00:04:41.880 | Diversification really makes a lot of sense, because as we've seen here

00:04:46.440 | over the last several months and really over the over the last few years,

00:04:50.560 | it becomes a little bit more difficult to predict exactly

00:04:54.680 | what asset classes are going to make the most sense for investors.

00:04:59.120 | And so owning stocks is a great way to sort of, you know,

00:05:03.720 | look at what's going on in the world today and say,

00:05:07.640 | well, we we had that that that sort of exposure

00:05:11.240 | to companies that are are sort of leading the way

00:05:16.000 | towards where we are going.

00:05:18.640 | And they give you the opportunity to stay well diversified.

00:05:22.960 | All right. That was that was great, Matt.

00:05:24.920 | I saw you raise your hand.

00:05:25.920 | I'm going to give you 15 seconds to chime in before I jump over to Scott

00:05:29.240 | to talk about real estate.

00:05:30.320 | Yeah, I just want to put a quick finer point on something Jason said,

00:05:33.560 | which is long term returns.

00:05:34.720 | If you look at, say, the past 150 years of data on an unlevered basis,

00:05:39.080 | stocks have definitely delivered the best nominal returns.

00:05:42.240 | 10% annual annualized for 150 years.

00:05:45.080 | You can't really get that with real estate bonds, gold or what have you.

00:05:49.960 | So stocks have been kind of the winner in that specific regard.

00:05:53.520 | That sounds pretty good.

00:05:54.480 | Scott, let's hear you make a case for real estate.

00:05:56.800 | First, I want to say I completely agree that unlevered

00:05:59.440 | stocks are going to outperform real estate.

00:06:02.040 | The reason I'm not, you know, and I think you should own both right long term.

00:06:05.960 | But since we're in a Mortal Kombat style, duke it out.

00:06:08.560 | Real estate versus stocks debate here.

00:06:10.800 | I'm going to make the case

00:06:11.600 | for why I think you should start with real estate on your financial journey.

00:06:14.760 | And a couple of reasons here.

00:06:16.280 | First is that leverage component.

00:06:18.040 | Long term leverage against long term appreciation

00:06:20.520 | makes a huge difference in returns.

00:06:22.440 | You can integrate real estate into your lifestyle through house hacks

00:06:25.640 | or what's called a live in flip.

00:06:27.680 | And that can generate huge long term returns that are really tax advantaged.

00:06:32.320 | You can generate more cash flow from real estate.

00:06:34.880 | And so if you want to retire early or use that to fuel your lifestyle,

00:06:38.960 | that can be a huge advantage.

00:06:41.080 | Real estate is often less volatile than stocks.

00:06:43.560 | And so that brings us back to the concept of leverage,

00:06:45.760 | which I'm sure we'll get into multiple times throughout this debate.

00:06:48.000 | And then I think I've already mentioned this from other tax advantages,

00:06:52.040 | but that makes a huge difference over time.

00:06:53.680 | A lot of that cash flow can be completely tax free during

00:06:56.480 | the early years of a hold period, and especially if you're levered.

00:06:59.920 | And also just wanted to mention, particularly right now,

00:07:02.720 | the fact that real estate tends to be an excellent inflation

00:07:05.680 | hedge is also pertinent.

00:07:07.080 | Yeah, Scott, I like how you said

00:07:08.360 | you're going to advocate for real estate being a way to start.

00:07:11.600 | I'm curious if you guys could talk a little bit about the barriers to entry

00:07:14.880 | for someone to just get into this.

00:07:16.120 | What does someone need to have?

00:07:17.560 | What kind of capital? What kind of experience?

00:07:19.520 | Maybe we'll start with stocks.

00:07:21.720 | Well, stocks are super easy to get into, but I would say

00:07:24.800 | stock investing takes very little time other than the minor hassle

00:07:28.800 | of opening a brokerage account, which today is like as simple

00:07:31.720 | as downloading an app and pressing a few buttons on your phone

00:07:34.520 | and connecting your bank account.

00:07:36.040 | I mean, that's really it.

00:07:36.960 | And I mean, in some cases, it's almost too easy today

00:07:39.480 | to start to open a brokerage account.

00:07:41.400 | But once you've opened a brokerage account,

00:07:43.320 | you can buy and sell stocks in a few seconds and boom, you're done.

00:07:47.120 | You can start earning those profits, those dividends

00:07:49.400 | that Jason was talking about, and really without lifting a finger

00:07:52.280 | more than maybe a few times a month or a few times a year.

00:07:55.560 | So it's really one of the fastest, easiest ways to get into investing.

00:08:00.880 | And you don't have a lot of need, a lot of capital.

00:08:02.200 | You can buy a hundred dollars with a stock today.

00:08:04.280 | And that's probably a good start for a lot of people.

00:08:06.200 | Real estate, though, it seems like it could be expensive, right?

00:08:09.000 | There are greater barriers to entry, I think, for real estate investing

00:08:12.960 | because it tends to be a more capital intensive asset class.

00:08:16.880 | You can't just open an app and buy rental properties for ten dollars,

00:08:20.880 | although there are some funds and some modern crowd

00:08:24.120 | funding platforms that do allow you to do that.

00:08:26.480 | But generally, I think of real estate investing as more entrepreneurial

00:08:32.120 | than buying equities and buying stock.

00:08:35.400 | And so in addition to capital, you need money for a down payment.

00:08:39.320 | You need to have solid, predictable income, typically,

00:08:43.240 | to get leverage on a property and take out debt.

00:08:46.760 | You need decent credit.

00:08:48.320 | So you do need all that to get started.

00:08:50.320 | And you also need a bit of an entrepreneurial spirit.

00:08:52.920 | You are starting a small business.

00:08:54.880 | And so you're going to need some level of business acumen and expertise

00:08:59.080 | to be able to operate that business successfully.

00:09:01.400 | Yeah. And I'll just piggyback on Dave's great point by saying that expertise,

00:09:04.640 | I think, comes in the form of several, maybe at least a several dozen,

00:09:08.880 | maybe several hundred hours of self-education on the topic

00:09:12.560 | because you need to know how to screen a tenant.

00:09:14.040 | You need to know that when a tenant is applying for your rental property

00:09:16.520 | and puts down the phone number as a reference for their previous landlord,

00:09:19.240 | that that might be their buddy.

00:09:20.680 | And you need to back channel that

00:09:21.720 | and make sure you're actually calling the previous landlord

00:09:23.680 | and getting the referral from them.

00:09:24.720 | Like there's so many little tips and tricks like that that you need to be aware of.

00:09:28.560 | Or if you don't learn them upfront, you will learn them downstream

00:09:32.320 | in a much more painful and more expensive fashion later on in that journey.

00:09:36.440 | So in addition to those things that, you know, credit, income, down payment,

00:09:40.840 | you also need this expertise that that can be a real investment of time

00:09:45.240 | that is probably not needed,

00:09:46.720 | especially for like index fund or other stock investing approaches here.

00:09:51.360 | Although I think the Motley Fool guys will put in just as much time and energy

00:09:54.800 | as many of the real estate investors who take it very seriously

00:09:57.480 | in trying to find that that alpha.

