July 2022

Mindy:
Welcome to the Bigger Pockets Money podcast show number 320 Finance Friday edition, where we interview Chris and talk about Zooming out three to five years and thinking about your future portfolio.

Chris:
I’ll tell you what I’m more challenged with than the leverage is the time commitment needed to do it properly and do it effectively. And we listened to the Bigger Pockets Real Estate podcast. We listen to the Rookie podcast. I have struggled with time management with all the different balls we have in the air right now.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my Costco clothing wearing cohost, Scott Trench.

Scott:
That’s right, Mindy. My entire wardrobe is from Costco, except for my shoes.

Mindy:
Tip to, well, head to toes, right? Scott’s socks. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or deal with the philosophical and good problem of earning a very high income and needing to understand how to allocate your time. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Chris today. I really like his story about not having a high income for quite a while and having a mountain of debt. And then I don’t want to say lucking into, but kind of lucking into a big windfall when they decided to sell a business. And now they have the very fortunate decision, what should we do with all of this money?

Scott:
That’s right. It’s a popup moment. We’ve spent 20 years grinding away, building a strong financial foundation, and now it’s really strong. And we’re almost surprised by how, the options that affords. And I think a lot of folks, or I think many folks, hopefully, will experience a similar end state at some point. And it’s good to be aware of that, plan around it, and deal with the good problems that that presents. There are still problems. And there are still things that we need to address here in our personal financial situations.

Mindy:
Yep. And one of the things that they do need to address is how do we go from super saver mindset to, hey, we can loosen the purse strings a little bit and actually start to spend some of this money that we have accumulated. Okay. Before we bring in Chris, I must tell you that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor Bigger Pockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax, and financial implications of any financial decision you contemplate.
Chris and his wife, Carrie, have a clear cut set of financial goals, which means they’ve had conversations about money. Yay. Further, they’ve written down their goals, which tells me that they are discussing them on a regular basis. More yay. Some of these goals are rather aggressive, but they just sold Carrie’s veterinarian practice. And now they’re looking for ideas for what to do with this big old pile of cash they’re sitting on. Chris, welcome to the Bigger Pockets Money Podcast.

Chris:
Thanks for having us and really me. Unfortunately, Carrie can’t join us, but thanks for having us. We’re excited to be here.

Mindy:
I’m so excited to talk to you today. Normally, with this show, we start off, we jump right into it with what do you earn and where does it go? But I think we need a little bit of context about your financial situation. So let’s get a little bit of your money story.

Chris:
Sure. So Carrie and I have been married for about 20 years. We’re coming up on that in another month or so. And we’ve always been pretty conscientious about our finances. Up until the last couple years, we haven’t really earned a whole lot of money, but we’ve always been very conscientious. We’ve discussed it. About a year out of college, she decided she wanted to go to veterinary school. And we had met with a financial advisor and the advice was, if you’re going to do this, if you’re going to take on two, three, $400,000 worth of debt, do it now while you’re young and you have time to pay it off. And so we did. We jumped in and went to, I supported her while she was in veterinary school for a few years in the 2000s. She worked for a couple different clinics and then ultimately decided to buy her own clinic in 2011.
And just this year decided and for a variety of reasons, and I can go into a little bit of this. Being a veterinarian is a pretty tough job on top of being a business owner. And this year was the year she decided, I probably still love being a vet and still doing the medicine part of the work, but I really want to drop doing the marketing and the HR and the legal side of things. And so we looked at a couple different buyers. And in January, signed a contract to sell the practice and really made almost three times as much as we paid for the practice back in 2011.
So it was a great investment. I don’t know if we … I would love to tell you that we had all of this lined up. We knew exactly what we were doing back in 2011. That was not the case. A lot of this was trial by fire and trial by error, and we made a lot of mistakes along the way, but it did pay off in the end. She has worked very hard for the payoff that she got and I’m really proud of what she’s been able to accomplish and what she’s built.

Scott:
Awesome. So can you walk us through any other parts of the money story? How significant is this event relative to the combined rest of your story in financial position?

Chris:
Yeah, that’s a great question, Scott. I think for us, we’ve always had goals, but to be quite honest with you, for the last 15 years or so, the goal has been pay off the veterinary school loans and we have been really diligent about that. And then we had this moment, and we had about three months notice, where we said, oh, we’re going to be able to do it like that. Like, in a heartbeat, we’re going to be able to pay off all the rest of her loans. Any of the business debt that was with the business and start fresh, decide where we want to go from here. We have a lot of good skills that have been built up all over those years. But this was a significant payoff.
So we purchased the clinic for about 430,000 in 2011. And with all of the payouts … And so the way the deal was structured is she would get a certain amount of money, was about 1.2 million to when the practice sale closed. And then an additional, somewhere in the neighborhood of four to 500,000 each, broken up over several years if the clinic continues to hit certain revenue targets.
So that gives us a little bit of break on the long-term capital gains, which is nice. But it also gives us some runway now to try to figure out what we want to do next with that capital and how we can invest it for our future and for our children. We have two daughters. One is in the middle of high school; and the other is about to finish elementary school. So we’ve got those major college expenses, potentially, and other expenses on the horizon.
Maybe to go back a little bit further. So we came from different money backgrounds. My parents were both professionals. My father worked for the Federal Reserve Bank. My mother was a professor. They knew how to manage money and that was a part of my upbringing. On Carrie’s side, her father was a general contractor. Didn’t have the best skillset to manage money. And unfortunately, during the ’80s, the family went bankrupt because of some spec homes that they had. And I think that influenced certainly her, Carrie’s risk tolerance over the years. And just how, I think it manifested itself in that we were not really willing to invest the whole lot while we were paying down that debt. We didn’t want to take on that risk at the time, over the last 15 years. But fortunately, through a lot of hard work, it’s almost like winning the lottery, except there was a lot of hard work behind it. Fortunately, we’re in a position now where we can be a little bit more forward leaning.

Scott:
Yeah. Well, the practice is an overnight success in just 15 short years.

Chris:
Right.

Scott:
So …

Chris:
Right.

Scott:
Yeah. Nice lottery win for you and Carrie.

Chris:
You talk about this a lot on the program and I appreciate it. But her salaries through those years were less than $50,000 a year. My salary, thankfully, was able to carry a lot of our housing expenses and a lot of our other expenses. But we were paying almost $30,000 a year just to pay off the debt, just to service the debt. I wouldn’t even say to pay it off, but just to service it.

Mindy:
Was that in addition to her salary or was that basically her entire salary was paying off her debt?

Chris:
Basically her entire salary.

Mindy:
Okay. If you’re listening and you want to be a veterinarian, listen to that. Rewind it and listen to it again. Her whole salary was paying off the two to three. How much total debt did she have? Two to $300,000? What was the exact amount, do you remember?

Chris:
Well, the exact amount I don’t, but with interest and everything else, it was at least 300,000.

Mindy:
$300,000 in her monthly salary essentially covered her debt payment to be a veterinarian. And she was able to, very fortunately in 2011, which was a downturn. Did you get a deal on the veterinarian practice? It sounds like …

Chris:
I don’t think we realized we did, but we did.

Mindy:
So you were able to buy low and sell high, which is a very lucky series of events. That’s not something that you can study for and fortunate to get into, you luck your way into that just like … I don’t want to say just like with the stock market, but yeah, just like with the stock market. You luck your way into it over time, and then you were able to sell it because we are in a really great position right now. Again, the economics or the economy. So …

Scott:
How much did you sell the business for? How much cash did you receive and what is the term, what are the key terms for the earnouts on a go forward basis? Because this play is not over yet, right?

Chris:
It’s not. No. There’s still hard work to be done. So the way it worked, her practice was grossing about 1,200,000 when she sold it. So that’s a two vet practice, grossing 1,200,000. She was on track to add an additional veterinarian, wanted to do that, but it cost money to hire a veterinarian. And there wasn’t enough cash coming off with what we had to hire another full-time veterinarian at more like 80 or 90,000 a year. Still, not that, not a whole lot when you’re spending $300,000 on an education. If she hits that 1,200,000, there’s a payment of about 67,000 a year for the next three years that she could earn. Once she gets it to 1,500,000, there’s an additional 100,000 per year on top of that as well. It doesn’t have to be earned in the first year. It can be earned over the course of a few, by the end of that third year. And then she would be eligible for the entire payment.

Scott:
Are there any other guaranteed payments from the business?

Chris:
No. Well, no, there aren’t. So she has the ability to earn production. So in the veterinary world, your salary should cover about 20% of what your revenue is, as a vet. And if she earns, if she brings in more than that 20%, then she gets a cut of that above the 20%. So she can earn, my guess is she’ll probably earn in the neighborhood of about 100,000 this year.

Scott:
Interesting. I have no idea, at this point in time, how to factor in the value of your continued interests in this business, into your net worth statement. So I was wondering-

Chris:
Yes.

Scott:
If we’re missing a big asset. We have your net worth in front of us here from that. And I don’t think you are. I don’t think you can reasonably put any part of that business interest into your net worth at this point in time.

Chris:
No. It’s nice to work. It’s an important goal to hit and I have full faith that she and her team will. But yeah, exactly. It’s not a given. And if the economy takes a downturn, that could certainly impact the revenue that’s coming into the practice.

Scott:
Fair enough. Well, let’s go through your financial statements and get a good picture of where you’re at and what your goals are.

Mindy:
Okay. Now here’s the part where we say, so what are you bringing and where does it go? Let’s look at your salary and expenses.

Chris:
So if you’re okay with this, Mindy and Scott, I’m going to go with after tax income.

Mindy:
Yeah.

Chris:
Because I think that’s a little easier to narrow it down.

Scott:
Great.

Chris:
And this would be both after tax and after some of the other deductions. So my retirement account, life insurance, all the stuff that would come out of my check. So total per month is about 12,366.

Mindy:
And that is just salary or is that salary and additional income?

Chris:
Yeah, so that’s salary for me and Carrie. And then we have, we also sold, in a separate transaction, the building that the clinic was housed in. And we sold it into a real estate partnership that we earn a monthly dividend off of. And then ultimately we’ll have a … there’s a payout in five years, should everything go successfully with that. But it gets us out of the landlord business, which as you might imagine, being a busy vet, and another busy professional, we are small, short on time in our lives. So that’s about $1000 a month at this point.

Scott:
Awesome. And where’s that go?

Chris:
So mortgage is a little over 1800 a month. Utilities are around 400. Charitable giving is at 2000 or so a month right now. No car payments, but gas is about 300 a month. Food, which is inclusive of groceries in our restaurant, our restaurant budget, is about 1900. We save out of, so we have some savings that go from my paycheck, but savings is about 30. Yeah, 3167 a month. And then subscriptions, Netflix, you name it, 318 a month. I have a category I call miscellaneous and that is 2000 a month. And I can go into a little bit more depth on that. And then medical is 100 bucks a month and I wish I had a …

Scott:
Okay. So we got about 6,700, 7,000 in house, what I’ll call household spending, which includes charitable giving, mortgage, utilities. And we got about 3000 going in cash that you’re accumulating each month after tax.

Chris:
Yes.

Mindy:
I want to jump in because this doesn’t affect you, but we are going to publish this and people are going to listen. If your expenses are something that you are interested in reducing, then I would suggest going a little bit more granular. You have restaurant and food combined. So I would break those out. If you wanted to track your expenses to see how much is going to restaurant versus how much is going to food, because restaurant expenses are going to be more expensive than grocery shopping expenses. You have subscriptions as an all encompassing. How many subscriptions do you have? Is that truly all the subscriptions. Do you need Netflix and Hulu and, and, and, and …? I’m not saying Chris, you need to look at this, although you could if you wanted to, because I truly believe almost everybody has room to cut. And I’m doing that spending tracker this whole year.
So I’m just going to plug that again. You can see me and my expenses and how granular I get, because I truly do want to cut my expenses at: biggerpockets.com/mindysbudget. But you have a miscellaneous of 2000. I bet you could really cut that if you wanted to. You also have savings of $3,167 right here. So I’m not in here to say, oh, you need to cut. Your salary is 12,000, after retirement accounts and insurance and lots of other things. So you’re already saving half of your income, including $3,000. You’re doing okay, Chris.

Scott:
Yeah.

Mindy:
You get the stamp of approval from me.

