Why Putting All Your Eggs in One Real Estate Basket is a Risky Bet | Ep 45

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 people and residences so that together we can build wealth while improving housing. I'm James. And this is my wife, Jessi..

Jessi: Hi. Here and was thinking about earlier in the evening when. I told our son to take his walkie talkie so I could call him back for dinner. Yeah. I'm calling and calling and calling. I'm like, man. So, I like lean over to the window in our kitchen and see him ride his bike past. I'm like, he's like right in front of our house.

Come on. Like, the signal's gotta be going. Like, come on. So I open up the door. I'm like, Sam, it's time for dinner, man. I like hold up the walkie talkie. He's like, oh.

James: Yeah. Yeah.

Jessi: What's going on? He like pulls out his walkie talkie. He's like, Oh, it's off. Like,

James: Nice.

Jessi: Ugh. Fail.

James: Ugh. Well, you know. But, you know. The intent was there.

Jessi: I, yeah. I guess.

James: Ugh. That happens. That happens. Like, I wish

Jessi: there were like multiple modes of communication. Mm. Which I guess there kind of are because it's like, okay, it's usually with a buddy. I could text that buddy's mom, or like, I mean, I could walk outside. So let me see if

James: I understand this right. But you're saying that you committed to one thing.

type of communicating. You put all your eggs into that basket and then it didn't work. And it turned out it was risky and he didn't even know it. And what you're wishing is that you had Spread out those options so that I wish I was less risky to get ahold of them. Is that what you're telling

Jessi: me? That is a very good segue.

James: Yeah. Yeah. Cause that's what we're talking about. We're talking about this idea of diversification and yeah. And not putting all your eggs into a single basket. I'm going to share a story first when when I was first learning about real estate you know, seventh grade, like eighth grade type of stuff.

After reading Rich Dad, Poor Dad and Cashflow Quadrant I got introduced to a Dolph de Ruz who, well. The author he wrote a book that was talking about real estate and he talked about like, he goes, Oh, I'm totally diversified. And he's like, cause I own residentials and commercial and industrial, and I own it in the U S on the East coast and the West coast.

And I own internationally in New Zealand and, and other places. And he was talking about diversification and that always, that was kind of struck me. It's like, huh, that's an interesting way to, to think about it. And so that's what I want to talk about tonight, because I think that Sometimes, yeah, it's just good to think about diversification in general and and just buying a lot of one type of property doesn't necessarily do it for you.

So I want to dive a little bit deeper into it and I'm changing up the format on how we do this. That's

Jessi: right. I have the questions. So we're going to do an

James: experiment. Yeah, I went through and I kind of cheated, instead of me just saying like, here's this thing, what do you think? We're gonna try a little different where you ask a question, and I'll kind of let you lead.

Feel free to go in order, feel free to not go in order, whatever. Oh, alright. Kind of leaving it we'll see kind of how, where it goes, how it flows. I've thought through each of them, so I don't know, we're gonna try this out. See how it feels. It may feel bad if we don't do it again. Yeah, it might feel great.

Or we'll add this as a particular format. So let's talk about diversification.

Jessi: Diversification. So this isn't really on the list. I feel like I need like a pre definition. Okay. So when you're, when you say diversification, you just mean different types of things?

James: Yeah. Like, like that example you were talking about with,

Jessi: Dolph D'Aruz, that did count as diversification.

Correct. There were different types of properties, different locations. Yes. Okay. Yes. Okay. So yeah, I'm thinking of it correctly.

James: Types. Yeah. You hear about this in all, in other settings as well, like in hiring people. They want to, we want to hire, You know, we want to focus on diversity and it's because in that particular case, it's not about mitigating risk.

It's about, we're getting different viewpoints. There's different strengths and benefits to diversification and you want to advantage of that. Having said that there's also like massive advantages where if you have all the same thing and they're all moving in the same direction, when you win big, it's like, or when you win, you can win huge.

But you, if you lose, you can lose big time, which again, that even works in the hiring field, right? Yes, you can, you can hire all the same types of people. And as long as you guys have like, you're doing the right strategy, that can be awesome. But you also risk missing out on some other crucial things because you're all are thinking and acting the same way.

So that's kind of, yeah, that's diversification. Okay. So why do some investors

Jessi: believe that diversification doesn't need to happen in real estate? Like it's, it's not necessary. Yeah. Well, it's not necessarily

James: that it's unnecessary. It's just they're like, well, I'm already doing it. They're like, because. Well, I was invested in the stock market and now I've diversified into real estate.

