The IDEAL Investor Show: The Path to Early Retirement

Ep 79 Diversification : Don't Put All Your Money in One Basket

May 03, 2023 Axel Meierhoefer Season 2 Episode 2
The IDEAL Investor Show: The Path to Early Retirement
Ep 79 Diversification : Don't Put All Your Money in One Basket
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Show Notes Transcript

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Axel is going to discuss the importance of diversifying your money into different asset classes and recommend some of the best areas to invest in.

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Hello, and welcome to another episode of The IDEAL Investor Show in our season two series about cash flow. As you know, we have basically broken the topic into a number of different areas to focus on, partially because I really want you to get educated from these episodes, but also to really have an opportunity to shine the light, in a sense on certain different topics that are relatively complex. And we want to do a combination of having me explaining things and putting a foundation and then also having some guests who specialize in some way, either specifically on that topic, or at least in a more deep sense on the topic. So the topic for this episode is diversification. And in other words, and you see this actually, on our website, right at the homepage, when you get there is the fundamental suggestion not to put all your eggs in one basket or have all your money in just one asset class. So to give you an example, where this oftentimes applies when we have new clients come to us, and I'm asking them, okay, what have you done with your money so far? And one of the answers they oftentimes say is, well, some of my money is taken right out of my income, and goes into my 401 K plan, which is coming from my employer. And that's where I put some of my savings. And when we go one level further, and I say, Okay, so what's actually in your 401 K plan, most of the time, the only thing they know is that when they first set it up, they were asked, Are you a low, medium, or high risk kind of person. And depending on that, the plan would actually determine which kind of mutual funds they would buy. And the vast vast majority of these mutual funds are investing in stocks. So if you say my 401 K is basically the main contribution for my investing and savings that I'm doing without even really having to do anything actively just being taken from my income, then you are putting your savings into that one basket of investing into stocks. So what do we recommend, and he has a graph that I'm happy to show you here in a moment that actually indicates our recommendation, just to start out with that is to have about 70% in residential real estate of the money that you invest about 10% in commodities, which would be gold and silver coins, up to 10%. In crypto, like I'm only in Bitcoin, I wouldn't recommend any other crypto, but some people like to have some different cryptocurrencies and the last 10% in stocks or other assets, like if you'd like to collect wine, and we had a great episode with somebody who is an expert in how to collect and invest in wine and whiskey as an investment. Some people like art, you know, like if you like to invest in art, and there are now ways to do this online, so to reiterate, 10% in kind of stocks and other assets, like 10%, in crypto 10% in gold and silver coins and the remaining 70% in residential real estate. So that's kind of like the diversification that I do for myself, and then I recommend for our clients, but I want to basically give you a little bit more of what other options would you actually have. And this comes from the notion that sometimes when people have these initial strategic calls with me, which by the way, if you go to the website, you can schedule one, if you're listening to this episode, or see this episode on YouTube, and you'd like to have a conversation to see is what we're doing for you. You can go to the website and schedule a strategy call. And what we try to find out during that initial strategy call is what do you want to accomplish? What is what I call your B hag or your big, hairy, audacious goal that you want to accomplish? And what have you done so far, to get closer to reaching that goal. And sometimes people say, Well, I like to invest in real estate, or maybe have even started already to invest in real estate. And I want this and then I want this and I want that. And ultimately, I want to have a little bit of everything. Now the problem that I would like to point out is mastery, just as a concept or principle is where you actually really spending a lot of time and really, really getting good at one thing. So that's why I believe I have reached a certain level of mastery in residential real estate investing, but I'm not claiming anything even equally close to it in all the other kinds and you might ask yourself and this is my this is part of diversification. What are the other kinds and so oftentimes you need a few notes for that and so I just wrote him down goes through them real quick with you because I want to make sure that they are as comprehensive as possible, but I'm not gonna dive into each and every one In Depth, I just want to mention them, and maybe a sentence or two what they are. So there are plenty of other episodes. And we will do more episodes in the future that go in depth to these different kinds of subtopics, so to speak. So I wanted to separate what are number one, the things that you can do with investing in real estate. And like I said, we focus on residential real estate. The second thing is, what ways are there to invest in real estate. And then the third thing is, what is the diversification just to put kinda like a capstone, like I said before, so when we come to real estate, I made my little list here. And what we are focusing on the residential real estate means anything that is considered less than 5 doors, or five units, what does that mean? A single family house, like a three bedroom, two bath, four bedroom, two bath house on a lot that we buy as an investment, and then give it to property management to put tenants in and we get the rent income. And after we have paid everything, the rent, the mortgage, the insurance and all that kind of stuff, we have some money left over that is our positive cash flow, our residual income from that