Motley Fool Money - What Real Estate and Stock Investors Have In Common

Episode Date: January 28, 2024

Owning companies can help you build wealth. So can real estate. Dave Meyer is the VP of Growth and Analytics at BiggerPockets and the author of “Start with Strategy: Craft Your Personal Real Estate Portfolio for Lasting Financial Freedom.” Deidre Woollard caught up with Meyer to discuss: - Creating a vision for your investing plan. - “The HGTV disease.” - Risk mitigation strategies for real estate investors. - A common way that real estate investors start out. Host: Deidre Woollard Guest: Dave Meyer Producer: Ricky Mulvey Engineers: Dan Boyd, Chace Przylepa Learn more about your ad choices. Visit megaphone.fm/adchoices

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A big part of the book is basically drawing out a business plan for yourself for real estate investing. And whether you're investing in stocks, real estate, whatever, I encourage you to do that to think about, you know, resource allocation, risk, goals, vision, what your values are, what your mission statement is. Doing those exercises to me have, like, really changed the way I invest. But I think more importantly, they've sort of changed the way I operate my life on a day-to-day basis. I'm Mary Long and that's Dave Meyer, Vice President of Growth and Analytics at Bigger Pockets and a returning guest on Motley Fool Money. Peter Willard caught up with him to talk about his new book, Start with Strategy. They discuss the data on how rental properties can help investors build wealth, the risks of diversifying in different markets, and how real estate investors think about their cash position. I've read some of your books before.

You've written a few of them, but this one feels like more of a true. A to Z guide for me. And one of the things I really loved is you started the book with this idea of vision. And I feel like we don't necessarily talk about vision other than like we want to make money. But whether you're investing in real estate or stocks or anything else, vision, you know, it's important. What does it mean to have a vision for your investing? Well, I think with most goals or problems that you're trying to solve in your life, you want to start with an end in mind to have an idea of what you're actually trying to accomplish. all the work that you're putting into something, what is that actually going to get you at the end

of the day? I think that's particularly true in investing and in real estate investing, because unlike in purchasing equities or bonds, like you can't just open an app and do it. You know, real estate investing is a bit more entrepreneurship. And so it's really important for people to understand what they're trying to accomplish because only then can you sort of back into the right tactics and the right strategies that work for you. And I think it's also super important because people's idea of wealthy, like you said, could be vastly different. Some people are investing just to move up their retirement date by 10 years or five years. Some people want to be tycoons. And where you fall on that spectrum will really impact the decisions that you should be making about your real estate portfolio

and your investing strategy altogether. Yeah, I think that's a really important point because it's you have to know what when you want the money to come in, essentially. And also not everybody does have the same goals. And your goals may be more modest than somebody else's. And I think that's okay. I think sometimes in both real estate investing industry and in stock investing, there's so much focus on wealth acquisition without the idea of what the wealth is for. And that's really what we're all here for.

And, you know, there's so many points in the book that I feel are applicable to all kinds of investors. And one of the ones that I really loved in this book particularly is the idea that you keep your whole portfolio in mind all along the way. So you're balancing your risk and return, not just from this property or this stock, but really all the way through as a whole. So easy to start out with when you've got one property or just a small portfolio of stocks. Harder as a portfolio gains complexity. So you've got the vision and then you sort of have to build in the portfolio. How do those two work together? Yeah, that's a great question. And I think, you know, when you meet with a financial planner,

a advisor, for example, and you mostly invest in equities, this is a question that comes up. People talk about diversification a lot. They talk about, you know, what your time horizon is. And for one reason or another in real estate, that just doesn't seem to be a topic that's discussed a lot. People talk about just buying deals and buying deals. And too often I've found that that's done without real consideration to risk tolerance and to the different types of income and wealth that real estate investing can help you obtain. Unlike some other investments, real estate can earn your cash flow. It can have huge capital gains in appreciation. It also works by paying down your loan and there's tax benefits. And to each investor, they're going to value those

benefits differently. And so I think it's really important to understand, start by understanding the broadest spectrum of ways that you can invest in real estate and the various benefits that different tactics enjoy. And then matching those up with your vision to make sure that you're buying the right types of properties and running your business in a way that is actually moving you towards your vision and not just sort of buying deals for the sake of them and to increase your unit account, which is something that definitely happens in this industry. Another thing I think about with stock investing too and with real estate investing as well is hold time. And it's not that every investment works well if you hold it long enough,

