BiggerPockets Real Estate Podcast - 758: Real Estate vs. Stocks: Which Will Make YOU More Money in 2023? w/Trey Lockerbie

Starting point is 00:00:00 Welcome to the Bigger Pockets podcast show number 758. In real estate, if you don't have adequate cash flow, then you can become a forced seller, and that's the worst position to be in. So I agree with Henry. As long as you have the cash flow to be able to withstand any, you know, short-term downturns, then you can absolutely buy real estate in pretty much any business cycle. I'm soloing the intro up all by my lonesome today, and today we get at some really good stuff. We're going to be getting into real estate versus stocks. Now, I'm going to fill you in

Starting point is 00:00:34 on the episode in a little bit, but I wanted to point out a few key highlights that we're going to be talking about, like risk versus reward over time, over 45 years of historical data to be more specific, how to evaluate your risk profile and which asset class could best fuel your wealth building goals. Today's episode is going to be an awesome panelist lineup, including Dave Meyer, Henry Washington, and we're even having Trey Locker be back on. Before we get into today's episode, I want to give a quick tip, which is if you're looking to educate yourself and become more savvy in the world of stocks, go listen to Trey Locker B's podcast. We Study Billionaires, available everywhere that you download your podcasts. Oh, oh, and bonus curveball quick tip, consider investing in bonds if you listen to

Starting point is 00:01:16 the end of the episode. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand new construction homes, 10% below market value, and the best markets across the country, without making real estate your second job. That's exactly what rent to retirement does. They're a full service, turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with Bigger Pockets for over a decade, helping thousands invest smarter. If you want to do the same, visit biggerpockets.com

Starting point is 00:01:57 slash retirement to learn more. Okay, we're going to shift gears for a minute to cover something important, especially for new landlords. The shows often talk about getting stuck doing everything ourselves and the cost of sweat equity. The key question is simple. Is my time better spent elsewhere? I use a tool that cuts down on a lot of landlord hassles.

Starting point is 00:02:15 And the wild part is, it's just $12 a month. It handles rental screenings, rent collection, maintenance requests, and accounting, all in one platform via a mobile app or desktop. It saves me time in tenant communication and keeps me organized for tax season. It's called Rent Ready, and you can sign up for a six-month plan for just $1 with promo code BP 2025. Pro users get it for free because we believe in it. Just sign in through your pro account to get started. Rent Ready helps ensure on-time rent with auto reminders, keeps communication professional,

Starting point is 00:02:44 and lets you post listings to multiple sites. Check it out at RentReady.com slash Bigger Pockets. That's RentR-E-D-I-com slash Bigger Pockets. What if I told you you could forget everything you know about investment property loans? Because host financial is rewriting the rulebook, tossing out those pesky DTI restrictions. They focus on your property's income potential. No tax returns or personal income statements needed. Simple, efficient, and tailored for investors like you.

Starting point is 00:03:11 Imagine a lender that sees the gold mine in your property, not just the numbers on your paycheck. That's the host financial difference. And they're approved in 47 different states. So your next big deal could be just around the corner. Ready to unlock your property's true potential, visit hostfinancial.com. Don't let old school lending hold you back another day. That's hostfinancial.com. You'll find out why.

Starting point is 00:03:32 Now let's get into it. A recent top performing article from the Bigger Pockets blog is the inspiration for today's show, Real Estate versus Stocks. To bring you up to speed, I'm going to read the intro line from this article to set the tone of today's conversation. Let's get one thing straight. Everyone should hold both stocks and real estate in their portfolios. Diversification is the ultimate hedge against risk. But that doesn't mean that we can't.

Starting point is 00:03:53 pit stocks and real estate against each other in a classic Mortal Kombat-style matchup, which earns the best return on investment, real estate, or stocks? And while asking this grandiose question, which investment is safer? There are a few callouts here, though. One, diversification is the ultimate hedge against risk. Risk and the fear of risk is what paralyzes so many investors, or being too risky is what puts people in the poor house. And two, running with the Mortal Kombat theme here, both stocks and real estate have their combo moves for building wealth, but can equally sweep an investor off their feet so fast that their head will spin. We brought this powerhouse group of investors together to evaluate the risk versus reward

Starting point is 00:04:31 over time in stocks and real estate, share how to evaluate your risk appetite, and to determine if there's a clear winner for the safest way to build wealth. Excited to dig in here with our good friends, Dave Meyer, Henry Washington, and our, in today's guest, Trey Lockerbie. Tray, how are you doing today, man? I'm doing great, Rob. Thanks for having me back. I'm excited to, you know, I'm still a real estate noob, so I'm just excited to represent the stocks, I think, in this discussion. So I'm excited. Well, awesome. Well, for those of all the listeners that did not listen to our amazing podcast that we did with you a few months back,

Starting point is 00:05:04 can you give us like a quick 30 second elevator pitch about who you are and your background? Sure thing. Yeah, I'm primarily a business owner. I own Better Booch kombucha, national kombucha tea company. And that got me really interested in Warren Buffett because he says he's a better investor because he's a businessman and a better businessman because he's an investor. So I said, I need to learn how to invest because it's capital allocation at the end of the day. And that got me really into the study of Warren Buffett. And it led to me becoming the host of We Study Billionaires, which is a podcast,

Starting point is 00:05:36 really focused on the Warren Buffett and value investing style of investing. Well, awesome, man. Well, thanks for being on the show today. You sent me a box of Better Boot. And I can confirm for all the listeners that it is the best kombucha I've ever had. But with that, I want to get into the first question here, which is for everybody, when was the last transaction that all of you had in either asset, whether it's real estate or stocks? Henry, I'm going to go to you first here. Absolutely. So my last real estate purchase transaction was Friday of last week. I purchased a single family home, and we are going to actually keep that one as a rental property. And my last stock transaction was this past Tuesday, where I bought a stock.

