The State of Real Estate in the United States
In this episode of Motley Fool Answers, Matt Argersinger, senior advisor for Motley Fool Millionacres, joins host Alison Southwick and Personal Finance Expert Robert Brokamp to talk about how COVID-19 has impacted residential and commercial real estate, and he offers his advice for homeowners and investors.
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This video was recorded on April 20, 2021.
Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick and I’m joined, as always, by Robert Brokamp and headed down the trail, personal finance expert here at The Motley Fool. I’ve been waiting a while trying to figure that one out. I don’t know. It’s fine. Don’t worry about it. Hi, Bro.
Robert Brokamp: [laughs] Hi, Alison.
Southwick: In this week’s episode, we’re joined by Motley Fool Millionacres Senior Advisor, Matt Argersinger. We’re going to talk about the state of real estate in the United States. All that and more on this week’s episode of Motley Fool Answers.
So, Bro, what’s up?
Brokamp: Well, every once in a while, you may read about or hear about, including on this very podcast, guidelines about how much you should have saved for retirement at this point in your life. They’re generally expressed as a multiple of your household income. But of course, these are just general guidelines. There are many variables that will determine how much you, dear Answers listener, need to be saving to retire how and when you want. In this What’s Up, Bro?, or WUB as we call it behind the scenes, I’m going to highlight two of those variables; the age you retire and your income.
Let’s talk about perhaps the best-known guidelines that came from Fidelity. You could find them, just do an online search for a report called, “How much do I need to retire?” and you’ll find them. But just so we review them very quickly here, according to Fidelity, if you’re 30, you should have one-times your household income already saved. So if you make $50,000 you should have $50,000 in your 401(k)s and IRAs. Age 40, you should have three times your household income, six times at age 50, eight times at 60, and 10 times at age 67. The guidelines that you often read about or hear about from Fidelity, they assume you are going to retire at age 67. However, that’s higher than the average retirement age these days. These days people are still retiring at 64-65. How much should you have saved up before you retire if you’re retiring at age 65? Current EBITDA, Fidelity, it’s 12 times your household income. Because you’re retiring earlier, that’s two fewer years of contributing to your retirement accounts and you’re claiming Social Security earlier, which results in a smaller benefit. That’s a pretty big difference. Retiring at age 65, you need 12 times your household income. But if you just wait two more years, you only need 10 times your household income. That shows the power of delaying retirement just a couple of more years. It’s always good to get a second or maybe even a third opinion.
Let’s see what T. Rowe Price says, and you could find their report just do an online search for, “Are my retirement savings on track?” from T. Rowe Price. Their guidelines are actually a little bit lower than what you’ll see from Fidelity. They think at age 30, you only need half of your household income already accumulated for retirement. Only two times by age 40, five times at 50, nine times at 60, and 11 times at age 65. They are a little behind Fidelity. I being a “plan to save” type of guy, I’d probably lean toward Fidelity’s guidelines. But the report is pretty interesting, definitely read it. They actually address a little bit about how being married affects your magic number. Worth considering and maybe if you read the report, you might feel like, you know what, T. Rowe Prices are more applicable to life situations.
Now, how does your income factor and how much do you need to save for retirement? Well, it primarily comes down to Social Security, which is designed to replace more pre-retirement income for lower-income Americans. Here are some stats from a report from Franklin Templeton. Let’s say over the course of your career, you averaged $50,000 a year. That’s adjusted for inflation, and when they calculate your Social Security benefits, they do adjust your income for inflation. But let’s say you averaged $50,000 a year over your career. Social Security is going to replace 45% of that. What if you averaged $100,000 a year over your career? Social Security will replace 33%, $150,000 a year, Social Security replaces 27%, and all the way down. That’s the more you make, the less you will get from Social Security, as a percentage of your pre-retirement income, and the more you’ll need to have saved up before you retire. To demonstrate this, we turned to some guidelines from JP Morgan. From its annual guide to retirement, which I highly recommend for all kinds of good stats and data related to retirement planning.
