Is Real Estate Investing Better Than Stocks or Gold? | Erik Averill & Justin Dyer | AWM Insights #64

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Episode Summary

Real estate markets around the country are booming – home values are skyrocketing, demand is high, inventory in many places is low, and many are wondering if they should be getting in to real estate investing.

We’re frequently asked about this form of investing from our clients, and many wonder if this is a “safer” form of long-term investing than the stock market. In a recent Gallup poll, the majority of investors surveyed believed that real estate is actually a better long-term investment opportunity than stocks, gold, and any type of savings account.

Erik and Justin discuss this topic in this week’s episode and tackle the most frequently asked questions we receive, and some of the biggest things people can miss when entering into this type of investing.

 
 
 
 

Episode Highlights

  • Recent Market News – Amazon buys MGM, US Treasury on Crypto, NYT set to buy The Athletic? (00:56)

  • A majority of investors believe real estate investing is a better long-term investment than gold or stocks (3:24)

  • What kind of real estate investments? (4:32)

  • Should I think of my primary residence as an investment? (5:20)

  • Is real estate investing “safer” than investing in the stock market? (9:20)

  • What is a “carry”? (12:04)

  • Risk vs Return in real estate (12:56)

  • How leverage factors in (15:23)

  • You are competing against professionals (20:34)

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Erik Averill: LinkedIn | IG
Justin Dyer: LinkedIn

+ Read the Transcript

Erik Averill (00:00):

Hey, everyone. Welcome back to another episode of AWM Insights. Today, it's only your power two. One is the CPWA and the CFA. We are Erik and Justin. Last week we had Zach Miller, the NFL just stud on the show and we've kicked Brandon off permanently, but no, he's actually down on vacation with the family. We wish him the best. And so you guys get to spend a little extra time with Justin and I today. And just for the audience who is listening for the first time here at AWM, we're community of athletes, founders, and investors, and we're on a journey to be the best at what we do. And so, we believe that you deserve the same when it comes to your wealth. And on this podcast each week, we try to cut through the noise of what Wall Street is selling you to bring you the knowledge, skills, and access that you need to invest like a pro.

Erik Averill (00:56):

And so today, we're going to tackle a topic that is at the forefront of everyday life investing in real estate. We know that the market has just been booming over the last year, and we've had so many questions around real estate that we want to dive into that before we get into that conversation, as we do each week, let's just recap what we're seeing in the news, in both the public and the private markets. And so, as a Amazon Prime subscriber, I was excited to hear that Amazon actually bought MGM for a cool $8.5 billion. So, it's going to add thousands of titles to Prime Video. The other thing that we saw was the US Treasury Department announced that it's taking steps to crack down on cryptocurrency markets and transactions. And so the big news here is that they're going to start requiring that any transaction worth $10,000 or more be reported directly to the IRS.

Erik Averill (02:04):

And so we're going to continue to see regulation around the crypto markets as those mature. And the news from the private markets for us in the sports world is it's being reported, this has not been confirmed, just reported at this time that the New York Times is set to buy The Athletic. And so really interesting thing, we actually had one of the co-founders Alex Mather of The Athletic on our other podcast about a year ago. So, really exciting. This is something where they set out to disrupt the way that sports journalism is happening. And now big traditional journalism is going to acquire them. And so just some interesting news there. But jumping into the conversation that we wanted to have today is in a recent Gallup annual housing market update is the majority of investors surveyed believe that housing is a better long-term investment than stocks, gold and any type of savings. And so the sentiment around investing in real estate, specifically residential housing is at the forefront of the conversation. And Justin I'd love just to hear your take on what's going on in the housing market.

Justin Dyer (03:24):

Well, loaded handoff there, right? With that poll from Gallup. The short of it is real estate is a good investment. Is it better than stocks? Is it better than gold? In general, the answer is no, especially with respect to stocks. I think that the piece that people often forget when it comes to real estate and actually let me even take a step back further and say, well, let's talk about what type of real estate you're actually discussing when it comes to this question, right? There's a whole separate podcast or a separate series of podcasts. And maybe we'll tackle that around all the different aspects of real estate investing. Is it land? If it's land, is it timber? Is it commercial real estate? Is it office commercial? Is it retail commercial? Is it biotech? You can get really, really granular. Is it cell towers? Are you talking about family single-family residences, multi-family residence, right? So the list goes on and on. You get the point.

