With the stock market being volatile as it is, it helps to keep your mindset in a position that continually learns. These days, people are putting money in the stock market without thinking about it. Before they know it, their money gets sucked out. Here, we are talking about real estate versus the stock market, clearing up what P/E is while providing great examples that will show you how things are done. We also cover defined contribution program – the 401(k)s, IRAs, and all those things – as well as some buy and hold properties. Get in touch with the market so that when you do take action, you won’t be blinded but guided.
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Have You Got The Ears To Hear?
I’m with Daniel, my brother from another mother. We had a great group that came to the Wealth Through Real Estate Academy. It was amazing to see how people’s mindset started shifting from the beginning to the end when they started realizing it’s the real estate is the easy part. A lot of things in life, it’s that way. It’s the daily disciplines of doing it that’s the hard part because of how we think. When people saw that generationally there’s a mindset, sometimes culturally even, where if you do it one way you make 15%. That’s not a bad rate of return. That’s about 50% better than the Fortune 500 index has averaged from 1928 to 2016. It’s not as good as if you were to put leverage on a piece of real estate.
Results can vary and all that, but we’ve got an example where you’re earning 47%, which gets you wealthier much faster. If you come to real estate and you’ve got $5 million, let’s say, and you want to put it to work. Making 15% on $5 million is fantastic. You’re making $750,000 a year, but what if you’re making 40% on that? The question is, “Are you willing to even look at it?” We had a teaching moment. We were talking about the mindsets of what we’re willing to pay for things when we think about it. People are putting money in the stock market and they’re not thinking about it. In a 401(k) or a corporate IRA or something like that, the money gets sucked out before they ever see it. It goes in pre-tax oftentimes. Sometimes it’s matched, which is good. That’s 100% of the first 3%.
That’s my only plus on that thing. If you can get that matched, then take advantage of it.
Most people don’t understand what P/E is. In this episode, we’re talking about real estate versus stocks. I used to tell a story about a machine shop. Not everybody knows what a machine shop is. Houston is an oil and gas country right on the west side of town. We’re right here in the heart of the energy corridor. A machine shop typically machines parts. They take a chunk of steel or aluminum and they’ll cut away all the parts.
They’ll turn it into a valve or whatever.
A little bit like with metal or what a 3D printer does with plastic or whatever. Imagine you have a machine shop that is throwing off $1 million a year in profit and the owner is absentee. The owner sucks out $1 million a year in profit.
He’s not working in the business. He’s not hiring people.
Pretend he’s in Boca Raton and enjoying life and the machine shop is here in Houston. Imagine he’s 65, 68 years old. He has some health issues or wants to spend time with grandkids or whatever. Instead of $1 million, maybe I’d like to get $4 million or $5 million. I want to sell because I don’t have that many years left or whatever the reason. The question is would you buy that business for $1 million? Everybody’s in on that. I’m like, “You’re trying to get better than 100% rates of return?”
At first, you have to tell people, “Whatever the buying price is, you have the funds or access to it.” Those people that hesitate at first, it’s like, “I don’t have $1 million. I wouldn’t buy it.”
They’ve never been shown how to raise $1 million, etc. Once you get past that, you’re adding to that story. It’s a simple question. Would you do it? It’s because of people’s own thinking, they say no. Get past that. Change your thinking about that and, “Yes, I’ll do it for $1 million.” Now, that I’ve got you $1 million, start auctioning it off. $2 million, “Yes, it’s still in at that.” $4 million, “Yes, it’s still in at that.” $8 million, “No, you lost me.” $4 million, 25% rate of returns is the minimum I’m looking for. Why are you buying houses, paying cash and making 15%? If I lose you at $4 million, which is a four P/E ratio and then I say, “Do you own any stock?” What I know about anybody that owns stock, you’re probably looking at a fifteen P/E at a minimum.
When I ask the question, “Do you own stock?” “I do.” This particular guy shared with me the stock. His particular stock, I pulled it up and it’s $19.8 million. That means that you wouldn’t pay $4 million for machine shop making $1 million a year, but you’ll pay $19,820,000 for $1 million of the revenue because of the stock market. What we say we would or wouldn’t do and our actions don’t align with that. If that’s conscious, you’re saying like, “I know that this is what I say, but instead of doing that I choose to do something else.” I don’t think for most people it’s a conscious choice. Sometimes people have these mindsets or these thought processes that they’re not even aware of. Most people haven’t taken inventory of how they think.
