The “Golden Age” of Real Estate is Over.

0:00Real estate is harder than it used to be, but you know what? I honestly do not care. Even though deals are harder to find, cash flow prospects are lower, and interest rates are higher, I still don't care. Because investing, whether in real estate or some other asset class, is not about comparing today's potential to some bygone era. It's about making the best decisions with your money, given the opportunities available to you today. So in this episode, I'm going to to make my case to you for why waiting for some magical era of amazing returns and low risk, which will likely never come, is not the right move and how you should instead be thinking about investing.

0:46Hey everyone, it's Dave Meyer. I'm the head of real estate investing at Bigger Pockets, and I've been an active real estate investor for more than 15 years. And right now, given current market conditions, we're seeing a lot of people sit on the sidelines. And I'll be honest, I'm not going to say that I don't get it because I recognize that real estate is harder right now. Deals are harder. But you know what? It really doesn't bother me at the end of the day. I mean, of course, I wish that conditions were amazing again, but I'm going to show you today why I think that's a dangerous mental trap you can find yourself in if you start going down that road.

1:25And instead, I think I can help you all frame the challenges and opportunities in real estate as a productive thing. I'm going to show you that there is an upside to everything that's going on in the market right now, and we're going to do that in today's episode. For those of you who are watching on YouTube, I'm going to be pulling out the whiteboard and drawing a little bit, talking a little bit about different eras of real estate investing. But don't worry if you're listening on audio. I'm going to be describing everything I'm doing at the same time, and you won't lose out on anything. Before we get into the show, I wanted to let you know about something really fun Henry and I are doing that I am really excited about.

2:05We are taking BiggerPockets on the road this summer, and we'll be driving around the Midwest to multiple different markets, looking for deals, meeting with agents, talking to the BiggerPockets community, attending meetups. It's going to be a great time. We're calling it the Cashflow Roadshow and it's happening this July from July 14th to 18th across three different markets in the Midwest. If you live in either the Chicago or Indianapolis area, we're going to be doing free meetups in those areas. The one in Chicago is on July 15th. The one in Indianapolis is the next night on July 16th. Henry and I are going to be there.

2:42We're going to be doing presentations. We're going to be talking about local market dynamics. There's going to be great networking. and we even have a few cool surprises planned as well. So if you live in one of those cities, you want to hang out with us, get into the BiggerPockets community in real life. Go to biggerpockets.com slash roadshow to learn more. And these events, they are free, but I should call out that you do have to RSVP because there are limits to the venues and they will sell out. So make sure to go to biggerpockets.com slash roadshow and reserve your spot today. All right, we're going to start this episode and just talk a little bit about the different eras of real estate investing.

3:19Because as you probably know, real estate investing is very cyclical and there are different time periods. There are times of recession. There are times of expansion. There are good times. There are bad times. And obviously over the course of decades or centuries, the US housing market goes through every kind of era. So I want to zoom out a little bit today and first talk about the era that I think we've exited. In 2023, it sort of ended. It started at the end of the financial crisis or the Great Recession during the recovery that happened from that event. So let's call it 2009 to 2010 to 2023.

3:57If you're watching this on YouTube, you'll see that I'm showing a chart here of U.S. housing affordability. This is basically how easy it is for the average American to go out and buy the average priced home in the country. And this is a really useful metric, as you imagine, both for investors and for homeowners, because it's a good lead indicator for how many homes are gonna be bought and sold during a period of time. If it's relatively affordable to buy homes, yeah, a lot of people are gonna go out and do it. If it's relatively unaffordable, we're gonna see transaction volume, basically the number of home sale, start to taper off.

4:33And what you see when you look at this chart and when you just consider affordability in the housing market in general, what you see is that the time from 2010 to 2023, that was the unusual time. We have entered a period recently where, yes, we have unusually low affordability. We're close to 35 or 40 year lows, but we just exited an unusually good time for affordability. So the chart I'm looking at, the higher the number, the more affordable things are. And basically this index went up to over 200. That's significantly higher than the long-term average from 2010 to 2015. But even in the period from 2015 to 2020, when as an investor myself, it felt like things were getting more expensive again, that was actually still historically affordable housing market.

