\n<\/p>\n
Real estate vs. stocks<\/strong><\/a>. Cash flow vs. consistent dividends. Equity vs. price-to-earnings. If you\u2019re reading this right now, chances are that you\u2019re more of a real estate investor than a stock picker. But maybe you\u2019re on the wrong side. Does the passivity of stock investing beat buying properties? <\/strong>Or do things like depreciation, tax write-offs, and the ability to use leverage while having tangible assets take the cake when it comes to the stock vs. real estate debate<\/strong>? And what about investing in 2023 <\/strong>as the economy continues to falter?<\/p>\n We brought on return guest, stock investing expert, and host of We Study Billionaires<\/em><\/a>, <\/em>Trey Lockerbie<\/strong>, to put him head-to-head against some of the most famous names in real estate podcasting. Rob Abasolo<\/strong> emcees this battle of investment strategies<\/strong> as Dave Meyer <\/strong>and Henry Washington <\/strong>bring in the housing heat. And while no physical jabs are thrown, Trey and our real estate investing experts put these two popular asset classes head-to-head to see which is a better bet for today\u2019s investors<\/strong>.<\/p>\n And if you\u2019re trying to scoop up deals at a discount<\/strong>, we touch on whether stocks or real estate are better bets during a recession<\/strong>, which comes out on top, and the risks you MUST know about before investing<\/strong> in either asset class. So, if you\u2019ve got some cash burning a hole in your pocket and don\u2019t know what to do with it, we may have the exact answers you need!<\/p>\n Rob: Dave: Rob: Trey: Rob: Trey: Rob: Henry: Rob: Dave: Rob: Trey: Rob: Dave: Rob: Trey: Rob: Trey: Rob: Trey: Rob: Dave: Rob: Henry: Rob: Dave: Rob: Dave: Rob: Trey: Rob: Dave: Rob: Henry: Rob: Trey: Rob: Trey: Henry: Rob: Dave: Rob: Trey: Dave: Trey: Rob: Dave: Rob: Dave: Rob: Dave: Rob: Henry: Dave: Rob: Trey: Rob: Trey: Rob: Dave: Trey: Rob: Dave: Henry: Rob: Dave: Rob: Trey: Rob: Dave: Rob: Henry: Trey: Rob: Trey: Rob: Trey: Rob: Trey: Henry: Rob: Trey: Rob: Henry: Rob: Dave: Rob: Dave: Rob: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Welcome to the BiggerPockets Podcast, show number 758.<\/p>\n
In real estate, if you don\u2019t have adequate cash flow, then you can become a forced seller, and that\u2019s 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 short-term downturns, then you can absolutely buy real estate in pretty much any business cycle.<\/p>\n
I\u2019m soloing the intro up all by my lonesome today, and today, we get into some really good stuff. We\u2019re going to be getting into real estate versus stocks. Now, I\u2019m going to fill you in on the episode in a little bit, but I wanted to point out a few key highlights that we\u2019re 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\u2019s episode is going to be an awesome panelist lineup, including Dave Meyer, Henry Washington, and we\u2019re even having Trey Lockerbie back on. Before we get into today\u2019s episode, I want to give a quick tip which is if you\u2019re looking to educate yourself and become more savvy in the world of stocks, go listen to Trey Lockerbie\u2019s podcast, We Study Billionaires, available everywhere that you download your podcasts. Oh, and bonus curveball quick tip. Consider investing in bonds. If you listen to the end of the episode, you\u2019ll find out why. Now, let\u2019s get into it.
A recent top-performing article from the BiggerPockets blog is the inspiration for today\u2019s show, Real Estate Versus Stocks. To bring you up to speed, I\u2019m going to read the intro line from this article and to set the tone of today\u2019s conversation. Let\u2019s 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\u2019t mean that we can\u2019t pit stocks and real estate against each other in a classic mortal combat style matchup. Which earns the best return on investment, real estate or stocks? While asking this grandiose question, which investment is safer?