Chris:
We were talking before the show recording started, Mindy, but it hasn’t always been this way. And that’s, I think, a valuable lesson. We really have tightened. We’ve followed our budget from the first day we were married, which has helped us significantly, particularly when we weren’t earning anything when she was in veterinary school. And so we’ve slowly grown it, but it’s never really gone off the charts for us, which has been really helpful. Particularly when this windfall hit our accounts this year. And when we’re saying, well, I don’t even know how to spend money. You know? That’s part of our challenge was trying to figure out how to appropriately spend. And luckily, a lot of this is automated, so we don’t think about it too much. It just goes where it needs to go and does its job.

Mindy:
I love that.

Scott:
How much do you have going to pretax, if any, as part of this?

Chris:
So pretax, so health insurance is pretty expensive. But I would say, let’s look here. So my retirement right now gets $1,700 a month. Carrie’s retirement, because we’re trying to catch that up, because she has really, literally, nothing except for the last few months is almost $3,000 a month for putting in, to try to max her retirement funds out this year. And then we have another 365 that goes to her HSA that she can invest in. So yeah.

Scott:
So once you’ve maxed out the retirement account for Carrie and you go into a more normalized situation, you have yet another 1000, probably, that you can add to your after tax bucket on a monthly basis.

Chris:
Yeah, that’s right. Yep. That’s exactly right.

Scott:
I might be off a little bit of the math there, but hopefully that’s in the ballpark.

Chris:
Yep.

Scott:
Okay. So we have three to 4,000 a month in cash accumulation, plus really healthy allocations filling up your HSA and your retirement accounts pretax.

Chris:
All right.

Scott:
Love it. Let’s go through assets and liabilities.

Chris:
Yeah. So assets, we have quite a bit of cash on hand right now and I’ll explain that. We have about 400,000 in cash. We have my 403B funds. I work for a nonprofit. It’s our version of the 401k. And 133,000. And that carries HSA. I have these backwards on our form, but her HSA has about 1500 in it and her retirement account has about 4,500 in it. And then we have our home, which is valued around 320. It’s probably a little bit more than that, but that’s a safe bet for now.
We have our after tax brokerage account invested in VTSAX at about 373,000. We have a, this is the real estate partnership that we’re in. That is 153,000. And then our personal vehicles, which I put on here, but I don’t really count them as assets because they continue to … Well, at least recently they’ve been going up in value, but that’ll eventually wane. Liabilities is a pretty short list. We have $190,000 or so left on our mortgage in our primary residence. So that’s our liability right now. We don’t have really have any … Beyond that, we don’t have any other debt. We paid the education loans off. We paid the cars off. All that stuff has been done.

Scott:
Awesome. And you and your mortgage is on a 15 year note, I believe?

Chris:
It is.

Scott:
And you’re paying that off earlier?

Chris:
Yeah. I think the intent is we’d rather not, if we can pay that off early, it’s not a huge amount and not a huge amount for us per month. So …

Scott:
All right. Now the most important question: goals. How can we help you? What’s the best thing? What are you trying to get to?

Chris:
Yeah. So, we want to have a good cash cushion, an emergency fund. So we’re going to keep 50,000 aside for that. Are going to have, I think both of our daughters are likely college material. Not that we’re pushing them in that direction, but they’ve both separately expressed interest in that path, so. That’s expensive as we all have known, and I’ve been listening to the podcast for a while and I know others see that expense as well. So I’d love to figure out a way to build some assets into our portfolio that would throw off enough cash to pay for college education. So the benefit that we have is that our older daughter and our younger daughter are separated by about six years. So we don’t have to pay for college for both of them at the same time. Now, again, that wasn’t planned. And I don’t think, if you talk to Carrie, she’d say yeah, it happened when it happened, and that’s how it worked. But now, 15 years on, I’m going, oh yeah, that was probably a good idea. So that’s one thing.
So we love our house. We had a house fire about five years ago, and thankfully everybody was okay. But we rebuilt. And so we have really what we want aside from one thing. We took our fourth bedroom and made it part of our master suite, which means we don’t have room for, really comfortable room for guests. So we have a garage. It’s a mess. We’d like to build a housing unit there that we could potentially use for an Airbnb-type rental; but really, for our guests, our parents, those who might come to visit us. So that’s on our plan as well. And that’s probably in the neighborhood of 100,000.
We’d love to have a place to go. Both of our jobs are pretty stressful. I refer to it as being “out of the zone.” If I am in the community here, I am always on call to a degree. So trying to find a place where we can escape to when we have time, but also to use as a short-term rental would be ideal for us. We love traveling. I think Carrie is more interested in retiring early than I am. But the idea is not a terrible one in my mind either. So … It’s a short list. It’s not too aggressive.

Scott:
Awesome. Well, I think a lot of those goals are going to be super achievable with the situation you’ve built here. Let me ask you another question. You seem very, your only debt is your mortgage. It’s on a 15-year note. What does that speak to about your overall tolerance for debt and investing in something like real estate, for example, with leverage?

Chris:
I think it would be best to describe my mindset is shifting on that. I think for so many years we’ve been grinding to pay off the $300,000 worth of veterinary school loans that we have a tendency to avoid debt, if at all possible. We don’t, we have credit cards, but we pay them off each month. We don’t overspend on that. And so I think we logically understand the value of leverage and what that can do. And certainly in the recent housing, boom, it really has paid off for a lot of folks who were in that. I think for me, though, it’s still a mindset shift. Over the past six or eight months, I’ve really tried to get more comfortable with the concept of adding a debt burden ultimately to achieve greater wealth in the end.

Scott:
Now, when does your oldest, potentially, go to college?

Chris:
So I have a sophomore, which so that’s three years. So what’s that 20, 25.

Scott:
So let’s start there. What does an ideal portfolio look like? You’ve got 1.4 million in cash. Your whole situation is converted to cash. What does an ideal portfolio look like in 2025? Let’s assume you stockpile another 200,000 on, well actually, I’m going to take a step back here because I have a cheating information. There’s another piece of information we need before we get into this, which is you are projected in future years to earn way more than what you’re currently earning this year. The 3,000, 4,000 per month that you’re saving will increase substantially in the next three to five years. Can you walk us through a couple of those key projections?

Chris:
Yeah, that’s a great point. And that’s where my brain has been spinning over the last few months. So with Carrie’s hard work and efforts with the veterinary practice, she has the potential to earn, basically, 167,000 a year, for each of the next three years. Whether she earns that all at once at the end of the three years or builds up, that’s how it should work for her. So she also has the ability to earn production bonuses. If she’s producing more in the practice, that could be a total of, I’d say, 20 to $25,000 a year. She’s able to keep a vet on board. She has the ability to earn a bonus from that. And I have a side hustle, which I’ve had for probably 10 years now, where I consult with some large international organizations on crisis management. And that can earn up to 40 to $45,000 a year for a couple weeks of work. So I’ve got some different levers to pull, to bring more cash into play.

Scott:
How much if, right now, your run rate is, let’s call it 40 to $50,000 per year. And after tax cash accumulation, what does it actually look like for 2023, 2024, in terms of how much cash you can accumulate?

Chris:
Yeah, we’re probably talking between 200 and 250,000 additional dollars per year.

Scott:
Before tax?

Chris:
Before tax, before tax.

Scott:
Great. So let’s call it 150 after tax.

Chris:
Yep.

Scott:
So we’re having, that’s $200,000 in cash accumulation per year for the next three, four years. That is a realistic possibility for you.

Chris:
Yep.

Scott:
Okay, great. So that’s the point I want to ask is you have 1.4 million in assets. You’re going to accumulate $200,000 in cash per year over the next three years. That puts you at 2 million bucks. Not counting any appreciation of your existing assets, any loan amortization, any of the 401k balances, that kind of stuff. Let’s call it $2.1 million in three years. Right? Now imagine you have a pile of $2.1 million in cash. What does the perfect portfolio that gets you those options that we just discussed, what does that look like to you?

Chris:
Well, that’s really why I’m here. I don’t have a huge sense for that yet. I think, Carrie and I have talked about our financial number, it’s probably between 2.1 and 2.5. So based on what you just said, it looks like three years, she can call it quits and get out of here. So she’ll be happy to hear that. I’m already joking a little bit there.

Scott:
Portfolio could go down.

Chris:
It could go down. That’s right.

Scott:
A year, in your case. But …

Chris:
Yeah. For me, I think we would both benefit from having more freedom to travel, more freedom to do certain things with our family and do things that we love with them. I think that the mix for our … I was doing the math before I gone on. Right now, we’re about 34% cash, 43% equity in the stock market, and about 24% real estate, including the equity we have in our home and the partnership that we’re a part of.
I would probably like to see the real estate be closer to 30 to 40% and probably earning us some regular monthly cash flow on that, so that we can transition from maybe what we do on a daily basis in our W2s to more of a part-time. I don’t think either of us envision ourselves completely getting out of the work that we’re in. We both love what we do. But I think we would benefit from not doing quite as much of it. And that’s a common theme that I hear on this podcast, and others, but certainly with your guests over the time that I’ve been listening.

Scott:
So let me try a portfolio and see how you react to it. Suppose your portfolio, you have $2.1 million. 100,000 is in cash. 1 million is in rental property real estate, generating a 5% cash flow on that; so that’s $50,000 per year. $600,000 is in stocks. And the imbalance is your paid off, your primary residence, which may or may not be paid off or on the track to get paid off. How does that portfolio feel?

Chris:
Yeah, at face value, it sounds pretty good. I would have to digest it a little bit more, but that is likely what we’re aiming for there. It probably goes without saying, but I’ll say it anyway. A lot of this thinking is new thinking for us. And so this has been a mindset shift in general that we’re still getting used to. I think we believed for a very long period of time that we would … Carrie was hoping she might be able to retire one day, given the debt that she had and the salaries that she was earning. I don’t think that’s a question anymore. It’s just a matter of when now. And I think she’s got a shorter horizon on that. And I’ll say this one thing, Mindy, you were talking about becoming a veterinarian.
The one bit of advice that Carrie gives to people who are interested in it is this is the type of career that you have to need to do. It can’t just be a want. If this is what will fulfill you in your life, then you’re probably cut out for being a veterinarian. But if it’s something you’re like, oh, that’d be fun to play with dogs and cats, it’s probably not quite to the level it needs to be in your desires to do it.

Scott:
Yeah.

Chris:
Because there’s a payment for it. She loves what she does, but it is not easy work.

Mindy:
Be a vet tech, if you just want to play with dogs and cats.

Chris:
Yeah.

Mindy:
But if you can’t imagine your life without taking care of animals and saving, then maybe talk to vets.

Chris:
Yes.

Mindy:
I think there’s a lot of veterinarians out there who will talk to you and give you the real scoop about it. Yes, there’s the amazing I saved this dog and it was this family’s whole life and yay. But there’s also a lot of … $300,000 loan payments that you’re making that don’t go away. And those aren’t eligible for public service loan forgiveness, are they? Or are they?

Chris:
In some instances they are.

Mindy:
Oh, they are.

Chris:
For Carrie, they’re not.

Mindy:
Okay.

Chris:
So at the time, they were not. Right, exactly.

Mindy:
Yay.

Scott:
But I think it’s a great point. Hey, we don’t think about these things, right? There’s a grind that’s been going on for 15, 20 years in your household to accumulate and get by, and figure those things out and be smart with money. And all of a sudden, as a result of that cumulative two decades of work, you now have options and can pop up and think, okay, what happens next? How do I think about that on a go forward basis? And that’s, I think, our job today is to help discuss that. And it’s, hopefully, fun and exciting, right? It’s also terrifying. There could be, there could certainly be, the decisions you make could put you at risk for certain things. If you decide, for example, take on a lot of leverage on something and it doesn’t work out or you’re all in stocks and the stock market will have volatility.
And that could be there, who knows what that volatility leads to in three years from now. But those are, this is where we have to make essentially a gigantic bet with your entire net worth. And the thing is, you’re doing that regardless of whether you do the exercise or not, right. Right now, your bet is saying, I want to be 35% in cash. I want to be this much in real estate, my primary residence, this much in stocks, so on and so forth. But either way, it’s a bet. It’s just, if you have complete control of that and you can live with the decision … and there’s no right answer to any of this. It’s an art.

Chris:
It is. And so, even though the clinic, working at the clinic was really hard work for Carrie. And again, she’s the one really driving that. I wish she were here to give you the insight that she has. But she guarded that asset. She controlled the asset. She was able to increase and pull the lever here and push the button there, and build it. This is scarier for us because there is limited control if we go into something that’s a more passive. And so I think both of us are sitting here going, how do we properly hedge against the risks that we’re likely facing? We’re in a great position, Mindy, you said it. I have a secure job. Carrie has a secure job. There’s always going to be a need for vets. The worst case scenario is we continue working like we are. But I think we both feel a responsibility to do right by this hard work that she’s put in for the last 15 years.

