How Does Real Estate Strengthen Your Overall Investment Plan? | Ep 50

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both properties and residences, so that residents, so that together we can build wealth while improving housing. I'm James and this is my wife, Jessi.

Jessi: I'm here and we can officially start listening to Christmas music. Ah,

James: yes. That's your rule, huh? That's my rule after

Jessi: Thanksgiving. Although Eleanor wanted to learn some Christmas Tunes on the piano and so I had to make a little bit of exception like hearing that Which I was like, okay, I understand if you're performing You know, you have to want to have things ahead of time.

You can't last minute.

James: Yeah. Yeah All right, but we're here. It's soft. We are in the yeah, just the whole holiday season, the Christmas holiday season. Here it is. Christmas spirit. Yeah. Yeah. As people start ramping down, it's time for us to ramp up , so it's all good. I wanted to talk about how your, how real estate can strengthen your overall, what was it? Your overall investment plan. Yeah. And I wanted to start off by having you verbally describe this chart here.

Jessi: It's pretty colors. Okay. So it's a three

James: column chart.

Jessi: Yes.

James: Comparing.

Jessi: Comparing different income levels.

James: Mm hmm. Mm hmm.

Jessi: If your net worth is between zero and almost half a million.

James: Yep.

Jessi: If it is, that's middle income.

James: If it's between half a million and

Jessi: 10 million ish,

James: and then above 10 million. And each column represents the percentage of where their wealth is invested. Okay. So, so the,

Jessi: the columns going up says it could be invested in your principal residence, pension accounts, liquid

James: assets, for people whose net worth is less than half a million, what percentage of their income is in their

Jessi: 61.

9 percent is in their principal residence.

James: That's crazy.

Jessi: So half of your investments are, is your house, but your house doesn't give you any money unless you sell it.

James: Well, that's true. Same with stocks and bonds for the most part.

Jessi: Huh? All right. Interesting. And then pension accounts like the job related.

And then liquid assets.

James: Yeah, yeah.

Jessi: Sixteen.

James: Yeah, okay. So, then how does that compare to people in that half a million to ten million, which I think is where most people are going to sit, live in Oregon.

Jessi: Okay. So,

the numbers start to break up a little bit. So, their principal residence is twenty five percent of their investments. Pensions is twenty two percent. Okay. And then. So, about

James: half their income is their house and stocks and bonds. Or half their wealth, I should say.

Jessi: Yeah, about half is, yeah. And then, there's a few other things.

Miscellaneous assets. Stocks, securities, mutual funds, trusts. Yeah, what's that

James: 18?

Jessi: Oh, oh, okay, never mind. Yeah, that's stocks.

James: Oh, so those are, so pension accounts are different than stocks.

Jessi: I would imagine pension accounts are more like 401ks. Yeah,

James: maybe you're right. And then those are just above and beyond.

It has to be job related. This is like more of the Yeah, yeah, I think you're right.

Jessi: Self-directed and private accounts. So if they've got 22%

James: in pension accounts and then another 18%, so we're talking like 40% is invested in the stock market.

Jessi: Mm-Hmm.

James: paper assets, that kind of thing.

Jessi: Probably about that. And then an additional, yeah.

James: What's that? 24.5%

Jessi: in business business equity and other real estate.

James: Ah, okay.

Jessi: Alright. Okay. So they, they. Have diversified quite a bit more. Yeah.

James: Yeah. So that means they probably got a rental or something like that Maybe and rental if your primary home is 25 percent and your and that in your rental is 24 percent That's probably got a rental maybe too.

Jessi: It's interesting to me that this middle column It it kind of evens out into these four big chunks. Yeah, you know, it's like there's very diverse primary resident My primary resident my retirement types of things additional You Investments in stocks, bonds, that type of thing. And then this business, business, oh my gosh, business, real estate area.

But it's, it's pretty evenly kind of split between those four. And then the, which I think

James: like that's most people who are listening. That's, they fall into that category. Sure. Yeah. It's kind of

Jessi: like, okay.

James: Our, ours doesn't look like that, but that's where we fall. Right.

Jessi: Yeah. It's okay. And then as you're, Net worth goes up.

