Podcast 125. Using Real Estate Data for Great Investments with Stefan Tsvetkov

Average Joe Finances:
0:00

Hey, welcome back to the average Joe finances podcast. I'm your host, Mike Cavaggioni and today's guest is Stefan Tsvetkov. So Stephan, super excited to have you on the show. Thanks for joining me today.

Stefan Tsvetkov:
0:10

Thanks for having me on Mike. My pleasure.

Average Joe Finances:
0:13

Yeah. Awesome. Hey, I'd like to start this off the same way I start every podcast episode off and we wanna know about you. So if you could share a little bit about yourself, share your background, how did you get started, especially in the real estate side. So how did this all work out for you?

Stefan Tsvetkov:
0:26

Yeah, so myself, so I'm financial engineer, originally. So I had a prior career in finance and I moved a financial engineer, turned real estate investor. So I came to the us at 22, Eastern European originally, I went to grad school at Columbia in New York City. And I worked like a typical route working for about a decade in finance. The recent few years, I've been a real estate and I am founder of a data analytics company called RealtyQuant.

Average Joe Finances:
0:54

Awesome. All right. Short and sweet, but it hits all the points of what we're looking for. Came to the us at the age of 22, worked for a decade as a financial engineer. And then you started, your own company called RealtyQuant, right? I'd like to talk about that a little bit about what RealtyQuant's all about, what you guys do. I Know that a lot of it's very data driven. So if you could share with us, what is the whole thing behind Realty Quant?

Stefan Tsvetkov:
1:17

Yeah. So RealtyQuant is really, that's a driven real estate. That's a driven quantities real estate. So it's a set of methods, techniques for like real estate investing that primarily myself and have built in house for my own real estate investing. And so it's really, it's if you think of a hedge fund and they're investing, they have their strategies, their investment strategy and so forth, and perhaps they're using data. So it's really building a ton of code, like Python codes and so forth, like in house to analyze properties, analyze markets and derive like the best investment decisions, find the best markets in the us, find undervalued residential, commercial multi-family properties and so forth. So it's just it's really like an analytical data driven approach to that. So we publish market valuations data. So for every count in US so what that means is just basically which markets are over, under fairly valued. So that's like fundamental honor. That's one thing that is out there for people to see it. realtyquant.com. So that's available for 2,700 US counties. So we can look up, let's say whichever account in Florida or Texas or other price, if it's over valued, undervalued based on fundamental historic analysis. And that's actually something that's been very high predictiveness after the global financial crisis as well as prior to recessions. So it's back studied against three recessions actually as to how well it's predicting over variation. And that's one thing. And the property side is just various other methods of machine learning. They do like financial modeling based on rental listings data for basically every commercial multifamily in the country. So that's a product that's coming up for RealtyQuant some textual property intelligence, like deriving kind of an automated underwriting module deriving like insights from your reading property descriptions. If you have thousands to read, can you derive like what's the condition of those properties based on what is stated there, like other parameters, so natural language processing, textual processing, textual property intelligence. Those are like different things like in house. We have our own AVM and AVM, like just for your audience, like ultimate evaluation. It's basically what zero's estimate is. So I have like my own kind of relatively simple AVM that I use in house to discover like some pricing efficiency, more from my like residential investing primarily, but I've been more focused on commercial recently in the Midwest. So..

Average Joe Finances:
3:49

Yeah, no, that's great. So you're basically pulling all this data, right? All this real estate data and putting it all together in this one spot, that's gonna tell you if an area is overvalued or undervalued. Is that like kind of the gist of it?

Stefan Tsvetkov:
4:02

That's on the market side, it's just, yeah. Pulling all governmental data for income population, housing support, and just deriving like a statistically valid estimate based on the prior sessions, if the market is over by what percent is 20% overvalued? Is it 10% undervalued? And that's when the market said that's a fairly, that's the market side. And then on the property side is just like getting more property analytics, like doing automated underwriting for properties, basically. Like pooling thousands of listings and underwriting them on the commercial side as well. It's a little bit challenging. But like for off market commercial, it's very doable based on, in the preliminary sense, based on their rental listing data. So that's another thing working on. So it's just like a lot of different like data products and analytics to help on one side myself as my own investment firm and on the other side, other investors as well.

Average Joe Finances:
4:57

Okay. Yeah, that's fair. So actually, I wanna talk about that a little bit too, about the actual whole data driven investing in general. So what is data driven real estate investing?