Mindy:
I have a few things that I want to talk about. You said that you have this ability to consult. At what seems like a fairly lucrative amount. I’m using your words. You said, “It’s a couple of weeks a year for up to $40,000.” Is there any way to grow that? Is that a guaranteed amount of work? Is there any way to … because that’s the kind of thing that I would suggest you just work for a couple of weeks a year, even after you quit your job, because that is, you’ve said that you want to, your goal is about $100,000 a year, maybe $80,000 a year. That’s half of your spend right there. So instead of needing 2.5 million, you need, or 2 million, you need 1 million, because you’ve already, you’re generating the other right there. Or maybe a little bit more because taxes and all of that. But that seems really lucrative.

Chris:
So I would love your input on this. So I’ve been doing this for about 10 years. I only consult with former colleagues and people that I know personally. So these are people that … I do have a website out there, but it’s not searchable in Google. I have to give you the exact website. It’s really for those folks to help them, sell it to their purchasing department. Here’s the challenge though. I can’t figure out how to scale it. What people are buying is my personal expertise, my abilities in a room, facilitating a group exercise. When they’re buying that service, they want me doing that service.
And there’s a certain … yeah, it’s a couple weeks a year. It’s a couple weeks that I take away from my family though. And that will … maybe in five or six years, that will be okay because the kids will be off in school and et cetera. But for now, it’s a real struggle for me to go. Do I really want to, is it worth the time and effort to do that? So yeah, I think that the challenge for me is a scalability one. The more I do, I could burn myself out on that pretty easily. It’s in high demand.

Mindy:
Oh, sure.

Scott:
But yeah, long-term, absolutely.

Mindy:
If you’re looking to generate $80,000 a year and these, let’s call it two weeks, makes $40,000 a year. Then you could do another two weeks, and now you’re working a whopping four weeks a year. Tim Ferris got nothing on you. Four-hour work week, four-week work year.

Chris:
Right.

Mindy:
Then you’ve got your $80,000. Then, I don’t want to say it doesn’t matter what your investments are because I still want to see a cushion, but then it doesn’t matter because you are generating the money that you need to live off of comfortably. $80,000 is a pretty comfortable live. And then if you don’t want to work four weeks a year, maybe you want to work five weeks a year.

Chris:
Yeah.

Mindy:
Then you’ve got your 100,000. So that’s something that I would definitely not give up. Even plan on continuing that into retirement because it’s so lucrative. But it sounds like you both enjoy your jobs.

Chris:
We do.

Mindy:
Carrie has a three-year plan to generate more income at the business and then step away completely?

Chris:
So I doubt that will happen. My guess is she’ll step back to maybe, she’s working four days a week now. She’ll probably step back to three days a week. And then a year later, maybe to two days a week. She has an interest in doing some international work and some volunteer work in the veterinary field. And I think this would give her some opportunity to do that. Luckily, she would have to get her license in different states, which is not impossible, but it does take some work and some financing. But she would have a broader capability of using those skills, if not volunteer, for minimal resources coming in.

Scott:
Let’s jump back to the big picture here, because I think that’s the major piece that you guys need to decide.

Chris:
Yes.

Scott:
On coming out of this is, what does my portfolio look like in an about right sense, plus or minus is 10%, in terms of total volume, in three years? And what are my outcomes from that? And I think you have a variety of choices and these, this all jives with all the goals you have here, right?
So, but if you went and said, I think, it sounds like estate is going to be a part of that. But I, for example, could see a portfolio that is a million dollars in paid off real estate producing five to 7% annual cash yield on that, at that point in time. I could see you having a paid off primary residence at that point in time, if you chose to do that over the next three years. I could see you having six or 700,000 in stock assets with that. And I could see that real estate being in both short-term and long-term rentals.

Chris:
Yeah.

Scott:
Per your desire to have a vacation property with that. So all of that’s possible. Do you think that you want to have … but you have to make a fundamental choice. Do you want to have leverage and go with that? Or do you want to not do that? Because I think that has a major impact on how you go about this. Whether you finance your house, which is going to get you the best rates and the best terms and use that to buy the investment real estate, or whether you go out and just get everything paid off in cash. And I think that’s going to be a hard decision for you based on what we see about your position right now.

Chris:
Yeah. I’ll tell you what I’m more challenged with than the leverage, is the time commitment needed to do it properly and do it effectively. And we listened to the Bigger Pockets Real Estate podcast. We listened to the Rookie podcast. I have struggled with time management with all the different balls we have in the air right now. And I’ll tell you a quick story. Earlier this year, we were looking at a short-term rental property, potential property, in outside of Western North Carolina. A community we’re familiar with. We know with there, we found a great real estate agent who knows investors, went down the path. We put a bid in, on a house. And in North Carolina, they have a due diligence period. And so we, with a little bit of investment, we could get a little bit more information. But we could, for any reason, say, no, not us, not now.
And we went through the process. We were in the due diligence period for maybe 60 days almost. Had a contractor come in. The house needed quite a bit of work. Ultimately, we couldn’t figure out how to do the work ourselves. It would’ve meant more weekend trips there. We just, we don’t have the weekends, right. We’ve got busy schedules. My work is not a 9:00 to 5:00, five day a week job. Nor is Carrie’s. And we ultimately, we paid a little bit of money and got out of it. It would’ve made a great deal. It was a good deal. And I think it still would’ve been. We couldn’t figure out, from the time perspective, how to commit those resources there. So I don’t know if you have any feedback on that angle. Leverage, I don’t think bothers us as much. I think we’ve gotten over that hill.

Scott:
Well, you have to think about your time management at this point, right? So right now your portfolio is not, is not large. It’s a large portfolio, but it’s not huge relative to your combined income. Right. Which is probably in the ballpark of 300-plus thousand dollars. Right. Pre-tax. So the value of your time, let’s say that the value of your time is probably north of $100 an hour, right? And managing a property of that size is probably not that valuable from a use case standpoint. But when we think about backing into your $2.1 million portfolio, you’re going to have in three years, if we’re still aligned on that thinking, okay, that portfolio should generate eight to 10% per year, most likely. Or five to 10% per year, depending on what your projections are. That’s $100,000 on the low end and $200,000 on the high end. Right?
So dedicating the time to getting that portfolio right is another full-time salary on top of that. And I think you need to factor that time value of that activity into the way you’re thinking about that. Because it may not be worth that right now, but it will be worth that in three years. And that will be, that will eclipse any one source of income that your family currently has soon. Maybe not exactly by that point in time, but that’s the framework I would give to you. And if you want to get exactly what you want out of that portfolio, time needs to be invested in it. And you got to treat it like the asset of that I think it is.

Mindy:
What other index funds would you be interested in? Or are you just interested in VTSAX? Jim Collins says, “VTSAX is the way to go.”

Chris:
Right.

Mindy:
He’s got a lot of money in there and he’s doing real well. So that’s a great place to put your money. But VTSAX goes up and down as well. So if you’re comfortable with it going up and down, that’s a great place to continue to put after tax dollars. And if you’re not, that is something you need to take into consideration when you’re looking at where your money should go.

Chris:
Right.

Mindy:
I know where you live because we had this conversation before we got on the phone, or before we started recording, and you live near the coast.

Chris:
Mm-hmm (affirmative).

Mindy:
There’s a lot of vacation opportunity spots where you are at. I think that your desire to have a cash flowing asset or assets that generate $50,000 a year by 2025 is viable with your income. With your debt situation, which is practically nothing, with your mountain of cash that you’re sitting on, and with your future income that’s available. I think you have a lot of opportunities to get several short-term rentals.

Chris:
Yeah.

Mindy:
What do you think about renting out your auxiliary dwelling unit when your folks aren’t in town?

Chris:
Yeah. So it’s up for discussion with Carrie. She’s not thrilled about that idea. But honestly, I probably would leverage that build. We’re right in the process of getting the designs completed on it. And if I could just convince her that a couple months, a couple weeks, a month, or a week a month, we rent it out and cover the mortgage on it, then that’s where I think we could be right now. So at least covering our costs on it. But yeah, I’m a little bit more interested in that than I think Carrie is. It’s still up for discussion. Maybe she’ll listen to the podcast and tell me one way or the other.

Mindy:
Okay. Carrie, this is for you. What is it about renting out the ADU that gives you the heebie-jeebies? Is it just, you don’t want to do the cleaning. You don’t want to have people there. I’m assuming it’s going to be a rather small item, a unit, like a one bedroom or maybe even a studio unit. So there’s not going to be the opportunities for a lot of parties because there’s just not a big space for it. You don’t have to have people in your space all the time. You could have somebody there just one weekend a month, or maybe there’s a big festival in town that you have, every apple picking or whatever.

Chris:
Yeah.

Mindy:
There’s a lot of opportunities to have short-term, just do it when the high dollar-

Chris:
Right.

Mindy:
Days like 4th of July and Christmas and Thanksgiving, and you don’t have to have them.

Scott:
With the short-term rental for your primary residence at this point is you’re going to generate $330,000 in household income this year. And you’re going to be generating $500,000 in household income within two or three years. Right. And so that income is irrelevant to your financial position. It’s nice.

Mindy:
Yeah.

Scott:
It’s a nice bonus. But it’s irrelevant to your financial position. And so you have this incredible luxury that I think is what you’re grappling with as a family right now about this immense amount of income generation and optionality that comes with that. And it all comes back to backing into three, five, seven years from now saying, what does my ideal portfolio look like? And you have the option to, for example, have that paid off portfolio that produces 50, 60, 70, $80,000 a year, work a little bit part-time and live your life for the rest of your life. You’re going to give up $400,000 in income.

Chris:
Yeah.

Scott:
In order to have that. And at that point, renting out your auxiliary unit makes a big difference, right. And that may enable that freedom. But that’s the luxury choice that you guys have right now. And that’s why I think you’re struggling with a real estate investment, right. Because you’re like, good God, I’m going to earn 350, $500,000 over the next five years. What am I doing dealing with this right rehab around the corner here.

Chris:
Right.

Scott:
Well, that’s highly relevant to your future state portfolio.

Chris:
Right.

Scott:
And that option you want. You just got to have, you have to figure out, okay. No, no, the life I want in three years is this what? And if that life says I’m working my full-time job and Carrie is not working anymore. And we have some passive income and we’re able to comfortably save, and I can begin the transition of leaving that, maybe you go with a more passive option that has less stuff there. And go with that.
If we’re both done and we’re just going to chill, you can do that because you’re going to have a paid off, you could have a paid off mortgage. You could have, most of your spending is flexible.

Chris:
Right.

Scott:
With charitable giving being a quarter of your spending right now.

Chris:
Right.

Scott:
Which I imagine you would decrease with lower income, to a certain extent. So that’s the crux of your issue right here.

Chris:
Right.

Scott:
I don’t have the answer for you. Do you want 500 grand or do you want a lot of free time, right. Do you want 500 grand a year or do you want a lot of free time? That’s … Congratulations. I think a lot of people are happy to have that problem. But that’s, I think, the crux of it. If I can get to it, of the issue that you have, or that we’re discussing today. Do you think I’m right?

Chris:
I think you are. Again, it’s getting used to seeing numbers like that on a regular basis and just try to put it in the right context because it hasn’t been like that. Maybe for the last two years. Maybe. But it hasn’t been like that for a while. So I think you’ve hit the nail on the head, Scott.

Scott:
I think not a lot of people, but many people, will come into a situation like this at some point in their lives. Especially if they have a variety of interests. In investing, entrepreneurship, side hustles, those types of things. And the value of your time begins to compound and overwhelm you to a certain degree.

Chris:
Yeah.

Scott:
I’ve had an issue like this to a certain extent, and something to just consider.

Chris:
Yeah.

Scott:
I think it’s a great issue to bring up. All I can give you from the advice standpoint at that point is, is determine what you want in three, five, seven, 10 years and say, here’s what it is. I’m writing it down. I’ve got a draft outcome of what that looks like, and begin making those moves. And if you decide you want the portfolio and the passivity, then invest the time at the expense of other income opportunities to set that portfolio up. If you decide, I want to keep working, then you’re right to be more passive and forego the opportunities like that real estate deal you walked away from. But I think that will put it in context and help you appropriately prioritize the way you invest your time. And then, obviously, the big portfolio you’re going to have.

