[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor. These episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome back. This is episode five, season three, which is investing. Episode five is, Date, we just recorded options, futures in private markets, which is coming next. In terms of, yeah, that was a, and Laura said it is the Wild, wild West. We were not planning on having Tyson join us for episode five, but he's in the seat. Headphones are on. We're making him stay. You're gonna love Tyson. We talked about it last time. Tyson deals and works with a lot of high net worth clients and high net worth situations, and this is a good area. I'll be interested in your opinions about real estate. This is one of those areas that is polarizing. I feel like either you absolutely love it or you

[00:01:00] absolutely hate it, and I think sometimes real estate investors, Think that financial advisors and wealth advisors are at odds with them a little bit, and I hope that that is clear that that shouldn't be the case. There are some great ways to invest in real estate. We'll talk about that today. Now I understand where that's coming from, by the way, because a lot of wealth managers don't make much money on the real estate investments that their clients. And maybe that's just sad if they, if they can't see past that and help understand and talk about their real estate investments. But, uh, anyway, maybe good wealth advisors don't, don't get in the way, but I think some, some poor financial advisors do get in the way of this, for sure. Just a little bit of dirt on our industry, I guess, right there. Oh, Scott's gonna love that. That's our compliance officer. He's amazing. But love Scott. All right, so real estate, we're gonna go through. Why? and how. People invest in real estate and then

[00:02:00] doing some comparisons. In fact, let's just continue on that conversation for a second here about, I actually don't think it's wise to pit like the stock market against real estate. I hear that all the time. Like, oh, I only invest in real estate. I do so much better than the stock market, or I do so much better in stocks than in real estate. Well, the reality is, on the same exchange on the stock market, there's actually real estate investments being traded. You could be buying real estate on the stock market. I'm doing stock in quotes, right? Because there are so many asset classes that can be purchased on the capital markets, so don't think that you're not getting one or the other. You know, you're not getting real estate in the stock market. That's actually not true. The real estate market can be purchased many different ways, but what they're usually referring to is owning real estate outright, and I do think that there is a potential for higher returns. In real estate when you are owning it outright. Just like there is a potential for higher returns

[00:03:00] when buying individual stocks and being willing to bet a little bit more on those individual stocks as opposed to buying the entire stock market, or opposed to buying a broad based, diversified real estate portfolio on the exchange. So we just, Laura and I ran some math. We pulled this from Y charts. Is that right, Laura? Yeah. Mm-hmm. Do you remember, I'll have to pull this back up, but do you remember the index we used for the real estate? It was the case chiller's house price index, I believe well done from Y charts. And over the last 20 years, the actual price increase has been an average annual of 4.53% on the average home price for 20 years. Which is not what it Residential. Yeah. Which is not what people have experienced in the last two years. Right. But that is over 20 years. Of course it's been way higher in the last two or three or four. The s and p 500 over that same time period was 7.5%, and if you stopped the conversation there, the people who were stock junkies would say, We went see? I

[00:04:00] told you so. Yeah, exactly. Yeah. That's not the whole conversation. The dividend yield on the s and p 500 is about 2%, and then real estate is about six to 7% cash on a lot of single. And, and you know, if you're a big real estate investor, obviously there are many properties that cash double digit returns depending on, you know, you might be buying at a really low price because you know how to find in the market, or you might be buying more distressed assets and charging rents, and we're just trying to get a rough average here. But the point is that real estate income is higher. Than the average dividend on stocks, even though real estate prices have gone up a little slower than the average price of stocks have gone up. So those two things offset each other and we're back to like, this is why it's a debate, is because it's so close. And depending on if you're buying individual real estate or individual stocks, or broad based real estate or broad based stocks, you could have any outcome as to which one's better.