We had somebody tell us one time that they were talking to somebody in their family or a family friend or something. That person’s reason for not knowing or for not doing anything about their situation was because if they did, then they wouldn’t be responsible. Many people are stuck in that mindset is I trust the system. I do what I’m told. If it doesn’t work out, it’s not my fault.
If I do something about it and it doesn’t work out, then it’s my fault.
That’s a broken mindset. I’ll argue with you that if you don’t do something, it is your fault. You’ve been shown and you’ve been given the opportunity to see something else. If you weren’t reading this, if you don’t have friends doing it, you hadn’t heard about it, you didn’t know this was a possibility. That’s a little different.
Here’s the thing that I find is it’s hard to change people’s mind, especially the older you get. The older you get, the more people get entrenched. I call it a rut. They get entrenched in that thought process. It is literally like breaking someone’s arm to get them to change their mind.
It’s like if you spill something on the couch and you don’t clean it up. The longer that stain sits there, the harder it’s going to be to get out. It’s the same thing with mindsets. The longer we live in a certain mindset, the harder it is going to be to change. One of my favorite things about what we do is being there and you see people when they walk in the door. The people that have an open mind, the people that have shown up and are ready to change. When you see them start to change, even in that short amount of time, and you see the light bulbs start to go off and then you can’t shut them up. They’re excited because they can feel it starting to happen. You can see the excitement and they know that they’re getting started and there’s so much more mindset to come.
I love making a difference like that in someone’s life. You realize that the person that walked out 48 hours later is not the same person that walked in. We had quite a few people that are in at the club level and they get an opportunity to come every month for several months. It’s starting to happen where people are taking advantage of that. It’s interesting because I know that I’ve covered everything that I did before and nothing extra. There were some key foundational things that were shared that didn’t get into the brain.
They didn’t have the ears to hear it.
We’re talking about the stock market versus real estate. What I recognize is that a lot of people don’t know the history that when we went away from pensions, which are what we call a defined benefit program. Everything’s defined on the front end regardless of the money you set aside. If you put in the time working, the company’s going to take care of you later. That money wasn’t counted like Social Security dollars. There’s not a vault that the Social Security dollars are in. That’s part of the budget. They spend that money. When corporations do it, it’s a bad thing. When the government does it, it’s okay. That’s the difference. If somebody came along to buy GE, oftentimes there was billions and billions of dollars in that pension, which needed to be.
That’s what the cooperators were doing, they’re buying up those companies with the pensions and they were using that to go buy the next one.The longer the stain sits, the harder it's going to be to remove it. Click To Tweet
It sounds like a good idea, but that’s not the best use of that. Eventually, you got to pay that liability. That didn’t work out well.
If you don’t have the ability to print, you can’t make it up.
What ended up happening is that we went to this defined contribution program, that’s the 401(k)s, IRAs and all those things. Which means when you stop and think about what 3% of total payroll is nationwide, from all employees that have access to that. Vanguard’s got 15.8 million 401(k) customers. You’re talking about 75 million to 80 million people in the whole or maybe 100 million people out of everybody that’s participating in that. That’s a lot of capital to put towards. The problem is there weren’t enough assets to buy. It’d be like if you had the only house for sale and there are 1,000 people trying to bid on it, it would jack the prices up.
We have gotten in this situation on the stock market where if you were buying a business individual, like a mom and pop or even bigger than that. If you were buying a $10 million, privately-held making $10 million a year profit. You’d buy based on earnings and most people have this comfort zone. If you had a lot of capital, in order to deploy that, you might bid it up a little bit and maybe you need a lower rate of return. If you had access to low-cost capital even more. It’s interesting when you break it down into smaller numbers where people can understand it because I feel a lot of people feel like they don’t understand the stock market.
Another reason they don’t truly try to be involved because it’s above their head. The guy that is running their account, he’s the professional, he knows. He’s got my best interest at heart.