Starting point is 00:06:20 for the sole purpose of the dividend that it's projected to pay out. Okay. All right. And Dave, what about you? I think last week for both, I just have automatic deposits into index funds every two weeks. And I think one of them went last week. And then I guess it's sort of real estate.

Starting point is 00:06:39 I mean, it is. I invested in a real estate focused lending fund just last week as well. Okay. Cool, cool, cool. And Trey, what about you? Similar to Dave, I have some like weekly auto. automated dollar cost averaging system set up. But when my more active investment was in late December, I invested in the Warner Brothers Discovery stock. So AT&T recently let go of Warner Media.

Starting point is 00:07:04 It merged it with Discovery. And it's an interesting stock. It was about $9 when I bought it. It's at about 15 now. So doing all right so far. And maybe after the exposure from this podcast, maybe it'll be at 1550. So let's hold out for that. We can definitely move markets here. And so can you quickly share your overall position, Trey? Are you stock curious, but mostly real estate, close to equal mix, stocked up in the sense of mostly stocks and reits? Yeah, so it's interesting because I don't know if I'm like most of the audience here,

Starting point is 00:07:38 but my net worth if I broke it down is about 60% in my business that I started, right? Because a lot of it's tied up there. My wife and I bought a house. That was our first big real estate investment. So that's about, you know, let's call it 30%. And then the remaining 10% is broken out really with a cash buffer, some Bitcoin and some stock. So it's still kind of getting relatively new with the investments beyond sort of, I would call the fundamentals. Yeah. And actually, you kind of mentioned this. And I know you're, you're very involved in the stock side of things. But you mentioned dollar cost averaging.

Starting point is 00:08:15 Do you think you could just give us a quick explanation of what that is? I assume that will probably come up a few times in today's episode. Yeah, it's a fancy word for basically automating investment. So you want to basically just put money passively into, let's say, an ETF or you can even do Bitcoin. You can do all kinds of stuff with this. And the idea is that you're sort of agnostic to the price at the time in the belief that the price will appreciate over a longer period of time. So let's say the stock market, there's interesting studies that show, you know, with over a year, it's a little bit more unpredictable. But within 20 years, it's almost, I think it's actually around 100% guarantee that you will

Starting point is 00:08:55 have made money. So over a longer period of time, it proves to be the case that you make more money. So just being agnostic to the price, you're going to capture a lot of the opportunities that come to you just through the price appreciation or depreciation. So it's like the concept of consistently investing. Sometimes you're going to buy when it's high. Sometimes you're going to buy when it's low, but it averages out to basically make you money in the end, right? Well said. Exactly right. Awesome. Awesome. And Dave, what about you, man? Where do you fall on the real estate slider versus stocks? Like, how diversified are you in all of those?

Starting point is 00:09:27 I guess fairly diversified, just probably in the opposite of most people. I'd say about a third of my net worth is in the stock market and two thirds are in real estate or real estate adjacent things. Okay. All right. Cool. And Henry, what about you? Yeah, I would still define myself from a percentage perspective as stock curious, right? I'm fully immersed in real estate. And I just took a look. I am about 3% of my net worth is invested in the stock market. So everything else is real estate. Yeah, I'm probably in the 5 to 10% area. I mean, honestly, it could be 3. But, you know, there's a lot to go over today. So Dave, I actually want to turn it over to you to give us sort of the big picture here, right? Some of the historical data over the last 45 years because you're much smarter than me and can say it a lot more succinctly than I could. So are you cool to kind of share some of that?

Starting point is 00:10:19 Definitely not smarter, but spend way more time reading this nerdy stuff. So basically the data about whether real estate or the stock market has better returns is I feel like it's one of those things like reading nutritional information. Like every study sort of contradicts the other one. It's like you can't, you know, if you read and try and figure out if eggs are good for you or bad for you, sort of just get completely contradictory information. This is sort of like what you see in stocks versus real estate. The stock market is generally easier to measure and understand. And I can tell you with pretty good confidence that over the last 45 years, the average return on the SEP 500, which is sort of just a broad set of stocks, returned about 11.5%. And then when it

Starting point is 00:11:10 comes to real estate, it's just sort of harder to evaluate. It's relatively easy to measure the returns on real estate if you only look at price appreciation. But as anyone who invest in real estate, no, there are also other ways that you earn returns, such as loan paydown and cash flow. And when you factor those things in, some studies show that they are about at par with the stock market. Some show that they perform better. And that's mostly when it comes to residential real estate. When it comes to commercial real estate, I've seen some data that shows that REITs, for example, some REITs studies show that they come in at around 9%, so that would be lower than the S&P,

Starting point is 00:11:51 while others show that REITs have returned around 11.6%, which is about at par with the SMP. So it really is sort of all over the place, but there are a few themes that do seem to be consistent from study to study. And that's that in any given year, the stock market has much higher potential and more risk. So it's just a more volatile asset class. You have a greater risk of loss on the stock market in a given year. But you have higher upside. So that's one thing. And the second thing is that over time, as Trey just alluded to, both asset classes go up over time.