00:09:59.360 | I don't know if that's true, but we'll take the compliment for sure.

00:10:02.200 | There's a question, Matt.

00:10:03.200 | You said, you know, 10% average returns on the stock market,

00:10:06.760 | highest returning unlevered asset class.

00:10:09.080 | I'm curious, how much work does it take for someone to kind of be in that group?

00:10:13.200 | Because the way Scott and Dave put it, you know, real estate can take a lot of work.

00:10:17.280 | But and you made it seem, oh, you just open a brokerage account.

00:10:20.240 | Is it that simple? Just open a brokerage account.

00:10:22.240 | And boom, you get those returns.

00:10:24.200 | You know what it actually is.

00:10:25.160 | And I'll explain why it doesn't it shouldn't it shouldn't be that way.

00:10:27.360 | But what most investors should do if they're investing in the stock market

00:10:31.720 | is simply by and Scott mentioned in an index fund ETF, S&P 500 index fund.

00:10:36.920 | Right. Right off the bat.

00:10:38.600 | You're probably outperforming 95% of active investors if you do that.

00:10:41.520 | It's simple. It's cheap.

00:10:42.800 | The fees are really low.

00:10:44.600 | And yes, you're going to if you do that, you're matching the return

00:10:47.560 | of the overall market, which I said, you know, going back more than a century

00:10:51.120 | is about a 10% annualized return.

00:10:53.120 | So that is what you can do.

00:10:54.320 | Now, we stock investors like to make things complicated when they shouldn't be.

00:10:57.560 | So we tend to, you know, buy individual stocks.

00:10:59.760 | We think we can outperform the market.

00:11:01.120 | We think we can be the next Warren Buffett.

00:11:02.760 | So we're doing things we're trading.

00:11:04.440 | We're sometimes doing leverage, which is really dumb in the stock market.

00:11:07.240 | And we're losing our shirts.

00:11:08.760 | But really opening, like I said, downloading that app,

00:11:11.840 | clicking a few buttons, buying an index fund, maybe putting 100 bucks in there

00:11:14.840 | a month if you're 22 years old out of college or something is an amazing way

00:11:18.760 | to get started.

00:11:19.920 | And it is about the easiest thing you can do.

00:11:21.600 | But here's a question for you, Scott and Dave.

00:11:23.840 | Matt talked about 10%.

00:11:25.280 | You guys talked about how it might take a little bit of work.

00:11:27.160 | We talked about leverage.

00:11:28.640 | If you start to think about the leverage you can bring into real estate,

00:11:31.280 | what kind of returns do you think we've seen or people can expect

00:11:35.040 | in their real estate investing?

00:11:36.440 | So this gets kind of complex here.

00:11:38.040 | I'll take a stab at this.

00:11:39.600 | So let's say that we assume that real estate is going to appreciate

00:11:42.280 | at an average of 3.4% per year, right?

00:11:45.440 | And if you lever that five to one, right, at least in the early years,

00:11:50.000 | you're going to get an appreciation rate that multiplies 3.4 times five.

00:11:53.880 | So that's what? 15 plus another 20, 17% from appreciation.

00:11:57.640 | You're going to be amortizing your debt during that debt service on that

00:12:01.040 | for the 80% of the the property value that is levered.

00:12:05.920 | And then you're going to hopefully be producing some cash flow as well.

00:12:09.280 | So you add those up, you should be looking at upper teens returns,

00:12:14.200 | maybe low 20s returns.

00:12:15.640 | And if you can't get there, you should invest in stocks

00:12:18.080 | because it's totally passive and you don't have to spend all this time

00:12:20.760 | thinking about how to buy real estate at the beginning.

00:12:24.280 | Now, over the 30 year period, you're slowly deleveraging,

00:12:27.600 | assuming things go reasonably well, right?

00:12:29.200 | You're paying down the loan.

00:12:30.680 | The property is appreciating.

00:12:32.400 | So your equity balance grows.

00:12:33.520 | And once it's paid off, now you're getting the unlevered real estate

00:12:36.960 | return of like three point four percent, plus maybe a four to five percent cap rate.

00:12:41.080 | This is the 45% cash flow component of the total equity value.

00:12:45.840 | So at the end of that hold period, in a typical you throw a dart at the wall

00:12:50.320 | and pick a rental property, a true actual rental property across the United States.

00:12:54.320 | You're probably looking at a seven and a half to eight and a half percent

00:12:56.920 | unlevered return at the end of that hold period once you paid off the debt.

00:13:00.720 | And you're looking at more than that in the early part of early parts of it.

00:13:04.320 | It can get more complex from there if we want to talk about tax

00:13:06.880 | benefits and those types of things.

00:13:08.880 | But that's what you should expect.

00:13:10.560 | And that's what you have to kind of keep in the back of your mind

00:13:12.760 | as you're investing over the years and decades in real estate there.

00:13:16.280 | And if you can't get it again, I would I would go to stocks.

00:13:18.680 | Well, let's talk a little bit about volatility, right?

00:13:20.920 | That that's a you know, averages, right?

00:13:23.760 | You gave a scenario of an average, Matt.

00:13:25.680 | You gave a 10 year or a century long average.

00:13:28.880 | What do you think it looks like year to year?

00:13:32.080 | And what kinds of volatility can people expect?

00:13:34.240 | How much risk are they taking?

00:13:35.720 | What could they lose?

00:13:36.720 | And and maybe even as far as what is just an amazing year look like?

00:13:40.680 | Sure. Well, I will say for the stock market, which we know is much more volatile.

00:13:43.960 | Let's use the most recent bear market as an example.

00:13:46.240 | 2022, the S&P 500, the broad market index at its lows was down about 27 percent.

00:13:52.080 | That's a that's a pretty big hit for a lot of people.

00:13:54.240 | And if you were investing in technology stocks,

00:13:56.720 | the Nasdaq was down about 40 percent at one point, typically in a bear market,

00:14:01.600 | which we know happens roughly once every five years.

00:14:04.560 | The the average loss is about 30 percent.

00:14:07.240 | And one of those is always around the corner.

00:14:09.080 | So that's what you can look forward to with stock investing.

00:14:11.560 | What you can also look forward to, though, is,

00:14:14.120 | you know, the gains can be pretty high in the good years.

00:14:16.800 | If I look at, like, for example, the last 20 years, five of the last 20 years,

00:14:20.720 | the stock market was up more than 20 percent.

00:14:22.880 | The average return was 26 percent.

00:14:25.120 | And so that's a pretty good year.

00:14:26.440 | Imagine compounding your your asset, your net worth by that amount.

00:14:30.080 | So the highs can be really high.

00:14:31.840 | And as Jason mentioned, stock stock market tends to go up over time.

00:14:35.360 | And so that's great.

00:14:36.720 | But you have to be ready for those

00:14:38.280 | those nasty bear markets that come that are inevitable.

00:14:40.440 | And the next one's always around the corner.

00:14:42.240 | Dave, what do you think about real estate when it comes to volatility

00:14:45.280 | and kind of downside upside?

00:14:47.240 | Well, I think that is one area where real estate does stand out versus equities.

