Making a BIG Change to My Portfolio

Dave:
I’m making a big change to my investing portfolio. I’m selling stocks and I’m doubling down on investing in real estate, but probably not in the way you think. A few months ago, at the beginning of January, I explained my upside era framework for investing in 2025. It’s all about finding deals that work pretty well today, but have the potential to really grow and dump rocket fuel on your portfolio over the next couple of years. And today I’m going to share my upside era Q2 update, including some moves that I’m making myself based on everything that’s happening in the economy right now. Because as you’ve probably heard, there’s a ton of volatility across stocks, crypto, and almost every other asset class. But personally, I see opportunity to take advantage of these conditions using real estate investing. And today I’ll explain how I’m personally doing that right now.
Hey everyone, it’s Dave Meyer, head of Real Estate Investing here at BiggerPockets. Welcome to today’s show. If you’ve been listening so far this year, you’ve probably heard me talk a lot about what I believe is a sort of new reality in real estate investing, which I am calling the Upside era. And if you want to get the full framework that I am using to describe real estate right now and to describe my own deal decision making, you could check out Show 10 66. It aired on January 6th, 2025, and it goes into deep detail about everything I’m thinking about. So if you missed that episode, I just want to keep listening to this one right now. Here’s the gist of the framework and how I’m thinking about things from 2013 to 2022 is what I call the Goldilocks era. It was basically this perfect conglomeration of conditions that made real estate investing really attractive, relatively easy and super successful.
These are things like prices going down during the great recession. While rents kept growing, we had low interest rates and by 2013, lending activity had started to resume. So it was pretty easy to get a loan and buy properties at a relatively good price, and that continued for like 10 years and a lot of people got really wealthy and it was great for the entire real estate investing industry. Then as we all know, 2022 hit interest rates started to skyrocket and we have experienced what I would consider a correction or a recession in real estate. And I want to be clear that I’m not saying that prices have gone down or crashed. I think there’s some confusion when I say sometimes that there’s sort of a recession in real estate because the word recession and what I am describing right now really describes the overall economic activity of our industry and that indisputably has gone down from 2021 to 2024, we saw nearly a 50% drop in the number of homes that are bought and sold.
So just by that measure alone, we have been in a recession. We’ve also seen largely prices have slowed down a lot, they’re still growing, but they’ve slowed down a lot. Rent growth has slowed down below long-term averages and in a lot of areas and a lot of asset classes they have actually declined. And so it’s been a really tough couple of years in the entire real estate industry in 20 23, 20 24, and obviously the second half of 2022 as well. But now as we turn the page and go into 2025, I think we are entering a totally new era for real estate investing and it’s what I call the upside era. And I want to be clear, and I think this is really important, that this new upside era has a lot of great opportunities and there’s going to be great ways for real estate investors, large, small, inexperienced, super experienced to profit and benefit from this new era, but it is going to be different from previous era.
It’s not going to be like it was from 2013 to 2022 when everything was just super obvious and kind of easy. Instead, you’re going to have to be a little bit more creative and I think look a little bit further into the future to understand how to generate the best returns. Alright, so that is my overview of the Upside era and as I mentioned at the top of the show, what we’re going to go into today is some moves that I’ve personally made in my own portfolio to take advantage of this new era and the opportunities that are going to be present and profitable going forward. So before I explain though what I’ve actually done in the last couple of weeks, I want to sort of give you an insight into my strategy and this framework that I’ve been using for deal selection. So my personal strategy in the upside era is to find deals that make sense today.
I don’t want to have anything that’s losing money. I want them to be able to break even within the first year of ownership. And I know that break even doesn’t sound like the most sexy thing, but let me just explain to you why I think about this way. First and foremost, I am not talking about that social media break even where people just take their rent income, subtract their mortgage payment and say that’s cashflow. That’s not it. Real breakeven, you have to be talking about CapEx, maintenance turnover, cost vacancies. So I’m saying that you break even and still generate actual positive cashflow after properly accounting for every expense and maintaining a cash reserve. And if you are able to do that, even though it doesn’t sound as sexy as what a lot of people say their deals are, I still think this is actually better than a stock market return because let’s just say breakeven, you’re getting a 1% cash on cash return.