but it's kind of close because you did an analysis and it showed if you bought and held just about any rental property for 11 years, any time within the last 50 years, there was a close to zero chance you'd lose money. And I love that you brought that analysis into the book because simple to understand, yet this is hard to practice. Life gets in the way. So you've talked to a lot of investors. What do they tell you is the biggest challenge in those long-term real estate holds? I think the challenge that most people have is maintaining proper liquidity and cash flow. When you look at this spectrum of assets that you can invest in, real estate is probably in the middle or more towards the less liquid side of the spectrum,

you know, and liquidity for everyone listening. I consider, you know, stocks and bonds fairly liquid. Cash is obviously liquid. Real estate, it's harder to sell than those types of things. Not as quite as hard as a different type of business or collectibles or anything like that. But I think it's really important for people to create sort of a defensive posture around a lot of long-term holds. to make sure that they can choose the right time to sell. Because like the analysis shows, there are certainly,

there is certainly variance in the housing market. Prices go up. They go down roughly once out of every seven or eight years over the last hundred years. And if you don't sell in those one out of seven years, then you're probably going to do pretty well. And the only reason you might sell during those adverse conditions is if you don't have enough cash flow or you don't have enough cash reserves to cover an unforeseen expense.

And so it's important for investors to not overextend themselves and take all of their cash flow and reinvest it quickly. Like you might with dividends, right? You might just take that money and put it right back into the stock market. With real estate, I think it's important to maintain larger, relatively large levels of cash reserves so that if things don't go well, you have these big capital expenses, like a new roof that can cost 25 grand. Like you need to have that money on a cash reserves.

hand, one, to just make sure that the property is livable and safe for your tenants, but of course, also so that you don't have to sell during one of those adverse times. Yeah, I think that's an important point that you made there about. That is, that is the weird things that can happen to a house is sort of the unknown there, whether it's, you know, the roof or the water heater or any of the lovely things that happen when you're on property. It's, you know, it's tough. So, you know, I think one of the things that that kind of ties into that and that you talk about so much in the book is self-knowledge. And I think self-knowledge is really important for investors and honest self-knowledge. So you talk about what you value, your risk tolerance, your skill set, certainly if you want

to repair that roof on your own, which I would not recommend, time horizon, assets, liability. So talk a little bit about the self-inventory and why that's really an important investing step. Well, with real estate, the spectrum of types of investment is really wide. Like, on one example, you could flip a house. That's basically a full-time job. You know, that takes a lot of work. It generates what I call transactional income, which is like ordinary incomes. You're paying full taxes on it.

And it's a very high-risk, high-reward proposition. For some people, that is everything they want and more. It's very exciting. It's fun. You get to see the fruits of your life. labor, I am not one of those people. I have a much lazier investor. I don't like to put that much time into my portfolio. And I have a lower risk tolerance. I'm trying to invest over a long period of time. I still work full time. And so I have cash flow and I can sort of look at this longer time

horizon. And in between those two ends of the spectrums, there's dozens of different ways that you can invest. And one of the most common things I see with real estate investors is they jump into sort of the hottest new strategy or new trend because it is maybe a very profitable way of investing, but it may not align with what you're actually looking for in terms of lifestyle and return. And this goes back to what we talked about earlier, where we need to start with your vision because only once you know what you're trying to accomplish, can this self-inventory guide you towards that end state that you're trying to achieve? And I see this a lot. in real estate investing.

And it's probably the most common advice I give to people is like there is no objective answer about what strategy or tactic is right for real estate investing. It really comes from an understanding of your own personal situation, preferences, risk tolerance, and so on. Yeah, I call it the HDTV disease where people just want to be flippers because it's like, ooh, that looks like a fun job. And it looks great on camera and you don't realize how it's really, really hard. And I think, yeah, they edit out a lot of the challenges and headaches and unforeseen expenses from those shows.

Yeah, yeah. They don't show too many people in the basement dealing with all the things you can find there. And I think, you know, I like what you said there too because it's not, you can also, you can keep your job. A lot of people think of real estate investing as you go all in. And I think the smarter way is as necessarily not to do that. And there's so much more beyond the fix and flip or even the single family rentals. So what are some of those? other options that you think people might not be considering?

