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Wall Street vs Main Street

Updated: Apr 24, 2020



The more fyre CAPITAL continues to grow, the more conversations I have with prospective investors. I absolutely love talking to new investors, this is a relationship business and I’m grateful to hear so many stories. So who do I talk to? Who is submitting interest cards? The short answer is everyone from individual retirees to institutional investors.

Through these conversations, the goal is to see if we're a fit - if what we offer is aligned with investor goals.

Through that discovery process, I've begun to notice a number of similarities and trends across all these conversations. It leads me to ask where these trends come from? Why do I see recurring themes? Who created them?


One of the most interesting themes centers around the 401k, or deferred compensation accounts commonly found through employment. There is a pervasive and widespread belief in the merits of investing in a 401k. Some are legitimate, some are not. So I think back to my own 401k...where did it come from...what were its beginnings...who was promoting it and how did I become a part of it?


If you ask most people about the merits of investing in real estate, the consensus is that it's a great investment. New investors will give examples of what their primary residences have done in the last few years. Or how much their home has appreciated since they bought it. On the subject of building wealth, few will argue that real estate is how most millionaires have created empires. Whether you’re a developer, a value-add investor or a flipper, real estate is seen as the #1 way to grow wealth.


So what prevents us from making the switch from what we’re used to in a 401k to an investment in commercial real estate? The answers are simple:


  1. Because it’s just what I’ve always done

  2. Because it’s what I’m used to

  3. Because my employer makes it really easy

  4. Because it’s simple

Once a train is moving at full speed, it requires the least amount of fuel - momentum carries most of the load.


When you look at the 401k...when you look at what Wall Street has been able to create for themselves, it’s astonishing. This isn’t a political rant, it's just a simple highlighting of some law changes back in 1978 - the original 401k legislation.

Wall Street created a vehicle by which employees could seamlessly invest in the stock market through an employer sponsored plan. Every month, wages come out of my paycheck before I even see it. A contribution is made into an account that is managed by a fund manager who collects fees on that contribution - and collects them for my entire life or as long as I keep my funds in the account. I don’t have to think about it, I don’t have to manage it, I don't have to touch it. It’s like a George Foreman Grill - I set it and forget it.


The great tragedy however is that what we all receive from our 401k’s in terms of convenience & simplicity we pay for in returns and diversification. Wall Street is placing a bet that people would rather sit and do nothing for a marginal return, than actively participate in their investments for a potentially much better return. So far, they’ve largely been right.


If this in part describes you, let me assure you that on some level it also describes me...or at least it used to...

I remember back to the very day that I enrolled in my employer’s 401k plan. I was sitting in a room with 44 other firefighters, and in walks a human resources representative. She passes out 44 401k enrollment sheets, one for everyone in the class, and instructs us to select a fund, select a contribution percentage & sign it.


What ensued was a sort of chaos...I saw 44 firefighters instantly become financial advisors to each other. We were all asking each other how much our contribution percentage was, what fund we were going with. It was amazing to see given my background in finance.


I mean think about it...without a single financial advisor in the room, without a single representative present on behalf of the employees...the plan manager just signed up 44 new clients at the blink of an eye.

What a way to sell. See what Wall Street figured out many years ago, is if they can sell a few representatives in a human resources department first...there’s no need to sell the plan participants - they’ll just sign right up no questions asked. Give those employees a few vague benefits, and they become willing soldiers ready to defend their participation in the plan.

So that’s basically how it works...and for most people that’s the end of the story. We continue to contribute for the rest of our careers, eventually retire, and receive an account with hopefully several hundred thousand dollars in spending money. Great deal right?


Well...no.


Not when you consider what you’ve left on the table. A number of years ago, I dove deep into how these successful investors are creating their empires through real estate. I gave myself an informal education on everything from the internal workings of commercial mortgages to the basic paths of wealth creation through real estate. I emerged on the other side of this journey with a completely different game plan when it came to my retirement savings.

I no longer contribute anything more than the employer match in my 401k.

Instead, I elect to pay the income tax on my earnings, and place those funds in tax-deferred real estate investments - commercial multifamily. Every month I receive distributions on those investments which I save up and reinvest in additional properties which pay even more distributions. The rate I am earning capital is roughly double what my 401k earnings have done. Not only that, but my investments receive annual K-1 statements which give my taxes big writeoffs every year. When properties sell, I roll those profits into other properties on a tax deferred basis through a 1031 exchange - and my investments begin to compound exponentially.


There is zero doubt in my mind that commercial multifamily properties are the best investments that individual investors can make.


Yes, there will be fluctuations in markets. Yes, property values will fluctuate. Yes, there are no guarantees on any profits or returns. But are these things any different than a 401k? No. Your 401k experiences the same changes in value that real estate does.


It’s time to take a look at commercial multifamily in a very serious way, it’s time to look at the tax advantages, the returns & the risk diversification strategy of these investments over your 401k.

Summary

Understanding the roots of how your 401k came to be empowers you to decide if its the best place for your retirement funds. All of the tax advantages available in a 401k have similar equivalent tax advantages in real estate. The cost of the convenience and simplicity of a 401k, is often returns and risk diversification.

Invest with fyre CAPITAL

fyre CAPITAL is a commercial multifamily investment firm. We purchase and/or partner in 150-600 unit, value-add apartment communities in fast-growing Tier 1 & 2 U.S. markets. Together with our strategic partners, fyre CAPITAL represents over 500 Million Dollars of successful real estate acquisitions. Our developers, sponsors and capital partners have amassed a network of over 1,500 unique investors. We provide new opportunities to invest in projects targeting a 14%-21% Internal Rate of Return . If you would like to join us on our next project, your first step is to Submit an Interest Card. We look forward to partnering with you.