The Basics of Real Estate Investing

We're going to talk about the basics of real estate.

So let's do that. Real estate investing. Why do I like real estate? I like real estate for two main reasons. You know, when you boil it all down, these are the two main reasons.

I invest in real estate. And it's not because I got to feel like I can put my hands on my investment, is not because all.

The tax breaks are so awesome. It's not for passive income.

Right. There's two main reasons I invest in real estate.

One is high returns.

Real estate returns are high, like stock returns. And so that's a good thing in your portfolio. In fact, with a little bit of.

Leverage added to them, they can be.

A little bit higher than stock returns because stock returns typically aren't leveraged. Obviously, if you leverage those, you'd expect to have a little higher return too.

And the second reason is relatively low, low to moderate correlation with the stocks.

And bonds in your portfolio.

I think it's the best of the alternative asset classes out there.

So when I, I don't know that I even think of it as an alternative anymore.

When I think about a reasonable portfolio.

I think about stocks, bonds and real estate.

Yeah, you can add some other stuff.

To it if you want, you know, and add a little gold or something, or some bitcoin or some other niche asset class, fine. But in general, you keep those to relatively small percentages of your portfolio. When we're talking about stocks and bonds and real estate, I think most people are okay with those being pretty good chunks of your portfolio. But those are the reasons why I invest in real estate. Now.

The trickiest part about investing in real estate is that you have to learn more than you do to invest in stocks. Let's be honest, stock investing is super.

Super, super easy because the right way.

To invest is very clear from the data, is to go get low cost, broadly diversified index funds, basically buy all the stocks and hold them forever. And that's how you invest in stocks profitably.

It's not hard, it's not complicated.

You can buy all the stocks in.

The world in 30 seconds.

You don't have to know a thing.

About one of the individual companies. Right. And you're going to get the market return over the two or three decades or whatever you're saving for retirement.

And that's going to be enough.

That's going to be enough for you to reach your goals. Stock investing, super easy.

Real estate investing, not as easy.

It's going to take more effort. And I'm sorry, I mean, there is.

One similar way to invest in real.

Estate, that's relatively easy.

And that's for people at one end.

Of the spectrum that want maximum diversification, minimal hassle, maximum liquidity. And that's to go buy an index fund of the real estate companies in the stock market.

So you already have those if you.

Own a total stock market fund. But this would give you a chance to put a little bit more of your portfolio into real estate. My favorite holding there is just the Vanguard Real Estate index fund. The ETF version is vnq. It's almost free like most Vanguard index funds. And I think there's 120 or something real estate investment trusts that you buy when you buy that, and that's cool, you can invest in real estate that way. That's often the way people start with real estate investing is just tilting their portfolio a little bit by adding that fund into it. Super easy, no big deal.

You do miss out on some of.

The benefits of real estate investing that you can get by investing another way.

But the important part when you decide.

To invest in real estate is to.

Figure out where on the spectrum you belong. Some people belong on the part where they're building houses and other properties from the ground up. Others are doing fix and flips. There's long term rentals, there's short term rentals. You can get off the direct side.

Of real estate investing.

You can invest passively in these sorts of projects, but still privately with syndications, funds that are basically 8 or 10.

Or 12 or 15 syndications.

And then finally on the publicly traded.

Side with a Reed index fund like bnq.

The important part is that you match. Those are all reasonable ways to invest. You can have a turnkey property and be a good real estate investor. You can be a fix and flipper and be a good real estate investor. You can be investing in syndications to be a good real estate investor. But you've got to match what you choose with you. That's the important part. If you're somebody that does not want to get your hands dirty, you don't want any tenant calls. You don't want to have to mess with evaluating syndication operators. Well, you're probably going to be dealing with mostly publicly traded real estate, maybe.

A few private funds.

On the other hand, if you're the.

Type of person that you're like, well.

What'S the greatest tax benefit I can.

Get out of this real estate?

How high can I get my returns? I want to be able to drive by my investments and show them off to my family.

Well, maybe you're going to be somewhere.

Else on the spectrum.

Maybe you'll be a turnkey investor, maybe you'll be in short term rentals, but.

