How TO Compare Stocks Vs Real Estate & WHich One is Right For you | How To with Gino Barbaro

[00:00:00] The problem with stocks, and this is a good thing and a bad thing, we've owned assets for 12-15 years now. Now the other thing with real estate, the massive tax benefits with real estate, you can do what is called a 1031 exchange.

[00:00:34] Hello and welcome. My name is Gino Barbaro, one of the co-founders of Jake and Gino. And in this how-to video, I really want to go over the differences between stock investing, investing in real estate, and more importantly,

[00:00:49] which one you are best suited for. When you hear people comparing stocks and real estate, they always look at the numbers, they look at the returns, but do they ever go into a person's money persona? The way a person thinks, the way a person feels, what's best for their personality? Very rarely. Now I'm here to tell you,

[00:01:18] this is my opinion and my opinion only, there is no comparison between creating wealth in stocks versus creating wealth in real estate. If you know what you're doing with real estate, the advantages are insurmountable versus stocks. You have the advantages of taxes. Remember, it's not what you make, it's what you keep. You have the advantages of building a scalable business.

[00:01:48] You have the ability, and this may seem like a negative to a lot of you out there, but there is little liquidity in real estate. While people are buying Bitcoin at 50,000 and then it runs up to 80,000, they push the button and they're out. You and the real estate. You and the real estate world are holding onto that home and you can't sell it. And sometimes that's a good thing because four and five years later, you're like, wow, I'm glad I didn't sell.

[00:02:18] The problem with stocks, and this is a good thing and a bad thing is the liquidity aspect. The average investor, I would say the vast majority of investors out there buy high and sell low.

[00:02:34] You should be buying when there's blood in the streets. Instead, what most investors do is they panic and they sell when there's blood in the streets and the intelligent investors out there are scooping it up. Now, that's what happens in real estate. The problem is in those down markets, it's really hard to sell your asset. So for the most part, unless you're giving the asset back, you have to hold onto the asset.

[00:03:01] The liquidity is actually working for you because you're not taking a massive loss. Your emotions aren't all over the place and you're saying, wow, I have to hold onto this thing. I have to operate this and come out on the other side. And for us, it's been genius. We've owned assets for 12, 15 years now. Our very first asset that we bought back in 2013, we paid $600,000 for that asset.

[00:03:26] It was 25 units. Back then, there was blood in the streets. Nobody wanted to invest in real estate. I didn't know that. I just knew that I needed to get out of my job. So I'm like, here, real estate's great. It can provide some cash flow for me. I didn't know the benefits of taxes. I just needed to make a little extra money every month. Fast forward to today, 12 years later, that asset is comfortably worth $3 million. So I 5X my returns and you're going to go, well, how much is that per year?

[00:03:55] Well, let's take into consideration not only the appreciation of the asset. We've also refinanced out all of our proceeds that we put into the deal. We put in $60,000 as a down payment because I had owner financing. We refinanced out $180,000. So we've pulled out all the capital that we had in there. We've been able to cost segregate the asset. So we've taken massive tax benefits. And we're getting paid every month.

[00:04:23] Now the cash flow is up to around $10,000 per month on this small little deal. That is a tremendous amount of money. How are you going to compare that to a stock? It's very difficult because as I said, people can go back and go, well, stocks over the last 30 years have returned 10% at them. Yeah, that's if you're continuing to invest every year, putting your money back in.

[00:04:49] You know, have you heard the term by Dave Ramsey, buy term insurance and invest the difference? Very few people do that. And very few people keep their money in the market when things are going poorly. They panic and they pull out. Very hard to do that with stocks. Now the other thing with real estate, the massive tax benefits with real estate. There's three strategies that you can use with real estate.

[00:05:13] There is the 1031 exchange that if you buy an asset, you hold on to it and it appreciates and you want to trade up. And buy another asset, you can do what is called a 1031 exchange. If you'd like more information, I would check out a gentleman named Dave Foster. Big fan of Dave Foster, 1031. He's been doing them for decades. He's a qualified intermediary. You need a qualified intermediary to perform one.

[00:05:39] But what you do is you're basically selling your asset and putting the money rolling into a like kind asset. And you're deferring the tax gain. So for instance, we bought that property for $600,000. We sell the property for $3 million. Let's say for argument's sake, we net $2.5 million. Well, capital gains on that $2.5 million would be on average, let's say 20%. You're talking about a $500,000 tax liability.

[00:06:08] We'd only net $2 million. But if you do a 1031 exchange, you're keeping all of the gains in that asset in the 1031 and it goes into the next deal. So that $500,000 that you would pay to the government, you're able to buy even more units with that. Do you see the power of that? Now in stocks, you can use some type of leverage. I would not recommend using leverage in stocks because all of a sudden stock price starts tanking.

