How I Plan to Beat the Market With Real Estate

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What’s Working for Me

Last week I mentioned that I may have found a real estate strategy that can outperform the S&P 500 — while still giving me cash flow today.

I love the idea of buying businesses, but the skills gap is real. That won’t be solved overnight. Real estate, though, fits me like a glove:

• I understand the business model

• It’s more passive than running a company

• I already have experience

• And my natural talents help me mitigate risk

So this week, let’s dig in.

The Role of Debt

If you want to outperform the market, there are only a few ways to do it:

1. Be smarter than everyone else.

2. Get access to opportunities others don’t.

3. Or juice your bets with leverage.

For most of us, #1 and #2 are tough to count on. That leaves leverage.

Now, if you grew up like me, you probably heard debt was bad. And it is — if you’re using it to buy liabilities. Cars, toys, lifestyle inflation. That kind of debt digs a hole.

But when you use debt to buy assets, it’s a different ballgame. The right kind of leverage can tilt the playing field in your favor.

Why I Don’t Use Debt in Stocks

It’s tempting to try to juice returns by borrowing. And some people do it in the stock market through margin loans. But I won’t touch it.

Why? Because stocks are inherently volatile.

If you borrow against your portfolio and the market drops 50% — which it does every so often — you’re underwater. Unless you can inject more equity (most people can’t), you’re forced to sell at a loss just to cover your debts.

No thank you.

Why I Do Use Debt in Real Estate

Real estate is different. The income stream from rent makes debt far less risky. With one down payment, you get:

• The property’s appreciation

• Monthly cash flow after debt service

• Equity paydown, courtesy of your tenants

That’s three engines of return, all fueled by leverage.

In year one, it’s easy to model returns of 20%+ ROI on your invested capital (down payment + closing costs + repairs) in the right deals.

The catch?

If you simply buy and hold, your returns will gradually settle toward the property’s underlying cap rate. On a long-term annualized basis, that usually means the S&P 500 comes out ahead.

So where’s the edge?

The Key: Equity Recycling

The answer is equity recycling — refinancing properties to pull out capital and redeploy it into new deals.

• The cash you pull out is tax-free

• You keep your equity light (boosting ROI)

• And you snowball faster into owning more doors

But yes, there’s a tradeoff: frequent refinancing means lower cash flow and higher leverage.

That’s why I think about real estate in two stages.

Two-Stage Strategy

Stage 1: Growth

• Use more debt

• Refinance often

• Accumulate as many properties as possible

Stage 2: Deleveraging

• Stop acquiring

• Pay down loans

• Sell weaker properties to strengthen the rest

This way you get the best of both worlds: growth while you’re young and risk-tolerant, stability and cash flow later.

Deals in the Making

Negotiations on the triplex fell through. But my offer on a single-family rental was accepted — pending inspection.

On another front, some colleagues and I are reviewing a tech startup raising a Series A. I haven’t decided if it’s worth investing yet, but it’s something I’m looking into.

If you’d like access to deals I find worthwhile, make sure you’re signed up for my deal list.

Bottom Line

Beating the market isn’t always about swinging for the fences. It’s about controlling risk while amplifying returns. Real estate lets me do that — as long as I use leverage wisely and know when to shift gears.

Happy investing,
—Dakota

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