There are a few call-outs 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. Two, running with the mortal combat 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 over time in stocks and real estate, share how to evaluate your risk appetite, and to determine if there\u2019s a clear winner for the safest way to build wealth. Excited to dig in here with our good friends, Dave Meyer, Henry Washington, and today\u2019s guest, Trey Lockerbie. Trey, how are you doing today, man?<\/p>\n
I\u2019m doing great, Rob. Thanks for having me back. I\u2019m excited to\u2026 I\u2019m still a real estate noob, so I\u2019m just excited to represent the stocks, I think, in this discussion. So, I\u2019m excited.<\/p>\n
Well, awesome. Well, for all the listeners that did not listen to our amazing podcast that we did with you a few months back, can you give us a quick 30-second elevator pitch about who you are and your background?<\/p>\n
Sure thing. Yeah. I\u2019m primarily a business owner. I own Better Booch Kombucha, a national kombucha tea company, and that got me really interested in Warren Buffett because he says he\u2019s a better investor because he\u2019s a businessman and a better businessman because he\u2019s an investor. So, I said, \u201cI need to learn how to invest because it\u2019s capital allocation at the end of the day,\u201d 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 really focused on the Warren Buffett and value investing style of investing.<\/p>\n
Well, awesome, man. Well, thanks for being on the show today. You sent me a box of Better Booch, and I can confirm for all the listeners that it is the best kombucha I\u2019ve 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\u2019s real estate or stocks? Henry, I\u2019m going to go to you first here.<\/p>\n
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. My last stock transaction was this past Tuesday where I bought a stock for the sole purpose of the dividend that it\u2019s projected to payout.<\/p>\n
Okay. All right. Dave, what about you?<\/p>\n
I think last week for both. I just have automatic deposits into index funds every two weeks, and I think when one of them went last week. I guess it\u2019s real estate. I mean, it is. I invested in a real-estate-focused lending fund just last week as well.<\/p>\n
Okay. Cool, cool, cool. Trey, what about you?<\/p>\n
Similar to Dave, I have some weekly automated dollar cost averaging system set up, but my more active investment was in late December. I invested in a Warner Bros. Discovery stock. So, AT&T recently let go of Warner Media. It merged it with Discovery. It\u2019s an interesting stock. It was about $9 when I bought it. It\u2019s at about $15 now, so doing all right so far.<\/p>\n
Maybe after the exposure from this podcast, maybe it will be at $15.50, so let\u2019s hold out for that.<\/p>\n
Oh, we could definitely move markets here.<\/p>\n
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?<\/p>\n
Yeah. So it\u2019s interesting because I don\u2019t know if I\u2019m like most of the audience here, but my net worth, if I broke it down, is about 60% in my business that I started because a lot of it is tied up there. My wife and I bought a house. That was our first big real estate investment, so that\u2019s about\u2026 Let\u2019s call it 30%, and then the remaining 10% is broken out, really, with a cash buffer, some Bitcoin, and some stock. So it\u2019s still getting relatively new with the investments beyond, I would call, the fundamentals.<\/p>\n
Yeah, and actually, you mentioned this. I know you\u2019re very involved in the stock side of things, but you mentioned dollar cost averaging. 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\u2019s episode.<\/p>\n
Yeah. It\u2019s a fancy word for basically automating investments. So you want to basically just put money passively into, let\u2019s say, an ETF, or you could even do Bitcoin. You can do all kinds of stuff with this, and the idea is that you\u2019re agnostic to the price at the time and the belief that the price will appreciate over a longer period of time. So, let\u2019s say, the stock market. There\u2019s interesting studies that show with over a year, it\u2019s a little bit more unpredictable, but within 20 years, it\u2019s almost\u2026 I think it\u2019s actually around 100% guaranteed that you will have made money. Right? 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\u2019re going to capture a lot of the opportunities that come to you just through the price appreciation or depreciation.<\/p>\n
So it\u2019s like the concept of consistently investing. Sometimes you\u2019re going to buy when it\u2019s high, sometimes you\u2019re going to buy when it\u2019s low, but it averages out to basically make you money in the end, right?<\/p>\n
Well said. Exactly right.<\/p>\n
Awesome, awesome. Dave, what about you, man? Where do you fall on the real estate slider versus stocks? How diversified are you in all of those?<\/p>\n
I guess fairly diversified just probably in the opposite of most people. I\u2019d 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.<\/p>\n
Okay. All right. Cool. Henry, what about you?<\/p>\n
Yeah. I would still define myself from a percentage perspective as stock curious, right? I\u2019m fully immersed in real estate, and I just took a look. About 3% of my net worth is invested in the stock market. So everything else is real estate.<\/p>\n
Yeah. I\u2019m probably in the 5% to 10% area. I mean, honestly, it could be three, but there\u2019s a lot to go over today. So, Dave, I actually want to turn it over to you to give us the big picture here, right? Some of the historical data over the last 45 years because you\u2019re much smarter than me and can say it a lot more succinctly than I could. So are you going to share some of that?<\/p>\n
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\u2026 I feel like it\u2019s one of those things like reading nutritional information. Every study contradicts the other one. It\u2019s like if you read, and try and figure out if eggs are good for you or bad for you, you just get completely contradictory information. This is 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 S&P 500, which is just a broad set of stocks, returned about 11.5%. Then, when it comes to real estate, it\u2019s just harder to evaluate. It\u2019s relatively easy to measure the returns on real estate if you only look at price appreciation, but as anyone who invests in real estate know, there are also other ways that you earn returns such as loan paydown and cash flow.
