March 2, 2024

Real estate vs. stocks. Cash flow vs. consistent dividends. Equity vs. price-to-earnings. If you’re reading this right now, chances are that you’re more of a real estate investor than a stock picker. But maybe you’re on the wrong side. Does the passivity of stock investing beat buying properties? 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? And what about investing in 2023 as the economy continues to falter?

We brought on return guest, stock investing expert, and host of We Study Billionaires, Trey Lockerbie, to put him head-to-head against some of the most famous names in real estate podcasting. Rob Abasolo emcees this battle of investment strategies as Dave Meyer and Henry Washington 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’s investors.

And if you’re trying to scoop up deals at a discount, we touch on whether stocks or real estate are better bets during a recession, which comes out on top, and the risks you MUST know about before investing in either asset class. So, if you’ve got some cash burning a hole in your pocket and don’t know what to do with it, we may have the exact answers you need!

Rob:
Welcome to the BiggerPockets Podcast, show number 758.

Dave:
In real estate, if you don’t have adequate cash flow, then you can become a forced seller, and that’s the worst position to be in. So I agree with Henry. As long as you have the cash flow to be able to withstand any short-term downturns, then you can absolutely buy real estate in pretty much any business cycle.

Rob:
I’m soloing the intro up all by my lonesome today, and today, we get into some really good stuff. We’re going to be getting into real estate versus stocks. Now, I’m going to fill you in on the episode in a little bit, but I wanted to point out a few key highlights that we’re going to be talking about like risk versus reward over time, over 45 years of historical data to be more specific, how to evaluate your risk profile, and which asset class could best fuel your wealth-building goals. Today’s episode is going to be an awesome panelist lineup, including Dave Meyer, Henry Washington, and we’re even having Trey Lockerbie back on. Before we get into today’s episode, I want to give a quick tip which is if you’re looking to educate yourself and become more savvy in the world of stocks, go listen to Trey Lockerbie’s 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’ll find out why. Now, let’s get into it.
A recent top-performing article from the BiggerPockets blog is the inspiration for today’s show, Real Estate Versus Stocks. To bring you up to speed, I’m going to read the intro line from this article and to set the tone of today’s conversation. Let’s get one thing straight. Everyone should hold both stocks and real estate in their portfolios. Diversification is the ultimate hedge against risk, but that doesn’t mean that we can’t 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’s a clear winner for the safest way to build wealth. Excited to dig in here with our good friends, Dave Meyer, Henry Washington, and today’s guest, Trey Lockerbie. Trey, how are you doing today, man?

Trey:
I’m doing great, Rob. Thanks for having me back. I’m excited to… I’m still a real estate noob, so I’m just excited to represent the stocks, I think, in this discussion. So, I’m excited.

Rob:
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?

Trey:
Sure thing. Yeah. I’m 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’s a better investor because he’s a businessman and a better businessman because he’s an investor. So, I said, “I need to learn how to invest because it’s capital allocation at the end of the day,” and that got me really into the study of Warren Buffett, and it led to me becoming the host of We Study Billionaires, which is a podcast really focused on the Warren Buffett and value investing style of investing.

Rob:
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’ve ever had. But with that, I want to get into the first question here, which is for everybody. When was the last transaction that all of you had in either asset, whether it’s real estate or stocks? Henry, I’m going to go to you first here.

Henry:
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’s projected to payout.

Rob:
Okay. All right. Dave, what about you?

Dave:
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’s real estate. I mean, it is. I invested in a real-estate-focused lending fund just last week as well.

Rob:
Okay. Cool, cool, cool. Trey, what about you?

Trey:
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’s an interesting stock. It was about $9 when I bought it. It’s at about $15 now, so doing all right so far.

Rob:
Maybe after the exposure from this podcast, maybe it will be at $15.50, so let’s hold out for that.

Dave:
Oh, we could definitely move markets here.

Rob:
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?

Trey:
Yeah. So it’s interesting because I don’t know if I’m 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’s about… Let’s call it 30%, and then the remaining 10% is broken out, really, with a cash buffer, some Bitcoin, and some stock. So it’s still getting relatively new with the investments beyond, I would call, the fundamentals.

