Why Real Estate is Better than the Stock Market
Oftentimes people ask, “David, how can you be so bullish about real estate investing for dentists?
Real estate crashes and goes into booms and busts just like the stock market.”
My response to them is:
Yes, the real estate markets are in fact influenced by interest rates, recessions and boom bust cycles. But real estate investing for dentists can be broken down into very niche asset classes in geographic areas. In other words, there is no national housing index.
Just the other day, federal reserve chairman Jerome Powell gave an eight-minute speech about their mandate to go hard on inflation. This means they're going to push interest rates up until they feel inflation is going back down towards their 2% target rate.
That is going to have a devastating effect on the economy.
No question, we are in a recession, it's going to hit hard. So back to the topic at hand, “David, doesn’t that affect real estate?”
Yes. But there is no national housing market.
Real estate is very fractionalized by geographic areas, local markets, asset classes, and (not least) the operators. Let me take you back 40-plus years ago when I first started investing in real estate.
It was 1980, and I purchased my first house by getting my dad to finance it (I didn't have any money). The year, 1980, was when the fed funds' rate was pushed up to 20%, and we went into back-to-back recessions during that period of time. I just bought the house based on fundamentals because that's all I knew.
These were basic fundamentals like, how would this house potentially cash flow, notwithstanding the fact that we had a mortgage interest rate of 13½ percent back then.
Yes, but there's an equilibrium there. The higher the interest rates, the lower the housing prices. We bought in during a recession when consumers were having a hard time paying bills just like we're facing right now.
Well, guess what?
In an affordable housing market, I was able to find renters. They paid enough to cash flow the property. Fast forward three and a half, almost four years, down the road. We sold that property and made about $50,000 capital gain profit.
Now that was in Texas. People say, “Well, yeah. Texas is always a great market.” Well, we do have a very strong economy in Texas. Geographically speaking, Texas has been very good to me, but I still had to go through a number of corrections, recessions, and downturns.
Some were more geographically specific to our area like the savings and loan crisis in the late eighties, but also, the Tax Reform Act of 1986 which devastated real estate across the board. But not all sectors are affected the same in real estate.
On the other hand, if you are putting your money in index funds, ETFs or typical 401(k)s, cash balance plans, or defined contribution plans managed by outside managers that aggregate a lot of money for a lot of investors to put into basic funds – you’re basically buying the market.
In real estate, I don't do that. I don't buy the market in real estate.
I can be very niched and very focused on the sectors that make sense. It's not about accumulation. It's not about valuation. Yes, It's important to buy at the right value, but it's all about the cash flow.
In real estate, it's all about the cash flow.
In the stock market, there are some stocks that pay dividends, but mostly it's called an accumulation game. Ride the bull market up and accumulate, accumulate, accumulate.
Financial advisors will say today, “based on inflation rate and the higher taxation coming, if you are anybody of a relatively high-income lifestyle, you're going to need to have $10, $15, $20 million to ‘retire' at the same lifestyle.”
Well, good luck.
For most hard-working, dedicated people to get there, it will be a long slog if you're saving, putting your money into 401(k)s and tax deferred vehicles.
In the markets that we invest in (real estate), we have a very diverse group of people. That's another point that many of you don't understand.
There are access points in real estate.
It's an inefficient marketplace where we have access to specific niche markets where we can decide what makes sense, how to ride through and still profit handsomely from recessions as well as up markets. That's the whole key, but you've got to be a little more actively involved.
So, you could do it the way I did 40 some years ago. I was very active. I networked. I created access points. I devoted a lot of time to it.
Now, most of you are further along in your career. You don't have that same timeframe.
You don't have the time to be boots on the ground, create those relationships, build a contractor database, and manage tenants. That's not what you need to be doing.
Not to mention that you can't diversify geographically. Even if you’re doing it in a good market like one’s that we invest in – Midwest, Southeast, typically not all the way down into Florida and some of the markets where there have been heavy investor influence.
That's the Big Money. The hedge funds. Private equity money has distorted the market.
We don't play in those markets because they're highly distorted.
We can stay out of those markets and stay in what I call, “the boring markets,” where we don't have the higher price fluctuations. We're just basing it on cash flow. Cash flow that's going to be steady for us, whether we go into a hard recession correction or not.
Somebody has got to put the time in to create the access points, the education, the pulse on the markets.
In Freedom Founders we have that. We have a very diverse advisory and sponsor base all over the country. We can also hedge our abilities in our investing between equities and debt.
Equities are typical. You own some aspect of the real estate. You own a property or properties. You have a membership in an LLC that manages a multi-family, self-storage, mobile home park community, or funds that diversify into different sectors of real estate. That's very applicable on the equity side.
What about the debt side?
I'm talking about debt as an asset, not a liability. This means you're the lender.
We can lend money and easily get double digit returns and be very safe as we're going through some of these rocky times in some of these markets.
So, the key is understanding what markets to invest in and then having the right people who have been vetted and have been through downturns before.
Again, if you've got time on your hands and you're in your twenties and thirties, you could probably build a runway to do this, but you're going to have to dedicate a lot of time.
I see the next decade, especially the next several quarters, as being very bearish on the stock market equities. I think it's going to be a stagflation economy.
We'll have inflation on the back end of this deflation curve. And I think companies who have stock in the stock market, just with profits because of the recession, aren't going to do well. Returns are going to be anemic.
What about housing?
I don't care if we don't have a high push in the values like we've had in the last several years. I don't care. I want the cash flow and I know that people always want a home. They want shelter, the right geographic areas, the right management, the right value-based cash flow investments.
That's what carries the day. It's what set me free some 17, 18 years ago and what has set hundreds of other dentists, professional practice owners, and business owners free.
This is not just based on my story, but on what we do to help others implement and execute on a game plan that sets them free. Now, they no longer have the uncertainty of “how much is enough? Do I have to just keep working and cranking? Can I ever take my foot off the pedal?” That's not a life you want to live.
My question to you is…
If you're not a believer in real estate investing for dentists and a big believer in the stock market, are you sure that's a plan that's going to get you where you want to go?
I think you need to find a viable plan right now, and if you're not sure what that is, dig in, do some due diligence. This is the time. Don't wait because waiting always sets you behind much further.
To your freedom!
P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think):
1. Schedule a Call with My Team:
If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest. www.freedomfounders.com/schedule
2. Become a Full-Cycle Investor:
There are many self-proclaimed genius investors today who think everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor who knows how to preserve and grow capital in up and down markets. Will you be prepared when the inevitable recession hits? Get your free report here.
3. Get Your Free Retirement Scorecard:
Benchmark your retirement and wealth-building against hundreds of other practice professionals and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3-minute assessment and get your scorecard.