When you factor those things in, some studies show that they\u2019re about at par with the stock market. Some show that they perform better, and that\u2019s mostly when it comes to residential real estate. When it comes to commercial real estate, I\u2019ve seen some data that shows that\u2026 REITs, for example. Some REIT studies show that they come in at around 9%, so that would be lower than the S&P. While others show that REITs have return around 11.6%, which is about at par with the S&P. So it really is all over the place, but there are a few themes that do seem to be consistent from study to study, and that\u2019s that.
In any given year, the stock market has much higher potential and more risk. So it\u2019s 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\u2019s one thing, and the second thing is that over time, as Trey just alluded to, both asset classes go up over time. 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\u2019re both good, but there is no conclusive answer which is I guess why we\u2019re here on this podcast debating which one is best.<\/p>\n
Yes. That\u2019s honestly very\u2026 I think you\u2019re right, the way you said about nutrition and how there\u2019s always a study that contradicts it. I feel that way too when I get into some of the numbers. I\u2019m curious, and you may not have the answer off the top of your head, but you mentioned that when you look at debt paydown 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.<\/p>\n
So that study is one I did myself, and because I was curious, Trey cited a stat that over 20 years, it\u2019s\u2026 Historically, if you own stock for 20 years, you don\u2019t lose money, and I was curious because I\u2019m weird like what the stat was for real estate. So I did this whole analysis, but it did not include the tax benefits. It just looked at how inflation adjusted housing prices, cash flow, and loan paydown contributed to your probability of a loss in real estate. Spoiler. If you want to point for real estate, the probability of a loss in a given year in real estate is lower than stock according to my personal, but not academic, not peer-reviewed study.<\/p>\n
Hey, anecdotal evidence counts for me, Dave, in my heart. So I know that there are some risks in both asset classes, right? Whether one is more volatile or not, that\u2019s obviously what we\u2019re going to get into. So what is less risky, real estate or stocks in today\u2019s general economic climate? Trey, I know that you\u2026 Obviously, you\u2019re coming more from the stock background, and this is what you study. So I\u2019d like to start with you and get your point of view on this.<\/p>\n
Yeah. So the article we\u2019re referencing talks a lot about how volatility is often described or what defines risk, and I think that\u2019s what you\u2019d find the most academia. But just through my studies and people I\u2019ve 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, \u201cWill this thing go to zero or not?\u201d If you look at it that way, you could make an argument that real estate is probably the less risky asset class because it\u2019s hard for a home to go to zero, unless maybe it burns down without insurance or something. But with stocks, that\u2019s a little bit more common. Now, if you are applying it to, say, an index where you\u2019re owning the top 500 companies in the US, and those companies are constantly changing out for the next best thing as some fall away, it\u2019s hard for that to go to zero, unless there\u2019s some apocalyptic event. Right? So it\u2019s interesting because if you look at it that way, it might net out even, but I would just say because of the nuance with individual stock investing, you could argue that real estate might actually be better.<\/p>\n
Yeah, yeah. I mean, even in your example of the house burning down, for example, you still technically have the land and 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? I know you mentioned that real estate typically is going to be a little less volatile, but yeah, curious to hear your thoughts.<\/p>\n
I think what Trey 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\u2019s advocate for a second, if you want to consider the risk of underperformance or opportunity cost as well, then I think there\u2019s 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 under underperformance by only investing in real estate, which is why, personally, I think diversification is important.<\/p>\n
Sure, sure. Henry, you mentioned you\u2019re 3% into the side of stocks and mostly into real estate, so does this have any\u2026 Is this because you feel real estate is less risky, or is it just because you like real estate more?<\/p>\n
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\u2026 Yeah. I think we can talk back and forth all day about what\u2019s more risky or less risky, but the truth of the matter is it\u2019s what strategy are you employing in either, and how risky is that strategy because yeah, real estate is typically not going to go to zero, and the stock can, but you can buy something, and then get upside down. Right? Nobody wants that either, and that can happen with stocks or real estate, depending on where you buy and what\u2019s going on in the market where you\u2019re buying, and the same thing with the stock.