Rob:
Yeah, and actually, you mentioned this. I know you’re 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’s episode.

Trey:
Yeah. It’s a fancy word for basically automating investments. So you want to basically just put money passively into, let’s say, an ETF, or you could even do Bitcoin. You can do all kinds of stuff with this, and the idea is that you’re agnostic to the price at the time and the belief that the price will appreciate over a longer period of time. So, let’s say, the stock market. There’s interesting studies that show with over a year, it’s a little bit more unpredictable, but within 20 years, it’s almost… I think it’s actually around 100% 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’re going to capture a lot of the opportunities that come to you just through the price appreciation or depreciation.

Rob:
So it’s like the concept of consistently investing. Sometimes you’re going to buy when it’s high, sometimes you’re going to buy when it’s low, but it averages out to basically make you money in the end, right?

Trey:
Well said. Exactly right.

Rob:
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?

Dave:
I guess fairly diversified just probably in the opposite of most people. I’d say about a third of my net worth is in the stock market and two-thirds are in real estate or real estate adjacent things.

Rob:
Okay. All right. Cool. Henry, what about you?

Henry:
Yeah. I would still define myself from a percentage perspective as stock curious, right? I’m fully immersed in real estate, and I just took a look. About 3% of my net worth is invested in the stock market. So everything else is real estate.

Rob:
Yeah. I’m probably in the 5% to 10% area. I mean, honestly, it could be three, but there’s 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’re much smarter than me and can say it a lot more succinctly than I could. So are you going to share some of that?

Dave:
Definitely not smarter, but spend way more time reading this nerdy stuff. So, basically, the data about whether real estate or the stock market has better returns is… I feel like it’s one of those things like reading nutritional information. Every study contradicts the other one. It’s 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’s just harder to evaluate. It’s relatively easy to measure the returns on real estate if you only look at price appreciation, but as anyone who 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’re about at par with the stock market. Some show that they perform better, and that’s mostly when it comes to residential real estate. When it comes to commercial real estate, I’ve seen some data that shows that… REITs, for example. Some 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’s that.
In any given year, the stock market has much higher potential and more risk. So it’s just a more volatile asset class. You have a greater risk of loss on the stock market in a given year, but you have higher upside. So that’s one thing, and the second thing is that over time, as Trey just alluded to, both asset classes go up over time. 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’re both good, but there is no conclusive answer which is I guess why we’re here on this podcast debating which one is best.

Rob:
Yes. That’s honestly very… I think you’re right, the way you said about nutrition and how there’s always a study that contradicts it. I feel that way too when I get into some of the numbers. I’m curious, and you may not have the answer off the top of your head, but you mentioned that when you look at debt 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.

Dave:
So that study is one I did myself, and because I was curious, Trey cited a stat that over 20 years, it’s… Historically, if you own stock for 20 years, you don’t lose money, and I was curious because I’m weird like what the stat was for real estate. 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.

Rob:
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’s obviously what we’re going to get into. So what is less risky, real estate or stocks in today’s general economic climate? Trey, I know that you… Obviously, you’re coming more from the stock background, and this is what you study. So I’d like to start with you and get your point of view on this.

Trey:
Yeah. So the article we’re referencing talks a lot about how volatility is often described or what defines risk, and I think that’s what you’d find the most academia. But just through my studies and people I’ve researched with investors, especially in the stock market, the consensus in that community seems to be more around defining risk as the permanent loss of capital, which is another fancy way to say, “Will this thing go to zero or not?” If you look at it that way, you could make an argument that real estate is probably the less risky asset class because it’s hard for a home to go to zero, unless maybe it burns down without insurance or something. But with stocks, that’s a little bit more common. Now, if you are applying it to, say, an index where you’re owning the top 500 companies in the US, and those companies are constantly changing out for the next best thing as some fall away, it’s hard for that to go to zero, unless there’s some apocalyptic event. Right? So it’s interesting because if you look at it that way, it might net out even, but I would just say because of the nuance with individual stock investing, you could argue that real estate might actually be better.

Rob:
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.

Dave:
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’s advocate for a second, if you want to consider the risk of underperformance or opportunity cost as well, then I think there’s something to be said for the stock market because there are times when real estate does grow much slower than the stock market, and so you can risk under underperformance by only investing in real estate, which is why, personally, I think diversification is important.