Five years ago, no one would buy a 1% cash on cash return deal, but in this upside era, I’ll tell you why I would at least consider it. I’m not saying I would buy anything that breaks even. Lemme just give you an example. If you were to generate a 1% cash on cash return, that’s a bit of a return, great. But then you probably get two to 3% return just from amortization that’s paying off your loan. Then if you get appreciation even of 2% with leverage, that can be another three or 4% upside and return on your investment. And then tax benefits are usually another 1% return as well. So when you put all those things together, you’re talking about a seven to 10% total return across your entire investment. And that’s not cashflow. I wanted to make that clear. That is a combination of building equity and cashflow and tax benefits, but when you look at that return profile, I think it’s at least as good or possibly better than what you get in the stock market because if you look historically, the stock market returns somewhere between eight and 10% annualized return.
So we were talking about just a break even real estate deal doing as well as the average stock market year. And this is what you have to be comparing your deals to because yeah, this might not be as good as it was in 2015, this perfect Goldilocks golden era of real estate, but as a real estate investor, you need to be thinking about resource allocation and where you are putting your money. And frankly, none of us can put our money into a 2015 real estate deal. You could either put your money in a savings account, you could put it into bonds, you could put it into crypto, you can put it in the stock market or you can put it into private real estate. And so I encourage you, whether you make the same decisions as I do or not, those are all subjective, but I really encourage you to think about your investing decisions this way.
Where are you going to put your money today to best improve your financial future? Do not be comparing today’s real estate deals to historic deals that may never be coming back. So that is the first part of the framework. So don’t get me wrong, I’m not saying just go out and buy any sort of break even deal that is just the first criteria for deals that I’m looking to buy. It has to at least break even because that sets my floor the minimum for my investment is probably doing about as well as the stock market give or take a couple of points. And it also obviously depends on how the stock market performs that year. But then the second part of the framework is really the important, and I think the exciting part is where you need to identify two or three, what I call upsides per deal that could take these average breakeven deals from solid and on par with the stock market to excellent and something that is going to outperform the stock market well into the future.
Because yes, I do want my deal to do as well as the stock market in year one, but let’s be honest, real estate investing is more work. It’s more stress than owning stock and buying an index fund. And so I need parts of my deal to offer upside far and away above what I am earning in an index fund. And that’s why I need to look for these two or three upsides. And just as a reminder, some of these upsides are basically ways that I can take that seven to 10% return and turn it from something that’s easily a 12 to 15% return. And these are things like investing in the path of progress, looking for zoning upside where it can add a unit, add a bedroom, add an A DU. This is things like finding places where there are supply constraints and rents are likely to go up.
These are all different upsides. And when you look at the framework altogether, if you can find a deal that is breakeven and then you have two, three, maybe even four of these sort of little bets that you are placing on your property, if one or two of those bets come true, then you’re going to take this from an average real estate deal to a great real estate deal over the course of several years. And although this might sound a bit different than how other people invest, this is kind of how it’s always worked, right? You are always trying to find deals that are going to grow and improve over time. I just think it’s particularly important right now in this upside era to set your expectations appropriately for what deals are going to look like when you buy them and then calculate how the return is going to grow over time and focus on that because real estate investing frankly just is a long-term game and that’s how you really need to be thinking about it in today’s day and age. Alright, so that is the upside error and the recap of the framework that I am personally using. And we do have to take a quick break, but when we come back, I’m going to share with you the moves that I personally made in Q1 to set myself up for even more upside in Q2 and beyond. We’ll be right back.
Welcome back to the BiggerPockets podcast. We’re here today talking about the upside era and before the break I sort of did a recap of the upside era and my framework for buying deals here in 2025. Now I want to provide you just with a personal update and how I’ve been thinking about my own portfolio, the moves that I made back in QQ one and the moves that I am intending to make and how I’ve set myself up for growth through the rest of 2025. So Q1, I’ve been working on one bigger deal. I am doing a live and flip, which I’m super excited about, but I’m not going to get too much into that today. I’ve made some offers on a couple of rental properties, but I haven’t been able to pull the trigger on any of that yet. But I did make a big move in Q1 that I think is going to really set me up for success for the rest of 2025.
And I want to share it with you because I think it explains several of the different ways that you could earn returns in the upside era and how I’m thinking about positioning myself for the long term. And I think some of the ideas and concepts that I use to make this decision and to make this move could helpful to you. So let’s talk about what I did. And first I just want to say that I want to share this with you in the spirit of transparency, but this isn’t personal advice on what you should do. You got to think about it, your own personal situation, your own risk tolerance, your own asset allocation. But with all those caveats, I said what I did was sell about 25% of my equities portfolio basically meaning my stock portfolio. Now, I did not sell any of my tax advantaged accounts.