00:14:51.840 | Of course, many people listening to this, myself included,

00:14:54.800 | all remember the great financial crisis and the sharp declines

00:14:59.400 | where we saw home prices on a national basis go down somewhere around 20 percent.

00:15:04.560 | But that is somewhat anomalous in American history.

00:15:08.320 | That's not saying that it won't happen again, but that is unusual

00:15:12.040 | to see large drops in home prices like we saw.

00:15:15.840 | And so to me, the real name of the game with real estate

00:15:19.360 | and the way you mitigate against volatility is just time.

00:15:22.400 | This is not a quick get in and get out strategy.

00:15:25.560 | But with real estate, if you can manage to hold on to properties,

00:15:28.920 | you are very likely to be able to wait out any short term volatility.

00:15:33.800 | And the risk of principal loss is actually,

00:15:37.960 | I think, significantly less than in the stock market.

00:15:42.560 | You talked about time. What about diversification on real estate?

00:15:46.080 | Are you are you suggesting just worry about time?

00:15:48.600 | Don't worry about multiple properties.

00:15:50.200 | No, I think I would absolutely recommend

00:15:53.800 | diversifying into multiple properties and even doing multiple strategies

00:15:58.400 | within real estate investing.

00:16:00.320 | You can, you know, invest in long term rentals.

00:16:03.000 | You can do short term rentals.

00:16:04.760 | I personally diversify across geographies into different markets

00:16:09.160 | to take advantage of different market fundamentals.

00:16:12.720 | But I think ultimately, not to be overly simplistic,

00:16:17.240 | but the name of the game in real estate investing is to avoid forced selling.

00:16:21.920 | And for selling is just basically what we say is like when you get in a situation

00:16:26.560 | where you can't hold on to your property and you are forced to sell

00:16:30.400 | at what might be an inopportune time in real estate investing.

00:16:33.840 | If you get to choose when you're going to sell, you are almost always

00:16:37.280 | going to make money.

00:16:38.480 | And so the way I think about being defensive and mitigating risk is one time,

00:16:43.600 | you know, just try and hold on for as long as possible.

00:16:45.960 | And the way to hold on is to generate, in my opinion, positive cash flow,

00:16:51.080 | because if you're able to make sure that your properties generate

00:16:54.280 | even two, three, 4% cash flow after all of your expenses,

00:16:58.440 | after all of your capital expenditures, then you get to sit back.

00:17:02.400 | You're still at worst.

00:17:03.880 | You're making a couple percentage points off of your cash flow and your amortization.

00:17:08.520 | And then you don't want to necessarily try and time the market on the buy.

00:17:12.440 | But then you do get to time the market when you're selling.

00:17:15.360 | And in those situations, it's pretty difficult to lose money in real estate.

00:17:19.640 | Jason, I'm curious what you think about risk mitigation in the stock market.

00:17:23.960 | Right. What is someone who's kind of nervous about a 20, 30% drawdown

00:17:27.960 | do other than just wait?

00:17:29.800 | Yeah, you know, I think there was a great point

00:17:32.120 | that was just mentioned there in regard to forced selling, right?

00:17:34.800 | That's something that applies to real estate.

00:17:37.720 | It applies to stocks.

00:17:39.360 | It applies to a lot of things in life.

00:17:41.640 | But you just you never want to be a forced seller, right?

00:17:45.200 | You never want to be forced to sell anything.

00:17:47.640 | And that's one of the things we love about investing in in stocks

00:17:52.160 | here at The Fool is that, you know, taking that longer view,

00:17:56.200 | you can sort of ignore the near term noise

00:18:01.280 | and let yourself sort of watch the story play out.

00:18:05.800 | And and I will say in regard to real estate, that's another

00:18:09.640 | another really beautiful thing about real estate is you don't have to sell.

00:18:14.560 | Right. And I think that's that's one of those things.

00:18:17.080 | It's always worth remembering is in real estate.

00:18:20.240 | Sometimes that can be a situation where you're in a little bit more of a

00:18:24.400 | situation where you might not have the options.

00:18:29.440 | Whereas in regard to stocks and the way we look at stocks,

00:18:34.040 | you know, we're buying we're buying shares into businesses

00:18:37.120 | where we feel like these businesses have the opportunity

00:18:40.720 | to perform over the long haul, over over 10, 20 years,

00:18:44.800 | hopefully much longer than that.

00:18:47.520 | And so I think in regard to diversification,

00:18:51.000 | making sure you put yourself in a situation where you don't own assets,

00:18:55.600 | where you feel like you need to sell anything. Right.

00:18:59.240 | That that's a big difference.

00:19:00.880 | I mean, that that that that can really make a big difference

00:19:03.760 | in how you view your portfolio

00:19:06.760 | and in ultimately the the allocation there.

00:19:10.320 | The stock guys, Matt, Jason, you talked about how you can buy an index fund

00:19:13.480 | and have access to lots and lots of stocks in a very simple vehicle.

00:19:18.120 | Scott, Dave, when it comes to real estate, how can you diversify

00:19:22.320 | without having a massive amount of capital to get going and buy lots of properties?

00:19:26.480 | It feels like that would be a huge barrier

00:19:28.640 | to entry to diversification for the average person.

00:19:31.080 | So when I got started in real estate, I didn't diversify. Right.

00:19:34.200 | One duplex was five or six times my annual income.

00:19:37.240 | I was highly levered and concentrated on a single asset in a single market.

00:19:43.080 | And all of my properties today that I own and operate

00:19:46.680 | personally are in the Denver metro area.

00:19:49.080 | So I'm making I not have a diversification in my real estate portfolio.

00:19:52.840 | I'm highly my returns will be highly correlated with the Denver metro market.

00:19:57.200 | And I want to chime in on the last point here around, you know, risk here.

00:20:01.120 | Difference between stocks and real estate is that the stock can never force you

00:20:05.040 | to sell. Right.

00:20:06.560 | Like something like your personal life could force you to sell.

00:20:09.080 | But in real estate, it absolutely can force you to sell.

00:20:12.640 | People who do not have reserves set aside, do not produce cash flow

00:20:15.920 | and have some sort of problem in their portfolio.

00:20:18.240 | They call this a disaster.

00:20:20.240 | Investors who are well-capitalized call it a capital expenditure.

00:20:23.520 | And you want to be on.

00:20:25.280 | There's a clear side of that equation that you want to be on

00:20:27.760 | if you're in the real estate investing world.

00:20:29.680 | And so, look, my my portfolio is a highly concentrated,

00:20:32.760 | not diversified investment and bet on long term appreciation

00:20:36.760 | in U.S. housing prices and rents and specifically concentrated

00:20:40.520 | on Denver, Colorado prices and rents.

00:20:43.840 | So it is absolutely in the way I do it and the way that most real estate

00:20:48.280 | investors in this country do it, at least in the residential space.

00:20:51.000 | They're not in REITs or these other types of commercial assets.

00:20:53.440 | It is absolutely you're giving up some of that diversification

00:20:56.840 | across all these different asset classes for a concentrated bet.

00:20:59.280 | Matt, I saw you had a follow up.

00:21:00.480 | I just well, let me let me.

00:21:02.360 | Scott, here's throwing a bone to the stock investing guys.

