\n<\/p>\n
REITs<\/strong><\/a> have long been a passive income <\/strong>generator for many who don\u2019t want to deal with the trash, toilets, and tenants that come with rental property investing. No 2 AM phone calls, no listings, no showings, and no sales<\/strong>. With REITs (real estate investment trusts) you simply click a button<\/strong>, buy a share in the company, and wait for your passive income (dividends) to flow into your account<\/strong>. Seems pretty sweet right? Matt Argersinger<\/strong> from The Motley Fool<\/em> agrees.<\/p>\n Matt isn\u2019t your typical stock investor. He\u2019s owned multiple rental properties <\/strong>and has even house hacked<\/a> and put in some serious sweat equity. He knows that leverage and forced appreciation are huge wealth builders in the realm of real estate, but still chooses to invest in REITs instead of rentals<\/strong>. Why? Matt is focused more on creating passive income\u2014as in TRULY passive income<\/strong>\u2014no tenant surprises or maintenance calls to make. Matt wants to research, invest, and let his net worth grow, all while still receiving real estate-generated cash flow.<\/p>\n Maybe you\u2019re skeptical. How can <\/strong>passive investing<\/strong><\/a> be so easy?<\/strong> If you\u2019re brand new to REITs, Matt does a phenomenal job at explaining what they are, how they work, which types to buy, and what you can do to get started investing today<\/strong>. Regardless of your knowledge of the stock market, if you like income-producing real estate, this episode is for you.<\/p>\n David: Matt: David: Henry: David: Henry: David: Henry: David: Matt: David: Matt: David: Matt: David: Matt: David: Matt: David: Matt: David: Matt: David: Matt: David: Matt: Henry: Matt: Henry: David: Matt: Henry: Matt: David: Matt: David: Matt: David: Matt: Henry: Matt: David: Matt: Henry: Matt: David: Matt: David: Henry: David: Matt: David: Henry: David: Henry: David: Henry: David: Matt: David: Matt: Henry: Matt: Henry: Matt: David: Matt: David: Matt: Henry: Matt: David: Matt: David: Matt: Henry: David: Matt: David: Matt: Henry: Matt: Henry: Matt: Henry: Matt: David: Speaker 4: David: Matt: Henry: Matt: David: Matt: Henry: Matt: Henry: Matt: David: Matt: Henry: Matt: David: Matt: Henry: Matt: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets podcast show 639.<\/p>\n
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\u2019ve got leases that they\u2019ve 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.<\/p>\n
What\u2019s 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\u2019s 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\u2019s show?<\/p>\n
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\u2019s 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\u2019re 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\u2019s the best one for you.<\/p>\n
This is not a typical Seeing Greene episode. We\u2019re not taking questions from different BiggerPockets members. We\u2019re 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\u2019d end up with. It\u2019s 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\u2019s a place in a lot of people\u2019s portfolios for this.
Henry, you shared a little bit about how you\u2019re venturing into some other investment vehicles, and this is something you\u2019re considering. Is there anything you can share about how you\u2019re venturing out of just traditional real estate investing into other stuff?<\/p>\n
Absolutely. For me, I am diversifying my investment portfolio. My baby, my bread and butter is always going to be real estate. I\u2019m 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\u2019re producing income from the real estate, I\u2019m 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\u2019t 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.<\/p>\n
If you\u2019re worried about not getting a Seeing Greene episode this week, don\u2019t worry, in a few weeks, we\u2019ll 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\u2019s 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\u2019s 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\u2019s cool because you get to hear someone who\u2019s 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\u2019t 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?<\/p>\n
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, \u201cYes, real estate, I get the best returns. There are so many other ways to make money,\u201d but try to go into this episode with an open mind, and maybe you\u2019ll learn something that peaks your interest, and you start investing in something that in 10 years you\u2019ll look back and be glad you did.<\/p>\n
All right. Let\u2019s bring in Matt. Matt Argersinger, welcome to the BiggerPockets Real Estate podcast.<\/p>\n
Hey, happy to be here.<\/p>\n
I am glad that you\u2019re here. So for those that aren\u2019t familiar with your company and yourself, would you mind giving us a little background on yourself?<\/p>\n
Sure. Wow. I\u2019m 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\u2019ve 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\u2019ve 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\u2019s the quick background. I live in Washington D.C. with my wife and a three-year-old son who\u2019s growing way too fast.<\/p>\n
I was just on the Motley Fool podcast being interviewed by Chris Hill. I don\u2019t 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\u2019s a very smart gentleman. I\u2019m 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.<\/p>\n
Oh, well, I was a few years out of school. I\u2019m maybe\u2026 Well, I\u2019ll take that as a compliment.<\/p>\n