Now, as of 2019, the median household income in the U.S. was $70,000 in a year. According to JP Morgan, if you retire at age 65 and that’s your average income, you will need nine times your household income before you can retire. What if you make $100,000 a year? Well, you need 11 times your household income, $150,000 a year, you need almost 13 times, $200,000 dollar income, you need 14 times, and on the way up. Again, the more you make, the more you have to save because you’re not going to get as much help from Social Security. So the bottom line is, these guidelines are helpful, especially when discussing retirement planning in general. But if you’re going to use them, you need to dig into the variables of each study and to see what you need to tweak to make them more relevant to your situation. Now, for something completely different, I just saw this on Twitter, that CNBC celebrated its 32nd birthday on April 17th. I also learned that I was totally wrong about what CNBC stood for. Do either of you, Alison or Rick, know what CNBC stands for?
Southwick: Oh, man. I assume the C stood for corporate. I don’t know. Rick?
Rick Engdahl: Canadian National Broadcasting System.
Southwick: Now you’re just being silly. All right, Bro, what is it?
Brokamp: I always thought the NBC was because it’s owned by NBC. It’s a National Broadcasting Corporate.
Brokamp: Then I don’t know what the C stood for.
Southwick: Corporate NBC was what I was thinking.
Brokamp: There you go. Totally wrong. Stands for Consumer News and Business Channel. I have no idea. Anyways, just a tidbit of trivia for you. That, Alison, is what’s up.
Southwick: As we’re starting to hopefully see the light at the end of the tunnel for the COVID-19 pandemic, I thought this might be a good time to look around and see how changes in attitudes and habits have impacted the real estate market, and who better to help us make sense of the landscape than Matt Argersinger, Senior Advisor for Millionacres. Hey, Matt.
Matt Argersinger: Hey, Alison.
Southwick: Thanks for joining us.
Argersinger: You bet.
Southwick: Always nice to have new voices and faces. Have you been on the show before? I forget.
Argersinger: I think I was on the show with you guys, maybe definitely pre-pandemic, obviously. I think at least a couple of years ago.
Southwick: So we have a lot to talk about.
Argersinger: Lots to catch up on.
Southwick: Yeah. What we’re going to do is, we’re going to talk about some of the different sectors of the real estate market; residential, retail, commercial, etc. We’re going to talk about it based on my super uneducated assumptions and we will see how right I am. Just from me absorbing headlines of articles and walking around my neighborhood, we’ll see how good my spidey sense is. You’ll tell me whether I’m right or wrong and feel free to tell me I’m wrong.
Argersinger: All right, I’m sure your guess is going to be a lot more educated than you think.
Southwick: Yeah. We’ll see. Let’s start off by talking about residential real estate. Because in my assumption, and this is based a lot on what’s going on in my own neighborhood, is that residential real estate is booming and there’s just not a lot of inventory, but a lot of demand, and that is driving up prices. Am I right?
Argersinger: You’re right. It’s hard not to call residential real estate, but the home market right now is in a boom. No matter what market, it’s so widespread. You can really go to any major market in the country, and you have the same situation. Not a lot of inventory like you said, prices at record highs, houses barely lasting on the market. You got bidding wars, people submitting no contingency offers, and escalation clauses to buy homes. I wouldn’t call it a frenzy, but it definitely is, especially if you’re a seller, a great housing market right now. If you’re a buyer though, man, it’s tough because there’s a lot of demand out there. You’re looking for homes and there’s just not a lot out there. One of the things that’s happening actually is that you have people holding on to their homes a lot longer than they ever have and part of that is because interest rates are so low and a lot of people have second and third homes. You also have a situation where a lot of buyers, the carrying costs of holding onto their home are not as high, so if they were lucky enough to buy a home several years ago, it’s easier just to hold onto. It’s cheaper to hold onto a home right now than try to sell it. There’s just a lot of factors playing into the market right now, but you can certainly call it a boom.