5:26And so I think what's going on a lot in real estate is that we have gone from a historical period of great affordability to historically bad affordability. And that difference has really changed people's perception of real estate as an investment overall. But my argument, as I'm going to sort of unfold over the next couple of minutes and throughout this episode, is that although there are challenges with affordability, that is absolutely true. You don't need the unusually good affordability that we saw in the 2010s to come back in order for real estate to be good again. Because in the 1990s, it wasn't that affordable and real estate was still a good investment or the 80s or the 70s or almost any other decade before that.

6:13So I think we need to sort of, as a real estate investing community, reset our expectations a little bit and not assume that we are going to be going back to the period that we had from 2010 to 2023. That was great. It really was an easy and good time to be a real estate investor. And we have entered a more challenging period. But as I said at the top, and as I'm going to go through a lot in this episode, that is not honestly all that relevant. It really doesn't matter at the end of the day to me as an investor, whether the returns I can get on real estate today are better than the returns I could get in 2015.

6:54They're probably not. And as I said at the top, I don't care because I still believe that real estate investing is a better investment than anything else I can do with my money as of today. And that is the thing that you need to be thinking about. The consideration that every investor makes, whether you're a stock investor, a crypto investor, a real estate investor, whatever it is, the calculation you need to be doing in your head is what asset class, what specific investment can move me closer to my personal financial goals? And for me, that is predominantly real estate. I do invest in some other things to hedge.

7:32But my whole point that I'm going to be talking about today is whether you agree with me that real estate is great right now or not, I really want you to take home the idea that it doesn't matter what real estate's doing today versus 10 years ago. What matters is how real estate investing compares to the other options you actually have. Because like it or not, you do not have the option to go back to 2015 and get those returns. I'm sorry, that is not coming back. And so you really need to make the decision about what you're going to do with your time and your money today. That's the calculation you need to be thinking about.

8:06So just to hammer home this idea of eras in real estate investing, I'm pulling up a new chart. This is the median sales price of houses sold in the United States going back to 1960. So we have 65 years of data here. So the thing that you notice when you look at this median sale price chart is that housing prices, the trend is very clearly up. And of course, there are exceptions to that. There are short-term exceptions to that. But the long-term trend of housing prices in the United States going up is pretty undeniable. Of course, you'll see this sort of short-term peak here in 2007, and it didn't bottom out until about 2011, and it took a good long time before prices reached their peak again, where they got back to old highs.

8:56That took about six or seven years, so that was a really rough time in the housing market. But that is the exception to the rule. Actually, if you look back at the data from today, back to what we have reliable information for, basically World War II. Since World War II, that was by far the worst time in the housing market. We've seen other periods like from 2018 to 2020 where prices were relatively flat. We also saw that in the early 90s. We also saw that during periods of really high inflation during the 1980s. And we've been relatively flat on housing prices, especially when you look at this on an inflation adjusted basis over the last couple of years since we exited that amazing time in the housing market.

9:41But despite those things, the reason I like real estate and still believe in it so much, aside from the cash flow, aside from the tax benefits, aside from the value-add opportunities, on top of all those things, if you are concerned about appreciation and prices going up, I think this chart will show you that although we had all these different eras over the course of the last 65 years, prices have still at least kept pace with inflation and have exceeded them over this time period. And this is true during periods of enormous turmoil. I know that we are in a period of whether it's internal uncertainty about domestic trade policy, or it's all the things going on geopolitically across the world.

10:24There's a lot going on. But you know what else? A lot of that was going on in the late 60s and early 70s. We had going off the gold standards in the 1970s. We had enormous inflation and recessions, huge recessions in lots of the 1970s and 1980s. And you know what? Home prices still went up. And I'm not saying that in the short term prices will definitely start turning around. I've tried to be candid that I think housing prices are going to remain, probably go down a little bit this year and they might remain relatively flat for the next year or so. But I'm still okay with that because the long-term trend in real estate is still going up and we are going into an era where assets are going to be on sale.

11:07And that's sort of the key thing here. You're getting an opportunity to buy in at a lower price over the next couple of years and take advantage of these long-term trends of appreciating prices. And that is on top of those other things like cash flow, tax benefits, amortization, value add, All of those other benefits to real estate investing are still there. But I know a lot of people out there are rightfully concerned and wondering what to do in a market where prices are probably going to decline a little bit in a lot of markets, not in every market. And I just wanted to talk to everyone about zooming out a little bit, understanding the area that we're in today, and putting it in context over the long term over what has happened with housing prices in the U.S.

