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Should you invest in real estate directly or indirectly through a REIT? In this episode, we debate just that. Tom and Michael go head to head on this topic and halfway through, switch sides to give you their strongest arguments for both of them. 

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Transcript

Pierre:

Hey there, everyone. Welcome to the remote real estate investor. Today we're sharing an episode that we did a couple of weeks back on the pod bean finance week, you can catch all of the episodes that were a part of that at pod bean.com/podcastweek/finance or simply search pod bean finance week on your search engine. And this episode is a showdown debate like we've done in previous episodes.

 

This debate is between investing in real estate directly or investing in real estate indirectly through a real estate investment trust, also known as a REIT.

 

Tom and Michael will be debating it out with email mediating and halfway through, they'll switch sides. So I hope you enjoy the episode.

 

Norma-Jean

And now we'll hand it off to our host of the live stream and the remote real estate investor podcast, Michael Tom and Emil, welcome.

 

Tom:

Thank you.

 

Michael:

Thanks so much.

 

Emil:

We're the we're the last show today, guys. So we got to get everyone hyped up I'm sure people are kind of, you know, like ready to end their day ready to enter the weekends. We got to

 

Michael:

It’s five o'clock on Friday. Let's bring bring the energy.

 

Emil:

Alright, so thanks, everyone, for joining us today. My name is Emil shore. And my co host here, as mentioned are Michael album and Tom Schneider. Say hi, guys. Hey, everybody. So we're gonna get into some quick intros on us in a second. But before we do that, wanting to give you all some background on the show, for those who are new listeners. So our podcast is called the remote real estate investor. And as you can imagine, there are tons of real estate investing podcasts out there, why did we decide to create a new one.

 

So there's this growing segment of investors who are bucking the trend of only investing in their backyard and finding ways to invest outside of their local market, either from hundreds of miles away. So think, living in Los Angeles, investing in Fresno, or investing across the country, so investing in the Midwest or the south east, or even in Michaels case, which we'll get into across the world.

 

So they're doing this because it's either too expensive to invest close to home. So think LA and New York, San Francisco, Seattle, any high cost of living area, or they're looking to diversify their portfolio across markets. And for anyone who's invested remotely, you know, it's a completely different ballgame with its own set of unique challenges, then if you're just investing locally, so we wanted to create this podcast and raise awareness and give our personal experience as remote investors. And we all invest that estate in different sizes of residential real estate. And we want to start this podcast again, just to educate people on on what that experience is like, and for people who are interested in potentially doing the same.

 

Besides us hosting a podcast where the three of us will will talk about our experiences. We also invite authors and industry experts to pick their brain as well on the show. So with all that out of the way, we'll we'll kick off some intros.

 

My name, again is Emil Shour. I'm a self employed marketing consultant living in the greater LA area. I started investing back in 2017. I picked up my first single family rental property in Jacksonville, Florida. I was hooked after I got my first quote unquote mailbox money, and have been growing ever since I've bought in Indianapolis, Memphis, St. Louis. And I'm up to six rental units of both single family rentals and small multifamily. Tom, you want to go next?

 

Tom Schneider

Yeah, so my name is Tom Schneider. I am the Director of Education here at Roofstock. I've like people who have worked at startups before, I've worn a lot of different hats. I previously worked as the lead product at one of the very first publicly traded single family rental REITs. At Roofstock. I initially was on the product side building out tools to manage transactions and appraisals, all that kind of stuff. Then I led the operations team for a while.

 

And the last year or so, I found this really interesting kind of gap within within the company, and that there's a lot of people who want to invest in real estate who just maybe don't quite feel comfortable, especially doing it remotely. Or you have people who you know, make the plunge and buy remotely and they're like, okay, what's next. So I left my operations post and started this basically little company within the company called Roofstock Academy and I've been doing it for about a year or so with Michael leading the coaching home and Emil and Pierre as well. So really, really fun. career journey and where we're at right now is the super fun.

 

I am a also an active real estate investor. I invest primarily in the southeast, as well as the Midwest. I am a California real estate broker as well. And I am in I've got roughly 10 or so, investment properties and all single family rentals. Michael, with that, I'll turn it over to you.

 

Michael:

Awesome. Thanks so much. So as I mentioned, my name is Michael Albaum. I'm the head coach with the rootstock Academy working with Tom. And so I started investing about 10 years ago, I used to work as a professional fire protection engineer in the commercial property insurance industry. And right about that time realized that that corporate job, the world wasn't going to get me where I wanted to go. So I started investing in real estate and doing all this kind of self education started with remote real estate in Southern California with a market I knew it was about six hours drive away from where I live, so some could call that local, but I call it remote.

 

And then I was traveling a lot for work throughout the Northwest us. And wherever I was traveling, I was constantly looking at the rental real estate market, because that's what real estate nerds do. And I found myself in a lot of really strong rental markets where the purchase prices were reasonable compared to what you could rent the properties for. So I was picking up properties all over the place and kind of left I felt like a bit of a slug leaving this trail of purchase properties in my wake. And it was a couple years ago that I got some advice that I was so spread out around the country with investments, it was pretty overwhelming.