Southwick: Yeah, there’s also one of the big stories that I feel like is, again, my assumptions. I hail from Boise, Idaho. Hey, Boise, Idaho. The story in Boise, Idaho is that it is booming unlike it has ever boomed before, which is saying a lot because Boise has been in this massive boom for probably decades now. The story has been people in California are selling their massive homes, massive expensive homes or actually just very high priced homes, retiring, or just moving to Boise and buying a massive home with all of that money, and now, because so many more companies are working remotely, they are able to do that from Boise. Even though there aren’t really that many big corporations to work from, you can still work for a Silicon Valley company, but then afford this massive home in Boise, Idaho. So when I go home, it’s like visiting a different town and it’s not so bad. There’s a lot better restaurants in Boise than there were when I grew up, so there’s that. That’s a bonus.
Argersinger: Yeah. I think your Boise example is a good one. There are essentially two trends happening. There’s a long term trend and this was happening even before COVID, which is you have a lot of this sort of natural migration pattern away from the northeast, away from the coast, into the middle part of the country, the southwest and southeast parts of the country and that is what’s happened, that’s been going on. People and businesses have sought out cheaper places to locate and lower costs, lower taxes, so that’s been a trend that’s been intact. But what happened with COVID last year is that it just got accelerated. You mentioned the work-from-home trend, right? Wow. I might be a tech worker in San Francisco, but you know what? If I can move to Boise, Idaho, and work remotely and my cost of living is down, but I also live in a great place like Boise, that’s pretty awesome.
One of the things we look at in Millionacres is fascinating. You can look at U-Haul statistics, so people renting U-Haul trucks and where they go. There’s some interesting data you can see, where does someone pick up the U-Haul, where are they dropping it off? It’s amazing to see the trends, the migratory patterns. You can see it right from the northeast, right from the coast, right into the middle of the country, right into the east and southwest. The lower the Sunbelt, great weather of course, but also just lower costs, lower taxes. It’s just been such a magnet and that magnet has only gotten stronger last year. You mentioned Boise, this might seem surprising, but one of the strongest markets in the country is Indianapolis. I don’t know if Indianapolis shows up on anyone’s top 10 lists of places where people want to live, but it’s been attracting huge populations because businesses are going there, it’s cheap and affordable and people are living there. Examples like that are all over the middle of the country. Depending on how this work from home trend plays out, we’ll talk about that I know in a bit, but it could continue for quite a while.
Southwick: Yeah. I saw an article in the Wall Street Journal that said that residential home sales are at their highest peaks, last seen since 2006. If I go on my way back to the machine of my brain, I remember that 2008, a couple of years after 2006, was a real bummer. Can you talk a bit about, should I be worried? Is this the same? Is it different this time? How should I feel?
Argersinger: Yeah, I’ve seen some of these headlines and certainly there’s even some major market prognosticators calling this a bit of a bubble and that we might be heading to another great financial crisis. I don’t think so. I think the fundamentals of the market are a lot different this time around. First of all, interest rates are still near historical lows. The Fed has come out and already said that they’re not going to be doing anything with rates probably until at least 2023. The credit markets are “a lot cheaper” than they were back in 2005, 2006. But the big reason to me is that, if you ask anyone who’s tried to buy or refinance a home recently, it’s very difficult to do. I just refinanced a home last fall and it took us three months to refinance it and I think I had to send maybe 1,000 pages of documents, my left arm, and my son to get that refinancing done. Underwriters and banks and lenders are a lot stricter these days and that’s good. In many cases, they’re requiring higher down payments. Gone are the days of the liar loans, the Alt-A mortgages, subprime loans. Those are still out there to a certain degree, but they’re not nearly as prevalent as they were back in the go-go 2004, 2005, 2006 times. There’s a lot more equity, so to speak, in homeowners’ homes. By the way, homeowner balance sheets are a lot higher as well. So there’s a really big buffer I think against anything like a housing crash or a crisis that could lead to what we saw in 2008, which was a real bummer, by the way.
Southwick: It was just a real, oh gosh, golly. One of the trends we’ve been talking about a lot this last year on the podcast is the idea of two Americas, where there is one group of people that is financially fantastic and undaunted by the pandemic and continues to thrive and do well, but then there’s this other group of people who are financially less well off. The difference between the haves and the have nots seems to continue to grow in this nation. You also seem to see that in real estate. I think the head of Redfin said that housing has become a luxury good. It’s like this idea that if you own a house, you’re excited about rising real estate prices. But if you’re not in the market yet, it’s got to be rough to get into it and buy that first home.