[00:06:38] You're going to sell. You're going to get called. I would personally stay away from that unless you're really savvy and you understand the market and you're totally locked in. Beware of that. The other one is the refinance. As I told you, we refinanced this asset two and a half years after we bought it. We're able to refinance out $180,000. Now that is a loan to yourself.

[00:07:05] You don't pay taxes on that money until you sell. You will recapture that money. But you have $181,000 of money in your hands. I had $60,000. Do you see the velocity of money? I mean, try to do that with stocks. Good luck. And the third one is the cost segregation. If you're doing an engineered study, a macro accelerated cost recovery system, you're able to accelerate the depreciation on your asset.

[00:07:33] Now, even if you don't do a cost seg study, fine. You don't do it. But you still have straight line depreciation. Whereas your asset price and your asset is appreciating in value, you're able to depreciate it. And whatever cash flow you have on the property. Let's say, for instance, you earn $70,000 in cash flow on the property this year. But you were able to depreciate $40,000.

[00:07:59] Well, your net income from a tax perspective would be $70,000 less than $40,000 of depreciation. Which is a phantom cash tax. There's really no loss. It's just a loss for depreciation purposes. $70,000 less $40,000. You're only showing $30,000 in income. So you're saving $40,000 worth of tax liability, which let's say your marginal rate is 25%.

[00:08:27] You're saving an additional $10,000 in taxes that you'd have to pay. So those are the benefits. When we come back from the break, I want to get into the money persona and discuss what's best for you. What vehicle is best for you to create wealth? And we are back. What is the best vehicle for you listening to create wealth? To answer that question, you really need to understand yourself.

[00:08:58] If the money persona of a person is a gambler, there's five money personas. Let's go through them really quick. I'd love for you to write them down. And really, as you're listening to this and when you go about your day today, tomorrow, think about what persona you exhibit most because you're going to be a blend of all five. But the very first one is the gambler, George the gambler. George loves action. He loves to flip.

[00:09:28] He loves to turn. He loves to churn his money. He loves the next great venture, the next great deal. He loves to push everything in. Multifamily is not going to be great for George in a lot of instances. It's boring. It's slow. He can get into the model of buying a multifamily, fixing it and flipping it, but it's still maybe a little too slow for George. George may be more into wholesaling, buying single-family homes, fixing them up and flipping them.

[00:09:53] But I think George would be more attuned, his personality, to investing in stocks, investing in Bitcoin. Those are the things that George likes to do. He likes to – I don't want to use the word gamble, but let's use the word speculate. With multifamily, it can get boring. And George can get bored. He can lose track of time and just say, I don't want to do this thing anymore. I'm going to go on to the next shiny object. So for George, possibly stocks may be the way to go. Now we have Ivan the investor. That's the I.

[00:10:23] That's the second money persona. Ivan loves multifamily. He understands building wealth takes time. He understands the model of getting his money, saving it, putting it into an asset, working that asset. It takes time. 12 months may take 18 months, may take six months, however long. It's not instantaneous. And Ivan is okay if there's no liquidity. George loves liquidity. George loves to churn his money.

[00:10:52] George loves the velocity of money. That's the gambler type. They love velocity of money. Now, obviously, Ivan as an investor loves to velocitize his money, but he doesn't mind waiting a little bit longer. If it takes 12 months or 18 months to refinance the asset, fine. And even if Ivan sees the opportunity to cash out his equity and to possibly sell, he's good with that. But Ivan understands tax benefits and tax consequences. And Ivan loves to use the 1031. I've gone through the first two ones.

[00:11:22] They're both sexy, in my opinion. We're going to go through the next three money personas. That's Steve the saver. Now, Steve is a little bit challenged because Steve loves to save. He loves to put his nickels and his dollars and he loves to see his bank account grow. But Steve lives in a life of scarcity and fear. Now, how do I know that? I was Steve for a long time of my life. And I still like to be Steve because I still like to see that money in the bank account.

[00:11:50] I still feel comfortable sometimes that I have that nest egg. I think Steve may have a blend of both. Steve may like stocks. He may like to do what we call dollar cost averaging, putting money in every single month. He feels that as a form of saving. He's saving his money in the stock market. Now, the stock market may be good for Steve. He has the discipline to do something like that. Ivan has the discipline. George doesn't have the discipline to do something like real estate where it takes a lot longer.

