In this episode, Jason Bible and Robert Orfino talk about investing in the stock market. Most people may not know that there are five stocks that make up 18% of the stock market. If you invest in the stock market and another economic downturn happens, what do you do and where do you go? If the market went up 25% the previous year, why do people only see an 8% to 12% return in their whole folio? Jason and Robert answer these questions and connect the topic with real estate investing and how it differs from the stock market. They also talk about the problems in the real estate marketplace and the math associated with it.
Listen to the podcast here:
Stock Market Talk With Guest Host, Robert Orfino
We’re back in the studio at 7:00 AM and 9:00 AM. We’re busy with all of our other real estate stuff that we’re not getting to the show. Let’s do real estate first.
We do. There’s already a little discipline. Our influencers are filling out.
Curtis is on board. George was shooting. People on the show are going to get a real treat. You’re going to get breadth and depth in real estate education on the show. I’m excited about having those boys on board. It was good to see George in the studio. I saw the pictures and Curtis, too. We’ve got to talk to Brian. We’ve got to start working on a private lender thing. What do you think?
Yes. We give them to Taylor.
Thank god Taylor is here to manage some of this organized chaos that we’ve got at the show. Let’s talk a little about the stock market. I sent an email out to our email list at 10:00 at night. I found a great article on Yahoo Finance. It said that there are five stocks that make up 18% of the stock market. These are Google, Facebook, Amazon and Apple. Who am I missing here? When our investors talk about, “I’m diversified. I’ve got my money in this and that fund.” I’m like, “If you don’t review the allocation of that fund that you’re invested in, it is highly likely that it is involved, at least in some way, with these big five.”
I heard this great quote, “When the United States coughs, the rest of the world gets a cold,” because of the size of the economy and a handful of other things. These five stocks have become large, representing 18% of the marketplace that when they cough, the rest of the market will get a cold. That’s the reality of it. I sent an email out that said, “You can keep investing in the stuff you want.” We invest in our household. We have a match and all that other stuff. My wife’s job matches her 401(k) contributions. We do that, but the bulk of our wealth is in real estate.
The idea that you’re going to be able to hide from the next economic downturn in the stock market is insane. The question is where do you put it? I’m a big proponent of putting it in real estate. What’s fascinating is that we have a lot of people who are like, “Jason, you don’t understand. There’s a real estate crisis coming because prices have gone up.” I’m like, “Explain to me why prices keep going up.” That’s the fascinating thing. A lot of people get in my face and get all huffy, puffy.
“I saw a guy on YouTube and they were someone over at the Broke Club. They are telling us about, “It’s coming so get ready and buy my program. We’re going to start investing in tax liens. I was at the Pitbull Conference. This guy got on stage talking about tax liens so I bought the tax lien program.” We understand that there are some big law firms that have taken on the bulk of that business. You’re looking for scraps that are falling off the garbage truck.
The last time we were in California, we drove up to the Elks Lodge. It was the first time I’ve ever done a real estate event at an Elks Lodge, where they had an elk and stuff on the wall. They’re in the little bar in the back. This is an old school in Southern California. They have a board. I was like, “This is fantastic.” We had been to I don’t know how many real estate events at that point, but we were there for a couple of days. You always get the traveling sales guy. Somebody is pitching their $14.97 real estate teaching program. The fascinating thing about that pitch is that they’ll have a picture of their big giant house, their kids, and the spouse. They’re all at Disney and all that other stuff. They’ll have Lambos and Ferraris. Every time we go to one of these events, I’d never seen a Lambo or Ferrari in the parking lot.
The guy either got Uber from the airport or rented the smallest compact available because every real estate guru is cheap. It’s hilarious.
They come in with the Chevy Spark. It’s like, “I’m crushing it. Here I am in my Chevy Spark. If I run over a pothole, it’s going to collapse around me and kill me.” I think they made it like some neon colors too.
They took the same color palette of those old dune buggies.
That’s hilarious. That’s what’s going on. We’re looking at the stock market and 18% of the stock market is five companies. There is some discussion that this is similar to the tech bubble. The setup is similar. In other words, these certain companies are the largest percentage of the actual market. If you’ve invested in some of these funds, even an index fund, it is going to be heavily weighted towards some of these tech stars. There’s no such thing as diversification anymore.