Stefan Tsvetkov:
5:06

It's a great question. Yeah. That investment, it's really a mindset I would say. It's just like having the mindset that okay, you can automate all of the stuff that you can do. Analyze properties and markets at scale as opposed to what is the more typical notion in real estate that real estate is hyper local. Now for something that's hyperlocal there is data driven techniques. Let's say like neighborhood appreciation, predictions, like hyperlocal thing, but generally, like you think of you are investing in your own backyard, so to say, like in your own neighborhood, technically that's kind of the other comparison for something that's well, not data driven, cause you're not really analyzing markets. You're not really analyzing perhaps even properties so much at scale or cross multiple strategies. And here it's really okay. You are gonna pull out like thousands and thousands of market or on market, like various data points and try to find like properties this way. And perhaps you're gonna underwrite them on like five different strategies, it's not gonna be just one. So it's a more scalable approach.

Average Joe Finances:
6:08

Okay. Now that's, that's how you would do it with it being data driven, but what are some, I guess common investing practices that are not data driven.

Stefan Tsvetkov:
6:16

Oh, that's a great question. Yes. So that would be if we take, for example just like picking if we take commercial investors, how they pick their markets, in my opinion, let's you have okay they're gonna pick like job growth and population growth and income growth, that is appears data driven in a way, cuz it's using some kind of data but in a sense often it's okay. Let's speak account to Georgia and a few other markets and see if they have good, fundamentals, generally speaking above some thresholds, perhaps. So that's not, let's say so that's a driven, like for me, so I really have it for the whole country and I know how it's evolving, I know how it's developing. I have a enlist in the data and inclusion about every single market.

Average Joe Finances:
6:57

So it's not as in depth?

Stefan Tsvetkov:
6:58

It's not as in depth and it's also not so statistically valid. So if, for example, if population is growing in a place, it doesn't mean prices are necessarily gonna increase. Typically prices are around like 40% correlated with appreciation, but not more. And so that's something. So now if you have prices and you have income, then okay then that's very relevant and very predictive, but not always. And then there is more so for instance, one study, I did it in RealtyQuant was okay, let's take fundamentals. If you think of all the multifamily syndicator investment manager investor does. So they take those fundamentals, again like income population growth, let's say job growth and so forth. And let's take those fundamentals, forecast the fundamentals and then forecast the prices of those fundamentals. And then on the contrary, if we just forecast the prices alone based on the historical prices. And so the second approach gave like a five times smaller error. So that's very interesting. And that was like, for instance, like in forecasting prices, very high level across different states in 2018, 2019, when the trend was very consistent. So 2018, 2019, like the error was like 1.4% in forecasting those prices was very easy to forecast prices but it's that easy if you go on using the price data alone. It's a little bit counterintuitive, but if you go on saying, okay, because there is population, because there's those other factors, and then these are going be the prices you inherently are committing a five times bigger error. So that's another kind of example. So that's it's not really, so data driven just to take three data points, and just say, okay, that's a good market cause it has this population, this and that. So those reports themselves, they may be derived and be data driven themselves. But if I read it, it's not gonna be that driven to me as I read it. I'm not gonna internalize that information perhaps. Unless they go in like really big depth and they try to experience it in some way, but typically it's not gonna happen. And so typically it's even like reading those summary reports, if you will. So you need to interact with the data or somebody on your team needs to interact very closely with it and be building intuition and feeling about it. And so that's like another thing. So it's really a mindset but again, if we work on the property side, it's just very much deals with automation and automated underwriting and just trying to make your work easier and scale. So that's the approach there.

Average Joe Finances:
9:22

All right. So what would you say are some of the differences then between, if a commercial real estate investors going out there and they're pulling that data the fundamentals that we, that you were just talking about, versus what like RealtyQuant would pull, like, where is that difference or the threshold of a difference in that data?

Stefan Tsvetkov:
9:37

Yes. So for example, so like I mentioned, so let's say for example, they would go to those, they would look at three, four markets. Like typically I would say thing or five or something like that. And they would okay, they would just look at those. It's three numbers for those markets. They look at again like job growth population and so forth.

Average Joe Finances:
9:56

Yeah. Like you said, it was very hyperlocal, right?

Stefan Tsvetkov:
9:58

It's right. What I would do is that, would that kind of take the whole country and try to forecast. First of all, it's broader, but second of all, it's also, the forecasting method is different. Cause now the forecasting methodology is actually statistical rather than, oh, just assuming that if those things kept going they're gonna go well in the future, but it's not really a, there isn't a forecasting method there. And so that's like the other that's one difference. But then how on the property side, on the property side, for instance, they would use like Yardi Matrix or prospect now data feeds. It's not yet product there, but it's been in the works this month coming out actually is so like financial modeling on top of market commercial multifamily data. So if you go like prospect now or the automate, or you have your inventory, perhaps there's signals for motivated sellers, but there is no insight financial insight on that of market data. So what RealtyQuant does or what I do, how I search for those deals, I actually would pick commercial multifamily in many different counties. I don't focus on just one, let's say few counties and try to pick the best ones in those counties and those best ones get identified by proxying based on rental listings data. Cause if you think of rental listings data, You have what the rent levels are there. You have some of the, what pet fees, administrative fees they're charging. You have even a sense of perhaps if they're billing utilities to their tenants. So one can model this. So you can get a preliminary glimpse of the income expense sheet of commercial model family. And they did a webinar, a lecture for my own webinar where I was showing, okay, a sample case of, okay, I'm doing this for 32,000 commercial properties that have, a hundred units, 200 units and so forth. So this is like the difference. It's just a more scaled approach. it's also typically not so necessary for many investors since. Okay. Again, you are just in a single market and you maybe are vertically integrated, and there are all kinds of reasons to be focused within that. But if you do go the other route and you want to be more agnostic and be able, okay to discover markets and opportunities in different places, then you need, need something like RealtyQuant.

