The Macro Analysis is Clear: Why We Are Reallocating (Away From Stocks) to Real Estate in 2025
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What's up, everyone? It's Dave from BiggerPockets. This week on the show, we've been talking a lot about the upside era. If you haven't heard, it's my theory about where the real estate market is likely heading over the next year and how investors pursuing financial freedom can take advantage of these dynamics to achieve maximum upside in the long term.

Today, it's time to stress test my theory. Our guest on this episode is Scott Trench. Scott is the CEO of BiggerPockets. He's my boss. He's also the co-host of the BiggerPockets Money podcast and a really experienced investor and personal finance expert.

And the reason I wanted to have Scott on the show is because I know he's also doing a lot of the same work I do, where you dig into data, look at macroeconomic trends, thinking deeply about investing strategy. And because he's definitely not going to be afraid to tell me if he thinks I'm wrong and he has different opinions than I do.

So I'm going to share in this episode a couple of my underlying hypotheses about the upside arrow with Scott. We'll find out if he agrees. Scott told me he spent many hours preparing for this episode, so I'm expecting a few spirited debates about residential, commercial real estate, and other investing options like the stock market and Bitcoin.

Scott Trench, welcome back to the show. Happy New Year. Happy New Year, Dave. Thrilled to be here. Always excited to talk about my favorite subject. Yeah. I want to start by getting your feelings about my hypothesis and theory for 2025. It's

If you've been listening to our episode so far here this year, you may have heard that my theory so far is that we're entering a new era of real estate. We're sort of ending this slog that we've been in. It's not like this is going to be some time where people are going to be able to go out, buy any deal, and things are going to be very easy for them. But

I still think there's all this upside. Real estate is still the best asset class for people to achieve financial independence. Let's just start there. Do you agree with that or do you think we're in for another tough couple of years? I agree with your conclusion and disagree with parts of your analysis, I think. Okay. That will make for a good show. I think real estate in 2014 through 2019 was –

such a no-brainer in a lot of ways because you could lock in low interest rate debt and get cash flow. I mean, a house hack at 95% leverage made a ton of sense. It was just a no-brainer, obvious way to build wealth.

That has gone away. And what I think has happened in the last couple of years is real estate has not been a particularly good performer. We'll talk about that in a little bit. It's not been the best asset class. And I've been pretty vocal, and I think you have too, about muted growth on prices and rents. And I think the story of 2025 is now that everything else has gone up.

and real estate has kind of stayed static for the last two or three years. I think we're seeing real estate emerge as a really attractive option compared to the other asset classes. So that's where I agree with your conclusion and disagree with parts of your analysis. Well, let's go into some of my analysis. I'd love to hear where you agree and disagree.

My core theory here is that we've bottomed out in residential housing, not necessarily in terms of pricing, but in terms of sales volume, which has been super slow. We're down about 50% from where we were during the pandemic. I think we're going to start to see that pick back up here this year. And I think we've also bottomed out from inventory perspective, and we'll start to see inventory come back.

which in my mind will be just the beginning of a healthier housing market. I'm not expecting huge recoveries this year, but let me just get your reaction to that hypothesis. I think single family housing has gone down in price a little bit over the last two years. I would actually value some of my properties a little lower, just a hair lower than I bought them at two or three years ago in some cases. And rents have gone nowhere, as a lot of landlords have noticed in much of the country, especially where I live.

in Denver, Colorado. I think that the transaction volume piece, you're absolutely spot on. And I want to really emphasize that we're talking about going from a historical low to 5% more than a historical low in terms of transaction volume. So for all intents and purposes, if you're in the real estate industry as an agent, I think at least the first half or three quarters of 2025, you're going to continue to feel a lot of pain because the business of transacting real estate will be

severely depressed, but up incrementally from historically low transaction volume levels in 2024. I agree on the incremental part of it. It's not going to be a huge increase in sales volume unless rates fall a lot, which I don't think is going to happen. We can get to that in a little bit. But I guess the reason I see this as sort of a turning point in the housing market is because we have to

hit bottom at some point. And even though I don't think it's going to be much better, I think we might be transitioning from what has really been a real estate recession in terms of transaction volume into one that is expanding, albeit very slowly.

Yeah, I think that that's absolutely right. And I think we'll see transaction volume gradually take up for the next several years, regardless of what interest rates do. A lot of people are locked into their housing or have owned housing free and clear in this country. And I think that the reasons that people have to sell because they move, they get a new job, there's family situations, there's just a desire to make that change.

We'll begin to overwhelm the lock-in effect that has been the story for the last two or three years. And another underlying thing that's going to loosen this up is median household American income, both nominally and on real inflation-adjusted dollars, are rising pretty substantially, 2023 to 2024. And I think that will continue into 2025. And that will incrementally, slowly but surely, begin to break this logjam of the lock-in effect. The lock-in effect makes your housing way more expensive when you move.

But if your real income is going up and housing prices are not moving in nominal terms, that means that you can afford to break that log jam. That will not happen to a huge degree, but it will happen to a small and incremental degree. And that's what's going to drive, I think, a good chunk of those incremental transactions that you're talking about here. Again, not going to move us back even to the historical average, just a few incremental points off this historic low in terms of transaction volume.