If you want to find out more about what we do, we’re talking about investing in real estate versus the stock market and some other opportunities out there. The easiest way is to go to our website which is MrTxRE.com. We have someone helping us with the website so it’s getting some updates. It doesn’t have our events from 2017 anymore. There are some current news and information on there, you should go and check it out. As always, if you’re interested in anything, we’re doing the mastermind, our classes, institute, and the fund. You can go ahead and text us at (281) 401-9008. The market is moving in a good direction, but the problem is that if the market went up 25% in 2019, why do people only see an 8% to 12% return in their portfolio?
There are a couple of things you’ve got to look at when you’re investing in stock stuff, especially in funds. The vast majority of investors out there are mom-and-pop retail investors, investing through their work 401(k), IRA, and some fund. Here’s the problem. Back in the day, when I worked for the corporate, you could log in and essentially pick from a gazillion different funds. It was cool. Some big benefits things, then changed and they had fifteen funds to choose from. You’ve got this “market” that has returned 25% in 2019, but whatever fund you’re investing in has A, fees associated with it, B, you are paying taxes inside that fund, and C, something called churn. They’re replacing stocks with certain stocks. They’re selling some and buying some and that’s creating some more expenses. From a market that was allegedly returning 20%, 25%, you may make 7% or 8%. It doesn’t sound like a big deal until you have a year where the market recedes by 10% or 12%. Yours is going to be worse. That’s probably going to be 15% or 16%. I’ve never had that happen in real estate.
We should say at this point that we’re not financial advisors. This is not financial advice. What we’re good at is taking houses that smell like cat pee and making money from it. That is our claim to fame.
We’ll have the mastermind and the same discussion with everybody, the smell of cat pee should not make anyone excited.
It will make you money but it shouldn’t make you excited.The idea that you're going to be able to hide from the next economic downturn in the stock market is absolutely insane. Click To Tweet
You get all these gurus that walk around on stage and go, “That’s the smell of money.” I’m like, “No, that is not what money smells like.” It smells like leather in a Lambo. It smells like a beautiful air-cooled Porsche. I haven’t noticed a smell inside Teslas because they’re not leather. It smells like formaldehyde plastic smell.
They’re California-based so they’d have to meet the indoor quality test from the Southern California Air Quality Management District small container test. It would have almost zero smell. There would be no VLCs coming off that car.
I’m sensitive to that smell. I lower the windows a little bit, and turn the heater on all the way up and let it sit in the driveway for an hour. Burn it as fast as you can. That’s the only way I can get rid of the smell.
I enjoy the contact time, to be honest with you. What does a clean office smell like? The answer is it smells like nothing. When it smells like pine, that’s a cancerous odor that’s going into your brain. When it smells like lemon, it’s the same thing. These are carcinogens.
I’ll tell you exactly what the office smells like. It smells like somebody’s microwaving their fish they had for lunch, burnt popcorn, and Hilda in Accounting with too much perfume on.
Do you know what our office smells like? Our office smells like five people have yet to figure out when garbage day is.
I keep walking by and I’m like, “This isn’t a real office. We have to empty this on Friday. Otherwise, it gets pretty rough in here.”
Anyway, we were looking at the stock market. It’s doing well. Overall, it’s what strategies you’re having. There are a lot of people who play that game as intense as anything else. I don’t. We have some index funds that mirror the Dow. That’s where we leave it through Fidelity. There are not a lot of fees. What I have in stock, I’m going to leave in stock. I’m not going to move it around too much, just part of it. I don’t own any mineral rights, which is something I’ve been looking into at some point. I want to get into owning the land rights for oil, mining, and things like that. There is a tax benefit that comes off of there that we have to figure out.
There is. I know exactly who we talk to. We could have a show about that. We’ve not gotten into the raw land business. Every time I look at it, I’m like, “This is something I could see us doing at some point,” especially as the fund gets a lot larger. Land doesn’t cashflow so you’ve got to hold on to it, but it does appreciate rapidly. I could see getting into some of the land stuff but I don’t know enough about it yet.