Chris:
Yeah. A lot of what we’ve been doing is continuing to educate ourselves. And it seems like the more passive syndications are on our … We’re thinking through syndications now; these other partnerships, we have a couple opportunities. Through my work, I do have the opportunity to see entrepreneurs, successful entrepreneurs, building their own companies. And there may be a possibility of doing some angel investing locally, where I have a deeper knowledge of the widget or the process that they’re engineering or building. So those are other options that we have in our toolkit right now. But it’s a lot of education. I’m not going to lie.

Scott:
If you like those investments and want to keep working. I would do that instead of real estate, frankly. Real estate, there’s a learning curve associated with this business. It’s 300, 500 hours. And that includes both time invested in that, in podcasts, in books, and looking at properties and all that kind of stuff. And your value of your time is pretty high. So paying that price is really expensive for you.

Chris:
True.

Scott:
It’s really cheap for $50,000 a year earner, Scott Trench. When I started my journey, I was making $25 an hour. That’s a cheap education to invest that time. It’s expensive for you. And so the passive option may be much better if you decide to work for 10 years, if you don’t, then the value of your time, you can put, oh, I’m going to pull that down because the value of my time is actually going to be, $40 an hour or my $80,000 year in passive income, that I’m going to have in three to five years. And that’s how I’m going to rationalize.

Chris:
Yeah.

Scott:
The way I connect that.

Chris:
Yeah.

Scott:
Hopefully that’s a helpful framework at least.

Chris:
It is. That was what I was hoping to get out of this call today is context, thinking about things in a slightly different way than I have been.

Scott:
We have no specific advice then, it sounds like. Maybe a couple times right in there. Just get some really good questions and hopefully reframing them.

Chris:
Well, maybe one area that you can give me some advice. Specifically on, we haven’t had the opportunity to really save a whole lot for Carrie’s retirement and pretax retirement accounts. Is it worth us doing that? We have the opportunity to do it. We probably could use the tax help in the near term. But is it better just to put it in more flexible investments after tax given where we are on the retirement side of things?

Scott:
I like moving into the after tax investments when you’re starting out and earning $50,000 a year and trying to get your first house hack or your first entrepreneurial pursuit. When you earn 300, $500,000 a year and have this flood of excess cash flow coming in over the next couple years, I think you’re wise to shield it, to play the tax advantage game, and do that.

Chris:
Okay.

Scott:
Personally. That’s my thought on that. So I like exactly what you’re doing. I wouldn’t change a thing about it.

Mindy:
Well, I’m looking at this 2022 salary of $325,000 and thinking what is $20,000 of tax savings going to get him?

Scott:
Yeah.

Mindy:
Or 40,000.

Scott:
Yeah.

Mindy:
I love not paying taxes.

Scott:
It’s going to get you 40,000 in tax savings.

Mindy:
Yes. I love not paying taxes, but it’s not hugely moving the needle.

Scott:
Deferred tax saving.

Mindy:
It’s not like-

Chris:
It’s deferred. Yeah.

Mindy:
Well, and yeah, it’s deferred. And then, but they’re already paying boatloads of taxes.

Chris:
Yeah. And, and so that’s the lure of real estate, right? If you do real estate correctly, then you can limit your tax liability, but it does per our earlier part of this conversation, it does take effort, work, time, commitment, all those, all those other things that at this point we have limited.

Scott:
Real estate will not help your tax situation because you’re high income earns. So if you earn less than, I think it’s like $150,000 a year, I got to double check that, but I think it’s, if you’re only less than a certain amount, then you can use the passive losses from real estate to offset your income.

Chris:
Got it.

Scott:
But with your income, you won’t, I don’t think, I don’t believe you will see those tax benefits.

Chris:
Okay.

Scott:
From real estate. The real estate income, the passive income from your real estate, will be lightly taxed, most likely.

Chris:
Yeah.

Scott:
Depending on how much income business produces. But I think that … This goes back to the Roth 401k debate. And I will say that even though I like what you’re doing, I actually contribute to the Roth in spite of also having a fairly high income.

Chris:
Okay.

Scott:
Because Roth 401k.

Chris:
Yeah.

Scott:
You can’t contribute to a Roth. You’ll have to do a backdoor or something like that in your circumstance. But I contribute to the post-tax retirement accounts because I like to think that, or I like to think that I’ll have a high income when I hit retirement age.

Chris:
Right.

Scott:
And perhaps tax rates and inflation will be very high at that point, in making an impact. But that’s a major bet. I like the tax advantage to play in your case, because you have way more cash than you know what to do with, in terms of an income right now.

Chris:
Right.

Scott:
That might change next year when you figure out your portfolio.

Chris:
True.

Scott:
Yeah. So that’s my high level take on that, frankly.

Mindy:
Chris, this has been a lot of fun. I think that there’s a lot of things that you and Carrie need to sit down and talk about and just like your-

Chris:
Yes.

Mindy:
Document that you sent us with your salary and projections and investments and all of that is very well laid out. I think that, you didn’t do that in one day. I don’t think you can just sit down in one day and say, ooh, we’re going to have this big old plan, but it gives you an idea of what to think about. I love Scott’s idea. What do we want our portfolio to look like in three years, when your daughter starts college? What do you want your portfolio to look like in five years? In 20 years?

Chris:
Yeah.

Mindy:
And back into it that way. But I do really want to caution you that the market, the stock market is unpredictable. So what would you do if your portfolio lost 50% of its value and then, start to …

Chris:
Yeah.

Mindy:
Hedge your bets. Maybe you have bonds because you are getting into the age of bonds. I don’t think …

Scott:
Well, here’s what I think on the bonds thing. Here’s what I think you should do on that. You want to save up for daughter’s education.

Chris:
Yeah.

Scott:
And that’s in two years, right. We just had a conversation about I bonds.

Chris:
Yes.

Scott:
The other day. Why don’t you put that money into a 529 Plan since you know you’re going to use it for college education.

Chris:
Right.

Scott:
And then earn the interest on the I Bonds, which is going to be ordinary income. And now you can shield that income from taxes. You got a fairly safe perhaps overall investment, with that. That’s going to meet inflation. And that might be a really good tip for daughter’s education is to contribute to. And you’ll have a business, you potentially have a side business, you potentially have a real estate business. They have the two of you. You might be able to put a good chunk into the 529 Plan or in very … Actually, I’ll have to think about that. There may be an opportunity to put money into a 529 Plan.

Chris:
Yeah.

Scott:
At least 10,000, maybe more. I got to noodle on whether you can actually do what I just suggested and use multiple businesses to contribute to the 529 Plan and get the I Bonds that way.

Chris:
Yeah.

Scott:
But either way, even if you just do that with one bucket, that’s a few thousand bucks.

Chris:
Yeah.

Scott:
That you’re saving in taxes for an expense you believe is highly likely to occur.

Chris:
Right.

Scott:
In two or three years.

Chris:
Yeah. I listened to the I Bond episode a couple days ago. I didn’t realize that the business could also contribute. So we’ve got, between the two of us, have three or four businesses, each of them could contribute.

Mindy:
And a trust.

Chris:
And a trust. Right. And then each of us. Do you know if our children can? Can we put I Bonds in our children’s name?

Scott:
This is a good question for our Facebook group.

Chris:
Okay.

Scott:
I don’t think we know the answer on the show. Let’s put that in the Facebook group and see what our listeners have there. Because we don’t have the research at the top of our fingers.

Chris:
Okay.

Scott:
But I think, I wonder if that would be a really good way to think about it. Is there a way to put the money into the 529 Plan? If so, how much? And how much can we, is it just, can I inside the 529 plan, can I just use one I Bond to save up for college or can I put multiple in there? And if not, can I, should we use additional I Bonds to be a savings vehicle for an expense we know is coming, even if it’s outside of the 529 Plan?

Chris:
Helpful. Thank you.

Scott:
So that would be where I’d use bonds.

Chris:
Yeah, yeah. Yeah. Well, we were always planning on using a 529 to legally launder that plan. We don’t need to put it in there for long-term, but certainly to help us pay for college. We can do that a year in advance, and then because we know we’re going to use it versus hoping that we-

Scott:
Legally launder? I love yeah. We’re going to use that phrase more frequently. We’re stealing that one.

Chris:
I’m glad I could contribute to your lexicon.

Scott:
Thank you.

Chris:
No, I really appreciate the time. This is always useful to talk about and I will make a … I know Mindy, you talk about the money dates quite a bit. We do those pretty regularly, have for a long time. They’re super helpful. It keeps us on the same page. And we throw in a little parenting date there, too, where we say, okay, how are we going to manage this with the kids? So we try to mix it up a little bit.

Mindy:
Okay. Well Chris, I’m sorry, Carrie couldn’t join us, but it was lovely discussing this with you today. Thank you so much for sharing your financial situation with us. And I think there are a lot of things for you to think about. I would love to hear what options you guys have chosen.

Chris:
Sure thing. We’ll keep in touch.

Mindy:
Okay, fantastic. I’ll check back in with you in a few months.

Chris:
Sounds good. Thank you both.

Mindy:
Okay. We’ll talk to you soon. Bye Chris.

Chris:
Bye-bye.

Mindy:
All right. That was Chris. That was a really fortunate series of events that he has found himself in. And now he has, he and his wife have a lot of decisions to make. And Scott, I think you gave them a really great framework to look at. Look, you are making a lot of money and you are looking at investments that aren’t going to be generating so much cash. And that’s, I’m in the same position they are with this whole, ooh, how should I invest to generate this amount of money? No, keep working at your job and generating this big, big, big amount of money that you’re generating because that’s where your true value is right now.

Scott:
Yeah. Well, I think that’s just a shift that everyone has to deal with, right? If you save 50% of your income or more, then mathematically after, a period of about 10 to 15 years, your portfolio is going to be a bigger source of wealth accumulation that 8%. I think. This is the math behind early retirement in general. It may be a bigger portion of your wealth accumulation than your income at that point. Right? And so that’s a part of the journey that you should just be aware of. That’ll be really hard for folks to deal with. If you’re, following the basic rules here and saving a big chunk of your income, investing for the long run, have a couple of lucky breaks or windfalls down that stream. You may face that problem earlier than you, but, and have to kind of make some trade offs about whether you want to earn money or invest and manage your assets.

Mindy:
Yep. And that’s an interesting conversation to have, and I don’t think that’s a five minute conversation that you can just flip the switch on.

Scott:
Nope. Only on this show. Well, I have one.

Mindy:
Okay. You should just totally flip that switch. Bam. Next problem.

Scott:
I have one challenge or one question I’d like to ask the community for our Facebook group at: facebook.com/group/bpmoney. And that’s the question I was asking earlier about the 529 plans. How much money can you put into a 529 Plan and use that to invest in high yield bonds, like the I Bonds that we talked about last week? I’d be really curious to know that and any other strategies for short-term, shielding short-term income or gains like that when you know you have an expense like college or a health expense or those types of things. What can you do? What are applications of that? I’d love to get a discussion going and get some ideas churning.

Mindy:
Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 320 of the Bigger Pockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, be sweet, parakeet.

David:
This is the BiggerPockets podcast show 639.

Matt:
REITs are one of the ultimate parts of the stock market where historical performance is a good indicator of future results, even though, of course, we were trained to believe that that could never be the case, but real estate in general is such a steady business. If you think about most REITs, most commercial REITs, they’ve got leases that they’ve signed with tenants that run not your typical rental lease, which is six months, a year, or maybe two years, right? In the commercial world, lease is run five years, seven years, 10 years, even 15 years.

David:
What’s up, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast. Joining me today is the man himself, Henry Washington, as we interview the Motley Fool’s Matt Argersinger. We talk macroeconomics. We talk real estate investment trusts. We talk stock trading, and we talk how to make it all work together. Henry, first off, how are you? Second off, what were your favorite parts of today’s show?

Henry:
I am doing very well. Thank you for asking, sir. Man, the show was great. Some of my favorite parts of the show where I just liked hearing the perspective of somebody who mainly invests in the stock market, but does own some traditional real estate. You can ask those questions that only somebody who does both would know, right? What’s your favorite strategy? Why one versus the other? What do you like about one versus the other? We have a little bit of a conversation about how he enjoys both of those investment vehicles.
We learn a lot about REITs, and what I really liked and what I really enjoyed was being able to hear how to start not just understanding REITs, but how to start researching them for yourself, and what key metrics to look for when you’re researching them so that if this is something you want to get into, you have a starting point for understanding these things and how to research and understand what’s the best one for you.