Rob:
Sure, sure. Henry, you mentioned you’re 3% into the side of stocks and mostly into real estate, so does this have any… Is this because you feel real estate is less risky, or is it just because you like real estate more?

Henry:
Yeah. I think it more comes down to the level of understanding that I have with real estate versus the level of understanding that I would want to have with stocks or different strategies with investing in stocks because… Yeah. I think we can talk back and forth all day about what’s more risky or less risky, but the truth of the matter is it’s what strategy are you employing in either, and how risky is that strategy because yeah, real estate 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’s going on in the market where you’re buying, and the same thing with the stock.
So, for me, it’s just I understand real estate, and I understand the strategy that I employ within real estate, and I typically stick very close to my strategy. I do the same thing with the stock market, but because I haven’t 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’s 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’m not risking more than I’m willing to lose there. Where with real estate, it’s a much more educated investment for me.

Rob:
Yeah, that makes sense. Actually, you brought up a good point that I’m going to backtrack a little bit because I did say that real estate doesn’t 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’t go to zero or in the negatives. Right? So it’s 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’re not going to be upside-down, and I think it’s probably similar with stocks, too. Right? You lose money on the sale, unless the company itself goes underwater, but I understand what you’re saying, Henry. There’s 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?

Trey:
Yeah. So it’s 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’re 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’re talking about $2 trillion or so if you’re talking about Microsoft, Google, that kind of thing. So it’s a very large spectrum, and I would say that there is actually more risk when you’re looking at things like micro-caps because they’re just subject to different factors. For example, liquidity or just… They’re still trying to grow and get market share. Whereas another business might have a large majority of market share like Google who has, I don’t know, 90% search or whatever. So they’re 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’re looking at it in that way as well.

Rob:
Yeah, yeah. Actually, speaking in this world of the different equities and everything, Dave and Henry… Actually, Trey, you may need to help out here, but what I’d like to do is actually line up the different equity types to the different housing types. So find the respective spirit animal of each. So I’ll just kick us off to solidify this, but imagine a mutual fund is like a multi-family. Those two would come together.

Trey:
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.

Henry:
Yeah. I would say a dividend stock is investing in a single family home for the cash flow because you’re buying something in hopes that it appreciates, but really, what you’re wanting is that monthly or quarterly cash flow.

Rob:
What about commercial? Commercial, commercial real estate. How would we pit that up, or what spirit animal we’d choose on the stock side?

Dave:
It depends what type of commercial. If you’re talking about office commercial, right now, that’s the Silicon Valley Bank of real estate. They’re both just nose-diving right now. If you’re talking about retail that’s like tech, it’s not doing great, but it will probably do okay in the long run, or if you’re talking about multi-family, I don’t know what you would compare that to, but it’s doing okay right now, but there are some concerns. Trey, I don’t know if there’s any type of stock that you would compare that to.

Rob:
What about penny stocks? Are those the government foreclosures like the HUDs of real estate?

Trey:
Yeah. A lot of times, micro-caps are penny stocks. So I was thinking about that house-hacking thing where you’re just getting that extra income, but it’s just maybe a little bit more volatile because you have a roommate, and who knows how that’s going to go?

Dave:
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’t have the best returns, but they’re relatively low-risk. I primarily invest in Denver. I think of something like that. It’s no longer this great cash-flowing market, but it’s 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’s probably a value opportunity that has some upside. So I think it’s not just the asset class within real estate, but also the geographic locations that can be… People can think about geographic locations and assess risk based on where you’re physically investing.

Trey:
I think that’s a great point actually because something that sold me on buying our first home was looking at the data around the 2008 GFC. I live in California, specifically Los Angeles, and there was this fact around… 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’s 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.

Rob:
Yeah, and I can’t blame them. I’d like to move in to a bigger question here since we’re 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’ll choose you first, Dave Meyer.

Dave:
Oh, god. So the question is like, during economic uncertainty like we’re in right now, which asset class is better?

Rob:
No. I think it’s just from a return standpoint of each asset class, do you typically see better returns in pre-recession times or in recessionary times?

