Is Real Estate Still THE Best Path to Passive Income? (Invited to Debate)

22:19Ryan Sterling:They're working for me. And when I think about my path to building wealth, I can't do it alone. I need help. And for me, I want to leverage the help of the people at those companies. Yeah, I'm with you. I think it's just there's a dose of humility that's helpful in diversification and just admitting you don't really know. I think that that's just super important where I studied the housing market all day. I think I have a pretty good grip on it. But you don't know what's going to happen on an individual property. You don't know what's going to happen. Regulation. If you went all in on short-term rentals, I think a lot of people have seen that concentration in short-term rentals was a risky strategy or in recent years, concentration in commercial real estate and multifamily in the Sunbelt booming for a while.

23:03Now it's really hurting. Even the smartest people in the world don't really know why I personally preach diversification. I diversify both in real estate and the stock market. But even within my own real estate, I do a lot of different stuff. I'm invested in different markets and different asset classes across the country, but I have the luxury of that, Ryan. And I think that's sort of where I think a lot of people have questions is like, I've gotten to a point where I have enough capital that I can spread it around. And that's a fortunate place to be. But when you're starting in real estate, it's so capital intensive.

23:38You kind of have to go all in on it, right? If you have to save up to put 25 % down on a rental property, that could be 100 grand. It takes people years to get to that. So can you diversify in that scenario? Or do you just kind of have to take a leap of faith if you're in real estate and trying to grow a portfolio?

24:00Ryan Sterling:I would say, who is the best candidate for going all in on building a rental property portfolio from scratch, it's someone who's young. And it's someone who's just starting. So it's like, look, if you can scrap together$40 ,000 and use leverage and buy the first property, and if you can have that vision to then a year later buy another one, and then two turn into four, then turn into eight, et cetera, that is the fastest way to build wealth. But it takes a lot of direction. It takes a lot of intention. It takes a lot of sacrifice. And I'm all for it. So I would say that if there's someone starting out today and they're like, I want to get to financial independence as fast as possible, I would probably be the first to concede that real estate is probably the best option, building a real estate portfolio.

24:47Ryan Sterling:I think the one caveat to that is for people who are in high earning areas, you know, I think about sales, for example. If you're a good salesperson, is your time and energy better spent potentially being distracted on real estate deals or making 20 more calls a day. And 20 more calls a day could turn into making this up an extra$200 ,000 of income. It's going to be really hard to replicate that in real estate for the short term. I think about our clients who are corporate attorneys or investment bankers. They are working so hard in such long hours and they're making so much money. Their time is at a premium.

25:24Ryan Sterling:And it's kind of what you were saying before is that it does require extra time and effort. If they don't have it, you're better off going for the biggest bonus you can get and then diversifying in the stock markets and having that be a way to build and compound your wealth. But I would say that if there's someone who's starting out and they're like, hey, I've got a decent enough job, but there's some upward mobility, but not crazy. And I've got time on my hands and I'm young and I'm willing to take risk all day long. That's perfect profile to start building a diversified rental portfolio. Yeah.

25:57I think that makes a lot of sense. That's sort of what I, when I was started, I was 22, 23, I was like, I had nothing to lose. There was nothing in my bank account. So I just figured I could try and hustle and got, you know, was so into it that I could pay such close attention to every deal that I did that I thought I had a higher probability of success. And I think that's true.

26:21Ryan Sterling:By the way, though, too, a really important point is like we've been talking a lot about risk and I think, look, everything needs to be through the lens of risk first. But risk is a very fascinating concept. And I would actually argue that someone who doesn't have anything to lose at 22, 23, who's taking a swing at real estate, guess what? If you don't take that swing at 22, 23 and you decide to stay in a safe, stable job, that might not be around in 10 years from now. I totally agree. Yeah. So you're taking concentration risk on your job. So that's where I would actually argue that if you're 22, 23, taking a swing at some investments, that's actually potentially the least risky thing you could be doing.

