Real Estate Investing in 2020 – Episode 382

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[00:00] In this episode, we’re going to dive into real estate. We’re going to talk about the historic low interest rates. We’re going to be talking about maybe some tax implications on that, good and bad. And we’re going to maybe even play crystal ball of revealing future. How’s that sound? I love it. I’m in. Okay. Excellent. So real estate is the rage. In fact, I’m looking around and we’re seeing an enormous amount of people becoming real estate agents. And we’re seeing others out there trying to get into the real estate investing game. You’ve been investing in real estate for decades, myself included. Let’s give a basic overview of what real estate investing is. And then we’re going to talk about how you can gain the maximum

[00:47] amount of opportunity with this. Awesome. Love it. Well, it is really a fun subject. And even though I think you really need as an investor to pay attention to whether real estate investing is the right thing for you or not, because as I talk about in my Busting Real Estate Investing Lies book, over time, I figured out that it’s not the right thing for me, but I still love it. I love what it can do, especially when people are just getting started out because with real estate, you can turn something into something from nothing. So we talk a lot about how people really like the stock market because they get something from nothing, i.e. put a little in, it turns into a lot. I think with real estate,

[01:33] you have a greater chance. But what I love about it is that the quote nothing isn’t truly nothing. So what I mean by that is that you do have to put some learning into the game. You do have to put some legwork into the game. You do have to put sometimes some capital into the game. And so people are hungry for reducing their taxes. Real estate is one of the best ways to do that. And let me just sidetrack on that super quick. Please, please keep your mortgage. I get so many people saying, well, I want to reduce my taxes and I want to pay off my mortgage. No, that makes no sense because real estate, just primary residence, not even investment, mortgage deduction is one of the last good tax benefits that anybody can take advantage of.

[02:26] And with interest rates so crazy low right now, there is just a world of good in just keeping your own mortgage. And then from there, learn investment real estate, even if you don’t do investment real estate, because the learning that goes along with it, the tax knowledge that you gain, the way interest rates work. And just as a tip, we’re going to talk about how life insurance and interest rates combine with real estate and interest rates before we get done in today’s conversation. But Spencer, you’ve actually probably done more real estate investing than I have you define what real estate investing is. I’ve owned a lot of real estate and time goes on as time. And I’ve been what they call a hard money lender to help people understand that.

[03:13] That means I took my capital and allowed other real estate investors to use it. And I made a good percentage off of that. So what does real estate investing mean? It means not a primary residence where you live and it’s having a tenant paying for the mortgage and the additional costs. Now, I look at a primary residence as home. I don’t see that as an investment. And on a balance sheet in my world, that is a liability. Do you see it the same way? It is interesting. Yes. And so Robert Kisaki has a definition that I totally agree with, which are assets put money in your pocket and liabilities take money out of your pocket. However, with Todd Langford’s Truth Concepts Real Estate Calculator, I have seen where when analyzed holistically, in other words, when you look at your home

[04:11] and you understand that not only is it a physical building, but it is a place to live. So not only is it a house, it’s a home. And you understand that if you didn’t have said home, you must pay rent unless you’re going to live under a bridge somewhere. When you incorporate the identification of that holistic aspect of you must pay rent, a home can earn a positive rate of return investment wise. Now, does that mean it’s investment? No, I agree. A home is not. But there is an extra element there that Robert isn’t speaking to because he has to speak to the masses and speak very simply. If he doesn’t, he would lose everybody. At Truth Training, when we look at truth concepts and we dig into the real estate

[05:02] calculator and we spent four hours on it, we can acknowledge some of these extra holistic aspects that are not common knowledge, nor are they easily understood without the real estate calculator. But that’s pretty deep dive. So I’ll take that. Yes. And I’m going to add in one caveat for myself, which is don’t speculate on real estate, especially your primary residence. And I too often see people doing this. They’ll say, oh, the market’s going up X percent a year. So I have to buy because if we stay here for two years, then it’s going to be worth X amount more. No, just look at it as a home and then go through the truth concepts calculator and the additional pieces. So we get into real estate investing.

[05:48] We think about that, the tax deductions and what’s happening. For me, there are different levels of real estate investing. You’ve got your primary residence. And for most people to give an overview, if you’re getting a mortgage on a property that is between one and four doors, I use the term doors, which means, you know, single family, duplex, triplex, quadplex, you know, fourplex there, that can be more of like your personal loan, your VA loans or FHAs or whatever else that looks like. Now you go beyond four. Now you’re in a different ball game. Um, I don’t like investing in single family as much because you have on one house itself, if that one tenant leaves, you have a hundred percent vacancy, whereas you own an apartment complex, you’re not a subject to

[06:38] something, uh, being a downfall. Um, well, I’m sure we’ll continue to dive on this and I’m, I’m intrigued to hear the life insurance and the investing and the return of that piece, where should we keep going from here? Well, let’s tackle that because we get so many questions on this because people desire to be real estate investors and it’s a great mode of operation and thought and learning that occurs and literal hard work sometimes, um, because these properties sometimes require that. And so how on earth can this mix in with life insurance at all? And again, I want to turn people, if they want a little bit more thorough story to the busting real estate investing lies book that Jimmy Vreeland