So, for me, it\u2019s 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 haven\u2019t researched a plethora of companies or a plethora of index funds even, my stock strategy is very, very, very high-level and not very risky because I only invest for long-term with the exception of the dividend investment I made recently. That\u2019s more of a test, but that for me. Again, I invested in that dividend stock, A, as a test, and B, if I lost that money, I\u2019m not risking more than I\u2019m willing to lose there. Where with real estate, it\u2019s a much more educated investment for me.<\/p>\n
Yeah, that makes sense. Actually, you brought up a good point that I\u2019m going to backtrack a little bit because I did say that real estate doesn\u2019t go to zero based on what you were talking about, Trey, but Henry is absolutely right. You could be upside down on an investment. you could flip a home and sell it at a loss. In that instance, it didn\u2019t go to zero or in the negatives. Right? So it\u2019s very similar in that you lose money on the sale. If you were to hold onto that piece of property, probably over time in 30 years, you\u2019re not going to be upside-down, and I think it\u2019s probably similar with stocks, too. Right? You lose money on the sale, unless the company itself goes underwater, but I understand what you\u2019re saying, Henry. There\u2019s so much out there, and we know real estate. For me, 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?<\/p>\n
Yeah. So it\u2019s probably what you would expect to some degree because lots of people categorize things as micro-cap, small-cap, mid-cap, large-cap when you\u2019re talking about stocks, and those are just the ranges of revenues. So micro-cap is $50 to $300 million, and on the other spectrum, large-cap, you\u2019re talking about $2 trillion or so if you\u2019re talking about Microsoft, Google, that kind of thing. So it\u2019s a very large spectrum, and I would say that there is actually more risk when you\u2019re looking at things like micro-caps because they\u2019re just subject to different factors. For example, liquidity or just\u2026 They\u2019re 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\u2019t know, 90% search or whatever. So they\u2019re still trying to grow, and I would say those are more risky for that reason, and they also tend to have more volatility if you\u2019re looking at it in that way as well.<\/p>\n
Yeah, yeah. Actually, speaking in this world of the different equities and everything, Dave and Henry\u2026 Actually, Trey, you may need to help out here, but what I\u2019d like to do is actually line up the different equity types to the different housing types. So find the respective spirit animal of each. So I\u2019ll just kick us off to solidify this, but imagine a mutual fund is like a multi-family. Those two would come together.<\/p>\n
Yeah, and I would say that micro-caps, as I highlighted there, would be like house-hacking or maybe flipping your first Airbnb, something like that.<\/p>\n
Yeah. I would say a dividend stock is investing in a single family home for the cash flow because you\u2019re buying something in hopes that it appreciates, but really, what you\u2019re wanting is that monthly or quarterly cash flow.<\/p>\n
What about commercial? Commercial, commercial real estate. How would we pit that up, or what spirit animal we\u2019d choose on the stock side?<\/p>\n
It depends what type of commercial. If you\u2019re talking about office commercial, right now, that\u2019s the Silicon Valley Bank of real estate. They\u2019re both just nose-diving right now. If you\u2019re talking about retail that\u2019s like tech, it\u2019s not doing great, but it will probably do okay in the long run, or if you\u2019re talking about multi-family, I don\u2019t know what you would compare that to, but it\u2019s doing okay right now, but there are some concerns. Trey, I don\u2019t know if there\u2019s any type of stock that you would compare that to.<\/p>\n
What about penny stocks? Are those the government foreclosures like the HUDs of real estate?<\/p>\n
Yeah. A lot of times, micro-caps are penny stocks. So I was thinking about that house-hacking thing where you\u2019re just getting that extra income, but it\u2019s just maybe a little bit more volatile because you have a roommate, and who knows how that\u2019s going to go?<\/p>\n
I have one other way that I think about this is that in stock world, you talk about blue chip stocks, or value stocks, or growth stocks, and I look at certain geographic locations in the same way. There are certain real estate markets that are extremely predictable and don\u2019t have the best returns, but they\u2019re relatively low-risk. I primarily invest in Denver. I think of something like that. It\u2019s no longer this great cash-flowing market, but it\u2019s still going to offer you pretty solid returns. Then, there are markets that are up and coming. There are the value ones that, I would say, where Henry invests in Northwest Arkansas. It\u2019s probably a value opportunity that has some upside. So I think it\u2019s not just the asset class within real estate, but also the geographic locations that can be\u2026 People can think about geographic locations and assess risk based on where you\u2019re physically investing.<\/p>\n
I think that\u2019s a great point actually because something that sold me on buying our first home was looking at the data around the 2008 GFC. I live in California, specifically Los Angeles, and there was this fact around\u2026 Yeah, 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\u2019s ridiculous, the decline was only around 25%, so 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.<\/p>\n
Yeah, and I can\u2019t blame them. I\u2019d like to move in to a bigger question here since we\u2019re on the topic which is, what has produced better in times like this? Would it be pre-recession or recessionary times that have yielded the best returns? This is a question for everybody, but if you need me to choose somebody, then I\u2019ll choose you first, Dave Meyer.<\/p>\n
Oh, god. So the question is like, during economic uncertainty like we\u2019re in right now, which asset class is better?<\/p>\n
No. I think it\u2019s just from a return standpoint of each asset class, do you typically see better returns in pre-recession times or in recessionary times?<\/p>\n
Oh, I think we\u2019re in the worst part. So I think if you think about the business cycle, people call them different things, but I would say that we\u2019re in what\u2019s known as, at least in real estate, the peak phase where things are still priced really high or people have expectations of high prices, but they\u2019re unaffordable, and so I think we\u2019re still\u2026 Prices haven\u2019t bottomed out, and so I think this is a dangerous time to buy real estate, unless you know what you\u2019re doing. You don\u2019t want to \u201ccatch the falling knife\u201d because I personally believe prices are going to continue to go down this year. That said, I participated in a syndication where the operator bought it for 30% below peak value value, and I\u2019m feeling pretty good about that. So it\u2019s not like you can\u2019t buy things right now. You just do need to be careful.