Dave:
Oh, I think we’re 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’re in what’s 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’re unaffordable, and so I think we’re still… Prices haven’t bottomed out, and so I think this is a dangerous time to buy real estate, unless you know what you’re doing. You don’t want to “catch the falling knife” 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’m feeling pretty good about that. So it’s not like you can’t 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’t, that would be a better time to buy, but I don’t think we’ve hit bottom yet. Unfortunately, it’s impossible to time because we won’t know when we hit bottom until after that has already happened. So I caution people against 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.

Rob:
But is there a similar concept? I mean, if we talk about stocks which… We went over the idea of dollar cost averaging with stocks. Wouldn’t that same theory technically apply in real estate? If you’re buying real estate every single year consistently, then in 30 years, theoretically, all that real estate should be worth a lot more. Is the reason that maybe we don’t look at it that way because the stakes are a lot higher and you’re spending a lot more on a house than you might on an individual stock?

Dave:
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’re going to do well, and that is true both in real estate and in the stock market.

Rob:
Yeah. Dave, sorry. Henry, were you going to say something?

Henry:
Yeah. Dave’s train of thought I think just triggered my train of thought to say I think you can get… I don’t know about percentage of returns, but from a dollar perspective, it seems like you would get a better return with real estate because you can use debt to buy real estate, 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’re essentially going to recoup that money, and then obviously, make more money, but I can only buy with capital on hand, and so the return is smaller.

Dave:
That’s a great point Henry just made that when you buy a stock, traditionally, you’re 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’t have adequate cash flow, then you can become a forced seller, and that’s the worst position to be in. So I agree with Henry. As long as you have the cash flow to be able to withstand any short-term downturns, then you can absolutely buy real estate in pretty much any business cycle.

Rob:
Yeah. Okay. What about you, Trey? What do you think?

Trey:
Well, because we were highlighting the volatility of real estate, I’m sure we might talk more about that where because of the illiquidity of that asset class, you probably just see naturally less volatility because it’s harder to get in and out in the stock market, but I wanted to provide 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’s still some debate around whether or not we’re in a recession, and so that’s unique. Most of the time, there’s a recession, the stock market decline shortly thereafter, but what’s 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’s almost rare for it to go any longer than that, and for every recession, the stock market recovering by the time the recession ends is about half. So five of the 11 times we’ve had recessions, the stock market has actually recovered by the end of the recession.
So to the point around maybe real estate fared better throughout the recession, but stock markets tend to bounce back, and there’s only been a couple of recent recessions that have been 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’s interesting to weigh out the pros and cons in that way knowing that, “Hey, we’re going into a recession. Stocks will probably naturally not fare too well because the recession is going to affect the underlying earnings of those companies.” But it seems like over the long run, you’ve 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.

Rob:
Yeah. That is interesting because as you were taking us through that journey, I was like, “Well, it honestly seems ideal that the stock market is really low,” because if you’re an investor, you’re like, “Okay. Great. Everything is cheap. I’m going to buy it.” But I think the flip side of that is you really don’t necessarily want that for a relatively large portion of the population that relies on dividends, and retirement accounts, and everything because that’s typically the stuff that’s really taking a hit.

Trey:
Yeah. Exactly. It’s important. I think everyone understands this idea, but price is not value. Right? So there’s a lot of these companies that may have deserved to have a price correction, but there’s probably a lot of companies in there and similar to real estate where the value is actually much higher than the price. I remember in the 2001 dot-com bubble, Amazon’s 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’d ideally want to find companies like that who are affected maybe by the price, but to your advantage. That’s the philosophy that the market is mostly efficient, but the market is also reflexive, so these downturns can actually gain momentum over time, and that can work into your advantage so you can find these opportunities.

Rob:
Well, I want to move into another niche within all of this, and so Dave and Trey, I’ll toss it to you guys on this as well. But given the current conditions of the economy and what we’re seeing in 2023, do bonds offer any better cash flow than indexes, or REITs, or anything like that?