00:21:04.440 | Let me throw a bone back and say, you know, the one advantage

00:21:07.400 | of the big advantage of real estate, even though you're super concentrated,

00:21:09.720 | is that those those Denver properties aren't getting priced or repriced every day.

00:21:13.440 | One of the things we fight against here at the Motley Fool and just stock

00:21:16.840 | market investors in general is that they're seeing the value

00:21:19.720 | of their portfolio change on a minute to minute basis.

00:21:21.760 | Stocks going up and down, you know, minute to minute, day to day,

00:21:25.120 | sometimes with big movements, especially during earnings season

00:21:28.040 | and other periods of time.

00:21:29.720 | And that's a big challenge.

00:21:31.240 | Getting some of the things Jason said was being being forced to sell.

00:21:33.960 | We deal with a lot of more emotional roller coasters here on the stock side.

00:21:38.520 | I love the fact that real estate is not repriced every day,

00:21:41.040 | so you can make your own decision.

00:21:42.400 | I think Dave said that, which is you can time your exit there with with lots

00:21:46.040 | of foresight, stock market, you know, can push a lot of people out quickly

00:21:49.800 | because they just get they see their portfolio down 20, 30% during a bear market.

00:21:53.440 | They see the headlines in the news about recession

00:21:55.600 | and all these bad things that are going to happen.

00:21:57.400 | And it can it can cause people to panic.

00:21:59.000 | And the fact that they can see their stocks and all the red in their portfolio

00:22:01.840 | and it can make them make an emotional decision.

00:22:03.760 | So I like the sort of pacifying

00:22:07.800 | patience and generating nature of real estate versus the stock market.

00:22:11.560 | Now, Scott just mentioned REITs.

00:22:13.120 | Jason, no one's made this case yet.

00:22:15.760 | I'm curious.

00:22:16.440 | Couldn't you just invest in real estate through your stock brokerage account

00:22:20.160 | and not have to worry about any of the other work?

00:22:22.400 | You absolutely can.

00:22:23.600 | And I think that's a great way to do it, actually.

00:22:25.480 | I think, honestly, that's that's probably the best way for most people

00:22:30.520 | to get real estate exposure is to rather than,

00:22:33.960 | you know, buying and selling properties or trying to become landlords.

00:22:37.640 | I mean, there are plenty of opportunities out there and in things like REITs,

00:22:41.240 | real estate investment trusts where you can you can invest in real estate

00:22:45.800 | without necessarily having to have that direct exposure.

00:22:49.400 | That direct exposure in real estate is just really difficult. Right.

00:22:52.600 | I mean, I think we can all agree that one of the most

00:22:55.160 | one of those difficult parts about investing in real estate,

00:22:58.800 | it's it's sort of the it's it's the getting into it, right.

00:23:02.400 | It's it's there.

00:23:03.120 | There are barriers to entry in just needing the capital to get in there.

00:23:07.440 | And that's what real estate investment trusts and things like that

00:23:11.440 | helped to break down.

00:23:14.600 | And so I think in regard to investing in real estate,

00:23:18.200 | real estate investment trusts represent a terrific opportunity for investors.

00:23:22.440 | If that's your thing, right.

00:23:25.400 | If you're invested, if you're interested in that real estate opportunity.

00:23:30.880 | OK, Scott, Dave, Jason just said REITs.

00:23:34.160 | Great way for people to get started in real estate.

00:23:37.080 | Completely different from the the path you laid out.

00:23:40.120 | What do you think?

00:23:40.840 | Look, I think I think that rental real estate that I directly own

00:23:43.960 | and operate has the advantage to give me that leverage.

00:23:46.280 | But it also gives me tax advantaged cash flow,

00:23:49.680 | which to me is super important.

00:23:51.720 | And index funds of REITs or stocks really just don't produce

00:23:55.760 | the same levels of cash flow that I believe I can get from rental real estate.

00:23:59.840 | And my goal in all of this is early financial freedom.

00:24:03.840 | Everybody has different goals when it comes to investing.

00:24:06.160 | But I I can't like I'm not going to sell off

00:24:09.960 | chunks of equity in my stock or REIT portfolio to fund my lifestyle.

00:24:15.160 | Like mentally, I just will not make that leap in my mind as a, you know,

00:24:20.120 | a guy in my 30s, a long time horizon ahead.

00:24:22.560 | I will spend a chunk of my cash flow

00:24:26.320 | that is being pulled off by my my portfolio.

00:24:29.000 | And to me, like, that's the that's the trump card for real estate

00:24:32.440 | in my portfolio at this point in my life for that.

00:24:35.640 | And why I like it a lot is because it offers that opportunity.

00:24:38.560 | And I feel like it's much harder to do that without dramatic trade

00:24:42.200 | offs in the equities markets at the highest level.

00:24:45.320 | One other thing I wanted to talk about and one benefit to real estate

00:24:48.840 | that we haven't even discussed is this concept of value add investing,

00:24:53.120 | which isn't for newbie investors necessarily.

00:24:56.040 | But this is similar to the concept of flipping houses.

00:24:59.520 | But you can do this with long term rental investing as well.

00:25:02.640 | When you buy a property, you fix it up and you're able to drive up

00:25:06.840 | the value of that property directly,

00:25:09.880 | ideally by more than what you put in to fix up that property.

00:25:14.600 | And that's just not something that you could do with REITs.

00:25:16.880 | It's not something that you can do with equity.

00:25:18.640 | If you're an experienced, good real estate investor,

00:25:21.360 | you have more direct control over driving your own profits

00:25:26.280 | than than the stock market or REITs, because they're just inherently more passive

00:25:29.920 | and you don't really have a say in the operations of those businesses.

00:25:33.440 | How much time does that take?

00:25:34.720 | Well, it depends.

00:25:35.680 | I mean, you can go everywhere from a, you know, down to the studs renovation.

00:25:41.000 | I've never done that myself.

00:25:42.360 | I have a full time job, so I would not take on a project like that.

00:25:46.280 | But I do what they call cosmetic upgrades,

00:25:49.520 | which are, you know, paints, floors, renovating kitchens and bathrooms.

00:25:53.280 | For me, maybe takes two or three hours a week.

00:25:57.600 | If I was doing something like that for the contractor, I pay to do it.

00:26:01.000 | I hope they're working full time on it, but sometimes I'm not sure.

00:26:04.240 | Yeah, I think the term is semi passive.

00:26:06.400 | Yeah, I think about cost basis and we've got to include our time in there.

00:26:09.640 | I know. I know.

00:26:10.480 | I know none of our financial statements often do.

00:26:12.680 | But Matt Jason, how much time are you spending maintaining your stock portfolio?

00:26:17.120 | Well, this is a great this is a great thing to bring up, right?

00:26:21.000 | Because I mean, I have the experience myself personally.

00:26:23.400 | I know Maddie does, too, of being a landlord.

00:26:26.560 | And when you're a landlord.

00:26:29.840 | You know, you go into it thinking, holy cow, man,

00:26:32.400 | I hope I don't have to really deal with too terribly much, right?

00:26:35.600 | Let's let's hope this is as easy as it can possibly be.

00:26:39.200 | But inevitably, I mean, things come up, right?

