Asset Allocation 101 and Revealing Millionaire Investment Portfolios

Dave:
What’s up, everyone? Welcome to On the Market. I am your host, Dave Meyer, joined by Kathy Fettke. Kathy, how are you?

Kathy:
Great. Happy to be here with you.

Dave:
Likewise. James is also here. James, what’s going on?

James:
Oh, just hanging out in Seattle. It’s been weird. The weather in Seattle’s been better than SoCal.

Dave:
That’s very unusual.

Kathy:
Which is why I’m wearing a sweater. It’s cold and overcast again. It’s June gloom.

Dave:
I mean, you guys know this because we’ve been talking for a while, but it is so hot in my apartment that my camera has stopped working and so have my headphones and I’m just sweating profusely because I live in a five-story walkup without air conditioning and it is hot as hell, right? They just don’t believe in air conditioning in this continent. I even have one. I bought one of those little ones that you sneak out the window, but it’s too loud to run during the recording, so I just have to sweat it out.

Kathy:
Well, this will be a quick show then.

Dave:
Yeah, it’s going to be four minutes.

James:
Dave’s going to have abs by the end of the show.

Dave:
Yeah, if I was like a high school wrestler, I would be sitting in this room for an hour to get down to my fighting weight.
All right. Well, we do have a great show today. I’m really excited about this one. This is going to be really cool. So for the most of the show, what we’re going to talk about is portfolio allocation. And we’re not just talking about real estate. We’re going to be talking about how Kathy, James, and myself all allocate our resources, our different capital funds that we have available into different asset classes. So we’ll be talking about real estate, but we’ll also be talking about crypto. We’ll be talking about stock market, we’ll be talking about lending and talk about why these make these decisions, how we think about building a portfolio that is optimized for returns, but also takes into counter respective risk tolerances and all that. So I’m super excited to talk about that and we’re going to get into that in just a minute.
But in the spirit of this show, talking about different assets, we’re going to play a quick game to see how well the two of you track the value of different assets that aren’t real estate. So this is not your area of expertise over the last couple of years. So do you guys track it? Do you think you’re going to know these answers? What gold goes for Bitcoin, that kind of stuff?

Kathy:
I don’t track it. I have an idea.

Dave:
All right.

James:
I have a tendency to lose money on everything except for real estate, so I don’t really pay attention to it anymore.

Dave:
We’ll talk about that in a minute. I want to get back to that. So what we’re going to do for this game is you have to guess month over month in the last month how much have these different assets moved up or down. So number one, James, I’m going to give this to you. Gold per ounce. How much has gold gone up in the last month? We recording this, just so everyone knows, in the middle of June.

James:
I’m guessing that gold went up like quarter percent.

Dave:
Kathy?

Kathy:
I want to say a little bit higher because of all the insanity. So let’s say 3%.

Dave:
It has actually gone down 2.3% gold. But you’re both right that it’s gone at a big run this year. Gold has definitely seen its value go up, but perhaps as inflation has started to abate a little bit, demand for gold is going down as well. What about Bitcoin, James? Where do you think Bitcoin’s at? I’m not even going to ask you percentage. How much do you think one Bitcoin costs?

James:
Ooh, I know it went on a run. I think it’s around like 22 grand right now. 23 grand.

Dave:
And any guesses if it’s gone up or down month over month?

James:
Well, it went on a run and I think it went up like a good 10, 15%, but I think it’s cool back down. And so I’m guessing it’s down 3% to 4. If gold’s down 2, I bet you Bitcoin’s down 4.

Dave:
Okay. Kathy, what do you think?

Kathy:
I’m going to be so wrong. I’m going to say that Bitcoins around 12,000 and that it’s just sitting there doing nothing, no change.

Dave:
Well, Kathy, you are correct in that you are very wrong. It is James, you’re a lot closer. It is 26,000 for Bitcoin. It was at around 60 grand at one point. But it’s been in the mid 20,000s for the last year or so, but it’s down 3.5% month over month. Probably some of the same forces that are pushing gold down. Kathy, what about the S&P 500? One of the best indexes to track the stock market.

Kathy:
There’s no rhyme or reason to the stock market these days. So I’m going to say it’s up 5%.

Dave:
James? This is just in the last month.