 

So a good friend of mine says go get divert, go get laser focus on a particular market and go hammer it, watch what happens it'll blow your mind. And I said, Okay, that's kind of counterintuitive to everything. I thought I knew about investing in diversification. But that's what I've been doing the last couple years in the Midwest with medium sized multifamily value add properties. And so for anyone that might not be familiar with what that is, it's basically buying the junky as dirty as most beat up properties I can find for really cheap, putting a bunch of money into them, getting them repositioned, and either selling them sitting on the cash flow that they then produce or refinancing them and getting some of the equity back out as cash in my pocket. So we'll probably be talking about some of that during the episode today. But yeah, right now, I'm in the process of selling a couple units. But as it stands today, I think about 75 doors currently.

 

Emil:

Nice. So we started with we gradually went higher in terms of experiences. So that's our thought, well, the intros.

 

Alright, so on our show, we like to do these things we call showdowns where we take a hotly debated topic, and we argue both sides of the aisle. So things like single family versus multifamily, using a property manager or managing by yourself using or investing in your backyard versus investing remotely, things like that. So one host will take one side, the other hosts will will take the other side and one of us will play moderator to make sure too many haymakers aren't thrown throughout the process.

 

So in today's showdown, we're going to cover investing in real estate directly. So think about just buying a property holding title in your name, all that fun stuff, or going down the much more passive route of investing in a real estate investment trust, which most people know as a REITs.

 

So Tom is going to take REITs first and Michael will make the case for investing directly. And I will play moderator. And so after that, after Tom and Michael each make their case, Tom will get the final word so we'll let Tom go first. Michael will get his follow up and then Tom gets the final word. And then we'll switch sides and Michael will go first Tom go second and Michael will wrap it up. And so guys just remember don't throw all your all your haymakers at your punches in the first round because you got to save some pros and cons that we didn't talk about, in round one and round two.

 

Michael:

I just gotta say I feel a little it's like the underdog here. Tom,

 

Tom:

You should feel like the underdog Michael.

 

Michael:

Tom's worked in both the read space and the single family space. me just the single family space and multifamily space direct ownership side of things. So it'll be interesting. Tom, I hope you brought a towel to wipe, wipe yourself up.

 

Tom:

A good one real original Michael real original.

 

By the way, love these questions that are coming in, we are definitely looking at this someone had just asked, you know, someone ended up using their first home as an investment property. How do you calculate cash flow? Considering all the mortgage I've been paying along with repairs and upgrades?

 

You know, one of the things about real estate investing is there are a lot of different metrics that you can follow. And I think for this particular example, in talking about your your first home and calculating the investment, I think thinking about opportunity costs would be important. So you know, of the money that you could take out if you were to sell it like that should you should think of that kind of as the basis as the money that you're returning on it.

 

 So a metric that I liked a lot. And I know Michael likes a lot as well. And I think everybody likes it a lot is this metric called is called a cash on cash return. And what that is, is that's looking at the money that you put into the house using that as the denominator. And the numerator, the top of this division formula would be your net operating income. I don't want to get too far into the weeds because we got an episode going right here. But that's a really great way to think about it is what is your net operating income. So your total money you're collecting minus any expenses minus your mortgage payments for the year and dividing that by the the what you've what you've paid for the property. So I don't want to get too much down into the weeds into this. But it's a really good question. I think that's the way a lot of people get started as turning the first home they purchased into a rental property. So…

 

Emil:

Nice. And I don't want to plug our show all the time. But there's an episode we did exactly on this it was called ignore the noise. Here's how to actually calculate projected cash flow. We walk through every single expense or line item that you should include as you're estimating cash flow. That's number 72. So if you're interested, we have an episode just on that.

 

Michael:

And then I would just want to take one more question here as well. Someone's asking how do you get into real estate if you have no experience? Which is a great question. I think it's something that a lot of people run into, without being to promoty it here. I'd say come check out Roofstock Academy. It's a really great place and we designed it for investors who are just starting out all the way up to those investors that are looking to scale their portfolio, or get involved in new asset classes, we've got a YouTube channel as well, which is totally free information. bigger pockets is another great place to check out totally free. If you need some additional help, I think Roofstock Academy is an awesome, awesome place to come get one on one coaching, and over 50 hours of lectures. And I don't even need to get into that right now. Just check out check out the website.