Starting point is 00:12:35 And so if you hold both of them for a long time, both of them are pretty high performing assets. For example, both of them do better than bonds and a lot of other types of asset classes. So they are both good, but there is no conclusive answer, which is, I guess, why we're here on this podcast debating which one's best. Yes, that's honestly very, it's, I think you're right. The way you said about nutrition and how there's always like a study that sort of contradicts it, I kind of feel that way too when I get into some of the numbers. I'm curious and you may not have the answer off the top of your head, but you mentioned that when you look at debt pay down and cash flow, it actually ends up being possibly hand in hand with stocks. Did that study at all take into consideration some of the tax benefits of real estate? Because for me, when I look into this, that seems to always be what puts real estate. right over the edge for me. So that study is one I did myself and because I was curious. Trey cited a stat that over 20 years, it's net in his historically, if you own stock for 20 years, you don't lose money. And I was curious because I'm weird like what the stat was for real estate. And so I did this whole analysis, but it did not include the tax benefits.

Starting point is 00:13:54 It just looked at how inflation-adjusted housing prices, cash flow, and loan paydown contributed to your probability of a loss in real estate. And spoiler, if you want to point for real estate, the probability of a loss in a given year on real estate is lower than stock, according to my personal but not academic, not peer-reviewed study. Hey, you know, anecdotal evidence counts for me, Dave, in my heart. So I know that there's some risk in both asset classes, right? Whether one is more volatile or not, that's obviously what we're going to get into. So what is less risky? Real estate or stocks in

Starting point is 00:14:34 today's general economic climate. Trey, I know that you, obviously, you're coming more from the stock background and this is what you study. So I'd like to start with you and kind of get your point of view on this. Yeah. So the article we're referencing talks a lot about how volatility is often described or what defines risk. And I think that I think that's sort of what you'd find in most academia. But I just through my studies and people I've researched with investors, especially in the stock market, the consensus in that community seems to be more around defining risk as the permanent loss of capital, which is another fancy way to say, will this thing go to zero or not? And if you look at it that way, you could make an argument

Starting point is 00:15:15 that real estate is probably the less risky asset class because, you know, it's hard for a home to go to zero, right? unless maybe it burns down without insurance or something. But with stocks, that's a little bit more common. Now, if you are applying it to, say, an index where you're owning the top 500 companies in the U.S., and those companies are constantly changing out for the next best thing as some fall away, it's hard for that to go to zero, unless there's some apocalyptic event, right? So it's interesting because if you look at it that way, it might net out even, but I would just say because of the nuance with individually individual stock investing,

Starting point is 00:15:55 you could argue that real estate might actually be better. Yeah, yeah. I mean, even in your example of like the house burning down, for example, you still technically have the land in the land value associated with that house. So in that aspect, I would agree. I would say that overall the risk of real estate going to zero is relatively slim. Dave, what do you think? Do you have an opinion on whether stocks or real estate?

Starting point is 00:16:18 I know you mentioned that real estate typically is going to be a little less volatile, but yeah, curious to hear your thoughts. I think what trade just said is spot on. If you look at and you define risk like what trey said as a permanent loss of capital, then I agree. But the data, just to argue against real estate, just to play devil's advocate for a second, if you want to consider the risk of underperformance or opportunity cost, as well, then I think there's something to be said for the stock market because there are times when real estate does grow much slower than the stock market. And so you can risk underperformance by only investing in real estate, which is why personally I think diversification is important. Sure. And Henry, you mentioned you're 3% into the side of stocks and mostly into real estate.

Starting point is 00:17:11 So does this have any, is this because you feel real estate is less risky or is it just because you like real estate more. Yeah, I think it more comes down to the level of understanding that I have with real estate versus the level of understanding that I would want to have with stocks or different strategies with investing in stocks because, yeah, I think we can talk back and forth all day about what's more risky or less risky. But the truth of the matter is it's what strategy are you employing in either and how risky is that strategy? Because yeah, real estate's typically not going to go to zero and the stock can, but you can buy something and then get upside down, right? And nobody wants that either. And that can happen with stocks or real estate, depending on where you buy and what's

Starting point is 00:18:00 going on in the market where you're buying and the same thing with the stock. So for me, it's just, I understand real estate and I understand the strategy that I employ within real estate. And I typically stick very close to my strategy. I do the same thing with the stock market, but because I, because I haven't researched, you know, a plethora of companies or a plethora of index funds, even my stock strategy is very, very, very high level and, uh, not very risky because I, I only invest for, for a long term, with the exception of the, the dividend investment I made recently. That's more of a test. But that for me, again, I, I invested in that dividend stock. A is a test and B, if I lost that money, I'm not risking more than I'm willing to lose there, where

Starting point is 00:18:50 with real estate, it's a much more educated investment for me. Yeah, that makes sense. And actually, you brought up a good point that I actually am going to backtrack a little bit because I did say that real estate doesn't go to zero based on what you're talking about, Trey. But Henry's absolutely right. You know, you could be upside down on an investment. You could flip a home and, you know, sell it at a loss. And in that instance, it didn't go to zero, went in the negatives, right? So, it's very similar in that you lose money on the sale. If you were to hold on to that piece of property, probably over time in 30 years, you're not going to be upside down. And I think it's probably similar with stocks too, right? You lose money on the sale unless the company itself goes