Right. Yeah. I don't believe there's going to be one thing that improves affordability. Unfortunately, I personally don't think we're going to see huge, at least national level price corrections. I don't think we're going to see huge drops in mortgage rates, but

But I think the most reliable of the three sort of pillars of affordability in the housing market is going to be wage growth. Like I expect wage growth to continue to outpace inflation. And this is going to slowly chip away at the affordability challenges that we're seeing. And that's why I think we're in this long recovery phase now. It's not going to be a super –

accelerated recovery, but I do think we're at the beginning. So it sounds like you sort of agree, at least in terms of transaction volume. Yes. I think personally that rent growth is going to be a bit muted this coming year.

And you have to really look at it in terms of single family and multifamily growth. Multifamily is probably going to stay close to flat where it is now. I think single family rents will still probably be close to the pace of inflation or something like that. How do you react to that? I think that's absolutely spot on. I completely agree. I think that what's going on here, right, in the last couple of years is when interest rates rise, rents should skyrocket, right? Because the alternative to buying a home, renting,

is so much more expensive with higher interest rates. And that hasn't happened because as I'm sure people who listen to this podcast are aware of by now, there's been so much supply built, 575,000 multifamily units, the most in American history delivered in 2024, we estimate. And that's going to be incrementally, that word incrementally,

has popped up again here, incrementally lower in 2025, but still north of 500,000. It will drop to 240 to 260,000 in 2026 based on the starts that are in progress right now. And that is, I think, the big story here in the real estate market. So yeah, I would not expect rents to grow again in 2025 unless maybe you're looking at some big growth in the back half. It all depends on the timing of when those deliveries are going to be hit in the market.

And that gets really precise. And it's worth mentioning just the caveat that we always try and mention is that what Scott and I are talking about is on a national level. You're going to see a lot of regional differences. Yes. Last year, for example, there were some markets in the Northeast, in the Midwest that were grew at seven, eight, 9%. We saw some markets drop 5% in rent. So the spread is,

the variance is really high right now. And I personally at least expect that to continue based largely on what Scott is saying, which is on supply. You have this sort of interesting thing going on where many of the hottest markets where people want to move that are really cool places to live, have the highest supply and are therefore seeing the biggest decline in rents, which is sort of confusing as an investor and,

But I'm curious if you think, Scott, that creates long-term buying opportunities in those types of market because, yeah, we got to spend the next year sort of sorting through this supply issue. But in time, do you think rents will recover in these popular markets?

Oh, yeah, absolutely. I came prepared today, Dave. I have 30 tabs of data ready to rock and roll for our conversation here. This is a great one from yieldpro.com, free resource. You can check it out. We can link to a bunch of these in the show notes if you want. But this has a pretty good forecast for rent growth

the new supply coming online and the future stuff that's in the pipeline still in a lot of kind of major metros that are fairly interesting. I love, for example, like Baltimore. I grew up near Baltimore, right? Baltimore is not thought of as a growth market, but they're not building a lot there. So it's pretty insulated from a lot of the pressures you'd see from the supply front. Supply is not your friend in the near term as an investor, at least historic supply is not your friend in the near term. But

That growth, that influx in supply is associated usually with reasonable and accurate forecasts for demand for people moving into those markets over the long term. So if you buy in Austin, Texas today –

I think in 10 to 15 years, you'll be well-rewarded. Now, am I going to be able to produce a really mathematically precise forecast for what rent growth is going to be in Austin for the next 10 to 15 years? No, but I'd bet on it all the same. Yeah. I would buy in Austin, Texas in 2025.

probably middle later of the year, but I would expect rents to go down for a little bit. And I'd expect to be buying close to or near that bottom at that point as supply begins to moderate. When I think about forecasting rent growth in a market, right? I mean, first you have to think about interest rates, right? Which is good luck trying to predict that. That's a hard one, but like you have to have an opinion or assess the risks there. Then you start with supply. You don't have to be smart to understand supply. Anybody can figure it out. You can Google it. It's pretty easy. You don't have to like really do much.

for that. And then demand is this ultra complex, very difficult analysis. You can spend 30 years doing and still get wrong. And I can debate you all day. Like for example, Austin, Texas, you can tell me all the stuff you want about incomes and job growth or whatever. But when you have a bunch of people moving from San Diego to Austin, Texas, and they spend their first summer there and there are bugs and there's a wall of water, you

You can like the differences between Austin and San Diego for business or whatever your, your, your situation is and your spouse is going to hate it and you're gonna be moving right back to San Diego. And,

And I don't have the data to prove that. I bet you that will come out this year. I think that people anecdotally will be able to see that, but I'll take that bet all day long. I'll take the same thing against Tampa and Orlando and some of these other markets here. And sure, beat me up in the comments here, but I think that that demand forecast is going to be really overblown in the next year or two, and this is going to be more pain. But again, over 15, 20 years, the underlying trend of more people moving on an inbound migration basis will be true. And an Austin investor may make wealth over that time period.