James:
In the last month, I think it’s down about 1.5%.

Dave:
All right, Kathy, you totally redeemed yourself. It is up 6% month over month. So there you have it.

Kathy:
See, that’s why I passed high school. I guessed well.

Dave:
Yes, you and me both. So we see gold and Bitcoin both down a little bit. Stock market is up. And we are going to get into all these different asset classes and why we do or don’t invest in them in just a minute. But first we’re going to take a quick break.
All right, everyone, welcome back to our show on our investment portfolio allocation. We’re going to talk a little bit now just… We’re going to start the show by just having all three of us. We’re going to run through rough percentages and how much of our total investments are in different asset classes like gold, crypto, stocks, whatever. So James, let’s start with you. How do you estimate your portfolio allocation right now?

James:
So my portfolio, Actually, I spend a lot of time looking at that every year. Basically, for the first 10 years of our career, we saved a lot of cash. That was my whole thing. I had a really bad experience in 2008. And so when you go through a bad experience, you start to do things a lot in the opposite way to where I don’t carry a lot of debt. I like to keep cash on hands and I like to be cash accessible because it was all locked up in 2008. So right now with my portfolio, I would say right now we have about 40% in holds, which are apartment buildings. We have nearly a thousand doors in the Pacific Northwest, and that’s where a lot of capital sits. I also leave a lot my own personal rentals. And then part of that will be towards a primary house that we’re going to be buying very soon because we just sold one of ours.
I keep, right now, I’m actually of my total net worth, I stay about 25% in cash accessible investing. And that’s in hard money space where I’m issuing out on short term. It’s basically anything that yields above 10%. So it’s a hard money notes, joint venture, flips, more passive income where I’m providing the financing for people. That has been one of the best ways I’ve been able to balance out my portfolio because the reason I like to have that is that’s constant income always coming in and it’s less effective by market changes at that point. So when we went through this really kind of nasty time from July to December, I had no effect on me whatsoever because of that passive high yielding income.
And so I like to keep it there because it helps service my payments by costs. But then at the same time, I have 25% of my total cash there, but we have probably 40% of the leftover cash and holdings. And then we keep another 20% roughly that goes back into our business because our business does short term development, which is fix and flip development which are high yield investments that we’re targeting like 30 to 40% returns and [inaudible 00:07:43]. And so I would say as a investor, I’m a very high risk investor, but we only invest in stuff that we know really well.

Dave:
Well, I mean, think it’s evident that you’re a high risk investor. The fact that you call a short term loan like a hard money loan cash. I think most people would consider that an investment and not cash. But that to you, if that’s as good as cash, you must be making some pretty good loans.

James:
If you underwrite it right, it is cash. Or it’s got cash with even better kicker. Because I look at those as they’re paying me a high yield, my hard money income pays for 100% of my living expense plus some. And so everything else is a bonus to me that I can reinvest at that point. But I consider it’s cash because I underwrite it correctly. And honestly, if the loan goes bad, I’m probably going to make double what I would’ve made even being the lender. So that’s why I consider it cash.

Dave:
And when I’m looking at you, James and Kathy both wrote out there portfolio allocations before this. You estimate you have 1%, a shocking 1% of your net worth in the stock market. Is that right?

James:
Yeah, that was kind of a rounding up thing. It’s probably like a 4. Honestly, I have some money still sitting on a Tesla short that I just won’t give up on. And I’ve totally gotten hammered on this thing. I’ve lost more money on that deal than I’ve… Nah, it has not gone good, but it’s more just me hanging in there.

Kathy:
Kathy Wood just sold her Tesla stock and she was bullish. So you could be onto something here.

James:
Well, I unfortunately shorted it when it was like at 300 a share though, so I got a long list.

Dave:
You got a list to go. You got a long way to go. All right. And crypto, you said 1%. So you’re really real estate heavy. Even it’s in loans, if it’s in your business, it’s basically all in real estate.

James:
It is in real estate. It’s what I know, it’s what I understand. I’m a person like to be in control of my own destiny. If something goes wrong, I can get mad at myself. I don’t like giving my capital and my investments over to a third party like a company subject to goal pricing. I want to be in control. And if something goes wrong, I want to be able to jump in and mitigate that, which is with real estate, if something’s going wrong, I can switch the plan and it’s my call, my hands are on it. If something goes wrong with Bitcoin, there’s nothing I can do besides sell it on the way down. And so that’s the real reason that I do it. I just believe that hardworking gets you a long ways in life and you can work your way out of a hole. And that’s why I love real estate.

