Ep. 188: Real Estate - A Good Investment Now? - More Knowledge, More Wealth

  📍 📍 📍 Good day. This is Gabriel Shane, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. My goal is to give you the knowledge you need to increase your wealth. Now, Ted, the listener, you can always reach out to myself or any one of my colleagues here at Falcon Wealth Planning.

Our phone number is eight five five nine six three. 25 26. That's 8 5 5 96. Falcon like the Bird, 📍 or visit our website@falconwealthplanning.com. That's falcon wp.com. First short. Now I'm the president here of Falcon Wealth Planning. We are a fee only non-commissioned true fiduciary for folks. We are here to handle everything that involves a dollar sign.

We are an. Independent registered investment advisory firm and we can help folks, give us a call. We can help you in your personal financial situation to help relate this show to your specific situation. Doesn't matter where you are, doesn't matter if you're building your career, heading for retirement, wanting questions on cash flows, taxes, investments, ensure it's estate planning, folks, you name it.

Anything that involves a dollar sign. We would be happy to help and we are offering a free financial assessment yet again to help in your situation. We help. Doesn't matter where you are, we have offices all across the country. We can help. Give us a call. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon.

Like the bird where we can help put together an assessment yet again to just relate the show to your situation, answer the questions that you may have, and we've been getting a lot of questions recently. Uh, I'll read off the simplest one, and this is from, uh, Lauren in Michigan, and she said in Ann Arbor specifically, is real estate a good investment?

That was the question that she asked. So I'm gonna address that in multiple different ways in this show because the concept and the idea to understand if real estate's a good. Investment. It depends on your situation, and let me give you a few examples of that on why. It depends. It's because is there other forms of income coming in?

Is there other assets that are coming in? Are you buying all cash? Are you getting a loan? What's your longtime projection of income? What's your long-term projection of diversified assets coming in? So it really depends. And here's the biggest part that nobody really understands is what is your tax situation?

And I give you a few examples here. Cause a lot of people think real estate is a write-off because of the ires giving this fantastic write-off called depreciation. It's a fake, if you think about it. Depreciation isn't really a write off. You know what I mean? Depreciation it. It's not something that you actually spend money on on an annual basis, but the government gives it to you.

And so if you bought your property for a hundred thousand dollars, they have a land value and the property value, and typically the property value can range anywhere between 50 to 85% of the purchase price. So let's just use 75,000, 75% on a hundred thousand dollars. Purchase price. The land is worth 25,000.

The property's worth 75,000. You get to depreciate that over 27 and a half years if it's residential, by the way, if it's commercial, it's 39 and a half years and you depreciate that little by little, and that is yet again, a fake write off to you. Why do I keep saying that? Because that's important to note.

What do you mean by that? Well, you see the government says from a lost point of view, cuz most people who get a mortgage show losses on their real estate. Now, why do they show a loss? Well, yet again, because factoring in the interest costs the property tax, any insurance, any vacancies, any supplies, any repairs, any other miscellaneous costs like maybe hoa, pool, landscaping, whatever.

You might be lucky. If you're bringing in, for example, if your expenses are 2000 a month, you'd be lucky to bring in 2,500 a month, and so you are only making $500 a month. But then you have this fake write off of depreciation, which would actually show your property showing maybe a loss of $500 a month, negative $6,000.

Now, here is the thing. What people don't understand about real estate is that real estate. You are not able to write off any losses on real estate unless your adjusted gross income is a hundred thousand to 150,000, whether you're single or married, adjusted gross income. If you make more than that, you cannot write off the losses.

People aren't aware of that, and they're buying real estate. You have middle America where their income is less than $150,000 a year, and they're thinking that real estate is a fantastic play for. Tax writeoffs, and it is not depending on their situation yet. Again, if their assets are higher than 150,000, then they cannot.

But here's the crazy part folks. This is the part that blows my mind. Let's just say your income is under a hundred thousand or 150,000 a hu uh, adjusted gross income. I'll focus on married and say 150,000, let's say it's not. Well, then the government puts a cap on how much you go right off in losses.

It's $25,000 a year on the federal level. Each state's a little different, but we'll say $25,000 a year. Why is that important to note? Well, because if your adjust Gross's income is under $150,000 in your married filing joint, that means your tax bracket is roughly 22%, could be even lower, and then you get to only write up 25.

Thousand dollars on that. 22%. Heck, what if you're on the 12% bracket? You're only getting back 12 cents on the dollar. Look how smart the IRS is. They're about to trick you. By the way, folks, if you're just joining me, you're listening to Gabriel Shaheen, certified financial planner and your host of more knowledge, more wealthy on every weekend, talking about all important topics of personal finance.