00:26:42.640 | If you're going to be a landlord, if you're going to own real estate,

00:26:45.480 | if you're going to rent it out, I mean, things are going to come up.

00:26:48.960 | It's going to require a part of your time.

00:26:52.000 | It's going to require a part of your life.

00:26:54.320 | And that's not always so easy to to budget,

00:26:58.200 | particularly when there's so much uncertainty.

00:27:00.240 | Now, when it comes to stocks, I mean, you kind of go into it thinking,

00:27:03.840 | well, there's going to be uncertainty just in buying shares in this company.

00:27:08.080 | I'm buying shares in this company.

00:27:09.440 | I don't know exactly what's going to happen with it.

00:27:12.160 | And so, I mean, you know, a year from now, five years now,

00:27:15.520 | maybe things will be different.

00:27:18.000 | But but it is something, right?

00:27:19.840 | I think when you when you look at investing in equities,

00:27:22.640 | it can be it can be certainly a lot of

00:27:27.160 | it can be a much less stressful situation, right?

00:27:31.680 | Then investing in something like real estate, particularly if you're going to

00:27:34.680 | invest in real estate with the with the intention of being active

00:27:38.480 | in being a landlord, in renting that property out.

00:27:41.680 | And I mean, just my experience, I mean, and I had a great experience.

00:27:45.600 | Trust me, I had a great experience renting property.

00:27:47.920 | I could have been a lot worse.

00:27:50.240 | But I certainly it made me realize

00:27:53.160 | that there were situations that could have been a lot tougher.

00:27:57.360 | And there were situations that I didn't necessarily look forward

00:28:01.600 | to wanting to deal with, so to speak.

00:28:04.000 | So that was kind of one of those things that made me think, well,

00:28:07.760 | you know, investing in stocks, I mean, that that is absolutely an easier way,

00:28:13.200 | a more passive way to let my money kind of compound and grow over time.

00:28:18.000 | So, you know, it goes to say like there are

00:28:21.280 | you're going to make money either way, right?

00:28:24.320 | If you make wise decisions, whether it's stocks or whether it's real estate,

00:28:28.840 | there are plenty of opportunities there.

00:28:31.040 | But it's just it's worth remembering if you're if you're taking that real estate

00:28:34.920 | angle and and you're looking to,

00:28:38.200 | you know, be a landlord or be a little bit more active

00:28:42.200 | in that that style of investing, it there's a lot to say

00:28:47.840 | in that that time sense, right?

00:28:52.120 | I mean, time time is money, as they say.

00:28:55.000 | I don't disagree with that.

00:28:56.640 | Being a landlord is more time and it probably is more stressful.

00:29:01.680 | But I also still think it's worth it.

00:29:04.120 | If you think about the difference in returns Scott was talking about,

00:29:07.640 | just the difference between a 10% compounded return and a 12% compounded return

00:29:12.960 | over 30 years, the difference between that is one point two five million dollars.

00:29:18.200 | That's an one hundred thousand dollar initial investment.

00:29:20.680 | And so for me, is it worth putting in a little bit of effort

00:29:25.320 | every couple of every couple of weeks?

00:29:27.360 | And it does come in waves for that increased return.

00:29:31.320 | Yes, because that's just the difference between 10% return and 12% return.

00:29:35.720 | If you're doing real estate well, you could be getting 15, 17, 18% returns.

00:29:40.120 | And so I personally do think it's worth it.

00:29:42.760 | And the other thing I'd say is that, especially in the beginning,

00:29:46.360 | I recommend to all people who want to go into real estate

00:29:49.280 | investing to do that stuff yourself.

00:29:51.360 | It is it's not fun all the time, but you learn a lot.

00:29:54.920 | And I think maybe Scott can comment on this, too.

00:29:57.600 | But for me, over time, as I've built my portfolio,

00:30:01.200 | I do less and less, even though my portfolio has gotten bigger and bigger.

00:30:05.520 | And I actually have a rule that I use.

00:30:08.080 | I won't spend more than 20 hours a month on my real estate portfolio.

00:30:12.560 | So I'm willing to put in five hours a week in an effort

00:30:15.600 | to get that outsized return.

00:30:18.000 | And over time, I just the stress goes away.

00:30:21.680 | You just get used to it.

00:30:22.600 | Once you've seen it all, man, you don't get surprised by anything.

00:30:26.600 | And you just you just roll with it.

00:30:28.280 | Yeah, I'll just chime in here and say that there's, you know,

00:30:30.600 | I go back to that startup cost for real estate investing,

00:30:33.200 | which includes not just capital, but time.

00:30:35.280 | And where I think the real estate really pays incredible dividends

00:30:39.240 | is like, let's say someone's worth making $100,000 a year.

00:30:42.520 | Their time is worth $50 an hour, assuming they work a 2,000 hour year.

00:30:47.080 | So the startup cost of 250 hours to learn real estate is $12,500

00:30:51.760 | for that individual.

00:30:52.920 | Well, a doctor making $600,000 a year is going to have a dramatically

00:30:57.640 | higher startup cost because them investing 600 hours is dramatically

00:31:01.120 | different from an entry level financial analyst.

00:31:03.480 | And so that's the kind of fun thing about real estate is for me.

00:31:06.160 | That cost was so low 10 years ago when I was getting into it

00:31:09.440 | and just kind of obsessing over learning all the ins and outs of real estate.

00:31:12.080 | And now I'm going to reap the dividends of that or the cash flow

00:31:15.520 | because we're talking about real estate, not stocks on this one

00:31:18.080 | for the rest of my career.

00:31:20.280 | And because I put in that, I still have to put time in on a continuous basis,

00:31:24.520 | but not that enormous upfront investment.

00:31:26.840 | Matt, Jason, I'm curious.

00:31:28.360 | Dave said 20 hours a week, a little bit of extra work

00:31:31.840 | generates over a million dollars.

00:31:33.800 | How are you guys using your saved 20 hours a week

00:31:37.600 | to either generate more returns for your portfolio

00:31:41.240 | or or, you know, increase the value of your life?

00:31:44.040 | Well, I don't know about Matty, but I'm using that time to work

00:31:48.040 | for the Motley Fool, right? That's my employer.

00:31:51.040 | They're the ones that are paying me week in and week out.

00:31:54.000 | I think that's one of the things I mean, just given my experience,

00:31:57.000 | having having served as a landlord and investing in real estate,

00:32:02.480 | I'm a homeowner today.

00:32:03.880 | I mean, I understand the dynamics of homeownership

00:32:06.680 | and the the the benefits of that investment.

00:32:09.880 | It just it really does boil down to time to me.

00:32:13.720 | And in certain cases, I think,

00:32:17.320 | you know, you look at investing in stocks in that as a way

00:32:21.200 | to help your money grow without necessarily having to commit

00:32:25.880 | so much time, so much attention on an ongoing basis,

00:32:31.120 | whereas with real estate, you know, you may be

00:32:33.960 | you may be a little bit more committed.

00:32:36.080 | Scott earlier said that one of the great things about real estate

00:32:38.840 | is it spits off cash flow and it's way easier to use your cash flow

00:32:42.440 | to fund your life than it is to use sell stocks to fund your life.

