More Knowledge, More Wealth - Episode 156: "Invest in Real Estate? It depends..."
More Knowledge More Wealth
Episode 156 – Real Estate
[00:00:00] Gabriel: Good afternoon. This is Gabriel Shahin certified financial planner, and your host more knowledge, more wealth here on every weekend. Talking about all important topics of personal finance. Our goal is to give you the knowledge you need to increase your wealth now to the listener, you can always reach out to myself or anyone of our colleagues here at falcon wealth planning.
[00:00:57] Our phone number is (855) 963-2526. That's 8 5, 5 96, Falcon like the bird where we can help relate this show to your specific situation. Now, a principal of Falcon wealth planning. We are a fee only financial planning firm. We manage money as well, but we specialize in comprehensive planning folks that goes over.
[00:01:18] Anything that involves a dollar sign, whether that's where you are today, how retirement looks like taxes, investments. Planning insurance folks who name it, we can help. And some of the bigger topics that we've been offering and talking about these dates is real estate, which we'll talk about in this episode as well.
[00:01:33] But if you want help with this, we can help nationwide folks give us a call. We'll offer a free financial assessment telling you what you should do, where you are today. And so on. Give us a call. Our phone numbers, eight five. 9 6 3 25, 26 that's 8 5, 5 96, Falcon like the bird we'd love to help you answer those questions that you may have.
[00:01:56] And lately, a lot of the callings that we're getting have been based on real estate, asking if it's a good time to buy. We have seen with interest rates rise, the natural. Occurrence that happens after that is real estate prices dropping naturally a $500,000 house at two and a half percent is different payment than if it's at a 5% loan.
[00:02:21] You get what I'm saying? The payments are more expensive. It's a few hundred dollars more expensive. So the idea for you to understand is if your income is 5,000 or 10,000 a month, and those payments are more, the bank is not gonna approve you for that same 500. it might be 450,000. So naturally real estate prices fall down when interest rates go up.
[00:02:46] So the question I always get. Does it make sense to invest in real estate right now? And I'm gonna give you that answer right now. And it's extremely important because that answer dictates your diversified portfolio. It dictates what you should be doing. It dictates the outlook on real estate. If you're holding it, whether you live in the home or it's an investment property for you.
[00:03:06] So the answer of what you should be doing in real estate, should you invest? The answer is very simple. The answer is it depends. It does depend guys. I'm sorry to say it, but it's true. It's common sense, right? If you have one property, that's half a million dollars after whether you get a loan on it or not, but let's say if half a million dollar home is netting you $10,000 a year, that's a 2% return.
[00:03:35] on that property. Hell yet can get a three and a half percent to year treasury right now. Why would you waste your time with real estate? if that's what your cash on cash return is, what does that mean? Well, if you rent it for 2000 a month and your payments are 1500 a month, including property tax, insurance, HOA, everything, then you are netting 500.
[00:04:02] If you multiply that by 12 months, you're netting $6,000 a year. I know that's different than the 10,000 I said earlier, but that's how you have to think of it. Now, the other side of it is figuring out what's the down payment of what you're paying. Now, if you, in fact, put 20% down or 30% down, let's say that's a hundred thousand dollars and let's say you're still netting $6,000 a year on a hundred thousand down folks.
[00:04:28] That's a 6% cash on cash return. You only had to put a hundred thousand dollars down and you now net $6,000 a year. It's 500 a month. Now some people say, sign me up. That's great. And I agree with you. That's a 6% cash on cash. Let's throw some asterisks out there that assumes there's no repairs that assumes there's no vacancies that assumes there's no outof pocket costs and anything with the property sunset.
[00:04:58] So yes, it's a 6%, but we know things. now, by the way, folks, if you're just joining me, you're listening to Gabriel, Shahin certified financial planner and your host of more knowledge, more wealth here, and every weekend, talking about all important topics of personal finance. And today we are discussing the concept of investing in real estate.