investment. So that's a single house in that same category is also these other three that belong to the residential real estate category. And that is anything like a duplex meaning basically two House halves shared by two different tenants what a triplex same idea with three units in a house, oftentimes, you have two units in the bottom, and then the roof is the third unit. And then four Plex, basically like in many cases is like a square building. And each corner is basically like an apartment, a studio or a two bedroom, three bedroom apartment. So you have four together, it's called a four Plex, all of these meaning less than five doors to open up and go into the tenants unit, all these fall under residential or traditional residential real estate. And that's the area that we mainly focus on. And just as a quick explanation, that is the exact same way and same area as if you were to buy a house for yourself or half of a house for yourself, the financing, the tax treatment, all these kinds of things are the same the property management, the Texas you have to pay the insurance you have to pay even though it's an investment, but all of that is the same. Now when you say okay, or somebody says I want to diversify within real estate, I want to kind of go up the ladder as a lot of people say the next thing would be anything that's bigger than four units. So starting with five doors, and the summary term that you will hear most of the time why diversifying within real estate would be apartment complexes, or multifamily real estate. And that is a different category, mainly for two reasons. And I'm not gonna dive deep into these. The first reason is, how do we actually find out what the value of an apartment complexes and the way that it's done is you just say, Okay, I, let's say 100 apartments in every apartment pays $1,000 of rent per month. So that's $100,000 per month, and then I take that times 12 months, so that's 1.2 million, and then you put a multiplier on let's say, multiply or five. So the value would then be basically $6 million, if you wanted to buy it. And how can you increase the value is if you renovate all the apartments, and you make, let's say, $200 more, so instead of $1,000, you make$1,200. So that increase that 20% increase means you could sell it now for $7.2 million, when you bought it for $6 million, but it has nothing in common with the residential real estate below five doors, and the financing is different, and the kind of people who can do it and the way to qualify and all of that. So even though a five unit apartment complex, or a 10 unit apartment complex on the outside looks very similar, like a house or a duplex, the rules are totally different. And that's why I'm saying mastery is so important. So I know about it, but nowhere near to the level of expertise like I do and provide for our clients in residential real estate. So that's the second category is basically multifamily apartment complexes. Now the next one after the and by the way, you sometimes also hear that to be called commercial residential real estate because it's treated more like traditional commercial real estate and what is commercial real estate. That's the third category that would be like an office building or like a mall or a strip mall or something like that anything where the real estate is the means to allow a business to run like a hair salon or a restaurant or anything like that the building is considered commercial real estate. So again, this is also treated differently the rent and and agreements are completely differently, much longer term than they would be for apartment complexes. So another category, that there are people out there who are really experts, some of which we actually have invited to The IDEAL Investor Show before. And then there's another category within real estate. And I call that the alternative real estate category. And I made some notes, just to make sure that you know, I touch at least on the most common ones, you have probably heard about storage units, my but somebody owns that building that holds the storage unit, and somebody is managing that whole complex of storage units. And that is a form of alternative real estate or alternative real estate investing that is also treated more like commercial real estate, then there are people who actually do resorts, like for example, where you can go with an RV or campground or tiny house resorts or stuff like that, that is also a form of living in real estate, but it's not considered the traditional real estate, then there are and we had a great guest on that where again, the purpose of the real estate is to allow a business to operate. And that would be for example, for something like a carwash or a coin laundry. But most of the time, when you purchase something like that, you're not just purchasing the building, you also purchase the operations of the carwash or the coin laundry. So you basically have the benefits from the building and the benefits from the business as an investor. So those are a number of different things. And just as a reminder, we focus on the very first one residential real estate with less than five units. Now the question is, okay, how can I, as an investor actually get into these real estate investment, if that category in my diversification aspect, that's the category I want to get. And so one way as a way to actually do it is called a real estate investing trust. So let's take an apartment complex, somebody says, Okay, I want to build this apartment complex, and I own it as a company, and I let other people get into the ownership of that as part of a trust. And so you can actually buy parts of that trust. And as that property that apartment complex, for example, is performing and generating income, the owners and CO owners of the trust can benefit from that the huge advantage in it's called a read is you don't have to do anything. It's basically like investing in a mutual fund. And you just get the statement at the end of the month or the quarter of the year. And that's it and little more involved is another way of investing in real estate is called a syndication. So in a syndication is, again, could be an apartment complex could be a commercial real estate complex. And what happens in a syndication is a group of people comes together and say, we want to put this together, we put some of our money in, we also invite