And today I was just talking about real estate in general. We had a question from Lauren in Michigan in Ann Arbor. Discussing, uh, excuse me specifically, is real estate a good investment? And I'm here just backing into that answer by just discussing some of the variables of real estate and I discuss how you are limited on the losses that you could take.

Real estate is great cause you have four main ways to make money. Number one, your cash on cash return. For example, if you put in $50,000 down on a property and that property is netting you a hundred dollars a month, that's 1200 a year. 1200 a year on a 50,000 down, that's a 2.4% return on your money.

It's cash on cash. That's one. Typically, we say it needs to be at least 4%. Number two, you get write-offs, which is includes this depreciation. Then I was talking to you about. Okay, so there's tax benefits of having a real estate property. Number three, somebody else, your tenant is paying down your mortgage.

You get it. It's financially beneficial because you're making money equity every month. If your mortgage payment is $1,200, well maybe half of it is going towards interest. Half of it's going towards principle, which means the principle is being cut in half every single month that, oh, by the way, the tenant is paying for.

And the last one is just the growth of property. Real estate grows folks over time, even if real estate has dropped. Five to 10% from last year to this year. It doesn't matter over long periods of time. Historically speaking, real estate appreciates over 10, 20, 30 years even if you bought a property in 2007.

By 2017, most properties across the country has either broke even or even made a little bit more. So now we establish that it could make sense to invest in real estate. Keep in mind this, and then we'll talk more about the real estate ways of being able to legally write off. Your assets right off these homes.

Now, here's the thing, real estate interest rates, mortgages are currently if you were to borrow at a bank around six to 7% Now, A year and a half ago, you were able to get two and a half percent. The investment for real estate differs substantially depending on the interest rate environment, and right now it is not as beneficial as it historically has been.

This is crucial to understand. If you should invest in real estate today. So is real estate a good investment? Well, sure it could be. But also know historically you wanna get at least a 4% cash on cash return, and now you can get a four to 5% United States Treasury less than a year. So it's in less appealing institutions and individual investors are not as excited to buy.

Real estate properties, which is another reason you're seeing the prices drop. In addition to that, with a rate so high, people can't afford it as much as they used to, which is another reason. That real estate prices has dropped a little bit. Now, if you're looking to hold onto the real estate for long periods of time, it could make sense.

But let's focus back on the taxes and the tax benefit because you're thinking it's a great tax benefit for you. But your re primary, uh, house is different than a rental property, your primary house, right offs the property tax and mortgage interest. You get to write off on your Schedule A, which is your itemized deductions, assuming you are itemizing, but for a rental property, It shows up on your Schedule E, which is different.

It's where your investments go, or excuse me, it's where entities go. It goes where real estate goes. So it could make sense for you to do that. Okay. For you to be able to have your property there. Some people end up putting in LLCs and so on. I'll save that for another show, but why do I bring that up and bring it up?

Because it's on a different sheet, which means it's subject to different laws. What does that mean now? A rental property? Okay, you get to depreciate. We went over that and I'll talk more in detail, but in addition to that, your rental property is not subject to the $10,000 salt limitation for people that are in high property tax states.

That salt limitation of $10,000 can easily be reached at a cap. Well, there is no 10,000 limitation for property tax when it's on your schedule. E. It's important to know in addition to that, your mortgage interest, which if you have a million dollar mortgage, I think now they lowered it to seven 50 as of 2018, they'll be disappearing in 2015.

But if you have a million dollar mortgage or you were capped at writing off only up to a million dollars, so if your interest rates 5%, you owe a million a mortgage, you can only write off 50,000. But on your Schedule E, you can run off unlimited. Just important to know, and folks, there are a lot more to go over.

As well. We're gonna talk about that after the break. But folks, if you need help with this, what I'm sounding sounds similar to you. If you have been thinking about real estate as an investment, if you have real estate and haven't factored the tax benefits of holding the real estate and making sure you're not taking advantage of all the strategies, which I'm gonna talk about in the next segment, give us a call, folks, we can help with this.

We specialize in this, whether you own five or 50 homes, that's great. We bought 50 homes alone last month alone. If you factor all our clients, you get what I'm saying? Give us a call. We would love to help. 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 where we'll give you one to two meetings, one to two hours of our time at no cost.

Folks, we're gonna go on a quick break. We'll be right back after a few words. 📍 📍

Welcome back folks. This is Gabriel Sheen, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. Today we're talking about real estate as a whole. I had a question from Lauren in Ann Arbor, Michigan, asking a question of real estate as a good investment.