00:32:46.440 | Matt, Jason, whether it's selling stocks or dividends,

00:32:49.080 | do you find that that same problem or is it actually easy?

00:32:52.600 | Yeah, that's that. I think it's a great point.

00:32:54.480 | I mean, I have a much better time

00:32:57.200 | spending income and dividends than I do selling stock,

00:33:00.600 | because that's when I have to make a decision.

00:33:02.120 | I hate making decisions about selling stocks.

00:33:04.400 | And so that's that's I think that is a clear advantage for real estate.

00:33:07.320 | It's much easier to spend cash flow.

00:33:08.920 | I feel the same way.

00:33:10.000 | I just want to get back real quick to the whole time conversation as well.

00:33:13.240 | I think any incremental time that Jason and I have.

00:33:16.240 | I mean, I talked about the cheat code of investing in the market ETF

00:33:19.680 | and getting that 10% annualized, right?

00:33:21.440 | Any incremental time we have is all about beating that number, right?

00:33:25.040 | Because otherwise, what are we doing right at the Motley Fool?

00:33:27.040 | So that that's kind of where we're spending our time is what

00:33:30.000 | what additional hours can we do to find the stock that's going to go up

00:33:33.520 | 10, 15 X over the next five to 10 years?

00:33:36.160 | And that's there's many examples of that, of course.

00:33:38.760 | That's where we were dedicated a lot of our time, because that's

00:33:41.600 | that's where we make the difference for our members, for those who read

00:33:44.280 | and subscribe to our services. Right.

00:33:46.280 | And one word answer.

00:33:47.400 | Do you think that you could beat Dave's return on his 20 hours

00:33:51.600 | with that stock research? Yes or no?

00:33:53.680 | I don't think so.

00:33:54.680 | I don't think so, because he's got no, I mean, he's got tremendous advantages

00:33:58.080 | with, like you said, with with leverage, knowledge of that asset, adding value.

00:34:02.520 | That's hard to do. That's hard to do in the stock market.

00:34:04.840 | So I'm going to give him props for that one.

00:34:06.160 | Well, since you're throwing some bones to us, I'll give I'll give one back here,

00:34:09.280 | which is like in real estate.

00:34:11.240 | You're never going to 20, you're never going to get a 10 bagger in real estate

00:34:15.920 | like by and not have to do anything but research, right?

00:34:19.360 | Like that's just never going to happen in our world.

00:34:21.280 | That's a really good point.

00:34:22.640 | A few topics, maybe they're a little a little nerdy, a little in the weeds,

00:34:25.520 | but I think we need to hit on them.

00:34:27.200 | We briefly touched on leverage.

00:34:29.240 | Anything else important to talk about leverage,

00:34:31.600 | especially when it comes to the stock market?

00:34:33.800 | Because if real estate has lower returns, but levered, it gets higher.

00:34:38.360 | Can't you just lever the stock returns and get a better return overall?

00:34:41.560 | Right. But it's the clearest way to go bankrupt if you're a stock market investor.

00:34:44.840 | I mean, most of the time, even even well-heeled investors

00:34:47.160 | can only get about 2X leverage

00:34:48.920 | compared to the 5X leverage that, you know, that Scott talked about,

00:34:52.520 | because most companies, most brokerages aren't just going to give you that.

00:34:56.000 | But even still, even doing that 2X leverage is incredibly dangerous, right?

00:35:00.360 | I talked about the the bear market where the stock market went down 27%.

00:35:04.040 | Well, imagine you've levered that up to X and all of a sudden

00:35:06.720 | your portfolio is down 60%, right?

00:35:08.720 | And that's that's can be a devastating hit to someone,

00:35:10.840 | especially who might be near retirement and needs those assets.

00:35:14.400 | And so leverage is a dangerous game in the stock market.

00:35:17.280 | I think it's a tremendous advantage in real estate.

00:35:20.400 | And, you know, Jason mentioned

00:35:22.240 | where actually we have experience being landlords as well.

00:35:24.440 | And I will say this, this is probably the biggest bone

00:35:26.520 | I'm going to send back to the bigger pocket scene, which is

00:35:28.840 | I've made the best returns investing in the stock market.

00:35:31.080 | Personally, I've made the most money investing in real estate

00:35:34.120 | purely because of the leverage factor.

00:35:36.320 | It's an incredible advantage.

00:35:37.800 | I've done well.

00:35:38.400 | And, you know, as you say, if you make the right investments

00:35:41.000 | and add the right value with your time, I'll chime in here on on leverage here.

00:35:45.120 | Like I think that any investor like I plan to invest in both stocks

00:35:48.440 | and real estate for the next 50 years, right?

00:35:50.480 | Ideally, I live that long.

00:35:52.120 | At least we'll see how things go.

00:35:54.200 | But, you know, I think that the stock market like I know it will crash 50%,

00:36:01.480 | at least once, maybe twice during that time period, maybe even more at a higher,

00:36:05.920 | maybe even more frequently or at or larger.

00:36:08.640 | And I also know that real estate will likely crash

00:36:11.760 | probably once or twice in that same time period, at least 30%

00:36:15.640 | in there, probably not 50%, although that is possible.

00:36:19.160 | And I think if you're investing in either of these asset classes,

00:36:22.000 | you're not planning on those happening.

00:36:24.200 | Like you're going to get wrecked

00:36:25.680 | if your portfolio is always dependent on that not happening.

00:36:28.200 | So I think that that's like a part of the thing that you have to be ready

00:36:31.200 | for defense here.

00:36:32.240 | And if you're levered in real estate, you have to be much more defensive

00:36:34.880 | than you are in stock and stocks, because if you just lose half

00:36:38.680 | what you have, that's you know, that's very bad in the stock market.

00:36:42.320 | But it's not like, oh, now my properties are underwater

00:36:45.560 | and I can't cash flow them because I can't find a tenant like that.

00:36:49.560 | So there's there's risks in both of these that you have to be really prepared for.

00:36:52.880 | The advantage of real estate's lower volatility

00:36:55.760 | and the fact that it doesn't swing as much as stock market is, again,

00:36:58.560 | that you can leverage it, as we've discussed several times.

00:37:00.720 | Two other things.

00:37:02.200 | Let's talk liquidity.

00:37:03.640 | I think that's an important thing for a lot of people listening.

00:37:06.000 | Life is unexpected.

00:37:07.360 | Sometimes people need access to capital.

00:37:09.360 | How do these two types of investing give investors access to their capital?

00:37:13.880 | I think it's my turn to throw you guys a bone.

00:37:15.720 | I haven't thrown one yet.

00:37:16.800 | So this is really one of the better advantages for the stock market.

00:37:20.800 | Real estate is relatively illiquid asset class.

00:37:23.880 | There are ways to get some liquidity,

00:37:26.840 | you know, through cash out refinances or there's sometimes options

00:37:32.280 | for lines of credit.

00:37:33.720 | But I think for real estate investors, the key is really to use your capital

00:37:38.160 | elsewhere in your portfolio to maintain some liquidity.

00:37:41.920 | So that's whether that's keeping personal emergency funds

00:37:45.240 | in terms of cash or cash reserves for every property or on a portfolio level.