Dave:
All right. What about you, Kathy? How do you allocate your resources?

Kathy:
Oh, this is one of those, “Do as I say, not as I do” moments. I feel like the contractor that never finishes their own house. So I constantly preach diversification. I’m so non-diversified. It’s embarrassing. Yes, 70% in real estate, I put 5% in stocks, and that’s just not true. It’s probably closer to 1%. And Rich’s plays on his phone. It’s just more like a game. Bonds, zero. And this is where I again, do as I say, not as I do. I have zero in bonds and yet we have cash that’s for reserves, and it really should be in something besides cash. And that could be short term bonds. So zero in bonds.
Commodities, we have gold. That’s mostly people look at gold or some people think it’s an investment. And I don’t agree at all. I think it’s just an insurance policy really, is more of a backup in case the US dollar just becomes totally worthless someday. Of course, if it did, there would be a new currency in the US. It’s not like the US is going to say, “You know what? We just don’t have a currency.” So it’s just more psychological of knowing that if everything fell apart, a few chunks of gold might help during the zombie apocalypse or something. But I’ve never seen it as an investment.
And crypto, Rich and I had a big fight over this and he won. He just bought some crypto right at the peak and we were holding it. But again, it’s kind of just not an investment. More of the hedge, which I think a lot of people bought crypto for, again, thinking that maybe the currency would completely fail. Collectibles, nah. I mean wine, if you’re going to have wine, drink it. I don’t understand that.

Dave:
I totally agree.

James:
How about luxury watches? Luxury collectibles?

Kathy:
Probably, but no. I just like real estate. Like you said, I understand it. I look at just a boring, boring hold of real estate. Well, we’ll talk about that later. But cash, about 20% in cash. And again, it’s not being used the way it should be. And that’s really just comes down to being busy and lazy with it. So Rich and I go to sit down and really focus on, “Okay, what’s the next way that we want to… How do we want our portfolio to look?” You could have your head down doing the thing that you’re doing for a long time and not look up and say, “Are we there? And this is where we want to be you?” We sit down every year with our goals and we look at our portfolio, but I think it’s time to just maybe look at alternative assets or see what a financial planner would say, which I haven’t talked to one in 20 years.

Dave:
All right. Well, both of you are along the same lines. We’re going to get into how you allocate your real estate portfolio shortly, because I’m curious how much of your real estate is in short-term rentals or long-term rentals or syndications or what. So we’ll get into that in a minute. But I just have to give voice to the reasonable amount of diversification crowd over here. I consider myself fairly heavy in real estate, I guess. I’d say that 60, 65% of my net worth is probably in real estate with about 25% in stocks and bonds. So to you guys, that probably sounds crazy, but I think to most people, the inverse sounds nuts.
I am holding probably around 15% in cash right now, which is more than I think a financial advisor would tell you to. But that’s honestly, just again, like Kathy said, “Do as I say, not as I do.” Just trying to be opportunistic about the commercial real estate market and just holding a little bit more dry powder than I normally would. But I guess I just feel like I worry about holding all of my money in a single asset class, even if I do believe real estate is the best thing to invest in long term. I also just get FOMO. I just hear about the stock market and I’m like, “I got to get in on that.” Sometimes it’s up, sometimes it’s down. But I don’t want to miss opportunities if they go on some of these huge runs. So I think I am probably a little bit more diversified than either of you.

James:
FOMO gets me in trouble.

Kathy:
Me too.

James:
I just won’t do it anymore. Bitcoin stocks, no way. That FOMO got me in deep trouble.

Dave:
Did you ever invest in stocks?

James:
Yeah, and it was terrible. I had a TD Ameritrade app. It was like blackjack for me. It was like I wake up at 1:00 in the morning and making trades. So I was like, “Ah, I’m going to buy this.” I’m too much of a trader. Dang. No, I did crush it during COVID.

Dave:
But so did that everyone.

James:
I know. I thought I was really smart. And then I learned that I was not so smart whatsoever.