Just I pity the folks who bought two or three years ago in large syndication funds in Austin, Texas. They're going to get crushed. That's yeah, that may never come back. Yeah, I agree with the overall sentiment. There's two things I want to pull out from what you just said, Scott. First is that supply growth is sort of correlated with demand projections. Is that basically the idea that.

developers and people who are building apartments have these sophisticated analyses of where people are moving and how population trends are shifting. And they would only build as much as they're building if they had a high degree of confidence that there's going to be people to fill those apartments. You can be highly confident and wrong.

But yes, I agree. They have models that believe there will be demand. Developers do not like going bankrupt. So they only build when they think that there's going to be a profit at the end of the tunnel. And they can either sell the houses directly to homebuyers for a profit, or they can sell the apartment complex that they're building and constructing to an investor.

at an acceptably low cap rate or high price to make a profit. So yes, they're fundamentally assuming that, and they've got complicated models, alluding to what I referred to earlier. They're probably wrong, directionally correct, but specifically wrong on a lot of those factors. Yeah, I want to sort of reiterate something. You said basically that you think these migration trends are not going to be as strong as a lot of people think.

are thinking they are. And we haven't talked about this in the past, but I agree. I think a lot of people are chasing the last trend in this scenario where tons of people did move to Austin, did move to Tampa and Orlando during the pandemic. And listen, our Texas and Florida population grew

Yeah, probably. But are they going to grow at the same rate? No metro grows at 10% a year. Right. Exactly. That's the problem here. The supply overmet the demand. Yeah. Right. Just so everyone knows, what Scott's saying is in Austin last year, the total number of units went up 10%. That is an absurd number. Yeah.

If you, you know, everyone says in their city, like, oh, there's so many cranes, it's growing so much. Like, you have never, unless you live in Austin, you've probably never seen 10% supply growth in a year. That's, like, really, really unheard of. And so...

Yeah, I just think it would take really unusual circumstances to be able to meet that demand. So thanks for sharing that with us. But as we get back to this idea of upside era, like one of my core theses about the upside of real estate over the next 5, 10, 15 years is long-term rent growth, because I believe –

unfortunately for some that the affordability issue that you mentioned earlier is probably not going to fix itself anytime soon. I do think it will get better slowly, but I'm not convinced that we're going back to historical averages of affordability anytime soon. And that means that demand for rental units is probably going to be very high.

And I believe the case for rent growth over five years is actually quite strong, especially in single family rentals and residential rentals. How do you react to that? I completely agree, Dave. I think that the supply will moderate

It will not go to historical lows. 240,000 to 260,000 deliveries in 2026 is not a historical low for multifamily. It's not like the lows we saw after the Great Recession. It is below the historical median, but it is still relatively close.

The X factor will be interest rates, I think, will continue to remain high. And if they continue to remain high and supply moderates, you will see rent growth come up pretty strongly. And I would expect high single-digit rent growth nationally in 2026.

And for that to gradually regress to the pace of inflation over out years, whether that's two to five years or whatever. But I think that 2025 is a great time to buy rental properties for that reason. You're not going to see rent growth in 2025.

But in 2026 and 2027, you're going to see pretty high rent growth. So high, potentially, that I think we're going to see the rent is too damn high people coming out of the woodwork and beginning to really complain about it in a way that has not been the case for the last couple of years because rent growth hasn't gone up much in most places.

Yeah, there are pros and cons to this scenario, but I think that is at least how I read it, the reality of the situation where we are probably going to need to have a higher percentage of renters in the next couple of years due to affordability. And it does just bode well for people who own existing rental properties or who are buying right now.

All right, so that's our take on rent growth in 2025 and beyond. Scott, I want to put you on the spot about the future of mortgage rates. But first, a heads up that this week's bigger news is brought to you by the Fundrise Flagship Fund. You can invest in private market real estate with the Fundrise Flagship Fund. Just check out fundrise.com slash pockets to learn more. All right, we'll be right back.

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I'm back with Scott Trench on the BiggerPockets Real Estate Podcast.

Predicting mortgage rates damn near impossible, but you have to have an opinion. Your opinion you just said is that they're staying higher. Can you just tell us a little bit more about what that means, like how high and what informs that opinion? Look, I think you got to have an opinion on the 10-year treasury, at least if you're going to do my job. Maybe as a regular real estate investor buying a rental every couple of years, you don't have to have this, but

I think that I got to have an opinion here. I've been trying to get people to look at bonds for years, Scott. It is boring, but it is important. Yeah. This website says you visit often whenever I Google it. So, you know, this is just US Treasury Yield Curve dot com. It's a very simple resource, but you can see that the yield curve for the federal funds rate, the one month treasury all the way up through the 30 year US Treasury.

here. And the 10-year treasury is a special place in the hearts of real estate investors because so many key metrics are kind of tied to that 10-year treasury. Now, what is normal here is if we go back to 2018, a normalized yield curve looks something like this. This is not perfect, but it looks something like this, where you have the federal funds rate at a certain number and the 10-year at

100 to 150 basis points higher than 150 would be kind of a perfect yield curve, meaning that like long-term historical averages, 100 is a little lower spread here. What has been the case for the last several years is the yield curve has been inverted because the market's expecting a recession. So the 10-year actually was lower. People were investing in bonds for longer durations with lower yield than the overnight rate.