I didn’t sell anything in an IRA or 401k. Those are accounts that I intend to keep into my sixties and seventies, not pay a penalty and use that for long-term wealth and my long-term retirement. But I sold about 25% of my normal brokerage accounts. Now, I know that I’m a little bit different than some of my friends that I bring on the show here like James Dard or Kathy Feki who have almost a hundred percent of their net worth in real estate. I am not like that. I estimate that my equities, my stock portfolio is like a third to maybe 40% of my total net worth. And if you do, the math year is say, has sold about 25% of that, that’s like eight to 10% of my entire net worth, which is a pretty big move for me at this point in my investing career.
So the question is then why did I do this? Do I think the stock market is going to crash or what’s going on here? I am not a stock expert. I do follow it pretty closely, but I am not so confident in myself that I think that I can time the market and say when and if the stock market is going to crash. But when I look at the really big picture and I zoom out of everything that’s been going on in different asset classes across the economy for the last decade, the last 20 years, I think that stocks are going to underperform in the coming years. I don’t know if that means there’s going to be a crash and then a rebound. I don’t know if that means they’re just going to grow very slowly over the next couple of years. But when you look at some of the most fundamental ways of valuing the stock market and projecting its performance forward, what you see is that stocks are very, very expensive.
And there are a lot of different ways that you can value the stock market, but two that I personally like to look at, one is called the buffet rule, which is a ratio of the country’s entire GDP to the value of the stock market, the total value of the stock market. And by that metric, stocks are very, very expensive right now there’s another very common way of valuing stocks called PE ratios or price to earnings ratio, which basically compares the price of one share of stock to the total earnings of that company. And if you look at both of these metrics of evaluating stock market or several other of them, they are very, very high. And previous times when we look historically when equities values were this high, the stock market underperformed and in many cases it has underperformed four years and sometimes that’s three years, sometimes that’s five years, sometimes that’s 10 years.
And again, that does not mean the market is necessarily going to crash. It just means we just had two years in a row where the s and p 500 went up more than 20%. That’s amazing. It was great. I was very happy to be heavily invested in the stock market for the last two years, but I just don’t think those returns can be maintained. I think that the best gains have been had, and this isn’t necessarily even a commentary on the economy as a whole, although there is recession risk. Don’t get me wrong. This is just sort of an analysis of previous periods where stock valuations got this high and what happens after. So that’s my look at the stock market. And this sort of relates back to what I’ve been talking about with real estate, right? My philosophy about investing is finding assets that are relatively safe and low risk that have upside.
I just don’t see that much upside in the stock market right now, even if the market doesn’t crash and there has been a lot of volatility lately, but even if the market stays close to where it is, I just don’t see it going up that much more in the next couple of years because it’s already just so expensive. You’re probably wondering, can’t you make the same case for real estate? Real estate is super expensive, right? Well, not really, or at least that’s not the way that I look at it because yeah, real estate is really expensive right now, but it’s due to really different issues. We won’t get fully into that, but if you listen to the show, you probably know that a lot of the reason that real estate is so expensive right now is mostly due to a supply issue. There is a lack of total housing inventory in the United States.
It’s getting even more and more expensive to build, and that has really pushed up real estate prices over the last decade or more. The other thing that changes how you evaluate the real estate market versus the stock market is that housing is a need, right? People need to live in these home, no one needs stock. So when stock market gets volatile or really expensive, people could just sell them without really any implications for their immediate quality of life. That is not true in the housing market. Another factor with the housing market is that 70% of people who sell their homes go on to rebuy. So you wouldn’t just go sell your home because you thought prices might go down a couple percentage points because then you would have to go buy into adverse market conditions instead of what happens in the stock market where people sell off when things get too volatile or too expensive. With real estate, you could just do nothing as long as you’re able to make your mortgage payments, you could just choose not to sell. And so though it makes the dynamics and the fundamentals of the stock market and the housing market really, really different. So to sum this all up, the way I’m seeing it is that there is less upside in stocks and equities right now than I see in real estate. That’s it. We do have to take a quick break everyone, but we’ll be right back in just a minute.
Welcome back to the BiggerPockets podcast. We are here talking about the upside era and how you can take advantage of it here in 2025. So let’s talk about those upsides in real estate that have me excited and making these moves and actually did a whole episode on 10 different upsides that you can use in your own deals. That one came out on January 27th. It was show 10 75, so you can go check that out. But a couple of the upsides that I am personally looking for are one rent growth. I’ve made the case in the past and we’ll continue to that, although I think the first half of 2025, maybe all of 2025 might have slow rent growth. There’s a really good case that rent growth is going to pick up from 2026 going forward. The second is path of progress and building in areas where there is a lot of infrastructure and money being invested.