Dave:
Yeah, I don’t blame you. I mean, I think being invested in the stock market, unless you’re really going to learn it, you’re better off just buying index funds and doing something extremely boring.

Kathy:
Oh, with that said, I just have to tell you a quick story that one of my surf buddies had gone through a divorce and he came to me and he’s like, “Ah, after the divorce, I probably have, I don’t know, $50,000 left. what should I do with it?” And I’m like, “Oh, there’s not a lot of real estate you could buy with that unless you do the Jamil type investing. I talked to him a year later, I’m like, “What did you end up doing?” He goes, “Oh, I put it in Tesla and now it’s 500,000.”

Dave:
Oh my God.

Kathy:
So sometimes people pick the right stock. Obviously, there’s risk to it, but he timed it well.

Dave:
Oh, totally. Do you guys know the stock NVIDIA, the chipmaker?

Kathy:
Oh yeah.

Dave:
It’s like single-handedly leading the stock market rally right now and a friend of mine told me to buy it. A year and a half ago I bought a bunch of it. It’s going crazy.

Kathy:
Wow.

Dave:
Don’t ask me about the other stocks I bought, but those are not even close. But this one, right now as of today it’s looking pretty good. So I’m going to brag about it.

Kathy:
Yeah, good on you for getting that. Too late now.

Dave:
All right. So since both of you are really primarily invested almost entirely in real estate, Kathy, I know you do syndications, you have funds. How do you allocate money within your real estate portfolio and how do you think about risk versus reward and different opportunities?

Kathy:
Yeah, I haven’t invested in other people’s syndications yet, so that I look forward to doing. We just have our own. As a syndicator, you have to have money set aside to invest in your own or else people might question it. So at some point we had about, I don’t know, 15 syndications going. So that’s where my money went, any extra money. I would say primarily it’s just boring old buy and hold rental real estate. We have now three short term rentals. Percentage wise, I don’t know, that’s gaining. That’s gaining because we’re looking at another one because again, the tax benefits are so fantastic there. But the bulk of it really is boring old buy and hold, which I love.

Dave:
So why short-term rentals? You mentioned the tax benefits, but are there other reasons you chose to diversify out of the traditional rentals and into short-terms?

Kathy:
Yeah, short-term rentals were kind of an accident for us. We have a guest house and we thought, “Well, let’s just see. Let’s just put it on the market” because we found that a lot of our nephews were just sort of camping out there. So we thought, “Why don’t we put it on the market?” And that was just more to see. And then we were absolutely blown away and booked immediately. And of course this was during COVID where a guest house was ideal because you didn’t have anyone near you, you had your own air. So we were booked constantly. And then we were like, “Well, this is amazing. Let’s put another little unit on the property.” And same thing, so it’s actually on our property. We discovered those two little rentals pay for our entire housing situation, plus the gardeners, which are expensive.
So it was so great that we decided to do another one. That one has been definitely slower because at least in the area we’re in, that one’s in Park City, it’s renting and it’s paying for itself, but it’s slower than I expected it would be. But we’re still happy with it because that year one, a lot of people are getting into short term rentals because there’s just so many deductions that first year. You get to deduct the cost of the furniture. I don’t want to talk tax stuff, but definitely bring a CPA on to talk about the sort of loophole there is right now with short-term rentals. It’s a fantastic way to get massive depreciation year one.

Dave:
So Kathy, we did bring on a CPA expert just to talk about that. It’s episode 96 with Brandon Hall where we talk about some of the tax benefits of owning a short-term rental.

Kathy:
I knew that. I’m just kidding.

Dave:
Of course.

Kathy:
I will definitely listen to that.

Dave:
You listen to every episode. I know.

Kathy:
I try. I try. I just missed that one somehow and I can’t wait. The firm actually does the accounting for our single family rental fund, so I love them.

Dave:
Oh yeah, they’re awesome.

Kathy:
So good, yeah.

Dave:
Okay. So what about when you talk about diversification within real estate, you can consider it between strategies like short-term rental, long-term rental. What about geographic diversification? Because I know you invest in a couple of different markets. How does that factor into your planning?