I think if you could theoretically time the bottom of the market, which you can\u2019t, that would be a better time to buy, but I don\u2019t think we\u2019ve hit bottom yet. Unfortunately, it\u2019s impossible to time because we won\u2019t know when we hit bottom until after that has already happened. So I caution people against trying to time the market, and instead, trying to think further ahead and to buy undercurrent market value if you, like I do, believe that prices are going to go down. I think Trey 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 at least a couple of quarters now.<\/p>\n
But is there a similar concept? I mean, if we talk about stocks which\u2026 We went over the idea of dollar cost averaging with stocks. Wouldn\u2019t that same theory technically apply in real estate? If you\u2019re 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\u2019t look at it that way because the stakes are a lot higher and you\u2019re spending a lot more on a house than you might on an individual stock?<\/p>\n
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 hitch yourself to that average over time, you\u2019re going to do well, and that is true both in real estate and in the stock market.<\/p>\n
Yeah. Dave, sorry. Henry, were you going to say something?<\/p>\n
Yeah. Dave\u2019s train of thought I think just triggered my train of thought to say I think you can get\u2026 I don\u2019t 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, so I can get a loan and buy large amounts of real estate 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\u2019re 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.<\/p>\n
That\u2019s a great point Henry just made that when you buy a stock, traditionally, you\u2019re not leveraged. So, once you own it, you do have an easier time holding onto it through any market downturns or volatility. In real estate, if you don\u2019t have adequate cash flow, then you can become a forced seller, and that\u2019s 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 short-term downturns, then you can absolutely buy real estate in pretty much any business cycle.<\/p>\n
Yeah. Okay. What about you, Trey? What do you think?<\/p>\n
Well, because we were highlighting the volatility of real estate, I\u2019m 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\u2019s harder to get in and out in the stock market, but I wanted to provide some interesting facts around the stock market when it comes to recessions. This is interesting because the stock market, to your point, Dave, has been down pretty significantly over the last year, but there\u2019s still some debate around whether or not we\u2019re in a recession, and so that\u2019s unique. Most of the time, there\u2019s a recession, the stock market decline shortly thereafter, but what\u2019s interesting about the stock market is that most recessions only last about a year. In fact, three of the 11 recessions since 1950 went on for more than one year. So it\u2019s 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\u2019ve had recessions, 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\u2019s only been a couple of recent recessions that have been unique. For example, 2008 was by far the deepest and worst 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\u2019s interesting to weigh out the pros and cons in that way knowing that, \u201cHey, we\u2019re going into a recession. Stocks will probably naturally not fare too well because the recession is going to affect the underlying earnings of those companies.\u201d But it seems like over the long run, you\u2019ve got a lot of other momentum built-in. For example, 401(k)s, pension plans, all these things that are actually act or passively flowing money into the stock market just through weekly or biweekly 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.<\/p>\n
Yeah. That is interesting because as you were taking us through that journey, I was like, \u201cWell, it honestly seems ideal that the stock market is really low,\u201d because if you\u2019re an investor, you\u2019re like, \u201cOkay. Great. Everything is cheap. I\u2019m going to buy it.\u201d But I think the flip side of that is you really don\u2019t necessarily want that for a relatively large portion of the population that relies on dividends, and retirement accounts, and everything because that\u2019s typically the stuff that\u2019s really taking a hit.<\/p>\n
Yeah. Exactly. It\u2019s important. I think everyone understands this idea, but price is not value. Right? So there\u2019s a lot of these companies that may have deserved to have a price correction, but there\u2019s 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 dot-com bubble, Amazon\u2019s price went down 90-something percent. I think it was like 96%. Obviously, the fundamentals of that company were still strong and improving every single day even throughout that period of time. So you\u2019d ideally want to find companies like that who are affected maybe by the price, but to your advantage. That\u2019s 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.<\/p>\n
Well, I want to move into another niche within all of this, and so Dave and Trey, I\u2019ll toss it to you guys on this as well. But given the current conditions of the economy and what we\u2019re seeing in 2023, do bonds offer any better cash flow than indexes, or REITs, or anything like that?<\/p>\n
Okay. So I brought this up because I think it\u2019s interesting to see that a lot of commercial real estate assets, which are easier to track, like if you look at multi-family, a lot of them are trading at cap rates which are below bond yields. So that\u2019s basically saying that you would buy a multi-family asset to earn 3% or 4% 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 multi-family investing. I mean, multi-family investing is great, I do it, but if you\u2019re asking which has a better chance of giving you that cash flow, I would trust the US government to pay back their bonds than I would a multi-family operator, especially right now. So I just think it\u2019s interesting to see that.