Average Joe Finances:
12:06

Yeah there's a lot of people out there that talk about why you should invest in different markets. Cause if you're all in the same spot, if that market tank. You're done for, if it's putting all your eggs in one basket, right? The same thing that you talk about with diversifying your, your stock portfolio, right? You wanna have it diversified. You don't wanna be all in on one thing. Cause when that one thing fails, you're toast. That's a very good point. And I think, based on what you're saying, one of the big differences that, besides just being like hyperlocal, like most people are when they start looking at their deals, right? This gives you that broader picture for you to, really, like you have a lot more to chew on and figure out, okay, maybe I don't wanna go here because I'm seeing some better metrics over here and then you could start to focus, maybe get a little more hyperlocal based on that, based off the data that you found on that specific area. So no that's that's pretty fantastic.

Stefan Tsvetkov:
12:57

And you are not basing it off the names of those markets. Let's say if you like the other approach or you're just some markets they're just already investors have identified, they're good markets or something like that. And here it's like pretty agnostic. It's just, I don't care. What it's name, the name of that market is. No.

Average Joe Finances:
13:14

That's a great point. Now.

Stefan Tsvetkov:
13:15

And there's valuation. So sorry, I just interrupting the other question that there's also valuation because the other thing is now in the real estate, we're primarily considered the property side and I know like investors do a really amazing job with finding like properties. So you think about it, right? So there's so many investors who do so well. Okay. They find like something that has a great value has a discount perhaps to and so forth. And this practice really well. So if you think of something like Warren Buffet type investing and finding under valid stuff, then okay. On the property side, it's done really well, but on the market side, it's not, and that's one thing I've been like going on like podcasts like this one and kind of talking to people. Okay. You can do the same thing on the market side in interesting. It's hard to do it in finance. I come from again, I was used to trade like interest rate and equity derivatives in finance and in finance, it's hard. It's even now, like I look at so many studies, is the market over valued and so forth. There's so many metrics there. Isn't it clear there kind of way of relative to each other. There isn't a clarity as to how, what exact percentage the market is over or not over about. And in real estate fundamental analysis works because that's like taking something a very simple sub-sector in the stock market, let's say utilities companies. It's not hard for somebody like, for a borrowing investor there to know what they should be worth generally speaking. And it's not hard to know what estate markets should work. Cause the estate markets they're driven by income population and housing supply, and pretty much that's it. And so if you track those, you can know it with a very, and so it did the study actually just to share like in about GFC, like global financial crisis and okay, and so what was the correlation at the state level? What percent marked states, just generally states were over and how much they declined after that. So if you take, let's say like California, Arizona, Florida, and Nevada were the states that like heavily crushed 40, 50%, they were 40 like 40, 50% over by the way, pretty much. And so this correlation, if you take it across those states with 85% correlation, very high, that's forecasting the future. Those are the kinds that happened over four years time. And Real estate is not so sarcastic, it's not so random. It's not like something where you just cannot know anything about it. And similarly in forecasting, like people tend to think, okay, you don't know where price are gonna go, and I'm not a fan of forecasting per se' so much. I do it cuz it's still better than not doing it, but I'm not a huge fan let's say emotionally. But then if we take even forecasting, so it's, there is a very big, I did momentum studies in, so there's very high momentum or auto code correlation, and so it ends up that, just if it takes something forward price, growth, this year is correlated with price growth last year to 77% ish, it's very high. So it's at some point the trend reverses and then it's gonna break. But generally speaking, there's lots of momentum and even that gives like this kind of, this sort of like weak form, inefficiency code and finances kind of thing, it becmes okay, you can somewhat even forecast prices and that's where in 2018 I think I match 2019. That was working really well. And then, okay. Later I say 2021 inflation kind of the trend broke or changed. But but yeah, so it's so reality is very fundamental and I've been trying to attract people with attention. Cause I don't think, I don't think it's so important if they forecast prices versus what they're doing now. Okay. They are committing a bigger error by only using all those fundamental. Not doing more detail, statistically valid forecasting. They are committing. In fact, in that study that I mentioned, like the area is like five times bigger, but still they catch the correct markets more or less. Everybody knows what the good markets have been. Everyone knows it's in Florida, in Texas, the Western states, like to the Western South, this market cycle, but what is extremely not practice and I've been getting a feel like of the private equity funds and syndicators to join a board actually is downside risk. It's valuation it's so easy to know what the valuation is and yet nobody does. And they don't know why cause there's big farms that do it more analytics does it. Bloomberg economics does it. There's the data that we publish as well it's but it's not common among like investors. And so they would be constantly guessing they would be in that market can be 50% over valid, or it can be 0% over valid and they have no idea about it. They just would think there is I live in let's say always invested in New Jersey. It's not a good choice, but let's say historically, it's a residential investor, years ago. And so people in New Jersey, they would say, oh, it's very over valued. And that's not true. Like to anybody who actually estimates looks at that would realize, okay, that's actually a very undesired state, this market cycle for it's valid reasons that it's undesired. And it's actually, underbar in five. It's not expensive at all. Cause nobody wants it. And if you go to Idaho and Arizona, in Florida, and those are the markets that are expensive and we can get into some exact percentages, I'm not sure if your audience wants to know like cities and so forth as for what what shows in the data is over about or under about.