Kathy:
Absolutely I’m bullish on geographic diversification. That’s what we’ve been teaching for years is so many people… I started in California, so many people would own a $1 million property. Maybe they paid 300,000 for it, but it’s worth a million, but they’re still getting maybe 2,500 in rent per month. And to try to get those people to understand that that’s not diversification. If there’s a vacancy, you’re 100% out of luck. But if you took that million dollars and diversified it with five properties nationwide, if you have any problems with it, you’ve got four other ones to carry you like a multifamily. Why not be in different markets where there’s different job centers, and if there’s a recession, maybe one area would be affected, but the other one might not be? Of course with climate change, having that diversification is really important too. You don’t know where the storm’s going to hit, so you want to make sure that you’ve got some properties that won’t be affected.

Dave:
So you do diversify. We found it. We found where you diversify, Kathy. All right. There we go.

Kathy:
Yeah, but there was one year where I was just so embarrassed because I teach, teach, teach, and then don’t do. But we had a house on a road, and then we were building another house on that same road. And then I had my office at the bottom of the road, and that was the year that the fires hit Malibu and came down that road.

Dave:
Wow.

Kathy:
So I’m looking at my friends going, “I cannot believe I teach diversification. I have three properties on one street where the fire’s coming.” Somehow all three properties were fine. It was a miracle.

Dave:
Wow. Lucky.

Kathy:
It really was because the homes next to it were burned. But that is another reason why, like I said, with climate change or just with normal disasters that happen, I mean I live in earthquake country, I wouldn’t want a whole bunch of properties in LA or San Francisco on a fault line, and people do.

Dave:
Well, this is really good. I mean, I’m glad we have the two of you here because I think a lot about diversification in real estate and how to do it, and I think there’s two schools of thought that people have. One is to sort of stick with a single strategy and then diversify geographically, and that sounds like that’s what Kathy’s doing. But the other way to doing it is sort of picking one market and then diversifying between asset classes and different strategies, which James, is basically what you do, right?

James:
Yeah. I am very diversified in my real estate portfolio, hence why I have 98% of my funds in real estate. But it is spread out and it’s spread out in all different types of classes. I really learned this in 2008 to diversify what I was doing, because in 2008 I was doing two things. I was only flipping homes and I was only buying BRRRR properties that I could finance all my money out of. And what happened is when the market slowed down, the rent stopped paying for themselves, the values plummeted, all my cash. I had financed and put too much debt on these properties and I was just sucking wind all the way around. The flip went bad, the rental went bad.
And so what I’ve done, it’s a little bit complex, but I keep a chunk of money in hard money short term notes that pay me passive income. That is one portfolio that I put it in. I keep a big chunk of money in there because I want that to be cash accessible and I feel like it’s the lowest risk because the average note loan to value that I’m lending on is 55% loan to value, and I’m making a 12% yield on that money. And so if the wheels come off and the market crashes, I’m still in a very good protected position and I have access to cash. So if the market does fall apart in crashes, then I can pull it out and go buy up as much as I want. Because one thing is I didn’t have enough cash in 2008 and I wish I would’ve had it sitting there because I would not be working right now if that would’ve been the case.

Dave:
So James, when you were choosing to diversify, why did you choose to stick basically with one city, one location and basically not diversify geographically, but instead to sort of stick to one area, but diversify the types of deals that you do in that one area?

James:
It’s for mitigation of risk. I have resources, access to resources, and I understand the market, the Seattle market better than I understand any other market in the United States. When you have access to resources and you have abilities to get things completed, it reduces the risk on a market. Now, if I’m lending money in a different state where I’m buying properties in a different state and I don’t have the same resources that I have in Washington, that’s a riskier investment for me. Because if for some reason I need to take control of that asset and reposition it, if I don’t have the skillset or the tools or the resources, that asset can go really bad. We see that happen with investors all the time. They buy something they don’t know. What they bought was a good investment, but they didn’t know how to execute on it, and it turned into a very poor investment. So the fact that I can execute on things reduces my risk dramatically so I can get a high yield with a lower risk in my opinion.

Dave:
So this is basically how you guys are allocating resources now, but I want to just turn to what you recommend to other investors. If you were getting started today, Kathy, let’s just assign a random amount of money. Let’s say you had $100,000 today. How would you allocate that if you were a new investor?