Argersinger: Yeah. There are two markets right now. I think, as we talked about earlier, if you own a house, obviously, you’re feeling great about your current situation, especially if you like your house and you want to live there, you’re all set. But you have to remember, there’s so many people that are trying to buy homes. You’ve got a ton of pent-up demand, not just from the pandemic and the recession that got in the way of everyone trying to buy homes, but we have this huge millennial cohort who are predominantly in their 20s, 30s, but they’re now earning good money and they have jobs and they’d like to buy a house, hopefully, somewhere where they want to live. The inventory, as we talked about, is so low, and just getting into buying a house, you’re competing with so many other buyers. It’s tough and not to mention people who are lucky enough to have jobs in great situations, in great financial situations, it’s already hard for them. But it’s even harder for people who are on the lower end of the sphere who might not have great credit, who are in and out of jobs, and maybe who worked in the service industry last year when the pandemic hit and have really faced a lot more hardships. That’s, unfortunately, playing out in a lot of parts of the market and I think real estate is no exception.
Southwick: What’s your advice for home buyers, generally?
Argersinger: First, my big advice always is don’t look at your home as an investment. It is one of the biggest purchases we’ll ever make, probably for most people the biggest purchase they’re ever going to make. But your home should be your home, it shouldn’t be something as viewed as, “Hey, this is part of my investment portfolio, this is the real estate portion of my portfolio.” I would never look at it like that just because we tend to treat our homes differently than we would in an investment. We invest in our homes differently, we take care of our homes differently. Don’t look at it as an investment.
Second to that, if you’re looking to buy a house, it’s a little bit cliche, but location is really key. So you want to focus on where you want to live, not so much the house itself. I can’t believe I’ve talked to so many people who go see a house, and it’s in a great neighborhood, it’s where they want to live, and they walk into the kitchen and they’ll see a backslash they don’t like and they are like, “I can never buy this house, not with that kitchen backslash right there.” I’m like, you can change that, you can change the kitchen, you can change the bathroom, you can modify the house, you can make the house what you want. What you’re really buying is where the house is. Is it close to things you love? Is it close to a great school for your kids? Is it a short commute to work? Does it have a great park system nearby? All those are the things that should be the reason you buy a house, not necessarily because you don’t like the tile in the bathroom. That’s my big general advice.
Then here’s one small tip, I would say. If you’re looking to buy a house, be a little patient, and maybe focus your viewing efforts in the fall and winter timeline. Specifically, I go from November to February. The reason is, A, you’re outside of the prime spring and fall home-buying seasons. But homes that are listed or still available during say November and February, you’re probably dealing with less competition, you’re probably dealing with houses that have been on the market for a while. There’s going to be fewer buyers bidding, and you might be able to negotiate with the seller. There’s usually reasons. Think about it. If someone lists a house, say, a week before Thanksgiving, they’re either desperate to sell, or they’ve got a situation in life where they need to move to somewhere else. That’s just one little tip if you are looking to buy, maybe be a little patient and wait for those down winter months before looking to buy a house.
Southwick: You said, don’t think of your house, your home as an investment, but what about those who do you want to invest in real estate like having rental properties?
Argersinger: Yeah. Then there you go. Then you come in with a certain different vantage point right about how you’re approaching things. I’ll just give an example. My wife and I, when we bought our first place, it was a two-unit place in Washington D.C. It wasn’t quite a duplex, but it was a road-house, it had a top main unit where we lived, and it had a rental basement that was very easy to rent out while we were living there. I wasn’t quite pure real estate investing, but it was a way for us to offset the cost for our mortgage. We also learned how to be a landlord and it was a good learning experience. So I would say if you’re getting into the real estate business and you’re looking to own a rental property, do something simple, do something turnkey. Do a duplex, maybe where you live on one side and rent out the other, or invest in a condo that you rent out because condos have a lot less maintenance. There’s nothing worse than, and I’ve dealt with this, is buying rental property that’s part of a 100-year-old house, and figuring all the problems and all the costs that you can imagine going to something like that. Keep it simple, keep it turnkey at least for your first one or two deals. Then as you get more experience as a landlord and you want to expand your real estate portfolio, you can go for bigger things, bigger rental properties, or you can get into the commercial real estate, but just keep your life simple at first as you’re starting into it, go slowly.