 

Tom:

I know, the questions are too much fun coming in. All right, I'm gonna just hit it real quick. So someone asked about investing from your Roth. So you can do what's called a self directed IRA. And there's several of these companies that can help facilitate them so you can invest out of your retirement fund be at your Roth or 401k. But it's a self directed IRA. And you know, there's a lot of different companies that facilitate that. I think we have a podcast episode that is specific to that. But if you search for that, like that's, it's it's really awesome, because a lot of people have a lot of money in their retirement account. And it's, it's not like your retirement account is completely limited to only investing in like equities and bonds, you can do alternative stuff, but it needs to be done through one of these Qualified Intermediary. Okay. All right. I'll take a pause on answering questions if we can get back to

 

Emil:

I want to answer one, two, there's a Okay, jump in jump in. These are great I want to make. So Alright, last one, what's the biggest mistake people make with an out of market versus in market rental? I thought this was a great question. So I want to tackle it, yeah.

 

This is this is just my opinion, I think the easiest trap to fall into is when you go to another market, you fall into the quote unquote, like spreadsheet trap, where you'll find areas within a market that they the numbers look amazing, but because you maybe don't live there, and you don't know what it actually looks like, you know, maybe a rougher neighborhood, the tenant quality may be low or things like that. So you're you're, you're going in neighborhoods where the yield could be better, but you're potentially getting a lot more headaches with it. You don't, that you don't know about without that local knowledge, which is why we always like to recommend build a team locally, talk to property managers, agents, other investors in those areas to learn that market. Since you're not living there. You're not like driving by all these areas all the time. So that's, that's my one tidbit where I think a lot of people go astray.

 

Michael:

I think, you know, all these questions are great. Please keep them coming. We will circle back and try to get to as many of them as we can throughout the episode. As we take natural pauses or if we have time at the end. We'll definitely come back. So keep them coming. These are all great.

 

Emil:

Alright, so it's showdown time, guys, Tom, you're gonna kick off reads, Michael, you're gonna get into direct investing. Guys. I want a nice clean fight. Nothing below the belt, keep it clean. Go to your sockets.

 

Michael:

He's talking to you, Tom.

 

Tom:

Oh, God. Yeah. Good. Good one, Michael.

 

Michael:

All right. All right. Let's, let's get this going.

 

Tom:

Okay, so I'm going to be advocating for owning indirectly. So this is where you are not taking direct title or you're not setting up an LLC that you own the LLC and buying. This is like investing in a REIT. And there's a couple of different flavors of this. So it's one common way is they call it syndications where you're like investing in a fund, what we're talking about here in this argument is specifically investing in a REIT, which is, you know, a publicly traded company that owns a whole bunch of properties, I'm going to tell you why this is the route to go owning indirectly. So one, you get automatic diversification. When you're buying in a rate, you're not just buying one property, you got ownership all across the southeast, in the Midwest, Florida, Atlanta, Texas, you know, a lot of these REITs have a similar composition of geographies, that professional like Wall Street investors have selected these companies that these do these acquisitions, they have great resources, and they're curating this wonderful portfolio to you for you to buy in, to automatically get diversification across these markets.

 

The other pro of going this route of owning indirectly is the time requirements. If I'm buying a REIT, Holy smokes, I just have to like click a button I can buy it if you're buying real estate, directly or through an LLC heaven to Betsy, that's, that's a good little time chunk to do that. You know, there's a lot of tailwinds on why people like to do that. But just thinking of it as strictly as a time consideration, you're spending quite a bit of time versus just clicking a button and you automatically own that.

 

Let's see the last point that I'll make before I let Michael crawl into the ring is the liquidity aspect, right. So one of the biggest challenges with owning real estate is you park your money and it takes a little bit of effort to get it out. And there's also a lot of question marks on like, what that you know, what you're going to be able to get out of it. I mean, I think we've gotten there's a lot of great technology that can help people estimate on what their property is worth, you know, Zillow, and all that kind of stuff. But ultimately, like the market speaks with the market speaks and when you exit there, it's going to take a little bit of time. Usually if someone's buying cash, we're talking like 14 days or 30 days financing. But it's going to take time and there's going to be a lot of unclarity of what that exit price is.

 

So Michael, I'm gonna let you come on in and do your thing. But that is my side of the showdown for investing indirectly in real estate, remote real estate.

 

Michael:

Tom, I really appreciate you giving me these gifts. But you know that it's not my birthday. I mean, this was really kind this really thoughtful.

 

Tom:

Good, good one.

 

Michael:

This is great. I love t ball. So this is great. I so appreciate these points. So I'm just going to respond to each one individually. And then I'll go on on my own rant. But so first of all talking about diversification, you have these Wall Street hedge fund managers, are they really taking your best interests at heart when they're choosing these properties? Are they looking to line their own pockets, and we get the scraps as the investors I'm not so sure that I'm not the best person to pick out hand pick and hand curate these properties for myself, based on my own personal risk tolerances and investment goals. So that's first and foremost, I would argue that I'm a better person to do that than at some Wall Street hedge fund manager.

 

The minimal time requirement. Yeah, I think that you're right, it is much easier to click a button. But I'm not sure how responsible that is, in the long run. And if somebody is learning wanting to learn how to invest in real estate, if they're looking at involved real estate as part of their portfolio, maybe they should learn the business inside and out. That way they can learn to feed themselves. Buying a read is like getting a fish. But investing directly is like learning how to fish. So I'm trying to eat for a lifetime man, I don't want just a one a one sushi dinner.

