We've been saying this for years. Real

estate, it's messy, it's time-consuming,

it's not liquid. And Graham finally

realized that his net cash flow after

all of his expenses and taxes,

insurance, maintenance, all of that,

he's only making like 4 to 5%, which he

says is like, "Why am I Why am I taking

all of this extra time and energy to do

what I could do with a Treasury bond,

right?"

>> When you guys sent all this stuff to me,

I don't actually watch Graham, so like I

thought he was like a dividend investor

guy. I didn't realize he did real

estate. Is that bad?

>> It's It's been a while since you've

you've hung out with Graham. No, Graham

is the buy and hold S&P, and he he got

his start in real estate and continues

to manage or continued to manage a bunch

of properties in LA, but he's just buy

the S&P and hold the S&P. And he's

changing that. He's come out with a

whole new strategy. So, we we have

things to talk about. But basically, LA

real estate is not passive. It is you

know, people talk about passive

investments, it is anything but.

>> Oh, Dave, no real estate is passive.

Jordan, by the way, uh Graham makes you

look like a degenerate gambler in terms

of how conservative he is with his

money, which I always have thought was

just ridiculously too conservative. This

is such an awesome thing when I saw that

note go out, cuz you know, every time

we're around him, right? I I I'm always

obviously promoting get more aggressive,

dude. Get Get into the stocks. Get

leverage, dude. Get it. And I I felt I

felt like the transition was happening

even before he sent that note out. And

when he did the post, I was like, "Yeah,

it finally happened."

>> Full disclosure, Chris and I have been

on his podcast a couple of times. Chris

is on it all the time, and you are

continuously telling him get more

aggressive. Your investments are

basically you're you're 95% in cash.

Why?

>> Well, the last time I was there, he

bought Amazon at 197, right? That felt

low. And he's sitting on it. I know, and

I I that's part of it. Like he's just

like, "What if I would have been doing

this a long time ago?" But here's the

thing.

>> This is a conversation. It's an argument

that we've been having with so many

people and so many friends for the last

20 years. And quite honestly, it was a

harder argument back in the day because

most of the appreciation, and I don't

think people who really truly understand

this, I don't even want to say most, but

a good chunk of the appreciation in

buying houses and renting them out for

cash flow, it's all about the increase

in value of that home over time. It's

not about the actual cash flow because

more times than than not, the cash flow

that you're generating from a rental

property that you purchased is so much

lower than you think it is, okay?

Because of maintenance, vacancies,

CapEx, surprises, property management

fees, there are a million things that

will eventually dent your cash flow and

your returns in residential real estate.

>> And when you really dig in deep with

guys I've been doing this for like 20

years and they're close to you, they

will whisper to you and they will admit

that after all the repairs, after all

the maintenance, they're all like on the

edge of getting out of it. Like cuz like

it's not what you think it is. They're

like, "We we're actually making our

money based on the appreciation of the

real estate. So even if the cash flow is

zero, what when you account for the

maintenance and all the headaches and

all the BS you got to deal with, even if

that's zero, they're still making like

single digit, mid single digit returns

on the appreciation.

>> The dream on paper is that that your

renter pays for all of your costs and

then you're going to make this big bank

when you actually sell the property at

some point in the future. But in a

market like LA, the appreciation has not

really been on the trajectory that

historically it has been.

>> Well, really, from what I understand,

the benefit is the leverage, right? So

you can buy a property, you leverage 80%

of it, and your renter is basically

paying off that 80%. So, that that's

where you make your money. Even if the

value of the property doesn't go up, you

get all that debt paid for.

>> But, Jordan, that's hidden risk, right?

And this is what we're talking about.

Like, I think real estate gives you the

illusion of safety because it's

tangible. But, the reality is is once

you get into that game, you're taking on

a lot of leverage, usually.

>> Well, it's a ton of leverage. Nobody

goes out that's in this game and just

pays 500 or 700,000 dollars for a rental

house. They put down, you know, 100,000

dollars, and the rest of it's debt.

>> Correct. But, there is a tremendous

amount of risk in that leverage,

especially when things go wrong, the

market reverses, you're still having to

pay for repairs, and at some point you

even get trapped in these homes that you

have leverage in. It is that kind of

like that black swan risk that real

estate investors don't fully appreciate

because it doesn't come around that

often, but the risk is real, it's there,

you are in a leveraged asset that's

completely illiquid. Okay? An illiquid

asset that you cannot get out of quickly

at all. Real estate looks really safe,

but often you're just hiding that risk

in the leverage and the illiquidity that

you have in that asset. And for two

decades, I've been telling people,

"Yeah, real estate's okay compared to

doing nothing with your money, but

compared to equities, you're not even

playing the same game." If you would

have taken all that money that you were

putting into real estate in all that

time, and you would have just thrown

that into aggressive equities over the

past Dude, I don't care. You're always

winning with equities, and guess what?