David:
This is not a typical Seeing Greene episode. We’re not taking questions from different BiggerPockets members. We’re actually diving deep into a spinoff of what we typically get into. I think a REIT is if a real estate investor and a stock investor had a baby, this is what you’d end up with. It’s definitely a different alternative to invest in real estate, but without the time commitment, without the effort commitment, and getting your feet wet. I think that there’s a place in a lot of people’s portfolios for this.
Henry, you shared a little bit about how you’re venturing into some other investment vehicles, and this is something you’re considering. Is there anything you can share about how you’re venturing out of just traditional real estate investing into other stuff?

Henry:
Absolutely. For me, I am diversifying my investment portfolio. My baby, my bread and butter is always going to be real estate. I’m always going to have most of my net worth tied up in real estate, like physical real estate in some form or fashion, but trying to do as much research as I can about other investment platforms and investment vehicles, and so being able to just spend the last 45 minutes learning from a professional around what real estate investment trusts are, and how to research them and understand them has been super helpful.
So, as the market is shifting, and as we’re producing income from the real estate, I’m just trying to find what are some of the best strategies in order to help get an even higher return on that investment. I like the stock market for some of the same reasons that I like real estate. I mean, we talked a little bit about it. Dividends are phenomenal, right? We get into real estate. A lot of us got into real estate to create passive income. Well, a dividend from a stock is truly passive. You don’t have to do any work to get that paycheck every quarter or every year, depending on the payout schedule of that dividend.
So when you start buying some of these stocks that pay dividends, and you get that truly passive income, it really feels good. You get some of those same warm fuzzies from real estate, and so I really enjoyed this conversation.

David:
If you’re worried about not getting a Seeing Greene episode this week, don’t worry, in a few weeks, we’ll be back with fresh Seeing Greene episodes for you in the traditional style. We just wanted to make sure that we were able to bring Matt in, and get some access to all the knowledge that he’s got. This was a really fun interview, also very insightful. I learned quite a bit more than what I had known before we had it. I think you could say the same, Henry.
Before we bring in Matt, today’s quick tip is check me out on the Motley Fool Money podcast. Just search for David Greene Motley Fool, and you should be able to find an interview where Chris Hill interviews me. We talk macroeconomics. We talk real estate investing, and it’s cool because you get to hear someone who’s not a real estate investor asking a bunch of questions that we hear all the time. You might just find out that you know more about real estate investing than you thought when you get around other people who don’t know it as well.
Check that out, and then let me know in the YouTube comments what you think about how I did. Henry, any last words before we bring in Matt?

Henry:
Yeah, man. Just get ready for some great information. Turn your brain onto the idea of the stock market. I know a lot of real estate Truists are just like, “Yes, real estate, I get the best returns. There are so many other ways to make money,” but try to go into this episode with an open mind, and maybe you’ll learn something that peaks your interest, and you start investing in something that in 10 years you’ll look back and be glad you did.

David:
All right. Let’s bring in Matt. Matt Argersinger, welcome to the BiggerPockets Real Estate podcast.

Matt:
Hey, happy to be here.

David:
I am glad that you’re here. So for those that aren’t familiar with your company and yourself, would you mind giving us a little background on yourself?

Matt:
Sure. Wow. I’m almost embarrassed to say this, but I joined the Motley Fool about 15 years ago, which makes me in full years a dinosaur at the company. I’ve spent most of the 15 years working on the investing side of the company on our various investing services, and spent a lot of time with David Gardner on a lot of his services, and spent some time with him on his podcast and things like that. But for the most part, I’ve been a stock market investor, a real estate investor, and those are my areas of focus at the company, and spent some time on Motley Fool Money podcast as well with Chris Hill on occasion. Love talking to him and talking about investment ideas.
That’s the quick background. I live in Washington D.C. with my wife and a three-year-old son who’s growing way too fast.

David:
I was just on the Motley Fool podcast being interviewed by Chris Hill. I don’t know what show number it is, but if you guys Google David Greene Motley Fool, you should be able to find that episode. We talked about macroeconomics. We talked about trends to look for in real estate. He’s a very smart gentleman. I’m sure that you are too. Also, how old were you when you started at Motley Fool? You look like you could not have worked there 15 years.

Matt:
Oh, well, I was a few years out of school. I’m maybe… Well, I’ll take that as a compliment.

David:
You were that like Doogie Howser. You look like you were 13 years old at a corporate job.

Matt:
No, I’ve just got this… The Zoom or the camera sometimes enhances your image. I just put that to max, so it makes me look 10 years younger.

David:
That is… I came from a background in law enforcement. That was our crew to solving every crime, as you just say, enhance, enhance, and then the camera footage becomes better and better. I would highly recommend anyone having any difficulty in life, the answer is just enhance.

Matt:
Enhance.

David:
All right. How about your own investing portfolio? Can you tell us a little bit about what it looks like, and what you’re interested in?

Matt:
Sure. Well, in addition to being a dinosaur at the Motley Fool, my portfolio tends to be a lot more, I’d say, conservative maybe than the average Motley Fool analyst. In my portfolio, you’ll find a lot of dividend companies. You’ll find a lot of real estate investment trusts, REITs. I like the companies that are profitable, good asset quality, predictable cash flows to the extent that they can pay out dividends, and buy back shares. Not to say I don’t have some companies like Amazon or Alphabet or others that are on the faster growth end of the thing, but that tends to be my focus.
Up to 20%, 25% of my portfolio tends to be in REITs. It’s just because I like that. I like the real estate sector. The historical performance of REITs has been incredible. You invest in an area of the market that not only delivers you great income, but also is much less volatile than the overall market. I tend to lean heavily into that. I like to say I’m, well, a relatively young guy running an old man’s portfolio.

David:
Not bad at all. So for those that are listening that aren’t familiar with what a REIT is, would you mind breaking that down?

Matt:
Sure. Real estate investment trust, they’ve been around for a while. I think Congress commissioned them in the 1960s, early 1960s. The way to think of them is a mutual fund of real estate. They trade in the public markets. You can buy and sell them in your brokerage account. But generally, what you’re buying with a REIT is a company that owns and operates probably a dozen, few dozen or maybe hundreds of properties. You can invest, for example, in an apartment REIT that owns apartment buildings. You can invest in an office REIT.
Wouldn’t recommend that these days, but that owns lots of office buildings. You can invest in hotel REITs, self-storage REITs. There’s just… If you think about real estate as an asset class, you can really invest in many of the different categories underneath that huge sector to include data centers and cell phone towers and various alternative categories of real estate. The brilliance of… I mentioned the historical returns. So if you go back to the early ’70s, so roughly 50 years since the National Association of REITs has been tracking REITs, they’ve delivered about a 13% average annual return, which I think might surprise a lot of people.
That’s about a percentage point higher than the overall stock market measured by the S&P 500 over that same timeframe. It might not seem like a lot, but 1% per year over 50 odd years can really add up in your portfolio. Not only do you get an asset class that’s relatively less risky with more predictable cash flows, high really asset based that pays out generous dividends. You get really outperformance on a total return basis. I love the asset class a lot. I wish more investors would check out REITs. I’ve made them a pretty big part of my portfolio.

David:
How would you describe the difference between a REIT and maybe a syndication where people are pulling their money together to buy a single?

Matt:
Sure. Well, they’re actually similar in a lot of ways, but with a REIT, if you’re looking at a publicly-traded REIT, again, you’re looking at a fairly large enterprise company that’s probably got dozens, again, if not hundreds of properties. With a syndicated pool, or maybe what’s popularly called crowdfunded real estate these days, you’re looking at probably a single asset, private run by a sponsor or an operator that you’re investing alongside with. That can be compelling too. Generally, those are only reserved for… Most of those deals are reserved for accredited investors, and so as a…
Most investors in the market don’t have access to those, but they do have access to REITs of course. I like that asset class as well. It’s something that’s taken off, I guess, over the last decade with the JOBS Act and the various acts that have come out of that. It’s become an interesting way for an investor to get exposure to single asset deals, which I like. You can use a crowdfunding platform, for example, to invest in an office building in Chicago, or an apartment building in Los Angeles, even though you might be on the east coast.
That wasn’t really possible as a real estate investor just 15 years ago. You had to have the right connections. You had to have a lot of money. Nowadays with crowdfunding and syndicated investments, you can invest in those right away. I think if you’re a credited investor, and you have some means, you have to realize that the investment minimums on those can be high like 25,000, 50,000, maybe even $100,000. You got to have some cash, but they can be certainly good deals.

David:
That’s a great description there. I’m curious in your own personal situation. I know you have a couple rental properties, I believe, in the east coast. Why move more of your capital towards publicly-traded REITs as opposed to just getting more rental properties yourself?

Matt:
That’s a great question. Well, I think that comes down to how badly do you want to be a landlord, and to deal with all the issues that come along with that. So if I look back at my own experience, my wife and I, we bought a rowhouse in Washington D.C. shortly after we got married. One of the reasons we did that is because your typical rowhouse in D.C. is actually a duplex. It comes with what they’re called English basement apartments. It’s unique to D.C. and some other cities. You essentially live in the top, or live in the bottom if you want, and you can rent out one of the units.
We couldn’t afford to live in the Capitol Hill neighborhood of D.C. at the time, but we found a way to do it by essentially buying this property, and hacking it up where they… The young people call it these days you’re house hacking. We didn’t know we were doing that at the time. We just bought a duplex, and renting out the other side. It’s a funny story. But one day, my wife happened to be reading an article in the New York Times, I think. This is going back to 2009, and there was an article about a company called Air, Bed, and Breakfast, which of course now we know as Airbnb.
But at the time, I think people called it Air, Bed, and Breakfast. She said, “Wow. instead of doing a full-time rental with our rental unit, we could try this Airbnb thing.” At the time, I think we were one of three units in all of Capitol Hill, in the Capitol neighborhood of D.C. that was doing Airbnb. It was crazy. We listed it, and I think it was like $50 a night. It was really cheap at the time. We booked 100 days in a week. We were like, “This is unbeliev… It’s mind blowing.” Nowadays, if I look at Capitol Hill though, there’s probably, I’m not going to joke, 500 Airbnbs in the neighborhood of this house.
Anyway, so that was our big first step into like, “Wow. Real estate’s a thing.” This was a house we wanted to live in, and just help pay our mortgage. But now, it’s like, “Well, this is interesting to us,” so we made two additional investments later on, bought two more properties, very similar with additional units, did the same thing. Now, we were our own landlords. We were our own property managers. That can be really tough, especially nowadays if I think if I have a kid, and we live outside of D.C. The 2:00 phone call about a toilet not working, or the heat’s gone off, or the AC’s gone off, that has happened multiple times throughout our life is not a joke.
If you’re not a person who wants to deal with those kind of issues, REITs or these private deals are fantastic. Just invest in the equity. Don’t deal with all the headaches.

Henry:
What’s funny is you’ve got this stock portfolio, and then the conservative real estate portfolio as you call it. I would say I’m the exact opposite. I have a healthy real estate portfolio and a very conservative stock portfolio, but it’s super cool to be chit-chatting with you. Because as I was doing my research to ramp up on starting to get into investing in the stock market, investing in some REITs, when I first got started, I read a lot of Motley Fool articles. This is super cool, full sucker stuff for me.
Tell me a little bit about… With you being invested in REITs and other performing assets in the stock market, and having actual physical real estate, there are some other ancillary benefits to real estate. Do you recommend people diversify like you have across both platforms, because you get some of these other benefits from a tax perspective, or you get leverage and appreciation and that kind of a thing, or do you just wish you were all in one, and not the other, now that you’ve seen both?