27:02Yeah. Diversification. Yeah, exactly. Because especially that early in your career, at least speaking for myself, I don't know where I was going to wind up. I didn't know what I wanted my career to be. And you're sort of putting a couple of irons in the fire, so to speak, to see what works out for you. So I think, yeah, I totally agree with you. You're young, go out, house hack, hustle, do those things that we talk about all the time on the show. It really just works. There's still risk. You got to mitigate that risk, but it really can work.

27:28Ryan Sterling:It's all risk. It's all risk. The other, I think, big group of BiggerPockets listeners and people who I talk to all the time are people with jobs that they like, that they're not intending to go full-time into real estate, And they want to diversify or they want access to capital and income in a way that they, at least I'll ask you about this, don't feel that the stock market provides. Right. So, you know, of course, there are dividend stocks, but they feel, you know, the cash return on real estate is better and worth the time. Right. So, again, this is the idea of worth the time. How should someone like that think about diversification?

28:13Because a lot of these folks, maybe they have a 401k if they're fortunate through work. They've been investing in the stock market for a while. But now they say, okay, I want some of that real estate action. How should they think about balancing and what capital to put where?

28:29Ryan Sterling:That is kind of what we see more often is that you have people who are in their late 30s, early 40s. They're still very much in the wealth building stage. they're established in their job, they have a family, they have responsibilities, etc. And that's where it comes back to what we were talking about at the very beginning of the episode is having that plan in place, having that direction and intention, and putting real estate into that. So it goes back to if someone's like, I want to buy one rental property and that's it, run the numbers and I think you'd probably agree with it. It's probably not worth the headache.

29:03Just a single one?

29:05Ryan Sterling:Yeah. Yeah. I mean, it's just – it's not going to be worth it. You really have to have the mindset that we're going to start to acquire a rental portfolio over the next five to ten years. And let's put that in a plan and let's see what it looks like. Now, of course, it all starts with one. So action produces information. So, you know, of course, you know, buy that first rental property and let's see how it goes. But go in with the mindset that this is going to be part of our portfolio of building wealth. Just know that's what you're doing. All right, everyone, we need to take one more quick break, but we'll be back shortly.

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33:24Welcome back to the BiggerPockets podcast. I'm here speaking with the CEO of NerdWalletWealth, Ryan Sterling. Let's get back to our conversation. And there's risk everywhere, including the stock market. So I'm curious your read on the situation right now. We're hovering around all-time highs. Obviously, I'm asking you to pull out a crystal ball that you don't have, but just give us your sense of how the stock market is performing and where it might go from here.

33:51Ryan Sterling:You just hit the nail right on the head in terms of, look, we're at all-time highs, the stock market valuations are stretched and are stretched to not the highest we've ever seen, but certainly very much on the high, uncomfortable side. So valuations are not gravity. So high valuations do not mean that we should expect a correction or bear market in the next 12 months. Markets that are richly valued can be even more richly valued a year from now, two years from now, et cetera. Same thing with markets that are attractively valued. So the high starting valuations do not do a very good job of informing you of what to expect over the next 12 months.

34:28Ryan Sterling:However, they do a good job of telling you what to expect over the next decade. And what valuations are telling us right now is we should expect lower returns over the next decade than the previous decade. How is that going to materialize? We'll find out. Is it going to be instead of 10 % returns, are we going to see 7 % returns? Maybe. is that going to be at a straight 7 % clip? Probably not. We're probably going to see markets get up to bubble territories and then have a crash in correction. That's typically what happens. I would say that 1996, during the dot-com boom, Alan Greenspan, who was the head of the Federal Reserve at the time, gave a speech that he called irrational exuberance.

