All Forum Posts by: Brian Formulak

With all of the volatility in the stock market, I wanted to offer some insight into my investing experience and how I position my overall portfolio to get through extreme volatility like what we are currently seeing.

I have been investing in real estate for the past 25+ years, but I would never solely invest in real estate even though in times like these a lot of people get the urge to get out of the market and either cash-out or invest in something else, such as real estate. Real estate is a great investment and has been a consistent source of personal returns for me for decades, but I will explain below why you can’t solely invest in real estate, and why you shouldn’t panic and sell your stock portfolio.

In the modern investing era, the stock market has averaged a 10% annual return. However, you cannot get an investment return without investment risk. Because of this, some years cause a lot of emotions because you see your portfolio keep dropping. It’s very easy to see this and want to sell all of your stocks and get out, and many do. I am not a financial adviser and this is not financial advice, just my personal opinion but selling after a large drop in the markets is not the right thing to do, and this is why.

Since 1990, if you missed the best 25 trading days because you sold all of your stocks, then your annual returns since then would be the same as 5 year U.S. treasury bonds - you might as well not have the risk for the low returns. This is very important because the majority of the best 25 trading days since then have come directly after the worst 25 days. This is meant to articulate that over time, the market averages out and drives a solid return and for that reason, you need to have the ability to stay in the market after a large drop.

This is where the benefit of diversifying, especially in real estate, comes into play. The stock market can drop 30% in a month, a recession can pop up, but people still need a place to live. This is exactly why I love rentals. In recessions, appreciation will not occur and people will sell their houses, however, rental markets stay strong because those same people selling their houses need a place to live, and they end up renting.

I design my portfolio to be mixed between the stock market, investment funds, private equity, and of course REIs, specifically rental properties. We see the importance of that more than ever now. My stock portfolio has taken a hit over the past month, but as this is occurring I am still receiving my rental cash flow checks every month that provides me income to pile up to reinvest when the market turns around. Having this mix allows me to capture high returns from the stock market in good markets, but also provides me the diversity and cash flow for when things get tough.

I encourage all of you to speak with your financial advisers and ask how you can better diversify your overall portfolios with a mix of stocks and mention that you would like to have some real estate rental investments in your portfolio as well. They will know best how to design the best plan for you. Just remember to work with them in times of volatility, and if you aren’t nearing retirement, don’t panic sell after a huge drop in the market. 

Good luck, and I would like to hear your thoughts/strategies.

With all of the volatility in the stock market, I wanted to offer some insight into my investing experience and how I position my overall portfolio to get through extreme volatility like what we are currently seeing.

I have been investing in real estate for the past 25+ years, but I would never solely invest in real estate even though in times like these a lot of people get the urge to get out of the market and either cash-out or invest in something else, such as real estate. Real estate is a great investment and has been a consistent source of personal returns for me for decades, but I will explain below why you can’t solely invest in real estate, and why you shouldn’t panic and sell your stock portfolio.

In the modern investing era, the stock market has averaged a 10% annual return. However, you cannot get an investment return without investment risk. Because of this, some years cause a lot of emotions because you see your portfolio keep dropping. It’s very easy to see this and want to sell all of your stocks and get out, and many do. I am not a financial adviser and this is not financial advice, just my personal opinion but selling after a large drop in the markets is not the right thing to do, and this is why.

Since 1990, if you missed the best 25 trading days because you sold all of your stocks, then your annual returns since then would be the same as 5 year U.S. treasury bonds - you might as well not have the risk for the low returns. This is very important because the majority of the best 25 trading days since then have come directly after the worst 25 days. This is meant to articulate that over time, the market averages out and drives a solid return and for that reason, you need to have the ability to stay in the market after a large drop.

This is where the benefit of diversifying, especially in real estate, comes into play. The stock market can drop 30% in a month, a recession can pop up, but people still need a place to live. This is exactly why I love rentals. In recessions, appreciation will not occur and people will sell their houses, however, rental markets stay strong because those same people selling their houses need a place to live, and they end up renting.

