Should I Invest in Real Estate? | Erik Averill, Brandon Averill | AWM Insights #8

 
 

Episode Notes

Real estate is a topic that a lot of people have interest in - often from being home owners themselves. There is wide exposure to the idea of investing through real estate in tv shows, books, webinars and more.

One question we've been frequently asked by our clients is if this current time is providing a unique opportunity to invest in real estate in the midst of market uncertainty. The ultimate answer is it mostly depends on your situation - we are massive supporters of real estate, but only within the right context and the right plan. More often than not, the devil is in the details.

Our clients receive numerous real estate pitches, but you have to understand all the details of the deal to accurately determine if it makes sense for you without an emotional attachment to the vision of the project.

In this episode, Brandon and Erik look at what it takes to approach investing in real estate like a pro, and address some of the most frequent topics and questions we receive including:

  • What are the best ways to approach real estate without an emotional attachment to investment decisions?

  • What are the most beneficial sectors of real estate when considering investments?

  • Should I think of my home as an investment?

  • Is flipping homes a viable option?

  • What cautions people should take when entering this area of investing Public vs private sector real estate investing

  • How to have a conversation with your advisor to explore if this is a viable and wise investment within the context of your risk tolerance and portfolio diversity

Listen at the link below, and if you'd like to hear more about the template we've created on how we analyze real estate investments - please feel free to reach out to us.

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of the AWM insights podcast. I'm your host, Erik Averill and I am joined by my older brother co founder and certified private wealth advisor, Brandon Averill. Brandon, glad to have you back for another edition of the podcast. Excited to keep this thing rolling. So the topic I wanted to jump in today is actually one that I think our listeners and maybe most excited about while we geek out on all the technical things. Real estate's a conversation that I think everybody feels very interested in probably because it's something that they can wrap their heads around, they've maybe experienced it through home ownership or just the general conversation, even as big as our president being known as someone who has made a lot of wealth through real estate. And so I want to jump into that topic today. Brandon. A lot of the questions we're getting from clients or just from people in general, uh, asking us is, Hey, Brandon is now a good time to buy real estate? And my first response is, I love the fact that the framework is, is this an opportunity to buy in the midst of uncertainty? That's, that's letting us know that our clients are thinking about investing in the right way. But what I want to hear from you brand is just a general opening is, it's kind of a broad question, but what are your thoughts about when it comes to investing in real estate?

Brandon Averill (01:20):
Yeah, Erik, I mean we obviously get the question quite a bit and I'll come out and say right out of the gate that we think, uh, investing in real estate over the longterm can be a huge wealth creator for our clients. But unfortunately where most people start is with residential real estate, the concept of flipping, they look at their home as an investment. I think, you know, what we really try to do is, is narrowed down what are we actually talking about here? What does it look like to invest in real estate as a pro? Because you know, buying your home quite frankly, isn't an investment that is something for you to live in it. You should not be banking on your home gaining in value. I mean, look, everybody has heard the stories from the old guy that you know, bought his home for 30 grand way back in the Truman administration and now it's worth 450,000 you know, and I think people don't do the math and really try to figure out what the return on that is.

Brandon Averill (02:15):
You know, there was a quote by the Yale economist, Nobel Laureate, Robert Schiller, he reported that yes, it's a longterm, but you know, from 1890 to 1990 the actual return on re residential real estate was about zero. So, you know, I think it's context around what we're talking about and I'm sure we'll get into more how to actually evaluate real estate and make sure that it is a good investment for you. But yeah, I think it's a, it's a great piece of the puzzle. You gotta figure out where it fits in and you got to make sure you're evaluating it like a, like a real investment and you're taking all the costs into account. You have an expected return on that asset. So those are the types of things we walk through with our clients.

Erik Averill (02:57):
That's helpful. So you mentioned that most individuals minds go to residential real estate, right? Whether it's seen fix fixer, flip it on, on TV or you know, just this, uh, example of, Hey, you know what, I bought this house, I got a portfolio of five and I'm renting them out and I'm making a little bit of income. But what you mentioned is you actually believe that wealth creation and real estate comes in different areas. What are the other types of real estate that investors should be investing in looking for expected return? And why is that return higher than what you would typically be able to access in residential real estate?

Brandon Averill (03:37):
Yeah, I think looking at the different areas of real estate, we obviously we've got the public markets. So I don't know if most people even realize this, but you can invest in real estate through the public markets. Uh, the benefits here are that you buy, you know, typically a fund that invests in a lot of real estate. And the, the benefit is, is that you have what's called liquidity. So you can turn around and sell that fund tomorrow, get your money out if you'd like. So there's a benefit certainly there. But then when we moved to the private markets, um, you know, the places we think there's, there's potentially the most value over time. And this fluctuates with where markets are at, but, and what regions you're looking in. But it's really commercial real estate. So where you're buying buildings and land and you're renting those to companies, et cetera.

