Episode Transcript:  

  Today we're gonna talk about real estate versus stock market vocabulary. So I'm gonna get pretty tactical today because if you have been investing in the stock market most of your life, and now you're trying to get into real estate investing, the vocabulary can. Seem very confusing and very different than what you've known and vice versa for those in real estate, looking to also diversify into the stock market.

Now, most of the time these terms are almost interchangeable because it's really the same concepts. They're just different words. So today I wanna walk you through the vocabulary that matters so that you can effectively execute a strategy across both types of assets, but also under. Stand that when you get into real estate investing, one of the biggest differences is you have to think like an owner because you are.

So let's get into it. Let's get REady2Scale.

Hey guys, my name is Jeannette Friedrich. I'm the director of Investor Relations here at Blue Lake Capital, where we specialize in multifamily real estate investments across the us. All right, and today we're gonna discuss basically the difference between real estate lingo versus stock market lingo and how it's important to understand both so that you can execute an effective strategy in either type of asset class.

So speaking of, let's start off with the term. Asset. So asset versus security. So in the stock market, you essentially are purchasing a security. It's essentially a piece of paper or even a position that you see yourself holding on an app in your phone that says you have some ownership of this particular company Now in the stock market.

The chances are you're never gonna walk through that company. You're never gonna influence their strategy. You're very unlikely to be able to pick up the phone and call their CEO and have a conversation with them. But nonetheless, that's how it goes. You purchase the security and you now are quote, an owner, a very small owner, but nonetheless, an owner.

Of that company. Now, in real estate, it's a little bit different because instead of calling it a security, we call it an asset. And an asset actually references not only the physical property that the company is technically buying, but in addition to that, the operations and the. Infrastructure. So you are not only an owner of the real estate itself, but also the business that operates within that piece of real estate.

So it is pretty different, especially when you take into consideration that there are ways that you can actually underwrite that building, underwrite that business, or actually be able to pick up the phone, call the CEO and ask them about their strategies. It's a very big difference between real estate versus the stock market when it comes to owning an asset versus a security.

All right, and so that leads me to my next term of the day, which is cash flow versus dividends. Now a lot of stocks don't even pay out dividends, and those that do, they're optional. They're actually voted on. So A CFO can decide on a whim that they just don't feel like this is the right time to be sending out dividends.

And poof, it stops. Now in real estate, it's not quite the same way. So the way that it works in real estate is dividends, which we call cash flow, is based entirely on the operations of the asset. Meaning that essentially once the debt and all of the bills have been paid for that particular asset, any remaining money is sent out as cash flow to investors for their distributions, typically on a quarterly basis.

Now the benefit from a real estate standpoint versus a stock market standpoint with this is that there has to be more transparency and clarity around the decision to either send out those cash flow dividends or distributions. Or not. And in real estate, a lot of that comes down to being able to simply review the operational metrics yourself, see if there is money and cash flow available after debt and expenses have been paid, and then no with confidence that yes, you can anticipate getting a distribution in the stock market.

It's not nearly as simple. There can be a tremendous amount of profit and still not a single dividend. All right, and the next term that we're gonna dig into today is equity. Now, equity essentially means the same thing, rather you're talking about real estate, or if you're talking about the stock market, it means ownership.

But the big difference between having equity in real estate versus the stock market can be the way that it is structured. So in the stock market, everybody owns equity on basically the same terms. It is what it is in real estate, depending on. The way that you got into the deal when you got into the deal, how you got into the deal can definitely have an influence essentially on your equity position.

And so what I'm talking about is there's such a thing as preferred equity, meaning that you are guaranteed to get an X rate before, say the sponsor or partners can take any of their fees. Or you can also use the term preferred equity, meaning that you get paid for. First before others do. So there's other ways that positions within the capital stack can be structured in real estate that give you not only equity, but a very significant point of positioning that is very different than the any option you would have in the stock market.

And now this leads me to appreciation. So appreciation essentially means the same thing, whether you're talking about real estate or the stock market, it simply means that something has become more valuable. But the kicker, especially when it comes to this. Stock market is the reason that something can sometimes become more valuable.