[00:05:18] And here's how you determine if it's a good property or not. We talked about cash on cash return. Very simple. If you only had to put a hundred thousand dollars down on a $500,000 home, that's what you measure your cash flow on from a cap rate point of view. And so when you look. Netting 6,000 a month after all expenses.
[00:05:35] And out of all the payments, if you have a mortgage on it, then you are getting 6% on your money, but that's not all of it. Folks. The other part you have to look at is if your payment in fact is $1,500 a month, part of that payment pays down the principle. Now, if your payment includes property tax and insurance, Your payment on your mortgage by itself might only be $1,200, which means maybe $400 a month is going towards principle.
[00:06:05] The other money we'll call it $800 is going towards interest. So the benefit of this, you guys is that you are paying down $400 a month off your mortgage. That's almost $5,000 a year that you are gaining in equity. That's in addition to the 6,000. Uh, cash on cash return. So where am I going with this? You are now making an additional 5%.
[00:06:30] It's not what you see in your, your, your, your money, your pocket, but it's what you see in the equity in your property. These are things that have to be looked at. It's something you'll tied up in the walls of your home. You may not ever touch, but the point is that's how it works. Don't forget it. So if you're getting a 6% cash on cash return, plus the 5% on the principal buy.
[00:06:54] you're now at 11%, but there's more let's say now there is, what's called writeoffs the depreciation on the property. It's a fake expense. The government gives you, I mean, it's a legitimate expense. There's nothing a leak about it. I'm just saying it's truly a vague expense. And so you depreciate that property over 27 and a half years.
[00:07:19] If it's a commercial property, 39 and a half. so on a half a million dollar property, that might be $10,000 right off a year that offsets it gets your positive income on the property. So that's 6,000 a year. You get, you might not have to pay taxes on it because you have this fake income that gets written off against that.
[00:07:40] Heck it might be negative 4,000 is what the I, what you pay taxes on, which means you don't pay taxes on that rental. Well saving that write off of $10,000, assuming that's what the, uh, depreciation is. Well, that might save you roughly another $4,000 a year in taxes. So the tax benefit of depreciation, let alone writing things off, like the proper tax, like the interest, like the, uh, insurance and, uh, HOA or gardener or pool maintenance, whatever it may be.
[00:08:12] You get to write these off. So the tax benefit of maintaining that home could be crucial. And why is that important? That's an extra $4,000 in annual tax savings on your a hundred thousand dollars down that you put on the property. That's an additional 4% cap rate. My goodness. Add that to the 6% cash on cash.
[00:08:30] And the 5% principle buy down. You're at 14. Excuse me. You're at 15%. Let's keep going. Right. You're having fun. Are you following me on all those folks? Let's talk about the fact, is that the properties also over time, appreciate historically speaking real estate appreciates. Let's just say it historically appreciates at a 3% rate of return.
[00:08:56] Okay. I mean, inflation is roughly 3%. I think it's even fair to say 4% historically. Hey, the past two years it's gone up 25%. You get what I'm saying, but let's just save 4% for an average. You add that on the appreciation side, guys. You're now at 19% return on real estate. This is why private equities were buying in left and right were one outta five homes in the states of Arizona.
[00:09:22] And some of these other ones, Arizona for sure were bought by institutions because they're running these numbers. So this affected the supply and demand as interest rates go up. It's no longer as appealing to use leverage. by part of real estate investing. And the benefit of it is the leverage of a mortgage.
[00:09:41] And when the interest rates go up, doesn't make as much sense anymore. Another benefit of having a mortgage is over time. You already know this, what I'm about to say, you get to raise rents as time goes on, but your mortgage payment stays flat. So after 5, 10, 15 years, your cap rate's even higher than that.
[00:10:02] Why? Because that payment is still on your purchase price. And now you've already raised your rents five to 10 times in that 10 year period. So it's great to have a mortgage because your payment is locked. These are the characteristics and the things that you should look at when investing in real estate.
