Have you ever wondered what the best way is to invest in real estate? On this episode, we’ll take a deep dive into the various ways investors can take advantage of the real estate market.
Welcome to the podcast, everybody. This is Creating Richer Lives. Creatingricherlives.com is our website. And our telephone number is (210) 526-0057. This show is brought to you by Covenant Lifestyle. Legacy. Philanthropy. Well, I hope you’re having a great week. And this show we’re going to spend some time talking about real estate investing. It’s certainly been very hot coming out of the pandemic. We’re seeing prices of homes going straight up, prices of commercial real estate going straight up. A lot of people are always interested in real estate investing. It seems like I never hear anybody say, “I don’t like real estate.”
Now, over the long term, real estate has done very well. I would argue the stock market has done even better, but I would put real estate in that category of something that has historically been a great investment. However, it does go down from time to time. There are bad times to invest in real estate. There are bad deals and bad ways to invest in real estate. And so I wanted to spend some time today talking about ways to invest in real estate and some things to think about if you’re thinking about doing that. That’s what we’re going to spend most of the podcast talking about today.
Now, when you think about real estate investing, it’s always soon as somebody gets married or they graduate college and they’re going to get that new job, the first thing people say is what? Well, you have to have a rainy day fund and then you need to start saving for your first home. They’re always, “Save for your first home.” Why is that? Do we really need a home? I mean, if you really factor in all the various things that take place to purchase a piece of property… When I say home, I don’t mean necessarily an individual single family home. It could be a condominium, it could be a townhouse, but something that you own, and it is real estate. Do you need to? Can you be a renter for the rest of your life? And I would say the answer is, yeah, you can. You don’t have to own a home.
Now, if we look back in the 1950s, ’60s, ’70s, people did purchase homes and stay in their homes for a very long time historically. It seems like in the last 20 years or so, people are on the move. I think people can work from various locations now. We certainly saw that after the pandemic. And it seems like with interest rates, as low as they’ve been, people just can move more frequently and can afford to buy a different home and transaction costs have come down. The realtor’s fees are still there, but a lot of transaction costs have come down. And so, because of that, I think people are moving more often than they have in the past. And so we’re a very mobile society, which begs the question, do you need to own something?
But let’s think about owning a home and let’s assume you’re going to. Is that an investment? When you purchase that home, is it something that you consider an investment? Most people would say yes, but I think if people really sat down and put the pin to the pad and started writing out all the various things they put into the home, the maintenance costs, the insurance, the taxes, maybe it isn’t always a great investment. But you are probably arguing is it a better investment than renting? I would say probably more oftentimes than not it is, but if somebody decides to rent for the rest of their life, I don’t say you should own a home. You hear it’s throwing money down the toilet to rent. Not necessarily. There’s a lot of benefits of renting.
But should your home, your primary home be considered an investment? I have never considered it an investment. When somebody shows me their balance sheet, yes, we want to look at their home value versus maybe their debt, maybe where it’s located, kind of ask them questions in terms of that equity that’s in the home, what they plan on doing with it, will they downsize. Those are all questions in relation to financial planning, but I don’t consider the primary home an investment. Unless you are somebody that maybe is always looking for a deal and you move every couple years. And when you get that deal, you are looking to make a profit. And if you do so, you move or you put some sweat equity into it. You’re buying the home, putting some sweat equity into it, really some tender love and care, and you try to make money on a longterm flip we’ll say. So you can do that, but for the most part, let’s put that in a separate bucket for right now.
Let’s talk about when you want to go to the next level and you have your investment portfolio that owns stocks and bonds and commodities. Real estate is usually a piece of the puzzle. And in my opinion, it probably should be for most people in some form or fashion. Now, some people will make that first investment and it’s a second home. Once again, is that an investment? I can’t tell you how many people come into my office and they say, “We own a condominium on the water somewhere, on a lake, on the ocean. Somewhere, we have a condo.” And they say, “It’s great. We go there four or five times a year, and the rest of the time we rent it out.” And I start really looking at the math.
And some of you that have been podcast listeners, I may have mentioned this in the past, but I look and I really run down some of the things and I really ask them, “Tell me how much these things cost? For example, how much the water bill is, how much maybe the HOA fees, the insurance, the taxes, the interior insurance, the cable and internet, the pest control.” All of these different factors go into the cost of owning that. And then how many days a year did you really rent it out? Did you rent it out during the winter time or is this only a summer rental place? So you start having to ask yourself, “Is it really a good investment when it’s really just sitting there? Unless I bought it at a great price, is the cashflow, net cashflow enough to justify this investment?”
