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How to do make money grow quickly, yet safely? Is real estate a good strategy if you need liquidity in 2-3 years? In this video, we discuss time horizons for real estate returns and what you could do if you need liquid cash within the next couple years but still want your money to work for you. --- Transcript   Michael: Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael Albaum and today I'm joined by my co hosts,   Tom: Tom Schneider,   Emil: and Emil Shour.   Michael: And today's weekend wisdom, we're going to be talking about some of the different time horizons to be thinking about with regard to your investment. So should you if you need the money sooner? Should you be investing in real estate? Do you see it as a long term growth vehicle? Or is it something that you're going to need in the more immediate future? So let's get into it. So, guys, we were chatting before the show, Pierre brought up an amazing question he's dealing with right now. And with his family that he's investing with, they are looking at investing money into real estate. And someone brought up the question of, well, the kids are going to college in a couple of years, should we be investing this money in real estate? What is the different time horizons that we should be expecting for real estate investments?   So Emil, I'm going to kick it to you first, if you are planning on using a chunk of change in three to four years, you know, you're going to need it for something, whether it's a new purchase a car, kids going to college kids, you go into school, what have you? Should you be investing in real estate? What are your thoughts?   Emil: Personally, I look at real estate only as long term investing. So if I was looking at something three years down the line, I would I would not take that money and put in real estate personally. Everything I buy, I'm thinking about in terms of at least 10 plus years. So   Michael: And what are you worried about in that three to four year time horizon? Why wouldn't you put it in real estate? The last couple years, the markets been on fire?   Emil: Yeah.Yes, yes, it has. But it's always hard to predict, will that happen? Just with real estate, in general, my thought is, on a long enough time horizon, it is much harder to mess it up. I'm, obviously I want to mitigate risk and do as good of a job and like, you know, you walk into a properties thinking like, Oh, my spreadsheet math is tells me I'm gonna make this much per year and blah, blah, blah. In reality, things happen, things break, you know, you have down years. And so to know that it's only going to be two to three years, it's very possible that that could be a period where either a the market goes down, we have some significant capital expenditure where cash flow for the year is negative, so you're losing some value there. So for me, I just I think two to three years, especially this is this is more of like a side hustle, quote, unquote, right? I don't I don't do real estate investing full time where I feel like I'm a pro and, and all that.   So just for me, personally, where I'm at in my career, I don't, I wouldn't take short term money and put it in real estate and be like, Alright, I'm gonna get on two to three years. Plus, when you sell a property, you're typically paying five to 6%. So like, even let's say you have five to 6% appreciation, after you sell and pay your commissions and closing costs, all those things like a lot of that could just be vaporized. So I like holding for long term.   Michael: I mean, I've got a follow up question for you on the timeline. So let's kick it out to a 10 year time horizon. Let's turn the clock back to somebody investing in 1999. They have a 10 year time horizon. Now 08 hits, they're planning on selling in 10 years, and they just get decimated?  Doesn't the same same risk factors apply 10 years down the road that we could be in a down market by the time you're looking to sell?   Emil: Totally, totally. to that. I will say though, that if you look at like historical price charts, I've done this, you look at 2008. That was an anomaly over like 60 years, right? I think people there's crashes, but a crash of that magnitude is very rare. Like, again, look at charts, look at price value, average price value across the country. there's times where it goes flat, or dips a little bit, you know, softening, but like just a cratering. Like that is so so rare. So you could have that like mentality. Oh, we could see another giant crash. But my thought is that they are pretty rare in one's lifetime. The fact that we have went 2008 I wouldn't expect to see something of that magnitude for a long time. But that's just my opinion, not advice or anything.   Tom: Yeah, and it also like that's crashing everywhere. That's not just real estate. That's like, you know, your equity   Michael: The financial markets,   Tom: The whole financial market, so it's like it's not like you're escaping it in one avenue versus another.   Michael: Well, if I put it in my bed, I'd have more money. Yeah, but it stuck it away in the mattress. No, that's such a great point, Tom. But same same question over to you three to four year time horizon, are you putting your money in real estate?   Tom: With a three to four year time horizon? I would probably put it in like an index fund. I real estate I think there's a better five year marker and to think of it just because of that really great point Emil made earlier about the you know, there are some transaction costs and frictions. I think a lot of it also is your risk tolerance, I'd say I'm, I'm pretty risk tolerant. But with that said, though, like where I'm taking my risks are pretty tried and true paths.   Actually, I'm going to contradict myself just bought my first little little bits of Bitcoin, little slivers of Bitcoin. So pretty excited. Oh, I'm in the digital currency world, the remote digital currency buyer  we're gonna, that's gonna be our new podcast, we're gonna.   Okay, so back to the question three to four years, that's a little bit tight. So, I mean, I think five years is a is a number that I would feel better about. But I could see if, you know, the deal was appropriate, like I could see shrinking into like a three to four year horizon. But, you know, it starts getting a little bit thinner when you start accounting for those transaction costs.   