You were that like Doogie Howser. You look like you were 13 years old at a corporate job.<\/p>\n
No, I\u2019ve just got this\u2026 The Zoom or the camera sometimes enhances your image. I just put that to max, so it makes me look 10 years younger.<\/p>\n
That is\u2026 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.<\/p>\n
Enhance.<\/p>\n
All right. How about your own investing portfolio? Can you tell us a little bit about what it looks like, and what you\u2019re interested in?<\/p>\n
Sure. Well, in addition to being a dinosaur at the Motley Fool, my portfolio tends to be a lot more, I\u2019d say, conservative maybe than the average Motley Fool analyst. In my portfolio, you\u2019ll find a lot of dividend companies. You\u2019ll 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\u2019t 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\u2019s 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\u2019m, well, a relatively young guy running an old man\u2019s portfolio.<\/p>\n
Not bad at all. So for those that are listening that aren\u2019t familiar with what a REIT is, would you mind breaking that down?<\/p>\n
Sure. Real estate investment trust, they\u2019ve 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\u2019re 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\u2019t recommend that these days, but that owns lots of office buildings. You can invest in hotel REITs, self-storage REITs. There\u2019s just\u2026 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\u2026 I mentioned the historical returns. So if you go back to the early \u201970s, so roughly 50 years since the National Association of REITs has been tracking REITs, they\u2019ve delivered about a 13% average annual return, which I think might surprise a lot of people.
That\u2019s 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\u2019s 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\u2019ve made them a pretty big part of my portfolio.<\/p>\n
How would you describe the difference between a REIT and maybe a syndication where people are pulling their money together to buy a single?<\/p>\n
Sure. Well, they\u2019re actually similar in a lot of ways, but with a REIT, if you\u2019re looking at a publicly-traded REIT, again, you\u2019re looking at a fairly large enterprise company that\u2019s probably got dozens, again, if not hundreds of properties. With a syndicated pool, or maybe what\u2019s popularly called crowdfunded real estate these days, you\u2019re looking at probably a single asset, private run by a sponsor or an operator that you\u2019re investing alongside with. That can be compelling too. Generally, those are only reserved for\u2026 Most of those deals are reserved for accredited investors, and so as a\u2026
Most investors in the market don\u2019t have access to those, but they do have access to REITs of course. I like that asset class as well. It\u2019s something that\u2019s taken off, I guess, over the last decade with the JOBS Act and the various acts that have come out of that. It\u2019s 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\u2019t 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\u2019re 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.<\/p>\n
That\u2019s a great description there. I\u2019m 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?<\/p>\n
That\u2019s 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\u2019re called English basement apartments. It\u2019s 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\u2019t 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\u2026 The young people call it these days you\u2019re house hacking. We didn\u2019t know we were doing that at the time. We just bought a duplex, and renting out the other side. It\u2019s 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, \u201cWow. instead of doing a full-time rental with our rental unit, we could try this Airbnb thing.\u201d 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, \u201cThis is unbeliev\u2026 It\u2019s mind blowing.\u201d Nowadays, if I look at Capitol Hill though, there\u2019s probably, I\u2019m not going to joke, 500 Airbnbs in the neighborhood of this house.
Anyway, so that was our big first step into like, \u201cWow. Real estate\u2019s a thing.\u201d This was a house we wanted to live in, and just help pay our mortgage. But now, it\u2019s like, \u201cWell, this is interesting to us,\u201d 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\u2019s gone off, or the AC\u2019s gone off, that has happened multiple times throughout our life is not a joke.
If you\u2019re 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\u2019t deal with all the headaches.<\/p>\n
What\u2019s funny is you\u2019ve got this stock portfolio, and then the conservative real estate portfolio as you call it. I would say I\u2019m the exact opposite. I have a healthy real estate portfolio and a very conservative stock portfolio, but it\u2019s 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\u2026 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\u2019ve seen both?<\/p>\n
That\u2019s a great question. I think as I\u2019ve gotten older, and your time gets mortified, especially with family, I\u2019m probably in a situation now where I would\u2019ve 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\u2019ve got the leverage working for you, so you\u2019ve got\u2026
Assuming you put 20% down or whatever your equity is, you\u2019re generally getting five to one leverage. You can\u2019t 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\u2019re run at a loss, right? Anyone who owns real estate probably knows this, but you don\u2019t really make too much money.