[00:05:00] I don't think it's a conversation of which one is better. It's a, which one are you comfortable? There are some pros and cons here. We're gonna talk about those first and then maybe some of both. We Right, exactly. Different amounts and then we dive into how do you buy it, real estate, so capital markets versus real estate. I actually think one of the, we talked about this today, Tyson, one of the benefits of owning real estate is that it is not priced as frequently. Yeah. I mean, for me in particular, I try to look at my accounts as little as possible, regardless of what the market's doing. And I just think that that's a good thing. There's been so much empirical study done about the more frequent you're reviewing the prices and values of your assets, the more subject you are to emotions. Because again, we go back to this concept of loss aversion. We feel losses twice as much as we feel the pleasure of gains. And if I'm looking at my account more frequently, not that you're seeing losses more, but you're exposed to losses more frequently, the more you're looking. Which then, increases that behavior anymore to

[00:06:00] where, you know, you start to increase the risks of making a bad decision. And with your house, you don't log in every day to see what your house price is at today. You don't pull in your garage and have a big banner that says, here's what my imagine house is worth today. Can you imagine the dinner time conversation you would have with your spouses? You both pull in and you're like, oh, it's down to 5 25 today. It used to be seven 30. Holy cow. We are so much less wealthy. Yeah, I don't, I don't think you would, but people have that exact conversation about their, their 401k or their retirement assets because they see it so frequently. Tyson and I, just out of curiosity, and because we're nerds ran some math today, we took the s and p 500 over the course of, was it 19? Yeah, early 1950 until now, Laura doesn't know any of this, but here, no, this is new to me. Okay. So we do a lot of prep for these episodes. Apparently not. Right? But so from 1950 until now, and then we said let's just check every two year period. Rolling Every single day from 1950 until now.

[00:07:00] And then how many times would you have been negative? How many periods would you have to go through some negative returns on owning the s and p 500 for a two year window? And this goes back to Tyson saying like if you were to just buy it and not touch it for two years, how many times would it be positive? Well, most, all the time it's positive. Since 1989. Which is, well, let's go back to 82. So you'd be 40 years old this year if you were born in 82. So this is over the last 40 years worth of information. There was a period in 82, a period in 89, 1 in 2001. Tyson's County for me, one in 2004, two periods in 2008, and then one in 2027. Okay? So seven periods over the life of a 40 year old in which you would have a negative return on the s and p 500 over a two year window. That's not that bad. Feels kind of like checking

[00:08:00] my house. On Zillow. I mean, obviously this, we're a little selection bias here. It's been a really good couple years, but even just looking historically, , not very many times. Are you getting an appraisal or evaluation in your house? Worthless. I mean, it's happened 2008 obviously, but not that frequent. Yeah, so by the way, that was, just to clarify, people are wondering how we got that math. Basically we're saying, you know, in 2008 there were two periods because it wasn't consecutive. Every single day there was a break and then it went back down to being negative over. So there were some positive days in between and then a negative again. But I almost would consider those 2008 dates to be one section. Anyway, that gives you an idea. That's housing. Isn't priced as often, which can create a higher risk tolerance. The less you view the volatility of an asset, the higher your risk tolerance is likely to be. I think you might be making this point right now, but I think also people, if you see the house, you know it's there. It hasn't burned to the ground like you feel better, whereas your stock is, your perception of the stock is it's

[00:09:00] a pixel on my screen or a paper that may or may not exist. Right? Yeah. When in reality, I mean you own. An equity piece of an actual living and breathing company. As employees and in, cash flow in and out, like it's just as tangible. It's just you don't see it maybe necessarily the same way. Right? So having a hard asset is definitely something that helps people feel more comfortable and have a higher risk tolerance, I should say. I think some of the difficult parts about real estate are, you could be very surprised. I never, ever get a bill from my stock portfolio that says, Hey, things have been rough and we had. Get a new tenant in and now you need to pay $3,000 to update the carpet or something like that, right? So surprise expenses happen. Concentration risk. If you buy one house or one rental property, you have some concentration risk in a neighborhood, in a state or city in a particular location that that may or may not do well. The first town home we bought, it went from 170,000 down to 90,000 in the recession.