Starting point is 00:19:27 underwater. But I understand what you're saying, Henry. There's so much out there. And we know real estate. And for me, you know, I hear all these terms like blue chip market, growth stocks, dividends. And so I want to toss it to you, Trey, and just ask, how do you categorize the different equities by risk. Yeah. So it's it's probably what you would expect to some degree because lots of people categorize things as microcap, small cap, midcap, large cap, when you're talking about stocks. And those are just kind of the ranges of revenues. So microcap is like, you know, 50 to 300 million. And on the other spectrum, you know, large cap, you're talking about two trillion dollars or so if you're talking about, you know, Microsoft or Google and that kind of thing. So it's a, it's a very large

Starting point is 00:20:10 spectrum. And I would say that there is actually more risk when you're looking at things like microcaps because they're just suspect, they're just subject to different factors. For example, liquidity or just, you know, they're still trying to grow and get market share, whereas another business might have a large majority of market share like Google who has, I don't know, 90% search, whatever. So, so there's a, they're still trying to grow. And I would say those are kind of more risky for that reason. And they also tend to have more volatility if you're looking at it in that way as well. Yeah.

Starting point is 00:20:49 Yeah. And actually, you know, speaking in this world of the different equities and everything, Dave and Henry, actually, Trey, you may need to help out here. But what I'd like to do is actually line up the different equity types to the different housing type. So, you know, find the respective spirit animal of each. So I'll just kick us off to kind of solidify this. But imagine like a mutual fund is kind of like the like the multifamily. Like those two would come together. Yeah. And I would say that microcaps, as I kind of highlighted there, would be sort of like house hacking or maybe flipping your first Airbnb, something like that. Yeah. I would say like a dividend stock is like investing in a single family home for the cash flow, right? Because you're you're buying something in hopes that it appreciates. but really what you're wanting is that monthly or quarterly cashbow.

Starting point is 00:21:44 What about like commercial? Commercial. Is there commercial real estate? How would we pit that up? Or like what spirit animal would choose on the on the stock side? It depends what type of commercial. If you're talking about office commercial right now, that's like the Silicon Valley Bank of real estate.

Starting point is 00:21:59 They're both just nose diving right now. If you're talking about like, you know, retail, that's like tech. Like it's not doing great, but it will probably do okay in the long. run. Or if you're talking about multifamily, I don't know what you would compare that to, but it's doing okay right now, but there are some concerns. Try, I don't know if there's any type of stock that you would compare that to. What about like a penny stocks? Are those like the government foreclosures, like the huds of real estate? Yeah, a lot of times microcaps are kind of penny stock. So I was thinking about that house hacking thing, right, where you're just sort of like

Starting point is 00:22:43 getting that that extra income, but you're, it's just maybe a little bit more volatile because you have a roommate and who knows how that's going to go. I have one other way that I think about this. And is that, you know, in stock world, you talk about blue chip stocks or value stocks or growth stocks. And I look at certain geographic locations in sort of the same way. Like there are certain real estate markets that are extremely predictable and don't have the best returns, but they're relatively low risk. I primarily invest in Denver, I think of something like that. Like, it's no longer this great cash selling market, but it's still going to offer you pretty solid returns. Then there are markets that are like up and coming. There are sort of the

Starting point is 00:23:30 value ones that I would say like where Henry invests in Northwest Arkansas is probably like a value opportunity that has some upside. So I think it's not just like the asset class within real estate, but also the geographic locations that can be, you know, people can think about geographic locations and assess risk based on where you're physically investing. I think that's a great point, actually, because something that sold me on buying our first home was looking at the data around the 2008 GFC. And I live in California, specifically Los Angeles. And there was this fact around the, I think across the country, the average decline was something like 50%. But in California, especially Los Angeles, homes over a million dollars, which most homes here are just because it's ridiculous.

Starting point is 00:24:19 The decline was only around 25%. So it was about half. Just going to that point about the less risky aspect, depending on where you are because people like to live near the beach and with good weather. Yeah, and I can't blame them. People love to call real estate passive income, which is interesting because most of the investors, I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates as low as 3.75%.

Starting point is 00:25:05 They've been trusted partners with Bigger Pockets for over a decade, and if you want to learn more, visit BiggerPockets.com slash retirement. The rise of the tech-savvy investors here. You don't need a huge team or tons of overhead to manage rental properties.

Starting point is 00:25:17 Just the right tools. So I want to tell you about how I use rent-ready to get ahead. For landlords who treat their time like capital and recognize the cost of sweat equity, this tool gives you everything you need to scale. Rent collection, tenant screening, maintenance accounting,

Starting point is 00:25:30 so that you're organized come tax season, and you can run numbers in preparation for future deals and more, all in one platform via a mobile app or desktop. Modern landlords don't just own property. They optimize it. Rent Ready will keep you organized, running leaner, and ready to grow. Start with RentReady.com slash bigger pockets. That's RentR-E-D-I.com slash bigger pockets.

Starting point is 00:25:53 And use code BP 2025 to get Rent Ready's six-month plan for a dollar. All right, rental property investors, listen up. Our friends at Dominion Financial already have some of the best DSCR rates in the industry. Now, they're the fastest, too. They just launched 10-day DSCR closing. That's right, 10 days. And they're still the only lender with the DSCR price beat guarantee. That means faster closing, the best terms, zero guesswork.

Starting point is 00:26:23 That's Dominion Financial. Check them out at biggerpockets.com slash dominion. Again, that's biggerpockets.com slash dominion. I'd like to kind of move in to a bigger question here since we're on the topic, which is, what is produced better in times like this? Would it be pre-recession or recessionary times that have kind of yielded the best returns? And this is a question for everybody, but if you need me to choose somebody, then I'll choose you first, Dave Meyer. Oh, God.