35:13Ryan Sterling:And he basically was saying the prices of these dot-com stocks are in unsustainable territory. He was right. However, it took four years. It was four years off. For that bubble to pop. Yeah. So, you know, if you're sitting there right now and saying, God, the stock market, it looks too richly valued. I'm going to be on the sidelines. You might have to have a good amount of patience before the dam ultimately breaks. Yeah. The other thing that I think that's important to note is the mega cap companies right now that make up the US market. So I'm talking about the NVIDIAs, the Apples, the Googles, the Microsofts, the Amazons, Metas, et cetera.

35:51Ryan Sterling:These are the greatest companies we've ever seen in the history of the world in terms of their scale, in terms of their cash flow, in terms of their capital allocation, in terms of their future growth prospects. So that also has to go into your consideration as a long-term investor in that you are having exposure to, again, the companies that we've never seen in the course of human civilization. These are the best companies we've ever seen. So how does that populate itself in terms of what we're advocating for our clients? It goes back to diversification in that we feel very comfortable being invested over the long term.

36:29Ryan Sterling:I always think about, do I think Google is going to be around 10 years from now or do I think Apple is going to be around 10 years from now? The answer is yes. Do I think it's going to be bigger than it is today? The answer is yes. Do I think it's going to be a straight upward trajectory from now to 10 years from now? Absolutely not. So you have to be able to stand the volatility and the diversification serves to mute the volatility when it presents itself. That's very well said, Ryan. Thank you. I think that's a very sober way of looking at it. I just want to provide a little bit of context here too, because I agree, I read a lot about the stock market and you hear this like decade of lower returns often.

37:07And I think the same thing is true in real estate. I say it on the show all the time. But I want to provide some context that the last decade for equities and for real estate were abnormally good. So some reversion back to lower returns is to be expected and is not necessarily a catastrophe. The second thing is, I just think the job of the investors, what do you do with your money today? And I see a lot of people get hung up on this on real estate where it's like, oh, I don't want to get into real estate because the returns won't be as good as they were in 2022. Or I don't want to be in the stock market because in the next 10 years, they won't be as good as the last 10 years.

37:45What else are you doing with your money? What's the other option? You know, I still think you need to be, I'm not just saying throw your money into anything, but saying I'm going to wait until there's going to be the best decade just makes no sense. Like you have no idea when it's going to come. Thinking that you're going to be able to identify it is the height of arrogance. Like you're not going to know. and if you're going to wait, you'll probably miss the whole thing. So taking a more pragmatic approach and adjusting your expectations, I feel like is just really important. Don't do this to get rich overnight, do it to get rich 20 years from now.

38:19And if you take that mindset, your chances of success are pretty high. At least I think so. So anyway, I really appreciate that. So Ryan, like what, what is your approach to that? Like for people like it's just dollar cost averaging kind of the right way into the market. I know it's boring, but it just works.

38:38Ryan Sterling:I mean, by the way, the boring is really effective. Like we always say, like, what we do is simple, but not easy. Having people stick with the plan over the long term, it's actually a lot harder than it sounds. You know, there's a saying that we overestimate what we can do in a year and underestimate what we can do in a decade. And that is so true as it relates to building wealth. And that if you think starting from zero, that you're going to reach financial independence in a year, that's just arrogant. Like that is like likely not going to happen. But the progress you can make over a decade, it's substantial if you stick with the course.

39:15Ryan Sterling:Now, you know, to your point, like what do you do if valuations across the board and asset classes are high? Good luck being in cash and picking the best opportunity to deploy your cash. It's likely not going to happen. I can tell you in the stock markets, tell me when a 10 % decline turns into a 20 % decline, when a 20 % decline turns into a 30, when a 30 turns into a 40. Look, we've had some air pockets of volatility in the last couple of years. And I know people who have been in cash and they still have the bat on their shoulder, even though there've been multiple opportunities to deploy cash down 20 % because they thought it was going to be down 40%.