Dave:
Okay. So I brought this up because I think it’s interesting to see that a lot of commercial real estate assets, which are easier to track, like if you look at multi-family, a lot of them are trading at cap rates which are below bond yields. So that’s 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’re 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’s interesting to see that.
With rising interest rates, there is this silver lining, which is that “risk-free assets” which no investment is… or excuse me, “risk-free investments,” and there’s no such thing as a real risk-free investment, but they call bonds or savings accounts risk-free because they’re so low-risk. They’re at 4% right now, and so you have to ask yourself if you’re, for example, a commercial real estate investor, “Is it worth getting a 5% cash-on-cash return and taking on all the effort and risk of buying that property when you could do basically nothing and get 4% from a bond?” So I just think that’s an interesting dynamic in the market. I’m curious what Henry and Trey think about that, and Rob, you as well.

Trey:
Yeah. it’s an interesting time because for the last decade, to Dave’s point about risk-free rates, it was actually more rate-free risk because these bonds were yielding so low, and you actually saw this play out. The risk was there, right? You’ve 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’t 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’s point, we’re at a certain, unique, I think, place where inflation is coming down and rates are going to probably cap around 5% would be my guess. At that point, you have a really good opportunity because you’re 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’re actually holding will appreciate as well. So not only are you getting that 5%, but you’re going to get some price appreciation from it.
So I find myself even surprised to say this and be pro-bonds after the last decade we’ve just had, but I actually think that if you’re only needing to have something like a 4% or 5% right now, and you really want low risk, it’s probably a good option. Then, furthermore, I would go as far to say go check out Vanguard or some other options that do these ETFs where it’s very liquid. You can get in and out of them. You don’t have to ladder your own bond portfolio to make this happen. So there’s options like that out there.

Rob:
Totally. Who would have thought on BiggerPockets, we’re like, “Bonds? Maybe. Actually, it might make sense?”

Dave:
I know. I just want to caveat that. I’m saying like commercial real estate if you’re looking at a REIT, for example, or buying a really low-cap multi-family unit. I’m 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’m just talking about commercial assets.

Henry:
I don’t know though, Dave, because if you think about… 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’re 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’s like, “What’s more important to you?” So it’s a weird time.

Rob:
Yeah, yeah. I’m sure a lot of this comes down to what your overall risk profile is. So if you don’t mind, Dave, do you think you could help people understand their risk profile, and maybe let’s just start off with what risk profile even is?

Dave:
Sure. Yeah. I just encourage people to think about… Now, I’m sure this happens to all three of you. People ask you for advice about what they should be investing in. It’s 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, “There’s three things that you should be thinking about.” The first is your overall comfort with risk like, “How comfortable are you risking money in the service of making more money?” People often stop at that. Just like, “How comfortable are you with risk in general?” But there there’s 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’t have the capacity to do it. Maybe they only have $20,000 in an emergency fund, but they’re super comfortable with risk. I wouldn’t risk all $20,000 of yours even if you are really comfortable with risk generally, or perhaps you have children or some family members to support or some other obligation, I wouldn’t risk all of your money. So I think you have to think about like even if you’re 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, “Are you investing for the next three years, the next five years, or the next 30 years?” because I think that makes a really big difference in what type of assets you should be looking at. If you’re investing for the next six months, maybe you should buy bonds. I don’t know, but that’s probably a pretty good bet. If you’re investing for the next 20 years, you should probably buy real estate or the stock market. So I think those are three things that people should think about. Unfortunately, there’s 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’s say, in 2014 to really think about what type of risk you’re willing to take, what capacity risk you’re willing to take, and what the time horizon is for your portfolio.

Rob:
Actually, that leads me to what I want to end with. We’ll call this the final game of today’s episode, which is thinking about today’s current conditions. If you had $50,000 available, if I just handed each of you $50,000 in a briefcase, it would be an underwhelming briefcase because… Have you ever seen $50,000 in person? It’s a little Dodgeball reference there, but if I gave you $50,000 each in a briefcase, what would you invest it in for the next five years?

Trey:
Yeah. So mine is probably going to be a little bit different if I’m 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’s 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’s still up about 300%. It peaked around 800%, but it’s still up. It’s actually still beaten most other asset classes. So if you look at… 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’s actually done quite well, and I think there’s 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’s remaining is, actually, I’m 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’ve been looking at that kind of thing. What I can’t really get over is the just amount of interest you’re paying right now on a real estate property. I know you’re 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’s different platforms out there that you can look into to do something like that, and I’ve had a lot of interest in that lately.

