Updated: Aug 16, 2022
Welcome to the Redfish, Healthy, Wealthy, and Wise podcast. Our focus is to deliver information that helps you become healthy, wealthy, and wise. This podcast is sponsored by Redfish Capital Management, the views and opinions expressed here and do not necessarily represent the views and opinions of SCF securities, Inc, or any SCF related entity. This material is for general information only and is not intended [00:00:30] to provide specific advice or recommendations for any individual securities offer through SCF securities, Inc. Member FINRA, S I P C investment advisory services offered through SCF investment advisories Inc office at 1 55 east Shaw in Fresno, California, SCF securities, Inc, and Redfish Capital Management are independently owned and operated. SCF is not associated with other podcasts. And the messages contained within. Brad [00:01:00] Murrill and Redfish Capital does not offer legal or tax advice. This material is not intended to replace the advice of a qualified tax advisor or attorney please consult legal or tax professionals for specific information regarding your individual situation now for your host, Brad Murrill.
All right, everybody. Hello and welcome back to the Redfish, Healthy, Wealthy and Wise podcast. My name is Brad Murrill, and I am excited to be coming to you today with, uh, something a little different. I'm gonna do a new series, and this is gonna be a series of three, possibly four podcasts that are all gonna be centered around investing in real estate. And so I'm gonna break up these, this series, if you will, into one today's discussion where I'm simply talking about how to invest in real estate, uh, res R E I T S. I'm gonna break down res and kind of how they operate and then, uh, finally how it is that you can invest in them. What kinds you should look at cetera, cetera. Uh, from there, I'm really looking forward to bringing in a close friend of mine. His name is Craig Bunn and Craig operates a pretty large industrial, uh, company here in Houston, where they focus on painting it's bunter and painting.
But what Craig has also been doing these last several years is something that a lot of my clients, uh, let's say dabble in, and that is flipping houses and Craig is really good at it. And he's got a really good eye for finding, um, what is a value in a home to get in there and then fix it up, which is really tough in today's real estate and Mar market. Um, and then to be able to sell it at a profit. So I'm gonna have Craig come in here. We're gonna talk about that for those of you who enjoy doing that, or have considered doing that. I know a lot of people, uh, also retire and from their regular nine to five job and they do that to make extra income. So we're gonna talk about the ins and outs of that, and then I'm gonna have another very close friend of mine, Whitney snow come into the office and Whitney is a realtor.
I believe I've had her on the show before. And, um, so Whitney's a, a successful, uh, realtor here in the Houston area. And there's so many people that are constantly selling and buying a home. And in these really different times, she's gonna talk to us about what you as a seller can be doing to maximize the profit that you get from your home. Um, it is not uncommon for her to list a home and then open it up for bids and to get, you know, 10, 15, 20 contracts on a home, and then sitting down with the homeowner and say, okay, here's what we have. Here's the best one here's looking at. 'em. So what she has really developed is, is a keen eye for being able to make sure that her clients are getting the most out of their particular home in this particular environment. And so I'm really excited about the civil series.
Um, a lot of us, uh, for, for many, many people in the United States, their home is their largest asset. And obviously as somebody who is in, uh, asset management, we have to take that into consideration when we're drawing up a financial plan for someone. So today we're gonna focus on real estate investing. And so that means we're gonna talk about res R E I T S for those of you who are not familiar with the asset class stands for real estate investment trust. So basically what a real estate investment trust is, is an entity that owns several properties and bundles them together. And then by law under this particular bundle that was set up, I believe it was 1960. They have to pay out 90% of the revenues that are generated by the tenants in the form of a dividend. And they can pay that out quarterly or they pay, you know, it it's an annual dividend, but it, but it's typically paid out quarterly.
And so the, the yields on rates are often higher than what you'll see in the stock market. So we know now the structure, so it's a pool of real estate assets where the tenants are paying the landlord. The pool is the landlord. They are then taking all of that money and must pay out at least 90% to you. The shareholder who owns the REIT. Now, why do people want to own REITs as a part of their stock portfolio? Well, for number one, we know, and most of us do know that real estate has been a very good performing asset. Something to hold in your portfolio, that's done well over time, over the last 25 years. So we went, I went back and I was looking at the, the website by the way, is NARI it's N a R E I T. The national association of real estate investment trusts.