Starting point is 00:26:55 So the question is, like, during economic uncertainty like we're in right now, which asset class is better? No, I think it's just like from a return standpoint of each asset class, do you typically see better returns in pre-recession times or in recessionary times? Oh, I think we're in like the worst part. So I think like if you think about the business cycle, there's, you know, people call them different things. But I would say that we're in what's known as like, at least in real estate, like the peak phase where like things are still priced really high or people have expectations of high prices, but they're unaffordable. And so I think we're still, you know, prices haven't bottomed out.

Starting point is 00:27:39 And so I think this is a dangerous time to buy real estate unless you know what you're doing. Like you don't want to quote unquote, like catch the falling knife because I personally believe prices are going to continue to go down this year. That said, you know, I participated in a syndication where the operator bought it for 30% below peak value. And I'm feeling pretty good about that. So it's not like, it's not like you can't buy things right now. You just do need to be careful. I think, you know, if you could theoretically time the bottom of the market, which you can't, that would be a better time to buy. But I don't think we've hit bottom yet. And unfortunately, it's impossible to time because we won't know when we hit bottom until after that has already happened. So I caution people against.

Starting point is 00:28:27 trying to time the market and instead trying to, you know, think further ahead and to buy under current market value if you, like I do, believe that prices are going to go down. And I think trade probably knows better about the stock market, but yeah, I think real estate is a little bit different and that price has just really started to go down on a year-over-year basis, whereas the stock market has been down for, you know, at least a couple of quarters now. But is there a similar concept? I mean, if we talk about like stocks, which we kind of went over the idea of dollar cost averaging with stocks, wouldn't that same theory technically apply in real estate?

Starting point is 00:29:08 You know, like if you're buying real estate every single year consistently, then in 30 years, theoretically, all that real estate should be worth a lot more. Is the reason that maybe we don't look at it that way because the stakes are a lot higher and you're spending a lot more on a house than you might like on an individual stock? I think yes. I mean, I do think I try to dollar cost average. I continuously buy and try to invest similar amounts into real estate. I change what types of real estate strategies I use a bit based on the macro climate. But I totally agree. The whole concept behind dollar cost averaging is that the value of these assets go up over time. And if you can basically hit yourself to that

Starting point is 00:29:49 average over time, you're going to do well. And that is true both in real estate and in the stock market. Yeah, Dave, sorry, Henry, were you going to say something? Yeah. I think what Dave's train of thought, I think just triggered my train of thought to say, like, I think you can get, I don't know about percentage of returns, but from a dollar perspective, it seems like you would get a better return with real estate because you can use debt to buy real estate.

Starting point is 00:30:18 So I can get a loan and buy large amounts of real estate, right, while the market in the market now, which can produce a very high return when the values go back up, if I can hold that property, meaning that property is going to produce some level of cash flow that covers that debt service. And so I can get a higher return in real estate, whereas if I go into the stock market, right now, yes, the stock market is down, which is a great time to buy because over time, you're essentially going to recoup that money and then obviously make more money, but I can only buy with capital on hand. And so the return is smaller. That's a great point, Henry just made that, you know, when you buy a stock traditionally, you're not leveraged. And so once you own it,

Starting point is 00:31:01 you do have an easier time holding onto it through any market downturns or volatility. In real estate, if you don't have adequate cash flow, then you can become a forced seller. And that's the worst position to be in. So I agree with Henry. As long as you have like the cash flow to be able to withstand any, you know, short-term downturns, then you can absolutely buy real estate and pretty much any business cycle. Yeah. Okay. What about you, Trey? What do you think? Well, because we were highlighting the volatility of real estate, I'm sure we might talk more about that where because of the illiquidity of that asset class, you probably just see naturally less volatility because it's harder to get in and out in the stock market. But I wanted to provide

Starting point is 00:31:43 some interesting facts around the stock market when it comes to recessions. This is kind of interesting because the stock market, to your point, Dave, has been down pretty significantly over the last year, but there's still some debate around whether or not we're in a recession. And so that's kind of unique. Most of the time there's a recession that stock market declines shortly thereafter. But what's interesting about the stock market is that most recessions only last about a year. And in fact, three of the 11 recessions since 1950 went on for more than one year. So it's almost rare for it to go any longer than that. And for every recession, the stock market recovering by the time the recession ends is about half. So five of the 11 times we've had recessions,

Starting point is 00:32:26 the stock market has actually recovered by the end of the recession. So to the point around maybe real estate fared better throughout the recession, but stock markets tend to bounce back. And there's only been a couple of recent recessions that have been kind of unique. For, for example, 2008 was by far the deepest and worse stock market because of the global financial crisis. So that was the longest bounce back. But then 2020, if you guys remember, was the steepest selloff almost ever, I think, but the shortest recovery about 60 days. So it's interesting to weigh out the pros and cons in that way, knowing that, hey, we're going into a recession. Stocks will probably naturally not fare too well because the recession is going to affect the underlying

Starting point is 00:33:12 earnings of those companies, but it seems like over the long run, you've got a lot of other momentum built in, for example, 401Ks, pension plans, all these things that are actually act or passively flowing money into the stock market just through weekly, byweekly payrolls from different corporations. You have lots of inflows just naturally going in because of that dollar cost averaging. We mentioned that helps, I think, keep propelling the stock market up and helping it recover over a shorter period of time as well. Yeah, that is interesting because as you were taking us to do that journey, I was like, well, it honestly seems ideal that the stock market, you know, is really low, right?