 

And then lastly, you mentioned the liquidity aspect of it. As we look at what's happening in the market today, I would argue that single family homes are becoming a much more liquid asset that are being bought, sold, valued and traded, almost like a commodity. So the fact that you see REITs buying these up by droves, almost as an indication that hey, this is now a commoditized asset class, which is pretty amazing. So I put my property on the market had to offer same day, and now I'm selling it inside of 30 days. If that's not liquid, I'm not sure what is.

 

But let me just kind of continue here, I want to make some additional points and give you you a chance to respond. So when I get to control every step of the process via direct ownership, when and how to purchase when to refi when to sell when to do upgrades, that is a massive, massive degree of control versus being in a read, you just get told what they did, you're getting told what the decisions were being made are and you get what you get, versus being able to be in the driver's seat.

 

Also, also, I think that leverage is a massive, massive piece of the pie here so I can control $100,000 worth of real estate for 20 grand in cash. How much could I get for 20 grand in cash, Tom?

 

Tom:

Quite a bit, get quite a bit lots of got a lot of shares there Michael.

 

Michael:

I would also say that the tax benefits of direct ownership far outperformed those of indirect ownership. So like we were saying in the beginning the episode, this is not tax advice. I'm not a tax expert, highly recommend speaking of tax professional before doing any real estate, anything real estate related, so that you understand the tax consequences. But I'm curious to know, can you do a 1031 exchange out of because when you go to sell those shares by guessing you're going to be hit with a pretty hefty tax bill versus me as a direct owner, I can take all of my proceeds and profits and roll those into another deal.

 

And then the last thing that I want to mention what happens Tom what a bunch of teenybopper short the REITs, like they did with game stock, but now it's called REIT stock. What are you going to do that?

 

Tom:

Boy, okay, all right. Oh, all right.

 

Emil:

Guys, remember we have around two So see, yeah, leave some punches for round two.

 

Tom:

Alright, I'll throw the throw them. Are you ready for rebuttal? Michael?

 

Michael:

Let's do it. I would love to,

 

Tom:

You know what you're doing when you add that property, direct ownership, you're buying yourself another job. And I think we're doing this for to become passively wealthy. So in buying a rate, you know, you're getting exposure to the asset class. And at the end of the day, it's a it's passive, you know, I think that remote real estate investing directly like can be passive, but it takes a little bit overhead on the front end, that when you buy it through a reap you don't have that overhead. It's you know, it's how quickly can you like click Buy on the stock exchange. So that will be my final point is the timing aspect.

 

Michael:

After that, nicely done.

 

Emil:

Back to your corners back to your corners. Well done. Well done lots of good stuff. There injury caught me cut me. There's definitely a lot left around too. So Michael, you are Now we're going to get the first word.

 

Tom:

Why don't we? Why don't we break up round two? There's a couple of questions that are kind of fun. So we have some more. Michael I think this is a good one for you.

 

I became an accidental landlord, twice, would you recommend creating an LLC?  You go out and go? You go out and lead the way, Michael? And again, you know, this is not there's people who have had success in both different ways. This is not legal advice. This is just our personal opinions on and on that stuff. So go ahead, Michael lead the way.

 

Michael:

Yeah, totally. So it's a really good question. So there are really two camps. On the subject pro LLC, and no LLC, the pro LLC camp says it's great to segregate and silo your assets from everything else that no LLC camp says, Oh, just get high liability limit insurance, it'll be just as good. Who's right at the end of the day is only determined after a lawsuit. And by then it's too late. So I'm personally of the pro LLC camp. I like having things in silos and separate buckets so that people can't come after my personal assets, and vice versa.

 

So being a California resident, it's very expensive to have an LLC, it's $800 a year even if the LLC doesn't do anything, or own anything. So I would say, Look into what's involved with starting an LLC wherever you live, and also what's required in maintaining an LLC, since there's documents that likely have to be filed on some sort of regular frequency, and there might be some dues or taxes that are that are due. And then ultimately, you can decide at the end of the day, what makes the most sense.

 

I mean, you can go get an umbrella policy to sit on top of your dwelling liability limits for somewhere in the ballpark of $300 per million. So if you go get an umbrella policy for 600 bucks, that's get to 2 million in coverage that'll also sit over your homeowner's personal homeowners and your auto, you know, that might be a good solution if it's really expensive to have an LLC, where you live, it's having an LLC, where you live is practically free, you know, then it could be a good way to go. Just know that the LLC, there's some additional accounting overhead that's involved with owning an LLC. And depending on how you're going to be taxed and might be, it'll likely show up on your personal tax return. Again, depending on the type of the LLC and how you designate the taxation. So it can be a good thing. So definitely look into it, talk to a local attorney about again, what's involved with starting it and maintaining it. And then you have to decide what makes what might make the most sense for you.