Equities get you your life back. You

have 100% of your time. Like, you're not

doing any work. There's no stress. Fully

liquid. Like, it it is insane to me that

people just their whole life is on the

real estate track as opposed to the

equity track. I love that even the

biggest real estate guy ever who's been

preaching this is like I'm done. And I

know LA's the worst of the worst in that

market, but still it's the same way

across the country. Dave, we have real

estate friends here in Texas. They're

They're doing the same thing. They're

getting out of real estate into

equities. Same exact thing.

>> Well, if you just do the math and look

at your what your returns would have

been if Graham went back and looked at

what he would have done if he had sold

all of his properties in 2020 or in 2018

and all of the the mental energy and

stress that went into what he actually

tried to do in LA was it was just the

numbers would be way different had he

had he taken our advice long ago. That's

all That's all I can say.

>> My four things that I want all the real

estate guys to know that are kind of

evaluating real estate versus, you know,

investing in equity. Right? With equity

with public market equities, you get

liquidity plus optionality and that

always wins, okay? You can buy and sell

anything instantly. You have all of your

liquidity. You have true compounding

versus trapped equity in real estate,

meaning the equities are going to

compound cleanly with dividends, price

appreciation. Real estate returns get

eaten up by all the vacancies, the

maintenance, the repairs,

>> thing is there's other financial

instruments you can hedge your

investments also in that

>> You're right. You could You could always

hedge and it's really easy to hedge. You

Jordan, you have time leverage with

equity. With stocks, you have no

operational load. With real estate, it's

a full-time job or part-time job unless

you outsource it, which is again is

going to kill your returns.

>> Dude, I rented a house out once and it

was the worst. It was the worst. I mean,

it was like it was it was phone calls on

the weekends,

you know, it was constant problems. It

was something went wrong with the house

and now we've got to write a big check

to a plumber or whoever to come fix

problems. You have none of those issues

with an equity. Like people at the

company are going to call you and say,

"Hey Jordan, you own 1,000 shares of

Amazon.

>> The warehouse door is stuck. We need you

to come deal with that for us, Jordan.

>> That's right.

>> Jordan, the real estate guys will never

talk about that because they don't they

want it to seem like they're in this

great investment and they don't want

people to know how hard they're working

and are all there until they do. Until

they come out. And then when they crack

and they start telling you all this

stuff, they admit that man, I wish I

just never got involved in this cuz it's

not what I thought it was. But by the

way, the fourth thing is very important.

Simply better risk-adjusted returns,

okay? You know, broad-based equities

generally returning 10% annualized over

the long term. Real estate looks safer,

but the truth is that those returns are

like mid to high single digit, but

roughly half of those returns are from

price appreciation. And now that we're

in a world where you can no longer count

on the price appreciation coming from

just everything goes up up up in real

estate. We've seen that that's not true.

There is a real risk factor there that

your total returns for all the work and

all the risk and all the illiquidity is

low single digits. Like you're doing all

of that for low single digits when you

could be getting double to maybe triple

in the market where your only work is on

your phone. You could be doing it from

the beach. You could be doing it from

anywhere in the world, right? There's

there's you're not a landlord.

>> Yeah, the other problem is you get

really big liquidity lumps, right? So,

you know, when you sell a house, it's a

really big event, right? It could be

$500,000. It could be a million dollars.

You're having to take out Maybe you

didn't need that.

With stocks, you can just sell some. You

can just sell a little bit, whatever you

need.

>> You're right. And listen, there's all

these unexpected things that are

happening now and part of the reason why

real estate is getting crushed is, you

know, the cost to replace an HVAC unit

today versus 8 years ago, massively more

expensive. The cost to basically do

anything in terms of maintenance and

repairs on your home is so much higher

right now than it was 5 to 10 years ago.

And these things are absolutely crushing

the guys that have 20, 30 houses out

there that the bills are coming in and

the margins on what you're making in

that ROI are not large enough to to

handle the bump in cost of ownership for

these landlords. It's It's terrible. I

love it that like Graham came to that

conclusion completely on his own and

it's not just him. It's so many real

estate guys that I know that are doing

the same exact thing right now. They're

They're moving into markets.