With rising interest rates, there is this silver lining, which is that \u201crisk-free assets\u201d which no investment is\u2026 or excuse me, \u201crisk-free investments,\u201d and there\u2019s no such thing as a real risk-free investment, but they call bonds or savings accounts risk-free because they\u2019re so low-risk. They\u2019re at 4% right now, and so you have to ask yourself if you\u2019re, for example, a commercial real estate investor, \u201cIs 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?\u201d So I just think that\u2019s an interesting dynamic in the market. I\u2019m curious what Henry and Trey think about that, and Rob, you as well.<\/p>\n
Yeah. it\u2019s an interesting time because for the last decade, to Dave\u2019s 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\u2019ve mentioned Silicon Valley Bank. I mean, their fault was having all this money from depositors, putting it into treasuries at 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\u2019t think people were really thinking about until it occurred, but now everyone is becoming aware to that actual risk.
So there is some risk, but today\u2019s point, we\u2019re 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. At that point, you have a really good opportunity because you\u2019re getting that more of a risk-free rate because the odds of rates continuing to go up from here, I think, are actually lower because of inflation decreasing. If they do go lower, then the bond you\u2019re actually holding will appreciate as well. So not only are you getting that 5%, but you\u2019re going to get some price appreciation from it.
So I find myself even surprised to say this and be pro-bonds after the last decade we\u2019ve just had, but I actually think that if you\u2019re only needing to have something like a 4% or 5% right now, and you really want low risk, it\u2019s probably a good option. Then, furthermore, I would go as far to say go check out Vanguard or some other options that do these ETFs where it\u2019s very liquid. You can get in and out of them. You don\u2019t have to ladder your own bond portfolio to make this happen. So there\u2019s options like that out there.<\/p>\n
Totally. Who would have thought on BiggerPockets, we\u2019re like, \u201cBonds? Maybe. Actually, it might make sense?\u201d<\/p>\n
I know. I just want to caveat that. I\u2019m saying like commercial real estate if you\u2019re looking at a REIT, for example, or buying a really low-cap multi-family unit. I\u2019m not talking about a lot of the strategies we talk about on BiggerPockets like value add or buying a small multi-family or even single family. I\u2019m just talking about commercial assets.<\/p>\n
I don\u2019t know though, Dave, because if you think about\u2026 We talk about a lot of new investors are struggling to find deals, that cash flow, or hit the 1% rule. Right? So I bet you find a lot of newer investors in the market right now running numbers on deals, and they\u2019re seeing 4%, 5%, 3% cash-on-cash return deals even in the single family space. 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 the tax benefits and the appreciation over time that is also going to be a benefit to you, but way less risk, so it\u2019s like, \u201cWhat\u2019s more important to you?\u201d So it\u2019s a weird time.<\/p>\n
Yeah, yeah. I\u2019m sure a lot of this comes down to what your overall risk profile is. So if you don\u2019t mind, Dave, do you think you could help people understand their risk profile, and maybe let\u2019s just start off with what risk profile even is?<\/p>\n
Sure. Yeah. I just encourage people to think about\u2026 Now, I\u2019m sure this happens to all three of you. People ask you for advice about what they should be investing in. It\u2019s really hard to answer that question, unless what type of risk the person is comfortable with. So when I talk to people about risk, I generally say, \u201cThere\u2019s three things that you should be thinking about.\u201d The first is your overall comfort with risk like, \u201cHow comfortable are you risking money in the service of making more money?\u201d People often stop at that. Just like, \u201cHow comfortable are you with risk in general?\u201d But there there\u2019s more to it than that.
I think the second thing you need to think about is your risk capacity. So some people are really tolerant of risk and comfortable with it, but they don\u2019t have the capacity to do it. Maybe they only have $20,000 in an emergency fund, but they\u2019re super comfortable with risk. I wouldn\u2019t 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\u2019t risk all of your money. So I think you have to think about like even if you\u2019re comfortable with risk, are you in a good position to take risk and to absorb any potential losses?