It was such a. Simple question, but we went over to the details. I gave you the four reasons why real estate could make a good investment and what you need to do to analyze if it's a good investment. But the question is, is it a good, real, uh, investment right now? And with interest rates right now, they're getting harder and harder to find a good one.

And with United States Treasuries paying four to 5% right now under a year, why would you go through the headache, the closing costs, the high interest rates, the filling somebody to rent from you, which could be months of vacancy? Why would you go through that with a high interest rate? And on top of that, if you have the cash to buy it out cash, you're gonna do that.

What all for four to 5%, you're losing some of the best benefits, which is your write-offs and someone paying down your mortgage, you are losing that. And the cash and cash return is not as good when you're paying all cash for the property. So the best part of real estate is the whole mortgage aspect of it.

You're borrowing somebody else's money, historically speaking at a lower rate and having the tenants pay down your mortgage. Leverage is one of the best things possible for an investment yield. That's like if you had an investment portfolio. You had a million bucks and let's say TD Schwab, fidelity, they let you take half a million dollars of that and buy even more stocks, and they were able to do that back in the day.

They call that margin. Now, the margin rates are extremely high. They're 10%. Back in the day we were able to get our clients 0.75%. Now those same folks are in the fives because interest rates went up. It's based on fed fund rates. Which is now L I B O R. So the point of this all well was L I B R L I B O R is gone.

Now it's fed funds. So my point of all this, not to digress, is that it's crazy how we're all so comfortable doing this. In the mortgage world with our homes, even the ones we live in, is to get a mortgage, but you are not comfortable doing it in the investment world. Some of the best returns, look at the hedge funds that are out there.

I'm not recommending you to do a hedge fund. They get their rear kicked when markets are doing bad. That's the thing with, but when things are great, they don't get their 10 to 20% returns. They're getting 60 to 70% returns. Why? Because they leverage and margin, and most novice investors wouldn't touch that with the 10 foot pole.

But you know, I know a lot of people who did. Was going to margin some of our clients during Covid. They were able to go on margin when it dropped 30 plus percent in just a short period of time, and literally four weeks the market was down 30%. We all knew why. Cause the market was shut down. Why is that important to note?

Because we knew the reason. We knew it was gonna be shut down forever and sure enough, within four months later it rebounded back. And they made a lot more because they were able to borrow money at a low rate to be able to capture market return if they thought they can make over two and a half percent, which is at that point in time with, for those specific clients, you know, once you have millions upon millions, upon millions, and back then they were able to get you under 1%.

But for those with maybe hundreds of thousands, uh, maybe one or 2 million, they can get into 2%. Well, that's over the year. We'll, in. Five months, they were able to make 50% on their money. Who cares that they paid 2% in interest? Oh, by the way, that was a year. So it's really over six months. That was only 1% in interest.

Who cares? They made 50% on that money. It's understanding what to do in market's job. By the way, I am without a doubt, not telling you to go in margin. And start investing. I'm just showing the differences, how people are so comfortable do it with real estate and not their investment performance. You're wondering why people made a lot of money during Covid, and keep in mind that assumes you bought in when it was down 30%.

You know what I mean? Because if it went down 30%. Okay, your a hundred thousand went to 70,000, and then you margined it to invest more at 70. Well, when the 70,000 came back to a hundred, that's a $30,000 increase on $70,000. You get what I'm saying? That's over a 40% return just for going back to where it was, and oh, by the way, it made 20% in 2020.

The stock market. So it's just by being strategic folks. So I just wanted to digress a little bit in that topic with real estate investing. Now folks, if you're just joining me, you're listened into Gabriel Shaheen, certified financial planner and your host of More knowledge, more Wealth. You're at every weekend talking about all important topics of personal finance, and today we just start talking casually about.

Investing in real estate cuz of the question we had earlier and I wanted to talk to you about the fact that in real estate, some of the best features of it is yes. Number one, the mar, uh, almost said margin the mortgage behind it cuz you only have to put a certain percentage down. And then also the fact that you get to depreciate the property over time if it's residential over 27 and a half years.

Commercial 39 and a half years. But keep in mind, when you go to sell that property later, let's just say you bought a property in 2000, come 2028. 28 years later, that property has been fully depreciated. If you depreciated $300,000 of that property, that $300,000 you now have to repay the tax on what you'd depreciated.

It's called. Depreciation recapture. People don't think about this when they have a real estate. Unless you're wanting to be a landlord for life or hold that property forever. Then you have to eventually figure out what you're gonna do with the re depreciation recapture, which means you have to repay the tax upon your ordinary income rates later.

