Hey guys, it’s Mo here 👋

I had a great weekend celebrating my birthday. I’m 29 now and I’ve been in the real estate game for about 4 years as a direct owner and in the industry since 2016.

I was talking to a friend of mine about equities vs stocks. He’s a tech guy who is all tech stocks and was talking about how his portfolio was up 30%. We got to discussing the merits of real estate vs tech and it got me thinking – is real estate really worth it?

Real estate is all about the long game.

This industry is not a “get rich quick” game. The real fruits of labor with real estate are over the course of 20-30 years when you can do some value add, fix it up, refi your initial equity out. As debt gets paid down, you refi even more money out.

Own A Lot Or Own None

The way I tend to think of real estate is that it makes sense to have a large concentration of it in your overall portfolio vs diversify and spread your money between 4-5 different asset classes when you’re young.

You see, time is an investor’s best friend. Say you have a 15 year fixed rate loan on a property. After the loan is paid off in 15 years (assuming you have tenants), you’ll have no debt on that property and can recapitalize it with debt. Either that or you can 1031 into a larger, more passive property and enjoy cash flow.

Let’s not deny that real estate is a lot of work. Especially if you have to actively manage construction projects and properties and due diligence for new acquisitions – this is not easy. That’s why PE groups take their acquisition fee and AUM fee.

The real magic of real estate is when you own A LOT of property and have a heavy concentration of it.

You see this with economies of scale. It’s a lot easier to manage 100 multifamily units than a stock portfolio (completely passive) and having 3-5 rental properties.

Your equities portfolio and real estate portfolio are both vying for the same dollar amount. With real estate, you have to put down 20-30% for commercial or 5% down for conventional FHA financing. With stocks, you have to put the entire amount down initially unless you are buying options.

Say you have a nest egg of $1mm. You can either buy $1mm of the S&P500 or 4 houses at $1mm each w/20% down + reserves. Either $4mm of assets or $1mm of equities…

At the end of 15 years, the S&P on average returns 8% – which would give you ~$3.2mm

Say you didn’t realize any liquidity events (refi or sale) with the 4 houses valued at $4mm and now the debt is paid off. You have $4mm of equity built up, starting from your small nest egg of $1mm.

This is not considering any appreciation or cash flow or capex so take it with a grain of salt. Big picture is that for the same cash outlay, you can have $4mm in paid off houses or $3.2mm equity in a portfolio.

Are We Biased With Stocks?

All my friends in tech (limited circle + sample size) usually hold the same companies in their portfolio. All FAANG, maybe NVIDIA, some cybersecurity stocks – etc.

We’ve been in a 20 year bull run and near 0% interest rates in the last 12. Everyone who had tech in their portfolio had won. We assume this kind of growth is going to be sustained over the next 15-20 years – this may or may not be true.

Everyone who entered the workforce since 2015 and had RSU’s rode sky high valuations and only has seen a bullrun. Confirmation bias is a hell of a drug.

Individual stock pickers may seen like God’s gift to mankind because they had a few winners. If you have ever read “A Random Walk Down Wall Street”, Burton Malkiel suggests to employ a passive strategy and put the money into index funds.

It’s not impossible to time the market – but more often than not, timing the market often falls flat on its face and you could have earned more by putting it into the S&P 500.

Furthermore, you need to have a lot of capital to move the market in your favor. Hedge funds can sway the price of a stock by buying and selling billions of dollars. The amount of data HF’s have vs retail traders is unbalanced and they have so much more data.

Time In The Market, Not Timing The Market

It’s all about staying afloat in the real estate game. Over time, if you do enough transactions and are able to stay afloat, you are going to be just fine. You can generate an income source from cash flow to replace your living expenses over time.

Part of it is due to debt pay down (assuming you have an amortizing loan) and the fact rents usually go up*.

*Depends highly on supply and demand.

If you buy 1-2 properties a year, you will be just fine. This is the equivalent to “dollar cost averaging” in the stock market, but you can do it with properties. As long as you’re moderately leveraged (50-60% leveraged), you are derisking getting wiped out and being on the hook for millions of dollars.

The earlier you start, the higher your likelihood of success is.

An Insiders Game

We also have to consider insider trading. In real estate, this is legal. It’s a knowledge gap you can employ to find alpha.

Examples of this would be if you know where new highways and economic developments are coming in and you buy parcels of land. Once new infrastructure is in place, the value of underlying land skyrockets and the “highest and best use” is significantly altered.

This is case in point with a lot of the Texas farmers who found oil under their land. The value of the land skyrocketed when the O&G companies started drilling on the farmers’ lands.

In the world of equities, insider trading is highly illegal. This is true unless you’re a politician (a la Nancy Pelosi with the Pelosi index).

There was the recent case of a BP M&A manager’s husband overhearing a merger and buying the target company’s stock. The stock exploded and the couple made $1.8mm net gain from unfair, insider knowledge. The wife ended up ratting on the husband, she got fired, and the couple divorced. (Source)

In real estate, what is “insider knowledge”? It could be anything – if you’re very close to a city’s political board, it’s perfectly legal to buy property in the path of progress.

If you employ a few of those strategies, you’re bound to get fabulously wealthy.

Conclusion:

I hope you’ve enjoyed this rambling about playing the long game. Real estate is a wonderful game that has withstood the test of time and created many millionaires many times over.

We’ve been biased and blessed with fruitful equity gains in the last 12 years due to quantitative easing since ‘08.

History repeats itself to those that don’t study it.

Feel free to email me if you’d like to chat more!

Thanks,

Mo