And so from this bigger picture, that's how they see it. Or they'll say like, well, you see, I own a single family home there and there and there and there I'm diversified and it's to some degree, yes, it's true. You are diversified, but you're also, it's just like, it's more of the same. Again, if we use that hiring analogy, I think that's going to be a useful thing all night or all podcasts, whatever is that idea of like, well, we just have, we have a lot of people who we've hired, but yeah, but all the same kind, if you own a bunch of single family homes, all in the same city and they're all the same style home, You've, you've mitigated like vacancy risk, but you're not necessarily diversified.

You're just doing more of the same thing. So I think that's what happens is they go, well, I'm, I did have an index fund in the stock market and now I've added this. We're like, yeah, that's good. But you're not diversified in real estate. Your portfolio might be. It's

Jessi: like within. Your real estate portfolio, there needs to be some more diverse diversification, correct?

Like micro diversification. Yeah.

James: Yeah. I guess there's different levels of it. Yeah.

Jessi: All right. You've kind of hinted at this, but what are the potential risks of not diversifying within the real estate sector?

James: Yeah. I've, it's, it's one of those, you know, it's fascinating. Mark Cuban is also, you know, he's a billionaire, so I'll pay half attention to what he has to say.

And and he actually talks about how he goes diversification is for suckers is one of his lines. He goes, when you look at most billionaires, a lot of them, they earned the majority of their wealth by not diversifying, by focusing on a single thing and getting after it. Yeah. And so I always like in the back of my head, I'm like, ah, it's kind of an interesting thing.

And, but his point is, cause if you're onto something, just go all in, put all your chips on that. Like, don't, don't try to diversify. Part of me is like, well, yeah. How many non billionaires are there? Because they also didn't diversify and it turns out it was a bad product. And yeah, and now they're struggling to make ends meet.

So like that's the risk is when things go bad, right? If, if, if, if everything you have is in there, you're in trouble. I would go as far as to say someone like if you have a job and that is your primary, if not only source of income and you're not doing any other diversification, yes, hugely risky in real estate in a specific.

I mean, there's, there's economic cycles is a thing. And if it affects residential, Boom. You're done. If it affects multifamily, that's all that you're in. Boom. It could cause a problem. There are there's just tenant risks too. And it's not just like, Oh, if you have a single family home, there's definitely tenant risk with that.

But if they're all the same types of tenants, yeah, it could potentially cause an issue. Maybe, you know, cause they all might be going through similar types of things.

Jessi: Interesting.

James: Yeah.

Jessi: I think too, like as I was listening to you talk. I, I don't know. I have a hard time believing that, like, a billionaire didn't diversify at, at some point.

James: Well, he did eventually.

Jessi: All right.

James: But, like, When he was

Jessi: getting started, he didn't?

James: Correct. Bill Gates. It's just kind of weird. Zero diversification. All Microsoft. All the time. That was it. Hmm. And it worked out pretty well for him. Again Elon Musk, he actually very first became, I think it was like a multi multi millionaire through PayPal.

That was his first thing. And then he diversified into Tesla and SpaceX and other stuff. Interesting. And those bets tended to work out, so now he's the richest man in the world. But your point was, how many, you know,

Jessi: hundreds or millions of people

James: Yeah, who's the other one? You don't even hear about, because they

Jessi: did the same thing, but it didn't work.

James: There's the other one. Yeah. Yeah. The Kardashian, Kim Kardashian, also, I'm pretty certain she's a billionaire as well, which is kind of insane. And you know, they have the, the reality show and a whole bunch of stuff, but they actually started just selling apparel, like handbags and stuff. That was how she actually made her first multi millions, was just doing that.

And then it turned into this reality TV show and she became her own brand essentially. So yeah, like it's, It's pretty, yeah, it's kind of interesting. If you want to be a millionaire, you should diversify. If you want to be a billionaire, don't, but it's high risk, high reward.

Jessi: Interesting.

James: And I think most people would be pretty happy just with some million being a millionaire because the chances of getting there are a lot higher.

Yeah. Yeah.

Jessi: Super interesting.

James: Yeah. But like, like I was saying, there's also just as many, if not a whole lot more people who are neither of those, because they went all in on this one product idea and it didn't work out. Failed

Jessi: and lost everything.

James: Yeah. So. All right.