It’s another 2 or 3 years and we are already moving into some commercial stuff we’re looking at that we’re familiar with. I did a lot of ground-up back in the day and commercial construction consulting. Not that I was a genius, architect, or engineer, but I sat in on a lot of meetings to understand the flow of construction and how those things were rented out. We have a couple of opportunities coming up here that we’re probably not going to pass on. We’ll probably move on it and extend our portfolio out another $10 million here quickly.
We got an accepted offer of $3.3 million. That’ll be a fun little project. What do you think? Maybe $50,000 and then how much for the other office suites? Do you think we got another $100,000 in rehab for tenant improvements if we do TI?
I’ll put $100,000 in that deal only because there are federal electric boxes so we have to swap out.
I’m amazed they haven’t swapped those out yet.
It hasn’t burned to the ground. It’s a matter of how aggressive the insurance company is. That’s what it comes down to.
We’ve got one of our first big commercial deals. We’ll do that syndication since that’s not designed for our fund. Our fund is a single-family fund. We pay 9% preferred return.
With a 10% equity kicker.
If you guys are interested in that you could send a text message.
(281) 401-9008. We’re almost capped out so we’ve got to get all these 94 properties lined up so we can figure out what the next round of raising is.
If you have been following along on Facebook, we contracted 94 houses a little after the first of the New Year, 2020. We’re selling some, keeping some, and some are going into the fund. We’re moving them around to find the best place for them. I don’t know what our fund will be up to after that. We’re going to sit down and run on all the numbers.
It’s over $15 million, closer to $20 million. At $25 million, we’re going to finish it. We have a mastermind coming up. If you’re trying to get an investment portfolio together, between 4 and 40, our mastermind is the place you need to be as quickly as possible. We talked about the market and how it’s still good for buying and holding more so by fix and hold. It’s not good for flips and I don’t think there are any turnkey rentals in this community.
What do you mean by turnkey rental?
I’m going to buy this house and I can put a tenant in and I’m going to make 9% to 12%.
You’ve got to be able to go in and buy them.
Those trailers, the RV park one. You want those.
Speaking of which, I haven’t heard anything about them. There’re contracts sitting in front of me. Here’s the problem with this marketplace, it’s going to be a challenge throughout most of Texas and that is prices are still rising. They’re not going to stop anytime soon. We looked at the properties in the portfolio. Chris ran comps from years ago to see how much they had appreciated. They’ve nearly doubled in value, which tells you they’re appreciating about 7% per year. That’s 7% of $150,000. That’s serious.
There are $300,000 houses before 2030.
It’s hard to lose when your appreciation alone is 7% and your cashflow is somewhere between 10% and 20% per year. Let’s talk a little about math. You’ve got to be careful with math because people get goofy with it. They’ll say, “Over five years, this is a 20% return.”
That is annualized to 4%.
What’s the annual return? What’s the real return on this thing on an annualized basis? People get goofy with the math and they’ll say, “Double my money in ten years.” I’m like, “Don’t get me wrong. It’s great at 7% a year.” The rule of 72, so 72 divided by 7 is about 10.
I love the stuff that pops up on my Facebook feed, it’s like, “21.5% projected internal rate of return.” I’m like, “That means nothing. How much of that have you given me?”
That IRR calculation, you can play with the math in there if you don’t know what you’re looking at.
It’s deceptive when I see posts like that. That means nothing to me. We’re talking about straight equity deals and that I should be happy because I can flip it in five years and double my money, but what are the fees? We try and make it as simple as possible. We hate complicating it. There are investors who like to complicate things. It’s like, “What if we did this?” “No, we’re going to do this.”
“Here’s what we’re going to do. We’re going to buy this thing, fix it, and cashflow it.” “What happens next? What do you think the appreciation of it?” I’m like, “I don’t know. Appreciation is probably going to be somewhere between 5% and 7%.” “What’s the IRR? What about this and that?” I’m like, “I can put it to you on a spreadsheet, but to be completely transparent, you should only care about the cashflow. What does the cashflow tell me?” Equity is a whole different game. That’s the war that we can experience in an appreciating marketplace or in upping the rents and lowering the expenses and all that stuff. The property we’re looking at this office warehouse complex, we bought it at 3.3%. We’ll put $100,000 to $150,000 into it. It’s already stabilized at a 7% cap on real actuals. When rents hit $1 a square foot, which I think we’re at $0.85.
