053: The Stock Market is Killing the American Dream
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Welcome back Cashflow Multipliers! Palmy and Nancy here, thrilled to be back with our favorite group of people– high-level investors with a dream to never trade their time for money again. So often in the world of investing there’s a lot of what we would call misinformation.
And misinformation can only lead to one thing: 😨😨 mismoney management. So let’s start with a pop quiz to see wherever everyone is at with their knowledge when it comes to the basics of investing.
What’s the first thing that comes to mind when you think about investing?
I’ll be honest, before we started in apartment syndication my answer was the stock market. Every time someone talked about investing, my mind went straight to Wall Street. 📈
Exactly! No coincidence there, that’s what the suits at the New York Stock exchange want you to think. They’ve permeated our minds through subliminal messaging for so long that many people are not aware of the many other investment options. This is especially true for meme stocks.
Wait– how has the meme industry permeated the stock market?🤔🤔
Meme stocks are popular shares with a cult-like following online and on social media platforms. Think back to all of the buzz that happened on Reddit about the GameStop stock.
So now these meme stocks are taking a life of their own by making these high-flying companies so accessible, profitable, and available to just about anyone.
And before any of you start panicking, no you did not turn on the wrong podcast, we’re still very much pro apartment investing– but we’ll get to more of that in a sec. Right now, we’re framing the problem before we get into solutions and how you can benefit.
Here’s the thing about the stock market, it has every right to be a little cocky. For the past 30 years, the stock market has been all action, and its strong performance has left even the most basic stock investors feeling like Jessie Livermore– one of the most famous traders in modern times. 👀👀
Buttttt all good things must come to an end. Since the start of this year, these massive double-digit returns for investors are crashing down to earth. We’re not huge fans of “cancel” culture, but the stock market is quickly becoming something no one really wants anything to do with.
But how did this massive shift happen? For years the stock market was in a league of its own and seemed to defy gravity altogether by producing double-digit returns for many Americans. It seemed to be the only thing reliable in the world while everything else crumbled around us.
Enter real-world problems that finally crashed the stock market’s party. Soaring inflation fueled by rising food prices, and the war in Ukraine have prompted the federal reserve to raise interest rates significantly for the first time in many years, sending the stock market prices plummeting to earth.
Nothing humbles you faster than seeing your investments dwindle. Suddenly, people need something, or someone, to wag their fingers at in disbelief and demand answers from. In those instances, we’re taking notes from Emily Bowersock Hill, the founder of Bowersock Capital Partners and chairwoman of the investment committee of the Kansas Public Employees Retirement System. Ms. Hill has been quoted saying “I don’t think people recognized how fragile of a foundation the stock market was resting on.” ✨✨
We couldn’t agree more. As of the podcast’s recording, virtually no stock has remained unscathed from the wrath of 2022. From meme stocks like GameStop, AMC Theaters, and the FAANGS from artists formally known as Facebook, Meta, and Alphabet– Google’s parent company. In fact, even the Goliath company, Amazon, has gone down more than 30% since the start of this year.
But if there’s one thing low rise jeans have taught us, it’s that people love following trends no matter how wrong they might be. This generation of investors who started investing in the last 5 years has never experienced a long bear market.
For those of you who have better things to do with your time than read the Wall Street Journal every morning, the “Bear Market” is a term coined by Wall Street when an Index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more after a recent high for a long period of time. 🧐🧐
But don’t take our word for it, Emily Hill, who we referenced earlier also talked about even when the market would fall a few percentage points, these young investors got so used to “buying the dip”. This translates to investing aggressively on a day of big losses and betting correctly that the share price would rally and keep going higher and higher. While that trend works now, we’re seeing it may not work in the future.
Even though we’re trying to make this content relatable and easy to understand, what’s happening in the stock market is not a joke for investors whose nest eggs are tied to the stock market.
They’re looking at their portfolios in complete disbelief from the beating it’s taken in the past few years. Many experts expect low-single-digit annual returns, about 5%, for the next few years– a huge letdown from the 17% percent average annual return that the S&P generated in the decade leading up to the start of the year.
There is no saying this lightly: The stock market crash is literally killing the American Dream. 😨😨 Personally, we have heard from so many of our dear friends who have not only lost a majority of the unrealized gains they’ve accumulated in the last five years, but some are even seeing their principle take a big hit as well.
This breaks our hearts 💔 for so many reasons, seeing people’s life work go down the drain is something we wish on no one. At the same time, we see this issue similar to another similar heartbreak– gambling.
Speculative stock market investing is like gambling in a casino. At first, when you get your first big hit or major win, you feel on top of the world– euphoric almost. However, there is a strong temptation to overindulge and be overly confident in your ability to continue to have the winning hand.