You make good cash flow though. But in terms of taxes, you\u2019re 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\u2026 It\u2019s not a cash expense, but it\u2019s a real expense. Generally, in terms of Uncle Sam, you\u2019re pretty much netting zero, even though you\u2019re netting, hopefully, some cash flow, actual cash flow. Then like you said, you also can\u2026 If you\u2019re in a market\u2026 I\u2019ve 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\u2019ve seen real estate just appreciate double digits a year for years in this incredible bull market we\u2019ve had. On a leverage position, you\u2019re growing the asset value as well. You\u2019re getting cash flow, so direct ownership is awesome if you\u2019re willing to put up with the headaches. I just think as I do get a little older, I\u2019m thinking to myself, \u201cHow 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?\u201d
I like the fact that we\u2019re diversified, but I certainly\u2026 My thinking is definitely evolving as I get older.<\/p>\n
Yeah, man. It\u2019s 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\u2019re pouring their money more into one than the other, because everybody\u2019s got that FOMO like, \u201cWhat should I be looking at coming forward?\u201d<\/p>\n
I have a thought on that that I don\u2019t think gets shared enough in our space, because I know there\u2019s some die hard real estate investors that are hearing this, and they\u2019re going, \u201cThat 13% return sounds okay, but I got 19%. I\u2019m sticking with what I have.\u201d It was\u2026 It hit me like\u2026 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, \u201cOf course, this is a part of the game,\u201d but there\u2019s other people that don\u2019t love this, that aren\u2019t in love with that. There\u2019s people that make very good money in a medical sales job, or they\u2019re a doctor. They\u2019re 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\u2019re getting takes so much of their time that they\u2019re taking it away from a place they could make more money.
It\u2019s something I realized that a lot of real estate investors don\u2019t understand why people invest in stocks, or in REITs, or in syndications, but it\u2019s because you\u2019re getting a pure ROI. It\u2019s 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?<\/p>\n
It\u2019s a fantastic point. I mean, there\u2019s a lot of things that go into direct real estate ownership that you just don\u2019t measure. Like you said, I mean, you don\u2019t measure the time, even though you can try to, but you don\u2019t really\u2026 You don\u2019t 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\u2019s good and bad in a lot of ways. The return on time is not great, and you\u2019re not really measuring the full return that you\u2019re getting from the commitment you\u2019re putting into an actual real estate property, but then you also get\u2026
There\u2019s that cliche sweat equity, which does come into play. I mean, I think of the fact that my\u2026 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\u2019s 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\u2019s wonderful is real estate, I feel like it\u2019s an entryway point, right? For people who don\u2019t have\u2026
I\u2019m not an engineer. I\u2019m certainly not a doctor. I\u2019m not a scientist. I\u2019m not a software coder. Gosh, I wish I\u2019d done that, but\u2026 Real estate was a way for me to enter an asset class, even as a person who didn\u2019t know anything. You can get in there. You can buy properties. You can learn how to do things. There\u2019s some pain involved, but you can make good money if you\u2019re willing to put in the hours, and learn how to do things effectively, and be your own property manager.
It\u2019s 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\u2019t require any of my time. I\u2019m a complete passive investor, but it can be a wonderful way, I think, if you\u2019re 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.<\/p>\n
Let\u2019s 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\u2019ve 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\u2019m like, \u201cHow are you preparing for this economic climate as it\u2019s fastly evolving around us?\u201d<\/p>\n
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\u2019s 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\u2019ve already been beaten down 30%, 40% to the point where some of their valuations look the best that they\u2019ve looked at in seven, eight, nine years. I\u2019m excited about that.
What I\u2019m seeing on the private side, though, is that you\u2019ve got a lot of stubborn operators who aren\u2019t willing to mark down the value of their real estate, or they\u2019re not willing to underwrite lower exit values for their properties. That happens in private equity, right? It\u2019s not exposed. It\u2019s not repriced every day, just like real estate. Real real estate isn\u2019t repriced every day. Thank goodness, but we know the times are tough. We know interest rates have gone up. We know there\u2019s inflation fears, and so the value of those assets has certainly come down.
You\u2019re 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\u2019m seeing a ton of opportunity that I didn\u2019t see a year ago. For example, one of my favorite REITs I\u2019m looking at is one called Alexandria Real Estate Equities, ticker ARE. It\u2019s the leading life sciences REITs. Some of their biggest tenants are big drug developers, biotech companies, hospital systems. A year ago, they\u2019re 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\u2019re at 18 times FFO. That makes me pretty excited. I feel like I\u2019m getting a pretty good value in them. That\u2019s very typical of a lot of REITs right now. The dislocation has happened in the public markets. So if you\u2019re 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\u2019s harder to get in, or on the private side where, I think, valuations have not adjusted as much.<\/p>\n
So as you\u2019re considering investing into a REIT, let\u2019s say someone hears this, and they\u2019re like, \u201cI like that passive income.\u201d This wasn\u2019t mentioned, but I do think that it\u2019s 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\u2019t have angles to see. If you\u2019re looking for a safer investment, obviously, there\u2019s 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\u2019re looking for within an individual REIT?<\/p>\n
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\u2019ve got leases that they\u2019ve 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\u2019ve got a tenant there that\u2019s 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\u2019re even inflation linked. You have an asset that\u2019s 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\u2019s not atypical to find a management team that\u2019s been there for 20, 25 years, or a CEO that\u2019s been with the company since he left college, and is still with the company. If you have a management team in place that\u2019s delivered great returns to shareholders, they\u2019re still involved in the business, because it\u2019s 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\u2019s highly likely it\u2019s probably going to have a pretty good track record going forward. Then with REITs, one attractive things of course is the dividend. That\u2019s 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\u2019s fund from operations, which is the cash flow of the REIT.