[00:10:00] It was brutal. We'd been married for three years and it just dropped and stayed down there forever. The general real estate market was back way before our town home came back. I know that home prices had come back within like 5, 6, 7 years for a lot of people, and it took us a decade basically for that just because that neighborhood wasn't as desirable. And a town home wasn't as desirable as a single family home anyway, so that, that concentration risk bit us. Luckily, we kept it as a rental property through the whole time and then some after that, and were able to sell it for again time. I always was so nervous that I was gonna get a call from the, the renter that I needed to come fix something one time. Unscrewed the, the little hose behind the fridge that the water supply line. And she didn't put Teflon tape in there and to redo it. And then she put the fridge back and that thing just dripped slowly for a long, long time. It was a slow down

[00:11:00] until the unit below me. Finally, their ceiling started. They noticed that their ceilings started to get really wet and dropped in on 'em. And who knows how long that was and. But there are some serious tax benefits to real estate, so understanding the tax benefits. This is in direct real estate. This is one of the main reasons people buy real. And the reason is that they get to depreciate it. The idea is that if you had a property, and let's say that this rental property is worth $500,000, of which one? Let's do some math. That's real. So let's say of which half of it is the land and half of it is the house. This is a, a really small house nowadays for $250,000. 250,000 is the lot. So land doesn't disappear, it doesn't go away. So the government is saying you can't take a deduction each year for the loss of your property, cuz land will still be there in decades. But the house, the theory is that

[00:12:00] someday that thing would all just crumble to the ground. And so instead of waiting until that day to get to take it as a loss on your taxes, the government allows you to depreciate it each. So that you get to take a tiny chunk of that each year as a loss against your income, which is great. It's funny because even though you get to take a loss, usually those assets are actually going up in value. So this is counterintuitive for most people because they're saying, well, that $250,000 house. Isn't going to be worth two 50 in 10 years, it's probably going to be worth a half a million or, or 400,000. Just the house plus, you know, the lot on top of that, right? So the reality is most houses go up in value, but the the government, because at some point it's not worth as much. We'll let you depreciate it now when you sell it in the future. You have to pay taxes on that depreciation cuz you gotta take a a deduction. So now your cost in the property is less. So let's say the cost was listed at

[00:13:00] 250,000 and you've depreciated 50 of it, your cost now on the, the actual piece of property, not the land, is 200. So you sell it all for 800 later, you gotta recapture the depreciation and then pay capital gains on top of that. That was a little bit deep. But understand that that's a really solid benefit for owning real estate and a couple other really nice things you could do. You can actually do what's called cost segregation. You can, you can take certain assets and certain pieces of the house and depreciate them faster than other pieces of the house. And get some serious deductions. Should see the carpet at my house. That's depreciated fast. You have two kids, two toddlers. That's going quick. It's going quick. Yeah, that's a great point. So that's something you might be able to, to segregate and depreciate faster. I'm not sure the IRS is gonna let that stand or hold up as defense for that. I have two toddlers. Have you not seen, uh, do you have children? Okay, so you can depreciate it quicker, and then you

[00:14:00] get to take some serious deductions. So people with high income oftentimes will buy real estate to potentially try to depreciate and reduce that back down. And exchange is really nice too. So like we talked about, all that embedded gain that you would have to pay if you sold. You can sell a real estate property. Let's say a house in your neighborhood is a is a rental property, and you think there's another neighborhood or a, maybe you wanna get into a bigger rental property. You could sell yours, buy another, and they let you say, oh, I just swapped it. I exchanged it. I'm not gonna pay taxes on the gain in the first one. I'm just gonna roll. Unrealized gain or potential gain into the next one. Man, I wish you could do that. With stocks, you can't. You sell a stock, it's done. It's, it's a gain. You have to show. Yeah. Some people have probably heard of this as a 10 31 exchange. You can move it to another asset. You're just deferring the taxes on it. But a lot of times people will defer it until death, and then at death they'll get a step up in basis and then avoid taxes altogether.

