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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about, well, all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. With me in the studio today is my esteemed colleague, mister David Fransen. David, how are you doing today?
David:I'm well. How are you?
Mike:I'm doing well. Great. This is gonna be a good show. And now just for the newcomers, this is how the show works. David will be reading your questions, and I will do my best to answer them.
Mike:You can send your questions in by either texting them to 913 363-1234. That's 913-363-1234, or email them to hey mike@howtoretireontime.com. Let's begin.
David:Hey, Mike. I've never been invested in real estate. I keep hearing about how, it is such a great investment. Is it? If it is, what's the best way to invest in it?
Mike:Yeah. This is gonna be a fun one. So real estate is an uncorrelated market. That's the first thing to understand. So when we look at diversification, it's kind of nice to have uncorrelated markets.
Mike:And if I had to define it, I think there's roughly 5 markets out there if if we're gonna define it specifically. You've got but you've got your cash and cash equivalents so your CDs, your money markets, your checking savings, high yield savings. You've got the bond market, treasuries, corporate bonds, all of that. You've got the equities market, so your stocks, specifically. And these are all uncorrelated, by the way.
Mike:So a lot of people have bond funds, they think they're inverse correlated, so stocks go down, bonds go up. That's not always true. They're separate. They're uncorrelated. Then you've got your insurance market.
Mike:And I say the insurance market because it can offer you different benefits and detriments than other markets, like a fixed indexed annuity is a very different way to potentially grow money and hedge against risk than an equities, strategy would look like. Then you've also got the alternative space. The alternative space, you're then dealing into the more the abstract. This is the the partnerships, this is the real estate, this is, you know, everything else. It's the grab bag.
Mike:And so within that, there's different categories. But real estate market is an uncorrelated market to all of these other ones. So the stock market can do whatever it's doing. The bond market can do whatever it's doing. The real estate market is gonna do whatever it's doing.
David:Okay.
Mike:They can all go down at the same time. They can all go up at the same time, and they can also go in different directions at the same time.
David:That's what the that's where the uncorrelated comes in?
Mike:They're yeah. They are just their own thing.
David:Okay.
Mike:So you don't want to say, well, I'm trying to hedge against a market crash, so I'm gonna buy real estate because when markets crash, real estate's gonna go up. That would be an inaccurate statement to say. So that all said, this is a reason why many people will invest in real estate is because they want uncorrelated markets to just kind of have a, I I don't wanna say broad diversification in a way that Charlie Munger had put it, and we'd said that earlier, the overgeneralization that's just saying, I want a little bit of everything for the sake of having a little bit of everything. You can be very deliberate in your equities strategy, your bond strategy, and your real estate strategy, like a sniper. You're just you're you're dialed into a very specific objective.
Mike:You can do that with real estate. However, you need to understand the different ways that you can invest in it. Me, personally, this is I'm not telling you you need to do it what what I do. I do not personally invest today in real estate. I'm not opposed to it in the future, but I'm more focused on more aggressive growth personally.
Mike:Real estate is just a different beast. Now later on in my life, I will probably incorporate real estate. So I want to be very open and transparent. What I do is different than what you're gonna do. I don't personally invest in real estate right now based on my lifestyle and legacy plan today.
Mike:Yeah. You may want it though. So here are the different ways that you can invest in real estate. You got your real estate investment trusts and there's 2 categories there. You've got the publicly traded REITs or real estate investment trust or you have the private real estate investment trust.
Mike:Be careful about publicly traded REITs.
David:Yeah. Tell us what.
Mike:Yeah. The the reason is because they're publicly traded, they can have liquidity issues as in they have to keep a lot of cash on hand for when people wanna sell them. If you have more cash within a trust, you're not making as much money. And a lot of these publicly traded REITs, in my opinion, have antiquated older just assets in their portfolio. It's just it's not as competitive and so you can't have your cake and eat it too.
Mike:Publicly traded REITs, I find to be less competitive than privately traded REITs. When it comes to real estate, you don't want a lot of liquidity. Where do you want your money? You want it grown. You want it in assets that can do something for you.