Justin Dyer (04:32):

And so, question number one is what type of real estate investment are you talking about? And there's different aspects to each and every one of those. Again, separate podcasts probably for each and every one, or those collectively, we can dive into that. But let's talk about this whole concept of, is it a better investment or is it safer than the stock market? In general, looking at some returns over the past, for the long-term, 10-plus years, even going back into like seventies and eighties, you can find real estate indexes that go back into the late seventies and it's done well, it's performed in line with equities, with stocks. So in that sense, no, it's not necessarily a better investment.

Justin Dyer (05:20):

One thing to keep in mind and I think when most people are talking about real estate, generally speaking, they're thinking about their primary residence. And that's a whole separate category of real estate by itself. We were actually talking just briefly before we were preparing for the podcast here that there's different value that each person ascribes to their own personal residence and so thinking about that as an investment, yeah, do you get a nice return from that? Hopefully you do if you have, if you've actually sold and realized that and pocketed and you're able to live off that. Hey, kudos to you. That's pretty good. When you actually take a step back and look at single-family as a whole, it basically just keeps up or just inches out a return over and above inflation.

Justin Dyer (06:08):

What really drives the return with single-family homes and your personal residence specifically, and real estate in general is leverage. Leverage in the form of borrowing money, right? Your mortgage that is leverage to buy an asset. It is just very easy to do so in the space of real estate. The banking world is set up in such a way that it understands those transactions. It's very comfortable. There's a raw asset as collateral to back up that loan that they can take back if you default on your loan. So, again, it's such a loaded kind of topic and there's so much nuance to it. The short of it is it's a great investment or can be a great investment if you think about it and approach it the right way. We certainly have real estate within our portfolios. It has a place there. And I think one thing to touch on and Erik I'd love your thoughts on this is how we think about the conversation around separating your home from your portfolio of real estate, if you will.

Erik Averill (07:23):

Yeah. I think that was so helpful for you to start to clarify the nuances of the term real estate. And we don't believe that it's one versus the other. It's better or worse than a different asset class. I think one of the things that we love to be able to reiterate for our audience and for our clients is the way in which we sit as your advisor, we're completely independent, right? The way that we're compensated doesn't change based off of if you invest in private real estate, public real estate, the public stock market, venture capital, private equity is when we start to think about constructing portfolios for you as the client, it's what is in your best interest given what your priorities are? And this leads to first and foremost, there's the financial component of looking at certain purchases. And then there's the investment component.

Erik Averill (08:19):

The majority of advice that we give to clients around their primary residence is does this make sense for your family? Is it in a location that is convenient for you? Is it a place that fits the size of your family, right? Because so much of it is you're making this an emotional decision where you're going to raise your family. And we always say is, you want to do something that you can sustain given your certain level of income and assets today, you don't put yourself in a situation where you're helping this thing has to appreciate for it to turn out to be a good decision, right? And so, as Justin mentioned, if you happen to catch the right wave of the real estate market, then sure, it's going to be a huge benefit to you, but you don't want to stake your whole investment thesis on a single concentrated, levered decision.

Erik Averill (09:20):

And I think this is where normalizing the conversation is so helpful of going... What we hear so often is, "If I invest in real estate, it's just so much safer than the stock market." And to me, and to us, a lot of times that's just normalizing the conversation and bringing some education that real estate is a type of investment. The stock market is actually a location. We've covered this time and time again on previous podcasts that the stock market, all it is, is just like going to the farmers' market, right? It's a location where you show up and you can buy certain things, the farmers' market, right? Different types of food, knickknacks, those types of things.

Erik Averill (10:04):

The public stock market, you can actually show up to this location and buy pieces of investment real estate and the advantage actually, being that you can trade it. You can get in and out of it, you have liquidity. Whereas for so much of the private real estate, while it feels safer because you can visually see your house, you have massive leverage in a mortgage, and you only own one house. And so it's very concentrated. And so this is the way I think we start to talk about it of saying, we absolutely love the asset class of real estate. We just demand the same due diligence that we would, whether we're going to invest in a private company or a public company, is there are these principles and foundations of how you look at good investments. And Justin's going to get into a little bit of how do you even start to look at real estate as an investment?

