In Episode 63, we welcome Gary Beasley and Gregor Watson, co-founders of Roofstock. If you’re one of our listeners who has written in requesting an episode on rental real estate, be sure not to miss this one.
We start with some quick background on the guys, how they came to found Roofstock, and the way in which their company is aiming to make rental real estate investing far easier. In essence, they want to simplify things by separating the “investing” side of rental real estate from the “operational” side of owning a rental home.
After the background, Meb starts with a broad, contextual question: So how would a new rental real estate investor start?
In the old way, you would identify a market in which you’re interested, look at tons of homes, make some offers, perform due diligence on the ones where the offers have some traction, renegotiation the price and finally buy, then find a property manager to handle operations for you.
But the guys then tell us how Roofstock is making this traditional process far simpler. Basically, the home and rents, tenant, and local property manager have already been vetted and approved. You see the various yields ahead of time. This enables investors to buy without all the traditional brain-damage. The guys tell us “Our goal is to make it incredibly easy to get exposure to the asset class (rental real estate).”
What follows is a wonderful discussion about some of the traditional challenges with rental real estate, and how Gary and Gregor are helping investors overcome those challenges. The discussion touches on how to compare rental homes across different markets… Evaluating rental homes via gross yield, net yield, IRR, and on an after-tax return basis… How Gary and Gregor arrive at rental home valuations… Financing versus all-cash buying…
There are also great tidbits of rental real estate investing wisdom dropped in. For instance, did you know that the total cost to a home-seller to vacate, spiff up, and sell is about 10-12% of the sale price? Did you know that the average cost of a property manager is about 7-8% of collected rents plus a separate leasing fee? Guess what percentage of rental real estate owners live within about an hour of the homes they own? You’ll find out…
Later in the episode, Meb asks about the range of yields on the various rental homes featured on Roofstock; specifically, why wouldn’t he invest in a handful of homes yielding, say, 25% versus those yielding just 5%? Is there a parallel here to high-grade bonds and junk bonds?
The guys tell us, yes, lower yielders tend to be the safer investments, whereas the higher-yielding homes are a bit riskier. But both potentially have a place in a rental portfolio, depending on the needs/goals of that investor.
There’s much more in this episode: the difference between buying single-family homes directly versus investing in a REIT… How to think about starting and building a rental real estate portfolio… How much time an investor would need to commit to being a landlord when not using a property manager… What happens if there’s another 2007… And Gary and Gregor’s single best piece of advice to listeners interested in starting with rental real estate investing.
What is it? Find out in Episode 63.
In Episode 62, we welcome journalist and author, Ron Lieber.
Meb begins by congratulating Ron, as it was Meb's pregnant wife who read Ron's book about how parents should discuss financial matters with their kids, and promptly told Meb he needed to read it and get Ron on the podcast.
Turning attention to Ron's book, "The Opposite of Spoiled," Meb begins by asking about Ron's motivation for writing it. Ron tells us there were three factors: one, a pointed question from his three-year-old ("Daddy, why don't we have a summer home?"); two, the focus of Ron's writing at work (young people who borrow vast sums of money to pay the huge college tuition bills); and three, his own situation as a teen, having seen the collegiate financial aid application process thanks to his mother. All of this together led Ron to the conclusion that "we're not having the right kinds of conversations with our kids about this stuff."
Meb mentions how it's a shame that they don't teach personal finance in high school, which makes it all the more important that parents have these discussions with their kids. Unfortunately, many parents are reluctant. Meb asks Ron why this is so.
Ron points toward shame. Perhaps parents are ashamed they don't know the answers to the questions (maybe they don't have a firm grip on finances themselves), or maybe they're ashamed at how much (or little) they earn, or at how they earn their money.
The conversation drifts toward a piece of advice in Ron's book; it's the suggestion that when facing a question from a child, the parent might ask "Why do you ask that?" The reason this is helpful is that many times, the stated question isn't really want the child wants to know. Questions like "how much do you make?" are rooted in fundamental questions such as "Mom/Dad, are we okay here? Is our family normal?"
Meb brings up the four things spoiled kids have in common from Ron's book and asks for some commentary. Ron tells us that, ironically, these spoiling factors have almost nothing to do with actual money. They are: one, not having any rules for kids; two, if there are rules, not enforcing them or having consequences; three, smoothing out the path in front of kids and making sure they never face any challenges; and four, allowing kids to grow up without any context for how lucky they are for their opportunities â€“ no gratitude, and instead, an attitude of entitlement.
This dovetails into a great conversation about chores, which points toward allowances. Ron suggests dividing allowances into three buckets: savings, spending, and giving. The specific allocations will likely reflect the values the parent is looking to instill (for instance, if a parent wants to focus on giving, the allowance amount can reflect what the parent believes is an appropriate amount the child should skim off the top for "giving").
There's way more in this episode, and if you're the parent or grandparent of a young child, you don't want to miss this one. You'll hear more about the conditions that lead toward materialistic kids and how to avoid them... Unique ways to deal with things like a visit from The Tooth Fairy... How to handle kids wanting cell phones (do you know how long Bill Gates made his kids wait before buying them a cell phone? You'll find out)... And how to use a great tool called "The Fun Ratio" to help your kids make better spending decisions.
What is it and how does it work? Find out in Episode 62.