Make sure that payout ratio is say\u2026 Below 70% is a good threshold. So, if you\u2019ve got a REIT with a good track record, good management team, payout ratio is reasonable, good chance. That\u2019s a good investment opportunity right there.<\/p>\n
Well, something you were talking about that I was thinking was a lot of the people that are doing really well, let\u2019s say the short-term rental space. Let\u2019s 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\u2019re doing amazing. If you\u2019re trying to get into that market today, it is incredibly difficult, and you\u2019re not going to get the same return.
So with the REIT, part of what\u2019s cool, it would be like buying into someone else\u2019s Scottsdale short-term rental at 2018 or 2019 numbers, right? A lot of those deals that they\u2019ve bought over the years, you are now jumping into that incredible opportunity and the cash flows that they\u2019re receiving, versus trying to get into the market that\u2019s more difficult now. Any thoughts on that?<\/p>\n
I think that\u2019s a great point. I mean, what your question reminded me of there\u2019s a REIT called Invitation Homes, and the tickers INVH. They fo-<\/p>\n
Is that Blackstones?<\/p>\n
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\u2019m buying invitation homes today, I\u2019m 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\u2019s a lot more expensive and hard to do.<\/p>\n
Can you talk a little bit about\u2026 I don\u2019t know if the right word is mindset, but let me frame it up for you. Then you\u2019ll see where I\u2019m going. As a traditional real estate investor, when we\u2019re buying a property, we\u2019re looking to get it at a good price, where we\u2019re 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\u2019re 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\u2019s 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\u2019re buying for cash flow. What\u2019s that mindset you should have when you\u2019re looking at a REIT versus traditional real estate?<\/p>\n
It\u2019s hard to do, but if you could have the same mindset that you do with a traditional house or property, that\u2019s the way to go, right? I look at my portfolio. There\u2019s several REITs I\u2019ve owned for over 10 years. That\u2019s because, hey, I like the company. I like the assets. They pay me a nice dividend. That\u2019s grown over time. Why would I sell, right? It\u2019s tempting to go into the stock market, especially for those who haven\u2019t been in the stock market to just go in, buy a bunch, maybe watch the REITs go up 10%, and you\u2019re thinking, \u201cOh, I\u2019m a genius. I\u2019m going to sell right now, lock in that profit, and I\u2019m good to go.\u201d
The reason I like REITs, especially to have that sort of slower mindset, is because you are buying into something that\u2019s 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\u2019re forced to pay out 90% of their pre-tax income as dividends, that way they don\u2019t pay federal taxes.
A lot of investors think that\u2019s a disadvantage, because a REIT can\u2019t retain earnings. It has to always issue new equity or issue debt because it needs to-<\/p>\n
I believe isn\u2019t it like 90% of the earnings have to be reissued? Is that right?<\/p>\n
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\u2019s not the case for your typical company that you might have a CEO at a software company or e-commerce company. They\u2019re getting cash. They\u2019re making money, and they\u2019re like, \u201cWell, we\u2019re going to start all these newfangled projects. We\u2019re going to go buy this other company. We\u2019re going to buy the competitor.\u201d
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\u2019re 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.<\/p>\n
I love that, man. I was wanting you to reiterate that for people, because we have\u2026 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\u2019s absolutely not how you should look at it if you\u2019re going to invest in something that you\u2019re hoping produces a long-term return, especially now, right? I\u2019ve had to just delete the apps, the broker apps off my phone. I don\u2019t want to\u2026 I\u2019m buying stocks for the long term, and so you get into this roller coaster of emotions.