And oftentimes many people have a mortgage on the second property. And with interest rates as low as they are, they say, “Hey, why wouldn’t I borrow the money?” That’s logical thinking, but when I factored in, they’re really not making as much money on that condominium or that second investment as they think they are. Oftentimes they’re making maybe two, maybe 3% per year. And so really, the only way for them to make really good money is for that thing to really appreciate in a substantial manner. And oftentimes that’s just not the case unless they bought it in a housing crisis or a 2008 financial crisis, the great recession, something like that, where they got a great price on it. They’re probably not making a tremendous amount just based on the day-to-day net cashflow. And people are surprised when I do the analysis. They go, “I thought I was making a little more than that.” Because they’re just looking at the rent, the gross rent, not the net rent after all the expenses.
But when you think about a second home, people are trying to use this for the benefit of family vacations, but at the same time, they’re trying to make a business out of it. And sometimes you can do that, but there are a lot of rules associated with that. You can’t just go and call it a business and go stay there multiple times a year. There’s a limit on how much personal use you can have, how much business use, and that’s something you should consult with a CPA on, because again, there’s certain rules on that and it can not be used so much for personal use. So be careful when you’re using real estate in that regard for personal reasons.
But let’s think about some of the types of real estate people do buy, whether it’s, again, the second home. Let’s go to the next level, which is a pure investment. Got your primary home, maybe even have a secondary home, but now you’re looking for other types of real estate. How do you do it?
Well, the first thing is you could invest in a fund or a public REIT, and these are just baskets of real estate. It could be in a particular building, but sometimes they’re a basket of different real estate properties. And it’s a great, easy way to invest in real estate. You get some income, you get the depreciation built into the fund. It’s very turnkey and very easy. Now, is it as fun? No, it’s not as fun. That’s why people do real estate investing. They want to touch it and feel it. However, with that fun that you wanted comes a lot of the maintenance and stress. That’s the issue. Is that you have to go take care of this place, or you pay a big premium for some sort of property manager who’s going to take a big chunk of the profit away.
So a public REIT or a fund of some sort, even a private REIT is a great way to get access to real estate, but the devil’s in the details. There is a lot of different ways to do this. In fact, I don’t know if you guys know this, but a few years ago, I think it was in 2016, real estate was actually added as a sector in the S&P. Now, it is a sector. And so when you own public REITs, you’re really just buying different types of stocks. They’re going to move just like the stock market. In fact, they may be more volatile than the stock market at times, because they are so hinged on what interest rates are doing. But you can diversify through public REITs, but the key point is how does that public REIT move in conjunction with the rest of your portfolio? If it’s moving the same, then are you really diversifying? If it’s moving the same as the rest of your stocks, then you’re not really diversified.
But there are private REITs that don’t move as much because they’re not traded from day to day. And what’s great about that is that you’re getting the actual real estate investing in the access to real estate and actual properties, but you don’t have the day-to-day volatility in the mood of the public markets. Now, what do you give up for that? You do give up some liquidity. Private REITs have been known to be very illiquid. There are some now that are semi-liquid because they are called interval funds, which means at various times throughout the year, there’re various intervals, you can actually liquidate your portion.
So there are REITs, baskets of funds. That’s a great way to get invested, but if you want to own individual buildings and go to that next level, again, you can go own a rent home. You’re not using it. You’re strictly buying it, maybe fixing it up and renting it out. Again, a lot of calculations to figure out what is the return. And you have to do these calculations in advance. You can’t go buy a home and then figure out if it’s going to make financial sense. You have to have a pretty comprehensive spreadsheet. Plug in your numbers, be very realistic about what you are renting out, how often, and again, do the simple calculation.
Now the great thing about a rent home is that if it’s rented, it’s rented 365 days a year. The negative is, it’s going to have a lower rent than something like an Airbnb or a VRBO. Those are going to rent out 100 nights a year, 200 nights a year, whatever the case may be, but you get a bigger premium because of the fact that it’s rented by the night. However, you do have to turn the place over, which there’s a lot of wear and tear potentially on that, but you can do that with a rent home. So a rent home is a great way to get started.
Now, here’s the thing though with rent homes and somebody told me this long ago. They said, “Listen, if you’re going to get in the rental home or apartment building, whatever it might be, you need to have the idea that you’re going to do more of these. Just doing one probably isn’t worth it.” And the reason they say that is because you need contractors that can give you a good deal, that are reliable. And if you’re not using them that often, you’re not going to get the type of service that you need and you’re not going to get the pricing that you need, whether it’s on appliances or whether it’s on actual labor. So the more you have, the more you can kind of have a normal regular crew, so to speak, doing those things for you, and you’re getting much, much better pricing. So if you go into this, it has to be almost a business.