 

Tom:

Yeah, you know, other considerations, if you're out in the process of buying or getting a loan, some lenders, like will not do conventional lendings to an LLC, like they wanted in your in the owner's name. So like some of those related processes could be a little bit more challenging with an LLC. But you know, again, there isn't like a major, like tax savings and like having an LLC, in fact, it's actually going to cost you more. It's not like you're getting extra tax benefits. But again, this is not tax advice, please talk to your tax in having an LLC, so I, you know, I personally have, you know, my, my name, and that's something you know, once you get over 10, you have to start doing private lending, so you might as well like, put it in LLC. So I think in just at two, like I'd say it's pretty common for people who have just two properties to not not have it in an LLC to have it in their name. But again, it's it's a it's a liability, kind of risk tolerance, kind of question.

 

Emil:

And also that point of lending, even if you already have loans on those properties, right. So even if you're not in the process of buying, but you actually own them, moving them into an LLC can like, have some ramifications. So you need to check with your lender before you do. Some lenders will say Oh, if it changes title, so if it goes from your name into the name of the LLC, you basically the the loan comes due and you have to pay the whole thing. So make sure if you have an existing loan in place on that property, you check with your lender before you make that move as well.

 

Tom:

Go ahead, Michael.

 

Michael:

I was gonna move questions, but go ahead, wrap it up.

 

Tom:

Yeah. I was gonna move questions, but I'll let you use you breathe in as the emotion you hit the buzzer first. So go ahead.

 

Michael:

About investing in the Roth. So from a kept we keep we keep harping on this, but not tax advice, not legal advice. So as I understand it, because of Roth is what's technically called a tax free growth account versus a tax deferred account. Any of the gains that you make inside a Roth, whether that's direct ownership and stock, bonds, real estate, any of the gains that you make, or profits that you make are tax free, so that when you go to access or make withdrawals from that fund, or from that account, they are not taxed. Same thing with real estate flipping. So I have been told and cautioned not to do this too often, because if the IRS sees you running a business inside of your Roth, I think they are frowning upon that. So plan is to do one to two a year to help boost some of the returns. But basically, I get to control the entire process. Well actually gonna take it back.

 

There's a lot of things that I can't do. There's a lot of red tape and specifics with regard to how the deal has to be done and what you can and can't do. Do so I physically can't do any work on the property, I can't, I can't, I don't believe I can personally manage the property. But again, it's a flip. So I'm buying a property, all cash, financing the flip all cash and then going to be selling the property hopefully for a significant gain, all of which proceeds will should and should be tax free, so that I can go do it either again, or then put those funds back into the stock market.

 

So in theory, it's a really, it's a really cool vehicle. I've heard a lot of people have a lot of success with it. And I'm very excited to be on this journey. So again, I'll have to keep everybody posted on how it goes assuming I end up purchasing the property that I have under contract.

 

Tom:

Nice, nice. Alright, Emil, you ready to start round two?

 

Emil:

Alright, so let's get start with round two. Michael, you're going to start by taking the side of reeds. Tom will get to go with direct investing. And then Michael, you get the final rebuttal.

 

Tom:

You're in trouble. Michael, go ahead. Go ahead. Go ahead.

 

Michael:

It's amazing that my birthday is gonna come twice in the same episode, I just, I'm really excited. So I'm gonna, I'm gonna try to not make the same points that Tom made. Because they weren't good points. Anyhow. So let me let me start by saying that I think that reads have access to capital A deals that I as an individual investor could never imagine, never have access to. And so simply, because of the economies of scale, they're getting more deals for cheaper and can also save on operational costs. So I as an individual investor, I'm likely never going to be even seeing the types of deals that they're doing. And I'm likely not going to be able to generate those kinds of returns for clicking a button for just putting my money into their deal. And sitting back and enjoying the benefits.

 

So in a REIT, I can also get extremely predictable returns, if you're owning a single home, and the HVAC goes out, which I promise you, if you're in this business long enough, it will, you have to replace it, that could be three to four to five years worth of cash flow on that particular house. So I personally, I really liked the regular distributions, I'll take my monthly quarter quarterly or annual distribution, check whatever the frequency is, and not lift a finger, I don't wanna have to worry about replacing roof shingles replacing the entire roof for the HVAC.

 

And then the other piece of this is I like the diversification that I can get with a read. If I own one house, and it becomes vacant, I'm 100% vacant. But if I own a read that owns multiple properties, if one goes vacant, I'm never even gonna know about it. So the diversification I get, I'm really able to spread the risk across multiple properties and not have to think about Oh, man, is my tenant not able to pay rent this month? What does that mean for me as the owner.

 

And then lastly, as an international investor, Reed's provide a much easier path to getting exposure into the real estate into the US real estate markets, I don't have to go through the process of getting a green card or getting approved for a loan or getting a bank account as a foreigner, I can just simply by the REITs and get the exposure to the markets without having to jump through all the hurdles. And being an international investor, I understand all the hurdles that one normally has to go through just to get a bank, a bank loan.