Mike:So if you do a privately traded REIT, you're going to have liquidity issues, but They're going to be able to take then more money because they're restricting the liquidity for a certain period of time and they're putting it into very specific real estate Investments
David:That makes sense
Mike:so that you can potentially get a better dividend you can have potentially better growth so that it could have more potential of a better experience But you've got to be almost like a CPA and do your due diligence on the accounting on the the market research and get very specific with it because just like a CD today you might get around 5 percent you could also get 0.5% privately traded REITs can be wonderful and they can be terrible it's the due diligence I do not recommend that people buy privately trader REITs from the company that's offering the REIT themselves you almost and I say almost because there are no such thing as absolutes but you almost want someone who's a professional to vet it for you okay you know it's like when you buy a used car you take it to the mechanic yeah say all right is this car a lemon or is it legit privately trader REITs get a third party to vet it for you I see if you don't know how to do the vetting yourself so that's the REIT category then you've got your real estate itself so whether you're a landlord with residential real estate you're a commercial real estate investor that's another way to get into it which we could do a whole show on just real estate investment which would be a lot of fun yeah but you got to understand the exit strategy and so as you do real estate investment like in the actual physical asset you'll probably enjoy depreciating the asset down.
Mike:But once you wanna sell it, if you have a fully depreciated asset, which means the basis the cost basis is 0 at that point, everything is taxable. So you need to understand your exit strategies like Delaware statutory trusts, for example. And then that that's a whole other topic unto itself but those are kind of the two ways that I see people enjoying real estate yeah it's not for everyone and that's okay so don't feel pressured to do it because everyone else is doing it that's a cognitive distortion to do what everyone else is doing do what's right for you but you know have some fun with it and when it comes to real estate ignore the youtubers. Please please please the TikTokers, the youtubers, the things that are out there, because you're I'm hearing things like, well, we're gonna buy a property, and it's negative cash flow, but that's okay because we're gonna depreciate the asset. The depreciation offsets the no.
Mike:That those are highly leveraged, situations. They're just they're they're riskier situations. That doesn't make sense. When you go into real estate, you want positive cash flow. Yeah.
Mike:Maybe you put money up front into it to then turn it into positive cash flow, but if you're going into real estate, make sure you're going towards positive cash flow. There are many TikTokers, youtubers that are also talking about the the Airbnb. This is an actual thing I heard recently. I couldn't believe it. They're gonna say, well, you know, go go on Zillow and find some sort of person that's had a rental property up for a long period of time, but just haven't been able to find a tenant for whatever reason, and say, hey, I'll do it.
Mike:I'll manage it. I'll take care of everything, but I'm gonna use that as an Airbnb, but I'll cover it all insurance and all that stuff and negotiate with them and let's say the person says okay and then it says now go out and then find someone to then to clean it up find some place to rent a furniture to furnish it find some place to then clean it. So you're adding up cost and all these different costs. Uh-huh. K?
Mike:And then you're supposed to just magically consistently get people renting from it for short term rentals. It can work, but there's an incredible amount of seasonality when it comes to Airbnb. And if the markets were to crash, you've got a long term rental contract. No one's traveling. And if inflation's an issue, people aren't gonna travel as much.
Mike:I mean, look back at the last couple of years and see how many people were actually traveling. Forget the COVID restrictions. Yeah. If people can't afford to travel, who's taking you up on your Airbnb option? So there's no such thing as a perfect investment product or strategy.
Mike:If it seems too good to be true, it is. You want consistent, dependable, positive cash flow in real estate. Don't overleverage yourself. Take too much debt, which is risk, and don't listen to these YouTubers, TikTokers who think that they have quote unquote hacked the system or found a secret, there are no secrets. If it were that easy, Wall Street would be doing it and beat you out of the market.
Mike:Uh-huh. And a lot of the times, I found that they they they'll say, well, I made 200,000 or 300,000. That's the gross revenue, usually. They're not including their their expenses, their taxes. Sometimes they are, but usually, I I'm noticing the overgeneralized claim to keep people excited.
Mike:And if it worked so well, why are they selling a course for $50 to teach other people how to do this? They're they're saying, hey. Pay me $50, and I'll train you to be my competition. Like, the whole thing just smells and reeks of deception. Right.
Mike:So, again, real estate, a wonderful investment in uncorrelated market. No problem if you want to get into it. Just make sure positive cash flow if you want REITs, so you're gonna put a certain amount of money in there. Consider privately traded REITs over publicly traded REITs. If you want to actually be a landlord, understand maybe get into a smaller resident first.
Mike:Test it out, get the experience, and then slowly add to your portfolio. Be careful out there. There's risks associated with every strategy. There's nothing perfect out there. Now that's all the time we have for today.
Mike:If you want more tips about retirement, income, taxes, Social Security, health care, and more, make sure you subscribe to this show wherever you get your podcasts. Just search for how to retire on time. Also, you can catch this show via our 247 digital broadcast by going to www. Retire on time radio.com. You can stream various episodes on your phone while you're on the go, in the car, or wherever you are on a run.
Mike:Just go to www.retire on time radio.com. From everyone here at Kedrick Studios, thank you for spending your time, your most precious asset with us today.