Rob:
Okay. All right. That’s good. All very, very good answers. Bitcoin, the underdog. It’s back.

Dave:
Oh, I didn’t see that coming.

Rob:
Neither did I, but I like it, and I don’t disagree. Henry, what about you? You got a plan carved out for the $50K I’m going to give you tax-free?

Henry:
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’m going to take that money, and again, right? So I am in a… 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’m going to buy two to three houses that are going to… They’ll most likely cash flow, not a ton, but they will most likely cash flow, but I’m going to hold it for the appreciation because the appreciation in my market… I’m in one of those rare markets where I get cash flow and appreciation, and so I can buy two assets that are going to pay for themselves, plus pay me a little bit of money each month for owning them, and they’re going to go up over the next five years if you zoom out. So if I have to invest for five years, that’s where I’m going to put the money. I mean, that’s not even a question for me. That’s where it’s going.

Trey:
Rob, sorry. I missed that five-year point. Can I change my answer slightly?

Rob:
Ooh, you already hit the final button just a bit, but we’ll allow it. We’ll allow it.

Trey:
Well, I’ll 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’s some nuance to stock investing, and what’s 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’re 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’s got a whole portfolio of these kinds of companies that you might want to look at. So I would probably put something into Berkshire Hathaway. 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.

Rob:
All right. All right. Yeah. Okay. I’m glad you changed your answer. That was very insightful. I’m 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?

Trey:
Can I jump in and just say…

Rob:
Please.

Trey:
The nuance to that question, in my opinion, is what Warren Buffett would say, “What’s in your circle of competence?” Right? So, for a lot of you guys, real estate is what you know, and I think that is… Actually, Buffett, to quote him again, says, “Diversification is for when you don’t know what you’re doing,” which I just love because it’s like if you know what you’re 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’t have the time to commit to studying and researching this business or the interest of doing it, then I can’t sit here and be like, “Yeah, that’s going to be the least risky,” because it just depends on the person. If your circle of competence is real estate, then by all means, go for that.

Henry:
I would say this as something to end on for me. It’s that this market or this economy is forcing us all in every investment niche to get back to the basics and the fundamentals. Right? 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’s not the case. You can really damage yourself, and so when you talk about circle of competence, I wholeheartedly agree. Right? I have to rely more now on my fundamentals as an investor, rely more heavily on my underwriting to make sure that I’m very, very confident that I’m 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’ve just got to get back to the basics, especially with real estate because the market is not forgiving anymore. Right? You’re going to have… 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’t know that I can say there’s a clear winner between stocks or real estate, but what I can say is you better invest the time to educate yourself on whatever strategy you’re going to do, and then take the action because no market is as forgiving as it was two years ago.

Rob:
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’re diligent and you study what you know, that’s ultimately going to be both the safest investment, but also the best investment for building wealth. So I think we can end it there, fellas. If we want to learn more and connect with you online, Trey, where can people connect with you, or reach out, or learn more about Better Booch?

Trey:
Well, if you’re stock curious, that’s 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’s a lot of content every week with that, and I’m on Twitter, @treylockerbie. Then, if you’re kombucha curious, you can go to betterbooch.com.

Rob:
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?

Henry:
Best place to reach me is on Instagram. I’m @thehenrywashington on Instagram, or you can check out my website at www.henrywashington.com.

Rob:
Okay. Dave, what about you?

Dave:
Well, Henry forgot to mention that he’s on an amazing podcast called On The Market that comes out every Monday and Friday, and you should check that out. But if you’re looking for me, Instagram is also great. I’m @thedatadeli.

Rob:
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’s the safest investment, so I’m going to let you close us out with any final thoughts you have for our awesome, awesome audience at home. You got anything?

Dave:
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’s 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’s 97%, 3% like Henry does, or 60%, 40% or something else. I think it’s admitting that you don’t 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.

Rob:
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’s like, “Hey, Rob, do you have anything to say?” and I’m like, “Uh, no, they said everything already,” 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’ll catch everyone on the next episode of BiggerPockets.

 

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