11:51basically for the last century. All right, so that's a brief overview of sort of the different eras that we've been in in real estate over the last couple of decades, but I want to turn our attention to the decisions that you as an investor have to make today, which is, is real estate the best use of your money today? We're gonna get to that in just a minute, but we do have to first take a short break. We'll be right back. This week's bigger news is brought to you by the Fundrise Flagship Fund. Invest in private market real estate with the Fundrise Flagship Fund. Check out Fundrise.com slash pockets to learn more.

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15:56Welcome back to the BiggerPockets podcast. We're here talking about the more difficult era of real estate investing that we are in today and why personally I still think real estate is worth every minute of time that you were thinking about investing into it, and it is a worthy consideration for what you should put your money into. As I said earlier, I think the main point I want to convey to everyone in this episode is do not compare your real estate returns today to historical periods. Compare them to other current opportunities. And I know this is hard to do, but this is the job of an investor.

16:33It is your job to figure out where to allocate your resources. So you want to ask yourself, were returns easier to get in 2011? Well, in retrospect, yes, but at the time, it wasn't that obvious. Were returns easier to get in 2015 than they were in 2011? Probably not, but 2015 was still an amazing, phenomenal time to invest in real estate. What about 2018? You know, it was a little bit harder than it was in 2015, but I bet anyone right now would pay money to go back in time to invest in 2018. The point of this is that the timing the market is impossible and no one knew in 2011 for sure that it was going to go on this amazing bull run.

17:17Additionally, no one in 2011 was thinking back to 2005 thinking, oh my gosh, what great returns we got in 2005 because there was immediate crash after that, right? So although it is super, super important to know what has happened in the housing market and to understand the history of the asset class that you're going in, that's what I'm talking about today. That's sort of what I talk about all the time on this show and on the market. These are really important things as an investor. But understanding what's happened in the past and sort of getting hung up on whether or not today is as good as the past, those are different things.

17:53And so the question again is, what do you do with your money today? And I will share my thoughts on real estate in a minute, but let's just talk about the other options because there are plenty of them. The stock market, of course, is the most obvious one. That is what most Americans who have money to invest, invest in. I do invest pretty heavily in the stock market, and there's a chance that it continues to go up. But if you look at some objective measurements of the stock market, for example, if you look at it at P.E. ratios or the so-called Buffett indicator, which compares valuations in the stock market to our total GDP in the country, if you look at almost all of these metrics of valuation of the stock market, prices are super, super high right now.

18:40right? So that doesn't mean that they can't go up any further. But the upside for the stock market to me, if I'm just thinking about this logically, I think there is probably a greater chance that there is a decline in the stock market in the next year or so than there is a lot of amazing returns. We've just been on an amazing run in the stock market. We had two back-to-back years of over 20 % returns. That's incredible. And to expect something like that to happen a third year in a row, especially when valuations are so high. There's so much uncertainty and risk in the market right now. I, you know, I still will put money in the stock market, but I do see a lot of risk there.

19:16What about crypto? Crypto has been on an amazing run also over the last couple of years. I do invest a little bit in crypto myself, but crypto going into a uncertain time like this, for me, feels a little bit risky because it just doesn't have the same hard assets, for example, that real estate does, or is not based on the same sort of fundamental valuations like the stock market is, crypto is largely speculation. And if you believe in that asset class and you want to speculate on that, that's totally fine. Like I said, I do it a little bit myself. But I don't think that if you were a wise sort of practical investor who's trying to build long-term wealth in a methodical way, you would be putting all your money in crypto.

20:01I get that some people want to take a shot are doing that. And some of them have made unbelievable amounts of money. Don't get me wrong. But the risk adjustment, when that's the way I think about things, when I try and build a total portfolio for my own wealth building, I like to put a little bit of my money into those high risk, high reward assets like crypto, and instead prefer to put the vast majority of my money in things like the stock market and primarily in real estate. What about bonds? Bonds are kind of boring. They've gotten beat up a lot this year. And although they are a great way to preserve wealth during normal periods, it's not really a great way to build wealth, frankly.