00:37:50.200 | It's important that you have some liquidity outside of the actual capital

00:37:55.440 | that you're putting into an asset, because right now it's relatively easy

00:37:59.600 | to sell real estate, but there are times when it could take months

00:38:02.360 | or even years to sell assets.

00:38:04.200 | So it's really important to make sure that you have easily

00:38:07.840 | accessible capital elsewhere in your financial life

00:38:11.160 | if you're going to be investing in real estate.

00:38:13.120 | Yeah, I mean, I think, you know, when you look at real estate

00:38:16.640 | versus something like stocks, I mean, obviously stocks are more liquid.

00:38:20.680 | Like if I need to sell a stock today, I can do that.

00:38:23.600 | If I need to sell real estate, that may require a little bit more time.

00:38:28.280 | And, you know, we mentioned earlier in the show

00:38:31.440 | here sort of that concept of being a desperate seller.

00:38:34.680 | You never want to be a desperate seller.

00:38:36.720 | And so, you know, trying to realize those returns from real estate

00:38:40.760 | doesn't always work out on our timeline.

00:38:43.320 | Now, the flip side of that is, you know, as a real estate owner,

00:38:46.840 | and I think is it, you know, I'm a homeowner.

00:38:49.960 | I think some of us are, at least if not all.

00:38:51.840 | But but you build that equity and you're able to borrow against that.

00:38:55.960 | And that really does make a big difference,

00:38:57.800 | particularly in a lower interest rate environment,

00:38:59.960 | which we used to be more familiar with than we are today.

00:39:03.680 | But hey, listen, we don't have any control over that. Right.

00:39:06.600 | But it's really nice to be able to borrow against that equity

00:39:11.160 | to do other things right that enables all sorts of things,

00:39:14.960 | whether it's funding college education or, you know, upgrading to a new house.

00:39:20.480 | I mean, there are a lot of things that owning a home can really facilitate

00:39:25.360 | in regard to equities, in regard to stocks.

00:39:27.880 | Sure. I mean, they're much more liquid.

00:39:30.400 | You can buy and sell them at the drop of a hat, and that's great.

00:39:33.920 | But that doesn't necessarily always work out so well

00:39:38.080 | because you're still subject to vagaries of the stock market.

00:39:41.840 | OK, we got one big topic that came up briefly,

00:39:45.240 | but we didn't really drill into it.

00:39:47.200 | Let's talk about taxes.

00:39:48.720 | Let's talk about the tax advantages each of you get from your style of investing.

00:39:53.360 | We're going to start with real estate.

00:39:55.280 | Yeah. So, you know, the real estate is a business.

00:39:58.760 | So all the like on a rental property, all the expenses like interest,

00:40:02.680 | a property management, if you hire that out, maintenance,

00:40:06.920 | those types of things can all be expensed.

00:40:09.200 | The land, the not the land, the structure and any improvements made to it

00:40:14.040 | can be capitalized and then depreciated.

00:40:16.520 | And that depreciation can offset cash flow on the P&L,

00:40:20.240 | which means that if you get a five, six, seven percent yield on your cash flow,

00:40:23.240 | you often are actually having a tax loss show up on your income tax returns.

00:40:28.000 | So you're not paying any income tax on that cash flow for a long period of time.

00:40:30.960 | And then when you go to sell the property,

00:40:33.200 | you have to recapture that depreciation, which is a trap that investors

00:40:36.000 | who think that they'll never have to do that sometimes run into.

00:40:38.840 | But there are options to continuously defer those taxes

00:40:42.880 | through what's called a 1031 exchange,

00:40:45.120 | where you can kind of continue to buy bigger and bigger properties

00:40:47.680 | using the equity in your portfolios.

00:40:49.560 | And some real estate investors like to play that game indefinitely,

00:40:52.840 | never pay taxes by deferring them indefinitely, die,

00:40:55.840 | pass on their properties to their heirs at a stepped up basis and go from there.

00:41:00.400 | This is wonderful in theory and practice.

00:41:02.800 | Investors sometimes run into challenges with that for that reason.

00:41:05.440 | However, real estate's not really a good option, in my opinion,

00:41:08.840 | for people to invest in like their 401k.

00:41:11.120 | So real estate, if you want to get into it

00:41:13.920 | and you're not trying to move out of your house

00:41:15.840 | and move into a new rental property with a really low down payment,

00:41:17.960 | you got to accumulate liquidity outside of that 401k and outside of your home,

00:41:22.040 | probably to the tune of $50,000 to $100,000

00:41:24.600 | in most markets to begin to put in the down payments.

00:41:27.680 | That's a challenge there.

00:41:29.040 | I'll speak for the stock side.

00:41:31.000 | We're not going to win this argument when it comes to taxes.

00:41:32.640 | I agree. I think real estate has a lot of tax advantages.

00:41:35.320 | I think when you look at the stock market, what we get,

00:41:38.400 | well, our advantages are in deferral.

00:41:39.880 | In other words, whether it's through retirement accounts, Roth IRA, 401k.

00:41:43.640 | I know there's certain vehicles, real estate, you can put into a self-managed IRA.

00:41:47.400 | Those processes are hard, though.

00:41:48.920 | But with stocks, it's easy.

00:41:50.600 | So you can defer taxes by never selling or rarely selling

00:41:54.040 | or by putting in the retirement accounts, which are advantages.

00:41:56.880 | But I would say you're not going to get sort of the very juice

00:42:00.600 | leveraged tax advantages you get with real estate in the stock market.

00:42:05.160 | And plus, in the stock market, even though dividends are great,

00:42:07.480 | they're double taxed and we're paying 15% rates or higher on those as well.

00:42:12.320 | So that's a disadvantage for us, except for those investors who, again,

00:42:16.760 | take a long term view of it and buy a company and don't sell it or have to sell it.

00:42:22.440 | You can defer those taxes for a very long time in stocks.

00:42:24.800 | I think we're at the point that I want you guys to stop throwing bones

00:42:27.520 | to each other's side, stop arguing for the other person.

00:42:30.280 | I'm going to have you guys do your closing arguments,

00:42:33.320 | like pretend you're on the courtroom floor, really trying to convince the listeners.

00:42:37.560 | I'm going to let real estate go first this time.

00:42:42.320 | And Dave, you want to take that?

00:42:44.360 | Yeah, my closing argument is that if you want to maximize your wealth,

00:42:48.240 | especially early in your career, real estate investing is by far the best way to do it.

00:42:54.080 | If you have the energy to put five or 10 hours a week to get started in,

00:42:58.560 | you can literally generate returns

00:43:00.520 | that are double that of the average of the stock market.

00:43:03.520 | And yes, it does take work.

00:43:05.000 | But if you have a good entrepreneurial spirit, the total return method

00:43:09.840 | of real estate investing, which includes cash flow, appreciation, amortization,

00:43:14.800 | value add and tax benefits is really unmatched in any other asset class.

00:43:19.640 | All right, Matt, you want to take it from the from the stock side?

00:43:22.640 | Sure. I will say, listen, if you want to invest easily via an app

00:43:28.720 | on your phone, as I talked about earlier, and you don't want to get the 2 a.m.