Kathy:
Such a good question. So much would depend on what the goal is of that person and the age. We talked about diversification and risk tolerance. As I get older, I’m way more conservative and I want to be way more diversified and take less risk. But when you’re young, it’s okay to take a little more risk. So let’s just say that it’s a 30-year-old couple that just got $100,000 bonus and they’re trying to build maybe their… I mean, my first step would be get a fourplex or something that you live in because you could put so little down. If you’re willing to be uncomfortable for a little while, get an FHA loan, put 3% down and get a fourplex and rent out the other units. You don’t have to live in that forever and you wouldn’t have to use very much of that 100,000.
But let’s say you already have your house, that’s not the issue. Then I would probably, again, depending on your time, if I had extra time or a spouse who’s not working, I probably would study the sub two, the subject two, not having to use that money or financing. Having that money just as reserves, but being able to acquire properties with no money down. That’s how I started with no money down deals, but that’s because we could do 100% financing back then. So that would be something I would study if I had time.
If I didn’t have time, I had a full-time job and just needed to invest, I would go into the areas like I’ve said that are on that list of highest job growth, highest population growth, but still the average person can afford the average rent in the area, which are the areas that we’re in, Dallas. I like Salt Lake, I love Tampa. Indianapolis has been a really strong market, parts of Ohio, in the parts of Ohio where it’s growing. So you wouldn’t be able to buy a lot, but if you were able to get into a growth area, it wouldn’t take too long to be able to refi, get your money out again if you don’t have the time to do the work and find an old property, fix it up and create your own equity. Then if you’re in a growth market, it won’t be long before there likely is equity and you can refi and go do it again.

Dave:
It’s good advice.

Kathy:
But again, like I said, it’s so different for everybody. Everybody’s circumstances are different.

Dave:
Well, James, what if for you, if you had 100,000 to invest right now, what asset class would you put it into?

James:
Oh, I mean for me it’s a no-brainer. It would be development or fix and flip. That is going to get you the highest possible cash-on-cash return. It’s going to get you the most growth in that first year. For me, I’m trying to get to my end goal with passive income, you need liquidity and you need money to be able to get you that right amount of passive income, right? The bigger your pond or your pool of money, the bigger your returns can be and the more income you can get. But that’s how you really change. Fix and flip can earn me 40 to 50% returns on my money in that first year. That 100 can turn into 150 and then the 150 can turn into almost… It is going to turn into 210 at that point. 220. I can domino effect that and then start repositioning it.
But after you get it up a little bit, then you want to start balancing it out. That’s what we’ve done with our portfolios. If I had 100 grand and I wanted to balance it out, I would do 15% in hard money. That’s a short term six month note that’s paying me a high yield. I then would buy apartments with another 20% of that because I like apartments. They’re efficient, they’re stable. They have growth, especially in our Seattle market. The rents are strong, population’s growing. That’s going up. The third thing I do is I hedge against what I do at my business and I would take another 10% and I go buy small properties, two to four units that hedge against my larger properties. So I like to balance out my portfolio. I don’t believe in buying just one asset class with rental properties. I think you need to be in two tiers because typically multifamily and single family swing a little bit different.

Dave:
You’re saying that right now for sure.

James:
Yeah. And it balances you out. And so at our company, we own about a thousand doors. I own that with my business partner. That’s all company funds. What I buy personally is a complete hedge against that. Everything I own is below 10 units and they’re small and they value add and they’re more equity position plays because my big portfolios giving me the cash flow, my small ones give me the equity that I’m going to trade for more cash flow later. And then another 30% we put in high yield investments, which is your development, your fix and flip that are going to get us 40, 50% growth that’s higher risk, but the growth is potentially there. That keeps that growing to keep putting money in those other buckets. And so I like to spread it out.
And then the last little 10%, I do syndicating myself just to get the tax break, but I think if you have a hundred grand, you should break it into different buckets and let the buckets grow themselves and then you’ll become a lot more balanced and less susceptible to risk.