You'Ve got to match yourself.

And so that's a really important aspect of real estate investing because if you don't, you're going to be unhappy. If you're really a very passive person and you've built some empire of short term rentals, you're not going to be happy. On the other hand, if you're like, I don't trust anybody else and I.

Don'T, you know, I think stocks or paper assets, well, you're probably going to be a lot more on the left.

Side of that spectrum, of that continuum of different types of real estate investing.

But none of it's wrong, right? It just needs to match you.

Okay.

A few other things I think you.

Ought to know about real estate investing. It's important to understand what's called the capital stack. What is the capital stack?

Well, at the bottom of it is the debt. So you go buy a property and typically this is leveraged in some way. There's some borrowed money, it's bought partially with other people's money, right?

A loan.

And so the bottom of that capital stack is the loan, the debt, the mortgage, whatever you want to call it. And typically that mortgage has first position, meaning if something bad happens with this investment, the lender is the person who gets their money first. And that's the least risky place to invest in real estate.

You can be the lender, right?

And obviously if you only lend on one property, that's still pretty risky because.

You'Re not very diversified.

But if you're lending on a whole bunch of properties like a real estate debt fund, that's a pretty safe place to invest because when things go bad, that debt fund can foreclose and sell the property. If you're only loaning 60% of the value of that property and they're doing a terrible job managing it, they're not paying you what they're supposed to be.

Paying you and you foreclose, well, you.

Can probably still sell the property for 60% of what it's worth, no matter.

How badly they've been running it.

And so you're pretty protected there.

Of course, your returns are limited, right? You're not going to get more than.

The interest rate you agreed to. Now that can be pretty good when.

You'Re lending money to developers sometimes because.

They'Re only borrowing money short term, they'll pay 12% and 2 points to borrow.

Money for six months or nine months.

And so you can often have a pretty good return. A lot of these debt funds have returns in the 7 to 11% range. Now you can move up the capital stack.

The next place on it is typically.

Mezzanine debt, sometimes called preferred equity. There's slight differences between those two.

That's kind of the next place in the capital stack.

You're not in first lien position when.

You'Re investing in those types of investments. Right.

The first people to get their money is the primary lender. They get all their money first and all the interest they're owed. And then, and only then, if there's any money left over, does the mezzanine.

Debt or preferred equity people get their.

Money, but they get their money next, right?

So if it really went a little.

Bit bad, but not terribly bad, you may still get all of your principal back and all of the interest you expected. At the top of the capital stack.

Are the equity investors.

These are the people that want the great returns. They're hoping everything goes awesome and they make 25% on this investment, but they get paid last. And so it's a riskier investment, and the more leverage that's on this property, the riskier that position becomes. When deals go bad, when properties do not do what they were expected to do, when the vacancy rate goes way up, when it costs way more to rehabilitate a property than anybody expected, when interest rates go through the roof, when an area becomes depressed for whatever reason economically, those are the people that get hurt. They're at the top of the capital stack, and so they're the last ones to get paid. So gauge your risk in how you.

Invest in the capital stack. Understand who's ahead of you, what the.

Terms are on that debt, especially if you're the equity investor, know what debt is there, how much, and what the.

Terms on it are. Because a lot of times that's going to make a difference of whether you get a solid return or even get your principal back.

All right, I think those are some of the basics to really understand about real estate investing.

If you'd like to learn more, we do have a real estate course you can check out. We call it no Hype Real Estate Investing. We actually have a webinar on the 12th that you should check out if you want to learn more about real estate. I'll be teaching that webinar and we're going to go into a lot more detail than we did in this podcast. But if you're interested in getting into real estate. That's a great free resource you ought to check out. The webinar's free, the course is not, but it does come as usual with our money back guarantee, like all of our online courses. So thanks for checking that stuff out.

If you're interested in doing more as real estate. If not, remember this stuff's all totally optional. It's possible to become financially independent, never.

Investing in anything but stocks and bonds.

You do not have to invest in.

Real estate, but if you're going to go outside the stock and bond universe, I think it's probably your first stop.

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.