One of the more common ways, one of the more beneficial ways of investing in real estate right now that almost no one considers is actually being on the lending side of real estate. It's something I've started doing a little bit over the last few years, mostly through funds. And if you're an accredited investor, those are available to people. But during high interest rate environments, being on the lending side is actually a very profitable way to generate cash flow. This is basically you can own someone's mortgage, for example, or you can rent, lend out money to

flippers using something called hard money, or you can be a private partner. You can sort of put equity into a deal and have someone else do sort of the hard work for you. So I think those are all options that people don't generally consider that much. They personally just think of flipping or owning rentals, which are the most common, I should say, ways of doing it. But there are tactics that work particularly well in these types of markets. Lending is one of them. Rent-by-the-room strategies work well, something called midterm rentals, which is sort of like a short-term rental, but it's kind of like corporate housing. You know, you're providing furnished housing for 30-plus days. So those are all strategies that can work really well, depending on, again,

your risk tolerance and the time that you're willing to put into your portfolio. Yeah, the midterm is something I'm seeing more of, especially as the Airbnb craze that was so big during the pandemic has sort of been abating a bit. And so related to that, a lot of investors, they start with the house hack, which is, of course, where you buy a property, usually a duplex or some other small multifamily and you live in part of it. Really good way to learn. But also, once you're in there, you kind of have to branch in. out. And a lot of people, they don't just choose one plan. And then the book, you talk about operating plans and ways to kind of layer those together. I think that's interesting because a lot of people think you just pick one thing and that's your whole portfolio. Yeah, I recommend a couple

of different scaling strategies. So I think house hacking is an excellent, if not the single, best way to get into real estate investing. And I'm usually pretty hesitant to give people blanket advice like that. But house hacking is that broadly beneficial to people that I do recommend it a lot. But I think that there's one or two different ways that you can scale from owning your first property. In the book, I call them either vertical or horizontal. People call them different things. But for me, what I consider vertical scaling is really becoming a master of your own market. We talk a lot about the national housing market, but anyone who works in real estate knows that the regional differences are far more important than what's going on on a national scale.

And so getting really good at understanding the supply and demand dynamics, demographic trends, government investment, business investment in your market is going to allow you to do a lot of different tactics within that market. So, for example, I have a friend who's a big investor in Seattle. He understands that market so well that he can do any strategy there, short-term rentals, mid-term rentals, commercial deals, rental properties, because he just understands the market so well. So that is a really good way to scale. The other way I recommend is that people get really good at one tactic, and then you can apply it to different regional places across the country.

So, for example, I mostly invest in rental properties, and then I participate in syndications as a passive investor. And because I understand those businesses well, then I can scale them to, from where I started in Colorado to many other places in the country where I invest now. And so that's where I sort of recommend to people is like trying to hold one part of your portfolio constant and not change everything altogether. So I wouldn't go from being a rental property investor in Denver to a flipper in Memphis. It's too much change. You're learning too much. So I would either be a flipper in Denver or I'd be a rental property investor in Memphis

because I could apply some of the skills and knowledge that I learned to this new situation. Because it's important to remember, real estate is entrepreneurship and you are running a business. And so you're basically, if you were going to start in a new market with a new tactic, that's an entirely new business you have to learn. And for some people, that's right, but it is a lot of work. So as you're thinking about that, like, you know this one thing that you're good at and then you move into this is the other one. How do you weight those different risks, especially as you think about the portfolio as a whole?

For me, I try to balance my portfolio across multiple different types of tactics and multiple types of markets, because I think that's the best way to diversify. But I am a pretty passive investor. So I think for a lot of people, most people sort of fall on the more active side of the spectrum. And for them, the risk of investing long distance often outweighs the benefits of going into different markets. And so if you are a more risk-averse person, picking one market and sticking with it is probably the best way to go. I recommend that.

You're not going to really go wrong, like investing in rental properties in one market. That's a low-risk, pretty safe way to invest in real estate. And then the other way I suggest sort of mitigating risk is partnerships. It's super common in real estate to, if you want to move to Memphis to be a flip, like I was going to say, to maybe just be a capital partner on your first deal where you invest with an experience flipper in that market. And often this trips people up, but bigger pockets the company I work for holds a lot of networking events. Most cities have something called Rias,

which are real estate investor meetups that you can go to. And this is a great way, even if you're in your own city, to mitigate risk. Because real estate, like, everyone's done it before. It's a business, but you're not like a startup innovating, you know, changing the world disrupting something, you're following a process that thousands of other people have done before. And so when you can partner with people who know what they're doing and partnerships are very common in real estate, it helps mitigate risk and sort of allows you to scale with a little bit more control. It's important, you know, talk about like vision, everything else and self-knowledge.