Kathy:
I so agree with everything you’re saying. There’s people that just literally can’t do that. They’re maybe professional athletes or they’re actors or they’re attorneys, dentists, they just can’t. They don’t have the time to develop anything or flip anything. That’s why I love to just use some really boring numbers here. Let’s say a $250,000 rental property, to me that’s on the high side. I like to stay under 200 when I can. It’s harder to do these days. But if that property just went up 5%, and let’s just take Tampa, that’s an area that this last year, one of the hardest times to be in real estate, it did go up 5%. That value on a $250,000 property is it’s gone up $12,000 and all you did was nothing.
But if you look at the down payment, the percentage, the cash-on-cash return, so let’s say you had to put $50,000 down to get this $250,000 property, you’re making a 25% return on the cash you invested, and this is not including the cash flow that you’re getting or the loan pay down or the tax benefits. That’s not even including that. Just on a 5% increase in a $250,000 property, the cash-on-cash return is going to be really high. So again, that’s just 100%, James, if people have the time and the energy and the ability to flip and develop, that’s where you’re going to make your money. But if you don’t, just get in the game. Just buy a good property and let it grow for you.

Dave:
Yeah, I think that’s a very safe strategy. I think I hear, Kathy, your approach is a little bit safer, but risk and return are related, and so you’re probably not eligible for the sort of types of returns that James is talking about. If you’re doing development, it’s riskier, but you can grow that capital faster. And as James said, he’s a bit more comfortable with risk than probably the average person. James, I’m curious, given the market conditions, would you still recommend development and flipping to people?

James:
Yeah, because there’s always buys.

Dave:
Even newbies? I should ask.

James:
Yeah, and there’s always buys out there. We’ve seen better buys. I’ve been talking a lot about how Seattle’s market is rebounding and it is. When people got nervous and they sat on the sidelines, they missed a huge opportunity to make some serious wealth. I mean, if someone would’ve bought six months ago on some of these fix and flip properties, they’re going to make a hundred grand more than they were performing. That’s a huge liquidity increase for people. But it comes down to risk in the market. We had a lot more cash in the development, in the fix and flip market the last three years because rates were so low we really believed in that section. As the market changes around, we’re moving the money around. That’s why I’m sitting so heavy with hard money notes right now because that’s why I take my portfolio and based on what’s going on in the market, because every market changes, there are different opportunities for every market, That pie chart is going to change for my allocations at that point.
We were allocating 20% percent family a couple years ago because I saw the growth there. Now I’m buying way less because it’s harder to cashflow it right now. But the apartments we’ve allocated more cash to because we’re seeing better deal flow. So you got to move around your money too if you really want to spread it out to wherever the opportunity is. Every market will have a different opportunity, but you got to adjust your investing principles at that point.

Dave:
Kathy, with a hundred grand, do you think you could diversify? If you had to do it, would you take… Like you said, if you bought a $200,000 property, you put 25% down, you might be able to buy two properties-ish. Would you buy it in two separate places or in one geography in today’s market?

Kathy:
I think with two properties, it doesn’t matter if you find one market that you really like and you like that you trust the property management company and you see the job and population growth. I think it’s okay to have two properties in one area. Having one property in two different cities, it just takes more work, right? Now you have to find two really good property management companies and build teams in two areas. So just starting out, I think if you just hone in on a market that has all the things you need and want, then why not get both there? You’re not diversified. Obviously if diversification’s really important and you’re older, then I would maybe split it up. If you’re younger, I wouldn’t worry about it too much. You have time.

Dave:
Yeah, absolutely. Well, if it were up to me, I think I would probably follow your advice a little bit more, Kathy. I think buying a multifamily, a small multifamily is a really good balance of risk and reward in almost any market. And people are always like, “Oh, you’d be uncomfortable for a few years. I’ve done it. It’s really not that bad.” The property. People make it out like it’s going to be this horrible situation. It’s honestly fine.

Kathy:
Yeah, I mean, that’s how we started. We bought a house that was really big, too big for us, but I could see that it had an in-law suite and it had another little section, so we turned it into a triplex. And same thing, we’re still doing it today, house hacking in a way. And it wasn’t uncomfortable. In fact, we had friends living there and they brought their kids and we were one big happy commune where our kids would play together, but we had separate areas. It was great.