The third is value add. These are things like doing the burr strategy, flipping or just finding ways to add capacity to homes. The fourth is zoning upside where adding ADUs or additional units on properties and of course other things like owner occupied strategies, which I’m already doing because doing this live and flip this year. So given that and given that I just sold a big chunk of my stock portfolio, how am I going to reinvest that into real estate? Because frankly, the reason that I love real estate and I invest primarily in real estate and that I am making this move is because long-term, my long-term goal is to get enough cashflow that I can live off of. And so whenever I see that there’s sort of an opportunity to reposition some of my money into a asset that is going to build me long-term cashflow, that is sort of what I’m going to do, even if it’s not going to be the best cashflow right now.
But as I said at the beginning of the show, I actually haven’t been able to make any rental property deals work so far here in 2025. I’ve offered on a few, I’ve been looking at a lot. I’ve underwritten quite a few deals, but I haven’t been able to make any work and that’s okay. I don’t like to push it. If the deals aren’t there, I’m not going to buy them. But because I do think market conditions are sort of ripening for better deals to be out there, I’m basically going to split the money that I pulled out of the stock market into two different things. First and foremost, I’m going to take 50% of what I sold and put it into a money market account. If you haven’t heard of a money market account, it’s very similar. He’s a very similar interest rate to a high yield savings account.
There’s some differences that I won’t get into, but basically I can earn four, 4.5% on my money right now, and I like that for two reasons. First is that it is highly liquid if you haven’t heard this term before, liquidity in terms of investing basically just means how easily you can turn an asset or an investment into cash and money market accounts are similar to high-yield savings accounts. You could just easily spend that money. And that is important to me because I am going to be actively looking for deals, rental properties, and I’m actually starting to look at and underwrite multifamily deals right now, and I want to have that money quickly available to me in case that I find that deal, which I expect to find in the next couple of months. I want that money available so that I can act quickly. Yes, in the stock market, you can sell it relatively quickly and you can pull your money out within a week or two, but I don’t want to be in a position where I have to sell my stock on a day that it happened to go down two or 3%, right?
That would be terrible. So I instead chose to sell 25% of my portfolio on an ideal day and then put that money into this money market account so that one, I am earning more than inflation, so I’m still earning a real inflation adjusted return and I have highly liquid assets that I can use to buy real estate deals in the next couple of months. And honestly, a 4% return right now looks pretty good to me compared to how volatile the equities market is. And I could be wrong, the stock market could go up 5%, it could go up 10%, but right now, the risk adjusted return of equities versus a money market account, I’m not complaining about a money market account, especially because it has the secondary benefit of giving me liquidity. So that is the first thing that I’m doing with that money that I pulled out of the stock market.
Now, the second thing I’m doing, and I know this is probably going to be controversial for some people listening to this podcast, but I’m going to use it to pay down my mortgage on my live and flip that I’m going to be moving into here in Q2. I know what people are saying, you should leverage as much as possible or that’s going to slow down my scaling. But just think about it this way, for every single dollar that I pay into my mortgage and I don’t leverage because I would be taking out a mortgage at let’s say 6.5%, I’m basically earning a six point half percent return on that investment. And again, I could be wrong, but I don’t think the stock market is going to get that over the next couple of months. And in the meantime, I can reduce my living expenses by like $1,500 or $2,000 a month.
That is a lot of money that I can be saving, adding to my liquidity, adding to my stockpile of cash that I can use for real estate. And at least to me in my assessment of different asset classes out there, it takes a lot of risk off the table. And to me, it is worthwhile to do this in this investing climate, and maybe I will do this for years if conditions stay the same and I’ll just keep a really low mortgage on my primary residence. But my expectation is that I will probably just refi this and maybe I’ll refi it three months from now or six months from now. It might be years from now, but if rates come down or I see a deal that is better than that 7% cash on cash return, I am getting by paying down my mortgage, I will refi and I will just use that money to fuel my portfolio when I think conditions are better.
So to me, this moves just makes sense. I don’t see a huge amount of upside in the stock market right now, and so I’m taking some money and earning a positive return and giving myself liquidity in order to buy real estate in the second half of the year, and I’m taking other money and just reducing my living expenses, taking risk off the table, and that money doesn’t have to stay locked in my primary residence forever. It will stay in there until I find other opportunities to use that money, whether that’s three months, six months, or three years from now. So personally, that is what I am doing, but as I said at the top, this is based on me, my goals, my current resource allocation, my read of the situation. But the question is what should you be doing with your own portfolio? My first piece of advice is to evaluate the risk adjusted returns of different asset classes yourself.