And that's because they expected the Fed to rapidly reduce rates. I've been saying for a long time, that's a ridiculous stance. Scott, let me just describe for people who are listening what you're talking about. So you're saying that in order for rates to drop, you would need to see short-term yields, which is like the federal funds rate, one-month treasury rates, drop below the 10-year yield, which is somewhere close to 4% right now.

right now. And not just below, they need to drop a hundred basis points, 150 basis points below that. So finally the yield curve has un-inverted here where the 10 year is now higher than the federal funds rate. It's not a hundred to 150 basis points. The 10 year as of today, January 3rd, when we're recording this is at 4.5, 4.57. And the

federal funds rates at four and a quarter. That's a 25 basis point spread. I'd expect that spread to increase to 100 to 150 basis points. And I expect the Fed to lower rates maybe one or two more times at most in 2025. Now that's a fool's errand to guess all this stuff. And I don't make specific bets on this. Maybe I wish I would have a few years ago, but I do think that that's the general direction I'm expecting things to go in. So what that means is that this 10 year will probably stay right where it is. Maybe bump up a

over the course of this year. And that will mean very little change in the way of mortgage rates. Mortgage rates are tied to the 10-year, but there's a solid spread between the 30-year mortgage rate and the 10-year right now that I think will reduce a little bit as this 10-year creeps up incrementally. So depending on when you time a rate, you'll see fluctuations, but I don't think you'll see any major noise in 30-year mortgage rates from where they are today here in early January throughout the course of 2025, unless there's a system shock.

That's the big wild card. Is there going to be a system shock, some sort of black swan that I can't see right now that disrupts the market? Of course, yeah. You always have to caveat there could be something that no one predicts. Personally, I do feel like the probability of a black swan seems higher than it normally is just with the way geopolitical conditions are right now. So everyone should keep an eye on those things. But since they're inherently unknowable, it's hard to sort of base your investing thesis around that. So I think

You've got a very good thesis here, Scott. I tend to agree. I think rates are going to stay probably around mid-sixes a year from now is my guess. But it sounds like we're at least directionally close that they're not going to drop too much. Yeah. And if you're listening, look, the takeaway here is this is impossible, right? The guessing of the interest rates. So we have an opinion.

on it, but there's so many different ways that it could go. The supply stuff is super easy. Nail your supply. Understand supply over the next couple of years. Just look it up, Google it, and understand how much relative supply is going to go. That will give you a really good idea of rent, and you won't ever embarrass yourself on a rent forecast with supply unless there's something totally wacky that goes on in the worldwide economy.

And then on the demand side, just be cautious. Use your instincts, right? You can build these complicated models and you can also tell if people are moving there and seem to like it and sticking with it, you've probably got a good long-term reason to believe in rent growth. If they're not, you should be a little bit more muted. The supply stuff will really make a much bigger difference in the near term, though, about how much rents and prices will move. Got it. Okay, great. Well, thank you for filling us in there.

I'm curious, you know, I have more questions for you, but I want to just jump to what you disagree with me about. Dave, I don't know if we would disagree very much on a lot of things. I think that the one observation, though, that I would love to discuss with you is this concept that like what happened in 2024, right?

was not much, right? Like the economy, like everyone predicted this doom and gloom, but basically American standard of living rose pretty nicely by like five or six, maybe even a little bit more percentage points versus the year before. And I can just demonstrate that for all the people that are complaining about how out of touch that is. No, that's literally what happened, right? 77,000 in real household median income in 2022, that jumped to 80,000.

Sure, it came down from 2019, right? 2019 through 2022 were not good years for the median American household. 2022 and 2023 were. Right.

And I think you'll see that continuing into 2024 here. And I think there's no reason to believe that that trend line will continue to be nice and positive in 2025. So that's the big headline, I think. And in the context of that, I want to show you some other prices that have kind of begun to move here. Let's look at the S&P 500 price over the last couple of years. I mean, this thing has skyrocketed. 83% gain.

but from 2020 to 2025. And that's before that drop off in the great recession, a 50% increase from January, 2023 to today. So that's, that's a 50% increase in the price of the stock market.

When we look at the median sale price of a house, yes, from 2020, it went up 28%. But for the last three years, it's gone down a few percentage points. So in the context of the stock market going up 50% in these two years, real estate prices went down.

Rents went nowhere. Basically 0% growth year over year in real estate. Bitcoin. Bitcoin exploded from 7,000 to 97,000 over the last five years. So the story of 2024, I think, is everything else got super expensive except for real estate in the assets that are generally accessible to ordinary Americans. And that, I think, is what makes me excited about 2025.

Unless you're expecting a big crash in everything and want to flee to cash...