[07:23] and I co-wrote and Jimmy is a experienced single family home investor. And so for the newer people in the block to real estate investing, there’s some good knowledge there, but he’s so experienced and has such a high business level to it that for our more experienced real estate investors that I know listen to us, it’s a good read there too, because of the additional value that Jimmy’s commentary in the book can bring plus said real estate calculator from truth concepts is in there. So that that’ll be fun for people as well. And there’s numerous stories in there about how life insurance mixes in because life insurance as a product works closer to real estate than any other financial product out there and it’s because

[08:12] it has an element of equity. So think ownership that enables people to borrow against just like real estate does and that equity that goes up all the time, regardless of whether you have a loan against it in life insurance is a valuable additional to any real estate investing because all real estate investors need to store their cash, they need a position to keep cash and liquidity for down payments, for fixing parking lots, roofs, repairing renters messes, et cetera, et cetera, et cetera. The good long-term real estate investors, the more real estate they have, the more cash they have because a cashflow problem that was $10,000 in a single family home is $100,000 in a 30 door apartment complex.

[09:15] So how does this work? Well, it’s the clarity that your life insurance is your position of cash and your real estate as you’re investing. And so the question comes up, Spencer, from our listeners all the time. I can make more money investing in real estate. Why would I invest in life insurance? And the answer is you wouldn’t invest in life insurance. You would store your cash in life insurance. And that delineation of life insurance is your cash position. Real estate is your investment should really answer the high level question and then the second level of the question is what are the interest rates when I borrow against my life insurance to do my down payment or whatever it is. So let’s just go over a real quick generic case study on that exact example.

[10:06] Do you think that’d be helpful? It is helpful. I’ve got my pen out. I’m ready to take notes. Okay, good. Because then you’ll help me keep my facts, right? So if we have, let’s go big, let’s do a bigger deal. Let’s say we have a million dollar property that we have an opportunity to buy for a $100,000 down payment, which would be pretty unusual. So, you know, it could be 200,000. It really doesn’t matter. I’m just throwing out some facts. And in order to make that apartment building become ours, we’ve got to come up with a hundred thousand dollars and we look around and we don’t have any cash at the bank because maybe we just did a deal and we think, oh my gosh, I have my cash value of life insurance.

[10:51] So let’s say we’ve been funding whole life insurance, which is the only type of permanent life insurance that matches well with real estate. And we have $150,000 of cash value liquid in our life insurance policy. So we call up the life insurance company. We say, will you please send me a hundred thousand dollars? I would like to borrow against my $150,000 cash value. And maybe the death benefit is $700,000. So if you’re driving, just please keep driving and listen to the concepts. You can go back later and write down the notes. So the life insurance company, and this is critical, sends us a hundred thousand dollars of their money. And we need to cover this again on another podcast because people get confused.

[11:43] They think it’s the client thinks it’s the client’s money that they’re getting, but the client is getting the life insurance company’s money. And let’s even say that that particular life insurance company charges 8% fixed rate for their loans, which is a little on the high side, but there are some out there that due to previous years have fixed interest rates of 8%. I have loans at 8% fixed. So I’m going to borrow against, this is such a critical word. It is not from your cash value. You’re borrowing against your cash value. You’re getting the insurance company’s money, a hundred grand. Your $150,000 is still sitting in cash value growing. Probably at around 4% as we record this today in 2020,

[12:25] but that’s not the comparison you’re making. The comparison you’re making is your 8% loan cost against the apartment building’s potential return of let’s just call it 16% for ease of discussion today. And what this means is that somehow through either the truth concepts, real estate calculator, or some other format, you have run all your numbers on your apartment building. And you know that if you make this $100,000 down payment on this million dollar apartment building, that you can run the rents, manage the building, do everything you need to do. And net, net, net, net after taxes and sales costs and everything else, management, even rental fees thrown in, vacancies, et cetera. You know that you can earn 16% on this apartment building.

[13:10] Now, Spencer is a real estate investor. Is that a reasonable rate of return for apartments? 16% is pretty good. Yeah, just pretty good. Not even awesome. So understand going in that you are borrowing against your cash value at 8% to do a 16% deal. And that’s a legitimate rate of return in the real estate world. I know that may seem high, but for our larger investors, that’s going to be totally normal. And here’s the $64,000 question. What is the rate of return that you are earning on the money? That’s whose money, Spencer? Life insurance company’s money. That you are paying 8% for if you can get that to earn 16%. Do you know the answer? No, I’m going to sound dumb. No, but I’m going to do this.