It\u2019s best to just have a strategy, whatever that strategy is, as long as it\u2019s an educated strategy, and then you\u2019ve 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\u2019ve gamified this investing with the apps on your phone, and there\u2019s the bright colors, and it\u2019s super cool. I\u2019ve got to just delete it, set it and forget it, and try not to pay attention to the news.<\/p>\n
I mean, I think real estate investors should have the best mindset, because you\u2019re used to holding assets that aren\u2019t repriced every day. You\u2019re not trading any out of real estate, so of course.<\/p>\n
What\u2019s your thoughts on that, Matt? That\u2019s something I\u2026 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, \u201cThis stock went up. This share went up. I did good today.\u201d It gives you that feeling of progress that you did well, but overall to me, it\u2019s bad for your wealth building, because you\u2019re not focused on being productive. You\u2019re looking at something your money already did.
Then when it goes poorly, it impacts you emotionally, and you feel like crap. Now, you don\u2019t want to go work hard to get more money. Are you of the mindset that it\u2019s 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\u2019s a place for the people that are micromanaging their individual portfolios?<\/p>\n
I don\u2019t want to say\u2026 I don\u2019t 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\u2019s exciting. But where you should treat stock investing is watching paint dry, is generally just\u2026 That\u2019s 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\u2019s almost better.
It\u2019s like, \u201cI love when I get the quarterly dividend check.\u201d That\u2019s my ego boost. I\u2019m like, \u201cOh yeah. This company just wrote me a check.\u201d By the way, sometimes, when they raise the dividend, I\u2019m like, \u201cOh, I just got a pay raise. This company just gave me a pay raise.\u201d It\u2019s fun to see that cascade, and then the quarterly cash you\u2019re getting from these stocks and REITs to go up over time. It might seem like watching paint dry, but it can be incredibly lucrative.<\/p>\n
I think that\u2019s 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\u2019t check the price of the house on Zillow three times a day. Did it go up? Did it go\u2026 Oh, it went down. This is horrible.<\/p>\n
My zestimate is crashing.<\/p>\n
I saw that.<\/p>\n
Why is Redfin 5% less than zestimate? Really?<\/p>\n
Yeah, and you\u2019re emailing Redfin requesting a new appraisal on your house, because it\u2019s not as high as Zillows is or something. I noticed this with a lot of the crypto investors. There\u2019s some really sad stories of when it tanked recently. Suicides happening, people\u2026 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\u2019s what I\u2019m 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, \u201cHere\u2019s the fundamentals. I\u2019m going to continue to invest based on the research that I did.\u201d 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.<\/p>\n
Watching paint dry can be fun. You get the\u2026 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.<\/p>\n
That\u2019s your Arkansas show in there, brother.<\/p>\n
Oh, sorry. Sorry. Excuse me. We don\u2019t have a lot to do here, so you go down to the Home Depot.<\/p>\n
It\u2019s 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\u2019s. It has their headquarters there. Everyone is very proud of those three things.<\/p>\n
Yes. We also have Walmart headquartered here, and so you all probably bought something from there recently, so you\u2019re welcome.<\/p>\n
[crosstalk 00:38:58].<\/p>\n
No, I love the point, David, just because what a lot of investors don\u2019t 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\u2019s just\u2026 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\u2019m not a crypto investor. I\u2019ve had fun staying poor the last few years, I guess, but it\u2019s an incredibly volatile space.
Now, a lot of these DeFi projects and stuff, you\u2019re layering on leverage to what is already an extremely volatile asset. That\u2019s just\u2026 In my boring, old real estate world, you just can\u2019t do that. But man, it can be treacherous.<\/p>\n
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?<\/p>\n
Sure. If you go to fool.com, there\u2019s a whole\u2026 We have real estate as a whole sector there. There\u2019s 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\u2026 Go to fool.com. I should do that first, I guess. But second, if you go to a lot of these company\u2019s websites, I mean, just go to\u2026 Let\u2019s use an example. Realty Income\u2019s website, ticker O, it\u2019s probably the most well known REIT out there. It\u2019s one of the largest ones. You go to their website.
There\u2019s a huge\u2026 There\u2019s 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\u2019s get it right from the source. There\u2019s 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\u2019s all. It\u2019s all useful stuff. I don\u2019t know if this is a good opportunity for me to do this or not, but I will go ahead and do it.