One of the things that bother me is when I ask people, “Do you have a 401(k) or do you have an IRA?” I don’t mean if you’re self-directed if you moved it over because you know what you’ve put in there. I’m talking about if you’ve handed it over to Fidelity or any one of those big houses. If I say, “Do you have a 401(k)?” They say, “Yes.” I’m like, “How much do you have in it?” They’re like, “I don’t check the statement all that often.” Number one, that makes me nervous. Number two, you realize that when you’re investing in the market, that you’re buying fractions of a business. You can’t afford to buy all of GE, but you can buy a very small part of GE or McDonald’s or whatever it is. The question is do you even know what you own? 99% of people say, “I don’t know what’s in there.” I’m like, “Does that bother you at all?”
How do you even know you got a good deal?
“It didn’t bother me until you asked me.” Is the problem in the asking or is the problem in not knowing?
That same person will drive to one grocery store to get their meat and to the other grocery store to get their produce because it’s cheaper. They’re getting a better deal at one, but their retirement, their livelihood.
They’re taking 3% pre-tax of their entire annual income.
They pay more attention to who has the better price on bananas than they do with their investment.
They got bananas like $0.48 a pound. In Randalls, they’re like $0.51.
I’ve done that. That was something I used to do. I thought saving $12 was the right thing for my family. That was a broken mindset, but what scares me to death is that there are people that will put the time and energy into something like that. When it comes to what’s important, they’re completely blindfolded and irresponsible. It’s time to wake up.
You start realizing that, “Where are you? Where do you want to be?” When you start making 35%, 40%, 45% instead of making 15% for no more work, for no more risk, for no more effort. Maybe slightly more risk because you’re leveraged. You got to make payments. I could argue that it’s three times the return, it’s maybe one-half more risk. Would you go 300% more reward for a 50% increase?
I was having a conversation with a couple and they were like, “We don’t have as much time as everybody else.” The market that we’re in and the time that we’re in, it’s a perfect storm. You can literally in a few years make up for 40 years’ worth of mistakes. I don’t think it’s ever been this perfect ever.
You and I both know people that are in Houston and they ask us constantly, “I’ve got a friend in Orlando. What do you think about investing in Orlando? I’ve heard that Detroit’s a good buy.” I’m thinking, “You don’t realize that people from California want to invest here.”
There’s so much money coming from all over the country and all over the world here because people know. It’s a focus thing for the folks that are here. If I could start talking about Tampa, then I can stop focusing on what I need to be doing here in Houston. I’ve got new stuff to learn and as long as I’m learning and not doing, I’m safe. Learning is a safe activity. Doing is scary. I’ve learned about the Houston market. I understand it. Let’s go talk about Topeka.
I can say that I’m doing something. It feels like I’m doing something when I’m studying and learning, but that doesn’t put money in the pocket. What could you do now that would put money in your pocket now or later? You don’t have to learn it all in order to make the money.
I had that conversation with a young couple and that for him that was the biggest mindset shift for him. He has opened his mind up enough that he’s to a point where he realizes he doesn’t need to know all the details. He doesn’t need to know everything. That he’s in the right spot. He’s with the right people. If he takes the action, not blind action but guided action. That he’s going to get done what he needs to get done. When you see people come to that conclusion on their own it’s like, “Congratulations. You’ve arrived. Your journey begins here.”
That’s the thing is you’ve arrived at the starting line. Until you get there, you’re not even at the starting line. Most people spend a significant chunk. What saddens me is when you see people that spend 10, 15, 20, 30, 40 years thinking about walking to the starting line, not even willing to begin the race to create the life they dream about. That’s what saddens me. An open mind and coachable, that’s exactly what we’re talking about. Taking action is the key. The real estate is the easy part.
At the end of the day, it’s the easiest thing that we do. The mindset and the consistency, that’s the hard part. That’s where most people have the hardest time.
What’s fascinating to me is what people have in terms of self-imposed barriers that they’re not even aware of. I could pray it out. Here’s a success story from a student. Here’s someone that was like you 90 days ago. Look at what they did. The human nature of like, “Yeah, but still I’m not sure if it would work for me.” How much evidence do you need? What you realize is that the only evidence they need is the results for themselves that they can’t get without taking action. You want the results before you take the action and the results only come from taking action. You’re stuck in this vicious cycle. It’s a guided action. Sometimes you win, sometimes you learn. The beauty is that when you do real estate the way that we teach, the odds of winning are amazing.