[00:15:00] Yeah. Nobody pays taxes on that. Yeah, which is. And then if it's your personal property, if you've lived in it two of the past five years, you have a pretty good exclusion. You can't do a 10 31 exchange on your primary residence, but for a married couple, you get $250,000 exclusion for each person. So 500,000 for a married couple, $500,000 of growth that you don't have to pay taxes on. I think a lot of people are gonna go over that. It feels like. It feels like people think they gotta adjust that. Right, and they haven't. They haven't moved this number in a long time. I feel like most people think that there is no such thing as taxes on your primary residence because of that exclusion. Because the exclusion and where it's been. Yeah. But now people's houses have grown, tripled in the last. Five years. Yeah, they're gonna have more than $500,000 of growth. But it's still a great, you know, you still get the 500,000 tax free. You just have to pay taxes on the remainder. But yeah, that's true. I have a client who wanted to, you know how in retirement it seems like people downsize, but they don't

[00:16:00] downsize. Like they downsize the size and of their house, but they don't downsize their, they upgrade quality cost of their house. Yeah, exactly. They just trade size for quality and maybe more open space. So I had a client that was in this same. And he sold his primary residence for 1.5 million. Wanted to buy another house that was at the same level, but just of cost roughly. But actually he wanted to to reduce it a little bit. He actually was downsizing in both, but it was gonna be newer and nicer. So he sold the property that one and a half million dollar home, I think they purchased it for something around $300,000. A long, long time. So they had this house where they had $1.2 million worth of gains. I divided that by a thousand in my head and then got to 1200. Great math. But anyway, $1.2 million worth of gains. They got to exclude a half a million of it. They still had to pay taxes on

[00:17:00] $700,000 worth of gain. That is their primary. And they were really surprised by that thinking that it, it was a total shock. They just thought there was no tax on primary residents. But that's, that's different. That's not an investment. That's your primary residence. So when you have a real estate investment that is not your primary residence, you get to depreciate it. You can expense certain things, any expenses that go into the property. Depending on how you log it and track it, you may be able to deduct things like mileage and you can deduct quite a bit from that rental property. So you take the income minus those deductions, and then you have your net income and you can subtract out depreciation. And at that point, a lot of people after depreciation show a loss. And so then that's how that loss helps you on your tax return against your, maybe your W two wages at work or your other self-employed income. Now, one of the main reasons that people do so well in real, Is because of leveraged growth. This

[00:18:00] is an interesting concept because those numbers we gave you earlier, I'm sure some people were listening and said, oh my gosh, I do so much better than four and a half percent on my real estate. And it's true because typically they are putting something like 20% down on their property, so they're getting maybe four and a half percent growth on a million dollar property. But that's a lot. I mean, $45,000 of growth that year. But it's on a $200,000 investment, that's way more than four and a half percent. Right? Right. And most people don't think about it this way. I mean, no one's going and buying their stocks with a 20% down payment and getting a loan for 80% of the stock that they're investing in. So if you think about it that way, wow, like people are almost taking a lot more risk in the real estate investment world it seems, because there's just so much more. I think institu, you're right, institutions have set it up this way to allow for it a little bit better. I mean, the rules don't allow you to buy a stock, by the way. You

[00:19:00] can buy stock on margin, so you could, you could actually buy it and maybe own half of it up front and borrow the other half of it against your own portfolio as collateral. That's called margin. But the industry and the world of, of real estate versus capital markets, they've set real estate up in a. To allow for that heavier and higher leverage. And I think that it makes sense that it's there because of the hard assets that could be, confiscated if, if needed. Right. It's sitting right there as collateral, so I get why, but yes, you're right. I mean that's, that's the reason that people see so much growth is is the leverage in it. Yeah. So it would just be interesting to compare the stock market if people were leveraging that much and compare that growth that. So if you take the, the concept of it's not a competition between the two and you should be owning both, but Tyson you'd mentioned earlier, you don't really love. Why is it that you don't like to have rental or other real estate like that besides your house? And I totally recognize this is a bias for me, so I'm not saying this is the