And they have a dearth of information on everything real estate. And as far as a re, not just real estate, but REITs in general are concerned. They are a fantastic website. If you wanted to go and get, uh, kind of more in detail into how REITs work, but over the last 25 years, according to the narrate site, if you look at the publicly traded rates, okay, those that trade on the stock exchanges, they have annualized 10.2%, 10.2%. That is an excellent return. The average yield on all of these together. If you lumped them all together and averaged out the yield, it would be 2.9%. So the 10.2 is the 2.9 is in the 10.2, but at the end of the year, investors returned 10.2% annualized on that money. So let's compare it to the stock market. The Russell 1000, which is the largest 1000 stocks that trade returned 9.96.
Over that same time period, the Russell 2000, the small caps and the mid caps returned 9.3. And then if you wanted to compare it to the us bond aggregate index, uh, that returned 5.14. So it it's, you, you often hear us talking about allocation and being properly allocated, uh, when you come in and meet with us or when we're meeting with clients or when we're talking to you on the phone. So you want to have some money in various stocks, which of course need to be allocated. We're not talking about that today. It's always good to have some in fixed income, some kind of bond to even out the ups and downs, even though lately there's been more up and downs in the bond market. And then real estate is another sector that you can have, which will further allocate your money because it is not correlated by not correlated means it doesn't typically trade in the same direction as the stock market.
Granted it is a stock. It will move as the markets move, but sometimes it will have a little less volatility than the general market will. So the basic characteristics of these res is that there is a dividend income. It's a portfolio divers diversifier, but also why it's getting a lot of tension lately. It's historically been a pretty good hedge against inflation. And that's all everyone wants to talk about right now is inflation because we are experiencing it. So why is real estate a good hedge against inflation? So think about it like this. I'm, I'm sitting in, um, our offices here at Redfish capital and I pay rent. I do not own this building. Everyone else in this building is paying rent to the landlord as inflation hits. What the landlord is able to do is when my lease is up, he is able to then say, okay, we're gonna renegotiate the lease and put a higher price on my lease when it, when it comes due, if prices are indeed higher at that particular time.
So res have a way of passing along if you will inflation costs to the, um, rent. And so I'm, I, everyone in this building as leases come due, he's going to get a higher price on it. So that, that is why that, uh, historically reeds have been able to keep pace with inflation, um, and, and, and not get at least blown away where if something is set, um, and you have a set cost, let's say you're building widgets. And then you can only sell your widget for a set cost, but the price to build that widget doubled you're in trouble so they can pass it along to the, uh, end product, which is, which are us, the renters. So as far as res go, there are a bunch of different sectors, and I'm kind of gonna go through these various different sectors, because I think it's important.
It's not just one kind of re just like, there's not one kind of stock. There's several different kinds of res in reality, there are 12 different, um, front, um, categories of REITs. Some of them, four of them are relatively new. And, but I mean, when I say new after 2010 and on like timber REITs became really popular and it's now its own classification of REITs infrastructure res came along in about 2012. Um, one of the hottest growing sectors were data centers as we've been moving into the cloud. And so data center reach, they came along really in popularity and I I'm guessing 20 16, 20 15, 20 16, uh, somewhere around there. And they've had phenomenal returns. And so we've got these different kinds of res that are out there, but the main eight sectors, the more traditional sectors of real estate investing are office res, which is I'm sitting in an office.
So you can imagine what office res buy. They just buy offices where people are paying 'em rent. You have industrial res, you have retail res. So think about each one of these groups of real estate. So inside of them are gonna be industrial properties. And this one is gonna be retail properties. You then have residential res obviously apartments places where people live healthcare res healthcare res are nothing but hospitals and healthcare related, um, uh, facilities. And you've note that around a lot of hospitals that there may be a hospital, but they're leasing it to someone. And they're usually very long term leases because it's a large building. Just like if it was a, the retail lease to let's say a target. I mean, they just don't put those up and move them every day. Um, you've got lodging and resorts hotels, and then you've also got self storage.
So those are the basic types of res that we call more of the traditional. And there's number eight is a diversified re and a diversified re just like its name owns a little bit of all of those in there because each one of these industries, each one of these groups move differently than the other. And that's where I like to take a bit of a deep dive is into looking into the different categories of res and what has performed better or worse before I get into that, though, I want to talk to you briefly about the largest res out there, that way, if you're sitting at home and you're looking it up on your computer and you wanted to take a look at some different res here's someone's to look at. So the largest rate by market cap market cap is basically a way that we in the stock market, we look at a company and we take the number of shares that are out there times the share the stock price that gives you the market cap that tells you the largest by capitalization, the largest one, that trades.