Matt:
That’s a great question. I think as I’ve gotten older, and your time gets mortified, especially with family, I’m probably in a situation now where I would’ve loved to have sold all our physical real estate properties at the height of this recent market. Missed that badly, of course. But no, I love the question, because there are certainly advantages and disadvantages of both. As you mentioned, with the direct real estate ownership, you actually own the properties yourselves. You’ve got the leverage working for you, so you’ve got…
Assuming you put 20% down or whatever your equity is, you’re generally getting five to one leverage. You can’t get five to one leverage in the stock market, as we know, love to. You get that leverage, but then you also get, of course, the tax benefits, which means you can write off depreciation, which is a big expense. You can write off your operating costs. The real awesome advantage of physical real estate is that generally, they’re run at a loss, right? Anyone who owns real estate probably knows this, but you don’t really make too much money.
You make good cash flow though. But in terms of taxes, you’re almost breaking even in a lot of cases, because when you add in your mortgage costs, your other operating costs, and then you add a depreciation, which is not a… It’s not a cash expense, but it’s a real expense. Generally, in terms of Uncle Sam, you’re pretty much netting zero, even though you’re netting, hopefully, some cash flow, actual cash flow. Then like you said, you also can… If you’re in a market… I’ve been in D.C. for the last 10 years or other markets.
My gosh, if you were investing in Austin, Texas the last 10 years, or name your awesome Sunbelt market like Miami, Tampa, you’ve seen real estate just appreciate double digits a year for years in this incredible bull market we’ve had. On a leverage position, you’re growing the asset value as well. You’re getting cash flow, so direct ownership is awesome if you’re willing to put up with the headaches. I just think as I do get a little older, I’m thinking to myself, “How nice would it be not to have to deal with tenants anymore, not have to file complicated taxes, and literally just have equity and a bunch of different real estate assets, and securities, and collect dividends and distributions, and call it a day?”
I like the fact that we’re diversified, but I certainly… My thinking is definitely evolving as I get older.

Henry:
Yeah, man. It’s always interesting when I talk to people who are more invested in the stock market versus real estate. I always like to try to learn as much as I can about why they’re pouring their money more into one than the other, because everybody’s got that FOMO like, “What should I be looking at coming forward?”

David:
I have a thought on that that I don’t think gets shared enough in our space, because I know there’s some die hard real estate investors that are hearing this, and they’re going, “That 13% return sounds okay, but I got 19%. I’m sticking with what I have.” It was… It hit me like… Maybe everyone else has already thought about this, but it just hit me how few people are thinking this way, that your ROI with traditional real estate investments, long-term rental, short-term rentals, anything is it includes more than just your money.
Your ROI measures money in versus money out. But with real estate investing, there is time. There is risk. There is elbow grease. There is frustration. There is failure. Those of us that love it just assume, “Of course, this is a part of the game,” but there’s other people that don’t love this, that aren’t in love with that. There’s people that make very good money in a medical sales job, or they’re a doctor. They’re a lawyer. They have a great opportunity to earn money, but it requires a lot of their focus. They actually lose money when they invest in real estate, because the return they’re getting takes so much of their time that they’re taking it away from a place they could make more money.
It’s something I realized that a lot of real estate investors don’t understand why people invest in stocks, or in REITs, or in syndications, but it’s because you’re getting a pure ROI. It’s not your time also going into it. Matt, is that a part of your journey that you had a bit of an epiphany with that same concept?

Matt:
It’s a fantastic point. I mean, there’s a lot of things that go into direct real estate ownership that you just don’t measure. Like you said, I mean, you don’t measure the time, even though you can try to, but you don’t really… You don’t measure the time, sometimes the stress, those little trips that you have to take to buy something really quick for the tenant or to fix something. It’s good and bad in a lot of ways. The return on time is not great, and you’re not really measuring the full return that you’re getting from the commitment you’re putting into an actual real estate property, but then you also get…
There’s that cliche sweat equity, which does come into play. I mean, I think of the fact that my… Gosh, YouTube has been a godsend over the last 15 years, but doing things like replacing a kitchen, doing drywall work, learning how to paint fast. I mean, there’s a lot of things you learn, and avoid having to pay a contractor some really expensive amount of money, or, especially these days, trying to find a contractor is just a nightmare. What’s wonderful is real estate, I feel like it’s an entryway point, right? For people who don’t have…
I’m not an engineer. I’m certainly not a doctor. I’m not a scientist. I’m not a software coder. Gosh, I wish I’d done that, but… Real estate was a way for me to enter an asset class, even as a person who didn’t know anything. You can get in there. You can buy properties. You can learn how to do things. There’s some pain involved, but you can make good money if you’re willing to put in the hours, and learn how to do things effectively, and be your own property manager.
It’s not for everyone. Trust me, I love the idea of just not having to deal with hassles, and having a stock portfolio or private equity portfolio that just doesn’t require any of my time. I’m a complete passive investor, but it can be a wonderful way, I think, if you’re someone who just has a lot of maybe soft skills, but you want to get into an investment where you can really lever up and get some nice exposure to do real estate.

Henry:
Let’s talk about a little bit of the elephant in the room, right? 2021, everybody was a genius in real estate and in the stock market, right? Everybody was making money. It was a big party. Now, things are a little different, right? You’ve got the stock markets down. Real estate is changing, definitely changing. The environment is changing. So as someone who has money in both places, how are you maybe changing directions, or are you not changing directions, and why?
I’m like, “How are you preparing for this economic climate as it’s fastly evolving around us?”

Matt:
Great question. Definitely a different world than we were in a year ago. I think, it goes back to, I think, what David asked about earlier, which was the comparing the private syndications to REITs. What’s amazing about, I think, the stock market is that prices and valuations get reflected pretty quickly. A lot of the great REITs that I follow, many that I own, I’ve already been beaten down 30%, 40% to the point where some of their valuations look the best that they’ve looked at in seven, eight, nine years. I’m excited about that.
What I’m seeing on the private side, though, is that you’ve got a lot of stubborn operators who aren’t willing to mark down the value of their real estate, or they’re not willing to underwrite lower exit values for their properties. That happens in private equity, right? It’s not exposed. It’s not repriced every day, just like real estate. Real real estate isn’t repriced every day. Thank goodness, but we know the times are tough. We know interest rates have gone up. We know there’s inflation fears, and so the value of those assets has certainly come down.
You’re already seeing that in a lot of markets, right? What I love about REITs, public REITs is that a lot of those valuations have come down so much though. I’m seeing a ton of opportunity that I didn’t see a year ago. For example, one of my favorite REITs I’m looking at is one called Alexandria Real Estate Equities, ticker ARE. It’s the leading life sciences REITs. Some of their biggest tenants are big drug developers, biotech companies, hospital systems. A year ago, they’re trading probably close to 30 times funds from operations, which is the equivalent PE for REITs, so 30 times, right?
Flash forward to today, they’re at 18 times FFO. That makes me pretty excited. I feel like I’m getting a pretty good value in them. That’s very typical of a lot of REITs right now. The dislocation has happened in the public markets. So if you’re a public market investor, you can take advantage of those. Not so much I think in the real estate side, where in the direct real estate side, where mortgage rates have risen, borrowing costs are a lot higher. It’s harder to get in, or on the private side where, I think, valuations have not adjusted as much.

David:
So as you’re considering investing into a REIT, let’s say someone hears this, and they’re like, “I like that passive income.” This wasn’t mentioned, but I do think that it’s worth considering that these are professional real estate investors that are analyzing these deals at a very high level, that do it all the time, that can put on their little nerd goggles, and look at something that your mom and pop investor, or your short-term rental investor, they just don’t have angles to see. If you’re looking for a safer investment, obviously, there’s nothing guaranteed, but in many ways, a REIT could be a better option than just wandering out and trying it on your own.
What are some things that you’re looking for within an individual REIT?

Matt:
Great question. I think REITs are one of the ultimate parts of the stock market where historical performance is a good indicator of future results, even though, of course, we were trained to believe that that could never be the case, but real estate in general is such a steady business. If you think about most REITs, most commercial REITs, they’ve got leases that they’ve signed with tenants that run not your typical rental lease, which is six months, a year, or maybe two years, right? In the commercial world, leases run five years, seven years, 10 years, even 15 years.
So imagine your REIT, you own property, and you’ve got a tenant there that’s signed a lease for the next 10 years. You have amazing cash flow visibility into that. Also, a great thing is that those leases often come with price escalators, annual price escalators from 3%. Some are linked to CPIs, so they’re even inflation linked. You have an asset that’s incredibly predictable in terms of cash flow. One of the things I look at with REIT is how has this REIT performed historically? Has it delivered a nice total return to investors?
The other thing you can look at is the management team behind the REIT. Unlike a lot of the other sectors of the economy, in REITs, it’s not atypical to find a management team that’s been there for 20, 25 years, or a CEO that’s been with the company since he left college, and is still with the company. If you have a management team in place that’s delivered great returns to shareholders, they’re still involved in the business, because it’s not a business that really gets disrupted like your typical technology stock or software company.
If you have a REIT with a great 10, 15, 20-year track record, it’s highly likely it’s probably going to have a pretty good track record going forward. Then with REITs, one attractive things of course is the dividend. That’s why, I think, most investors think of REITs is because they pay nice dividends, but you need to take a look at the payout ratio, and understand what kind of earnings power the REIT has, where it’s fund from operations, which is the cash flow of the REIT.
Make sure that payout ratio is say… Below 70% is a good threshold. So, if you’ve got a REIT with a good track record, good management team, payout ratio is reasonable, good chance. That’s a good investment opportunity right there.

David:
Well, something you were talking about that I was thinking was a lot of the people that are doing really well, let’s say the short-term rental space. Let’s take Scottsdale Arizona or the Smokey Mountains in Tennessee, really popular areas. If you bought your place in 2019, 2020, you probably paid half of what those are now. Your interest rate was half of what it is now. Those people are crushing it. They’re doing amazing. If you’re trying to get into that market today, it is incredibly difficult, and you’re not going to get the same return.
So with the REIT, part of what’s cool, it would be like buying into someone else’s Scottsdale short-term rental at 2018 or 2019 numbers, right? A lot of those deals that they’ve bought over the years, you are now jumping into that incredible opportunity and the cash flows that they’re receiving, versus trying to get into the market that’s more difficult now. Any thoughts on that?

Matt:
I think that’s a great point. I mean, what your question reminded me of there’s a REIT called Invitation Homes, and the tickers INVH. They fo-

David:
Is that Blackstones?

Matt:
Well, originally, it was owned by Blackstone. It was founded by Blackstones, spun out several years ago. They specialized in single family rentals in a lot of hot markets. Their stock price is down, I want to say, 25% from its high. In a way, if I’m buying invitation homes today, I’m getting exposure to this massive single family rental market at probably, like you said, 2017, 2018 prices, where as an individual, if I go out and try to buy a house in one of those markets, good luck. It’s a lot more expensive and hard to do.

Henry:
Can you talk a little bit about… I don’t know if the right word is mindset, but let me frame it up for you. Then you’ll see where I’m going. As a traditional real estate investor, when we’re buying a property, we’re looking to get it at a good price, where we’re going to get some cash flow, and then hopefully we get some appreciation. But the goal typically for most buy and hold investors is to get in, and then we hold that thing for as long as possible, and reap the benefits for as long as possible. When we’re talking about REITs, how should somebody who may be traditionally looking at owning property who might be interested in now looking into some of these REITs, what’s the mindset you should have as you go into trying to buy into a REIT?
Because with stocks, you can try to buy low, sell high in a month, or you can try to hold it for the long term. You can buy because you like the dividend payouts, and you’re buying for cash flow. What’s that mindset you should have when you’re looking at a REIT versus traditional real estate?

Matt:
It’s hard to do, but if you could have the same mindset that you do with a traditional house or property, that’s the way to go, right? I look at my portfolio. There’s several REITs I’ve owned for over 10 years. That’s because, hey, I like the company. I like the assets. They pay me a nice dividend. That’s grown over time. Why would I sell, right? It’s tempting to go into the stock market, especially for those who haven’t been in the stock market to just go in, buy a bunch, maybe watch the REITs go up 10%, and you’re thinking, “Oh, I’m a genius. I’m going to sell right now, lock in that profit, and I’m good to go.”
The reason I like REITs, especially to have that sort of slower mindset, is because you are buying into something that’s paying you a dividend. By the way, if you can reinvest that dividend, you can grow your stake in that REIT over time, really tax efficiently, and even boost your dividends that way. One of the really underappreciated things about REITs is that because they’re forced to pay out 90% of their pre-tax income as dividends, that way they don’t pay federal taxes.
A lot of investors think that’s a disadvantage, because a REIT can’t retain earnings. It has to always issue new equity or issue debt because it needs to-

David:
I believe isn’t it like 90% of the earnings have to be reissued? Is that right?

Matt:
90% pre-tax has to be paid out as dividends. What I love about that though is it forces REIT managers to be really conscious about the capital they have at the company, and not to do anything silly with shareholder capital. That’s not the case for your typical company that you might have a CEO at a software company or e-commerce company. They’re getting cash. They’re making money, and they’re like, “Well, we’re going to start all these newfangled projects. We’re going to go buy this other company. We’re going to buy the competitor.”
Oftentimes, they end up wasting a lot of shareholder capital. Whereas with a REIT, I get the dividend income myself. I can make the best decision as an investor, what to do with the capital. On the other hand, the CEO of the REIT, the board of the REIT has to make the best decision as well, because they’re paying out, like I said, 90% of their pre-tax income. So in a way, REITs are the ultimate long-term hold investment. I think if you find a good one or two, buy, hold, reinvest the dividends, and you feel pretty good in a bunch of years.

