We’re back this Friday with another bonus video, from a YouTube video we just released! You’re going to want to watch this one too!
In this episode, Anthony breaks down the risks involved with investing and investing in real estate. What’s riskier… a government bond, REIT, stocks, or commercial real estate?
To answer this… first we need to define risk itself!
Find out how, and more, in another bonus episode of Multifamily Investing Made Simple!
“That Goldilocks zone of high returns and low risk is commercial real estate.” – Anthony Vicino
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Is Real Estate Investing Risky?
[00:00:00] Anthony: Everybody knows. Investing in real estate is risky.
Hey, what’s up guys. I’m Anthony Pacino of Invictus capital author of passive investing made simple and cohost of multifamily investing made simple podcast. Today. We’re going to break down one of the most common things I hear from non real estate investors all the time. It’s this. Real estate it’s risky.
And when people are talking about risky real estate, generally they’re leaning on 2007, 2008 there going back to the financial crisis and saying, Hey, remember when the whole world imploded because of real estate and all the shenanigans that, that got us into. Okay, fair enough. But here’s the thing, not all real estate is created equal.
You know, when you look back on 2007, 2008, that was largely a crisis of [00:01:00] residential real. The type of real estate we like to invest in is commercial real estate. So multi-family industrial storage office retail. These are fundamentally different asset classes than residential real estate. And when we look at how they’ve performed over the decades, we see on a risk adjusted return basis.
Commercial real estate might just be the best investment out there. Now I know that’s a big claim without data without citing my sources. That’s just the. How do we know it’s true? Well, Thomson Reuters did a pretty big study. They looked over the course of 20 years. And over this 20 years, this included the financial crisis.
So, you know, they just weren’t sugar picking, uh, the, the years in which they were looking at, what they did was they plot. Um, the seven major asset classes. So we’ve got like large stocks, shortstop, I’m sorry, small, small cap stocks, uh, corporate bonds, government bonds, and yes, commercial real estate. And they [00:02:00] plotted that on a graph, looking at returns versus risk.
Okay. So when we’re looking at this, a lot of it makes sense. But the more you dig into it, the crazier, it starts to appear. So in the corner where we see high returns and high risk, you see stocks. And that makes sense. A lot of people, they realize like high risk equals more reward, right? So of course stocks are going to be up there.
And then when you look at government bonds and corporate bonds, they are down in the other corner where there’s low risk and low return. Because if there’s not very much risk, then why would you be getting a big return? That makes a lot of sense. But when you go directly above the bonds, what do you see up there?
And that Goldilocks zone of high returns and low risk is commercial real estate. It’s crazy. Right. And what’s even crazier maybe about this whole thing is that it doesn’t even take into consideration the tax benefits associated with investing in real estate versus the tax treatment that you get [00:03:00] in stocks or in bonds.
The whole concept of risk is interesting because I think a lot of people don’t have it well-defined we ensure we could say the black Sholes model, we could define risk in X, Y, or Y way. But when you sit down and you ask a number of different investors, what’s risk really mean to probably all going to answer it slightly different.
Right. And so we have this difficulty even defining what risk means. So how can we have a good conversation about whether or not real estate is even risky? So, number one, I want to, I want to think about three things when it comes to investing. I think we all want one of these three things. We wanna make our money work harder for us than we worked for it.
We want to keep more of what we. And we want to not lose money, right? Those are Warren buffet, Warren Buffet’s rules, right there. Don’t lose money rule, number one, don’t lose money rule number two. And generally, if you can do this, if you can make your money work harder for you than you worked for it. And if you can keep more of what you make and you can avoid [00:04:00] losing money, you’re going to do pretty good.
Right. And so that’s the ultimate de-risk investment strategy right there. That’s what we’re looking for to keep risk nice and low. So how does real estate kind of play in. Well, when it comes to making your money work harder for you than you worked for it, that’s really talking about, I want really good returns.
I want to beat the average. I want to beat the market. And if you look at index funds over the last decade or so, you’d be getting somewhere between seven and 9%. But when you look at the performance of private sector, real estate, it’s usually north of 15%. So double the returns that you could otherwise expect in the stock market by, by, uh, Number two.
It’s not about what you make. It’s about what you keep. Right. We can make a million dollars, but if we lose a million dollars in the same year, like, oh, okay, well we shouldn’t, we broke even great. It’s not helpful. We got to keep more of what we make and to do that. We need to have tax benefits because the biggest bill that you’re going to.
By far in your life is the amount that you’re gonna be paying back to uncle Sam. So anything that we can [00:05:00] reduce, anything that we can do to reduce our taxable liabilities is going to be massive. And when it comes to investing in real estate, we get all the benefits of depreciation, which means that we can very often.
Not always. All right, you’re gonna want to consult with your CPA and your, your tax advisor on this, but very often we can receive our cash flows throughout the life of the project. Completely. Tax-free not to mention when we go to sell an asset, we can utilize something known as a 10 31 or a deferred sales trust, or a Delaware statutory trust to be able to move all of the capital gains and the proceeds from that asset, defer it and move it into a new cashflow generating asset completely.
And you can’t do that. And pretty much any other investment vehicle shorter, the energy sector and gas. And, um, you definitely, aren’t getting that in the stock. And number three, don’t lose money. This is where it just comes down to. We need to make sure that we have a very controlled mitigated downside.
And that’s a thing with real estate is that as long as it’s always on the S on the [00:06:00] correct side of supply demand, like it’s hard to go wrong. And the thing with real estate is people always need a place to live. Specifically. The type of real estate we specialize in is multi-family and we love it because people always need a place.
And if you look at where we are as a country, we’re about four to 5 million housing units short to fill current and demand four to 5 million. That’s crazy. It’s going to take us years to get back on the right side of that curve. So, what that means is that there is more demand than there is supply for this asset class.
And as long as you have that, regardless of what the macro market does, as long as there are people that want what you have, you’re going to continue to do well. And that’s why we like commercial real estate in particular, it’s really hard to lose your money in it. As long as people keep continuing to want the thing that.
So, when we talk about is investing in real estate, risky, sure. Investing in anything is risky. Investing by nature is inherently risky. Anybody telling you otherwise is lying to [00:07:00] you. They’re trying to sell you on something, don’t buy it. But when it comes to understanding like the risk adjusted spectrum of all the different investment vehicles, whether it’s crypto or NFTs, uh, stock market bonds, real estate alpacas for us, it’s clear.
No. Real estate comes out ahead as the least risky of all the different investments. And again, this is not financial advice. This is just our personal experience. And I’m curious, I’d love to learn more about your experience investing in real estate. Do you currently have assets? Are you looking to get into your first property?
Have you been investing for years? Did you get burned in 2007? Like tell us your story, get down to the comments and let us know, engage with us. We’d love to hear from you guys. And if you enjoyed this video, make sure that you smash that subscribe. So that you can get notified of all future videos and hit the light button over and over and over.
All right, that’s going to do it for me guys. We’ll see. In the next video.[00:08:00]