And remember, you’re not getting the diversification when you buy one rent home, as opposed to a REIT, which is a real estate investment trust, which again, it’s this basket of properties, but you can do that. You can buy a rent home. You can also buy a commercial building. And this is very interesting because it’s industrial. Nowadays with e-commerce picking up and growing rapidly, people need warehouse space. And so there are a tremendous amount of people out there that need warehouse space and warehouse space is pretty easy. It’s pretty not real fancy, but you can get these leases on them and you can own the building and lease out the property. And you lease it out to tenants for business purposes, this is a commercial building. Could be office, could be industrial. I mentioned warehouse, but it could also be office space as well.
Now, we do know there’s risks from an economic standpoint, when you do certain things like this, like economic. If the economy turns south, what happens to commercial space? People don’t need as many warehouses. People may not need office space. We know that the pandemic caused a severe drop in office space because people started working from their home and some of them aren’t going back into the office. So within the commercial space, you have the industrial, you have the office, but you also have the retail space as well. Again, very, very risky right now because a lot of shops are saying, “Why don’t we just sell our stuff online and not have all this inventory sitting in a store?” Cloths, it’s a little more difficult, but certain other products can be sold online 100% of the time and don’t need retail. So you’ve really seen the death of retail go into… And it’s not the death of retail, it’s how retail is being done. People are using more so I would say online versus brick and mortar, and that’s been a trend that’s been going on and certainly was accelerated during the pandemic.
But what’s interesting is all that retail space is being repurposed now into other things. So again, commercial real estate people think it might be dying because of what’s happening with going e-commerce, but that’s not the case. Again, it’s just changing. So you need to adapt. And that’s why to diversify your real estate portfolio into office, into retail, into industrial, own a little bit of each of these things, makes a lot more sense than focusing on one, unless you have a very specific expertise. If you’re a do-it-yourselfer, you may go in and say, “I can go in and buy homes on the cheap at times, fix them up myself, and lease them out.” Or flip them, which is another tactic of real estate investment. It’s simply to buy something cheap, fix it up and go and sell it.
So, again, it depends on what your expertise is, but if you don’t have the expertise, you really need to consider a fund or some sort of basket. Because again, it’s just a very labor-intensive and it almost has to be your full-time job.
What about apartments? There’s a whole world out there of investing in apartments. I know some of you have done that. There’s various groups that help you do that. Oftentimes they’re using your money. So that’s why they want to help you do this. They may sell courses, they may do all kinds of things, but at the end of the day, it’s very hard to buy your own apartment complex. Maybe you’re buying a smaller one. Again, a REIT can be a great way to do this. Now the problem with the REIT is you’re not using the leverage that you can use on individual pieces of real estate. Individual pieces of real estate, you may be putting down very little money. And so your cash out of pocket or your cash-on-cash return can be very good, and your cash out of pocket can be very low. That’s benefit of the real estate investing, plus the depreciation. When you invest in a REIT, you’re putting all those dollars to work. You want to invest $10,000 or $100,000 into a fund, that’s what you’re putting up there. You’re not really using and getting that type of leverage.
Now there’s another interesting thing in real estate. And these are just finder’s fees. I know people that go out and simply find deals for real estate investors. So people that want to buy individual homes, for example, they go out and they snoop around and they talk to neighbors and they see who wants to put their house up for sale and maybe sold to an investor. And they go find the home, take it to the investor and say, “I found a home for you, give me a thousand bucks and I’ll tell you where it is.” And they get it done. And they just get paid a finder’s fee. Very, very low risk, of course. A lot of time being spent driving around and getting to know neighborhoods and talking to people, getting the lay of the land, but that’s what they do. That’s a finder’s fee.
The other thing you can do in real estate investment and this to me is more not real estate investing as much as it is lending, is caring the mortgage for real estate investing. Whether it’s on the commercial side or an individual home, you can be the bank. Now you’ve heard me talk about this for years on the podcast that we think about bonds and we think about corporate bonds and municipal bonds and bond funds. There’s a whole nother world out there, which is lending to real estate investors or real estate purchasers. So people that need a home and maybe don’t qualify for traditional financing, you can be the bank. And the great thing is usually the real estate is the collateral. So it could be a building, it could be a home, but you are the bank. So you’re doing the lending.
I wouldn’t think of this necessarily as real estate investing so much because you’re really just the bank and it’s more of a bond. However, if they don’t pay and you get the real estate back, then you turn into a real estate investor because now you own the property. That’s the collateral. So it’s an interesting way to diversify a portfolio on the lending side and maybe a little bit on the real estate side as well.
But you can see there’s tremendous ways and a lot of different ways to invest in real estate. Now the key, and you heard the old adage location, location, location. That is very true. We have very low interest rates in this world. And so real estate investing has been doing very well. We have a tremendous number of TV shows telling you how easy it is, and it’s not that easy. Anybody who’s gone in and tried to buy a home at auction and tried to flip it knows how difficult and how much work there is when you do that. You guys know that. But there is a lot of different ways to invest in real estate, but you do have to figure out: where am I investing? What part of interest rate cycle am I investing? Where am I in the economic cycle?