Another way to say this? You become addicted. Addicted to that feeling of knowing you’re going to win it all back at any second. But if you don’t stop gambling, there’s a strong likelihood that all your gains, including your principle, can be wiped out. Let’s be clear, you can lose just as quickly as you won. 😇😇
Did you know that gambling is actually one of the hardest addictions to break? Why? Because it’s knowing in the back of your mind you can win it all back in just a second. When people go too fast and too soon, it can be hard to recapture those losses, and sadly we all know this story doesn’t have a good ending, leaving families in financial devastation and broken relationships. 😲😲
Because the stock market is incredibly intoxicating right now, it’s caused a lot of investors to let go of their guard and forget about how extremely volatile and dangerous the stock market world can be. Palm, I think you have the perfect story to illustrate this point.
I sure do. It starts with two frogs and a pot. The first frog was placed in a boiling pot of hot water and immediately jumped out and escaped. The second frog was placed in a lukewarm pot, and as the temperature started to increase, the frog adjusted to the temperature and started to feel more comfortable and relaxed. As the heat increased, what was once comfortable quickly became deadly as the water reached a boiling point.
What does this story tell us about the stock market? As the market does well, people tend to overlook all of the downsides, and red flags 🔴 and only focus on the upside. We all have that one friend who is always getting back her ex— like girl, you can do so much better than the dude who hasn’t paid for a single meal since 2018. Our point? Many people can’t see the detriment right in front of them when they get too comfortable. 🙄🙄
Too often people pour more and more into companies based on speculation with no true fundamental strength, some of which are yet to reach profitability. Clearly, this is a problem– but there is a solution.
The speculative nature of the market can be avoided with apartment investing. We’ve said it once and we’ll say it again. When it comes to building your wealth, there is nothing with a better risk-adjusted return than multifamily apartments.
Multifamily apartments are our bread and butter. We know it well because we have seen the ROI’s, witnessed amazing returns in volatile markets, and have saved money in taxes to seal the deal. If the stock market is the disease that is killing the American Dream, then multifamily apartment syndication is the antidote we need to help people recapture their wealth and regain financial freedom. So let’s get into it! 🤓🤓
#️⃣1⃣: Multifamily Apartments Are Hard Assets
We don’t have to tell you the difference between eating amazing food at a restaurant, versus watching food being prepared on the Food Network or your Instagram feed. Until Taste-a-Vision becomes a thing, there’s like nothing like enjoying a good meal in real life.
Similarly in real estate, and to illustrate our first point, there is a very real difference between paper and hard assets. Bonds and cash simply don’t have the value they used to because they lose their purchasing power when prices for goods and services are rising. That same $50 you used to budget for groceries seems like a lot less these days.
Commercial real estate is generally a fantastic hedge against inflation because it holds true intrinsic value, is in limited supply, and is a yielding asset. We know “real estate” especially commercial real estate, can be a broad term. For us, we chose multifamily apartments to invest in on the simple truth that everyone needs a place to live. Shelter and safety are the minimum for humans to function.
Not to mention, we view multifamily apartments as one of the best inflation hedges within commercial real estate because lease structures in multifamily are far better positioned to benefit from an increase in inflation than other asset types. Other commercial real estate assets might have lease durations of five, seven, or even ten years, but multifamily leases can reset at six, nine or twelve months. And when leases reset, that gives us the opportunity to reprice rents as prices increase.
The annual turnover of an entire multifamily property is usually around 100 percent. This high frequency provides investors the opportunity to quickly react, increase rental rates, and hedge against rising inflation.
#️⃣2⃣ Multifamily is an Income Producing Investment
Everyone wants to see their investment come back to them immediately. And doubled. This is a ‘have everything now’ type of generation we’re living in, which means a lot of people don’t have the patience to wait and see. This brings us to our second point, multifamily is an income-producing investment.
For us, we like to start distribution about 5 to 6 months into a hold, however, the cash flow tends to accrue from day one of the ownership of the asset. One of the biggest benefits of being a passive investor is seeing your gains come in on a quarterly basis, unlike the stock market where there’s no tangible benefit or gains realized until the stock is sold.
Furthermore, buying income-producing assets helps reduce the risk, because the returns are based on the fundamental strength of the property and not on speculation of future value.
You know, I actually read something that illustrates this point exactly.
Oh yeah? What did it say?
That you never want to date a person who has potential but is already potenched.
I love that! Because it’s true– you want to invest in something you know will produce value for you, you don’t want to waste your time on scrubby stocks that may or not make it for ya.
All of this to say, how much income should you expect? Our professional opinion, and the target you should be going for, is that your cash flow annual average should be anywhere between 6-7%.
#️⃣3⃣ It’s All About Value
Our third biggest reason why multifamily apartment syndication can help you reclaim your financial freedom is through value-add.