Justin Dyer (10:58):

Yeah. And it's similar to how you would look at a number of investments or a number of different types of investments, but getting into some specifics, right? We want to, especially on the private side, where if you're going in with a fund manager who's ideally the reason why you'd be doing that is they have expertise in a certain marketplace. There's a certain region, let's call it. They have an area of expertise in a sub-asset class within real estate, right? Call it nursing homes or multifamily property management, right? They have that proven track record. And so you would partner with them in most cases. And it makes sense as well to Erik's point, you don't want to overconcentrate, right? You want to ideally have a diversified real estate portfolio and doing that on the private side is admittedly a little bit tough just because of the dollar amounts that are involved with it. So something to consider right there. But going back to the manager side of things, okay, what are they charging?

Justin Dyer (12:04):

Real estate managers charge what's called a carry, which is very similar to the venture capital and private equity world. It's kind of what they get for putting risk into the project as well. What is that carry? Is it 20% of the income distributed in 20% of the equity on the back end when the property is sold? We've seen a lot of deals actually lately that have a much higher carry. And I think this actually speaks to... This is my anecdotal opinion on it, but I think it speaks to the amount of capital chasing real estate. They're basically like, "Hey, if we can charge 50% for carry on this deal instead of 20%, hey yeah, sweet. We'll take it." Right? And the market is bearing that because there's a lot of money chasing real estate deals and specifically in this multifamily space.

Justin Dyer (12:56):

And then further to that, let me wrap it up as well with the property management, right? One of the negatives in my opinion with respect to real estate is in private real estate specifically, is that it's a big real asset that requires a lot of maintenance. And there's a cost involved with that, both in terms of just outright maintenance fees. And hopefully if you didn't own something and you needed to buy lumber recently and whatever, it's gone up like 400% in the last couple of months. And so that's a raw, hard cost that you can't avoid. Then there's the property management fee as well, right?

Justin Dyer (13:36):

Again, so that's the firm you pay to make sure if you have tenants, you're getting paid on time. If the faucet breaks, it's getting fixed, things like that, right? So, there's a ton of costs if you will, and components to look under the hood and going back to this idea of partnering with a manager that knows a certain region, right? It's still is not a risk-free endeavor. A great buddy of mine listens to the podcast, probably you know who I'm talking about. He knows the space quite well. And anecdotally said, "Hey, we partnered with this one manager," where we did, we got double-digit IRR, internal rates of return. So, think about your rate of return in some cases, in a specific region, but then they did a deal somewhere else in a nearby, similar type city and they didn't get their equity back, right? So, there is risk in this. It's not this risk-free proposition.

Justin Dyer (14:36):

Again, going back to this principle of risk and return are related. What drives the risk and return within real estate is a little bit different than what drives it on the equity side of things. But there's a lot of similarities with investing as a whole, okay? Can you diversify away and get exposure to a number of different areas and economies? Local, regional economies. Are you all in California and some big earthquake is going to hit and guess what that does to the price of your real estate? Or Florida and a big hurricane hits, right? So, there are a number of factors. And again, we'll probably dive into a number of them within each sub-sector, but there are a number of basic factors you want to consider when going into a real estate transaction.

Justin Dyer (15:23):

And I don't want to forget, we've talked about this concept of leverage, right? And that's a very important factor as well. How much leverage is either the manager putting on the property in the transaction that you're doing, you're getting into? Or if it's a direct investment yourself, how much leverage are you comfortable with, right? That potentially increases your expected return, but it also increases your risk as well.

Erik Averill (15:46):

Yeah. And it's interesting. I was on a conversation with a client recently of going back to how emotional this is and how convoluted it can get is you can find yourself overstretching your family's situation and actually providing extra risks to it by convincing yourself, "Hey, I know it's probably a little out of my budget, but the real estate always goes up." Right? And so, going back to this misnomer that's one is safer over the other. Well, it all depends based off of the analysis that's being done. And I think of leverage, right? And I know this for Sadie and I, we were part of this where we got really lucky. We bought a home a few years ago and we sold in October of last year and we're shaking our heads at what somebody paid us. Now, we had to buy another home, right? And of course, but all of a sudden it feels like, "Oh, this is easy. Your house always goes up."