We’re talking about stocks versus real estate and the stock market is so volatile. I went to lunch with a banker. I won’t just say a banker, I’ll say the banker. I shared this analogy that I’ve come up with and he goes, “That’s brilliant.” I said, “If you want to think about are you making a safe gamble, if you will, on your future. If I wanted to go buy any stock, let’s say I want to go buy $150,000 of this stock. You have $150,000 set aside.”
Whatever it is, let’s say it’s the safest stock there is. Everybody knows it.
I’m wondering what that might be.
One would have said Apple before.
Apple lost in value.
Whichever one that is, that’s the one you’re picking.
Is it Ford? Is it Sysco Foods? Is it Home Depot? Somebody you feel is going to weather ups and downs in the market place, all that stuff. Something that’s not technology-based. When you look at some of the things that Warren Buffett owns, it’s a lot of transportation stuff because nobody’s going to replace trains anytime soon. He owns big chunks of Burlington and he owns XTRA Lease, the trailer leasing company and all that stuff. Let’s say it’s one of those. If I said, “Mr. Banker, I want to buy $150,000 of whatever the safest stock is. I’m going to put $30,000 down. Can I borrow the other $120,000?” The banker’s going to say, “We don’t do that.”
This is the banker that you have a relationship with that’s loaned you money before. That knows you’re going to be good for it.Learning is a safe activity. Doing is scary. Click To Tweet
If I go to him and say, “I’ve got $30,000 down. I want to put 20%. I want to buy a house that I’m going to rent out. It’s going to rent for this much and it covers the payment easily, all that stuff. I want to borrow $120,000. I’ll put up $30,000, you put up $120,000. Will you do that Mr. Banker?” They do that all day long, up markets or down markets. They’ve been doing it for a long time.
When he was in town last, he brings all these cool charts and graphs. Two things caught me off guard. He says, “Real estate is booming in Houston. I don’t know if any of you guys know this, but we finished a recession.” I’m thinking to myself, “Recession, in Houston?” It completely blew me away. I didn’t know that. The other thing he said that caught my attention was he showed the market cycle, the ups and the downs over the last many years. We teach if you want to buy low, sell high. The stock market, the whole nine yards. He said, “If you completely mess that up. If you bought at the peak at any peak you pick and then you were to go sell at any low down the road. Not a low behind, a low in the future, you still made money.” If that’s not safe, you can buy as bad as you possibly can and sell at the worst time to sell and you still make money.
Short-term holding costs could eat you up and things like that. What he’s talking about primarily is buy and hold properties.
This was over a long cycle. I’m not talking about a three-week period, ten years.
In any ten-year period of time, if you bought at the high and then you sold it to low. Find the lowest low ten years later that you’ve always sold for more, going from high to low, provided that you hold it for ten years. In six months, you can pay too much. If I buy a $300,000 house for $1 million, I’m probably not going to get bailed out. If I bought it at market price and then I sold it at a market price ten years later, even if I bought it the highest high and then sold at the lowest low in that ten-year span, you can’t pick any point to point where the low is higher.
If you pull the stock market, it doesn’t work. Not even a little bit.
The point of all that is to say if the banker won’t put their money at risk, because bankers are conservative. If you had $1 million sitting in the bank in cash, it’s your money there and you want to go to them to get a loan. A lot of people think, “If I have $1 million, maybe I can leverage that. Go borrow $5 million.” They’ll lend you $500,000, maybe $700,000 depending on what you want to buy. Whatever you’re buying with that, they want that as collateral plus the $1 million. That’s how conservative most bankers are. When it comes to real estate, they’ll lend you 80% of the purchase price all day long. There’s a way that you can get around that. That’s why people use hard money, for example, is that let’s say you’re buying $150,000 house and you’re buying it for $100,000 because it needs $20,000 worth of work. You’re all in for $120,000 on that situation.
What happens is that if you’re going straight to the bank, here’s what some people do is they go and they use their capital and buy that house for $100,000. That makes it more difficult to refi out because you don’t have a mortgage. You normally have six months or more to do a cash-out refi. If I go use hard money, something like that or create a mortgage that will do it based on the future value and when it’s fixed up. They’ll do it on the $150,000. They’ll lend you 70%, 75% depending on the hard money lender of not the purchase price like a mortgage company would do, but of the value. Your purchase price may be lower than that.