Southwick: Let’s move on and talk about the state of commercial real estate. As you taught me before the show, commercial real estate falls into a few different categories, such as retail, office space, hospitality, and industrial. Let’s start off by looking at retail real estate. My assumption, this is my very uneducated assumption, is that it’s maybe a mixed bag. I feel like the big headline long story has always been the decline of the big box store, and I think that’s probably marching along. But I feel like consumers are still consuming, and people are spending their stimulus checks and still shopping. I don’t know. I’m going to guess mixed bags.
Argersinger: I think mixed bag is right. If you look at the retail sales that just came out recently, there was huge historical growth in retail sales. Obviously, that’s what you said, people have stimulus money. They have been waiting to go out. People are getting vaccinated, so they’re feeling more comfortable going on shopping. Clearly, we saw a big jump in retail sales recently. But you’re right, it’s kind of, where is that going? Where’s that happening? Big-box stores, malls, department stores, it was already bad coming into COVID, and those places just obviously experienced an even more dire scenario once the pandemic hit last year. Those are going to continue to suffer. I just think, if you looked at how consumers were shopping, they were already moving away from places like that. The idea of driving and going to a place specifically to go shopping is becoming a little bit of a thing of the past.
I think when I look at retail, I mean, look at what’s working in retail, you have situations where there is a reason I’m going to this location beyond just to go shopping. Maybe it’s because there’s a pharmacy there, or there is my favorite salon, or there’s a movie theater I like to go to, or a great restaurant, or a bowling alley. All these reasons why families get out of the house. They’re going to go to places like that, and then there’s adjacent retail to that. Great. One of the other big trends you are seeing is a lot of retail is being transformed into other uses. Simon Property Group, which is the biggest mall in the country, has a habit recently of turning their retail footprints into data centers or warehouses. Amazon has been buying a lot of those. Or they’re taking some of their bigger mall footprints, and actually redeveloping them entirely into, “mixed-use properties,” where you might have some retail, but there’s also maybe multi-family apartments, or condos, or medical offices, senior housing, entertainment venues, things like that. Retail’s going to be repurposed into places where people want to go to have experiences, or because they have a need or want to go there.
The shopping side of it I think is becoming almost ancillary actually to that because we know what people are doing there. They’re shopping online more than ever before. In fact, if you look at e-commerce sales last year 2020, they pulled forward about five years worth of e-commerce growth into one year. We know that’s the trend when it comes to retail. People are shopping more online, they’re buying more fresh produce and restaurant food online, and those trends certainly aren’t going away.
Southwick: All right. Let’s move on and talk about office space. Because my assumption is that people who manage their own office space are running around with their heads on fire amid all the stories basically about how people with office jobs want to keep working from home. If I were working in the office space, I would probably be a little worried.
Argersinger: Well, yeah. If you’re a big office landlord, it was tough and there’s so much uncertainty out there. If you look, for example, at Empire State Realty Trust, which is the real estate investment trust that owns the Empire State Building. Well, they own the Empire State Building, but they also own a lot of office space square footage in Manhattan. Man, they’ve had a tough time. They’ve seen their occupancy plunge, they’ve seen their rental collections drop down to 60%. That’s been tough. So the traditional office landlord in the big city has faced a lot of pressure. There’s just big uncertainty about what’s going to happen. I think we even see a little bit of the uncertainty with us here at The Motley Fool, where we don’t know what our working situation is going to be in a few months. Are we going to be coming into the office regularly like we were before, or is it more of a one or two days per week hybrid situation, or are a lot of us just working from home most of the time? I think that’s the question a lot of offices and businesses face.
