2852: Why Investing in Things Producing Things Produces Financial Freedom by Chris Reining on Investment Returns

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[00:00:40] [SPEAKER_00]: This is Optimal Finance Daily. Why Investing in Things Producing Things

[00:00:46] [SPEAKER_00]: Produces Financial Freedom by Chris Reining of chrisreining.com.

[00:00:52] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diania Merriam.

[00:00:56] [SPEAKER_00]: This podcast is actually one of multiple shows in our network, covering different topics like

[00:01:02] [SPEAKER_00]: personal development, health, and relationships. So if you like narration style podcasts,

[00:01:08] [SPEAKER_00]: be sure to search for Optimal Living Daily wherever you're hearing this and check out our

[00:01:13] [SPEAKER_00]: other shows. But for now, let's get right to today's post as we optimize your life.

[00:01:24] [SPEAKER_00]: Why Investing in Things Producing Things Produces Financial Freedom by Chris Reining of chrisreining.com.

[00:01:34] [SPEAKER_00]: Years ago, a coworker casually mentioned to me the only reason she showed up for work was that all

[00:01:40] [SPEAKER_00]: her friends were there. I asked, so what happens when you retire? It caused some nervous laughter

[00:01:47] [SPEAKER_00]: and then we went about our day. Just a few weeks later, the company let her go.

[00:01:52] [SPEAKER_00]: Don't think after putting in 20 plus years you're not disposable.

[00:01:57] [SPEAKER_00]: She emailed me a month later asking if I knew of any positions in our field. You could sense she

[00:02:03] [SPEAKER_00]: was desperate for money. This causes you to pause and think what kind of life is this? Taking

[00:02:10] [SPEAKER_00]: orders from people, dealing with office politics, worrying about getting laid off or fired,

[00:02:15] [SPEAKER_00]: and then begging someone to please hire you one more time. Plus, there's mountains of evidence

[00:02:22] [SPEAKER_00]: that many workers find their jobs completely meaningless and unfulfilling. At some point,

[00:02:28] [SPEAKER_00]: you might realize there's no amount of money that changes the fact that you're wasting your time.

[00:02:34] [SPEAKER_00]: Could the answer be as simple as what Benjamin Franklin once said?

[00:02:38] [SPEAKER_00]: Quote, remember that money is of a prolific generating nature. Money can be get money

[00:02:45] [SPEAKER_00]: and its offspring can be get more. End quote. Instead of endlessly working for money,

[00:02:53] [SPEAKER_00]: you can have your money work for you. Well, that's what investing is. While it can mean many

[00:02:59] [SPEAKER_00]: different things, what it always means is owning assets, things producing things.

[00:03:06] [SPEAKER_00]: A rental house isn't a pile of bricks with a roof. It's a monthly check. A share of a stock

[00:03:12] [SPEAKER_00]: isn't a lottery ticket, it's part ownership of a company. What doesn't produce things?

[00:03:19] [SPEAKER_00]: Think cryptocurrency or gold. You're just hoping someone else pays a higher price and

[00:03:24] [SPEAKER_00]: that person hopes the same thing. The key difference is speculating about price is likely

[00:03:31] [SPEAKER_00]: to ruin you. While investing in things producing things like real estate and SPOC is a well worn

[00:03:38] [SPEAKER_00]: pass to financial freedom. Things producing things, real estate. Investors buy apartment buildings or

[00:03:46] [SPEAKER_00]: farms or single family homes for the cash flow. If you're not buying the asset outright,

[00:03:52] [SPEAKER_00]: most of that cash pays for the mortgage, property taxes, maintenance and repairs.

[00:03:57] [SPEAKER_00]: But eventually it generates steady monthly income. In 2012 after the US housing bubble

[00:04:04] [SPEAKER_00]: and great recession, 30 year mortgage rates were hovering around 3%. It was a fantastic

[00:04:10] [SPEAKER_00]: time to buy real estate at distressed prices, financing it at very low rates. A leveraged

[00:04:17] [SPEAKER_00]: way of owning a cheap productive asset. As long as there are tenants, the money shows up in your

[00:04:23] [SPEAKER_00]: bank account each month like clockwork. Which reminds me of a story about a guy who owns a 70 unit

[00:04:29] [SPEAKER_00]: trailer park and 200 unit storage facility. When times are bad, people are looking for cheaper

[00:04:36] [SPEAKER_00]: places to live and store their stuff. And when times are good, well there's always someone

[00:04:42] [SPEAKER_00]: that's not doing so good. In other words, real estate can work as a hedge against downturns

[00:04:48] [SPEAKER_00]: while at the same time a hedge against inflation because rent prices rise over time.

[00:04:54] [SPEAKER_00]: Things producing things, stocks. The reason investors want to own stock is because over

[00:05:02] [SPEAKER_00]: long periods of time it appreciates more than real estate. For instance, using Robert Schiller's

[00:05:08] [SPEAKER_00]: data, over the past 30 years real estate returned about 1% while the S&P 500 returned 6%.