It kind of shifts more into this business and other real estate. You actually have

James: 50 percent of it is in business and real estate?

Jessi: Right, and well in about 80 percent of your wealth is investments.

James: Which makes sense, I mean you can't

Jessi: Yeah, I mean if you're making more money but your living expenses are staying the same, like, you're gonna put it somewhere.

James: Well for the most part a house is like, it's fixed, right? You can't I mean, I guess you can go out and buy

Jessi: a

James: million dollar house, but you probably don't.

Jessi: Yeah, most people probably don't. Yeah. Huh. Interesting.

James: What's interesting about it?

Jessi: It is interesting just the amount It makes sense, you know, like, if your net worth is smaller, you don't have as much to invest or diversify in multiple different things. That, that middle column is the most interesting to me, because it's like, you don't have a ton of wealth. But, you don't, it's not the, it's not the smallest, so you're not like, oh man, I you guys have

James: like two million dollars, you're, you're way ahead of the curve on most people.

Well, yeah, that's, that's quite

Jessi: a bit. So that's. I'm thinking even of the, the lower end of that.

James: Oh, okay. You know. Yeah, yeah.

Jessi: The half million marker.

James: Okay, okay. Yeah. So what I think this does a good job of is painting that picture of how real estate adds to the diversified portfolio plan. And what I really like to think about are three buckets of where you should be investing.

And this is how like family offices, which are large investment groups and how billionaires think about their investing. Again, there's three buckets. So the first bucket is that well really that first bucket is the direct investments. These are things that people are doing, like they, they fund all the other buckets really.

And so it might be something like a business that they own or a job that they have, right? It's this thing you are working directly on it. You spend your time and energy focused on that, making it valuable again, earning income or getting profits from it. And you have the most control out of it and it is also really hard to liquidate as a general rule.

Like obviously if you have a job, you can't sell the job, you just get to quit. And often if you have a business, like sometimes finding a buyer for that business can be very difficult. But while you own it, the cash flow can be awesome. Does that kind of make sense? That's that first bucket. And Yeah, and so you want to have, you got to have that part to some degree.

Jessi: In that first bucket, are you always trading your time and energy for the income or you're getting? Yeah.

James: Yeah, you are. Mm hmm. Mm hmm. Whether that's a business or a job. You're involved somehow. Yeah. You are controlling it, which means you're putting your time and energy into it. It's not

Jessi: passive whatsoever.

James: Correct. Yeah. Right now it might be leveraged. Like you might have employees, you might have other stuff, but like, it's your, it's your main thing. The other bucket that a lot of people have is what they would call like the defensive portion of it. And the goal with this bucket is just to maintain your wealth.

That's it. And so you have zero control over it. And the liquidity of it is very easy. And so examples of this are like stocks, bonds. That kind of thing, commodity. And this is the classic situation that you see most people have, right? Hey, you've got an awesome job, earn the money. Now take some of that, set it aside for the future, preserve your wealth.

And you're doing it in something that is totally unrelated to you whatsoever. Right? Like you could do whatever you want and the, that money is just going to do what it's going to do. And there's value in that, right? The issue with it is that it is, it's defensive, right? And in some ways your goal is like, I just want to keep up with what normal investments are making.

That's about it. Like, as long as I beat inflation, I'm happy. That kind of thing. Again, the downside of it is, there's nothing you can do to make it better or to improve it. It's just, it is what it is.

Jessi: You're trusting someone else to manage. Correct. Yeah.

James: And to be clear, like, you know, You want to have some of that.

Like you don't want to forsake that part of the investment piece of it. Like, is that because it's balanced? If you don't

Jessi: stable or less risky or.

James: Yeah. I don't know if stable is the right word, but just less risky in the sense that it diversifies where your wealth is, right? If you've got all your money, like if you, all you have is a job,

Jessi: you're

James: And your wealth is just that income that comes in and you're spending all of it.