There\u2019s a service I run at the Motley Fool called Real Estate Winners. I don\u2019t love the name, so you guys can tell me what you think of the name. Let\u2019s call it Real Estate Winners. When you\u2019re 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\u2019s mostly a REIT-based investing service. It\u2019s 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\u2019s a great\u2026 I have to get that plug in.<\/p>\n
Can you go a layer deeper for us and for those like-<\/p>\n
Sure.<\/p>\n
I mean, I love\u2026 No, even how simple it sounds like, \u201cYou want to know something about somebody. Go to their website.\u201d I get that. But for those of us who are just\u2026 There\u2019s just a lot of people who are intimidated by the stock market, and then doing this individual research, because the information\u2019s not all in one consolidated place. So if I\u2019m researching REITs, and I\u2019m going to these websites, what are two to three key metrics I should be looking for at these websites?<\/p>\n
I think look at a\u2026 This is a little bit of an insider metric, but funds from operations, I\u2019ve mentioned it a few times. It\u2019s commonly known as FFO. That is basically the key earnings metric that\u2019s for REITs, because like we talked about with real estate, depreciation\u2019s a major expense. So when your average company reports earnings, it\u2019s usually depreciations in there, but most companies don\u2019t have a lot of depreciation because they\u2019re not asset heavy. They\u2019re 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\u2026 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\u2019s\u2026 Try to find a REIT that\u2019s say trading for less than seven or eight times debt to EBIDA, gives you good indication that the balance sheet\u2019s probably fine, and the REIT\u2019s not going to run to any financial issues.
Then the other one I mentioned, I think, earlier is the payout ratio. Especially if you\u2019re 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\u2019s above that number, if it\u2019s 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\u2019re very easy to find. Again, if you go to a REIT\u2019s investor relations website, usually, the earnings release will have those metrics at the very top, and you can figure it out.<\/p>\n
What are some things you\u2019ve seen in a REIT where they\u2019ve gone wrong, where it did not perform well, or maybe people might have lost money?<\/p>\n
Well, one of the big traps that I think investors will get into is there\u2019s a whole class of REITs called mortgage REITs. There are REITs that aren\u2019t 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\u2019s 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\u2019s ARR, but if you look at that, it has a 16.5% yield on it right now. As a novice investor, I\u2019m thinking to myself, \u201cWhoa, 16.5% dividend yield, dude, sign me up.\u201d But then you look at the long term total returns of that REIT, and they\u2019re abysmal. That\u2019s because essentially what\u2019s happened is the mortgage REIT has not made as much income as it\u2019s paid out in dividends, and so the value of the equity of the company is just steadily declined, and that\u2019s very typical. One of the things I wanted to mention on the show was just that if you\u2019re looking at REITs, pay attention to equity REITs, not mortgage REITs.
Mortgage REITs are a whole different class. They\u2019re 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\u2019s one red flag to look for.<\/p>\n
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\u2019re set up that way?<\/p>\n
In a way, but a lot of those REITs, they\u2019re not run that way, unfortunately. I like where you\u2019re going there, but no, a lot of these REITs, unfortunately, they\u2019re trading in and out of these securities all the time. They\u2019re buying and selling them. They\u2019re 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, \u201cYes, this is a\u2026\u201d Even some of the best ones in the industry, that would be like\u2026 Starwood\u2019s got a mortgage REIT. Blackstone\u2019s got a couple mortgage REITs, I think.
I\u2019m 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\u2019s a really different process. I just avoid this space altogether, because why play in a playground that\u2019s tough when I can play in a sandbox that has great opportunities?<\/p>\n
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\u2019m 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\u2019s trading lower than it traditionally has now, and jumping in? Because there\u2019s SPG who\u2019s more commercial, or there\u2019s REITs that do with storage, and there\u2019s REITs that do with single families, like you talked about earlier. So, give us some framework around that.<\/p>\n
Sure. I\u2019d be very simple. I wouldn\u2019t 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\u2019s the Vanguard Real Estate ETF, the ticker\u2019s VNQ. I want to say it\u2019s 95% REITs, and it has some other real estate holdings. That\u2019s a great\u2026 It\u2019s got a nice track record. It\u2019s delivered about 9% return since inception over 16 years. The only disadvantage with an ETF generally, including VNQ, is that they\u2019re market cap weighted.
So if you look at it, you\u2019re buying into that what you think is a very diversified ETF, but you\u2019re actually getting tons of exposure to data centers and cell phone tower REITs, which are they happen to be the largest REITs. You\u2019re 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, \u201cHow do I start a REIT portfolio?\u201d 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\u2026 I\u2019d buy an apartment REIT. I\u2019d buy a hospitality REIT. I\u2019d 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\u2019s a pretty good basket. You can feel confident that I\u2019m not going to try it. I can\u2019t really time when a particular REIT or a particular real estate sector\u2019s going to do well, but at least I get good exposure broadly to the sector.
One area that I\u2019m 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\u2019s more than any other part of the market. I think since COVID, it\u2019s the one with the biggest uncertainties, right? There\u2019s just tens of millions of square feet of empty office space right now in a lot of places. That\u2019s either got to be replaced, or it\u2019s got to be sold at bargain prices. A lot of those office REITs are it\u2019s 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\u2019s just really fire sale prices, so you might get some opportunity there.<\/p>\n
With your position on the overall macroeconomic situation that the country\u2019s in, I guess I was thinking when you were talking about mortgage back REITs, I don\u2019t know this, but my intuition would tell me that there\u2019s 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\u2019re like, \u201cHey, let\u2019s go buy a bunch of paper, because we can get a higher return on it than what we can raise the money at.\u201d Rates were very low. There was tons of capital.