[00:05:16] [SPEAKER_00]: What that means is if you're going to buy an asset compounding for 30 years at 1% versus 6%,

[00:05:23] [SPEAKER_00]: the difference there is 5%. And what 5% does to the results over long periods of time,

[00:05:30] [SPEAKER_00]: like 30 years, is pretty eye-opening. Here's the math. A $100,000 piece of real estate

[00:05:37] [SPEAKER_00]: compounding at 1% will be worth $135,000 in 30 years while a similar stock investment

[00:05:45] [SPEAKER_00]: at 6% will be worth $575,000. That's a difference of $440,000 and why people want to own stock.

[00:05:56] [SPEAKER_00]: Of course, on average the market falls 10% once a year, about 20% every four or five years,

[00:06:03] [SPEAKER_00]: about 30% every decade, and 50% a few times during a lifetime. Market volatility makes holding

[00:06:11] [SPEAKER_00]: stock more difficult than real estate, but it's the price investors pay for superior long-term returns.

[00:06:20] [SPEAKER_00]: Things producing things produces financial freedom. Real estate provides steady inflation

[00:06:27] [SPEAKER_00]: adjusted income and there aren't minute-to-minute market valuations which cause investors to

[00:06:33] [SPEAKER_00]: panic and sell. Stocks being sensitive to every miniscule macroeconomic event

[00:06:39] [SPEAKER_00]: have short-term volatility but provide long-term reward. Warren Buffett quipped,

[00:06:46] [SPEAKER_00]: quote, if you don't find a way to make money while you sleep, you will work, end quote.

[00:06:52] [SPEAKER_00]: The point is that it doesn't matter how you have your money working for you because a dollar

[00:06:57] [SPEAKER_00]: from a rent check is the same as a dollar from a stock. What matters is investing in things

[00:07:04] [SPEAKER_00]: producing things. You just listened to the post titled, Why investing in Things Producing Things

[00:07:14] [SPEAKER_00]: Produces Financial Freedom by Chris Reining of chrisreining.com and I'll be right back with my

[00:07:21] [SPEAKER_00]: commentary. Buy low, sell high. Buy low, sell high. It's a simple concept but not necessarily

[00:07:29] [SPEAKER_00]: an easy concept. Right now, high interest rates have crushed the real estate market.

[00:07:34] [SPEAKER_00]: Prices are falling and properties are available at a discount, which means Fundrise believes now

[00:07:41] [SPEAKER_00]: is the time to expand the Fundrise flagship funds billion dollar real estate portfolio.

[00:07:48] [SPEAKER_00]: You can add the Fundrise flagship fund to your portfolio in minutes by visiting fundrise.com

[00:07:55] [SPEAKER_00]: slash OFD. That's F-U-N-D R-I-S-E dot com slash OFD. Carefully consider the investment objectives,

[00:08:07] [SPEAKER_00]: risks, charges and expenses of the Fundrise flagship fund before investing. This and other

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[00:08:22] [SPEAKER_00]: advertisement. As I was reading this, I could hear thousands of you thinking,

[00:08:29] [SPEAKER_00]: 1% long term appreciation on real estate that can't be right. My home has doubled in value

[00:08:35] [SPEAKER_00]: since I bought it. So let's dig into this a little more. Well, I'm personally not a real

[00:08:40] [SPEAKER_00]: estate investor. I had the pleasure of recently seeing Rich Carey from rich on money speak

[00:08:46] [SPEAKER_00]: at campfire about this very topic. Rich owns 30 rental units and I was really surprised at what he had

[00:08:53] [SPEAKER_00]: to say about appreciation. He was making the point that real estate investors need to focus on cash

[00:09:00] [SPEAKER_00]: flow and only by properties that fit the 1% rule, which basically states that the properties monthly

[00:09:06] [SPEAKER_00]: rent must be equal to or no less than 1% of the purchase price. Many people who invest in

[00:09:14] [SPEAKER_00]: high cost of living areas where properties that follow the 1% rule are nearly impossible to find

[00:09:20] [SPEAKER_00]: will often say that they're banking on appreciation of the property over the long run.

[00:09:26] [SPEAKER_00]: The trouble is that over the long run, appreciation on real estate typically just keeps up with

[00:09:31] [SPEAKER_00]: inflation, but you may have periods where you see big jumps. So for example, Rich bought a

[00:09:38] [SPEAKER_00]: house in 2003 for $280,000 and two years later the house was worth $400,000. That's a 42% increase

[00:09:48] [SPEAKER_00]: in value, which is awesome. And this is what you hear all the time when people talk about their

[00:09:53] [SPEAKER_00]: homes appreciating. However, when he sold that house in 2016, it sold for $400,000,

[00:10:01] [SPEAKER_00]: meaning that it didn't appreciate any further over 13 years. And the real appreciation was 2.6%

[00:10:09] [SPEAKER_00]: per year for the time that he owned it. To put that in perspective, over that same period,

[00:10:15] [SPEAKER_00]: money invested in the S&P 500 index would have returned 118%. This is another reason why

[00:10:23] [SPEAKER_00]: many people in the personal finance space will point out that your primary residence is not an

[00:10:28] [SPEAKER_00]: investment. A property is an investment when it's an income producing asset and it becomes an

[00:10:35] [SPEAKER_00]: income producing asset when you focus on cash flow on rental properties, not appreciation.

[00:10:42] [SPEAKER_00]: And that's a wrap for another Monday show. Have a great rest of your day and start to your week

[00:10:47] [SPEAKER_00]: and I'll be back tomorrow where optimal life awaits.