So let's briefly get into the largest rate that trade on the exchanges. This is a little overview here. And the largest rate that trades by market cap is an industrial rate called Prologis. And so Prologis being an industrial rate. I want you to think warehouses that's in essence, what they do now, they've got a pretty good customer. Their largest comp customer is a company maybe you've heard of 'em Amazon. So when you think what Amazon does is they have to deliver all these different, uh, packages and goods. They send them to a city, they fly 'em to a city. The then they take it to a warehouse within the Amazon warehouse, distributes them to the local, uh, trucks, vans, whatever it is that are then delivering it to, uh, the last mile to get to the, um, the home, the business, or whoever placed the order, the then the last, uh, in the, in the line, if you will, for the customer.
And so that is Prolog. They've got about 3000 properties. I think, I think 19 different companies, those are really, really big. Um, Amazon is one of their customers. They've got a lot of different customers, but just think of these big distribution centers that you see, they're the ones that own the land, that own the property that these distribution centers are sitting on that then, uh, bigger companies are coming out there, putting their, um, facility on and then operating out of that particular facility. The next two that are the two largest that trade are in the same. I'm lumping 'em together, cuz they're in the same specialty re category of broadcasting. So again, these are these giant broadcasting towers that you see, uh, you're driving down the freeway, you're driving downtown, whatever it may be. So we got these big towers out there. And so American tower and crown castle are the two largest real estate investment trusts that invest in this particular category.
And they own the raw land that these towers sit on. So the company will come in, they will, they will lease the land with permission to build a tower. And then obviously they have to pay the rent that that land is on. And being that, you know, it's rather expensive to build these big towers. They can be kind of long leases. Another interesting thing that, that we've seen businesses doing, especially, um, in these taller buildings is they're now leasing the top floor or the rooftop to these particular companies. And so these companies are coming in, they take the rooftop, they build it up, uh, on top of the, the roof. It's just another way for the business or the, the owner of the building to make money. So that's American tower and crown castle. And then finally the fourth largest, uh, by market cap that trades on the exchange is public storage.
I know you've seen these all over the place. These are self storage units and, um, that's real simple where they just go in and they, they lease out the property. Then the property owner comes in, they set up all the storage units, they set up the fencing around it. They set up the security and they make their check. When people like you and I rent out a storage facility, I've got one. And I just pay that check every month. Well, a portion of that check obviously goes to the landowner. So those are the four largest publicly traded rates that are out there. And that gives you, um, one option to look at. So going back now to the, the sectors. So let's go back now to the individual sectors. I'm gonna concentrate on the main eight that I went through, office industrial retail, residential healthcare, lodging, self storage, and diversified.
I'm counting on my fingers to make sure I get all eight <laugh>. Um, I've got a, a chart in front of me that I ran, ran off. Again. This came from the nare site and this broke down the returns for each of the sectors in the real estate investment trusts that trade publicly. And it went back to 1994 and it's ranking the returns of all of the office, res of the industrial, the retail, the residential, it breaks it down by group. So then I took out my highlighter and I wanted to see which of these groups, and this is something I've been tracking for years, but I like to follow and see which one of these groups performed the best in a particular year. And then I can add up the number of years they were the top performer. So if I just go back to 1994, I can look at self storage.
Res self storage res were the top performer eight times since 1994. In other words, they returned the highest amount outta any of the groups. And it's not by a small sum. I mean, just last year alone, the self storage rate index returned nearly 80%. That's a big return that includes dividends, but that is an awful big return. So eight times they led all the industry groups in the returns, and then we have number two spot way back at number at only four times. But four times is still good. But four times they led the industry. That's the healthcare res. They led the industry four times, but self storage was eight. Then the rest we kind of have a smattering. Uh, industrial was three, retail was three. Residential was three lodging was three office only one time. And then diversified has never won because it's diversified.
It's not gonna win it. It can't, uh, just by its very nature <laugh> cuz it owns all the different ones. So it's not going to, but I, so I, I look at that. It's important to me to know that this is the sector, which sectors have performed the best. So it's obvious that self storage has performed the best. And here's another thing I like to do. I like to look back at bad years in real estate to determine what they've done. So I went back to 1998, brutal brutal year in real estate, pretty much every sector in 1998, lost money. In fact, I'm looking to make sure every sector in 1998 lost money, every, every real estate sector, the self storage sector lost 7.2%. But when you compare it to the other sectors, lodging lost 52% healthcare, 17% diversified rates lost 22%. Residential lost eight retail only lost four industrial lost 11 and office lost 17.