Starting point is 00:33:54 Because if you're an investor, you're like, okay, great, everything's cheap. I'm going to buy it. But I think the flip side of that is you really don't necessarily want that for a relatively large portion of the population that relies on dividends and retirement accounts and everything, right? Because that's typically the stuff that's really taking a hit. Yeah, exactly. It's important. I think everyone understands this idea, but price is not value, right? So there's a lot of these companies that may have deserved to have a price correction, but there's probably a lot of companies in there and similar to real estate where the value is actually much higher than the price. I remember in the 2001.com bubble,

Starting point is 00:34:31 Amazon's price went down 90-something percent. I think it was like 96%. And obviously the funder, fundamentals of that company were still strong and improving every single day even throughout that period of time. So you ideally want to find companies like that who are affected maybe by the price, but to your advantage. And that's the philosophy that the market is mostly efficient, but the market is also reflexive. So these downturns can actually gain momentum over time, and that can work into your advantage so you can find these opportunities. Well, I want to move into a sort of another niche within all of this. And so Dave and Trey, I'll toss it to you guys on this as well. But given the current conditions of the economy and what we're seeing in 2023, do bonds offer any better cash flow than indexes or reits or anything like that? Okay. So I brought this up because I think it's interesting to see that a lot of commercial real estate assets, which are easier to track. Like if you look at multifamily, a lot of them are trading. at cap rates, which are below bond yields.

Starting point is 00:35:38 And so that's basically saying that you would buy a multifamily asset to earn, you know, three or four percent cash flow when you could buy a government bond that yields over that, which is a better cash on cash return with much less risk than multifamily investing. I mean, multifamily investing is great. I do it. But, you know, if you're asking which has a better chance of giving you that cash flow, I would trust the U.S. government to pay back their bonds than that I would a multifamily operator, especially right now.

Starting point is 00:36:16 So I just think it's kind of interesting to see that with rising interest rates, there is sort of this silver lining, which is that quote unquote risk-free assets, which no investment is, or excuse me, quote unquote risk-free investments. And there's no such thing as a real risk-free investment, but they call bonds or savings accounts risk-free because they're so low risk. They're at, you know, 4% right now. And so you have to ask yourself, you know, if you're, for example, commercial real estate investor, is it worth getting a 5% cash on cash return and taking on all the effort and risk of buying that property when you could do basically nothing and get 4% from a bond? So I just think that's kind of an interesting dynamic in the market.

Starting point is 00:37:00 I'm curious what Henry and Trey think about that. And Rob, you as well. Yeah, it's an interesting time because for the last decade, to Dave's point about risk-free rates, it was actually more rate-free risk because these bonds were yielding so low. And you actually saw this play out. The risk was there, right? You mentioned Silicon Valley Bank. I mean, their fault was having all this money from depositors, putting it into treasuries at

Starting point is 00:37:23 these low rates, and those were locked in for, say, 10 years. whereas rates started to go up really aggressively. And so there was this duration risk that I don't think people were really thinking about until it occurred, but now everyone's kind of becoming aware to that actual risk. So there is some risk. But to Dave's point, we're at a certain unique, I think, place where inflation is coming down and rates are going to probably cap around 5%, would be my guess. And at that point, you have a really good opportunity because you're getting that more of a risk-free rate

Starting point is 00:37:55 because the odds of rates continuing to go up from here, I think are actually lower because of inflation decreasing. And if they do go lower, then the bond you're actually holding will appreciate as well. So not only are you getting that 5%, but you're going to get some price appreciation from it. So I find myself even surprised to say this and be kind of pro bonds after the last decade we've just had. But I actually think that if you're only needing to have something like a 4% or 5% right now and you really want low risk, it's probably a good option. And then furthermore, I would go as far as say, don't check out Vanguard or some other options that do these ETFs where it's very liquid. You can get in and out of them. You don't have to ladder your own bond portfolio to make this happen.

Starting point is 00:38:40 So there's options like that out there. Totally. Who would have thought on bigger pockets? We're like, bonds? Maybe. Actually, it might make sense. I know. I just want to caveat that I'm saying, commercial real estate. If you're looking at like a REIT, for example, or buying a really low cap multifamily unit. I'm not talking about like a lot of the strategies we talk about on bigger pockets, like value ad or buying a small multifamily or even single family. I mean,

Starting point is 00:39:08 I'm just talking about commercial assets. I don't know though, Dave, because if you think about, if you think about, you talk about a lot of new investors are struggling to find deals that cash flow or hit the 1% rule. Right. And so I bet you find a lot of,

Starting point is 00:39:22 newer investors in the market right now running numbers on deals and they're seeing, you know, four or five, three percent cash on cash return deals, even in the single family space. And so, yeah, I can see why looking at bonds. Why take on the real estate risk? Now, there are other benefits of real estate that you would get like the tax benefits and the appreciation over time that is also going to be a benefit to you. But way, less risk. So it's like what's what's more important to you? So it's a weird time. Yeah. Yeah. And I'm sure a lot of this comes down to what your overall risk profile is. So if you don't mind, Dave, do you think you could help people understand their risk profile? And maybe let's just start off with what risk

Starting point is 00:40:10 profile even is. Sure. Yeah. I just encourage people to think about when, you know, I'm sure this happens to all three of you. People ask you for advice about what they should be investing in. And it's really hard to answer that question unless you know what type of risk the person is is comfortable with. And so when I talk to people about risk, I generally say there's sort of three things that you should be thinking about. The first is your overall like comfort with risk. Like how comfortable are you risking money with, you know, in the service of making more money? And people often stop at that just like how comfortable are you with risk in general? But there's, there's, more to it than that. I think the second thing you need to think about is your risk capacity. So