Erik Averill (16:55):

But then when you start going through, it's like, "Oh, I made this amount of money." You start asking, "How much should I pay in property tax? Oh, you remember we had to redo that landscaping." Or, "We've got to fix that and we've got to fix that." And now all of a sudden, it's like I had no spreadsheet where I was capturing every dollar that I spent to maintain that home for the last five years, right? And so it's really hard to treat your primary residence and what I'm not saying is that we don't believe in home ownership, we absolutely believe it. We said, "Just don't treat it like an investment. It's an important asset to you," but then if you are going to take calculated risk, we just want to make sure you're getting the return that you deserve.

Erik Averill (17:35):

So, what we don't want to see happen is as you put your family in a situation where you're taking more concentrated risk by owning one rental property, or trying to flip one single place when the return really isn't there. And so, I joke around, Josh and I, and for those of you listening, don't know Josh, he's a CPA, CFP who works with us. And we were joking around that. What if I took 80% leverage and put it in the S&P 500? So over the last decade, the S&P 500 is annualized a 13.6% return. Now, what if I did that with 80% of borrowed money, right? Justin, it would be astronomical my returns-

Justin Dyer (18:21):

To the moon baby.

Erik Averill (18:22):

And now... Yeah, to the moon, and people are like, "That's wild. That is so risky." But that's what we're doing in real estate.

Justin Dyer (18:28):

Yeah. And that's an important point. You've kind of touched on it as well. And this can be said for all private investments. Not specific to real estate, where with public equity markets or public markets in general, we get the benefit of being able to trade that really efficiently every single day. If you own a stock, you can buy it or you can sell it almost instantaneously. Private investments, that's not the case and kind of a function of that or I guess a result of that is we get current prices. And there are some interesting studies that I've seen and if anyone's interested, maybe we can put these in the show notes, but where they try and get a more true apples to apples comparison of asset prices between private illiquid markets and public liquid markets.

Justin Dyer (19:22):

And guess what? These studies, again, across a number of different outfits, they basically show the same thing, right? Risk and return are related. There's really, truly no free lunch. And if you're getting outsized returns, you're probably doing it through some sort of engineering of sorts. And when I say that, it's a little bit of a nerdy way of saying... Going back to this idea of leverage, you're introducing some form of financial engineering into your investment or to your equation to help you out. And if you're comfortable with that or you're experienced with that, hey, it makes sense. Again, we do like real estate kind of for that reason, not specifically for one of the reasons being it is a safe way to introduce leverage and get some benefit from that. But you have to be comfortable and you can't necessarily just put your blinders on and think, "Hey, this is the greatest thing since sliced bread because it only goes up."

Justin Dyer (20:18):

No, in all reality, if you actually dig into some interesting academic studies and let's say marked to market, if you will, the academic or the accounting term, you mark to market real estate or private investments, they don't move the same way as the public markets do.

Erik Averill (20:34):

Yeah. And I love how you're just going into a lot of the engineered risk, right? Or looking at the details of it is we actually think it's such an incredible investment opportunity, but so does the rest of the world. And so what does that mean? It means that it is attracting some of the smartest people in the world to the asset class. And I think one of the other dangerous things that we see is almost believing that you are not competing against professionals, that when you go and you buy a home, or you go and buy a rental property, or you enter into trying to take down a multi-family unit is almost believing like it's just you versus a few other people in your similar situation. And that's not the case. So, there was a study I heard from A Wealth of Common Sense, they referenced it is it's estimated that 20% of the home purchases across the nation are actually coming from private investors. That these are private equity firms. These are hedge funds. These are institutional investors that they have a mandate to return returns or give returns to investors, right?

Erik Averill (21:50):

And so, you're not competing against your neighbor, you're competing against the smartest people that they are when it comes to investing. So once again, in the private markets, you got to ask the question like, "Why am I so lucky to get access to this house? And why did somebody else pass on it? And why did it not get eaten up in the private markets off listing before it hit the listing?" And so, we don't try to be pessimists around here on that. It's just more of, we know how hard you've worked for your money, right? And we want you to capture the returns that you deserve. And ultimately, we don't ever want you to take more risks that could jeopardize you accomplishing the priorities that are so important to you. And so, we hope this conversation has been helpful. This is literally opening the door into the conversation of real estate. We love it as an asset class, as Justin had shared. It is so nuanced that over the episodes in the future to come, we're going to deep-dive into specifics and different types of real estate.

Erik Averill (22:55):

And so, if you guys have questions, we'd love to hear from you. Head over to awminsights.com. We'll make sure to link in the show notes to some of those things that Justin referenced. And until next time, own your wealth, make an impact and always be a pro.