Average Joe Finances:
18:29

Yeah. Those are the hotspots right now, right?That's what's hot in the market and that's where everybody's putting their money. And when you do that's what causes some of this. It's like the gold rush, everybody run into California to, with shovels to get gold. What you said earlier, like about the market being overvalued, like that is such a buzzword right now, when you say overvalued, right? Because it grabs attention. But at the same time the data and the metrics that people are looking at to, to come to this conclusion that it's overvalued sometimes is so broad that you really can't pinpoint where it's overvalued. And I think that's like what you were talking about with that. And, and then you look at different markets, right? Like you used New Jersey as an example, right? Yeah. Nobody's buying real estate investment properties in New Jersey. And why is that? It's not like a landlord friendly area. Right? And they look at the properties and they say, oh, the properties are overvalued. Cuz it pretty much all of the Northeast. You look at that and you're like, oh, it's all way overpriced. But when you look at what the, the median household prices out there, it's pretty normal. So same thing out here in Hawaii too. We say the same thing. Oh, it's so expensive to live here in Hawaii because the median household price is over a million dollars. And sure it is. And of course the policies here also are not very landlord friendly. There's all these other metrics that come into play when you think about where people are putting their money, when they buy in, buy real estate, that's the stuff that people need to be thinking about when they want to jump into the market, is there opportunity in areas like that? Sure. But it's is the risk higher? Yes. So those are things that you have to all get together.

Stefan Tsvetkov:
20:02

Exactly.

Average Joe Finances:
20:02

And make sure that it's something you're comfortable doing. I wanna like dive into that a little bit cuz right. Cuz so you, you created this you created RealtyQuant, right? As something for yourself at the beginning, right? This was something that you wanted to do for yourself as an investor and even now something that you share with everyone else. So I just wanna, I kind of wanna jump into that a little bit. Cause I feel like what are some of the personal things that you were looking for that you felt would help other people and that's, how you came to the conclusion of creating this?

Stefan Tsvetkov:
20:30

Absolutely. Yeah. No, really everything. I really point really the stuff that I choose, essentially build for myself that is through them. That's the goal. And so for, if we take again, market variation, the reason for like market variations like you said, like many people that it's a buzzword. I actually don't like it because it creates this kind of negativity bit in the market and creates like some kind of a bit like fear mongering. I almost like I saw like people on LinkedIn camp a little bit getting too heavy with Recession word and I call it topic.

Average Joe Finances:
21:01

Oh, it's like fake. It's it's to get to exactly. And so to get you to what it's attention, grabber rights to get you to watch their video or listen.