Jessi: It's highly risky

James: in the sense that when you lose your job or you retire, like you've got nothing. And so that's risky. Same. You maybe have a business and I don't know, man, a couple of lean years, something happens. Whatever, like, boom, you're down. I mean, I've, I've listened to enough entrepreneurship podcasts where they were like, they talked about how one of the mistakes they made was they build these businesses and they just kept reinvesting, reinvesting, reinvesting, and it grew a lot and then something happened and they had never taken any chips off the table and they just went, Oh, what do I have to show for this?

Nothing. I was like, no. And so they regularly like, okay, you gotta like, you gotta allocate some profit for yourself, even if it's a little bit. At least get into that habit of taking chips off the table at least a little bit. There's no guarantee that that business continues on. Yeah, so that's the idea.

And it's super easy, right? You can open up an IRA and say I'm automatically going to transfer money into it. You don't have to think about it. It doesn't take any of your time. You can still focus on the other areas of your life. And that's where a lot of people are. And then they stop. That's where a lot of people are.

They go, cool, done, good enough. And there is also a middle ground there, a third bucket, if you will, and that is often cash flowing real estate. And what's cool about it is, at least for us, is you can use that to pay your living expenses, which is a cool idea to say, yep, I've got this business or this job.

It's generating the income. We talked a lot about this when we were getting started generating this income and then we're going to filter it into these other, we got one, that's kind of a preserver wealth. Don't worry about it. And the other one where the whole goal is to pay for our living expenses.

Yeah, that's it. And you have. You don't have full control, but you have influence over it. Especially if you're a passive investor, like you can choose where you're going to invest in. You can vet sponsors, that kind of thing. Liquidity is often it's medium, you know, like you could sell a house. And that's, you know, it's very possible if you're part of a syndication, they have regular times of exits that happen.

Again, it's a lot easier to sell than it is a business potentially, but not nearly as easy as selling some stocks. And so it's kind of this middle ground. And again, it's like the department, self storage offices, anything that you could invest either actively or passively in and kind of depending on the route that you go, it depends on how much time you have to, you know, Learn the systems and, you know, and learn how to invest it.

Like if you're like, I don't have the time to do this or the expertise, cool. Like you should go down the passive route because you can still earn the income and you can still get a lot of the benefits, but you don't have to be that expert and, or, you know, or you don't, or you're like, yeah, I still want to buy it, but I'm going to hire a property manager to run it all because they can do the day to day stuff.

And I can still sit at the higher level strategy side of my portfolio. And so that's one of the, I want to make sure I want to check my notes here. To make sure the cool part about real estate, unlike stocks, as you observed or your primary home is you often can get some cashflow from it while still owing it holding it.

You don't have to sell it to totally cash out. And that's that's just a huge perk in general. And so it's like, and it's like your business or a job, you don't sell it or lose it. Like that's the only way that you get income. And then with stocks, typically the only way you get income is by selling it.

And this is like, yeah, that's like, that's a hybrid round. It really is the middle. And so that's how it can strengthen your plan. Because I think you can have a lot of people where they've got an awesome job, they're working hard and they're putting all their money into preserving wealth. It's like, cool, but they're not doing like, They're not doing that middle ground of like, man, you could do just a little bit more work here and you can earn some extra returns to just accelerate that timeline for when you have the option to retire.

Jessi: And is it kind of like you're, I mean, you have your job and you're taking a portion of that income and putting it into these other two buckets. Do you I don't want to say this. Do you, do you just take more? out of that first bucket to put it into, like, let's say you have bucket one and bucket two. And you're taking, Give me the

James: label number for me just so I know.

The one

Jessi: is your job. Huh. And you're, you're working, you're trading your time for money, and you're taking that money and you're putting some of it into bucket two, which is like this retirement account. Yeah, yeah, yeah. Stocks, bonds.

James: Yep.

Jessi: And, like, let's say I want to start doing a bucket three. I'm like, well, I'm Do I take some of the money from my bucket too to start putting it over here?

Or do I just have to work harder and make more money and then put it over there?

James: I think oftentimes it's taking some from bucket two

Jessi: and

James: moving it over there.

Jessi: It's transferring some of that that I allocated into my savings to do something different.

James: Yeah, yeah. I mean, there are some people who, like, They'll do a side hustle or whatever, because they'll say, ooh, I'm not, in general, I am not investing enough, and so I need to, and the problem is I need to increase my income.