And oh, by the way, If you bought that property for 500,000 and now that property's worth 2 million, you now also have 1.5 million in capital gains tax. If you're in a state like California, just on the capital gains, just on that could be 500,000 in taxes. Not inclu, that's on 1.5 million of growth, not including another hundred thousand, most likely in taxes, if not more in the depreciation recapture.

So to get 2 million, you would actually pay $600,000 in taxes, which means you only clear 1.4 million assuming no commission or closing costs at all. You get what I'm saying? This is why people do what's called a. You can say it with me, don't worry. 10 31 exchange, they sell an investment property and buy another investment property, sell a rental, buy a rental like kind exchange.

Might I add? So this is why we people see people doing that. What a lot of people don't understand, depending on their tax situation now. Now when you go sell it later, that's fine. You may be in a lower tax bracket. But for those in a higher tax bracket, now remember what I said, higher tax bracket. You cannot write off the losses.

So the tax return for those who made too much have a section in their taxes called un allowable losses, which means you were not able to do it, which means if you sell the property later that offsets, you don't have to pay the taxes on the UN allowable tax. Uh, un allowable losses. But what if you do want to pay, uh, pay the taxes later, which reverse engineering means you want the tax write off.

Today, what a lot of people don't understand is the IRS has a clause for high income earners. Something that happened to President Donald Trump is as a real estate professional, they remove the income limitation 150,000, which means you can now write off losses. Now, here's the crazy part. In the current tax all it says, you can write off up to only $25,000 in losses, but if you are a real estate professional, you can actually write off an unlimited amount.

Hmm. This is important. Let's say you had $200,000 in losses. In a normal situation, if you make, let's say a million dollars a year, you can't even write off the 200,000 losses. Okay, well, let's just say that your income was in a million, but it was a hundred thousand. You can write off the 200,000 losses, which throws your income to a negative.

That's annoying. Last situation is you could be a real estate professional making a million dollars a year with 200,000 losses. You write off the full 200,000. Why is that important? Because that could get you, depending on the state you live in, up to 50 or more, 50% back on your money. What does that mean?

You could save a hundred thousand dollars in taxes in a situation like that, and that's what President Donald Trump got a lot of slack more where him and Hillary, remember they were arguing those primaries. She's saying, you take advantage of the loopholes in the system. This is exactly what they were talking about.

This situation right here allows anybody to take advantage of a real estate professional. Take the losses. And you can offset them against your ordinary income, which is a fantastic tax strategy. And there are some rules behind that where you have to, you can't just have one property and say you're a real estate professional.

No. How about five? What about 10? Well, you need to, if you have a full-time job that takes 40 to 60 hours a week, I doubt you're gonna have enough time to go and unplug a plunger of a. The tenant of yours. You get what I'm saying? So typically you need to to spend about 750 hours a year on real estate. And yes, that is a number our government has, says, sounds about right.

My point to you is, do you know all this stuff? I mean, my goodness, I've been talking for almost a half hour nonstop about the in and out of real estate, and my point is, is it's complicated. You hire a manager, but guess what they do? They manage. The properties not your financial situation. They don't actually give tax advice and they tell you, please talk to your accountant.

And I see it all far too often, people doing this themselves and it's scary. I know why it's scary cuz I know the tax laws and this is hard enough to know the tax laws but the incorporated properly and to be able to spot check to make sure you're following it correctly. Folks, this is why you should talk to a professional.

We are happy to help. Give us a call. We'll give you one to two meetings, one to two hours of our time out at no cost. Folks, we'll be happy to help. We have offices all over and we help people nationwide. Our headquarters is here in Southern California, but still we understand nationwide concepts. We have accountants, CPA on board where we can help relate the show to your specific situation.

We would love to do that. Folks, give us a call. Our phone number is eight five five nine six three. 25 26. That's 8 5 5 96 Falcon like the bird. Or visit our website@falconwealthplanning.com. That's falcon wp.com for sure. We can help answer the questions that you may have, see if you're eligible for some tax strategies.

We just talked about real estate cause that was a question I got on the radio show, and if you have a question too, Please feel free to ask 📍 it@radiofalconwp.com. That's radio@falconwp.com where we can either play your question on air or I can read it off here. And I just asked that you tell us not your last name and where you're located and I'll play it on the air one of these days.

I would like to answer like three or four of your questions on there. That'd be fantastic. But folks, that was a fast, fast show. I wanna thank you for tuning in with us This. Uh, weekend. Feel free to join us every single week through Spotify, through Apple Play and so on. We are, uh, what do they call those?

Uh, uh, uh, iPods and so on. Uh, my goodness. Uh, I had a brain part there, but feel free, we would love to help you out. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon. Like the bird folks, you've been great. Feel free to reach out if you have any questions and I want you to enjoy your weekend. Have a great week and God bless.