It's important to what you bring to the party. And sometimes what you bring to the party can be different. Sometimes sometimes you're bringing the money and sometimes you're bringing the sweat equity or the knowledge or the connections. So knowing what you bring helps you know what you're looking for, I think, in other people. Yeah, that's exactly right. And in the book, I talk about this a bit

that every real estate deal basically needs three resources. You need capital and money. You need time because it's a business and you need certain skills to execute your business plan. And the thing I genuinely love about real estate and I think that draws a lot of people to it is that you don't need all things. three of those. And if you have one of those three resources, you can bring that to the party,

like you said. So, for example, when I got started, I committed a lot of time. I was relatively young and didn't have a lot of money, but I was able to attract partners because I committed the time and the sweat equity to it. Not everyone's going to have access to partnerships like I did, and not everyone's going to have time like I did. But I encourage people to sort of think about it in that framework where it's like every deal needs these things like you need to bring one of them. You may have all three, but you may only want to bring one of them. So what do you want to contribute? What are you willing to contribute to your portfolio, whether it's time, your skills, or your capital? You have to bring one of those three things to get into these deals.

You've been doing this for a while. And, you know, I think no investment, you know, situation is perfect. We all make mistakes. It doesn't matter if you're a stock investor, real estate investor. Everyone has that one. What's what's what's what's one of yours? I think the I've made many mistakes. Luckily, most of my investments have performed well, but within each deal, things always go wrong. I think one of the things I regret most about my portfolio and wish I did differently was outsource a lot of the work earlier. it's very tempting when you get into real estate and you're in a situation like I did where I didn't have a lot of cash on hand to just do everything yourself. You know, try to fix toilets, try to build

staircases, do whatever it takes to save some money. And over time, you learn that that does not save you money. That costs you way more money in the long run, both in terms of your time. And usually you spend a couple hours and then you hire the plumber anyway. So I think that part of the business is, heart is one of the difficult parts of scaling is learning to give up a little bit of control, to give up a little bit of your profit, you know, in the short run to focus more on building that sustainable business over the long run. So that's certainly one. The other thing that I think has been a challenge over the last few years, or last decade, I should say, is because real estate is illiquid, you do generate, you keep, you have a lot of, you have a lot of

lot of money held up in these deals. And it's really important to figure out ways to reallocate that capital into high producing deals. So just as an example, the first deal I did, I built up quite a lot of equity, almost all of my net worth was in there. And I was super proud of that and super excited about that. And then, you know, I learned a little bit more about finance. And a few years later, I was like, this is a terrible use of my money. Like I should have refinanced out of it or sold that deal earlier and redeployed it into different properties. And so I think that's another common challenge with real estate is like you have to manage your portfolio fairly actively, and it's not as easy as going on an app and selling a stock and trading it. You have to sort of be involved

and constantly evaluating how your portfolio is doing and making sure that you're making the best use of your time, your skill, and your capital. The book is called Start with Strategy, but it's really strategy every step of the way and keeping that larger vision in mind as things change. So in stock investing, you know, you look at your portfolio, you reallocate maybe, maybe once a year. Some people do it more often. Do you put those kinds of time resets in your, in your strategy, or how do you look at that? I think for someone who invests like I do, more frequently than annually is important to do it, you know, maybe quarterly is how often I would sit down, look at the financial statements of all my properties, put them into my portfolio tracker.

For people who are just getting started, it's probably not, you know, once a year is probably plenty sufficient if you own one, two, or three properties. But I do think it's sort of this mentality that's important more than the actual reallocation of capital is to just start thinking about ways to improve performance or to better align your portfolio with your vision because, you know, you can just set it and forget it. But real estate is creative. Like, there's all sorts of different things that you can do. There are different ways that you can use your capital. You can buy new properties or you can renovate old properties. You can go into short-term rentals or medium rentals. You can convert a rental property to a meeting-term rental. So there's

all these different things that you can do, and it can be overwhelming. So I think more than quarterly is too much. But once a quarter, just think, like, are there things that I could be doing better to better achieve my long-term goals with the existing resources I have? And that, if you do that quarterly, I'm fairly confident you'll achieve most of your financial goals. And I think so much of that is about treating your investment portfolio as a business and yourself as a business. We are all, we are all in the business of making money to better our lives. Yeah, absolutely. Yeah, I think that's a great way to look at it.

And a big part of the book is basically drawing out a business plan for yourself for real estate investing. And whether you're investing in stocks, real estate, whatever, I encourage you to do that to think about, you know, resource allocation, risk, goals, vision, what your values are, what your mission statement is. doing those exercises to me have like really changed the way I invest. But I think more importantly, they've sort of changed the way I operate my life on a day-to-day basis. So highly recommend it. Well, thank you so much for your time. The book is Start with Strategy. Thank you.

As always, people on the program may have interests in the stocks they talk about. And The Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.