I've talked to plenty of people where they're like, man, I just want to invest more. Like, cool, gotta earn more.

Jessi: Right, and that's, going back to that graph that you showed me at the beginning, I feel like that's one of the biggest differences between those three groups of people as well. You know, it's like the people in this in this lower, or this middle income, their net worth is lower They, they don't have as much to put into those investment buckets.

And as your income increases, you get a side hustle, you get a different job, you get more expertise, whatever, you get higher pay, you have more to invest in those other spots. Yeah.

James: And yeah, naturally

Jessi: kind of diversify. So I,

James: and I think there are a lot of high income people who are investing as if they're low income.

Interesting. Where they're just putting. A lot of money into that defensive bucket only. And the opportunity is to say like, no, there's this other bucket here, this cashflow in real estate that you should be allocating some of your wealth to. I think that's the, like the fundamental, cause I a hundred percent agree.

Yeah. If you're a low income, like man, do what you can save. Awesome. Work on investing yourself, right? Increase your skills, increase your value, increase your income. Yeah. That's probably your highest return on investment. Hmm. But when you're already in the upper income, it's like, man, just stop just putting it all into the stock market.

That's fine. It will work eventually, but that's not necessarily the most diversified, the most, the strongest way to grow your wealth.

Jessi: Makes sense. Yeah.

James: So there you go.

Jessi: Cool.

James: So that's what I wanted to talk about today. It's just a, it's a simple concept of like, really just think about, and I love the visual of the three buckets of where, where your time attention and money is coming, where your wealth is.

And yeah, so I find that super helpful for myself. And again, I think for you and I, we both started with jobs and that was where we put a lot of our time and attention in and we did do both buckets, but we were primarily like real estate bucket was like our, our big one. And then we did have some retirement one and We now have a lot less retirement one.

It's probably, it's, it's definitely less than 10%. I think of our overall wealth. I think we're, we're proportionally we look like That ultra high wealth where it's like, yeah, no, we're not, I, we're not even, they're like at 49 percent business real estate. We're probably close for like 80 percent real estate, which part of me is like, and, and I'll admit it's a hybrid too.

Right. Where I'm like, it's the direct business. It's where I spend my time and energy and it's also cashflow and real estate. And so that's one of the reasons why it's as big as it is. But But yeah, and that's something I actually think about for myself. I'm like, Oh, like we, that defensive bucket is not really existent for what we're doing.

And that's an area where I'm like, okay, if I had to have a place to improve, that would be it. So we're in that opposite, like what, you know, the pendulum swung a lot on that. Again, I'm super comfortable with it. I know how it works. And and so it's, it's a lot less risky for me because I understand the system really well and I understand how the investing works and that's okay.

Well, there's.

Jessi: Yeah. Like we've talked about in other episodes, there's a lot of diversification within that,

James: that Yes. Also true

Jessi: subsection. So it's like it's, it is virtually impossible for that entire investment to, to,

James: right. Like blow up at once. Got apartments.

Jessi: Yeah.

James: Single family homes, storage warehouses.

Yeah. Rent by the room. Yeah. It's kind of. My one, probably one, chink in the armor is it's all within an hour of me. That's probably the one where I'm like, eh,

Jessi: I don't love

James: that part of it. But, you know, they're technically all different cities. They're just all near each other. So but yeah, no, it's kind of just interesting thinking about like, all right, what are the best ways to allocate it?

So I would say if you're sitting in a situation, Or you are like, no, I've got some upper income. I've got, I'm sitting on some wealth. And if you do the math and you're like, man, I have a large proportion of it. That is just sitting in stocks and bonds. That's where I'd be like, ah, you know, it's worth having that conversation.

Checking out our previous episode, talking about self directed retirement accounts, saying like, okay, how do I allocate some of this over to real estate, not necessarily to make big bucks and go crazy, but it's like, it's just part of that diversification process and strengthening your portfolio. So there you go.

And hopefully you found that helpful. If you did, we'd love to hear about it in the comments. And if you would like to learn more about investing with us, you can check us out at furlo.com. Thanks for listening and have a great day.