The gross is at $0.91. It’s not far to go.
I love this commercial real estate term, “It’s in the middle of the path of progress,” which is a nice way of saying it’s a Class C with a whole bunch of Class A being built around it. That’s what’s going on.
There’s a lot of construction blowing on our property.Land doesn't cashflow right. You’ve got to hold on to it, but it does appreciate pretty rapidly. Click To Tweet
We’ll be in it. Let’s call it $3.5 million at foreclosing costs.
The only real thing we do is we’ve got to take care of electrical panels and then I want to put a metal fence up in front and we’re done. There’s not much. We’ll offer some special TIs. We can get an occupancy over 90%.
Push those, get that building built. We’ll be in at $3.5 million and once we hit about $1 per square foot rental, get occupancy up over 90%. We’ll make $1 million on that thing easy. This is one of those deals where it’s the benefit of having a show. I guess it was from somebody who reads the blog, like, “We might have something for you.” We’re like, “Send it over.” Off-market, it’s a couple of guys that know about it. If you’ve got any of those deals out there, send them over to me. We’ll take a look. We are active and what we realized is that even in the commercial space, single-family, we think there are only about 60 real buyers in the marketplace at any one time.
Any given 30 days.
There are about 60 people buying properties. It’s not a whole lot. People think, “I’ll hear this at the Redneck Country Club or the Republic Country Club. There’s always a competition. The competition is crazy.”
Did you see the foreclosure class? They were all gone. All the foreclosures are gone.
“It’s crazy.” We send out a package of 40 properties and say, “Who wants to buy them?” We get 4 or 5 people. They’re like, “We’re interested.” What’s amazing is how many people said they were interested and when I said, “Shoot me a screenshot of your bank statement.” The drop off rate was 60%.
That’s a shaft from wheat.
Yes, very quickly like, “You’ve got to have money to do investing? I went to this class one time and they said I don’t need any money.” That’s not how that works.
The people who showed up are for sure real. Most of them had a small portfolio already. No greens there. They were looking for something specific. As I was watching those videos, I was laughing and thinking. Everyone I know in California, if you’re in California and you’re reading this, we’ve got twenty houses you need to buy because that’s where this market is heading.
You’re going to be $20,000 to $30,000 out of pocket. It will cashflow you a little low in 12% to 20%.
I think 12% to 15% is a pretty solid number and the appreciation is going to be about 7% a year.
The appreciation is going to blow you away. These things will double in value in ten years. People ask, “Jason, why do you think they’ll double in ten years?” It is because they did over the last ten years. Tell me what’s going to stop appreciating. Is Texas all of a sudden not growing?
It doubled in value over the last ten years. Let’s think about what happened over that time. Wasn’t there a recession in the middle?
Also, a great real estate crash?
It still doubled in all the middle of all that.
The median home price in Houston continues to rise even through the real estate crash.
The worst real estate crash in the history of mankind.
The only time people are correct is in January. When they’re like, “The market is going down.”
It happens in January. Nobody’s buying houses. They go out to the Midwest and they’ll go, “No one’s buying houses in the winter.” Yes, because it’s miserable.
It’s horrible. Nobody buys houses up in the Northeast in the winter. You can’t even walk there. There’s ice all the way up to the front door. You can’t get into the house. The more that we read about the stock market and the movies that are coming out and as soon as some of these guys jump into it and start understanding this space, you realize, as my dad has always said, “The only people getting rich are the brokers.” We get it. That’s the game.
My favorite is the broker that looks like Einstein. I cannot remember his name. He’s on one of the floors. He doesn’t own any stocks. He’s on all the shows. Here’s the guy that does it every single day. He doesn’t even eat what he cooks. That ought to tell you something right there.
As you get older, you gain a little wisdom. You can sit back and take a look at that. It’s not a cynical look. It’s like, “What percentage of this is guesswork? How much are they guessing on?” Anyone that predicts the future, ultimately, it’s a guess.
The only guys that can predict the future are ones that create it. When Elon’s like, “We’re going to Mars.” I was five minutes from the bar one time, you had to drive all the way back up to Cyprus, but I got to catch a little bit of that State of the Union. Trump was like, “We’re going to Mars.” I was like, “We’ve got two egos banging against each other. This is going to be great.”