Then, the last thing, I think, almost everyone overlooks is your timeline like, \u201cAre you investing for the next three years, the next five years, or the next 30 years?\u201d because I think that makes a really big difference in what type of assets you should be looking at. If you\u2019re investing for the next six months, maybe you should buy bonds. I don\u2019t know, but that\u2019s probably a pretty good bet. If you\u2019re 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. Unfortunately, there\u2019s no objective way to measure your own risk tolerance. There are all these subjective things, and there are a lot of really good websites that you can go to and take some tests, but I encourage people, especially in this type of market, because it is riskier than it was, let\u2019s say, in 2014 to really think about what type of risk you\u2019re willing to take, what capacity risk you\u2019re willing to take, and what the time horizon is for your portfolio.<\/p>\n
Actually, that leads me to what I want to end with. We\u2019ll call this the final game of today\u2019s episode, which is thinking about today\u2019s current conditions. If you had $50,000 available, if I just handed each of you $50,000 in a briefcase, it would be an underwhelming briefcase because\u2026 Have you ever seen $50,000 in person? It\u2019s 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?<\/p>\n
Yeah. So mine is probably going to be a little bit different if I\u2019m making some assumptions here, but I would probably put a quarter of it into Bitcoin. We talked about this last time on the show, Rob, where we defined Bitcoin as digital real estate. I find right now that no one is talking about Bitcoin I think because it\u2019s had a big decline, but you have to remember, it had a huge run-up just like everything else when everything was a wash and all this liquidity that was going around. So, for example, in early 2020 till now, it\u2019s still up about 300%. It peaked around 800%, but it\u2019s still up. It\u2019s actually still beaten most other asset classes. So if you look at\u2026 I have a chart from last August that shows that Bitcoin is up, to date, around 125% versus the S&P at 17%, the NASDAQ at 6%. Gold, -5%. Bonds, -17%. Silver, -22%. So not comparing to real estate, but across other liquid assets that I consider, it\u2019s actually done quite well, and I think there\u2019s a lot of macro things happening right now that would create a tailwind for Bitcoin.
So I would do that, and then the $40K that\u2019s remaining is, actually, I\u2019m going to say, real-estate-focused, but farmland is actually still interesting to me because of inflation, where it is and with these rentals, and I\u2019ve been looking at that kind of thing. What I can\u2019t really get over is the just amount of interest you\u2019re paying right now on a real estate property. I know you\u2019re not married to it. Right? If rates go down, we can refinance, but there are these pools that you can get into on farmland which might have different levels of leverage behind it depending on what structure it is, but there\u2019s different platforms out there that you can look into to do something like that, and I\u2019ve had a lot of interest in that lately.<\/p>\n
Okay. All right. That\u2019s good. All very, very good answers. Bitcoin, the underdog. It\u2019s back.<\/p>\n
Oh, I didn\u2019t see that coming.<\/p>\n
Neither did I, but I like it, and I don\u2019t disagree. Henry, what about you? You got a plan carved out for the $50K I\u2019m going to give you tax-free?<\/p>\n
Oh, tax-free, $50K. Yeah, man. So the caveat there when you asked the question is for the next five years. So when you said that, my immediate push is I\u2019m going to take that money, and again, right? So I am in a\u2026 I guess you would call it a lower cost market. So I could take that $50K, and I could most likely buy two to three houses with that $50K. So I\u2019m going to buy two to three houses that are going to\u2026 They\u2019ll most likely cash flow, not a ton, but they will most likely cash flow, but I\u2019m going to hold it for the appreciation because the appreciation in my market\u2026 I\u2019m 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\u2019re going to go up over the next five years if you zoom out. So if I have to invest for five years, that\u2019s where I\u2019m going to put the money. I mean, that\u2019s not even a question for me. That\u2019s where it\u2019s going.<\/p>\n
Rob, sorry. I missed that five-year point. Can I change my answer slightly?<\/p>\n
Ooh, you already hit the final button just a bit, but we\u2019ll allow it. We\u2019ll allow it.<\/p>\n
Well, I\u2019ll keep in spirit of the discussion and cover some stock stuff because that will 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 there\u2019s some nuance to stock investing, and what\u2019s interesting is that even through recessions, what they call good and cheap stocks actually do well. So the broad liner stocks, the big tech companies, as rates fluctuate, those will continue to struggle in my opinion, but you\u2019re going to find really durable, defensible companies out there that will actually perform well. Berkshire Hathaway. I got to rep Warren Buffett for a second, but great option I think during this current environment, and he\u2019s 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. Markel is very similar. Other either critical energy infrastructure, material type stocks, but it has to be on a case-by-case basis, and it has to be the right price.<\/p>\n