[00:20:00] way it should be for everybody, but I think it's worth recognizing, you know, if you truly wanna get that extra return out of the real estate portion. Leverage is one thing that we just talked about. Also, I think a way you do that is you're really smart and savvy about where you're buying and the types of properties you're buying and you're spending. The third thing, you're spending a lot of time, you know, either cleaning the properties, maintaining them, prepping them, finding tenants. Cause if you're not doing that yourself, you're paying somebody else, which is a cost, which reduces your total return. And depending upon how much time you may or may not have, I mean, you have to weigh that into your investment. Whereas for. I'm happy taking maybe a little less return for just putting it in into stocks, into public markets and forgetting about it, letting somebody else do that for me for a much lower cost, and that is where it's personalized. My brother owns a property maintenance company and he has a rental property hoping to have more in the future, and he loves it. He would rather spend his time, you know, maintaining the property, doing that than

[00:21:00] researching, you know, different investments. So it really is, according to your personality. I'll throw in there too. I think sometimes, and I've even had to do this with myself, I think we forget sometimes. We do have a pretty good real estate investment. If you're a homeowner, like if you own a home or you still have a mortgage on the home, like you're invested in real estate, like that equity you have in that home is part of your net worth and part of your portfolio. And for some folks that might be the biggest piece of their portfolio, where you've already got a really big allocation to real estate. And so make sure you're kind of weighing that as well. Do I want to add even more real estate to where wow, now I've got two thirds or three fourths of my net worth in buildings. Makes sense. So if you are willing to spend the time, can be a really lucrative and really fantastic wealth creation tool owning real estate outright. If you are not willing to spend the time, you can do somewhat of a hybrid. Which Laura alluded to already, which is using a property management company, you 

[00:22:00] still will have to spend a decent amount of time on which properties are you buying and the actual costs and the process of the transaction of buying and selling, and you'll have to maintain and work with the property management company periodically to keep things working. That's more of a hybrid model because you don't have to spend quite as much time. They usually will take a percentage of the income or percentage of rents. Short term rentals has become a really popular thing with Airbnb and V R B O where you could hire other people to potentially keep that thing running for you. And there are some, like we are in Utah and down in St. George, Utah is the southern tip of Utah, where it's a lot warmer and like 10 to 15 degrees warmer it seems like most of the time. It's an area where a lot of people go to vacation, and I have a client who bought a home for a couple hundred thousand dollars and cash flows about 70 a year from it. That's after expenses and it's been a fantastic investment for him. Now, I do think he spends a little bit more time, but he has a

[00:23:00] property management company out there, so it's, it's a little bit of a hybrid. And bought at a fantastic time. Okay, so now if you are the type where you're like, I want zero, I wanna spend zero time on my real estate investments. There are real estate investment trusts, REITs, R E I T S, there are equity REITs, and then mortgage or debt rates. Equity REITs means this is a trust structure. Think of it kind of like a fund. We've talked about funds in previous episodes. This is somewhat of a. It's a pooled investment of ownership in real estate. Now in a reit, you will be likely owning more commercial real estate compared to individuals oftentimes buy residential real estate. The more experienced real estate investors who do direct investing in real estate, those folks sometimes get into commercial and buy direct commercial buildings. But if you're a novice or

[00:24:00] new to real estate investing, investing, usually you've purchased a single family home or town home or condos and you're renting those out, REITs are completely different. The portfolio, may it be extremely diverse inside. The price of your portfolio is likely to fluctuate a little bit more on what real estate businesses need, rather than what real estate individuals need, which is, you know, homes for individuals and then office space warehouse and things like that. That's gonna be a lot more in your res. Mortgage Res are the ones that basically pool together a bunch of of loans that are involved in real estate, so that that's an entirely different profile. That's a way to invest in real. But on the lending side, instead of the ownership side, how we talked about in the first episodes of this season that stocks are more like ownership. Bonds are more like bonds. Mortgage rate is more of the bond side. Equity rate is more of the stock side. So it's tricky cuz sometimes people will lump all of these REIT