Real estate is the lowest price relative asset here. And I think the story of 2025, absent some catalyst I can't see, is going to be the standard of living continuing to creep up at an above average rate. It's not like people are going to transform their lives overnight in 2025. Yeah. It's going to creep up a few basis points for the median and ordinary American. And I think that that demand is going to go into real estate, higher standard of living for rentals or the primary homes that they purchase.

which will bid up the price for those. And I think it will go to entertainment and luxury spending like professional sports or vacations or fitness and health, you know, for millennials who are trying to live a longer whatever. But I think demand for those things will go up as production capacity seems just fine for the ordinary staples that people generally purchase. I actually totally agree with you. I think there is going to be a slight upkick in demand. I don't see any big shocks coming, oil, other types of things that you're saying, but demand

You know, I hear a lot when I say these types of things, when I'm optimistic about housing, really when I'm optimistic about anything to do with the American economy, I hear these things about how

The national debt is going up. Credit card debt is increasing. Do any of those things worry you about the American consumer? Let's talk about both of those in order. So U.S. national debt, right? Last I looked, it was like $32, $34 trillion, and the national tax revenue is like $7 trillion. I did this math maybe a few months ago, and I think it was, that's like a person making $100,000 a year that does not pay tax having a $500,000 mortgage.

Right. So it's like one hundred twenty five thousand one hundred thirty thousand dollar a year household income earner having a five hundred thousand dollar mortgage. That's not crazy. Right. Is it the best credit investment in the world? No. That's why the U.S. credit got downgraded a few years ago. Yeah. But you're not in scary territory. You're not you're not in territory where that's completely untenable.

Now, if that goes up to six times, seven times, eight times, you're going to see a gradual degradation of U.S. credit over those time periods, which puts upward pressure on treasury yields, on interest rates in those situations, which will increase borrowing costs. I think it's a process, not an event.

for the next several years. At some point, it could balloon into a problem that really creates massive pain for Americans in a general sense, but I do not think it is a problem that will become acute in 2025 or 2026. I'm trying to find places where we're disagreeing, Scott, but I totally agree about this. I think...

debt is sort of this, I wouldn't say existential, but it's a long-term issue for sure. Like I'm not saying that having ever increasing debt is a good thing. You know, if you look at how much economic output the U.S. has versus the total debt, it's actually stayed almost the exact same for the five years. So like as a percentage of how much

money the US has and is creating. That hasn't changed. It has grown since the Great Recession, but it hasn't grown as much as you would think. There is probably going to be a point where that becomes an issue, but it's not like all of a sudden there's some breaking point that we're going to see in the next year, at least as far as I see it. So I totally agree. US credit gets downgraded a few points. I think that's much more of a risk with a divided Congress, which we're not going to have.

in 2025, around there, that can't pass a budget in the near term. So I do not think you're at risk of seeing US credit get downgraded for the next year or two. At some point, that becomes a risk, but that's a problem for another time, I think, not an acute one. What I think the biggest risk that people are going to start worrying about that I'm worried about is this. The stock market is currently trading at a 26 times price-to-earnings ratio. The S&P 500 is trading at 26 times trailing 12-month price-to-earnings ratio.

And I am a big index fund investor. Yes, I have real estate. I have about the same amount of assets in real estate as I do in stocks, but my equity position in real estate is much lower because I use debt, right? So I have this, you know, my buildings that I own are worth about the same as my stock portfolio, but my net worth is much, very much more heavily concentrated in stocks.

And part of that's a function of the fact that the last two years, my stock position increased 50% and my real estate position didn't go much of anywhere because of what we just discussed. In the 10 years following a time when the trailing 12-month price-to-earnings ratio of the S&P 500 is north of 25, it is currently 26, there has not been a positive return from the S&P 500.

That I think is going to start concerning folks. It concerns me. And I am a big fan. I've talked to JL Collins, the author of The Simple Path to Wealth. I call him a friend. He's been on the BiggerPocketsMoney podcast several times. But I'm like, at some price, surely, it is no longer makes sense to buy

the stock market from a passive index fund investment perspective. This seems like a reasonable cutoff here at 25 times price to earnings. Maybe it's 30 for some folks, maybe it's 40, maybe it's 50. I did poll the BiggerPockets money community on this and said, at what point would you begin to worry that your index fund portfolio is overvalued? And 74% of them said, I will stick with index funds no matter the price and never worry, which is great. That's the textbook answer. I don't think I'm capable of giving the textbook answer and I do this for a living.

I think that I'm starting to worry a lot about that. And I think that this year in January, I will sell a big chunk of my index fund position and move it into multifamily real estate for the reasons we discussed. Multifamily. Okay. Like duplex, triplex, quadplex, small multifamily, the stuff that I've been, that's bread and butter. I think we're a little early for the best deals on like true apartments. Yeah.