Michael: Makes total sense. makes total sense.   Emil: What do you think?   Michael: Yeah, so I personally probably would, personally probably, I feel like that's probably not grammatically correct. But I would, I would go purchase a smaller value ideal and look, to reposition a building at that point in time, because a three to four year time horizon to reposition a small property is very doable, it's very reasonable. If it were my first deal, probably not. But the fact that I've done it a couple times, I've been able to, and this is not me to to my own horn, but double building values inside of about 18 to 24 months, just with some value add repositioning stuff.   So that is absolutely a great investment in my opinion. But Emil, you bring up such a great point of the closing costs and the Commission's just eat away so rapidly at at your profit. Even if you buy something under market and try to turn around and sell it. The Commission's closing costs, just eat that up so quickly. And capital gains right?. If you're if you need that money, you're going to be using it. You also have to pay capital gains tax. So.   Michael: Right. Right. So your your true. Gain isn't, it becomes much smaller very quickly,   Tom, go ahead!   Tom: To follow up on your point on doing value add stuff. I mean, when I think of value add, I think of a little bit higher beta as in like kind of higher highs and lower lows. And, you know, if you have such a short time horizon, I would think you would want to do something safer. counter argument. Come at me, Michael.   Emil: Let's go debate.   Michael: So I think that when you look at cap rates, and I'm talking about multifamily value adds because multifamily trades based on cap rates, so if you look at adding value to property, and we can do a quick example, let me get my my calculator.   If you go by $150,000 multifamily property five units, and you're able to add, let's see, let's see, you buy it at a 6% cap rate, which is a fairly low cap rate for that price point, I would imagine. So what that tells me is that 150 grand, that property yields $9,000 in annual noi. So let's say it's a five unit building, and you're able to manipulate the value and you add a $25 bill back to every tenant. So you change nothing about the property except adding $25 to every tenant utility bill, which is 25 by 525 bucks a month. When you multiply that by 12 months, that's 15 $100 that you've just now added to that noi.   So now your building noi is 9000 plus 1500, which is 10,500. If the market hasn't changed at all, you should be able to sell that building of the exact same cap rate you bought it for a six cap. So when we take that noi divided by our cap rate of point O six, we get $175,000, which means that there's 25,000 in profit to be had. But per a meal's great insight. We need to be paying closing costs and commissions and a 6%. commission, we're paying 10,500 and closing costs. So our 175 gets eaten down to was at 165, 164 and change, leaving 14,000 in profit and 15k and profit 14k and profit. And then another two in closing costs are 13k and profit. So you'll pay probably 25% on those capital gains.   So 13k times point seven, five, you'll walk with about 10,009 and three quarters and 10,000 after a year on your initial investment depending on what that is, could be a great return could be a less good return. But this was just a real quick and dirty example of doing a minimal lift of a $25 utility bill back.   Now you add some additional dollars in there and doing rehab and you up the rents the rents by 100 bucks a month. You know that might be 500 bucks, so that's $500 per month by 12 is six grand a year. Now that takes her noi up to $15,000 again divided by that same six Cap, that's 250 grand. So you added 100,000 in value by manipulating every unit by $100 a month, increasing the noi, that is absolutely worthwhile. And I think that the returns on that would be, you would be blown away.   Tom: I dig it. I guess my when I hear you say value add, I always think of like, you know, going into the walls and doing stuff, but like what you're talking about is more of just optimization of the the rent and like maybe bringing up to market rent getting involved in some big project. And I had a time horizon that I needed to get the money back, and it was like the money was accounted for at the year. I'm saying that's a good example.   Michael: Yeah, I think you have to be really strategic around what type of value add you're willing to take on and a time horizon, like my development project, I'm working on redevelopment project. We've been in it now for two and a half years. So there's no way that that would be on the table for, you know, that three to four year time horizon, but a smaller project? Absolutely could? Absolutely could.   Emil: You also brought up a good point in that. If you're thinking you're going to do this right on the first one. Don't delude yourself, like probably probably get one or two under your belt as like test cases. And then you can be like, you know what, I can probably do another one, get out in two to three years. And feel like you'll be successful versus like, I'm gonna learn everything on the first try and try to make some money on that, too. That's,   Michael: And hope it goes well, yeah, yeah. Well, you're gambling a on that deal. But you're also gambling on whatever that dollars are earmarked for. So if that's your kids college fund, you have to say, Hey, sorry, I, you know, the deal didn't go as planned my bad.   Tom: My bad!   Michael: But, um, so, Tom, kind of, to your point, and your strategy, would you feel comfortable putting that money into the stock market and an index fund with that same time horizon? Because I mean, same same issue applies where you could lose the principle?   Tom: Michael, did you just throw back on me what I threw at you?   Michael: I may have.   Tom: I mean, again, this is not like investing, advice, yada, yada, yada. All of that. I mean, the safest thing was just to put it you put it into into a CD, but that's like, not very fun. You know,   Michael: It's your kids college should definitely be fun.   