[00:25:00] together and say, oh, rates have a certain risk profile. Not necessarily, those could be very different between debt or equity reit. And then there's a difference between public and private. So you may be able to buy a bunch of real estate investment trusts, right on the public exchanges, but others you won't be able to buy unless you go direct. And it's a non-public rate. And some of these get really tricky. They only have redemption periods every so often. So back to liquidity, they don't provide you as much liquidity. I say back to liquidity cuz we talked about that. In our next episode, so in the future, when you listen to our next episode, we'll talk a little bit about liquidity on private assets and alternative invest. But real estate investment trusts that are non-public are less liquid. Sometimes financial advisors really like real estate investment trusts. They like to propose them to clients, and there's a reason for that. A lot of these do provide a commission to financial advisors, so especially these non-public

[00:26:00] ones. That they may pay five, six, 7% to the wealth advisor or broker that's telling you to buy it. So it's something you want to ask about. Understand the the prospects and risks of the real estate investment trusts, but also understand the compensation and how that advisor makes money off of recommending that real estate investment trust to you. And that'll help. So we've talked. Just general concepts around owning real estate. Talked about some of the pros and cons. The bottom line is, yeah, we probably have a little more experience here with capital markets, and I don't just wanna say stock markets because it's, there's so much more. We even talked about REITs, which are part of. Capital markets, so it's real estate investing within capital markets. We have more experience with that, but individually, most of our advisors have had or do have rental properties and pretty comfortable with the concept of them. I ended up selling mine and then we went back to the same concept you, you mentioned, Tyson. My life at Capita has gotten so busy that for me to be pulled away.

[00:27:00] For a day or half a day, to go fix toilets or paint or whatever it may be. I just can't quite afford that time in my life as well as, coaching them in, in soccer and things like that. It just didn't make a lot of sense for me from a time standpoint, but I keep telling my wife like, let's go get a short term rental. Let's buy cuz then we could go stay in it at times. And she keeps reminding me that we don't have time cuz I over, I overspend our time like crazy. That's, that's one of my biggest flaws. I heard that one a ton too. By the short term rental cuz then we can use it. Cuz I thought that same thing. And my decision I came to was then I feel like I'm forced. Anytime that my family wants to go on a vacation, I've gotta go to that place like St. George. I can't go anywhere else. I can't go to Hawaii, I can't go anywhere. I gotta go to St. George, which. That doesn't sound as fun to me. Yeah, that's true. I have a friend who owns one in St. George, and he makes so much money on it that he actually, when he goes down, he rents a separate one. Wow. So he, he won't, he doesn't even stay his own, doesn't stay in his own place

[00:28:00] because it makes enough money that he'd rather pay less money to stay in someone else's place than stay in his own Weird, right. But, It's the way it works. Well that's real estate. So next time we'll talk options, futures and venture capitalism, private equity. And then after that we're gonna bring it all together with building your portfolio and how you decide what fits you and how do you bring these pieces together. The best one, make sure you listen to that one. Hope so. Thanks. Appreciate it. Tyson. This podcast is intended for informational purpose only and is not a substitute for personal advice from Capita. This is not a recommendation offer or solicitation to buy or sell any security. Past performance is not indicative. Or for a future results, there can be no assurance that investment objectives will be achieved. Different types of investments

[00:29:00] involve varying degrees of risk, including the loss of money invested. Therefore, it should not be assumed that future performance of any. Specific investment or investment strategy, including the investments or investment strategies recommended or proposed by capita will be profitable. Further Capita does not by legal or. Tax advice. Please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast, certain of the information discussed during this podcast. Is based upon forward looking statements, information and opinions, including descriptions of anti anticipated market changes and

[00:30:00] expectations of future activity, capital beliefs that such statements, information and opinions are based upon reasonable estimate eight and assumptions. Forward looking statements, information and opinion are inherently uncertain and actual events or results may differ materially from those reflected in the forward looking statements. Therefore, Undue reliance should not be placed on such forward looking statements, information and I opinions. Opinions. Registration with the C S E C does not imply a certain level of skill or training.

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