Tips for Real Estate Investors

Dave Meyer is the VP of growth and analytics at BiggerPockets and the author of Start with Strategy: Craft Your Personal Real Estate Portfolio for Lasting Financial Freedom.

Motley Fool host Deidre Woollard caught up with Meyer to discuss:

• Creating a vision for your investing plan.
• "The HGTV disease."
• Risk mitigation strategies for real estate investors.
• A common way that real estate investors start out.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 28, 2024.

David Meyer: A big part of the book is basically drawing out a business plan for yourself for real estate investing. Whether you're investing in stocks, real estate, whatever, I encourage you to do that. To think about, you know, resource allocation, risk, goals, vision, what your values are, what your mission statement is. Doing those exercises to me has really changed the way I invest. But I think more importantly, they've changed the way I operate my life on a day-to-day basis.

Mary Long: I'm Mary Long, and that's Dave Meyer, vice president of growth and analytics at BiggerPockets and a returning guest on Motley Fool Money. Deidre Woollard caught up with him to talk about his new book, Start With Strategy. They discussed the data on how rental properties can help investors build wealth, the risks of diversifying in different markets, and how real estate investors think about their cash position.

Deidre Woollard: I like this book. I've read some of your books before, you've written a few of them, but this one feels like a more of a true A-to-Z guide for me. One of the things I really loved is you started the book with this idea of vision. I feel like we don't necessarily talk about vision other than like we want to make money. But whether you're investing in real estate or stocks or anything else, vision, it's important. What does it mean to have a vision for your investing?

David Meyer: Well, I think with most goals or problems that you're trying to solve in your life, you want to start with an end in mind. To have an idea of what you're actually trying to accomplish and all the work that you're putting into something. What is that actually going to get you at the end of the day? I think that's particularly true in investing, in real estate investing, because unlike in purchasing equities or bonds like you can't just open an app and do it. Real estate investing is a bit more entrepreneurship. It's really important for people to understand what they're trying to accomplish, because only then can you back into the right tactics and the right strategies that work for you. I think it's also super important because people's idea of wealthy, like you said, could be vastly different. Some people are investing just to move up their retirement date by 10 years or five years. Some people want to be tycoons, and where you fall on that spectrum will really impact the decisions that you should be making about your real estate portfolio and your investing strategy altogether.

Deidre Woollard: Yeah, I think that's a really important point because you have to know when you want the money to come in, essentially. Also, not everybody does have the same goals, and your goals may be more modest than somebody else's, and I think that's OK. I think sometimes in both the real estate investing industry and in stock investing, there's so much focus on wealth acquisition without the idea of what the wealth is for. That's really what we're all here for. There's so many points in the book that I feel are applicable to all kinds of investors, and one of the ones that I really loved in this book particularly, is the idea that you keep your whole portfolio in mind all along the way so you're balancing your risk and return, not just from this property or this stock, but really all the way through as a whole. Easy to start out with when you've got one property or just a small portfolio of stocks. Harder as a portfolio gains complexity. So you've got the vision and then you have to build in the portfolio, how do those two work together?

David Meyer: Yeah, that's a great question. I think when you meet with a financial planner or advisor for example, and you mostly invest in equities, this is a question that comes up. People talk about diversification a lot. They talk about what your time horizon is. For one reason or another, in real estate, that just doesn't seem to be a topic that's discussed a lot. People talk about just buying deals and buying deals. Too often I've found that that's done without real consideration to risk tolerance, and to the different types of income and wealth that real estate investing can help you obtain. Unlike some other investments, real estate can earn you cash flow, it can have huge capital gains and appreciation. It also works by paying down your loan and there's tax benefits and to each investor they're going to value those benefits differently. So I think it's really important to start by understanding the broadest spectrum of ways that you can invest in real estate and the various benefits that different tactics enjoy, and then matching those up with your vision to make sure that you're buying the right types of properties and running your business in a way that is actually moving you toward your vision. Not just sort of buying deals for the sake of them and to increase your unit count, which is something that definitely happens in this industry.

Deidre Woollard: Another thing I think about with stock investing, too, and with real estate investing as well, is time. It's not that every investment works well if you hold it long enough, but it's close because you did an analysis and it showed if you bought and held just about any rental property for 11 years, anytime within the last 50 years, there was a close to zero chance you'd lose money. I love that you brought that analysis into the book because it's simple to understand. Yet this is hard to practice. Life gets in the way. You've talked to a lot of investors. What did they tell you is the biggest challenge in those long-term real estate holds?