I'm on there, but I'm seeing cap rates creep up. I can buy a six to seven cap multifamily duplex, triplex, quadplex in Denver right now. Denver? Really? I put an offer in last night on one. We'll see if that works. But I believe I can actually get that. And is this going to be in a neighborhood? No, but it's in the same places that I've lived and bought properties over the last 10 years. And I'm like, okay, if that thing appreciates 3% a year and that rent forecast is even close, I'm

I've got a 3.5% appreciation on a six or seven cap rental compounding at those rates, at least at rate of inflation over the next 10 years. That I think is a much more compelling place for me to be than here. This is a chart, by the way, for those that are not watching, that are listening, you should go watch this on YouTube. I have 30 tabs open of data that I wanted to share for this podcast. Yeah. But this is a chart of S&P 500 returns in the 10 years following where

their trailing 12-month price-to-earnings ratio was. And when price-to-earnings ratios are lower, the S&P over the next 10 years tends to perform better, higher returns than if price-to-earnings ratios are higher, which they are at a not historical high, but close, pretty high ratio right now here in 2025, the early part of 2025.

I'm surprised to hear you say this. I don't disagree, but I am surprised to hear you say that you would sell index funds. But it sort of makes sense. I mean, I just saw that we had the two best back-to-back years for the S&P 500 in decades, right? You have to imagine that that has to run out of steam sometime soon. Yeah.

I stayed up late last night staring at my phone, doom scrolling, looking for all this stuff. And I found some arguments. I found one on Seeking Alpha that was compelling about why there could be a really long bull market. So many folks today are putting their money in passive index funds and just setting it and forgetting it. That thing could ride a lot further. I could be dead wrong on this.

I just won't sleep well at night if my position is two thirds in passively managed index funds at this price ratio. And I'm going to transition not all of it, but a big chunk of it into multifamily real estate that I can touch, see and feel here in Denver, Colorado, which I think is at least better priced than

than S&P 500. I'm not going to put it in bonds and earn simple interest and pay taxes on simple interest right now or munis at 3% yield. I'm going to buy something that offers a little bit better yield here. And I think it's the safe play for me right now.

What about cash? Because you think things are coming down, traditional stores of value like gold, high, Bitcoin, high. Would you just liquidate and wait it out and see what's going to happen? Or do you think the risk of inflation...

means that cash is not a very enticing opportunity. Warren Buffett's all in huge amounts of cash right now. Berkshire Hathaway has a historic pile of cash. They don't buy real estate. They have it in treasuries, right? Short-term treasuries. Yeah. So I think that cash is a potentially good option, but it's just not the way my mind works, right? I'm not trying to produce 20% plus annualized returns over the next 50 years and become one of the richest people to ever live. Right. I'm trying to sleep well at night.

and achieve a solid level of financial freedom. And cash does not solve that for me. If I purchased this multifamily and let's say the prices go down 10%, 15, 20% next year, terrible crash, right? It's paid off. I still have the NOI from the property.

to live off of and can lick my wounds and continue to bruise my investment portfolio, continue to grow from that point. And so that's kind of the way I think about it. I think if I was like really trying to make a ton of money and I was thinking there was going to be a crash in a lot of these asset classes, I might be moving more into cash. I certainly hold more cash than I used to, but I think that's just a function of

15 years of attempting to build wealth and being moderately successful at it and holding a little bit larger of a cash position as a result, because now I have more of a protection mindset than a, how do I grow at all costs and get to my first couple hundred thousand or first million mindset. Right. But I think that that's the difference there. I think if you were hedge fund manager trying to get fit, put up 50% next year and really had some specific thesis around timing and certain markets, maybe, maybe you go more to cash.

Okay, that makes sense to me. Yeah, and I think, you know, if you give Warren Buffett as an example, he's not...

taking money out and considering buying duplexes in Denver, you know, with that money. So when you're faced with keeping it in the stock market or cash, that's a different calculation to make than it is if you're someone like us, where you could take money out of the stock market and then put into private real estate. Just people who operate at the scale of Berkshire Hathaway, probably not going to do that. They'd probably just buy a company that does that if they found that attractive. Yeah.

Yeah. And then look, as a real estate investor, one of the moves I made in the last couple of years was hard money lending. So I had a fairly solid position in hard money notes that generated 12% to 13% interest. Now that's simple interest. And I'm in a relatively high tax bracket. So that was not very efficient way to build wealth. But it actually ended up being better than buying the next duplex over the last couple of years, but way worse than buying the S&P 500.

for example, especially on an after-tax basis over the last two years. So it ended up being a mistake in some ways to do the hard money lending. But when those loans mature, usually six to nine months, sometimes 12 months, then you have cash. So if you're thinking like, hey, I want to buy multifamily in Q3, and you put your money into a hard money note or two, as long as nothing goes disastrously wrong with that placement, you should have your cash back and

and could then potentially put it. So bonds or other debt are potentially more attractive for folks right now than they have been on average last couple of years, especially with treasury yields, which are closely correlated and sometimes pegged to bond yields are going up.

We have to pause for a final ad break. On the other side, I'll ask Scott if 2025 is finally the time to find strong buying conditions and opportunities in commercial multifamily. Later, you'll want to hear his pretty hot take on Bitcoin too. We'll be right back.