00:43:32.040 | phone call from a tenant whose toilet broke and you got to go there and fix it.

00:43:35.280 | Check out stocks.

00:43:37.480 | Like I said, the unlevered return is probably the best in the world that you can get.

00:43:42.680 | And it's simple.

00:43:44.680 | It's highly liquid.

00:43:46.080 | You can buy something today and sell it five minutes later

00:43:48.320 | and get your cash out if you want to.

00:43:49.720 | Not that that's recommended.

00:43:51.120 | So I just think if you're starting out, you have a little bit of money.

00:43:54.280 | You don't have enough for a down payment or big capital

00:43:56.080 | to become a big invest real estate investor.

00:43:58.080 | And you don't have a lot of time.

00:43:59.680 | Stock market investing is probably the way to go.

00:44:01.360 | I'll let the listeners decide who won this debate.

00:44:03.560 | I'm not going to make any make any judgments here.

00:44:05.840 | But I heard the entire time, I think every single one of you at one point

00:44:10.320 | mentioned that you've dabbled in the other one's sport of investing.

00:44:14.200 | So how do you guys think broadly about real estate and stocks

00:44:18.400 | fitting into your overall investment portfolio?

00:44:20.880 | I didn't hear anyone advocating for a portfolio exclusively of one or the other.

00:44:25.400 | Yeah, I'll jump in there right now.

00:44:27.120 | Just say, listen, I own a lot of both. Right.

00:44:30.200 | I mean, we have we we're homeowners here in northern Virginia.

00:44:34.760 | We have equity in our house.

00:44:36.640 | We've utilized that equity in our house.

00:44:38.720 | We're big investors in stocks and ETFs.

00:44:42.960 | So we're big participants in the equity markets.

00:44:46.120 | I mean, to me, this really all boils down to sort of diversification.

00:44:50.680 | I don't think it's one or the other.

00:44:52.840 | I think that's the beauty of this system is you can participate in both.

00:44:56.640 | It's just a matter of how you do it. Right.

00:44:59.440 | And if you want to be more active on the real estate side

00:45:03.440 | and act as a property owner and a landlord, then that's great.

00:45:08.480 | Do that. Try that.

00:45:09.680 | I mean, I've tried that.

00:45:10.640 | And it's there. There are a lot of things you learn from it.

00:45:13.360 | It can be very rewarding.

00:45:14.880 | But but regardless, whether you're a landlord or just a homeowner,

00:45:19.520 | building up that equity can be tremendously valuable.

00:45:22.680 | By the same token, you can still invest in equities at the same time. Right.

00:45:27.440 | You can you can continue to build that retirement portfolio

00:45:30.240 | and just sort of ignore all of that short term, short term noise

00:45:34.720 | that that we always criticize. Right.

00:45:37.840 | And just sort of let the equity sort of do their thing.

00:45:41.640 | Let those companies continue to grow.

00:45:43.280 | So to me, it's not a one or the other thing.

00:45:46.160 | It's really the beauty of the system is you can participate in both.

00:45:49.640 | And they can be very they can be very powerful

00:45:52.080 | to ultimately getting to where you want to go in regard to your financial freedom.

00:45:56.560 | Yeah. One of the things I always think about is I call it the

00:45:59.680 | the middle class trap, right, where what I don't want to do with my portfolio

00:46:03.920 | is I don't want to have all of my wealth in my home equity

00:46:06.960 | and then my 401k balance and not have any liquidity outside of that.

00:46:11.680 | No cash flow, no optionality.

00:46:13.080 | So every couple of years, I take out a piece of paper

00:46:16.000 | and just literally a piece of paper and I draw a circle and I think, say,

00:46:19.360 | this is how much wealth I'm going to have in three, five, seven, ten years.

00:46:22.440 | You pick a number. Right.

00:46:23.600 | And I say, OK, what do I want my portfolio to look like at that point in time?

00:46:27.120 | I just slice it out into different pie chunks.

00:46:29.400 | Right. Probably financial advisors are crying about how simple

00:46:32.440 | and stupid this exercise is, but it works for me.

00:46:34.560 | And I say, OK, what do I want it to look like at that point in time?

00:46:37.920 | And if I'm not on that track, I start changing my behavior,

00:46:41.640 | even if that means I'm doing slightly inefficient things

00:46:43.840 | like not maxing out my 401k to save more for real estate, for example.

00:46:48.120 | So for me, I want a third, a third, a third, a third in real estate,

00:46:51.240 | a third in stocks and a third in private business.

00:46:53.440 | That's what I'm looking for for my long term portfolio.

00:46:56.080 | And I keep looking at it and every once in a while say, am I on the right track?

00:47:00.280 | I need to course correct

00:47:00.960 | a little bit with where I'm allocating the cash coming into my life

00:47:03.720 | in order to make that true.

00:47:05.320 | And so I think it's that simple for me as an exercise and that hard

00:47:09.400 | to make those big, challenging tradeoffs about where to direct your cash flow.

00:47:12.800 | I think in getting me and Scott to represent real estate here,

00:47:17.520 | Jason and Matt, you're getting the two most maybe stock friendly

00:47:21.600 | personalities in the BiggerPockets network.

00:47:24.280 | I have a lot of friends who are 100 percent in real estate investing.

00:47:28.520 | But I typically my my target allocation is like 60 40 real estate.

00:47:34.480 | And I would split my real estate in half for passive and active.

00:47:38.080 | So I try and do like 30 percent into actively owned rental properties,

00:47:42.160 | 30 percent and more passive opportunities, 40 percent stocks.

00:47:46.440 | And as Scott said, it's never perfectly there.

00:47:48.600 | But that's sort of what I shoot for.

00:47:50.280 | Matt, any final thoughts?

00:47:51.560 | Yeah, I'll just say I'm glad we did this,

00:47:52.880 | because I think these are the two, in my view, the best

00:47:55.000 | the two best asset classes out there. Right.

00:47:56.960 | We're going to talk about bonds or gold or God, crypto.

00:48:00.480 | These are these the best.

00:48:03.560 | And I think, yeah, for me as well, I think everyone here has a good mix of both.

00:48:07.840 | I'm obviously more weighted stocks and real estate.

00:48:10.080 | But I see I see so many advantages to both.

00:48:13.600 | And I plan to invest in both for the rest of my life.

00:48:15.600 | All right. Well, I think we've we've convinced everyone,

00:48:17.280 | at least of what the two best asset classes are.

00:48:19.880 | If you want to go a lot deeper on the real estate side,

00:48:22.720 | check out the BiggerPockets real estate podcast and all the content you guys create.

00:48:26.680 | If you want to go deeper on the stock side, check out the Motley Fool podcast.

00:48:30.960 | Everything on your site.

00:48:32.720 | I've been a user of both of them, so I've consumed the content.

00:48:36.520 | I've read the blogs.

00:48:37.560 | I appreciate all you guys have done.

00:48:39.760 | Thank you for being here.

00:48:41.080 | If anyone wants to go deeper on other stuff I've moderated,

00:48:43.600 | I've lots of conversations over at all the hacks.

00:48:46.240 | So thank you for being here.

Stock Market vs Real Estate: Which Will 10X Your Money?

Chapters