[00:12:19] So Steve may love stocks, but Steve may also find his way into real estate. If Steve can understand that to save money is not only saving money for an event. Steve and Gino, we were conditioned to save money to pay for an event. For instance, to pay for your kid's college, to pay for retirement, to pay for a vacation. Now, if Steve can start connecting saving money to buy an asset or to invest in an asset,

[00:12:49] such as a dividend paying stock or a cash flowing real estate asset, the cash flow from those assets pay for the events and create more savings for Steve. Steve. And then all of a sudden that event is over and Steve still has his assets. I think either one of those assets is good for Steve. But Steve, I'd like to tell you, come over to the dark side. I think you'll like real estate long term because then once you start understanding the tax benefits,

[00:13:19] the velocity of money from that perspective, the inflation hedge, the basic human needs, all the other benefits, I think Steve will start going towards real estate. Then we have Amy the avoider. Unfortunately, Amy the avoider is not going to like either vehicle because Amy grew up in a household where they just avoided the conversation of money or money was painful. And at times that happened in my household.

[00:13:49] I would see my mom and dad fighting about money. My dad wanted to spend, he wanted to buy the car. My mom wanted to save money for the rainy day and they would clash. And at some point they would avoid talking about it. And if you grew up in that household, you turn around one day and go, well, that's why I'm late with my bills. That's why I don't want to open up my laptop and look at my checking account. That's why the credit card statement comes and I just don't want to see it. I've been there as well.

[00:14:20] Now, that persona is challenged when it comes to investing. We have a little bit of that. Now, if you're totally avoiding finances, what I would say is please don't dive into any kind of investing, especially real estate investing. I mean, as well as stock investing, you can't avoid looking at your investments, analyzing them, trying to get better at them. Beware of the avoider type. Go back into your childhood.

[00:14:48] Understand what's going on and start to develop the relationship. I'm looking for my book right now. I would say to you, if you're looking to work more about money and family and legacy and money personas, just email me, gino at jakeandgino.com and I'll send you a free PDF copy of our Happy Money book. It goes into these personas. It goes into the relationship of money. And with your relationship of money,

[00:15:12] as you can see, it will really guide you towards what vehicle is best for you. Is it stocks? Is it crypto? Is it real estate? Now, we've gone through George the Gambler, Ivan the Investor, Steve the Saver, Amy the Avoider, and finally we have Sarah the Spender. Sarah likes to spend money. Now, I didn't have this problem. I had the opposite problem.

[00:15:40] I felt tortured when I needed to spend money and that's not a good way to live as well. But Sarah needs to understand why is she spending all this money? How is she going to be able to invest her money? Because if you're not able to save capital, you won't be able to invest. If you're the spender type, understand what's going on in your mind, the neuroscience with the brain. We have four happy chemicals,

[00:16:07] dopamine, endorphins, serotonin, and oxytocin. When Sarah has that feeling or that stress, the feeling of spending money unconsciously makes her feel better. She whips out her cell phone, buys something on Amazon, gets that rush of dopamine, feels great. And then a week later says to herself, well, did I need that extra thing that I bought on Amazon? Not really. But the pattern continues. Please, if you are the Sarah the Spender money persona,

[00:16:36] I want you to read the book. Our book will help you out and make you understand that the relationship with money, what you went through, what you saw as a child, just understanding what actions you're taking. And then obviously, if you want to change those actions, or transform them, because I don't want you to stop spending money, because there is joy in money, right? You're creating and earning this money. Money is just a tool. I want you to be able to enjoy spending it, but I want you to be able to control it and understand and be able to spend on things that you want to spend on,

[00:17:06] not these impulse purchases. Now, as I wrap up the show, my opinion is that real estate is the ultimate vehicle to creating wealth. But you need to understand that real estate in any fashion needs to be looked at as not only an investment, but as a business. And that was a mistake that I was making early on. I was treating it as just landlording. I wasn't looking at it as income versus expenses and cash flow,

[00:17:36] and then trying to scale. Stocks are a lot easier to get into. It's a lower barrier to entry. You go in, you open up an account, and you start trading, and you can get in and out. It's a lot harder to create wealth when you are going in and out and you are allowing your emotions to take control of your trading. Very few people, in my opinion, become wealthy from investing in stocks alone.

[00:18:04] They typically have a balanced portfolio, and as you see over the last 10 years, the alternative investments have really grown. Alternative investments include real estate. I really want just to say to you, thanks for spending part of your day with us here. Your time is precious. You could spend it elsewhere doing a lot of other things. I and my goal here with these how-to videos is really to open up your mind

[00:18:34] and really to make you think about investing, about what's the benefits, how it relates to you. It all comes back to you and your investment goals. And if you want a copy of the book, once again, it's Gino at Jake and gino.com. Once again, thanks for spending part of your day with me, and I will see you on next week's how-to. Thanks for tuning in. If you enjoyed today's video, be sure to like and subscribe so you'll never miss another episode. We'll see you on the next one.