So they only lost seven in that particular year. So you go, okay. So in bad times, real the, the self storage sector of real estate tended to outperform the other sectors. So let's look at two more years, 2007, we all remember that one. Uh, that was a brutal year. Um, healthcare reads actually outperformed that year brilliantly. They made 2.3% self storage dropped almost 25% that year. The others were down more in 2016. Uh, self storage dropped 8%. Well, those are the only three years. I'm sorry. There have been four years that they dropped in 1999. Self storage also dropped 8%. So there's been four years out of all of these going back to 94 where they lost money, but all the rest they made money and then outperformed in eight out of those years, if you add up all the years, the good years and the bad years, the average annual return for the self storage re sector, going back to 1994 was 18.8, 3%, which far in away beats all the other sectors.
So that tells me something as an investor. It tells me that self storage is rather durable. And the reason why I think it's rather durable is you, some of you have storage units. I have two. Um, I have one that I keep, uh, uh, down in Galveston. I keep a boat, uh, down there in a storage facility in Galveston. And then I have one in, uh, here in Cyprus just for stuff. Cause I'm always amazed at how much stuff my family can generate. We have so much stuff that we can't live with all our stuff. And if you want to see something really funny on stuff, Google George Carlin and his bit on stuff, you will not regret it, my friends. So, but we've got all this stuff. And so I have a storage unit where I keep my extra stuff. Kids go off to college.
I need a place to put their stuff. It pays automatically. I think it's a hundred and something bucks a month. It's not expensive. It's not a big space, but it just comes out of my checking account. I don't even think about it. That's most of self storage. When you think about self storage, the cost to build a self storage facility is nothing compared to the cost of what I'm sitting in. Now in my office, it costs a bunch more to build an office than it does. Think how much more it costs to run an office than it does a self storage facility, self storage facility. You put up some gates around it, make sure that it's safe. And then oftentimes you have a leasing office inside of the leasing office. You have someone who works there and often they live in the leasing office <laugh> and so they don't have to pay rent.
So they're not making a whole lot of money, but they're living rent free. They make a little bit of money then to run the business and make sure that everything is safe. That's generally the cost. I think that has a lot to do with the fact that why the self storage industry has done so very, very well. So that is in general res if you will, that are publicly traded. They trade on the stock exchange, but that's not the only way to skin this cat. So private res are another way that people can invest in the real, in the real estate area. So I'm just briefly, briefly gonna touch on this. Just acknowledge that their existence, there's some, some attributes to these. So on a stock, on a publicly traded rate, you go in and you buy it. Um, it goes up or down, whatever the market may do, you you're collecting your dividend.
And then, um, at any point you can sell it and say, I'm done. I want out, thank you very much. Goodbye. Now, a little different with privates, these, it, it takes more money on the initial investment to invest in them. You'll see some that will allow you a minimum investment of five to $10,000. You'll see others where the minimum invested is a hundred and still others where the minimum invested is 500 to a million dollars in order to, for you to invest in it. So the private rate is it gives you a little bit more see through, you actually know what it is that you own when you own the private rate. So let's pretend that you have an office rate and, and you give them your money and you own a portion of these particular buildings. And they'll tell you, here they are. And they give you the list and you're owning a portion of these particular buildings.
So what are some of the advantages and disadvantages of that real basically, I think you can see better exactly what it is that you own. There's a, a downside, I think, on the tax front and the tax front I Henry. Absolutely. I can watch him just pale. When I mention the word K one, uh, K one taxes are how many, many of these res, um, are taxed to K one usually comes to be honest with you after the text deadline, which is part of the reason why I think Henry tends to vomit a little bit. <laugh> when he, when he hears the word K one, uh, it takes a little bit longer to get out there and it's much more complex. Some will issue a 10 99, but, um, the most that, that I have seen, uh, issue a K one. When you put your money into one of these, you're generally gonna be locked up for a certain time period.
They're not liquid. Okay? So you can't put your money in and say, oh, look, this has come up. I need to reinvest. I wanna do this. You can't, they're in there for a specific time period. Some of them will allow you to redeem, but when you redeem, it's usually at a percentage below nav. So if the, the, the actual rate, the net asset value of the private rate is trading at 10, they may say, fine, we'll give you $8 and 50 cents or $9 or $9 and 25 cents, whatever it may be, if it is within a five year period, six year period or whatever, and you usually don't become liquid until the company then says, all right, we're through, we've just sold all of the properties or we're going public, whatever it may be. So that's how those work. And they do play a large part of how people can invest in the market, but there's definitely some give and take as to whether or not it's, it's worth it.