[13:58] For the sake of listeners, I’m going to walk you through my thinking, which may be totally wrong, but that way you can correct me. Is that cool? Awesome. Yes. Okay. So this is how I look at it. One, I’m borrowing the money from the life insurance company. So it’s actually not being pulled out of my account. Two, when I have to show proof of funds, I have a trail where that proof of funds is coming. It’s not gifted. It’s not anywhere else. Three, it’s not having to pull the capital out of my operating, my savings account, or whatever that would be. And then I can see it’s 16%. So for me, at least what I see, there’s no out-of-pocket expense. I wouldn’t take it and say 16% minus 8%. I don’t even know how you would calculate it in that way.

[14:42] I happen to have a truth concepts calculator that does know how to calculate it. Good. And I go over this in the Busting Retirement Investing Lies book. And it’s on Todd’s blog as well. So we can put some show notes. I’ll send you a specific blog link that addresses there the business deal, the transaction, if you will, is borrowing at 4% and investing at 5%. But it’s the same concept. If you’re borrowing at 8%, so Spencer, I’m going to correct you. Okay, good. You don’t have no money in the deal. Close. But you have an 8% cost in the deal. $100,000 times 8% is $8,000. That is your cost in your million-dollar deal. Now, the transaction of $100,000 at a cost of 8% into a deal that is earning 16%,

[15:34] you said it well, it’s not 16 minus 8. It takes a rate calculator. Think HP12C, Texas Instruments, that type of calculator, which real estate people can do with both thumbs. And or it takes a truth concepts calculator. And so this is like a financial calculator where you put in 8 as the present value. You put in 16 as the future value. You put in one year because we always measure interest rates in one year period of time. And that is a 100% rate of return. That’s why I chose the 16 so that it would be easy math. Because 8 to 16 is double. That means 100. Now, you’re not earning 100% on the entire deal. You’re earning 16% on the entire deal. But on the $100,000 that you borrowed from the life insurance company,

[16:26] against your cash value, you are earning 100%. And so this is how real estate investors use whole life insurance is their position of cash, not as an investment, and their real estate as an investment, and they tie the two together. Because just to finish this out as we wrap up here, now you’re going to use the positive cash flow from the real estate investment to pay back the loan at the life insurance company. And you can take the entire, if you got like a 20 year mortgage, because this was probably a commercial loan, you can take the entire 20 years to make that down payment paid back. Or if you want, you can throw all your extra cash flow from your real estate deal against the loan and pay it back quicker.

[17:20] In which case then, Spencer, you truly would have no money in the deal. And the real estate calculator would tell you that because it’s literally an infinite rate of return once you got your life insurance loan paid back. And the calculator cannot calculate infinite. It’s going to say N slash A, because you have no money in the deal. There’s one other piece to this puzzle. And as you mentioned about Robert and his book, you can’t necessarily get into all of the complexities because then you lose people. You have to go after the main general topics. And then we can get into some of the offshoots. In real estate investing, there’s a method, what they call the BRRR method, which is buy, rent, buy, rehab, rent, refinance, and repeat.

[18:10] What’s beautiful about this, and hopefully listeners will start to see, there are a couple of variables right now in the real estate world that, and I’ve been investing for decades, that are just phenomenal. So one, what we have to look at is where historical rates, which is great. It’s considerably easy to get access to capital. But what else is amazing is that in taking this property right here, a million dollar deal, put $100,000 down, if you are purchasing something and you modify it, or you run it more efficiently, you increase the rents or whatever the other inefficiencies are that get removed, now you can refinance that deal, pull the capital back that you had, and then go and do other deals.

[19:00] The other thing as a real estate investor, at some point by doing these single family deals, you will tap out, meaning like normal lenders aren’t going to loan you money. And so you have to be using this life insurance vehicle and the refinance piece coupled together to be able to really get those infinite returns. And that’s why a lot of us want to just do bigger deals because it’s, in many cases, the same amount of work or more work to do small deals. Absolutely. This is wonderful. This was a great episode because we got into the weeds. One other thing for you listeners to think about is this. A lot of the wealth that was created in specific states like California and with specific age generations, your baby boomers, those people are either fleeing California right

[19:46] now or the baby boomers, a lot of them are wanting to retire and not have as many headaches. What does that mean? Well, many of them on apartment buildings, and I’ve seen this in storage units and commercial buildings, they weren’t running it efficiently. Maybe they used like a paper ledger. They didn’t process credit cards or whatever that could be. So that’s why right now is ripe to be able to disrupt with the right amount of technology and then go in and rent and repeat this process as often as possible. Say the BRRR again. I love that. So BRRR means buy, rehab, rent, refinance, and repeat. For a lot of people, they use this on the single families. I would just challenge, so much on this podcast, we talk about mindset and a lot of

[20:34] reasons why new real estate investors start with single family is because that’s what they understand. If you are able to emotionally and mentally have the mindset of something larger, there’s no harm in starting with a larger project. But again, that’s going to depend on you. That BRRR method is amazing, works really well. Super cool. Thank you, Spencer. Thank you, Kim. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.