Henry:
I love that, man. I was wanting you to reiterate that for people, because we have… Especially new stock market investors, we get into this idea of trading. The word trading in the stock market tend to be this synonymous thing. That’s absolutely not how you should look at it if you’re going to invest in something that you’re hoping produces a long-term return, especially now, right? I’ve had to just delete the apps, the broker apps off my phone. I don’t want to… I’m buying stocks for the long term, and so you get into this roller coaster of emotions.
It’s best to just have a strategy, whatever that strategy is, as long as it’s an educated strategy, and then you’ve got to force yourself to stick to it. I find it harder to force myself to stick to that strategy when it comes to investing in the stock market, investing in REITs than I do with my traditional real estate, and mostly because they’ve gamified this investing with the apps on your phone, and there’s the bright colors, and it’s super cool. I’ve got to just delete it, set it and forget it, and try not to pay attention to the news.

Matt:
I mean, I think real estate investors should have the best mindset, because you’re used to holding assets that aren’t repriced every day. You’re not trading any out of real estate, so of course.

David:
What’s your thoughts on that, Matt? That’s something I… My thoughts are a lot of people get into day trading. They get sucked into making money through real estate, because it feels good to the ego to be able to say, “This stock went up. This share went up. I did good today.” It gives you that feeling of progress that you did well, but overall to me, it’s bad for your wealth building, because you’re not focused on being productive. You’re looking at something your money already did.
Then when it goes poorly, it impacts you emotionally, and you feel like crap. Now, you don’t want to go work hard to get more money. Are you of the mindset that it’s better to find a way to make investing as boring as possible, and just let it do its thing, or do you think that there’s a place for the people that are micromanaging their individual portfolios?

Matt:
I don’t want to say… I don’t want to make investing in the stock markets sound boring. It can be fun. I mean, I think the most joy I have investing is just learning about a new company, learning about a new REIT, learning about a new industry. If I like it getting some skin in the game, I think that’s exciting. But where you should treat stock investing is watching paint dry, is generally just… That’s the approach you want to take with the stock market, and dividend paying companies and REITs allow you to do that, I think, unlike a lot of other stocks. Because talking about the gamification of it, I might feel good if the stock I own is up 10%, but to me, it’s almost better.
It’s like, “I love when I get the quarterly dividend check.” That’s my ego boost. I’m like, “Oh yeah. This company just wrote me a check.” By the way, sometimes, when they raise the dividend, I’m like, “Oh, I just got a pay raise. This company just gave me a pay raise.” It’s fun to see that cascade, and then the quarterly cash you’re getting from these stocks and REITs to go up over time. It might seem like watching paint dry, but it can be incredibly lucrative.

David:
I think that’s the key is when the check comes in, you can get your excitement from that, right? As a real estate investor, when the cash flow comes in, get excited. Don’t check the price of the house on Zillow three times a day. Did it go up? Did it go… Oh, it went down. This is horrible.

Henry:
My zestimate is crashing.

David:
I saw that.

Matt:
Why is Redfin 5% less than zestimate? Really?

David:
Yeah, and you’re emailing Redfin requesting a new appraisal on your house, because it’s not as high as Zillows is or something. I noticed this with a lot of the crypto investors. There’s some really sad stories of when it tanked recently. Suicides happening, people… horrific, horribly sad stories that people put their identity in their net worth through an asset class that is so volatile. They thought they were a real millionaire, because these assets went up to million. Then when they went down, they absolutely tanked.
I guess that’s what I’m getting at is if you let a rising asset price or your portfolio going up in value make you feel good, you are exposing yourself to the downside where it can also make you feel bad. If you can detach from the outcome, and just say, “Here’s the fundamentals. I’m going to continue to invest based on the research that I did.” I like what you said. Do a lot of research on the paint color. Then once you put it on, just let it dry. Just let it be dry.

Henry:
Watching paint dry can be fun. You get the… It looks different in different lights. You want to let it dry, and see if the color looks [crosstalk 00:38:30] going to look like.

David:
That’s your Arkansas show in there, brother.

Henry:
Oh, sorry. Sorry. Excuse me. We don’t have a lot to do here, so you go down to the Home Depot.

David:
It’s much slower pace over there. I remember when I visited Arkansas, they were really proud of the Bill Clinton library the fact that Derek Fisher was from there. One other thing, what was it? It was Dillard’s. It has their headquarters there. Everyone is very proud of those three things.

Henry:
Yes. We also have Walmart headquartered here, and so you all probably bought something from there recently, so you’re welcome.

David:
[crosstalk 00:38:58].

Matt:
No, I love the point, David, just because what a lot of investors don’t appreciate, especially newer investors, is the downside hurts a lot more than the upside, and various psychologists have written things. I think, Jason Zweig has written about this in the past, but it’s just… I think, losing money on a stock hurts three times as much as the euphoria from gaining 10% on the stock. I mean, especially in crypto, I mean, my goodness, I’m not a crypto investor. I’ve had fun staying poor the last few years, I guess, but it’s an incredibly volatile space.
Now, a lot of these DeFi projects and stuff, you’re layering on leverage to what is already an extremely volatile asset. That’s just… In my boring, old real estate world, you just can’t do that. But man, it can be treacherous.

David:
So when it comes to looking for specific information about REITs, do you have some favorite resources? Is the Motley Fool a good place to go? Is there other places that you recommend people look these up?

Matt:
Sure. If you go to fool.com, there’s a whole… We have real estate as a whole sector there. There’s free articles every day coming out, talking about various REITs or real estate companies. I think one of the best things you can do if you… Go to fool.com. I should do that first, I guess. But second, if you go to a lot of these company’s websites, I mean, just go to… Let’s use an example. Realty Income’s website, ticker O, it’s probably the most well known REIT out there. It’s one of the largest ones. You go to their website.
There’s a huge… There’s great investor relations segment of their website that has presentations that has transcripts from conference calls, and earnings press releases. It has so much great information, and so you can really get to know a company just based on its investing relations site. I think that’s get it right from the source. There’s always usually a section on the dividend history, and how long they paid the dividend, and what the current yield is, and things like that. That’s all. It’s all useful stuff. I don’t know if this is a good opportunity for me to do this or not, but I will go ahead and do it.
There’s a service I run at the Motley Fool called Real Estate Winners. I don’t love the name, so you guys can tell me what you think of the name. Let’s call it Real Estate Winners. When you’re trying to start a service, you have to do a trademark search, and figure out what names you can actually use. That was one name we could use, so we took it. Anyway, so with Real Estate Winners, it’s mostly a REIT-based investing service. It’s a subscription. What we do is we come out with one or two new REIT ideas a month along with a bunch of other content.
If you go to reits.fool.com right now, you can get a nice 20% or 25% discount off the annual subscription fee. We, of course, are publishing research all the time on that service and new ideas as well, so that’s a great… I have to get that plug in.

Henry:
Can you go a layer deeper for us and for those like-

Matt:
Sure.

Henry:
I mean, I love… No, even how simple it sounds like, “You want to know something about somebody. Go to their website.” I get that. But for those of us who are just… There’s just a lot of people who are intimidated by the stock market, and then doing this individual research, because the information’s not all in one consolidated place. So if I’m researching REITs, and I’m going to these websites, what are two to three key metrics I should be looking for at these websites?

Matt:
I think look at a… This is a little bit of an insider metric, but funds from operations, I’ve mentioned it a few times. It’s commonly known as FFO. That is basically the key earnings metric that’s for REITs, because like we talked about with real estate, depreciation’s a major expense. So when your average company reports earnings, it’s usually depreciations in there, but most companies don’t have a lot of depreciation because they’re not asset heavy. They’re not very capital intensive, but REITs, of course, own real estate, and real estate is an asset that you can depreciate over time.
FFO, it takes earnings. It takes out the depreciation adjusts for some other expenses. That gives you good underlying way of looking at a REIT. Has the FFO… What is the FFO per share? What is the price to FFO per share? Has the FFO grown over time? That tells you how REITs earnings are doing. I think looking at the balance sheet is good too. I think something like your debt to EBITDA, for example, with REITs, something that’s… Try to find a REIT that’s say trading for less than seven or eight times debt to EBIDA, gives you good indication that the balance sheet’s probably fine, and the REIT’s not going to run to any financial issues.
Then the other one I mentioned, I think, earlier is the payout ratio. Especially if you’re a dividend focused investor like I am, you want to make sure that the dividend is both sustainable and can be grown over time. If the dividend per share is, say, 70% of the FFO per share, generally, that dividend is going to be fine. If it’s above that number, if it’s above 70%, you have to be a little worried that the dividend could either be cut, or that it could had trouble growing that dividend over time.
I think those are three metrics, and they’re very easy to find. Again, if you go to a REIT’s investor relations website, usually, the earnings release will have those metrics at the very top, and you can figure it out.

David:
What are some things you’ve seen in a REIT where they’ve gone wrong, where it did not perform well, or maybe people might have lost money?

Matt:
Well, one of the big traps that I think investors will get into is there’s a whole class of REITs called mortgage REITs. There are REITs that aren’t backed by real property or assets. There are simply REITs that invest in securities, commercial-backed securities, mortgage securities, or they lend. They do a lot of lending to commercial real estate or residential mortgage borrowers. What’s attractive about those is the yields can be really high. For example, one REIT that comes to mind right now is Armour Residential REIT.
I think the ticker’s ARR, but if you look at that, it has a 16.5% yield on it right now. As a novice investor, I’m thinking to myself, “Whoa, 16.5% dividend yield, dude, sign me up.” But then you look at the long term total returns of that REIT, and they’re abysmal. That’s because essentially what’s happened is the mortgage REIT has not made as much income as it’s paid out in dividends, and so the value of the equity of the company is just steadily declined, and that’s very typical. One of the things I wanted to mention on the show was just that if you’re looking at REITs, pay attention to equity REITs, not mortgage REITs.
Mortgage REITs are a whole different class. They’re much more difficult to analyze. But if you look at equity REITs, you know that the REIT is backed by real estate, and it makes all of its income essentially from real estate operations like rents or other things. That’s one red flag to look for.

David:
Is the play on a mortgage REIT that over time, the amortization schedule starts to favor the company, because the majority of the payments are interests in the beginning? Is that why they’re set up that way?

Matt:
In a way, but a lot of those REITs, they’re not run that way, unfortunately. I like where you’re going there, but no, a lot of these REITs, unfortunately, they’re trading in and out of these securities all the time. They’re buying and selling them. They’re buying them and levering them up in a lot of cases, which is why they can pay out those incredible yields. I have yet to come across a mortgage REIT that I can confidently say, “Yes, this is a…” Even some of the best ones in the industry, that would be like… Starwood’s got a mortgage REIT. Blackstone’s got a couple mortgage REITs, I think.
I’m not going to bet against Starwood Property Trust or Blackstone, but again, even there, the REITs have underperformed over time versus your typical equity REIT. It’s a really different process. I just avoid this space altogether, because why play in a playground that’s tough when I can play in a sandbox that has great opportunities?

Henry:
Yeah, man, as somebody who, again, owns property, is invested in REITs, we talked a lot about how to research some of these REITs. So if I’m a real estate investor now looking to get into REITs, should I focus on looking at REITs that are involved in asset classes that I know, or should I just be looking for opportunity in a REIT like a REIT that’s trading lower than it traditionally has now, and jumping in? Because there’s SPG who’s more commercial, or there’s REITs that do with storage, and there’s REITs that do with single families, like you talked about earlier. So, give us some framework around that.