Um, one of the other features I think of private res that are, um, important, and really why they're issuing this K one is when you own a, a private rate, you actually get to participate in the write downs, uh, of taxes on each individual specific property. So it will lower your cost basis, uh, by a little bit when you don't have that advantage in the publicly traded re uh, that that trades like a stock. So you definitely do have that particular advantage, but you have to weigh that against some of the disadvantages, um, that come with a private re. So it's kind of important to think about both and being that it, there is a, a tremendous amount of money wrapped up in that particular area of investments of REITs. I wanted to make sure, um, that I was at least touching on it briefly in this overall re discussion.
So that should be about it. I'm just trying to give you a little general overview on re and investing in the real estate market. It can be a fantastic thing for you to do at the same time. Don't remember, there have been some periods of times where real estate gets absolutely hammered. <laugh> we've seen that. I can. I still think that, uh, oh, 8 0 0 9 period was one of the, uh, most telling times in American investing history, where we saw this giant bubble in real estate, and then asset prices just collapsing, um, on the back of the financial, in, in, in the banking crisis. So in, and that, wasn't the first that we've seen in the far as the real estate bubble. So one of the things you should be asking yourself as well, is, are we in one now there very well could be. There's some positive things that are going on out there in real estate, but it could be the top of the market.
So these are all things that you need to consider when it comes to investing in real estate. Um, again, as a reminder, I am so excited to have my good friend Craig Rin, um, on the show with us here, coming up soon as we're doing this series on real estate investing, where Craig is gonna talk to us about his process, when it comes to buying, fixing up and selling a home, otherwise known as house flipping, of course, that's gotten hugely popular too. And all the different shows that are out there on TV. I mean, you just turn on any cable station, um, or streaming station. Now that many of us have gone to streaming, but you can just plug it in and just find out all these different shows where you've got these couples that are coming in, they're buying a house, they're renovating it, and then asking the owner if they wanna, uh, flip it or keep it, or, or do whatever.
And then, uh, following that up, I've got another really close friend of mine, Whitney snow, who I'm trying to remember. I may have said this in the beginning. I'm trying to remember, um, whether or not I've had her on the show yet, uh, before she is an outstanding realtor here in the Houston, Texas area. And she really works hard and has kind of got, got it down to a process. If you will, of getting your home ready to sell some of the things that you can do that are actually improving the value versus some of the things that really aren't, uh, giving you a lot of the value, some of the things actually can, can take away, uh, from the value of your home. So if it's your long term, permanent forever home, I don't think it makes much of a difference, but if you do plan on selling at some point in the future downsizing, when the kids go to college, whatever that may be, that would be fantastic.
That's where Laura and I found find ourselves now is my youngest. Jackson is, uh, heading off to college. And, uh, he was so excited to have this, uh, have a big graduation party. And, and, and I was all in all, I'm all in on this graduation party. And he's like, why are you so excited about my party? I said, son, this isn't your party. This is my party. <laugh> all my kids are gone. They're off to college, but you know, I mean, so they're not quite gone as far as the payroll is concerned, but this party's for me, this is a big day for me. So a lot of people in, in the shoes that Laura and I are in have considered are contemplating downsizing within a few years and stuff. And so if you are in that particular category, then I think tuning into, uh, Whitney's, uh, interview would be fantastic.
And then if I can come up with another one, we might make this a four part series on real estate right now is the three part, but Hey, who knows? I might come up with a four part. I've been trying to get my friend Ignacio, Ernesto Grio in, in here, on this show. And what, uh, what Iggy, uh, and does is he does senior housing. He builds these amazing apartments on, in, uh, the senior housing area. And so I might bring, I'm try, I'm gonna really try hard to get Iggy in here and just kind of talk about what we're looking at is we've got the baby boomers and we've got these other generations that are looking to also downsize, but also, uh, make life a little bit easier. And these kind of facilities that they're building now are just amazing. We used to have this old, you know, talk about old folks homes, things of that nature, not anymore, not anymore. These are nice. I'm looking forward <laugh> to the day where I might be able to do something like this. So anyway, I'm going on and on and on. Look forward to talking to y'all soon. Thank you for your business. Thank you for listening. This is Brad. Talk to you soon.