David Meyer: I think the challenge that most people have is maintaining proper liquidity and cash flow. When you look at the spectrum of assets that you can invest in, real estate is probably in the middle or more toward the less liquid side of the spectrum. Liquidity for everyone listening, I consider, stocks and bonds fairly liquid, cash is obviously liquid. Real estate, it's harder to sell than those types of things. Not quite as hard as a different type of business, or collectibles or anything like that. But I think it's really important for people to create a defensive posture around a lot of long-term holds to make sure that they can choose the right time to sell. Because like in the analysis shows, there's certainly variants in the housing market. Prices go up. They go down roughly once out of every seven or eight years over the last 100 years. If you don't sell in those one out of seven years, then you're probably going to do pretty well. The only reason you might sell during those adverse conditions is if you don't have enough cash flow or you don't have enough cash reserves to cover an unforeseen expense. So it's important for investors to not overextend themselves and take all of their cash flow and reinvest it quickly like you might with dividends. You might just take that money and put it right back into the stock market. With real estate, I think it's important to maintain relatively large levels of cash reserves so that if things don't go well, you have these big capital expenses like a new roof that can cost 25 grand. You need to have that money on hand, one, to just make sure that the property is livable and safe for your tenants. But of course, also so that you don't have to sell during one of those adverse times.

Deidre Woollard: Yeah, I think that that's an important point that you made there about that is the weird things that can happen to a house is the unknown there, whether it's the roof or the water heater, or any of the lovely things that happen when you own property. It's tough. So I think one of the things that ties into that and that you talk about so much in the book is self-knowledge. I think self-knowledge is really important for investors and honest self-knowledge. You talk about like what you value, your risk tolerance, your skill set. Certainly, if you want to repair that roof on your own, which I would not recommend. Time horizon, assets, liability. So talk a little bit about the self-inventory and why that's really an important investing step.

David Meyer: Well, with real estate, the spectrum of types of investment is really wide. Like on one example, you could flip a house, that's basically a full-time job. That takes a lot of work. It generates what I call transactional income, which is like ordinary income. So you're paying full taxes on it. It's a very high-risk, high-reward proposition. For some people that is everything they want and more. It's very exciting, it's fun. You get to see the fruits of your labor. I am not one of those people. I am a much lazier investor. I don't like to put that much time into my portfolio, and I have a lower risk tolerance. I'm trying to invest over a long period of time. I still work full time and so I have cash flow and I can look at this longer time horizon. In between those two ends of the spectrum, there's dozens of different ways that you can invest. One of the most common things I see with real estate investors is they jump into the hottest new strategy or new trend. Because it is maybe a very profitable way of investing, but it may not align with what you're actually looking for in terms of lifestyle and return. This goes back to what we talked about earlier, where we need to start with your vision. Because only once you know what you're trying to accomplish can this self-inventory guide you toward that end state that you're trying to achieve. I see this a lot in real estate investing, and it's probably the most common advice I give to people is like there is no objective answer about what strategy or tactic is right for real estate investing. It really comes from an understanding of your own personal situation preferences, risk tolerance, and so on.

Deidre Woollard: Yeah, I call it the HDTV disease where people just want to be flippers because it's like, oh, that looks like a fun job and it looks great on camera. And you don't realize how it's really hard.

David Meyer: Yeah, they edit out a lot of the challenges and headaches and unforeseen expenses from those shows.

Deidre Woollard: They don't show too many people in the basement dealing with all of the things you can find there. I like what you said there, too, because you can keep your job. A lot of people think of real estate investing as you go all-in. I think that the smarter way is necessarily not to do that and there's so much more beyond the "fix and flip" or even the single-family rentals. What are some of those other options that you think people might not be considering?

David Meyer: One of the more beneficial ways of investing in real estate right now that almost no one considers is actually being on the lending side of real estate. It's something I've started doing a little bit over the last few years, mostly through funds. If you're an accredited investor, those are available to people. But during high-interest rate environments, being on the lending side is actually a very profitable way to generate cash flow. This is basically, you can own someone's mortgage, for example, or you can lend out money to flippers using something called hard money. Or you can be a private partner, you can put equity into a deal and have someone else do sort of the hard work for you. I think those are all options that people don't generally consider that much. They traditionally just think of flipping or owning rentals, which are the most common, I should say, ways of doing it. But there are tactics that work particularly well in these types of markets. Lending is one of them. Rent-by-the-room strategies work well, something called midterm rentals, which is sort of like a short-term rental, but it's, it's corporate housing. You're providing furnished housing for 30-plus days. Those are all strategies that can work really well depending on, again, your risk tolerance and the time that you're willing to put into your portfolio.