39:52Ryan Sterling:So you have to get timing right, which is impossible. So the dollar cost averaging piece, I think as it relates to real estate, it's the same principle that, you know, if you have a plan and a direction and intention to own 20 rental properties. And in this year in the plan, you're going to acquire two rental properties, acquire two rental properties. Obviously, you know, don't force yourself to do it. You have to do the research. You have to do the diligence. You have to make sure that you're underwriting the deal in a way that makes sense for you. But like, don't get too cute and say, let's wait for things to correct.

40:25Ryan Sterling:And I'm just going to be out of the game and I'll get back into it in four years from now. Like that's going to derail you over time. I completely agree. Just sticking with the plan. It's harder. It's easier said than done, but it is absolutely the right approach. One more question for you here, Ryan, before we get out of here. And that's about finding and working with a financial advisor. Most real estate investors I know do not do that. I personally have one. When my wife and I, we've been together for 13 years, but we finally got married three years ago. And I was like, man, I got to get a financial advisor because I don't want to be wrong.

41:02and I just want someone else to gut check because I had been doing it by myself for 10 years. It was super hard to find a financial advisor that knew anything about real estate. I think I probably, I'm not exaggerating, probably interviewed eight or nine before I found one. And I was specifically talking to people who said they understood real estate. Why is that? And do you have any tips for people on working, if they want to be in real estate, presuming that they are either all in or doing this at diversification, but they want to build a portfolio. How do you best work with a financial advisor?

41:38Ryan Sterling:Unfortunately, in this industry, financial advisors, oftentimes, the vast majority of their job is to be a salesperson. And they're salespeople first, practitioners second. So I think it's important to find an advisor and find a firm that considers themselves practitioners first before anything else. You know, there's, of course, you know, certain clues like people who have their CFPs, etc. But unfortunately, I do think, you know, it does take some work and it does take some interviewing. And I think it's important to articulate what your values are. And, you know, for people listening to this podcast, real estate is probably a deep value in terms of it's going to be a part of your plan.

42:19Ryan Sterling:I would only work with an advisor who understands you and understands what you're trying to build. It doesn't mean that they're going to underwrite everything. It doesn't mean that they're going to sign off on everything. It doesn't mean that they're going to agree with everything you say. However, they understand with the spirit of what you're trying to accomplish and really take financial planning in a holistic sense, not just try to gather your assets and invest it in a stock portfolio. Again, there's a place for that. You know, investing is one of our core tenants, but it comes with financial planning and coaching.

42:54Ryan Sterling:And, you know, one thing I loved what you said because, you know, I say this all the time, you know, building wealth is like building a reputation. Warren Buffett has that famous quote of a reputation takes you decades to build and only seconds to destroy. Wealth is the same thing. You know, wealth can take, you know, three decades, two to three decades to build. And one to two bad decisions can completely erode the process. So a big part of our job as financial advisors is also making sure our clients aren't making the big mistake. But, you know, unfortunately in this industry, there are a lot of people that are going to try to sell you products that are going to try to sell you on, you know, just their investment portfolio.

43:30Ryan Sterling:And again, while there's a place for that, you really have to interview people and to feel like they understand you, understand your values and ultimately what you're trying to accomplish. Well, thank you so much, Ryan, for being here, for all of your insight. We really appreciate it. Yeah, absolutely. And we'll say just kind of quick plug. Yeah. We are starting a podcast. it is called Your Next Dollar. Andrew Giancola is our host. And I know he's been on this show before. Yeah, Andrew's awesome. Yeah, Andrew's great. We're super excited for Andrew to launch this. And I will be a recurring guest.

44:02So if you enjoyed this, make sure to tune in. Awesome. Well, good for you. That's awesome. We'll definitely check it out. Andrew's great. Was on the show just a couple of weeks ago. So good. And obviously, hopefully we got some good practice for you being a guest. Good, yeah. Well, thank you. This is a good warmup. Well, thanks again, Ryan. And thank you all so much for watching this episode of the Bigger Pockets podcast. We'll see you all next time. Thank you all for listening to the Bigger Pockets real estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform.

44:34Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian Kay. Copywriting is by Calico Content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing.

45:01You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.