In Episode 61, we welcome Jack Vogel, CFO/CIO of Alpha Architect, and the partner of Wes Gray, who you may remember as one of our earliest Meb Faber Show guests.
After Jack tells us a bit about his background and how he came to be at Alpha Architect, Meb jumps in, starting with "factors" - specifically, the value factor. Meb asks about Jack's value philosophy in general, and how he creates a value portfolio.
What follows is a great look at how a professional portfolio manager/asset allocator creates a portfolio. Using quantitative tools, Jack starts by constructing the universe of potential assets to include, keeping in mind scale. Next, Jack applies some forensic accounting in order to exclude certain toxic assets that one wouldn't want in a portfolio. Then, he screens for value. Jack likes using enterprise multiples. Finally, he looks for "quality." These are things like free cash flow, margin growth and marketing stability.
Meb then points the conversation toward momentum investing. Jack offers us a general overview first, noting how momentum investing can be really beneficial for value investors. He also makes the point how it's definitely different than growth investing.
In discussing creating a momentum portfolio, Jack discusses adding seasonality (which means addressing when to rebalance) and quality. On the topic of quality, Jack gives us a great example of what it means in the context of earnings; it involves two stocks, one of which is flat for an extended period, but then explodes in value in a short amount of time, versus the other that experiences the same growth, but gradually and consistently over the entire period. Which earnings are more "quality"? Jack gives us his thoughts.
Next up is Alpha Architect's great tool, Visual Active Share. It's a wonderful way for investors to compare the holdings of an ETF to its benchmark index. Investors can use this to see just how "different" the ETF in question truly is. After all, you don't want to be paying too much in fees for an ETF that's really just a closet index fund. The guys discuss whether there's a particular number for what "good" active share is, as well as the challenge of tracking error as you grow more "different."
As usual, there's a great deal more in this episode: Alpha Architect's new value, momentum, trend ETF... A discussion of the state of robos... What new tools Jack and his crew at Alpha Architect are working on now in order to help investors pull back the curtain on various funds... And of course, Jack's most memorable trade - it was the last individual stock he owned, which he now refers to as 'The Titanic.'
What was the stock? Find out in Episode 61.
In Episode 60, we welcome the great William (Bill) Bernstein.
Bill starts by giving us some background on how he evolved from medicine to finance. In short, faced with his own retirement, he knew he had to learn to invest. So he studied, which shaped own thoughts on the matter, which led to him writing investing books, which resulted in interest from the press and retail investors, which steered him into money management.
After this background info, Meb jumps in, using one of Bill's books "If You Can" as a framework. Meb chose this as it starts with a quote Meb loves: "Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of financial professionals in the long run, and make you a millionaire over time?"
The challenge is the "If" in the title. Of course, there are several hurdles to "if" which Meb uses as the backbone of the interview.
Hurdle 1: "People spend too much money." Bill gives us his thoughts on how it's very hard for a large portion of the population to save. We live in a consumerist, debt-ridden culture that makes savings challenging. Meb and Bill discuss debt, the "latte theory," and the stat about how roughly half of the population couldn't get their hands on $500 for an emergency.
Hurdle 2: "You need an adequate understanding of what finance is all about." Bill talks about the Gordon Equation, and how investors need an understanding of what they can realistically expect from stocks and bonds - in essence, you really need to understand the risks.
Meb steers the conversation toward investor expectations - referencing polls on expected returns, which are usually pegged around 10%. Using the Gordon Equation, Bill's forecast comes in well-below this (you'll have to listen to see how low). The takeaway? Savings are all the more important since future returns are likely to be lower.
This leads to a great conversation on valuation and bubbles. You might be surprised at how Bill views equity valuations here in the U.S. in the context of historical valuation levels. Bill tells us to look around: Is everyone talking about making fortunes in stocks? Or quitting good jobs to day trade? We don't see any of these things right now. He's not terribly concerned about valuations.
Hurdle 3: "Learning the basics of financial and market history." Meb asks which market our current one resembles most from the past. Bill tells us it's a bit of a blend of two periods. This leads to a good discussion on how higher returns are more likely to be coming from emerging markets than the U.S.
Hurdle 4: "Overcoming your biggest enemy - the face in the mirror." It's pretty common knowledge we're not wired to be good investors. So Meb asks the simple question why? And are there any hacks for overcoming it? Or must we all learn the hard way?
Unfortunately, Bill thinks we just have to learn the hard way. He tells us "The more comfortable you are buying something, in general, the worse the investment it's going to be."
Bill goes on to discuss the challenge of overconfidence and the Dunning-Kruger effect (there's an inverse correlation between competence and belief one has in their competence). Meb asks if there's one behavioral bias that's the most destructive. Bill answers with overestimating your own risk tolerance. You can model your portfolio dropping 30% and think you can handle it, but in when it's happening in real time, it feels 100% worse than how you anticipated it would.
Hurdle 5: "Recognize the monsters that populate the financial industry." Basically, watch out for all the financial leeches who exist to separate you from your money. Bill tells us a great story about being on hold with a big brokerage, and the "financial porn" to which he was subjected as he waited.
There's way more in this episode: Bill's thoughts on robos... What Bill thinks about any strategy that moves away from market cap weighting (Bill thinks "smart beta" is basically "smart marketing")... How buying a home really may not be a great investment after all... Cryptocurrencies... and even Meb's "secret weapon" of investing.
All this and more in Episode 60.