Now, there have been some big headlines where companies like Google [Alphabet], Goldman Sachs come to mind where they’ve said, “We prefer people in the office. We think there’s collaboration and culture-building that happens at the office that just doesn’t happen if everyone’s working in their solitary office at home.” I think there’s something to that as well. I think most offices are going to move to more of a hybrid. Employees are definitely going to have more flexibility, and Office Manager is going to be OK with workers maybe coming in one or two days a week. But that also means offices are going to have to be redesigned, or they are going to become the co-sharing places that WeWork was trying to establish before they imploded. Maybe there’s still trying to establish, but the idea of where workers come into the office for one or two days a week to collaborate, and it’s not like these individual offices. It’s so many questions, and it’s just a really tough place I think to invest or be confident in given where the trends are.
Southwick: Let’s move on to talk about industrial. My assumption is, I have no idea how industrial is doing. Well, it just conjures up smokestacks, and factories, and obviously, no clue, no clue how industrial is doing.
Argersinger: [laughs] Well, industrial has undoubtedly been the big winner. I can say any part of the industry has been a winner from the pandemic. When we say industrial real-estate, it’s actually mostly made up of warehouses, logistics centers, flex office spaces, and light manufacturing, especially in the United States. That has absolutely boomed. It was booming even before COVID. It’s booming even more now. A lot of reasons we talked about e-commerce, people buying things online, but we just don’t have enough warehouse space and logistic fulfillment space in this country. I saw a report by CBRE, which is a big commercial real estate analytics firm a little while ago, I think at the end of last year, where they talked about the need for 400 million square feet. We need 400 million square feet of more warehouse space just to handle returns that we don’t currently have right now, and so we need hundreds of millions, in fact, billions of more square feet of warehouse space. People are buying more things online. We need the transportation and warehousing infrastructure to handle it, especially in those last-mile places near cities. If I’m living in Boston or Chicago or Washington, D.C., and I order something online, I want that in a day or two. I’m used to that. That’s an incredible feat. That requires there to be some kind of warehousing fulfillment center within a reasonable distance from where I live. There’s just not a lot of those right now. There’s a huge demand for that space, and it’s not just traditional warehouse and fulfillment, you’ve got cold storage is another one. People are ordering fresh food and groceries and restaurant food online now. So there’s not a lot of warehouse space that handles specifically cold storage.
The other big trend that’s helping industrial is another product of the pandemic is the trend toward near-shoring or in-sourcing. If you think about manufacturing, the United States and most modern economies have prided themselves over the last several decades on just-in-time manufacturing. While the Urban Land Institute came out with a recent article that I thought was really interesting and they talked about just-in-case manufacturing. When you think about medical supplies or vaccines, jeez, face-mask, we had such shortages of those things early on in the pandemic and the reason is because we outsourced a lot of those manufacturing to other countries. There is now a trend toward bringing a lot of that home or at least a percentage of it back to the shores so we can produce it here. We, of course, just don’t have the manufacturing space we used to in the country. That is another trend where we need more industrial space. That side of the real estate market has absolutely boomed and it’s probably going to boom for several more years.
Southwick: Yeah, and it’s interesting how you need industrial space everywhere. Like your point, it’s that last mile shipping, that last mile warehouse. You can’t just go by Wyoming and turn Wyoming into one massive warehouse even though you’ve got land there. You need it just a little bit outside Baltimore, which is like, well, OK, now we don’t have so much space.
Argersinger: Exactly. You don’t have space and think about how expensive that is and warehouses are huge. The average Amazon fulfillment center, I believe, is a 500,000 square feet facility. It covers football fields. How do you find that land or space outside or near major metropolitan centers? It’s very tight and very expensive.
Southwick: Yeah. Last one is hospitality. My assumption is that, oh, wow, they took this one just square on the chin as a result of the pandemic.