I design my portfolio to be mixed between the stock market, investment funds, private equity, and of course REIs, specifically rental properties. We see the importance of that more than ever now. My stock portfolio has taken a hit over the past month, but as this is occurring I am still receiving my rental cash flow checks every month that provides me income to pile up to reinvest when the market turns around. Having this mix allows me to capture high returns from the stock market in good markets, but also provides me the diversity and cash flow for when things get tough.

I encourage all of you to speak with your financial advisers and ask how you can better diversify your overall portfolios with a mix of stocks and mention that you would like to have some real estate rental investments in your portfolio as well. They will know best how to design the best plan for you. Just remember to work with them in times of volatility, and if you aren’t nearing retirement, don’t panic sell after a huge drop in the market. 

Good luck!

I base my investments on cash flow, and that is a nice cap rate there. However, knowing that it wouldn't be valued at $100k down the road, why not try and get the price a bit lower? 

For us, we primarily focus on cash flow cap rates. All of our properties need to be in an area where the average rents align with the cost of the property, rehab costs, annual expenses, as well as long term capex (bigger ticket items such as HVAC). After calculating all of our costs, we won’t even pursue a property that we don’t believe can drive a minimum 10% annual cap rate. Keep the 10% cap rate (annual investment return) in mind throughout your analysis, and make sure you stick to your numbers and do not invest unless the numbers work for you.

@Jenny Lowe

I can offer some insight into the Indianapolis/Indiana market. Since this is your first property, I would recommend you start with a single family home instead of a duplex to minimize the scope of the rehab so you can learn the process a bit easier than a larger, more lengthy rehab. Single family homes throughout Indiana still offer great returns on investments because of the rental rates and property prices. I focus my analysis on local rental comps as the main metrics I use are cap rates and rent/value rates.

I encourage you to save up a bit more of savings while you educate yourself on real estate investing, however, there are a lot of financing options such as conventional loans, VA loans, hard money, etc. I would fully educate yourself on all of these different options to discover what will work best for you.

Once you are fully educated and put a plan together, the only way to truly learn and make it work is to just go for it. Once you have that first one under your belt, your confidence will skyrocket and you will greatly improve as you continue to invest.

Best of luck to you.

@Rene Smith I have been investing in real estate throughout Indiana for 20+ years and have seen a consistent return on investment of 10%+ annually with my rental portfolio. The real estate market in Indiana is very good for return on investment because of the low fixed costs, property prices, and the economic factors such as types of jobs, job growth, rental rates, etc.. If you need additional insight into investing in Indiana, let me know. 

@Thomas Lo I have not invested in Phoenix but can offer insight into Indiana, especially the Lafayette area because my son went to school there. Since you are looking for an investment property for cash flow, you need to minimize your fixed costs and one of your major fixed costs is property taxes. The property taxes in Indiana are very advantageous for investors, which is key to maximize cash flow. In addition, although I only invest based on cash flow, Lafayette/W Lafayette has consistently been a nice hybrid of very good cash flow as well as some additional appreciation.

Also, an investment property in a college location can offer additional cash flow because you can charge rent by room, not just by house. With that said, Purdue has seen strong enrollment numbers and the school is in a great position to continue strong student population.

@Mia Trasolini the closing costs seem high, I would talk to a few different lenders to see what other prices you can get to refinance. Right now is a great time to do so as rates are at multi-year lows. If you can get your all in costs to be $2k and lower for option 2, I would definitely do so to gain additional cash flow, as well as your long term savings of $21k+. I would not refinance with option 1 as that rate is way too high given the current rates and not worth the up front costs. 

@Steve Meyers Indiana is also a great market for the $60k-$100k range. Single family rentals offer a nice return on your investment with monthly cash flow with low property taxes. I don’t do Airbnb, I have long term tenants in place, and in my experience seen very high tenant demand the markets I invest in throughout Indiana.

@Ramki D. right now is a great time to refinance as rates are at a multi-year low. Talk to some local lenders and inquire about rates that they can get you to. You may be able to get a rate closer to 3% so make sure you ask for the rate as well as ask what the monthly savings are vs. your current loan. You may even be eligible to refinance and pay about nothing out of pocket, and it would unlock additional monthly cash flow and save you thousands over the life of the loan.