It can be based on a headline. It can be based on geopolitical positioning. It can be based on crazy things like poly market and how people are simply betting in poly market. It's extremely reactive and stock can suddenly grow in appreciation and be worth a lot more money as quickly as it can lose all of that appreciation.

Now in real estate, thankfully it's a lot more calm than that. And one of the things that's you know, very advantageous for real estate owners is that you don't actually have to rely on headlines or bets and other crazy factors like that. You can actually. Force it. So in real estate, there's a lot of emphasis on what they call NOI, which is a net operating income.

And essentially the higher the NOI becomes, the more valuable a property becomes. And the way that you can influence that is there are a multitude of ways that you can actually manipulate that. So for example, you can go in and do. Renovations, which a ton of real estate investors do because they know that if they go in and make improvements to the property, they can charge even more in rents and begin to get a higher NOI, which in turn helps the asset to appreciate and become more valuable.

You can also do it by lowering expenses or increasing occupancy. There's a number of ways to be able to influence that NOI growing more positive and hence. Forcing that appreciation into the asset. Now, while that's technically a win for real estate, I will admit that the stock market does have a win over real estate, which is liquidity.

Now, liquidity simply means how hard is it or how easy is it to get your money out of a deal? Or out of an equity position when you technically own something. So in the stock market, everything is highly liquid. You can buy and sell all day long on a whim whenever you want, without really any type of consequences.

Now. While that's very beneficial to a lot of people and they appreciate being able to do that. Sometimes it's actually not the best thing though because then it allows people and markets to operate off of knee-jerk reactions, which can be very bad for the market as a whole. In real estate, typically, real estate investments are illiquid, meaning that once you get into the deal, you are in it and you can be in it for three years, five years.

Seven years before you maybe have the option to be able to exit that investment. Rather, it's selling the investment, doing a refi on the investment or some type of capital event that triggers that exiting window. You have to wait until that happens to be able to get your money out of a deal. So it's a very big difference between the two strategies.

But the reality is that's. Some investors appreciate being forced into that discipline to have to ride through with the investment all the way to the end because oftentimes, whatever the issues are, they're usually short term and can be resolved in time. And last but not least, we're gonna talk about tax strategy.

And this is where real estate shines all day long. So in the stock market, you can execute an effective tax strategy. You can pay attention to when you're going to be potentially selling some shares for for profit, which will ultimately result in capital gains tax that you're gonna have to pay and simultaneously try to operate some tax loss harvest.

On the other hand, so that way you can try to offset some of that, but it doesn't make a huge difference. And ultimately there's still a lot of tax responsibilities that have to be addressed when you are operating solely in the stock market. Now in real estate, there are some very unique tax benefits to being a real estate investor, including being able to.

Forced depreciation into an asset, meaning that you can actually produce a loss on paper that you can use to offset any gains that you're getting from the investment. So you can literally be cash flow positive and still turn around and leverage those losses to actually completely reduce. Sometimes people are even able to eliminate.

It's rare, but you can definitely reduce. Your taxable burden in a way that is absolutely unheard of and impossible to do in the stock market. It's one of the reasons why so many people have real estate as part of their investment strategy and portfolio, because really there's no one that compares to real estate when it comes to being able to execute some significant tax benefit.

So rather you're investing in the stock market and looking to get into real estate, or if you're in real estate and looking to diversify also into the stock market. Either way, I hope you found this video helpful so that you can effectively execute a strategy competently across both asset classes. In the meantime, be extraordinary.

Have an awesome week, and I will see you guys on the next episode. Ready to Scale is brought to you by Blue Lake Capital, where we hunt down the best multifamily investment opportunities that we can find and invite investors to join in with us. We target Class B value add multifamily properties across the Sunbelt.

Our CEO Ellie Perlman invest a substantial amount of capital into every deal. This means our interests are aligned with yours. If you're an accredited investor looking to. Span your portfolio and diversify sponsors. Be sure to visit us@bluelakecapital.com. Blue Lake Capital, be bold, be extraordinary, and keep moving forward.