Stefan Tsvetkov:
21:07

So I'm actually not I'm not a fan of it like that, because to me it's like something like market valuation over under February, I track it already for two years, consistently quarterly for every geography. It's not something that is meant to, scare people off or whatever. It's just like to be aware of okay, where to start, if you were having capital in X market, perhaps you start balancing your portfolio, perhaps you start moving to other markets and it's not because if, even if there was a recession, there's not gonna be a ton of opportunities in real estate, which, every investor knows that there will be. But again, it makes a difference where you are, because if you look, for instance, I'm sure perhaps you had Vinny Chopra here right at this podcast, or I'm not sure. And let's say Vinny Chopra, he was at my webinar and he was saying, he did like his first indication 2008. And I remember he had a very good return on that particular syndication, but it was the entry point was in 2008, but the reason is okay, knowing the data myself, how back then, he invested in an under valued county in the then undervalued state of Texas, because by the way, Texas at the peak of 2008 was under valued 5%. And that was not the case. If whoever invested in Florida at the time and was all their networth. And so it's like very important. And so that's like more like the question, but it's not like to scare people. And it's also another thing it's not also, if something is over about, cause you're in Hawaii. Mike, let me give you an example in Hawaii. Yeah. Hawaii, there's there was a recession in 1990. Okay. It's like an old time thing. This study, I did a recession in 1990, Hawaii 1990 US real estate, very undervalued. 39 states are undervalue. Many of them deeply undervalue. If you take the whole US index case, shooter, whatever you want, the prices basically flat after the recession, there is a recession prices stay the same, it's like the thing you've heard, like in recessions real estate, doesn't always decline. It's true. But the reason is it wasn't on enough, over as well. And so at the time was undervalued about 0% decline, but there were eight states, which were over valued more than 20% over valued and they all decline. And so Hawaii was an example in Hawaii was 48% in my study after 1990 overworld. And what happened then? That there's very stronger, relatively, strong like growth or recovery afterwards. And there's no like broad based real estate issue to actually for real estate to crash and broad real estate stay the same. Markets, collection of markets in Hawaii, the state of Hawaii. So that collection of markets is 48% overall. And the prices declined only 14%. It's not like they're gonna, they declined as much as the over variation, but this is a secondary question. If a collection happens or not, because those prices, they declined, they were 14% lower in 1998. Eight years late. So they were stagnant and slightly declining for eight years. And so that is really the risk. I think now that I've been trying to communicate to some people who invest in Idaho, it's not because they have a forecast. Oh, if cause Idaho is like around 50% over, but it's the only one. So I'm not even, I like, I'm not in any way making like some kind of statements of it being over valued, let's say like negative.

Average Joe Finances:
24:32

The world's coming to an end.

Stefan Tsvetkov:
24:34

No yet. No, 2021 quarter one, USA real estate was fairly valued right around 0%. It's quite impressive. There were few markets that were slightly overboard. The Idaho was it around 25% at the time. But again like that was the case. And even now it's not, if you take broad us real estate, do you know where it's now in my data, plus 13%. That's it. It's not like it's a huge bubble, but again, the highest endeavor was with GFC at plus 20% in this, that source. So that's the biggest bubble is plus 20% you could take the whole US cause like many places stay undervalue and so on and so forth. And so now it's at plus 13 in my study versus plus 20 at GFC. And then basically other recessions being at around zero and or negative or under valued so there is an over variation that is there, but that over variation is in few places. And yeah, Idaho is very pronounced and so Idaho came, I think like plus 54% or something like that, so can extreme and they speak to some investors that they know like personally in Idaho. And and I think the question is it's not like our price is going to crash or correct. Even if they don't something that is so much over valued, the question is it's what is going to be its relative performance over the next decade. And chances are, if we take the comparison to Hawaii at a similar evaluation in 1990, that the very best price performer, this market cycle, the state of Iowa hood underperforming. Because Hawaii was also the very best price performant then, and that is really the dynamic. And so it's really some, so that's the real thing. Now depending on how strong economic recovery is and first of all, we don't even know if there's gonna be recession yet or when it's gonna be and so forth, but let's say assuming there was, if the economic recovery is very strong, then the correction ends up smaller. If the economic recovery is very weak, then you know, the correction ends a bigger like GFC, the go financial crisis. But then either way sooner or later, that lower evaluation resolves. Always. Like, like GFC. For instance, there are like 2,700 counties they have in my data. So how many of them didn't resolve? I have to, it was less than 1% perhaps or something it's 99 point something percent did resolve. And so that's like the importance of you don't need to time the markets. If you know this, you need to just be very, like just understanding that if you're buying some very overwhelmed time, cause you have to keep an another thing. How you mentioned, okay those are the hot markets. But then if we go back to 2020 beginning. Now Utah is a hot market, too, right? Let's say generally Western States, Utah was fairly developed at the time and it was already had, it had already appreciated a lot and it was still fairly developed. I believe the county that contains Denver, being like Denver, being a top performing cities market site was also fairly developed. So it depends sometimes if we're a little earlier in the cycle, it could be that extremely booming markets are still fairly or even undervalue. You just have to track it and enter at the right time. But it just happens to be okay with inflation, as like all investors, they say, oh, inflation is amazing for real estate. It's just gonna grow real estate and so forth. Part of what that led to is over relation. And so since the second and It came out actually at my own, I have a YouTube channel and I came out at my own YouTube channel, like the second and what is it like and mentioned basically second and third quarter of 2021 is when US real states started sort of entering. More extreme over variation regime where before it was fairly bottled. And so it started a little bit of a bubble regime because a very sharp change from something that was very consistent for four years, at least. Suddenly all suddenly jumping. So why is it happening? It's because of inflation in many like kind investor demand around that. But but yes. And so those are like, Like some consideration and yeah, so generally if we speak like very high level, so Western States are overvalued in this data kind more over valued, and then Southern States a bit less, let's say just overvalued and then Midwest is fairly valued and then Northeast is even under valued and it's not a good predictor of appreciation on the upside, if something's undervalue, because typically it's most often it's weak markets already at this point of the cycle. So they're weak. They're not gonna appreciate that they're undervalue, but they likely will be protected in a recession at least from evaluation standpoint, cuz that's in GFC. They are around 10 states that were under valued, at the time there decline was median, I think 4%. And 4% was actually the, I think, average income decline after GFC. So kind if you work, let's say if you take in the more simplified and just prices and incomes, and that drives valuation now there's perhaps more. But then we can say that in normalized terms, That's in price to income terms, they stay the same, those states. So you have the biggest decline in the biggest kind of collapse of real estate in US and the under valued states, they stay the same. So it's like quite impressive. And so that's the benefit for, some of the people investing for you now cuz I spoke like this private equity fund and they were saying, okay, we are investing in secondary and tertiary markets in the Midwest because okay, there is concerned with some of the over heatedness in, in other places and assuming winter recession so forth. And that's the benefit of seeking like higher caps or seeking yield as well in this case, because it could outperform if there was a recession, if there isn't enter recession, then not then the over valued markets without perform until then. But at some point, Something is very over valued something is just 20% over. Okay. That's not a big deal. If something is 50% over valued, then perhaps it's not, it's just like the surprise. I think that's gonna be there for investors. In my opinion, from what they've seen historically in the data is that is actually gonna become a weak performing market. And that's something they don't realize. That's the example Hawaii at that time and cuz valuations, they mean revert. And they just, if you look at their history, if something was over, it always goes to zero at end, it always goes zero. It could have me a hundred plus percent over. It always goes to zero.