 

Tom, I know, I see you're kind of bloodied over there already. I'll let you let you kind of come in and just and share your piece.

 

Tom:

Okay, so this is what I'm talking about why owning direct is, you know, I agree with my first points I made was very relevant, you know, it is a little bit of a time overhead to do it. But once you do that initial overhead of time, there is no greater wealth creator than real estate. And I'm going to talk about a couple of those reasons and why it's so specific to direct ownership.

 

So Michael kind of sloppily trenched you know, like a, like a, like a pig walking through some beautiful flower bed he didn't really the highlight the the numbers so the tax advantages, so I'm gonna I'm gonna let you guys all know, I got an acronym for you to stay with us. It's the three Ds of real estate direct ownership, there is deductions. So right, all these costs that you you have, so you're paying your property manager, you're fixing the H fac, guess what, that's all a deduction, you can have a paper loss with real estate, even though you're like making money. So the first D deduction.

 

The second one deferral, right. So in owning the property every year you can you see me depreciation, I jumped ahead depreciation every year that they own the property, you can write, you know, write off this depreciation of the property over, you know, a certain number of years, so you're just taking more paper loss in third is this deferral so I can sell my property, move those proceeds to buy another property and not pay a red cent of taxes on moving out and it's crazy. It's like my wife and my wife's a tax attorney and she like blows your mind whenever she like looks over the advantages of real estate So the three DS is something that you can do with direct ownership that you're not going to be able to do with the REIT is incredible.

 

The other piece, so having worked at a publicly traded REITs, I remember following the stock price, and thinking to myself, like, This is nuts, like we are performing incredibly, like our vacancy is very low, our overhead is low, all this good stuff. But guess what the price did not reflect that. And I think there's something really frustrating about, you know, a butterfly in Korea, that can chaos theory can like, affect your stock price. I'm kind of like a piglet walking around in a in a rose garden right now. So a, you know, your stock price is there's so many things that are not related to the performance of the asset, with the publicly traded REIT versus your rental property where Guess what, if they pay rent on the first of the month, good news, your value just went up, you don't have to worry about these, you know, externalities that are just out of your control. It's straight direct performance.

 

You know, kind of related these bigger companies, there's a lot of overhead with them, there's paying that CEO that big salary, there's, you know, all the Sarbanes Oxley public company, yada, yada, yada, there's just a lot of costs that go into that. And by owning it directly, you strip all those costs, and you put them in your back pocket.

 

The last thing I'll say is in owning individually, in a you know, I can see this argument going either way, you also have the publicly traded REITs, they're basically a very similar composition, they have pretty much the same leverage at like roughly 50% of these other single family REITs, they all have pretty much the same footprint of like the same cities. So in buying individually, it's like using, you know, a shotgun versus a excuse, a sniper versus a shotgun and a violent comparison. But anyways, it's being very direct with what are the markets that you believe in, and you can be way more targeted in that process. And, and honestly, like, you know, like I said, it can be a little bit more time on the upfront, but it's really rewarding down the line in that you set up these systems and the mailbox money is real, and you're paid directly on the performance of the asset versus this, you know, investing indirectly in these in these public REITs. So, all right, go ahead. Go ahead, Michael.

 

Michael:

Tom, I think it's so comical that you think that you'll have access to better analysis tools than professional advisors.

 

Tom:

That’s why Roofstock was invented, Michael, that's why Roofstock was invented. So you know, bringing Wall Street to Main Street, go ahead. You know, what, if you said that five years ago, I'd say you're right, that is comical of me to say, but it's different now, Michael, different that.

 

Michael:

The Times have changed. I know. I know.

 

Tom:

Seriously?

 

Michael:

Yeah. But I'm sticking to my guns for round two here and that and then we'll circle back and, and convene. So I think that the analysis tools that these investors have professional investors have far outweigh that of the individual investor with you, and he can Google and have access to there's just no way we can compete. So that's first and foremost. Secondly, you know, I don't want to be worrying about my neighbor not mowing their lawn or keeping trash on their lawn, which is now going to drag the value of my property down, versus the stock market. When the stocks go up, man, we are, sky's the limit, man, we are screaming up there. So you know, the individual ownership, it just you're subject to what your neighbors are doing. And I think that that's too impactful versus the aggregate of being spread across multiple markets and numerous properties, you can spread that risk out, you can peanut butter spread that risk out across multiple properties.

 

So I just think it's kind of a no brainer, you know, I don't want a second job. You mentioned it so nicely in the first round. I want that mailbox money. And there's no way that going through the process of getting a mortgage finding a property manager checking in on the property manager possibly having to change the property manager like Emil is in the process of doing, getting insurance quotes that you're running through right now. Filing tax returns with the CPA making, checking on his tax returns the CPA. It's just it's craziness. It's madness. You know, what kind of world do we live in? Where if someone thinks they have time for that? I'm REITs all the way man.

 

Emil:

All right.