[00:10:22] I don't know if it's a good idea to invest in real estate. Now it depends on the deal you get. That's the answer and the deal goes two ways. Number one, what's the purchase price that you're paying for this thing. Are you getting a great deal on it? And number two, the terms of the loan is your bank offering you 7% or are they offering you 4%?
[00:10:43] You get what I'm. So what matters folks of what that looks like to make sure if it's a good idea to invest in a real estate, there are some still good deals out there. There are some people in financial duress. There are people not doing as well as they were. Institutions are no longer getting involved at the mass.
[00:11:05] They were prior in the mass purchasing. They, they were. this could yield opportunity for you, especially if you're in a high tax bracket, especially if you're own real estate, whether it's commercial, residential, whether it's commercial and you work out of there, maybe you're the build business owner that also works in there.
[00:11:21] There could be significant opportunity for you to take advantage of real estate right now, despite the interest rate, this could make a lot of sense for you financially. This is why we're recommending that you talk to a financial profess. we would love to help you. I'm not here telling you to go buy real estate.
[00:11:38] I'm this is a financial show, name, the show as more knowledge, more wealth. I'm just trying to get you knowledge. I personally think it's okay if people invest in real estate, but it's not liquid. It's not for everybody. Some people don't like the headache. Some people don't like to call it two in the morning that their, uh, toilet doesn't work.
[00:11:54] It's not for everybody, but if you wanna have a conversation of just to see where you're at, what makes sense, what you're doing and what's available to you, give us a call folks. Our phone number is (855) 963-2526. That's 8 5, 5 96. Falcon like the bird. We would love to help answer these questions for you.
[00:12:14] This is what we do on a daily basis, folks yet. Feel free to reach out. We're gonna go on a quick little break and we have more information on other types of ride offs you can have with real estate, especially if you have a large real estate portfolio, or even if you have just a high tax situation, stay with us.
[00:12:30] We'll be right back after a few words.
[00:12:32] Welcome back folks. This is Gabriel Shahin, certified financial planner, and your host of more knowledge, more wealth here on every weekend. Talking about all important topics of personal finance today. I thought I'd pick on real estate and just see how it works. See what makes sense. Understanding if real estate's a good investment.
[00:12:48] There was a lot of perks to real estate. I went over to some of the tax benefits that you. With paying down your principle every month that the tenant, the renter is doing on your behalf, you put, you might get a positive monthly cash flow that adds to your cap rate. You might be getting depreciation writeoff and other writeoffs as well.
[00:13:06] The house also appreciates in value. Um, and then lastly, there, it, it is locked. That payment is a lock principle and interest payment throughout the life of the loan, which is nice, uh, because that with rent's increasing, that could be very helpful. So I'm not telling you to go buy real estate, especially now with interest rates as high as it was, because the key is leverage with real estate.
[00:13:27] It's crazy, by the way, people don't leverage with their investment accounts. people leverage all the time with an asset and they call it investment in just real estate. But how come you don't margin your in. You have a million dollar count, how come you don't take $500,000 out and put it also in the stock market.
[00:13:41] So you have $1.5 million in the stock market with only a million. Why? Because people consider that risky cuz they see the value of the portfolio on a daily basis, but they don't always see that. With the stock Mar or with the real estate market. I mean, some people think the Zillow prices, their actual price of the home.
[00:13:59] No, it's a zest demand. It's not a full on appraisal. And what is the value of your home whenever somebody's willing to pay for it? That's the actual value of your house. So understanding that there are other benefits, the core benefits of real estate is taxes massive along. the good old leverage. So I'm just acknowledging those two points.
[00:14:24] What I'm saying to you is this, there are other ways to do tax benefits with a rental property, whether it's commercial or residential, and it has to do with something called here's the fancy name, cost segregation. What the heck is that it's an accelerated depreciation instead of writing it off over in 27 and a half years or in 30, uh, nine and a half years, there are additional writeoffs that you can get early on, depending on the structure of the property.