So it may be a bad time just investing in real estate period. You may just hold off and you’re waiting for interest rates to rise or market to pull back. And then you can go in there. I mean, you think about March 2020 during the pandemic, and people were unloading properties because I mean, it was a very scary time. They didn’t know what their job situation looked like. So what happened? Well, they started selling those properties, inventory built up, obviously office space was plummeting in places like New York City, and condos and high rises were falling in price. That was the time to strike. So you can use this rifle approach where you go in there and you’re waiting like a sniper and you’re going to take out a piece of real estate at a particular time, but you have to figure out, do you want to take on leverage because that’s really what boosts the returns? Do you want to do that? And if so, what kind of rate are you going to get on that?
So there’s a lot of dynamics here, but you can build a diversified investment real estate portfolio to compliment what you’re doing in stocks and bonds. And listen, real estate is not a substitute for bonds. I think bonds have a place. Even though the yield, the interest that you’re receiving isn’t that attractive nowadays, they do have different characteristics. They don’t have as much risk in some aspects as real estate. They may not be paying as much, but you can use that money at times if real estate were to fall. So it’s a great way to have a source of funds to invest in stocks or real estate by pulling from bonds. So bonds still have a place.
A lot of people are using real estate as their income generator. In other words, they may just own equities and real estate. They don’t own any bonds. I think that’s probably a mistake to do it that way because bonds do still have a lot of benefit outside of their rate that they’re paying. So there is a benefit of still owning bonds in this environment. How much? Is up to you and your financial advisor. And again, I’m a big proponent of liquid alternative funds and alternative types of investing in addition to real estate investment.
I think, again, if you’re going to diversify, there’s numerous ways to do it. I don’t think many people in this country are really doing it. I think if they have real estate exposure, it’s probably strictly through public real estate funds inside their 401(k) or maybe their brokerage account. And what they don’t realize is what I mentioned earlier, that a lot of these real estate funds and public REITs will simply move like the stock market on a day-to-day basis. And they move so much like the stock market, they’ve actually included it in the S&P as a sector now. And there’re studies again, that I have seen from years back that show that public REITs may in fact be more volatile than the Standard and Poor’s 500.
So you need to really be careful on what you’re getting, especially if interest rates start to rise. Think about that in the big context of how much real estate you should have in your life. And again, I would exclude your primary home. Yes, it may come into play if you downsize and you have some cash to invest from that sale, you could also use it to fund long-term care when you sell your house and you want to move into some sort of community that’s independent living or assisted living. So you can use your primary home for that, but in terms of just investing, I don’t look at primary homes from that perspective. We’re talking about real estate investing outside of that. And even from a second home, you may get lucky and buy a second home and really sell it for more appreciation, but you don’t have that cashflow.
I learned that a long time ago. I bought lots of raw pieces of property over my life and I made money on a lot of them, but the missing component was cashflow. You’d buy dirt and you’d just go sell dirt. Now there’s no insurance to pay, but there are taxes to pay and there’s commissions to pay to sell it. But just owning the dirt, you have to have price appreciation. It’s like buying a non-dividend paying stock. Has to have price appreciation to make money. So if you can get cashflow from real estate investing and potentially use leverage, yes, it’s riskier, but that is how you get better returns over the long-term. But there are tremendous ways to invest in real estate now, much more than we had 10, 15, 20 years ago, a lot more than we had 30, 40, 50 years ago.
And so you can diversify and you can use some of that real estate income to boost your overall investment income inside your portfolio that maybe the bonds aren’t picking up the slack in this environment. So think about that.
I think the thing missing for most people is number one, they’re not looking at all the real estate options. I think they go down to the beach for the weekend and they say, “Boy, this condo sure is nice. We should buy one of these because we’re going to come down here three times a year.” It just mathematically doesn’t work very well for people to do that, but I see that a lot and people get trapped into thinking they’re going to use it every weekend and it’s just life is too busy. And again, you may use it for personal reasons and it’s not an investment. And so you have to be very careful about the tax deductibility and all these other things that go with it. And so you may end up losing money on it when you would have been better off, maybe just doing an Airbnb or a VRBO going down to the coast three or four times a year. So think about that before you even go into real estate investment.
If you want to diversify, though, I’m a big proponent of real estate investing in all different forms and fashions. I think I’ve done almost every type of real estate investing you can do. And it is a lot of fun at times, but it is a lot of work. It’s a lot of work. It’s not as easy as people make it seem like on the television.
Appreciate you guys checking out the podcast. Don’t forget to share it with your friends, and don’t forget to go to creatingricherlives.com. Take care, everybody.
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