Tom: It should definitely be fun. But yeah, putting the fun and fun college fund. No, I mean, I would feel okay, taking that. putting it into an index fund, you know, I'm not like playing to the penny stocks, like, just betting, you know, some some big. I'm not gonna say the name of the funds, I don't think we can, but just some big index fund that covers the stock market. And with low fees, and let it ride.   That's actually what I've been doing recently, with my rental income that I've been collecting on my portfolios, where before I had it sit just in cash. And now I've been really aggressive about moving it into an index fund. And it's like already like, like, meaningful income. Like, it's like growing in I. And for sure, like, it puts me more at risk to fluctuations in the market. But I'm in a position to be a little bit more pro pro risk in my life right now. So, that's my answer. Yeah.   Michael: Yeah. makes total sense.   Emil: To add there, I think it probably depends on what this cash is for. If it's like you want a nice sports car in a couple years, you know, you lose that money you're you have, you can get another car, if it's your kids college tuition, maybe maybe just played a little safe, right? Like, it's pretty damn important that you don't, the value doesn't go down so that you can pay for your kids college, which is important. So I don't know, that's, that's one of the thing I would factor in here is like, what is the money going to be used for? how important that it does not shrink at all?   Michael: Yeah, it's it's a great point. But then, so doubling down on that question, let's say you get this slug of cash, and there's no more cash coming and you have to grow it into something in three or four years for your kids college fund. One, what do you do with it? How do you play it safe, yet still grow it?   Tom: The boring side of the spectrum is just some certificate deposit or where the stream is? I don’t know, Penny stocks.   Emil: This is this is very simple. You go to Vegas, and you put on black.   Michael: That's a easy decision. double, triple, quadruple your money immediately walk away with college fund in hand.   Emil: Literally, seconds, you can double it. You don't have to think about it or you'll go home crying one way or another. But hey, you don't have to think about it. It's just one other way. It's easy.     Tom: Little Johnny's gonna learn something from this either way. You know what’s fun about this episode is we all had kind of different. Kind of, I guess me and Emil were more on the same camp, but we had disputing opinions on what to do.   Emil: Yeah, we need now. Just goes to show you much groupthink here. Yeah.   Michael: You don’t you guys get some individual ideas, huh,   Tom: embrace debate,   Pierre: I think that's something that they're experiencing a lot is that they talk to a bunch of different people, and everybody has a disputing opinion on what they should do. And then they find themselves kind of paralyzed by all of the options, because everyone swears by their strategy,   Michael: Are these all people that have done what they're looking to do? Do you know? Pierre: They’re different financial planners and stuff, different people that are in the finance world, or people that are employing the different strategies?   One thing that I told them, take a step back and take the big picture view of the finances that they have available, and then maybe make a partition and say, like, this is the money that we absolutely need. And this is what's leftover. And this is what we can deploy towards, you know, real estate so that you can get the balance of both the short term, short term returns that are going to be liquid and the time horizon they need and while they're still looking towards the long term.   Tom: Yeah, that makes a lot of sense. Go ahead, Michael.   Michael: I was gonna say, I think another strategy I was thinking about, before we started talking about this is just splitting your funds, you know, maybe in half and say, Okay, I'll put half in the stock market and keep half in cash. So if things go Great, well, there's some upside there. And if they don't go so great, I've still got some cash, I'm not up a creek without a paddle so to speak. And that might work for some that might not be a reasonable, you know, the tough being in the tough spot of Hey, I've got this slug of cash, I have to make it into more How do I do that in a safe way as possible yet still hitting my yield goals or my my end end value goal.   That's it's tough and I think it can be different for every person and there are different ways as we were just mentioning to approach it and probably multiple right ways to do this. You know, at the end of the day, the whoever is right is only going to be known at that three to four year time horizon. So pick up pick a strategy that you believing in that you're in informed about and then just go do it.   Emil: There you go. It's the one that you feel the most confident that maybe you have some edge with something right like maybe you just know tech companies really well and you're good at Tech stock investing whatever it is, or you're you invest really well in real estate, you have good options available to you or you have a business where you know, you can put them you know, invest that money in a business and make it double or triple whatever just like what is the best avenue that you believe you'll get to be able to like, grow that money.   Tom: To complement this episode again. Wow. Really nice little full circle back here to this a great look. A nice little bow you put their meal very, very nice. Yeah. Know your risk tolerance know your strengths and their weaknesses. And Go Bears. Yeah, that's, that's great.   Michael: Well, now that we've got that bow tied up all nice and pretty sure we get out of here.   Emil: Let's do it.   Michael: Thanks, everybody, for listening. That was our episode. Hopefully this was helpful. Hopefully, this begs you to ask some more questions, have some more hard conversations and be thinking about things looking into the future. As always, feel free to give us a rating or review wherever you wherever it is, you want your episodes and we look forward to seeing on the next one. Happy investing.   Tom: Happy investing.   Emil: Happy investing.