Average Joe Finances:
30:43

Yeah. Those are all great points and there's a lot to unpack here, because you're talking about, pretty much like what makes the actual real estate market overvalued. So you touched on that. And then you're also talking about what are the metrics and predictors that you're looking at to mitigate that risk right? Now, you also talked about, like which areas are overvalued right now. But I'm more curious as to where you are seeing like the best performing markets, like for people that are wanting to get into it and start investing, like where's, where are those spots? Where are those hot spots for them?

Stefan Tsvetkov:
31:18

Yeah, this is a great question because it's the most difficult time for this, it's not straight thing to give, because think about it, it's like the best performing one are the ones that're going and becoming more and more overwhelmed. Best performing investing in Phoenix, Arizona, or in Boise, either

Average Joe Finances:
31:34

Revealing all the secrets here

Stefan Tsvetkov:
31:35

or in no, it's, that's not a secret.. Average Joe Finances: It's just the data. Yeah, no, I'm just saying, so that would be the best performing would be like the ones that are already overwhelmed and they continue because of momentum, they continue getting more and more overheated and more and more overwhelmed. But the tricky part is really, I think your question is okay, how do you forecast? What's gonna be right for performance from now into the future, and that's a hard question because I don't know if recession triggers or not. If I do a model, that's your recession trigger. Okay. I can try to forecast. Now I have valuation. I can forecast the fundamentals in different markets and net them out. And because we have a recession trigger, I can perhaps say that okay, that we are gonna get like those that relative perform that a bit less strong performance in the recession based on those fundamentals and something like that and try to model it out. Now at this time, there's no point of working evaluation until a recession triggers there is a well point of working evaluation, but there's no point of for appreciation forecasting. And there is, don't even point of working at the fundamental so much, cuz what you have to do is take the trend of the prices and forecast that and write that because that's like what's actually happening cuz there's momentum. So depends if the recession triggers, if recession doesn't trigger at some point a year from now and so forth for this one year or two years or more of whichever period, it's gonna be the same markets that now have shown the highest appreciation this cycle are going to continue to be the best one. So it's gonna be markets in Idaho, in Arizona, in Utah, in Nevada, in Florida and Texas.

Average Joe Finances:
33:12

So you're saying its good to, to stick with those markets?

Stefan Tsvetkov:
33:15

No, I don't think so.

Average Joe Finances:
33:16

Okay. Okay.

Stefan Tsvetkov:
33:17

You think what is good though? No. So that again, that's those are the ones that's gonna, they're gonna appreciate. until recession hits. Once that happens,

Average Joe Finances:
33:24

they still got that momentum going.

Stefan Tsvetkov:
33:25

The worst ones. Yeah. That happens. They're gonna be the worst ones to be in. And so where if one takes, okay, just cuz they don't know if recession triggers or not. So if the best place, in my opinion now is to invest in the Midwest and places like that to invest for yield and to invest a boring thing. But essentially undervalued markets or fairly divided markets. And so that's what I do. So I search for now commercial multifamily in the Midwest, cuz I don't want to invest in for that I think came out that what, 27% over the state of Florida. But it that's a taste. That's my own like risk preference. Cause again, I can, I could have said I'm gonna invest in 27% overworld Florida, because prices are gonna boom the most this one year in Florida. And that's a very valid strategy. But again, if recession triggers, then this is your best statistical predictor under perform. Let's say not necessarily declines could, it could be that doesn't correct. Don't correct price, but definitely under performance after.