Starting point is 00:40:56 some people are really tolerant of risk and comfortable with it, but they don't have the capacity to do it. Like maybe they only have $20,000 in an emergency fund, but they're super comfortable with risk. I wouldn't risk all $20,000 of yours, even if you are really comfortable with risk generally, or perhaps you have children or some family members to support or some other obligation, I wouldn't risk all of your money. So I think you have to think about, like, are you, even if you're comfortable with risk, are you in a good position to take risk and to absorb any potential losses? And then the last thing I think most, you know, almost everyone overlooks is like your timeline. Like, are you investing for the next three years, the next five

Starting point is 00:41:40 years, and the next 30 years? Because I think that makes a really big difference in what type of assets you should be looking at. Like, if you're investing for the next six months, like, maybe you should buy bonds. Like, I don't know, but like, that's probably a pretty good bet. If you're investing for the next 20 years, you should probably buy real estate or the stock market. So I think those are three things that people should think about. And like, unfortunately, there's no objective way to measure your own risk tolerance. They're all sort of these subjective things. And there are a lot of really good, you know, websites that you can go to and sort of take some tests. But I encourage people, especially in this type of market, because it is

Starting point is 00:42:20 riskier than, you know, it was, let's say in 2014, to really think about what type of risk you're willing to take, what capacity risk you're willing to take, and like what the time horizon is for your portfolio. Okay. Actually, that leads me to what I want to end with. Well, we'll call us the final game of today's episode, which is thinking about today's current conditions. If you had $50,000, available. If I just handed each of you $50,000 in a briefcase, it would be an overwhelming briefcase because have you ever seen $50,000 in person? It's a little dodgeball reference there. But if I gave you $50,000 each in a briefcase, what would you invest it in for the next five years? Yeah, so mine's probably going to be a little bit different if

Starting point is 00:43:04 I'm making some assumptions here. But I would probably put a quarter of it into Bitcoin. And we talked about this last time on the show, Rob, where we kind of defined Bitcoin is digital real estate. And I find right now that no one's talking about Bitcoin, I think because it's had a big decline. But you have to remember, it had a huge run-up just like everything else when everything was kind of a wash and all this liquidity that was going around. So for example, in early 2020, until now, it's still up about 300%. You know, it peaked around 800%. But it's still up. You know, it's actually still beaten most other asset classes. So if you look at, I have a chart from, You know, last August, that shows that Bitcoin's up to date around 125% versus the S&P at 17%.

Starting point is 00:43:49 The NASDAQ is 6, gold, negative 5, bonds, negative 17, silver, negative 22. So not comparing to real estate, but across other liquid assets that I consider, it's actually done quite well. And I think there's a lot of macro things happening right now that would, you know, create a tailwind for Bitcoin. So I would do that. And then the 40K that's remaining is actually, I'm going to say real estate focus, but farmland is actually still interesting to me. So because of inflation where it is, and with these rentals, and I've been looking at that kind of thing, what I can't really get over is the just amount of interest you're paying

Starting point is 00:44:30 right now on a real estate property. I know you're not married to it. If rates go down, you can refinance. But there are these kind of pools that you can get into on farmland, which, you know, might have different levels of leverage behind it depending on what structure it is, but there's kind of different platforms out there that you can look into to do something like that. And I've had a lot of interest in that lately. Okay.

Starting point is 00:44:52 All right. That's good. All very, very good answers. Bitcoin, the underdog. It's back. I didn't see that coming. Neither did I, but I like it. And I don't disagree.

Starting point is 00:45:01 Henry, what about you? You got a plan carved out for the 50K. I'm going to give you tax-free. Oh, tax-free 50K. Yeah, man. So the caveat there that when you ask the question is for the next five years. So when you said that, my immediate push is I'm going to take that money. And again, right, so I am in a, I guess you would call it a lower cost market.

Starting point is 00:45:27 So I could take that 50K and I could most likely buy two to three houses with that 50K. And so I'm going to buy two to three houses that are going to, they'll most likely cash flow, not a ton, but they will most likely cash flow. But I'm going to hold it for the appreciation because the appreciation in my market, I'm in one of those rare markets where I get cash flow and appreciation. And so I can buy two assets that are going to pay for themselves, plus pay me a little bit of money each month. for owning them and they're going to go up over the next five years if you zoom out. And so if I have to invest for five years, that's where I'm going to put the money. I mean, it's not even a question for me. That's where it's going. I actually, Rob, sorry, I missed that five year point. Can I change my answer slightly? Ooh, you already hit the final button. We'll allow it. We'll allow it.

Starting point is 00:46:26 Well, I'll keep in spirit of the discussion and cover some stock stuff because that'll be, I mean, just more aligned. So of the remaining 40K, I would. probably just be looking for opportunities that come up on a per company basis. So it's, there's some nuance to stock investing. And what's interesting is that even through recessions, what they call good and cheap stocks, right, actually do well. So the, the broadliner stocks, the big tech companies as rates kind of fluctuate, those will continue to struggle in my opinion. But you're going to find really durable, defensible companies out there that will actually perform well. And Berkshire Hathaway, you know, I got to wrap,

Starting point is 00:47:04 Warren Buffett for a second, but great option, I think, during this current environment, and he's got a whole portfolio of these kinds of companies that you might want to look at. So I would probably put something into Berkshire Hathaway, Markell's, very similar, other either critical energy infrastructure, material type stocks. But it has to be kind of on a case-by-case basis, and it has to be the right price. All right. Yeah. Okay. I'm glad you changed your answer. That was very insightful. I'm glad I allowed it. Well, to kind of finish up here, I mean, would anyone here say there is a clear winner as a safer investment?