 

Tom:

That’s not true. That's ending with a lie of Michael a great way to end your argument only for the purposes of this show. But for the for the show for the.

 

Michael:

Absolutely.

 

Emil:

All right. You're done. You guys are done. I'm cutting both off. You guys can't see anymore. Your ears are swollen. Nice job, guys. There was a couple things I wrote down that I wanted to touch on that. For each side, I'll start with reads. I don't think anyone mentioned that there's less money to get started. So the reeds, you can go invest like 1000 or a couple you know, if you don't have the money to put a down payment on a single family home, or he could be a good way to get some real estate exposure for much, much cheaper.

 

Michael:

That was gonna be by knockout blow, but you called it too quickly Tom was already down,

 

Emil:

I want to hop in the ring too

 

Michael:

The ref is putting on gloves.

 

Emil:

Right? And then reads, um, I think it was kind of touched on it. But you have professional management like these people manage 1000s 10s of 1000s of homes, they know what they're doing, they have the scale to just have the most efficient, awesome processes to like to know this stuff. So I'd, I'd say they're, they're very professional. versus when you go direct, you're dealing with a property manager who maybe only has 100, or you're self managing and dealing with that nightmare.

 

Going back to the direct side, doing a cash out refi, you can't. So let's say your property value goes up your interest, interest rates go down, you can actually pull some of the equity out in that home, you still own the property, you're still making a profit each month, but now you just maybe got your original down payment back by doing a cash out refi. And you can go reinvest that elsewhere.

 

Tom:

Emil, I think you might have won this fight these points you're making are really, really good. So sorry, continue just stepping on the back right now.

 

Emil:

Thank you, Tom. Yeah. And then the last one is, is building equity. So with direct you, you get equity in a home, right? So yes, you guys mentioned the leverage benefit, right, you can buy $120,000 with a home for 25k, or whatever it may be. But then also you have a tenant. So you're making cash flow each month, hopefully, making profit each month. And then you're you're also having your tenant, pay your mortgage, and you're building equity in this home. Versus with a REIT you don't get that you kind of you, you put your money in and it's paying you a dividend out or whatever it is, each month or quarter, whatever it is. So otherwise, you guys nailed everything else.

 

Tom:

So we got a fun question that came in. What do you get? What do you guys think about tiny houses, and I love me a tiny house. So a great strategy that some investors use. Now, this isn't a remote strategy. But a great strategy some investors use to get going is the strategy called house hacking. And that is where you buy a property and you live in it. And either in the other room or the other unit or the other little tiny house, you make that a rental.

 

So it's a way that you are, you know, starting you are owning property, but you're also collecting that rents to either offset your mortgage, or just have a little, you know, extra cash on the side. So the tiny house is a great, you know, way to start generating some income. I think it should be done through the same financial rigor that you would do in evaluating buying like a different property. So looking at what those costs are and what kind of rents you would get. And, you know, establishing Okay, what is that cash on cash? Or what is that cap rate, or IRR? There's there's a ton of different metrics that people use. And I mentioned we we all really like cash on cash as a metric. I think IRR is fantastic to just thinking about total return.

 

So to final might make my final point on the tiny houses. Yeah, yeah, I think that that that strategy can make sense. Especially if you don't maybe don't feel comfortable and want to be right on top of your investment. I think the downside is you know, if there's whatever broken toilet, whatever that person is right there. One of the things I love about remote investing is I have professional property manager where there's anything wrong going on, I'm not answering phone calls, they're managing it, you know, I pay them a percentage of the rent they collect every month, but I'm okay paying for them that because they're making it like a very passive investment for me.

 

Michael:

I love this question two. And it's so timely, I'm actually in the midst of looking at a couple of deals to set up Tiny Homes on the property. So Bay Area, California is really expensive. And so my wife and I are looking to move. And so we're looking at property and looking at what the zoning requirements are for placing some of these tiny homes. And it's interesting because you can put them on a foundation and make them permanent, you can put them on a trailer make them non permanent Airbnb, long term rental, there's all kinds of regulations around how you have to do this. But I think that there are absolutely ways to go about doing it and make a significant profit.

 

There are multiple different styles of Tiny Homes to I've we just came across a company that's up in the Bay Area. That makes them out of containers, their container homes. So those are pretty cool. There's modular homes there stick built at us. So there's all different ways to slice that pie. But Tom, I think hit the nail on the head that you still want to evaluate it and see if it makes sense as a financial investment. And then also I would be looking at what the property value might jump to after the fact a lot of people like having a granny unit or additional 80 or whatever you want to call it. That could add some tremendous value to the property. So then combining a couple of these different strategies you go put in an ADU now you go get a refinance the property is worth more you can take some cash out it's kind of a combination of a burr house hack into

 

Tom:

There's a ton of tailwinds for Tiny Homes to just I think local areas are getting more friendly, like in wanting it to be a little bit more dense. And then also with the pandemic, like having, like an extra little office or something is, you know, quite a premium of, you know, having having that I feel like it's probably, you know, this is a little bit subjective and be commenting on it. But I feel like that has greatly increased the value I, I just had a no no parallel thing with me her turn just ended in like, wow, that would have been really nice to have a little extra little unit instead of just like, right in right in the grille of the house. But anyways, it was a good experience, though. AuPair but it would have been nice with a little in law or whatever. Granny tiny home.