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So, Scott, we've talked a lot about macroeconomics. We've talked about residential real estate. I want to pivot to commercial. We'll get to office, but let's just talk a little bit about the multifamily sector. This is not my expertise, but I do invest in large multifamily syndications passively. And from the research I do, I am seeing...

slightly better opportunities. I'll be honest, I've been surprised that the opportunities haven't been better. I thought that in 2024, we would see much bigger discounts on multifamilies that we have.

But the stress is still there in my mind. And to me, it's going to start coming to a head at some point. And I kind of think it's going to start this year where we're going to see a little bit more motivated selling. And that will probably lead to better buying opportunities.

Don't get me wrong. There's still a lot of overpriced stuff out there that probably the majority of things are overpriced out there. But in my mind, I think 2025 is a year to watch this market because the logjam may start to break and there might be good buying opportunities. Curious what you think about that. I think that's a pretty, pretty spot on thesis. I've been a really big bear on the multifamily commercial real estate market for the last couple of years.

And I think that that's been generally accurate. Although I overestimated the distress that would be in that market. We really haven't seen the delinquencies or the distress sales or the total wipeouts that I thought were coming in 2024 happen. I talked to a neighbor the other day who is in real estate advisory office.

a company that, like, if you're trying to buy a $100 million apartment complex, he would help you find the debt or shop that around with a couple of major banks. And he thinks that 2025 still might be too soon to see some of that distress. It might even be pushed farther out to 2026,

because there's games that folks can play or tactics they can do to defer certain expenses hitting. There's a whole bunch of things there that I need to get my head around more because I've been very confident in distress and I've been very confidently wrong in that distress hitting the market.

the last two years, even as we've generally been directionally correct that multifamily has not had a good time the last couple of years for investors. Cap rates have continued to expand. Prices have fallen. NOI is not growing at the rates, but the forced selling and foreclosure has not occurred in mass, which has not created the really good buying opportunities. At some point,

you know, you'd think that will happen. You know, if you're really thinking about, I'm going to pile up cash and wait and just sit on it and collect interest in my savings account, that's one reasonable stance to take. You have a good shot at being right in the multifamily sector at some point in the next year or two, but you might be waiting until deep into 2026 for those opportunities if my neighbor's right. I am similarly surprised that

I mean, I just felt like with interest rates as high as they are and the nature of commercial debt that we would see this distress. But from what I hear from people who are more knowledgeable than I am, the banks have just gotten better. And so have operators. It's sort of kicking the can down the road and delaying a little bit on some of the distress. But yeah.

If our collective idea about rates is correct and that they're going to stay high, at some point, the bill's going to come due on a lot of this debt. And people are going to have to refinance into higher rates. Rate caps are extremely expensive. And I do think there's going to be some selling. But it's something I just think people should pay attention to this year because whether it's 2025 or 2026, I think –

sometime in the next two years, there's going to be good buying opportunities in large multifamily. I think that's going to be really difficult to really nail that bottom of the market. But absolutely, I would guess it will be in the back half of 2025 or early 2026 would be the bottom. If you said, guess when the bottom of multifamily will hit.

All right. Well, what about another commercial asset class office? It's taken in massive, massive beating over the last couple of years. Privately, you and I have just been chatted. I know you're you have an interest in office space. Tell us about it. Oh, my gosh. So office, I was like, where's the blood in the water? Right. I drove down to a suburb in Denver and there's signs everywhere. Office space for lease, office space for sale. It's all over the place. If you drive into places that have office inventory everywhere.

And I'm looking at these things and they're priced at levels that are giving them a 9% or 10% or 11% cap rate, right?

These are small offices. These are like 4,000 to 10,000 square foot buildings here. And they're triple net. So, I mean, how awesome are parts of those things? Triple net means that the tenant pays the taxes, the utilities, and the common area maintenance for that. So in some ways, the yield on paper is so much higher than a multifamily apartment complex, which multifamily cap rates expanded from an average of about 4.5% to a little over 5% in 2024. Wow.

for example. So that means prices went down by about 10% in multifamily on the same levels of income. Some markets saw incomes decline, but prices have really gone down in the commercial office. Now, the problem with that is that for those types of buildings, you have one tenant. Usually the tenant is an owner-occupier. I'm not the owner-occupier for those buildings. And so you're looking at an expensive build-out

It could take you six to 12 months to find a tenant. And then that's not something I'm capable right now of operating in my job as CEO of BiggerPockets around there. I explored the thesis and then decided to abandon it because I'm not willing to put in the work to make it happen. Although I think somebody who is willing to make it work could do pretty well there if you're prepared for that long timing. Now, what happened over the last couple of years to Office?

Well, ain't nobody building office, right? The supply is not really a factor in the office space in a meaningful sense like it is in multifamily, right? Because nobody started building office four years ago. There's not a large pipeline of supply. And during COVID, work remote became a thing and office vacancy surged, right? As companies abandoned their leases, turned to work remote. That pattern's beginning to shift back.