Jessi: So, so diversification isn't necessarily the only way or the best way to proceed, but it's maybe a less risky way to proceed,

In a more guaranteed way to invest.

Less risky. In.

James: Yes. More predictable. More predictable. That's how I would say it.

Jessi: That's a good,

James: good word choice. Guaranteed is a word we try not to say.

Jessi: Ha. Predictable. All right. So provide some examples of diversification within real estate. Yeah. Some different types of real estate. There's tons of

James: times.

You got your classic residential, you know, single family homes, multifamilies, condos, even those, you know, you get some diversification. People living in it. You got like commercial, right? Office, retail. That kind of stuff. You got, what is it? Industrial, right? I think like warehouses, manufacturing plants distribution centers.

It's kind of a fun one. You got land just on whatever, undeveloped land, timber land. Oh, yeah. It has like a resource on it or something. And and then you just have like your specialty stuff. Like think self storage, mobile home parks hotels, motels. Sure. Yeah.

Jessi: Does that count as real estate?

James: Sure.

Why don't we have a theme park? Because they're probably really expensive. But, the

Jessi: insurance.

James: But yeah, that's but yeah, all sorts of time, and like I said, there's there's even You didn't ask this yet, but like, there's different types of real estate, but then there's also different strategies, right?

And, and I, and I, what I talked about earlier was, like, you could have something on the West Coast, East Coast the Sun Belt, up in the North, South, you could have stuff outside the United States, like that all, Goes towards diversification. And then you could have different strategies, right? You go, Oh, I've got this, this is a longterm buy and hold.

Jessi: And

James: then you can say, I've got a flip that I'm doing. Ooh, I'm doing some notes on someone else's flip. I am part of a syndication over here. I'm, you know, I'm passively, I'm, I'm sponsoring this one. Like, so there's, so there's even just within strategies as well. So there's a lot of ways to diversify and.

Yeah. And I would say if you're the kind of person where you're like, yeah, I've got a lot of money sitting in the stock market. I'm interested in real estate, but like, yeah, partner with someone who knows what they're doing. You know, someone like me and say like, yeah, we could use the funds cause we're doing investments all the time.

And then you know, and that's the way that you can diversify. And one of the things that I'm doing is looking for different types of deals so that I'm diversified myself. You know, I think about us, right? We own, we own an apartment. We own. Some student housing, we own some warehouses, we own some storage, like we're diversified and we are within the Willamette Valley, but we're not in a single city.

Yeah. And that would probably be my one like, yeah, we're kind of all in on Oregon and, and again, Willamette Valley even more specifically. And so, you know, there's some potential risk there, but I'm trying to mitigate it by just the different types of properties that we have and, and doing different strategies.

Right? So like right now doing a flip, gonna buy another flip in a couple of weeks, but I also own a lot of, Long term buying holds, that kind of stuff. And so yeah, just trying to change the strategies that way to diversify. And, and so, yeah, if you're looking at passively get involved, you might think like, yeah, what are different types?

Maybe not just like go after the same type over and over and over again.

Jessi: All right. You kind of, you kind of hinted at it, like if a real estate investor or an investor isn't going to actively. necessarily be managing the properties. How can they, how can they be sure that their sponsors diversified or that they are actually diversifying when they're investing in something,

James: you know,

Jessi: how to, how do they know?

James: And again, there's a balance there, right? Because you don't necessarily, it's interesting, right? Like there are advantages if you find a sponsor who's like, I do this kind of deal. This is what it looks like. This is my buy box over and over and over and over and over again. That's that high risk, high reward type of situation, right?

Chances are they're going to do a really good job. And at the other end, like they're also just doing one thing. Yeah.

Jessi: If the market shifted and they had to pivot, it would be a lot harder.

James: Yes. And their entire portfolio could potentially be in trouble. Maybe, which I know that

Jessi: type of scenario

James: would do that.

Here's one. So a lot of syndicators. They typically buy multifamily homes, residential, larger properties, right? And a lot of them, what they do is they go and they find ones that are not in great shape, you know, CC minus type of thing. They fix them up and then they refinance them. Well, in order to fix them up, they're using commercial debt, which are often in that five years or less timeframe, and they have a fixed interest rate.

And usually these things are on. seven to 10 year cycle plans, right? So let's pretend that you did an investment, I don't know, six years ago, right? And you were like, okay, cool. We did this plan. Interest rates were stupid cheap. And so you, you did the debt, you did your thing, and now you're like, time to go sell.