20:39And so I don't think anyone who's trying to build wealth, probably the people listening to this podcast, aren't going to get super excited about putting all your money in bonds, right? So that's probably not a great thing. What about hard assets like gold? I do personally buy gold. I think it's a good way to hedge. Again, not going to make you rich. That is more of a stable thing to put money in to hedge against inflation. Or if you have fears about, you know, currency debasement or something like that, you can use crypto and gold to do that. So a little bit of that. What about things like small businesses, like buying service businesses?

21:14I actually find this highly intriguing. I think the numbers are there. It makes a lot of sense to buy kind of small businesses because they can throw off a lot of cash flow. I think it's probably the only other asset class other than real estate that can realistically put out a good amount of cash flow. It probably has higher cash flow potential than real estate, but it is higher risk, right? Like not everyone knows how to go and operate a laundromat easily. And I know people think, oh, it's just a laundromat. It's super easy. Trust me, I see a lot of people failing at laundromats because they are getting bid up and the prices are super high.

21:49Or you might want to buy a home painting franchise. Great idea. Those things can make a lot of money. You're not just investing then. You're a small business owner. And if you are not good at operating that business, you could fail and you could lose it all. It's also super time intensive. Running a small business takes a ton of work. So I'm not knocking on these other options. I think they're all worthwhile considerations. But the reason I, who spends literally all day every day thinking about where to put money and how to advise people on different investments. The reason I always come back to real estate investing is because the diversity of returns to me gives you the best risk adjusted returns.

22:31Are the upsides as huge as crypto? No. Is the cash flow as amazing as small business? No. But are the risks as high? No. And so when I think about the likelihood that I'm going to get a consistent 10, 15, 17 % in real estate, I feel really good about that. And when I compare that to things like the stock market, that's when I get really excited because the stock market historically returns somewhere between 7 % and 10 % annually, depending on how you invest, what methodology you're looking at to track that. Real estate, on the deals that I look for, I can get 10 % in the first year and it only goes up from there.

23:11And this risk adjusted returns really to me comes from the different areas you get returns in real estate, because we talked earlier about appreciation, why long-term housing appreciates. That's a really good hedge against inflation. And when you're using leverage, that's a great way to build wealth. On top of that, though, you also get cashflow opportunities. They're tough right now, but I think they're going to get better. And if you've owned any real estate in your life, you know that the cash flow that you generate in year one is usually the lowest that you generate and that it just goes up over time.

23:46The third thing is amortization. That's just paying off your loan using the income that you get from tenants. That earns you a return as well. What about tax benefits? What about value add investing? All of those things are still there even during this era of harder deals to find. So to me, when I look at all these things together, even if home prices don't go up next year, I'm still getting all those other things. I'm getting cash flow and amortization and tax benefits. I can still add value. Or perhaps one year I have a particularly tough time and I have a lot of expenses and so my cash flow is a little bit negative.

24:25Well, I still got maybe appreciation that year. I still got amortization. I still got all those tax benefits. And so it really mitigates your potential for downside losses in real estate. while giving you four or five or even six different ways to make money. And since we don't know how the market is going to react, and it's almost impossible to time it, just having basically all of these buns in the oven in real estate is what gets me excited and has me continuing to come back to real estate as where I want to put the majority of my wealth, because one of these things might hit in any given year and make your deal go from a single to a double, maybe even to a home run.

25:04And that to me is why real estate is such a good risk adjusted return. Now, getting back to sort of the point here is that you need to make this decision for yourself. I sort of went quickly through the pros and cons of the stock market bonds. That's not the point of this show. This is a real estate show after all. So you should understand that I have a bias. I have been a real estate investor for 15 years and you should think Think about this for yourself. Do you think that real estate is a worthwhile investment? Do you think it has great risk-adjusted returns? There are no right answers to this question, but this is the right question.

25:41That's, again, the thing I want to hammer home. Think about how do I invest today? Do not think is real estate better today or 10 years ago. I cannot tell you how many people reach out to me, probably daily, and say, I don't want to invest right now. I'm going to wait till things go back to 2018. Maybe that will happen. Maybe it will literally never happen. We were in this unusually great period in 2018. That might never happen again. And if you don't invest today, you might miss out on things. Same thing is true in the stock market, right? No one in their right mind, no stock investor I've ever met has ever said, I'm going to not invest in the stock market this year because 2013 was the best year in the last two decades.