And I believe I need to really get grounded in the thesis around pricing and these other things a little bit more on this. But I believe there's a play to be made around buying urban core office at pennies on the dollar, knowing that the property will be unoccupied for several years, like 20%.

like two, three, four years before you get it back to full occupancy and capitalizing your investments. So some syndicator out there, I think is going to be able to put together a play where they're going to buy an asset that might've sold previously for 30 million bucks for seven or 8 million bucks.

It's going to require capital injections for the next two or three years while it slowly reabsorbs tenants in a downtown or urban area. By the end of it, they'll be able to sell it for 20 million bucks. And I think there's a killing to be made in that space, but you're going to be bold, capitalized for a very long-term investment horizon. And I think that you're going to need an investor who actually agrees with that and is willing to not take cashflow during that time period, the first couple of years like myself. So if you're out there putting that thesis together, please email me at scottatbiggerpockets.com.

I'm actively looking for those and would love to explore them. We'd love to have you on Passive Pockets. Please tell me I'm crazy if you disagree with that and think that the office pricing is not there. All right. Well, I've told you most of my theories about 2025. It sounds like we're generally agreed that like, yeah, it's not 2015 where you're going to go out and buy the easiest cashflow. But as an investor-

The game is resource allocation, right? Like looking back and saying, hey, things are not as good as they were seven years ago is pretty irrelevant. What matters is like what you're doing with your time and your money today to improve your financial position. And to me, it's real estate. Sounds like you agree to the point where you're going further than I am selling some of your or thinking about selling some of your index funds and moving it over to real estate.

Are there any other things that you're seeing in the market, macro, housing market, multifamily market, that you think the audience should know about? You know, I think Bitcoin has a compounding chance of really ruining a lot of people's lives. And that the fact that it's trading at around $100,000 in the first quarter of 2025 is not a sign that things are going well. It's a sign of the risk continuing to bubble up in that asset class. So, you know, people tell me that's an expensive position to hold.

that's my thing. I'm going to continue to hold that position. I'm really worried about that and think that that's a real problem brewing in that space and that the price going up is not a good thing. It is a really major risk to a lot of people's lives. If you look at a lot of historic economic or investing dating things, you hear this term irrational exuberance a lot.

which is usually the period where people are just pumping money into an asset right before a bubble pops. Do you think that's what's going on in Bitcoin? I think the problem with opining on Bitcoin more specifically than that is that the people that are big supporters of Bitcoin will give you a lot of grief and

If you don't use extremely precise language, which is why I spent 30, 45 minutes using extremely precise language, making my case about it in the rational investors case against Bitcoin. Okay. We will link to that below. Yeah. In a general sense. Yes. I agree to what you're saying. Yeah. Okay. So what else are you saying that we haven't talked about yet? Okay. So the other pieces here, if I'm generally right about,

about 2025 being a year where the median American continues to see their standard of living increase at a slightly faster than historical rate, which is again, the grounded theme there. I think that there's plays that are interesting in, again, entertainment, including professional amateur sports. I bet you that the NFL, college football, we already saw that, are

are going to have great years. I think that that's going to be a really interesting space where folks are going to have some compelling investment opportunities. I think that vacations and investments in family, including homeschooling, including childcare, I think there's going to be some really interesting plays that are going to develop over the next couple of years in that category.

I think financial planning and investment advisory services are going to be really interesting. I think there's going to be a lot more demand for those as wealth begins to slowly grow for Americans in both nominal and real terms. I think that luxury home builders and luxury rentals are actually going to have a field day over the next couple of years. I think your luxury real estate destinations are going to see demand surge. I don't know how that plays out with short-term rental supply, which has been the big story the last couple of years, but I wonder if that's actually going to have a good year in 2025 and 2026.

And I think health and fitness are going to have a really good year. So there's some things there is like, are people going to maybe invest a little bit more, not a ton, but a little bit more in things like treadmill or weights or whatever it is as the square footage per family slowly grows in America with new housing adoption. So just those are some things that, you know, to noodle on if you're thinking about some play money investments in 2025 and 2026.

And all this is based on the thesis that discretionary spending is going to go up. So they're going to go towards discretionary items like vacation and exercise and entertainment. That's the core thesis here. And again, you have to like, this is where I can live with some conflicts in my mind, right? Like, how does that not jive with a really good year for the stock market? Well, again, I think the stock market's just priced so high.

Yeah, that it's it's factoring in even more of that than what really what should be. And there's a lot of people just dumping cash blindly into it because they've been told that index fund investing is the way to go. That's what worries me about that at the very least, not the underlying growth of America and the American consumer in twenty twenty five.

All right. Well, Scott, thank you so much for joining us today. This has been a lot of fun. Thank you for bringing all your knowledge, all your graphs, your 32 tabs that you opened up and showed to us today. I have more, Dave. Really appreciate it. And thank you all so much for listening. We'd love to hear your theories about 2025 in the comments, or you can always find Scott and I either on BiggerPockets or on Instagram. We'll see you in just a couple of days for another episode of the BiggerPockets podcast.

Thank you all for listening to the BiggerPockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian Kay. Copywriting is by Calico Content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com.

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