If you haven’t heard this term before, risk adjusted return, it basically means you can’t just look at the upside potential of every single deal. You also have to look at how risky that particular asset is because this falls on a spectrum, right? On the low end of the risk adjusted return spectrum is probably bonds or money market account, like what I’m investing in right now. These are very low risk, but very low return options for holding your money. On the other end of the spectrum, you probably see cryptocurrency where you have opportunities to double your money or triple your money, but the risk of you losing a lot of that money is also really high. And so you have to sort of look at each asset class, each potential investment in this lens. How likely is it for me to earn a good return? How likely is it that I am going to lose some of my money?
That calculation, that thought process is risk adjusted returns and frankly, figuring out and thinking through risk adjusted returns, it’s not as easy as it used to be five years ago. There’s just no way I would’ve paid down my mortgage instead of buying another rental, just no way. I never would’ve thought of doing it. But today, when I reevaluate risk adjusted returns, it makes a lot of sense. And the reality of this is you really do just have to do this for yourself. There’s no objective evaluation of what the best risk adjusted returns are, right? You might see huge upside in the stock market right now and think that I am crazy to see risk there or risk of underperformance there. That’s totally up to you for me, my personal understanding of markets, my risk tolerance, my risk capacity, my long-term goals, my current cashflow, it’s just different from yours.
And so you need to think about this yourself. The second thing you need to do after you sort of look around the market and assess the risk adjusted returns and different options for your money is to consider your goals. Do you want to be really active in your investments? Do you want to be managing and thinking about your money every day? If so, you could potentially think about reallocating into different asset classes, but if not, if you’re more the type of person who’s said it and forget it, I just want to buy index funds, that’s absolutely what you should be doing. You don’t need to be doing what I’m doing. I’m relatively active in managing my portfolio, and so I am always thinking about these deals. I’m always researching these deals. If this is not something that you do or want to do, then just leave your money and your allocations as they are.
The third and last thing that you should be asking yourself as you’re thinking about how to take advantage of the upside era as we go into Q2 is would you actually do something with the money, right? If you were thinking about selling equities or maybe you’re thinking about selling a rental property or some real estate, think about what you would realistically do with that money. Because if you were going to sell your index funds, for example, and then just do nothing with that money, you’re going to put it in a regular savings account and not earn a lot of money, and you’re just sort of doing it out of fear, you’re probably better off, at least historically speaking, just keeping your money in the stock market and letting it compound over the next several years. But if instead, you’re reallocating because you have a plan to immediately earn better returns, or you want to position yourself to take advantage of opportunities that you see coming in the next couple weeks, next couple months, next couple of years, I think that’s a totally different thing because remember, if you do sell real estate or you do sell stocks, you are going to have to pay taxes on it.
There are repercussions for that. This is not just like, oh, I can take my money out of the stock market, see what happens, and then I’ll just put it back in if it doesn’t work out. I mean, you could do that, but that’s not a good move because you’ll have paid taxes unnecessarily. You have to have a plan for your money. So my three pieces of advice as we head into Q2 in this upside era are, again, one, evaluate different asset classes for risk adjusted returns. And that’s not just stock market versus real estate. Do that for individual real estate asset classes. Think about risk adjusted returns for single family homes versus small multifamily versus flipping versus short-term rentals. And assess if you think there are good opportunities, and if you have the right waiting for where you’re putting your money relative to the second step, which is your goals.
So again, look at those risk adjusted returns, then consider your goals and think about if you have your money in the right place given those two things. And then lastly, really just gut check yourself and make sure that if you are going to make a move, if you are going to reallocate capital, reallocate some of your time in the upside era, make sure that you’re actually going to follow through on it because sort of doing a move like this halfheartedly is probably going to leave you worse off than when you started and just worse off than if you just did nothing. So again, do those risk adjusted return assessments, consider your goals, and then make sure that you actually have a plan to do something with your money. That’s true if you’re reallocating resources or if you’re just trying to put more principle into your overall portfolio here in the upside era.
Alright, everyone, that is my upside era update for Q1 and giving you some thoughts about where I’m going in Q2. I would love to hear what you all are doing with your opportunities for upside as we enter Q2. So if you’re watching here on YouTube, make sure to let me know in the comments. But if you’re listening on the podcast, hit me up on either Instagram or on BiggerPockets and let me know what you’re thinking about. Thank you all so much for watching and listening to this episode of the BiggerPockets podcast. I’m Dave Meyer. We’ll see you next time.