Deidre Woollard: Yeah, the midterm is something I'm seeing more of especially as the Airbnb craze that was so big during the pandemic has been abating a bit related to that. A lot of investors, they start with the house hack, which is of course where you buy a property, usually duplex or some other small multifamily and you live in part of it. Really good way to learn. But once you're in there, you have to branch out, a lot of people they don't just choose one plan. Then the book you talk about operating plans and ways to layer those together. I think that's interesting because a lot of people think "pick one thing and that's your whole portfolio."

David Meyer: Yeah, I recommend a couple of different scaling strategies. I think house hacking is an excellent, if not the single best, way to get into real estate investing. I'm usually pretty hesitant to give people blanket advice like that. But house hacking is that broadly beneficial to people that I do recommend it a lot. But I think that there's one or two different ways that you can scale from owning your first property. In the book, I call them either vertical or horizontal. People call them different things. But for me, what I consider vertical scaling is really becoming a master of your own market. We talk a lot about the national housing market, but anyone who works in real estate knows that the regional differences are far more important than what's going on on a national scale. And so getting a really good at understanding the supply and demand dynamics, demographic trends, government investment, business investment in your market is going to allow you to do a lot of different tactics within that market. For example, I have a friend who's a big investor in Seattle. He understands that market so well that he can do any strategy there.

Short-term rentals, mid-term rentals, commercial deals, rental properties, because he just understands the market so well. So that is a really good way to scale. The other way I recommend is that people get really good at one tactic, and then you can apply it to different regional places across the country. So for example, I mostly invest in rental properties and then I participate in syndications as a passive investor. Because I understand those businesses well, then I can scale them from where I started in Colorado to many other places in the country where I invest now. That's where I sort of recommend to people is like trying to hold one part of your portfolio constant and not change everything altogether. I wouldn't go from being a rental property investor in Denver to a flipper in Memphis. Too much change, you're learning too much. I would either be a flipper in Denver or it'd be a rental property investor in Memphis because I could apply some of the skills and knowledge that I learned to this new situation. Because it's important to remember, real estate is entrepreneurship and you are running a business and so you're basically, if you are going to start in a new market with a new tactic, that's an entirely new business. You have to learn. And for some people that's right, but it is a lot of work.

Deidre Woollard: As you're thinking about that, like you know this one thing that you're good at and then you move into this is the other one. How do you weigh those different risks, especially as you think about the portfolio as a whole?

David Meyer: For me, I try to balance my portfolio across multiple different types of tactics and multiple types of markets because I think that's the best way to diversify, but I'm a pretty passive investor. I think for a lot of people, most people sort of fall on the more active side of the spectrum. And for them, the risk of investing long distance often outweighs the benefits of going into different markets. If you are a more risk-averse person, picking one market and sticking with it is probably the best way to go. I recommend that; you're not going to really go wrong like investing in rental properties in one market. That's a low-risk, pretty safe way to invest in real estate. Then the other way I suggest sort of mitigating risk is partnerships. It's super common in real estate. If you want to move to Memphis to be a flipper, like I was going to say, to maybe just be a capital partner on your first deal where you invest with an experienced flipper in that market. Often this trips people up, but BiggerPockets, the company I work for, holds a lot of networking events. Most cities have something called RAS, which are real estate investor meet-ups that you can go to. This is a great way, even if you're in your own city, to mitigate risk. Because real estate, everyone's done it before. It's a business, but you're not like a start-up innovating, changing the world and disrupting something. You're following a process that thousands of other people have done before. When you can partner with people who know what they're doing and partnerships are very common in real estate, it helps mitigate risk and sort of allows you to scale with a little bit more control.

Deidre Woollard: It's important to talk about like vision and everything else, and self-knowledge. It's important to know what you bring to the party and sometimes what you bring to the party can be different. Sometimes you're bringing the money and sometimes you're bringing the sweat equity or the knowledge or the connection. Knowing what you bring helps you know what you're looking for, I think, in other people.