Argersinger: Along with retail, just really one of the parts of the real estate market that, in price, suffered the most. The one thing about hospitality, if you’re looking at it from a real estate lens, is your tenants are on one-day leases. I’m in an office where maybe I have a tenant who’s on a multi-year lease or even an apartment building where I’ve tenants that are on a six month lease or a one year lease. It’s not like they can walk out the door and just stop paying rent, there’s things that can be done. That’s not the case for the hotel space. As soon as COVID hit and you had closures come in and states implemented restrictions, people flew home, and man, they just didn’t travel, they didn’t stay at hotels and so occupancy across the whole market just plunged. Really dire situation.
Now, part of it for sure but I also think it’s one part of the real estate market that is going to probably bounce back but the fastest and the hardest. Because as things open up and hopefully by say the second half of this year, and certainly into 2022 as people get comfortable traveling again, either for work or pleasure, or Las Vegas starts hosting conferences again and people are traveling to that, I believe there’s so much pent-up demand for people to travel, especially to places like resorts or destination cities. That I expect is really going to help the hospitality market, hotels. What I’m a little concerned about is the business travel side of that. It’s easy to see people traveling for pleasure and that coming back. What I want to know is, given how successful Zoom has been in the work-from-home trend, do people feel the need to jump on a plane to go to Boise, Idaho, or Los Angeles for a few days to meet a client or to do business? That’s a big outstanding question for me. But certainly, it’s one of those parts where I think there’s a lot of value in hospitality if you pick your right spots.
Southwick: All right, Matt, let’s have you just wrap this up with a bow here. What’s your overall take on real estate right now? Real estate investing, go. [laughs]
Argersinger: Well, I’m really biased here, Alison and Bro, but I work for Millionacres, which is the real estate side of The Motley Fool. I’ve been a real estate investor for many years. I’ve studied the real estate markets and I think it’s a wonderful asset class to invest in. I think every investor should have a percentage of their portfolio in real estate. If you want to go to millionacres.com, there’s tons of free resources there. There’s my pitch to go there but real estate had a tough year in 2020. But interestingly, looking at 2021, real estate is one of the best-performing sectors of the stock market and I bring that up because one of the easiest ways to invest in real estate is to look to invest in Real Estate Investment Trust. REITs as they’re commonly called, they’ve been around since the 1960s. You can think of them as mutual funds of real estate. But the beautiful thing is there’s hundreds of REITs to choose from. They usually often pay nice dividends because they have to pay a high percentage of the pre-tax profits back to investors as dividends so they don’t pay taxes at the federal level. Real Estate Investment Trust have an excellent track record if you go back really decades. The National Association of REITs has actually tracked it. The average REIT has actually outperformed the stock market over time and with much less volatility. It’s a great way to invest in real estate that way and I think that’s one way to get exposure to the market.
Another way that we talked about earlier, Alison, is just buying an investment property. Now, that comes with a lot of additional headaches. Buying REITs with your brokerage accounts is a lot easier and cheaper. But that is a way if you really want to leverage yourself to real estate, you can start with buying real property. One other way that’s come about more recently and really just in the last, say, decade is the idea of crowdfunding. Nowadays, it’s possible for individual investors to invest in syndicated deals or deals that are crowdfunded. In the past, it was impossible for you to invest in, say, an office building in Chicago or a self-storage facility in Denver, Colorado, if you didn’t live there and you didn’t have connections and didn’t have a lot of money. But now you can, you can actually buy equity in those situations. Usually, you have to be an accredited investor to do that, but those regulations are changing all the time and the securities are getting a lot more accessible really by the day. Really three ways, I think, to get started in the real estate market, either with Real Estate Investment Trust, buying your own property, and we could spend hours talking about the challenges of that, or by looking at crowdfunding as a way to do it.
Southwick: Well, Matt, thank you so much for joining us and explaining the real estate market to us. This has been really fascinating and I was also very excited to learn that most of my assumptions were maybe pretty close to being right, so yay me.
Argersinger: I’d say you were pretty spot on, Alison, actually.
Southwick: My gut always has a good sense of what’s going on. All right, Matt, we’d love to have you back on in the future. But thanks again, this has been great.
Argersinger: Thank you.
Southwick: Well, that’s the show. It’s edited corporately by Rick Engdahl. Our email is [email protected] For Robert Brokamp, I’m Alison Southwick. Stay Foolish, everybody!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.