I don\u2019t know this for sure. There\u2019s probably a lot more complication than I\u2019m aware of, but in general, you make decisions that you wouldn\u2019t normally make when there\u2019s 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\u2019s why you\u2019re more towards the equity-based REITs?<\/p>\n
No, it\u2019s a very good point. I think, as we get higher interest rates and quantitative tightening, I think of course, unfortunately, you\u2019re 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\u2019re seeing, and what I\u2019m already seeing is that you\u2019re 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\u2019re the ones who are really taking the brunt, because they can\u2019t borrow at the ridiculously low rates that some of the big institutions can. In a lot of cases, they\u2019re 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\u2019re trying to recapitalize something. You\u2019re going to see the stress there first as always with the smaller players, and you\u2019re 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\u2019ve 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.<\/p>\n
[crosstalk 00:52:09] financial crisis.<\/p>\n
Correct. It\u2019s great financial crisis. I shouldn\u2019t assume that people know what that acronym means.<\/p>\n
I did that.<\/p>\n
I was actually shooting from the hip there. I had no idea.<\/p>\n
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\u2019ve 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\u2019s probably going to be stress.<\/p>\n
That makes a lot of sense actually. When it comes to investing strategies with\u2026 I mean, obviously, we\u2019ve 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\u2019s your thoughts on\u2026 Are you leaning more towards defensive-minded strategies where you\u2019re trying to retain wealth you\u2019ve built, or are there opportunities that you think where you can go be aggressive and increase your wealth?<\/p>\n
Great question. I tend to think steady Eddy through most cycles, right? I mean, don\u2019t change your strategy too much based on what\u2019s 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\u2019m of the mind, how you guys land, but I\u2019m on the mind that we\u2019re probably in a situation where inflation is just about to peak. You\u2019re already seeing a lot of commodity prices roll over.
You\u2019re seeing rents start to flatten out. Housing prices are definitely probably going to come down. We\u2019re probably at that\u2026 In terms of the inflation boogeyman, maybe that nightmare is coming to an end. Now, there\u2019s other risks to the economy. We could have a recession. Energy prices are still high. There\u2019s Ukraine, Russia. There\u2019s still supply chains. I mean, there\u2019s 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\u2026
My opportunity set was empty. My opportunity set\u2019s fairly good right now, especially if you\u2019re taking the three, four, five-year time horizon. I\u2019d say yeah. I mean, I\u2019m never the guy who jumps in an, dives in and says, \u201cThis is the bottom end. We should be buy\u2026 I\u2019m buying stocks hand over fist.\u201d But certainly, we\u2019re in the spaces. I look at dividend paying companies\u2019 REITs. I\u2019m seeing some pretty good opportunities.<\/p>\n
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?<\/p>\n
Well, I mean, you certainly can\u2019t get to leverage, of course, that you can with direct real estate ownership. With REITs, the benefit is you are\u2026 I mean, a, you\u2019re getting a dividend that\u2019s not double taxed, so you\u2019re 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\u2019re usually paying at your marginal tax rate. It\u2019s not the preferred capital gains rate. REIT dividends are generally not qualified, which is something that a lot of people don\u2019t know.