And within a two month time period, interest rates over doubled on you. And you're like, and, and either you're like, well, we were going to refinance. Which that was the syndication that we were part of, right? They were like, yeah, we're going to build and then we're going to refinance. And they went, ah, just kidding.

We can't actually refinance anymore. The numbers don't make sense. So now they're like, okay, now we've got to think about the next plan. And they've just been sitting on it because they're like, we don't know what to do with this. And investor money is locked up in it. So that's like, that's a very real scenario that lots of syndicators are dealing with right now because interest rates moved up on them.

And then while they're sitting on it, Boom, interest rates resets and they go, ah, I was paying out to investors. Now I'm not, maybe you got to do a capital call maybe instead of refinancing it and keep it for the long time. You're like, ah, we just got to sell it. We don't have a choice and we're not going to sell it for as much as we thought we were, because whoever buys it is going to have debt and they're just like, this thing just cascades.

So that's, and that's happened to a lot of syndicators right now.

Jessi: So, I mean, interest rates are kind of, that affects properties across the board, doesn't it?

James: Yes. But it's a specific strategy that they're trying to implement that only lasts 5 to 10 years. Okay.

Jessi: So if you had like a buy and hold it wouldn't affect you nearly as much.

Yeah.

James: Yeah, exactly. Like if you had bought a single family home and you had 30 years fixed debt, you know, 6 years ago, you don't care. You're just like, I guess I'm just not going to sell, which is honestly what's happened, which is why the market doesn't have nearly as much volume as it has in the past, but interest rates are starting to come down and volumes are starting to pick up as people go, Oh, okay.

Yeah. Now the numbers kind of make sense for me.

Jessi: All right. So you talked about some challenges already that investors face. Do you have any, anything else you want to say about challenges when it comes to diversification?

James: Yeah,

Jessi: it's just,

James: it requires more broad knowledge, right? It's like, I think about us and again, we're, we're in self storage, we're in warehouses, we're in single family homes, we're in multifamily homes, we're in co living, like those are all managed

Jessi: differently.

James: Yeah, exactly. Like in the warehouses. They're all custom leases that you have to deal with and in co living, that's like the way that you manage that is very different and storage is like completely different than all of those. And, and so there's, there's just complexity in order to do that and you kind of got to know it.

Now, if you're a passive person, ideally like you're like, no, I, I'm not the one who's doing all that day to day. I'm going to trust my sponsor to handle all of it. And so that's the nice part about being a passive person Person is you can actually pretty easily get that kind of diversification by partnering with people who know more about that type of investment.

So I would say that's, that's the risk. Is it just, it requires more knowledge, more expertise, and it can get pretty complex to manage it all pretty quick. If you're not careful, especially if you're doing it actively.

Jessi: That might be something that you talk to your sponsor about. If you're thinking about investing with someone, maybe ask what systems do you have in place to manage properties?

And what if you have this type of property? Yeah. What if you have this type or this type? What do you do differently? You know,

James: yeah, those are good questions. Yeah.

Jessi: Okay. So how, how does diversification within real estate compare to diversification in other asset classes and other types of investment, like the stocks or.

I don't know. Other types of investments. Can you diversify in the, in other areas, I guess?

James: Yeah. I mean, I guess a single piece of real estate can probably be analogous to a single stock or potentially, yeah, a single stock. And then if you keep buying the same type of real estate, it's like, yeah, I keep buying the same kind of companies in the same sector.

Jessi: Okay.

James: It's a little bit different than that because. Oftentimes, if you're buying companies in the same sector, like there's, there tend to be winners and losers. You know, it's not like there's a ton of them out there depending on the sector, whereas with real estate, you're like, nah, you can have two houses that are right next to each other and they can both win and that's okay.

So that's probably one of the big differences, but it's just that recognition of any single investment is the equivalent of a single stock. If you're buying a house. Right now there's ways you can get around that. Like if you can buy into a REIT or do some crowdfunding type of stuff. Now you're spread across different types as you can get away with it.

But that's, that's just something that you just want to keep in mind. A single investment is like a single stock and there's all the good and bad involved in that. And you can create your own diversification version of an index fund by buying a whole bunch of different stocks. And that's what some people do, but there's a lot of time to do that Involved in.

And you don't have any control over it. That's the other weird part about it. Whereas like you can diversify again, you could, you could be buying single family homes, but then your strategy is different for each one.

Jessi: Okay.