other people to join the syndicate to put some of their money in oftentimes 50k, 60k, 100k each. And so now we have a bunch of money, let's say we raised a total of $10 million. And we can go to the bank and say, hey, look, we as a group now have $10 million, please give us a loan. So we can create this apartment complex, this commercial real estate complex or whatever it might be. The point there is you are legally much more involved, because you are a limited partner to the syndicate. And the general partners are the ones who manage everything and you have a part in it. That means if there were, for example, a go to say we buy an apartment complex that is somewhat rundown, and then we want to renovate it. And five years later, we want to sell it us a limited partner are invited to participate in what is actually happening. Now you don't have individually decision power. But as a group, there are some opportunity to have more input of what is actually being done and how much money is being spent. Now I'm looking down here, the next category is the one that we do pretty much most of the time, and that is direct personal ownership, meaning like we buy a house, we give it to property management, property management, courts, tenants, and we get the leftovers from the rent after Property Management paid for any repairs and their management fee. And then we use the remaining money to pay mortgage and all that good stuff. So that would be personal ownership. Now the issue with that, just to be reminded is as you start buying more and more of those, your value, your asset value of all these different properties increases. And if you own them personally, then you're also personally liable. That means if you ever get sued, then everything that belongs to your name is in jeopardy. And that's why there's an alternative where you make an estate plan and you either have a trust or at least a series LLC where you basically not personally own these individual properties under your name anymore but their own either buy a company that you own or buy a trust that you have for so those are a couple of different ways of how can you actually invest in this category of real estate and what different categories Are there so you can diversify in the way and the type of real estate, but you would still have all your bad acts in that real estate basket. So let's briefly touch on the other ones. And I mentioned them in the beginning, but I want to mention them again, another asset category would be stocks. So I have a few stocks, but only from one company meaning Tesla, because I'm a fanboy of Tesla. The other category will be commodities, and most people for ease and convenience. And that's what I recommend is get gold and silver coins and really take possession of them, you never know what's going to happen, they are basically your heart reserve, because for the last 5000 years, gold and silver coins have always been accepted everywhere in the world, no matter whether there was a war or the economy fell apart, or the dollar is nothing worth any more whatever it might be your gold and silver coins would always be your reserve. So that's a category then crypto, I mentioned, I have 10% of my assets in Bitcoin, what depends, it goes up and down like crazy. So sometimes it's 10%. Sometimes it's 5%. Sometimes it's maybe 2%. And then the last one I want to mention because a lot of people don't have that on their radar is international and international is in my view becoming more important in the future. Because we are in a transitory time where not everything is guided by the dollar anymore, or at least there are strong signs that that time is coming to an end. And as it starts coming to an end other currencies like the euro, the yuan, or maybe currencies that we don't even know about yet will have more prominence in the world. And so if you ever decide, okay, I would like to have a place that I really like to go on vacation. So I buy myself and apartment, let's say in Bermuda or the Bahamas, or somewhere in the Caribbean or in Hawaii, while Hawaii wouldn't be international, but any of these other Caribbean countries are in South America. So they all have different currencies, and almost none of them have dollars. And yes, currently, your dollars will be accepted. But in the future, they might not be any more. So that's a form of diversification to hold assets that are valued in different currencies. So in summary, this don't have everything in one basket is a very valid principle. And even though our basket real estate is the biggest one, and I spend a little extra time on what that really means and what are all the different variants. residential real estate, in my view, is still the biggest one, then you want some commodities, some crypto and some stocks, and that's a good value asset, diversification, there's a lot of other crazy stuff you can do. And I don't want to say I want to discourage you from doing them. It's just those value aspects that I mentioned in today's episode are the ones that are most likely to retain value during inflationary times, war times, like we have with Russia and Ukraine, what other crazy things that might be happening. So the preservation of your value and the growth of your assets is most likely in those diverse categories that we touched on today. So I hope this was educational. If you're listening to this, I would really like to ask you to download the episode and give us a comment or rating. If you're seeing this episode on YouTube. Please give us a like that makes a huge difference. If you're not already a subscriber, please subscribe to the channel and give us comments and tell us if this was helpful if I left something out what I should maybe touch on in the future and what other future episodes you would like to know or hear about so that we can serve you the best way possible. So be well stay safe and I catch you at the next episode. Thanks for listening and I hope you enjoyed today's episode of the The IDEAL Investor Show more info and the links we mentioned during the show in the show notes or you can go to our website at Idea wet and sign up for the Apple podcast link. And if you'd like to talk to me sign up for a strategy call. Hopefully you want to share what you learned with your network and bring more people in we're really eager to hear your comments and until next time be well stay safe and ciao.