Average Joe Finances:
34:25

It can give you a good idea of what's to come if that recession hits right.

Stefan Tsvetkov:
34:30

Very much. It depends again, like how much of a correction scenario is, but if you have GFC correction scenario, then pretty much what the valuations were in different, against states, that's how much they declined in a very high level to an 85% correlation. But that's not always the case, like mentioned for, it could be a smaller decline, because the recovery is very quick. We're very strong like incomes and everything's performing very well after the recession at some point. So it can vary, but even if that's the case, that market has a lot to overcome has all that over variation to overcome. And so it becomes more stagnant. And so that's for instance, in Hawaii, between, think of investing in Hawaii 1990, that was the best performing highest price appreciation anywhere in the US. You invest in Hawaii 1990, fast forward, eight years in one quarter and prices are 14% war. So that's not a good time to invest it just because, okay that was the best. And then if one was talking to investors, they were just saying, that's the best mark. That's the thing that I listen, I hear about now. Okay. It's extremely booming. Fundamentals are so strong. I know that fundamentals are strong. That's reflecting the prices. Everybody knows that. The question is where prices related to those fundamentals. And if they're 50% higher, then that's not a good market to invest. And so it's probably gone under perform next market cycle and very high likelihood. And it's very hard, much harder for like other places, just 20% over world gets, different things can happen there, different scenarios, perhaps their recovery is strong and so forth. But yes, so my personal opinion is people should start rebalancing from Western and Southern markets to the Midwest and places like that, or other Southern markets that are just not over bottled, like less desired Southern states, and that's just my guess, but this is a risk preference. Everybody can have their own risk preference and trues.

Average Joe Finances:
36:21

Yeah. It's just good to diversify and not have all your eggs in one basket. Because if you drop that basket and they all crack, then you're done. Stefan Tsvetkov: Yeah. So there are investors who are only in Phoenix, right? They're investors. They have their whole huge multifamily portfolio, Phoenix all. Yeah. I know when we were talking before we hit record and, was telling you I'm in three different markets right now, so yeah. And I always thought it was good to diversify. Cuz whether you're in the stock market or in real estate, it's important to be in different areas in different markets. Cause each real estate market is its own entity. It is its own market just because you see a huge decline somewhere doesn't mean that every market in the US is gonna decline the same. If you look back to 2008, 2009 timeframe, yes. You know where. There were some places that dropped 40 to 60% out here in Hawaii dropped 10%. So it just depends on what market you're in. And what kind of impact it's gonna have when it does go Kaboom, if it does go Kaboom, we'll see. There's a lot of factors that lead into that. But again it's very hard to predict these kind of things, which is, if you could predict these things, I think everybody would be rich.

Stefan Tsvetkov:
37:23

But I think it's hard to, yeah, because it's hard to predict the timing and it's also hard to predict the exact magnitude of a correction, but in terms of, I think those are not even the most important questions for me. Let's say is an investor. I don't know. It's a professional account investor coming from finance, but I don't even look at the prices. I just look at like evaluation, like this discussion because to me it's just, it doesn't matter something that's 50% over decline's only 15% after the recession. Mean it does matter but not super much because it's still going to underperform by that decline of 15% is gonna be dragon for too many years. Or something like that. And it's just it's whether you have a sharper correction or not, it's an important question, but a secondary question to me. And so yes and no. Yes. It's hard to forecast of course. There's especially trend when trend changes, all that stuff. It's hard, but just knowing, having the knowledge of how over valued something, it's not hard because that's just in the data and the fundamentals are very simple. It's again, it's income population, housing supply, and there is never, there's nothing else because people say sometimes like real estate, now it's gonna be different, or something like that. Okay. Different from GFC, if you take, they had all those that financial structuring of product and excessive lending and all that. Doesn't matter. GFC evaluations, they were consistent with. It was like 1990., it was over valued and very simple fundamental terms that were measurable. And there were people who were looking at it at the time. There was Ingle windsor is somebody I think knew about you, this, some of his stuff, Ingle Windsor out in Massachusetts. So he was out on CNA and like sharing like some stuff about the California for the markets and so forth. So yes and no, it's hard to forecast the, like the exact price movements, but to just know if something was over valued is not hard, then it's something that is accessible in back then. Yeah.