Brandon Averill (04:23):
And then the multifamily space. Cause I think when you ultimately start to look at real estate and as a, as an investment, you have to look at scale because there are just costs that watered down your return. If you're just buying a single family home in surprise, Arizona, you've got the electric bill, you've got the HOA, you've got all these different things that go into account. I think most people unfortunately simplify it too. What's my rent? Okay, does it cover my mortgage? Great. Hey, this is a great investment. But at the end of the day, if you're looking at this like a pro, you're building out a model with all the costs involved, property taxes, the threat, what we're going through right now of occupancy issues. You know, you can't fill your, your home. I mean how does this all impact your ultimate return? Cause it's all about trade offs. You know, if you're gonna be able to acquire, let's say a 7% return in the, in the stock market from real estate to tie up your money to go through the hassle of having a private investment, you sure as heck should make sure that you're at least generating, you know, 11 to 15% on that, on that property. I think when people start to do the math, residential becomes very difficult. But if you get into the multifamily or the or the commercial space, it becomes a lot more viable.

Erik Averill (05:41):
That's super helpful. I think it's interesting, one of the things that we talk about, right? Of, of why we really want everyone to do their due diligence and to be very cautious going into this is we want you as the investor to actually capture the return that you deserve because you've worked so hard for your money. And there's this, I think mentality of why people enter into real estate is, is it feels safe, right? Is even after 2008, it still feels like, Hey, this is a guaranteed win. And I, a lot of times I think as we talk to investors or clients down the road have had this experience of going through real estate, it becomes as big a disappointment. And what we're trying to hopefully educate you as the listeners today is it doesn't have to be a disappointment that with any investment, if we look at it of when are you going to use the money?

Erik Averill (06:33):
Um, what are the risk associated and are we going to make sure that we get the return that we're due. So when Brandon you talk about that 12 to 15% because illiquidity, you know, I think that that's so important. And just the caution or the warning in the private markets that we've also seen is because they're private, um, in the information is not fully transparent. The devil is in the details. A lot of times you're going to see initial investment docs that say, Hey, we're promising and upside of 15, 18%, but the devil or in the details of the management fees. Can you talk a little bit about, uh, just what are some of the risks when it comes to the private markets? And you know, obviously we don't have too much time to go into super detail, but just some high level things that we can provide our listeners.

Brandon Averill (07:22):
Yeah, I mean, I'll try to keep it super short. I mean, as you mentioned devil in the details, we see tons and tons of real estate pitches from different folks. And the one thing we've learned over time is you have to understand the deal. Fortunately, we have relationships with fantastic real estate investors that built, uh, hundreds of million, uh, millions of dollars of wealth for their family over time. Uh, and so we've been able to parcel through those. But it takes a pro here for every 10 pitches that you see on the real estate side. It's kinda like the venture side. You probably only want to consider one or two and you want to find a good manager that you can trust and then hopefully you can go back to them over time. But yeah, certainly you're going to get pitched, especially our clients being athletes, it's pretty amazing how many, you know, how many people have got a hotel in Nashville or uh, you know, some student housing near the university of Minnesota, you know, and all that stuff might be great, but it's really easy to sell.

Brandon Averill (08:21):
And as you said, Erik, I mean, you can look on a daily basis at your stock portfolio. You can see the price changes with real estate. You know, you can't see that on an ongoing basis, but you better believe that, that that value is changing. Uh, if you think about it in this way, if you went every single day out to, to sell that property, do you think the value would be the same every day? There's no chance. So, you know, there's some benefits to not being able to see things but make no mistake, it's definitely moving up and down and value like everything else.

Erik Averill (08:51):
Well that's great Brandon and you know, it makes a lot of sense, right? Where there are some of those risks. That's where the higher upside is available. Um, and so once again I think listeners is, we are massive supporters of, of real estate in the proper context and personalized to your custom plan. As I think as you hear us say every single week is you need to be talking to your certified private wealth advisor asking the question, not is real estate a good investment? But is it within, what are my goals for my family and for my portfolio? Where does real estate fit in and isn't an appropriate investment based off of my risk profile? And so kind of with the end of that, if you guys have any questions, we'd love to hear from you. As Brandon mentioned, we're looking at real estate deals every single day. We would love to share with you even how we analyze it. We've got a template, uh, that, that we'd be more than happy to share with anyone on a, whether it's a residential real estate investment or a commercial investment. So please reach out to us and until then, and we will return next week to the next episode of the AWM insights. As always, we sign off with stay humble, stay hungry, and be a pro.

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