Starting point is 00:47:43 Did anybody kind of sway their opinion here over the course of the last 45 minutes? Can I jump in and just say, please? The nuance to that question, in my opinion, is what Warren Buffett would say, what's in your circle of competence, right? So for a lot of you guys, real estate is what you know. And I think that is actually, Buffett to represent. to quote them again, says, diversification is for when you don't know what you're doing, right? Which I just love because it's sort of like,

Starting point is 00:48:11 if you know what you're doing, you can go concentrated and you can concentrate heavily. I know a lot about kombucha. So my portfolios I highlighted very concentrated in that one stock. So, but if you look at things like, you know, stocks,

Starting point is 00:48:26 if you don't have the time to commit to studying and researching these business or the interest of doing it, then I can't sit here and be like, like, yeah, that's going to be the least risky because it just depends on the person. And if your circle of competence is real estate, then by all means, go for that. You know, I would say this as something to end on from me. It's that this market or this economy is forcing us all in every investment niche to get back to the basics and the fundamentals. Right. It's not,

Starting point is 00:49:01 you know, two years ago, you, you, could accidentally make money, right, in the stock market or the real estate, because things were on the up. Now, that's not the case. You can really damage yourself. And so when you talk about Circle of Competence, I wholeheartedly agree, right? I have to rely more now on my fundamentals as an investor. My rely more heavily on my underwriting to make sure that I'm very, very confident that I'm buying a good quality deal, right? And I would want to do the same thing if I was investing in the stock market.

Starting point is 00:49:39 If I was going to put a significant amount of money into the stock market, I would want to be as sure as I could be that I was making the best, the best most low risk investment to yield me the best return. And so we've just got to get back to the basics, especially with real estate,

Starting point is 00:49:56 because the market is not forgiving anymore, right? You're going to have, but at the same time, this is the, this is a, you want to buy when things are down, right? Because that gives you the most upside and the long term. And so I agree. I don't know that I can say there is a clear winner between stocks or real estate, but what I can say is you better invest the time to educate yourself on whatever strategy you're going to do and then take the action because it's not, no market is as forgiving as it was two years ago. Yeah. Yeah. I mean, I was going to also ask, is there a clear

Starting point is 00:50:29 winner for building wealth, but I think you both summarize it. It's, you know, play to what you know. And if you're diligent and you study what you know, that's ultimately going to be both the safest investment, but also the best investment for building wealth. So I think we can end it there, fellas. If we want to learn more and connect with you online, Trey, where can people connect with you, or reach out or learn more about Better Booch? Well, if you're stock curious, that's a term I heard for the first time today. Definitely check out the investorspodcast.com. We have a plethora of podcast there. A lot of it pertaining to stock investing and just amazing free courses and some other resources you might want to check out. My podcast is called We Study Billionaires. And there's a lot of content

Starting point is 00:51:15 every week with that. And I'm on Twitter at Trey Lockerby. And then if you're kombucha curious, you can go to Betterbooch.com. Awesome. And for everybody that missed our episode with Trey Lockerby on bigger pockets. That was show 646. I would definitely recommend going to check that out. Henry, where can people find out more about you? Best place to reach me is on Instagram. I am at the Henry Washington on Instagram or you can check out my website at www.henrywashington.com. Okay. Dave, what about you? Well, Henry forgot to mention that he's on an amazing podcast called On the Market that comes out every Monday and Friday. And you should check that out.

Starting point is 00:51:56 out. But if you're looking for me, Instagram is also great. I am at the Data Deli. Okay, awesome. But you can find me at Rob Built on Instagram and on YouTube. And please feel free to leave us a five-star review on the Apple podcast platform wherever you listen to your podcasts. Dave, I skipped you on the final word for building wealth and what's the safest investment. So I'm going to let you close us out with any final thoughts you have for our awesome, awesome audience at home. You got anything? Man, no, I think Henry and Trey did a good job. I think that the, idea of the staying in your sphere of competence or whatever Warren Buffett called it is super

Starting point is 00:52:33 important. But I do encourage people not to like limit themselves and think that there's just one way to invest that, you know, if you do the work to learn enough and can diversify comfortably across asset classes, I think that is wise, whether that's, you know, 97%, 3% like Henry does or, you know, 60, 40 or something else. I think it's sort of admitting that you don't know which one's going to do better, but that both are good is a good way forward and exposing yourself to the risks and rewards of both asset classes. Hey, that was really good, man. I call this the David Green effect. I David Green to you where the guests will say an amazing final thing. And then he's like, hey, Rob, do you have anything to say? And I'm like, oh, no, they said everything already. But you really

Starting point is 00:53:23 close this one out. So thanks everybody at home for listening today. Thanks everybody for joining us, Trey. Henry Dave, always a pleasure. And we'll catch everyone on the next episode of Bigger Pockets. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico content. And Editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter,

Starting point is 00:54:18 please visit www.w.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential,

Starting point is 00:54:36 or other damages arising from a reliance on information presented in this podcast.

BiggerPockets Real Estate Podcast - 758: Real Estate vs. Stocks: Which Will Make YOU More Money in 2023? w/Trey Lockerbie

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.