We’ve said this before and we’ll say it again, much like the housewives, even apartments need to get a look work done.
Hey! You’ve seen the tabloids go crazy every time the Kardashians get a new face, hence, adding value to the already legendary last name. No press is bad press, right?
I’ll leave that one to the tabloids. For us, the reasons are simple as to why you want to invest in a value-add multifamily property. You know they’re going to need repair and upgrades, and adding value helps to justify the rent increase, which adds to your return overall.
Not every sponsor sees it this way, and some simply don’t have the ability, but it’s one of the best reasons to consider purchasing a particular property. Plus, there are so many ways to add value big or small. From painting the exterior and landscaping, to complete unit upgrades like new kitchens and baths.
Adding new technology is also a good one and a huge draw for renters. Not to mention adding luxury amenities like a washer and dryer is another way to increase rent.
But do you know what doesn’t see your value as we do? Stocks. Purchasing stocks does not allow you to add any value to them, since you have no control over the company’s management and strategy.
#️⃣4⃣ Get Those (Leverage) Gains
Number four is all about gaining leverage. If you purchase stock on margin, you’ll need about $50,000 in order to buy $100,000 worth of shares. And if the stock loses value, that means you’ll have to come up with more cash or the stock will be sold to cover your position.
The beauty of investing in real estate is that you can do a lot more with a lot less versus what you can with stocks. There are only three times where the value of the multifamily apartment matters: when you buy, refinance or sell.
At no other point in time does the underlying value of the asset impact operations. It doesn’t impact how much we can charge for rent nor impact the mortgage.
#️⃣5⃣ Tax Hacks
You know the phrase, nothing is certain in this life but death and taxes. Taxes are, inevitably, a part of this life. However, our guess is the first person to say this probably wasn’t investing in multifamily apartment syndication.
Paper loss sounds like a negative, but honestly, it’s nothing but gains. As in, gaining an advantage above other investors. Unlike the stock market where you pay capital gains on profits, multifamily apartments let you pay little to no tax on capital gains due to bonus depreciation, which can be sizable.
Imagine this scenario: An investment of $100,000 may yield a $100,000 K-1 paper loss and can be used to offset like-kind passive gains. That’s a one-to-one ratio between your investment and your paper loss. We don’t mind the ghosting effect when it comes to our tax statements by the time April arrives.
#️⃣6⃣ It’s Called Passive for a Reason
Our last point today is arguably the most important. It’s called passive for a reason. We don’t preach on our corner of the internet because we love to hear ourselves talk–
We’re introverts, remember?
But because we know there’s a better way to live and believe everyone should have fair and equal access to financial freedom and the life they envision for themselves.
In a recent poll, when asked if people would rather work 60-70 hours a week versus spend a dozen hours on the weekend trying to figure out this investment gain, nearly 100% of people voted to not work more than those 60-70 hours.
Instead, most people would prefer to have the option of doing the least amount of input for maximum results.
Makes sense to us! And if you’re sitting there thinking “that’s just not how life works,” we hear you because we subscribed to the same type of thinking for so long, too. But you’re missing a crucial element to this piece– you don’t have to rely on just you to achieve this. Half the battle is getting the right people on your side and knowing where to look and listen.
The ability to leverage people’s expertise, talent, and time are crucial to living the lifestyle of not just your dreams, but also theirs. You have an incredible ability right now to start looking for people who know where to look, have been in this game a while, and who want to see you succeed.
Hint! 😉😉 They’re closer than you think. Like, in your ears or on a speaker close.
Multifamily apartment syndication is thee way to secure your investments with the least amount of risks for all the reasons we listed above and more. It allows passive investors to participate in large investments with a strong risk/reward profile while not managing the not-so-glamorous parts like tenants, toilets, trash, and termites.
Your financial future is dependent on no one else but you. How you leverage your time and utilize the resources around you will make you a better and stronger investor in the long run. The stock market is a way but we certainly wouldn’t call it the way. If history has shown us anything, it’s that those wolves on Wall Street can’t always be reliable. 🤓🤓
We’re all human. We all make mistakes. The economy is fickle and nothing in this life is guaranteed. So when you see your 401K not cutting it, and you’re stressed about the future, know that housing isn’t going anywhere and your investment into apartment syndication can reap some incredible returns for little time. You can reclaim your American Dream.
That’s all from us today, Cashflow Multipliers Team! We, as always, love spending time with each of you. If you haven’t already, don’t forget to rate, review and subscribe to the pod! Plus, sharing is caring– send this to a friend or fellow investor, we love to hear what others think!
We’ll be back with you guys Thursday as we celebrate our 50th episode! We can’t believe it…
Talk soon! 🙌🙌
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