That\u2019s a downside and a good side though, because generally, you\u2019re getting a higher dividend anyway, even though you\u2019re paying a little bit higher taxes. But no, I think with\u2026 You have to remember with REITs, even though as an equity investor in REITs, you\u2019re not getting a lot of those leverage\/depreciation\/tax advantages bonus, the operators of the real estate are, so the companies you\u2019re investing in are getting those benefits, and it\u2019s resulting in good cash flow and good earnings to you after all those benefits have factored in.<\/p>\n
That\u2019s a perspective.<\/p>\n
Right. They\u2019re taking leverage on their side, right? I mean, oftentimes with REITs, just like we take mortgages and houses, they\u2019ve got loans outstanding on their properties, right? So, they are getting leverage returns. What\u2019s fantastic about that is when a REIT signs a new lease, or that lease goes up, or that rent goes up 3%, they\u2019re getting a leverage return on that, and getting that to you. Real estate\u2019s great for turning small returns into great returns using leverage. Even with a REIT, you get it indirectly.<\/p>\n
Man, I like that perspective. I\u2019ve always\u2026 Well, I shouldn\u2019t say I\u2019ve always. Well, since I\u2019ve been building a stock portfolio, REITs have always been interesting to me. I\u2019ve owned a few. I\u2019ve since sold out of them, because I\u2019ve changed my strategy. But what I do like is\u2026 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, \u201cWas that the right thing to do or the best strategy?\u201d My thought there was that\u2019s more somebody who probably has some cash on hand, because you\u2019re going to be losing cash every month if you\u2019re not getting cash flow. So, being able to leverage somebody else\u2019s investment in your asset is probably a better use of the money than going ahead and buying something that\u2019s going to be losing. We, at that point, were thinking about like, \u201cWell, you can leverage somebody who has a fund that\u2019s in the asset class.\u201d
But now talking to you, it\u2019s being able to put that into some sort of REIT as well is probably not a bad idea. All that to say, if you\u2019re scared to get in the market, or if you can\u2019t time the market just right right now to buy something, and you\u2019re considering buying something that\u2019s going to\u2026 You\u2019re worried about it\u2019s going to lose money. This could be a great option for you to try to research and understand, \u201cCan you buy into a REIT that maybe isn\u2019t trading as it used to?\u201d
You\u2019re 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.<\/p>\n
I totally agree with that. I mean, again, as long as you\u2019re investing capital you don\u2019t need right now, and you have a long enough time horizon, it\u2019s a great place to put capital. I certainly\u2026 I wouldn\u2019t 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\u2019s FOMO or whatever you want to say. I would say the REIT would win the battle for me there.<\/p>\n
All right. Well, this has been fantastic. I\u2019m having a really good time here. We\u2019re going to move on to the last segment of our show.<\/p>\n
Famous four.<\/p>\n
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?<\/p>\n
I don\u2019t know if it\u2019s my absolute favorite, but since it\u2019s appropriate to the topic, there\u2019s a book called Investing in REITs. It\u2019s 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\u2019s passed away several years ago, but it\u2019s considered the primer on investing in REITs. It\u2019s very easy to read. It\u2019s an awesome\u2026. It can really educate you about the market. I\u2019ve read the book three times actually.
I have a book that\u2019s my version is just scribbled with notes, because there\u2019s just so many good insights that I always go back to. Investing in REITs would be the book.<\/p>\n
So with this question for real estate investors typically ask what\u2019s your favorite investment book, and everybody always says Rich Dad Poor Dad. What\u2019s the Rich Dad Poor Dad of the stock market world? Is it MONEY Master the Game? What\u2019s that book?<\/p>\n
Oh gosh.<\/p>\n
The Intelligent Investor.<\/p>\n
I\u2019ve never read it, so it could be. I\u2019m sure you\u2019ve gotten this one, but the Roger Lowenstein biography of Warren Buffet. I think it\u2019s called The Making of An American Capitalist. It\u2019s not so about the stock market. I mean, of course, it\u2019s about Warren Buffet, so it\u2019s 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\u2019s become today, I think he wrote one of the best books out there for real estate investors.<\/p>\n
That\u2019s a fact. All right. Sorry for the deviation. Question number two, what is your favorite focus stock podcast and or episode?<\/p>\n
Oh gosh. Chris Hill would kill me if I didn\u2019t say Motley Fool Money, right? But okay, that\u2019s boring. I think the Patrick O\u2019Shaughnessy Colossus, family of podcasts, especially he\u2019s investing the best podcast. I go to that pretty often. I think that\u2019s probably my go-to.<\/p>\n
Awesome. What hobby or skillset do you need to be in the stock market?<\/p>\n
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\u2019t have it all the time, but I think if you\u2019re a patient person, that\u2019s 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\u2019s just really just investing in great companies, holding them, and being very patient.<\/p>\n
All right. In your opinion, what sets apart successful investors from those who give up, fail, or never get started?<\/p>\n
I think my last answer to the other question might. I\u2019d probably feel the same way. It comes down to emotional fortitude more than anything else. I think that\u2019s what\u2026 It\u2019s not who\u2019s smarter, or, I think, who does better research or who\u2019s more diligent. It really comes down to just your emotional fortitude.<\/p>\n
All right, so where can people find out more about you?<\/p>\n
All right. Well, you can go to fool.com. I\u2019m also a regular guest on our Motley Fool Money podcast and radio show with Chris Hill. But if you\u2019re 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\u2019s a discount there of 25% off the normal price. So if you\u2019re 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.<\/p>\n
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.<\/p>\n
Oh, thanks David. Thanks, Henry.<\/p>\n
Thank you very much.<\/p>\n
Great time.<\/p>\n
This is David Greene for Henry the fifth, wonder of Arkansas, Washington signing off.<\/p>\n