Dave:
That sounds nice. I want to grow up there. Well, I’m just going to say one last thing about resource allocation that I think I’ve mentioned on a few podcasts. I can’t remember if it’s On The Market or somewhere else. But I think it’s a little bit controversial with the real estate crowd. But I do think for the first time in my real estate investing career, and for probably 15 years at least, there are reasonable ways to get cashflow outside of real estate. And I know this sounds boring, but you can get 5% on a government bond right now, and I think it’s a really interesting competition for real estate. If you look at cap rates for example, for multifamily, it’s around 5%. And so you’re getting the same amount of cashflow on a multifamily property, which has a lot more risk than at a government bond.
That’s probably going to obviously push down multifamily prices because that can’t last. But I do think it’s a reasonable thing for people to keep some money in a savings account or a bond portfolio for the first time in a long time, especially if you’re risk averse. If you add a hundred grand and you wanted to invest 50 of it into a rental property like Kathy was talking about or into a flip and keep some money in a very safe, almost risk-free asset, it’s not a bad idea. We’re seeing inflation is coming down for the first time in a long time. Bond yields and risk-free assets might be offering a positive return over inflation. So it’s just something to consider if you are a relatively risk averse person. I’m not saying you should do that. I still think you should buy real estate and get into the game. But if you’re worried about putting all your money into a single asset class, there are relatively safe ways to actually earn a inflation adjusted return right now. And it’s something maybe you should consider.

Kathy:
If you’re old.

Dave:
Yeah, if you think I’m crazy, obviously.

Kathy:
No, really playing it safe when you’re older is really important. You don’t want to start over when you’re 60. And I’ve seen people do it. I sure don’t want to. But if that same person were young and really did the research and bought a property in an area where there’s so much demand for rentals, you have a good property manager, the difference would be $25,000 in equity gain at a 5% increase. At a 5% appreciation rate, they’d have $25,000 if they bought two properties versus a $5,000 gain in bonds.

Dave:
Yeah. Yeah. I mean, you’re only getting cashflow. They don’t appreciate. I mean, they can’t appreciate. But they don’t appreciate real estate. I just think that when you look at the market, a lot of people are nervous, and I still think that buying real estate makes the most sense. That’s what I do. But for years, we are in this situation where you couldn’t be patient. You had to invest your money because inflation was eating away at your cash in the bank. And that dynamic is changing. And that’s sort of all I mean, is that I feel more comfortable personally holding cash in the form of bonds right now and waiting to see what happens in the commercial real estate market because my money’s not losing value in the bank in the same way that it was a year ago or two years ago. And it allows you to be just a little bit more patient than I felt two years ago when you’re just seeing your money to decrease in value by 10% just sitting in the bank. You know what I mean?

Kathy:
Yep, guilty of that for sure.

Dave:
Yeah. All right. Well, any last thoughts from either of you on portfolio allocation or advice to our listeners?

James:
The one thing I would say is what I just talked about, that’s built off a plan that started with building income first, and then we adjusted that plan in. I would think the only thing I really want to emphasize to newer investors, especially ones that have been making money the last two years, is save your money and create a plan for it because the money comes in, but it goes as just as fast. And if you don’t set that plan up and put yourself on a disciplined schedule of acquiring real estate or investing that money, it’s going to blow up in smoke. So just make sure you put a plan together. If you’re making money, plan it out. You don’t want to be looking down the road in five years and be like, “Man, what happened to all the money I made?” It’s gone. Toys are great, but assets are better.

Dave:
James, you’re going to love my new book.

James:
Is that what it’s called?

Dave:
No. It’s just all about financial planning for real estate investors, but that doesn’t come out until the fall, so hopefully all of you buy it. And James, maybe you’ll get a pre-read, write a little blurb for me.

James:
I’m 100% in. And I love your last book. It’s getting past around my office’ sales training.

Dave:
Oh, thank you. Well, I’ve got about a hundred of them if you want some extra copies.

James:
Oh, I got my own share that we’re passing around.

Dave:
All right. Well, thank you both so much for joining. I appreciate you sharing all this information about how you think about risk reward and balancing your own portfolio. If people have questions for you, Kathy, where should they reach out?

Kathy:
You can find me at realwealth.com. That’s our website. That’s our company. And you can join there for free or on Instagram at @kathyfettke.

Dave:
And James, what about you?

James:
Probably best way’s on Instagram, @jdainflips, or jamesdainard.com.

Dave:
All right. And I am @thedatadeli on Instagram, or you can always find me on BiggerPockets as well. Thank you all so much for listening. We appreciate you all and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.