[00:14:53] Now, this is something that you need to specialized accounting for. This is something that can't be done at your local CPA. You don't wanna specialize in things like this, cuz then you become a Jack of all trades and a master of no trade. So this is something that could make sense, especially if you have number one, high taxes, number two, a lot of real estate in your portfolio.
[00:15:12] The recommendation is to please consult with a tax advisor, but this can have an add substantial tax benefits to. Normal personal tax returns or your partnership tax returns, whatever the real estate is held in. I see a lot of people missing this out and there's a lot of people that do this. And hypothetically, you can go back 15 years to do a cost segregation study.
[00:15:35] That's what it's called. So you could do that. It's not uncommon to do that. It's just people. Fearful of the unknown. There's a lot of extremely wealthy individuals and people with just one rental property that are not taken advantage of this. Most of the time, people realize this later, when they start complaining about real estate, all I'm trying to tell you is this could save you time.
[00:15:58] This could save you money. Some people would rather get the write offs today. Why? Because they'd rather get the money back from the government today versus stretched over 27 and a half. Other people you'd rather get the money today because you're in a higher tax bracket. Now, maybe you're working in conjunction with the income could make a lot of sense for you to take advantage of that.
[00:16:18] I do recommend it for a lot of you guys, depending on your situation. But if you wanna see if that makes sense for you guys, listen, we're a wealth management from. Not a money management firm. Listen, we manage money for our clients. I'm not trying to say we don't, but we specialize in comprehensive tax planning.
[00:16:35] You call now will give you a complimentary tax assessment and we'll tell you what you should do. We'll explain it to you even better than that. This is why we grow so much off referrals. We recommend it. Give us a call folks. We would love to help explain to you what we're talking about. Help relate this show to your situation.
[00:16:53] Our phone number (855) 963-2526. That's 8 5, 5 96, Falcon like the bird love to put together a free assessment to really answer those questions that you may have. You come in with the questions we will be able to help you answer 'em by the way, folks, if you're just joining us, you'll listen to it. To Gabriel Shahin certified financial planner and your host of more knowledge, more wealthier on every weekend.
[00:17:19] Talking about all important topics of personal. today. We thought we'd pick on real estate. We always talk about those dirty annuities that sometimes get soldier way or insurance products or some of these scammers out there trying to give you, uh, first trustees of a property that doesn't exist or selling you gold and silver, that's unregulated, and they're charging you unregulated commissions.
[00:17:39] And so we always talk about those, but real estate is a legitimate investment and does have room in a portfolio. And there are times it makes sense. There's also times you have way too much in real estate and you're so heavily loaded, cuz you're just respectfully ignorant about the stock market works.
[00:17:55] Our job is to explain to you what makes sense for you. And sometimes that matters with liquidity. Sometimes that matters of. Getting a monthly income that you can control, not with your tenant controls. Sometimes that matters on the tax strategic way of getting that money out because some of the cons of real estate is you can't just sell that property.
[00:18:13] You have to repay the taxes on everything. You depreciated, everything that you wrote off it's called depreciation recapture, and you still have to pay the capital gains on that as well. So you are stuck with real estate where you're not able to easily. Able to get your money out of it. So it could be very troublesome.
[00:18:32] It could be annoying. And that's why you see people sometimes in their seventies to eighties, complain about their real estate. Kind of the joke in the industry is you spend the first 20, 30 years accumulating your money, gathering all this stuff, all this property, all these different accounts. And then you spend the next 20, 30 years of your wealthy years trying to simplify your life.
[00:18:53] I see a lot of people going from residential to triple net. My point is, is that you have to understand what works for you. What I'm saying on this broadcast may or may not apply to you. That is why we tell you to speak to a professional. And of course there's us. We help people all across the country.