We need to go there. Put them together and under the gravity of their ego will pull Mars to us.
I immediately went to Twitter. I’m like, “Has anybody started tweeting Elon yet?” He’s got this thing with Jeff Bezos. I don’t know if you’ve seen this.
You see an interview with Elon and they’ll say, “Jeff Bezos got that ship. They have one rocket.”
It’s a huge marketplace.
They’ve got so much cash, what else are you going to do with your money?
I’m waiting for the sea labs. Waiting for the under the ocean cities.
They’re chatting with Elon and they said, “Jeff Bezos got his little rocket ship to do an X, Y, and Z.” Elon looks at them and goes, “I’m sorry, Jeff who?” I’m like, “It’s getting under his skin a little bit.” It will be interesting to see how those three boys bang around on each other, pushing NASA and then Jeff with Amazon.
It’s good for us because it’s with Velcro and Tang.There's an advantage to not worrying about profit in your first ten years of business. Click To Tweet
Velcro and Tang are pretty funny.
That’s what we got from the $19 billion space program. Elon had a quote where he said, “It’s been ten years since an American based rocket has put an American in space. There’s something wrong with that.”
One of the best commercials ever, back in 2009, they did debut, this one at the Super Bowl. This is somewhat timely. GM put out a commercial, where if you remember GM goes into receivership. Obama flips bankruptcy law on its head. They’re bailing out the auto industry. They essentially handed over the union. It was all a mess. You can go back and read it. They were pulling dealership franchises, like willy-nilly. Do you remember the big dealership?
Not just pulling them, but forcing them out of business in the opposite way. It’s like, “Jason, you did well, we need you to take this dealership over.” Here’s a partner. Go and get this professional athlete and he’s your new partner. It was crazy.
Which is what caused a lot of turmoil in the stock market. You’re like, “We turned bankruptcy law on its head. What is going on here?” After that, they talked about the space program. That’s essentially when they scuttled the shuttle project. GM comes out with this ad and it talks about American excellence in engineering. They were announcing the new Corvette at this point. They’re showing these guys, the plant building and all this stuff, and then they end it with, “Americans still build rockets.” Of course, his Corvette comes flying through, but he’s right. We got to bum a ride from the Russians anytime you want to do something.
I don’t want to be the old curmudgeon, but I think the last two generations are more interested in their things than big things. It is what it is. I’m perfectly okay with the status. It all comes back to the center. I’m excited about going to Mars. If we can get the cryotechnology going. I’m telling you, if we had cryotechnology that worked, I’d be in it already. I’m tired. I’m like, “Open me up in 100 years. Let me see what it looks like.”
What’s interesting is the trip is only seven months, but if you’re going to go any further than that, we’re going to have to freeze you a little bit.
It’s all bad. It’s almost like they never should come back because of the effects of time in space.
It’s fourteen months there and back. It’s not easy. What’s fascinating is, when I was graduating college, Google, Yahoo, Facebook were not quite there yet, but those are all the cool places to work for right out of school. I’m wondering what brain drain Tesla is having in the talented engineer marketplace.
I can tell you, it’s the number one company that engineers want to work for. Of the top 25, the only auto other American automaker was Ford at eighteen.
Which is odd.
BMW and Ford were on there and then that was it as far as cars. The engineers are going there because he lets them do the work. There’s an advantage to not worrying about profit in your first ten years of business. That’s how you become a disruptor. You don’t worry about it. You keep raising cash.
That’s actually a good point. We can bring this back to real estate when I hear about the “iBuyers” out there. This is the Zillow, Blue Door, and the Redfins of the world. I don’t find them as disruptors.
In our world, they’re boogeymen. That’s what it is. You might as well tell me that aliens are coming down and getting all the good flip deals.
That or “That’s why I’m not a good broker anymore.”
There is one house in my entire neighborhood that got a blue sign in front of it. Everything else was Keller, Gary Green, and all these traditional guys won. That is not a disrupter make.
What percentage of the EV market does Tesla own?
They own 20% of the EV market. That’s domination right there. That’s what it looks like. As a side note, I saw the Chevy Volt is on the cutting block. No 2020 model.