David Meyer: That's exactly right. In the book I talk about this a bit, that every real estate deal basically needs three resources. You need capital, money, you need time because it's a business and you need certain skills to execute your business plan. The thing I genuinely love about real estate, and I think that draws a lot of people to it, is that you don't need all three of those. If you have one of those three resources, you can bring that to the party like you said. For example, when I got started, I committed a lot of time. I was relatively young and didn't have a lot of money, but I was able to attract partners because I committed the time and the sweat equity to it. Not everyone's going to have access to partnerships like I did and not everyone's going to have time like I did. But I encourage people to think about it in that framework where it's like every deal needs these things, you need to bring one of them. You may have all three, but you may only want to bring one of them. So what do you want to contribute? What are you willing to contribute to your portfolio? Whether it's time, your skills, or your capital, you have to bring one of those three things to get into these deals.

Deidre Woollard: You've been doing this for a while and I think no investment situation is perfect. We all make mistakes. It doesn't matter if you're a stock investor, real estate investor, everyone has that one. What's one of yours?

David Meyer: I've made many mistakes. Luckily, most of my investments have performed well, but within each deal, things always go wrong. I think one of the things I regret most about my portfolio and wish I did differently was outsource a lot of the work earlier. It's very tempting when you get into real estate and you're in a situation like I did where I didn't have a lot of cash on hand to just do everything yourself. Try to fix toilets, try to build staircases, do whatever it takes to save some money. Over time you learn that that does not save you money. That costs you way more money in the long run, both in terms of your time and usually you spend a couple hours and then you hire the plumber anyway. I think that part of the business is one of the difficult parts of scaling is learning to give up a little bit of control, to give up a little bit of your profit in the short run to focus more on building that sustainable business over the long run. That's certainly one. The other thing that I think has been a challenge over the last few years or the last decade I should say, is because real estate is illiquid, you have a lot of money held up in these deals and it's really important to figure out ways to reallocate that capital into high-producing deals. Just as an example, the first deal I did, I built up quite a lot of equity, almost all of my net worth was in there. I was super proud of that and super excited about that. Then I learned a little bit more about finance and a few years later I was like, this is a terrible use of my money. I should have refinanced out of it or sold that deal earlier and redeployed it into different properties. I think that's another common challenge with real estate, is you have to manage your portfolio fairly actively. It's not as easy as going on an app and selling a stock and trading it, you have to be involved and constantly evaluating how your portfolio is doing and making sure that you're making the best use of your time, your skill, and your capital.

Deidre Woollard: The book is called Start With Strategy, but it's really strategy every step of the way and keeping that larger vision in mind as things change. In stock investing, you look at your portfolio, you reallocate maybe once a year. Some people do it more often. Do you put those time resets in your strategy or how do you look at that?

David Meyer: I think for someone who invests like I do, more frequently than annually is important to do it. Maybe quarterly is how often I would sit down, look at the financial statements of all my properties, put them into my portfolio tracker. For people who are just getting started, it's probably not. Once a year is probably plenty sufficient if you own one, two or three properties. But I do think it's this mentality that's important more than the actual reallocation of capital, is to just start thinking about ways to improve performance or to better align your portfolio with your vision because you can just set it and forget it. But real estate is creative, there's all sorts of different things that you can do. There are different ways that you can use your capital. You can buy new properties or you can renovate old properties. You can go into short-term rentals or medium rentals. You can convert a rental property to a medium-term rental. There's all these different things that you can do and it can be overwhelming, so I think more than quarterly is too much. But once a quarter just think, are there things that I could be doing better to better achieve my long-term goals with the existing resources I have? If you do that quarterly, I'm fairly confident you'll achieve most of your financial goals.

Deidre Woollard: I think so much of that is about treating your investment portfolio as a business and yourself as a business. We are all in the business of making money to better our lives.

David Meyer: Absolutely. I think that's a great way to look at it. A big part of the book is basically drawing out a business plan for yourself for real estate investing. Whether you're investing in stocks, real estate, whatever, I encourage you to do that. To think about resource allocation, risk, goals, vision, and what your values are, what your mission statement is. Doing those exercises to me have really changed the way I invest. But I think more importantly, they've changed the way I operate my life on a day-to-day basis. So I highly recommend it.

Deidre Woollard: Well, thank you so much for your time. The book is Start With Strategy.

David Meyer: Thank you.

Mary Long: As always, people in the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.