[00:19:09] We're more than happy to do that for you. My point is, is when you look at real estate as a whole, you have to isolate that specific situation. What is the estimated rent you can get for the. Let's say you bought a place for 500,000, put 20% down. That's a hundred thousand. Is there any additional spending you have to do to make that property subpar for somebody can just move in.
[00:19:34] You might have to redo the floors. You might have to redo a bathroom. You might have to repaint the house. There are still things you may have to. So, if you have to put in $50,000 and only put a hundred thousand dollars down, you really are all in one 50 folks, you have to calculate everything, including the closing costs.
[00:19:54] This will help determine if it's a good investment. Personally. I say, if you can't get a four per, uh, 4% cash on cash return, assuming it's rented the whole year 4% cash on cash return is probably not a good investment. Simple. I'll say it again. That means if you have a property for 500,000, you put a hundred thousand dollars down, which means 400,000 on a note on a mortgage.
[00:20:21] Let's just say your payment's $2,000 a month. You really have to get at least $2,350. That extra $350. A month. Why? Because over 12 months, that's $4,200, 4,200, plus that a hundred thousand down, assuming that the a hundred thousand included in closing costs, assuming the a hundred thousand dollars included, if you had no upkeep or repairs to the house to make it rentable, that gets you a 4.2% return.
[00:20:49] You won at least 4%. Why because things are gonna happen with that property. And it's not as passive income as you think passive income means you do nothing. There's times you do a lot. There's people who are retired, who are not a realtor that are considered real estate professionals, and IRS acknowledges that, that you're spending a lot of hours on this and give you additional.
[00:21:09] Write-offs where you don't have limitations on how much you can write off. Now, those type of individuals can have a fantastic opportunity for cost segregate. Depending on their tax bracket. My point with all this folks is understanding your situation. What makes sense for you? I can't tell you what makes sense for you off this radio show off this videocast off this podcast or whatever it is, but we, our team is able to help identify what you.
[00:21:38] By understanding a little bit more about your situation. That's understanding what your tax situation looks like, understanding what your real estate situation looks like is standing, what your overall assets look like, what your cash flow is. What's your retirement goals. These all play a part of if real estate is a good investment for you, people ask, come up to me all the time and say, Hey, uh, should I buy a rental properties?
[00:21:58] I don't know. do you have a hundred million dollars in a bank or a hundred dollars in a bank? Are you working right now? What's your income situation? How stable is it right now? What's your stomach for volatility of people calling you in the middle of the night that something's broken? Is this property in California where you live or is it a New Hampshire where you've never been.
[00:22:17] You get what I'm saying? So there are important concepts to this, and I know a lot of people say, this is why you get a, a property manager. And that does make sense for some of you. I do agree, but they're taking five to 10% of the gross rent. Instantly. That example, before you're getting 2350 a month times out by 12 months, that's almost 25.
[00:22:40] Excuse me. 27,000. They're getting $2,700. Rental management for them. Well, if you only made 3,500. or 4,200. They took majority of that money, which means you're not getting that 4% cap rate that we were talking about. Folks. These are the things that we do on a daily basis, and we would love to help you with give us a call.
[00:23:04] We can help. See what makes sense for you. Our phone number is eight five five nine six three. 25 26 that's 8 55 96, Falcon like the bird, or visit our website@falconwealthplanning.com. That's Falcon wp.com. For short, we can help put a free tax assessment for you at no cost, truly helping relate this show.
[00:23:29] What we've been talking about to your situation. Folks, we could do that. We would be. To help, man, that was a fast, fast show. I wanna thank you for tuning in with us this weekend. Please feel free to reach out to myself or any one of our colleagues here at Falcon wealth planning with any questions that you have.
[00:23:45] Our phone number is (855) 963-2526. That's 8 5 5 9 6 Falcon like the bird where we can help answer the questions that you have and relate the show to your situation. Call us we'll have a free confidential convers. To really help with all the questions you may have folks who want you to enjoy your weekend, have a great week.
[00:24:07] And God bless.