Average Joe Finances:
39:24

Yeah, no that's a lot to unpack and just a lot of good golden nuggets there, Stefan. Definitely. So I kind of wanna transition this now to get more back to you as a person as we go into something that we call the final round, I want to ask you some more personal questions about, you and this kind of gives our listeners good understanding of how you got to where you are today, because when you look at, you came to the us at 22, and you went to school and you went to Columbia, and started working in finance and just, you started building this massive undertaking in, in real estate investing. Especially with this program that you built or this website that you built. It's a Testament to the hard work that you've put in. And it goes back to something that you mentioned earlier was that mindset, right? I want to touch about, touch on all of that, in these questions. So if you're ready, we'll go ahead and start the final round.

Stefan Tsvetkov:
40:13

Sure. Yes.

Average Joe Finances:
40:13

Okay, awesome. Hey, so Stefan, the first question is, and this is a big one. It's a doozy, right? What's the biggest mistake you've ever made?

Stefan Tsvetkov:
40:23

Biggest mistake personally spending as much as 10 years is in employment as opposed to entrepreneurship where employment is sort of income optimizing instead of equity optimizing and a waste of time for me personally. And so I wish I that's the biggest mistake I wish I, I exited earlier and entered into entrepreneurship.

Average Joe Finances:
40:47

Okay. Yeah. That's fair. Alright, this kind of ties into the next question, right? Because I'm sure you've had, you have a lot of lessons learned from that. What is something that you've learned that you wish you knew when you first started?

Stefan Tsvetkov:
40:58

Yes. So when I first started. Let's say when I was working my W2 job and let's say I would invest, and I look at, like things, private stocks or cryptocurrency or other stuff. And I think what I wish I had learned is how to do private equity investing, like earlier, be it in real estate or in other, I honestly don't care if people invest in real estate and improve, let's say commercial estate and improve the profitability of those building or if they had that expertise, they invest in techno technology companies or data companies or whichever private companies want dramatic if they wish whatever they wish, but private equity investing where you have control. And you also labor respect with control comes labor, and the responsibility but where you have control and where you yourself affect the valuation of that business. And that's like something that I wish I got into much earlier. Instead of just basically not having high quality investment options in just the stock market and that.

Average Joe Finances:
41:59

Okay. Yeah. That's fair. It's definitely something that you can take with you into the future as you go on and utilize that as you can look back and be like, okay, I know where I messed up on this. I gotta do better. That's awesome. All right. Next question is, do you have any tips or tricks that you would recommend to someone that is just getting started today?

Stefan Tsvetkov:
42:21

Great question. So tips or tricks to someone that is just getting started?

Average Joe Finances:
42:25

Use RealtyQuant

Stefan Tsvetkov:
42:26

well, yeah yeah, I guess realtyquant.com/analytics. They can look up some data there and some can read our blog as well. So that's, those would be like the best place for tips. Yeah. Yeah. Thanks.

Average Joe Finances:
42:41

See there you go. Awesome. Alright. And so for you personally, do you have a favorite business investing or real estate related book or podcast or both?

Stefan Tsvetkov:
42:51

Great question. No, not like a book. I liked a finance book called When Genius Failed, like with the hedge fund, like the Russian depth crisis. So that's I can state as a book that I like. I like the best ever real estate show like few other podcasts. I'm not a huge consumer of, to be honest of books and in the real estate space in that sense.

Average Joe Finances:
43:16

Okay. No, that's fair. That's fair. You got a good book recommendation in there too and some good podcasts that, that you enjoy. That's awesome. Now that's it for the final round Stefan, but I do have one more question for you and it's probably the most important question of all and cuz people will listen to this episode and they're like, man, This guy knows what he's talking about and he's doing the data, he's doing the research, he's getting all the data, he's got a great system put in place. So they're like, I wanna learn more about Stefan Tsvetkov right. Where can I find that information about him? So do you have a website, social media, anything like that you could share with us?

Stefan Tsvetkov:
43:51

Yeah, absolutely. Yeah. So realtyquant.com. So our data is there also I will be starting like a data-driven investing course. It has, it's gonna have some programming in there, but I'm gonna do also no, no programming version, a lighter version as well for investors. So if they wanna learn from me about like, how to do like that during I think that's something that, that I've been working on as well, but it's gonna be realtyquant.com. I also have a YouTube channel Finance Meets Real Estate.

Average Joe Finances:
44:19

All right. Fantastic. Hey we'll have those links in the show notes to make it easy for everybody you can just copy and paste or click away and go check out Stefan and see what he's doing. Go check out his website, go check out his YouTube channel. Cuz if you liked what you heard here, you're gonna have all of that and more when you go check out his stuff. Definitely appreciate it. And Stefan, Hey, I really appreciate you taking the time to join me today on the show.

Stefan Tsvetkov:
44:42

Appreciate it, Mike. Thanks.

Average Joe Finances:
44:44

All right. Hey we're outta here. And Aloha from Hawaii.