You build in the purchase price plus the repairs and then you do a refinance out. It’s what they call a rate and term refi into your longer-term financing. It reduces the amount of money and you have more leverage. It’s not your money necessarily in the deal, but you do have an equity spread there between what you’re in it at. Using that example, if you needed $20,000 to work and you bought it for $100,000 and it’s worth $150,000. You may only have $10,000 in that deal. You have $30,000 worth of equity. At that point, you owe $120,000 and with some closing costs and things like that. You’re all in at $10,000, but your $10,000 now has $30,000 worth of value. That’s probably going to throw off something like $300 a month. $3,600 a year and you’re getting 30% cash on cash.
That’s not including the 35% for appreciation. That’s not including the 12% cashflow. That’s not including the mortgage pay down or the depreciation or any of that. You’re immediately taking $10,000 and turning that into $30,000 worth of net worth. There’s no other asset class you can do that in.
If you could stick $10,000 in a machine and it spits out $30,000 and you only had a minute. Every time we put $10,000 in, you’d be like a debt machine. With the stock market, you’re not doing that. Rule number one, there’s never a scenario where you can buy at a discount to value.
You can never buy and capture equity.
When we’re buying at a discount to value, the reason why that is the supply and demand curve changes. Not everybody wants to buy a house that needs some work. There are lots of people that want to buy a retail-ready, move-in house, but not as many people want to buy something that needs that extra TLC, the handyman special. As investors, we broke through some other mindsets there that some people say, “I don’t want to pay retail.” They’ve got this aversion to retail. I’m like, “Who’s the comparison for the retail?” A lot of investors miss this a lot when the true retail, which is an end-user owner occupant. They always can pay more and are willing to pay more. Let’s say I buy a house at $100,000. That is a comp because I paid $100,000 that shows up on MLS if that was an MLS deal. If you want to buy a house, I’m an investor. You’re an investor. Should you be buying at a discount to my $100,000? If everybody that’s buying houses in a particular area is an investor and that now becomes the, “Retail.” It’s false retail.
That’s how those people end up on the sidelines, waiting for a deal that doesn’t exist. It doesn’t happen anymore. You need to distinguish MLS from retail. Are there retail houses on MLS? A lot of them, but there are non-retail houses on MLS as well. MLS does not equal retail.Taking action is the key. The real estate is the easy part. Click To Tweet
MLS is nothing but a marketing tool for agents. It’s like Google. It’s the Google of real estate. You can search there what’s for sale. It’s the eBay of Houston real estate because not everything that’s sold on eBay is new. They sell some used stuff on there. They put new homes on HAR. They put old homes on HAR. They put lots on HAR. They put retail-ready houses like a move-in ready, a house that needs to be lived on.
When you go onto eBay or Amazon, they’ve got new, they’ve like new, they’ve got good condition and then they’ve got rough. All the same stuff.
We got all that on HAR and then some. HAR requires at least six photos. It’s funny when they take one photo six times and it’s always the front or the outside. You know what the inside is like.
For those of you that haven’t got to the start line, let’s talk to you folks before we send you off into the world. We have a start line for you available. It is our Wealth Through Real Estate Workshop. Tom is going to explain to you why you should be doing what we’re doing. I encourage you to come out and see that. You can register for that at www.RightPathRealEstate.com. Go to the Events tab, click on Workshop and then they give you an option to sign up. Whichever one fits your schedule the best. Please click a link and register and we look forward to meeting you in person. I was going to give a discount, but then I realized you can’t give a discount on free.
We’ll pay you to get here. We’ll pay you in quality information that will change your life. What I realized is it was fun because we had an interesting experience in that we have a person that’s gone beyond the Wealth Through Real Estate Academy. She and her husband had joined at the next level of mentoring, but she had never been to the Wealth Through Real Estate Academy. She came back for that because her husband had been and they had taken action. To see through her eyes, someone that already knows what works and to see her take on us talking to people that haven’t been on the other side of that success. Go to the website. Register for the free Wealth Through Real Estate Workshop. Thanks for reading.
You all have a good day.