 

Michael:

That's, that's a great plug for aupairs too. was great. It was great. Yeah.

 

 

Emil:

I just saw so funny. This question came up, I just fell into a YouTube black hole. And it was this guy who, I don't know if he builds them baizen whatever. But he has tiny homes across the country. He manages them all himself remotely. He has 10 across the country, Airbnb ism. So all short term rentals, and he's making like 2k a month on each one, like, just, he has 10 of them, he quit his job like he has he manages himself so he gets like a cleaning crew and a local handyman, a contractor and he just has all these Tiny Homes cross country if that was pretty cool.

 

Tom:

I just thought of a business idea. So you…

 

Michael:

own 10 Tiny Homes across country, right?

 

Tom:

Find like a big enough of a lot, right? And then you you do like a lease on the lot for like 30 years. You do it for free, but then they get the building after that time period. Right You follow me? So you so you you have whatever the 30 years of income you're generating there. There's got to be some clause in there at the property transfers, but I the tiny home Empire, the tiny home leasing, whatever the like, you know, whatever. How many square feet of land? Well, I think there's some, there's some

 

Michael:

there's definitely some there's definitely something there. Yeah, there's definitely something there. We'll have to do another episode about that. The remote real estate investor Tiny Home Empire,

 

Tom:

Tiny home Corner lot Empire.

 

Michael:

So I think we should also touch base Tom on kind of our personal thoughts about the battle, and personal views and opinions. So you know, and ending with a live for me, which is you totally caught me. I am a big, big, big proponent of invest of direct ownership. Everything I do, for the most part is direct ownership. I don't think I own, I might own a couple shares of a couple different reads. But it's a very, very small percentage of my portfolio. I just think that I think you mentioned it really nicely. The tailwinds of direct ownership are so massive when directly compared to indirect ownership and read that for me, it becomes a no brainer.

 

If you have the time, if you have the will, if you have the desire to learn the real estate investing business, I think that there's no better way to do it than indirect ownership, you might start out in a read and try to understand what's going on. But to be honest, from my experience, and Tom, you'll know better than me, but you're not. The REIT folks that people who are involved in the read are not holding the hands of their investors, showing them financial statements, profit and loss reports, they can see reports understood helping them understand how the business is run. Is that fair to say?

 

Tom:

Sure. Yeah. I mean, there's, there's good and bad ones, just like any other business, but you know, I guess you kind of continue on to it. It's like, you know, it's kind of like, it's, I think of it as like a little bit of a hobby as well, you know, of doing this type of remote investing. And yeah, there's a good quote out there you know, everyone should have three hobbies, one that makes them happy one makes them health healthy, and one that makes them rich, and like this very much fits in that kind of ladder category of hobbies to have and you know, like, like, like we've talked about, there's a little bit of work that you do upfront. And then sometimes as things come up either you're selling or whatnot. But it's it it's honestly like I it's really enjoyable. I don't know it's it's, it's fun. Yeah.

 

Emil:

Real Estate Investing kind of covers two of them for me personally like that. The happy in the wealthy, which is nice. Until you know, you have a pipe burst, and you're like, this is why I do this. What am I doing? But then you have enough of those urges, like you know, it's a home. things break, you fix them, you move on, it's all good. Yep, the first couple that hurt, they hurt a lot.

 

Michael:

Well, it's one of those things that unless you know what to expect it, it sucks even more. So if you go into this eyes wide open. We talked about in the academy all the time. It's so important to go get educated what you know where you do, that doesn't really matter. But just make sure that you go get educated by people that understand what they're talking about. So you go into this investment eyes wide open. Because the last thing that I want to hear and I hate hearing about it is somebody buying a single family home thinking it's like a REIT, thinking that their experience is going to be like that of a read, especially with a lot of these turnkey providers. Oh, it's so easy.

 

There's still stuff that has to get done. So again, go get educated. Go ask questions, go learn about what's involved with owning and operating single family rentals or rental real estate for that matter, so that you're not surprised or you're less surprised rather because, again, you're going to be surprised if you're in this business long enough. I can promise you that. So you just want to understand what are the risks? What are the pros, what are the cons? Okay, great. Let's Let's do it. I know there's going to be surprises and I was gonna be speed bumps. I'm okay with that. You know, then then direct ownership is probably for you.

 

Pierre

Alright, everyone, that was episode. Thanks so much for listening. If you liked the podcast, make sure to subscribe and leave us a comment that helps us out a lot. And also go check out the Roofstock channel on YouTube. We post all of our episodes there along with a bunch of other content from the Roofstock team. Thanks so much for listening. Happy investing.