All right. All right. Yeah. Okay. I\u2019m glad you changed your answer. That was very insightful. I\u2019m glad I allowed it. Well, to finish up here, I mean, would anyone here say there is a clear winner as a safer investment? Did anybody sway their opinion here over the course of the last 45 minutes?<\/p>\n
Can I jump in and just say\u2026<\/p>\n
Please.<\/p>\n
The nuance to that question, in my opinion, is what Warren Buffett would say, \u201cWhat\u2019s in your circle of competence?\u201d Right? So, for a lot of you guys, real estate is what you know, and I think that is\u2026 Actually, Buffett, to quote him again, says, \u201cDiversification is for when you don\u2019t know what you\u2019re doing,\u201d which I just love because it\u2019s like if you know what you\u2019re doing, you can go concentrate it. You can concentrate heavily. I know a lot about kombucha, so my portfolios, as I highlighted, very concentrated in that one stock. But if you look at things like stocks, if you don\u2019t have the time to commit to studying and researching this business or the interest of doing it, then I can\u2019t sit here and be like, \u201cYeah, that\u2019s going to be the least risky,\u201d because it just depends on the person. If your circle of competence is real estate, then by all means, go for that.<\/p>\n
I would say this as something to end on for me. It\u2019s that this market or this economy is forcing us all in every investment niche to get back to the basics and the fundamentals. Right? Two years ago, you could accidentally make money in the stock market or in the real estate because things were on the up. Now, that\u2019s 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, rely more heavily on my underwriting to make sure that I\u2019m very, very confident that I\u2019m buying a good quality deal. Right? I would want to do the same thing if I was investing in the stock market. 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, most low-risk investment to yield me the best return.
So we\u2019ve just got to get back to the basics, especially with real estate because the market is not forgiving anymore. Right? You\u2019re going to have\u2026 but at the same time, you want to buy when things are down because that gives you the most upside in the long-term, and so I agree. I don\u2019t know that I can say there\u2019s 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\u2019re going to do, and then take the action because no market is as forgiving as it was two years ago.<\/p>\n
Yeah, yeah. I mean, I was going to also ask, is there a clear winner for building wealth? But I think you both summarized it. Play to what you know, and if you\u2019re diligent and you study what you know, that\u2019s 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?<\/p>\n
Well, if you\u2019re stock curious, that\u2019s a term I heard for the first time today, definitely check out theinvestorspodcast.com. We have a plethora of podcasts 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\u2019s a lot of content every week with that, and I\u2019m on Twitter, @treylockerbie. Then, if you\u2019re kombucha curious, you can go to betterbooch.com.<\/p>\n
Awesome. For everybody that missed our episode with Trey Lockerbie on BiggerPockets, that was show 646. I would definitely recommend going to check that out. Henry, where can people find out more about you?<\/p>\n
Best place to reach me is on Instagram. I\u2019m @thehenrywashington on Instagram, or you can check out my website at www.henrywashington.com.<\/p>\n
Okay. Dave, what about you?<\/p>\n
Well, Henry forgot to mention that he\u2019s on an amazing podcast called On The Market that comes out every Monday and Friday, and you should check that out. But if you\u2019re looking for me, Instagram is also great. I\u2019m @thedatadeli.<\/p>\n
Okay. Awesome. You can find me, @robbuilt, on Instagram and on YouTube. Please feel free to leave us a five-star review on the Apple Podcasts platform, wherever you listen to your podcasts. Dave, I skipped you on the final word for building wealth and what\u2019s the safest investment, so I\u2019m going to let you close us out with any final thoughts you have for our awesome, awesome audience at home. You got anything?<\/p>\n
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 important, but I do encourage people not to limit themselves and think that there\u2019s just one way to invest. If you do the work to learn enough and can diversify comfortably across asset classes, I think that is wise whether that\u2019s 97%, 3% like Henry does, or 60%, 40% or something else. I think it\u2019s admitting that you don\u2019t know which one is going to do better, but that both are good is a good way forward in exposing yourself to the risks and rewards of both asset classes.<\/p>\n
Hey, that was really good, man. I call this the David Green effect. I David-Greened you where the guest will say an amazing final thing, then he\u2019s like, \u201cHey, Rob, do you have anything to say?\u201d and I\u2019m like, \u201cUh, no, they said everything already,\u201d but you really closed this one out. So thanks everybody at home for listening today. Thanks everybody for joining us. Trey, Henry, Dave, always a pleasure, and we\u2019ll catch everyone on the next episode of BiggerPockets.<\/p>\n