James: And, and that's a form of diversification. Flip one's

Jessi: a buy and hold one. And

James: you can, again, you can do different

Jessi: locations

James: and so you'd be like, yeah, no, these are, they're all different in that regard.

Jessi: It's that micro diversification that we talked about rather than macro,

James: but

Jessi: Little

James: tweaks. Yeah. So I think that's probably the, the, the big thing that, yeah.

Jessi: So similar to that, this is not on here, but similar to like, okay, I might totally mess this up because I don't really know how stock investing works, but I think, I think there's like stock brokers who like, I, let's say me, Jesse Furlow has.

You know X amount of dollars that I want to put in stocks and I'm like, I have no idea how to do this

James: Yeah,

Jessi: there's a person who I could like I give it to

James: you

Jessi: and be like do the like invest this for me Yeah, and get a good return. Yeah, and they'll like make an agreement and be like, yeah, okay I'll invest this and I will manage the diversification and where it goes and Switch it around if it needs to so that you make the best profit Mm hmm.

Is that the equivalent of me as a passive investor giving a sponsor money? You Yeah, kind of. So what are, like, how is that different? They're a

James: little bit different. Like, you're, you're not just talking about a stockbroker. You're talking, what you describe as more like a financial planner. Oh. Yeah, a stockbroker is, hey, buy these shares.

And they go, you got it, boss. And they buy the shares for you. That's a stockbroker.

Jessi: So you're still deciding what they buy or don't buy. Correct. Yeah, yeah, yeah. Got it. So in

James: some ways, it's Sponsor is a lot closer to a stock broker than a financial planner. Cause that financial planner in theory is more like, let's look at your big picture and where you're at.

Interesting. Now they also have some sort of partnership with a company and they offer a specific type of investments and they will only buy and sell within those investment options. And so it's similar in that regard. Similar,

Jessi: but no, exactly the same. Okay. Yeah. I was just kind of curious as well. No,

James: that's cool.

It's a good question.

Jessi: Cause, cause I mean, I've, I've heard you say multiple times, you want, you want to do your due diligence and know who your sponsor is and how they're investing. Like, you don't just want to be like, here's my money. Take it, you know, which is like, okay, that's, it's not a hundred percent passive, but you're not necessarily buying the place, fixing it.

And oftentimes,

James: good syndicators will try to bridge that gap between, like, the stock broker and the financial planner. They'll be like, man, tell me about your goals. Where is it you want to head? What are you looking to get out of it? What, why, where else are you invested just to make sure that, like, we're in a good spot for you?

And so, I will try to guide people through those higher level thoughts, because that's what a financial planner does, right? They're going to ask a whole bunch of questions. Like, when would you like to retire? How much do you want to have when you retire? And you go, I don't know. They go, all right.

Jessi: Tell

James: me about your current lifestyle.

How much are you spending? You know,

Jessi: do you want to buy a Dutch bros every day or not? Yeah. Yeah. Good questions. All right. Last question.

James: Okay.

Jessi: What is the bottom line for investors when it comes to diversification within real estate?

James: I think it's I think it's just remembering that. properties are all different and they're not all the same and you got to keep them that way.

Very circular. I know. Properties are different. I just, or different investments. How do I say it? Like you can't do the same investment over and over and over again. You can't just buy more of this particular type of stock. Like you can't, you can't do that. Yeah. And, but at the same time, like, You don't want to just always pursue the same kind, I guess.

Like, what am I trying to say? Big picture here, bottom line, make sure you're diversified. Make sure you're being intentional. Don't just buy a deal because, Oh, it sounded good. Really try to think of it holistically. Like, well, what do I currently own? And if the answer is nothing, yeah. Well, it's your oyster.

Have fun. If if you do have a bunch of stuff, really try to say like, okay, how does this fit in, am I doing a capital development? Am I diversifying well? And again, it's different, different sizes, different types, different strategies, different locations. So it's kind of like the four things to really think about how you're diversifying and yeah, if you've got stuff in the stock market, find a one place does diversify as well.

So that's kind of my, I think I'd be my bottom line then. Yeah. Yeah. Evaluate. Evaluate. Yeah. Be intentional. That's right. Oh, it's good. And if you're listening to this podcast you definitely are being intentional. And if you are listening to it, I want to say, thank you so much. Hopefully, you enjoyed it.

We would love it if you left a rating and review wherever it is that you listen. And if you would like to learn more about investing with us, you can check us out at furlo.com. So with that, thanks for listening and have a great day.