Matt:
Sure. I’d be very simple. I wouldn’t try to go in, and try to guess which REIT is trading at a low valuation, or which might be the best opportunity. I mean, one easy way to start, if you want, just to dip your toe in would be there’s the Vanguard Real Estate ETF, the ticker’s VNQ. I want to say it’s 95% REITs, and it has some other real estate holdings. That’s a great… It’s got a nice track record. It’s delivered about 9% return since inception over 16 years. The only disadvantage with an ETF generally, including VNQ, is that they’re market cap weighted.
So if you look at it, you’re buying into that what you think is a very diversified ETF, but you’re actually getting tons of exposure to data centers and cell phone tower REITs, which are they happen to be the largest REITs. You’re not getting a lot of diversification in other areas of the market, like you said, self storage or office or apartments. So, my approach when someone asks me like, “How do I start a REIT portfolio?” I would simply go out to the market, again, looking at REITs that have outperformed or delivered nice returns over time.
I would just get a basket in… I’d buy an apartment REIT. I’d buy a hospitality REIT. I’d buy a self-storage REIT, an industrial REIT, which there are many now, and buy a data center REIT as well. So if you got six or seven REITs that you can invest in, it’s a pretty good basket. You can feel confident that I’m not going to try it. I can’t really time when a particular REIT or a particular real estate sector’s going to do well, but at least I get good exposure broadly to the sector.
One area that I’m a little concerned about, two areas probably, but one mainly is office used to be one of the biggest parts of the real estate sector as you can imagine. It’s more than any other part of the market. I think since COVID, it’s the one with the biggest uncertainties, right? There’s just tens of millions of square feet of empty office space right now in a lot of places. That’s either got to be replaced, or it’s got to be sold at bargain prices. A lot of those office REITs are it’s going to be a struggle, I think, for a while.
That might be one area of the REIT market I would avoid. The other one might be traditional retail. Even though I think a lot of those are trading, it’s just really fire sale prices, so you might get some opportunity there.

David:
With your position on the overall macroeconomic situation that the country’s in, I guess I was thinking when you were talking about mortgage back REITs, I don’t know this, but my intuition would tell me that there’s so much capital that has been infused into the market, and these hedge funds like Blackstone have to find something to do with it that they’re like, “Hey, let’s go buy a bunch of paper, because we can get a higher return on it than what we can raise the money at.” Rates were very low. There was tons of capital.
I don’t know this for sure. There’s probably a lot more complication than I’m aware of, but in general, you make decisions that you wouldn’t normally make when there’s so much money, and you have to invest it somewhere. Do you think that some of those asset classes are at risk if we see quantitative tightening take place, or if we have a bit of a reset, and that’s why you’re more towards the equity-based REITs?

Matt:
No, it’s a very good point. I think, as we get higher interest rates and quantitative tightening, I think of course, unfortunately, you’re not going to see the Blackstones of the world go down, obviously, because, like you said, even today, they can borrow rates that are obscene. What you’re seeing, and what I’m already seeing is that you’re seeing a struggle at the smaller operator level. I look at a lot of private equity, real estate companies that are small. They own several properties, or they own maybe 500 apartment units, very small.
They’re the ones who are really taking the brunt, because they can’t borrow at the ridiculously low rates that some of the big institutions can. In a lot of cases, they’re getting high interest rate construction loans, or high interest rate mezzanine loans or bridge loans, trying to do a single development in a city or town, or they’re trying to recapitalize something. You’re going to see the stress there first as always with the smaller players, and you’re seeing that.
With the big REITs, the nice thing about REITs in general right now is REITs have some of the best balance sheets they’ve had in years. They learn their lesson from the GFC 12, 13 years ago when REITs were a lot more leveraged, so a lot of equity.

David:
[crosstalk 00:52:09] financial crisis.

Matt:
Correct. It’s great financial crisis. I shouldn’t assume that people know what that acronym means.

Henry:
I did that.

David:
I was actually shooting from the hip there. I had no idea.

Matt:
No, you nailed it. You nailed it. Great. They learned a lot of lessons back then, and I think they entered this latest crisis with COVID, and now this tightening cycle in much better shape. I’ve a little worry about some of the mostly larger REITs out there in the public space. The smaller private operators are the ones where there’s probably going to be stress.

David:
That makes a lot of sense actually. When it comes to investing strategies with… I mean, obviously, we’ve got a lot of money in circulation, but we also have really high rates. We have a lot of inflation with regular household goods. Things are changing in a pretty quick pace. What’s your thoughts on… Are you leaning more towards defensive-minded strategies where you’re trying to retain wealth you’ve built, or are there opportunities that you think where you can go be aggressive and increase your wealth?

Matt:
Great question. I tend to think steady Eddy through most cycles, right? I mean, don’t change your strategy too much based on what’s happening in the macroeconomy. But I mean, I would say certainly compared to last year, I feel like there were probably more opportunities in the market today, so I am feeling a little more aggressive. I am playing a little offense. I mean, I’m of the mind, how you guys land, but I’m on the mind that we’re probably in a situation where inflation is just about to peak. You’re already seeing a lot of commodity prices roll over.
You’re seeing rents start to flatten out. Housing prices are definitely probably going to come down. We’re probably at that… In terms of the inflation boogeyman, maybe that nightmare is coming to an end. Now, there’s other risks to the economy. We could have a recession. Energy prices are still high. There’s Ukraine, Russia. There’s still supply chains. I mean, there’s just a lot out there right now. But last fall, it was really difficult to find opportunities in the market, and even taking a five-year view, I felt pretty…
My opportunity set was empty. My opportunity set’s fairly good right now, especially if you’re taking the three, four, five-year time horizon. I’d say yeah. I mean, I’m never the guy who jumps in an, dives in and says, “This is the bottom end. We should be buy… I’m buying stocks hand over fist.” But certainly, we’re in the spaces. I look at dividend paying companies’ REITs. I’m seeing some pretty good opportunities.

Henry:
So with real estate, like physical real estate, one of the benefits that we enjoy is the ability to leverage your assets to either reinvest, and go, and buy other assets. Are there ways to do that with REITs specifically or with stocks? What are some other ancillary benefits other than just dividends that a REIT might provide you?

Matt:
Well, I mean, you certainly can’t get to leverage, of course, that you can with direct real estate ownership. With REITs, the benefit is you are… I mean, a, you’re getting a dividend that’s not double taxed, so you’re getting a dividend straight from the companies without them having paid federal income taxes on it. Now, the downside of course is that with REIT dividends, you’re usually paying at your marginal tax rate. It’s not the preferred capital gains rate. REIT dividends are generally not qualified, which is something that a lot of people don’t know.
That’s a downside and a good side though, because generally, you’re getting a higher dividend anyway, even though you’re paying a little bit higher taxes. But no, I think with… You have to remember with REITs, even though as an equity investor in REITs, you’re not getting a lot of those leverage/depreciation/tax advantages bonus, the operators of the real estate are, so the companies you’re investing in are getting those benefits, and it’s resulting in good cash flow and good earnings to you after all those benefits have factored in.

Henry:
That’s a perspective.

Matt:
Right. They’re taking leverage on their side, right? I mean, oftentimes with REITs, just like we take mortgages and houses, they’ve got loans outstanding on their properties, right? So, they are getting leverage returns. What’s fantastic about that is when a REIT signs a new lease, or that lease goes up, or that rent goes up 3%, they’re getting a leverage return on that, and getting that to you. Real estate’s great for turning small returns into great returns using leverage. Even with a REIT, you get it indirectly.

Henry:
Man, I like that perspective. I’ve always… Well, I shouldn’t say I’ve always. Well, since I’ve been building a stock portfolio, REITs have always been interesting to me. I’ve owned a few. I’ve since sold out of them, because I’ve changed my strategy. But what I do like is… I recently had a question from someone who was considering buying a property that essentially was going to break even, or even lose a little bit on the cash flow, but they were still willing to try to purchase this property in order to get in the game.
They were wondering, “Was that the right thing to do or the best strategy?” My thought there was that’s more somebody who probably has some cash on hand, because you’re going to be losing cash every month if you’re not getting cash flow. So, being able to leverage somebody else’s investment in your asset is probably a better use of the money than going ahead and buying something that’s going to be losing. We, at that point, were thinking about like, “Well, you can leverage somebody who has a fund that’s in the asset class.”
But now talking to you, it’s being able to put that into some sort of REIT as well is probably not a bad idea. All that to say, if you’re scared to get in the market, or if you can’t time the market just right right now to buy something, and you’re considering buying something that’s going to… You’re worried about it’s going to lose money. This could be a great option for you to try to research and understand, “Can you buy into a REIT that maybe isn’t trading as it used to?”
You’re taking advantage of somebody else who is a professional investor and who has bought at the right time, and you get a piece of that. I love that perspective.

Matt:
I totally agree with that. I mean, again, as long as you’re investing capital you don’t need right now, and you have a long enough time horizon, it’s a great place to put capital. I certainly… I wouldn’t be the one to rush out just to try to buy a property that was cashflow losing, just because I want to get one. It’s FOMO or whatever you want to say. I would say the REIT would win the battle for me there.

David:
All right. Well, this has been fantastic. I’m having a really good time here. We’re going to move on to the last segment of our show.

Speaker 4:
Famous four.

David:
This is going to be a modified one just for you, Matt. Henry and I will take turns firing questions off at you. Question number one, what is your favorite stock or equity-related book?

Matt:
I don’t know if it’s my absolute favorite, but since it’s appropriate to the topic, there’s a book called Investing in REITs. It’s one of those watching paint dry titles, but Investing in REITs by Ralph Block, who used to be a member of the Motley Fool. Unfortunately, he’s passed away several years ago, but it’s considered the primer on investing in REITs. It’s very easy to read. It’s an awesome…. It can really educate you about the market. I’ve read the book three times actually.
I have a book that’s my version is just scribbled with notes, because there’s just so many good insights that I always go back to. Investing in REITs would be the book.

Henry:
So with this question for real estate investors typically ask what’s your favorite investment book, and everybody always says Rich Dad Poor Dad. What’s the Rich Dad Poor Dad of the stock market world? Is it MONEY Master the Game? What’s that book?

Matt:
Oh gosh.

David:
The Intelligent Investor.

Matt:
I’ve never read it, so it could be. I’m sure you’ve gotten this one, but the Roger Lowenstein biography of Warren Buffet. I think it’s called The Making of An American Capitalist. It’s not so about the stock market. I mean, of course, it’s about Warren Buffet, so it’s about the stock market, but that is probably one of my favorite stock market books. I do love Rich Dad Poor Dad, though. I mean, just to go back to that one, I definitely read that one, and despite whatever Robert Kiyosaki’s become today, I think he wrote one of the best books out there for real estate investors.

Henry:
That’s a fact. All right. Sorry for the deviation. Question number two, what is your favorite focus stock podcast and or episode?

Matt:
Oh gosh. Chris Hill would kill me if I didn’t say Motley Fool Money, right? But okay, that’s boring. I think the Patrick O’Shaughnessy Colossus, family of podcasts, especially he’s investing the best podcast. I go to that pretty often. I think that’s probably my go-to.

Henry:
Awesome. What hobby or skillset do you need to be in the stock market?

Matt:
I think ultimately, you have to have two things. I think you have to be curious, curious about businesses, curious about finances, and then I think you need to have patience, which is so hard. I don’t have it all the time, but I think if you’re a patient person, that’s absolutely the key. You have to have the right emotional mindset to not care what happens in the stock market every day or every month or even every year. It’s just really just investing in great companies, holding them, and being very patient.

David:
All right. In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Matt:
I think my last answer to the other question might. I’d probably feel the same way. It comes down to emotional fortitude more than anything else. I think that’s what… It’s not who’s smarter, or, I think, who does better research or who’s more diligent. It really comes down to just your emotional fortitude.

Henry:
All right, so where can people find out more about you?

Matt:
All right. Well, you can go to fool.com. I’m also a regular guest on our Motley Fool Money podcast and radio show with Chris Hill. But if you’re interested in really taking a big step into real estate investing in the stock market, you can go to reits.fool.com, and that will give you subscription access to the service I work on called Real Estate Winners. I think there’s a discount there of 25% off the normal price. So if you’re really interested, go to reits.fool.com. Fool.com is just a great place to start, of course, with a whole bunch of free articles on real estate investing, so start there.

David:
Fantastic. Thank you very much for this, Matt. This has been insightful, even a little profound that I would say, and most importantly fun. I can tell that you are a full-time podcaster for a job because you did a great job. We appreciate you being here.

Matt:
Oh, thanks David. Thanks, Henry.

Henry:
Thank you very much.

Matt:
Great time.

David:
This is David Greene for Henry the fifth, wonder of Arkansas, Washington signing off.

CNBC’s ‘Halftime Report’ investment committee, Brenda Vingiello, Jason Snipe, Josh Brown and Jim Lebenthal, discuss whether or not traders should invest in REITs.

CNBC’s Diana Olick joins Power Lunch to report that Fifth Wall, a venture capital firm focused on real estate technology, announced commitments of half a billion dollars to close its inaugural Climate Fund. It is the largest private fund formed specifically to decarbonize the real estate industry, according to the firm.