Real Estate Investing with Keith Weinhold – Bonus Episode

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[00:04] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to the Prosperity Podcast. Today we have a special bonus episode with our guest, Keith Weinhold. We’re going to be speaking to him about real estate and cash flow. Now, you’ve probably heard of Keith before because he has one of the most popular real estate podcasts out there. In fact, his podcast is called Get Rich Education, and he’s also a bestselling author. He’s a writer on Forbes and a writer for Rich Dad Advisors. Now, Keith has been buying real estate since 2002, and he owns apartments in Alaska,

[00:57] homes in Texas, and he even owns a coffee farm in Panama. He’s the owner of GetRichEducation.com, and he teaches others about real estate investing. What we’re going to do is jump into the interview, and Kim is going to be asking Keith these questions so that you can learn more about real estate investing, understand the five different ways real estate investors get paid, and you’re also going to understand how to really look at properties, or should I say, stop looking at properties and think about real estate investments different. Let’s jump into the interview. Welcome to the Prosperity Podcast. Today, we have a special guest, Mr. Keith Winehold. So, Keith and Kim, are you there with us? Kim is.

[01:46] I’m here. Well, what I’m going to do as the co-host is I’m going to turn it over to Kim and Keith because I am just like all of you listeners, that I’m pulling out a piece of paper and I’m going to take notes and I am excited to learn. So, Kim, I’m passing the mic over to you and Keith. Fabulous. Thanks so much, Spencer. We’re always grateful for your help. So, Keith, I’m so excited to talk with you today for our listeners because you operate in a space that all of our listeners and clients are super curious about, and that is Cash Flowing Real Estate. So, we got to hear a little bit about your bio earlier, but do go ahead and tell me how you got really started in the real estate investing arena.

[02:33] Oh, thanks so much for having me, Kim. Talking about this stuff fires me up. Well, I grew up in upstate Pennsylvania, Appalachia, to a lower middle class family, but I had some great parents. I was a pretty quiet and shy kid. In fact, Kim, my classmates voted me as the most quiet and shy kid in my high school class. So, it’s crazy that I do all these talk shows and media appearances. I only graduated 17th out of 75 in my class. I wasn’t even in the top 20%. We had a pretty frugal upbringing. I mean, my mom was clipping 10 cent coupons for Cheerio cereal. But the thing is, is we traveled well. My parents had us travel really well. And I think my father especially kind of instilled within me that

[03:17] unless you’re passionate about your day job, don’t let that define who you are. You know, ask yourself a better question. What kind of life do you want to design for yourself? You don’t have to live to get paid. You can get paid to live if you can figure out how to do it. Now, he wasn’t very entrepreneurial, so I didn’t get concrete ideas, but he taught me to be aspirational. And one of the places we vacationed to, Kim, when I grew up in Pennsylvania was to Alaska. And with successive vacations to Alaska, I found out that Alaska really fit my interests. I love to ski. I love to go mountaineering. So to this day, I live in a place I dreamed of living, Anchorage, Alaska. I didn’t know anyone here.

[03:58] I didn’t get any job here. I didn’t let an employer steer my lifestyle design. I designed my lifestyle for myself. And then I built income around it. And shortly after moving to Anchorage, Alaska, Kim, I fell in with a crowd of friends that I would call aspirational. You know, if you want to change yourself and change your circumstances, the fastest way to do that is change the people that you hang around with. And two friends that I had while I was working a day job back then at the time, what they had done is they made their first ever home a fourplex building where they lived in one unit and rented out other three. I didn’t have a lot of money to start. They didn’t either. But with an FHA loan, you can qualify for a fourplex building

[04:41] with just a three and a half percent down payment as long as you live in one of the units for at least 12 months. It’s actually something very actionable for your audience to do if they’re just starting out. Now, that doesn’t work in every market, in every geography. But that’s how I started with a bang in real estate investing in Anchorage, Alaska, back in 2002. AMT – Love the story. Yes, we’re big fans of fourplexes and that’s a great strategy, especially for younger individuals or couples to get started with. So in doing some reading about your process and your thinking behind the real estate, I know one of the quotes that you like to make is to stop looking at property. Can you elaborate on that?

[05:23] KF – Yeah. Some people say, now, what in the heck, Keith? When I listen to you, I get all fired up about buying real estate. Well, Kim, I often have to jump in and tell people, whoa, whoa, whoa, whoa, whoa, slow down, slow down, slow down, stop looking at property. And here’s the thing, most real estate investors, they end up having an awful experience and they get all jaded about real estate because they weren’t strategic. Look, here’s how most people buy a rental property. They might drive past a yellow duplex both ways on their way to work every day and they think the duplex looks sort of pretty and it’s nicely landscaped in the yard with the bushes and everything. And one day they see a for sale sign on it

[06:06] and they figure they could probably get some rental income that way. So they will buy that pretty yellow duplex that they kept seeing on their way to work. Well, that’s not very strategic. They probably let emotions get involved. Emotions might have something to do with your own home that you live in, but income property is about the facts. So stop looking at property. The property is only the fourth most important thing in real estate investing, which is a substantial epiphany to most people. Back up, the number one thing in real estate investing is you. What do you want real estate to do for you? Do you want to buy something that has an expectation of appreciating? Or do you want something with tax incentives?

[06:48] Or do you want something for lifestyle investing that might be in a place you enjoy vacationing? Or do you want to buy property for the production of passive income and cash flow, which is probably the number one reason, but it all starts with you. The second most important thing is the market that you buy in. The market could be geographic or use type that’s going to secure what you want. The third most important thing is that team of professionals, and especially the quality of that property manager that’s going to secure that asset for you. That property manager as part of your team is key. You don’t want another job. This is called the investing. Pull back and think, what’s my return on life?

[07:29] I don’t want to be the one taking a call about a strip of cove base that came up in the bathroom. And then fourthly and only fourthly is the property, because if those first three things don’t work, you, the market, and the team, thirdly, especially that property manager, then the property won’t work either. Yes, it’s so important to have professionals on the team and then just the team itself. It’s why we’re such big believers in a lot of the bridge loan work that we do. And I love your sentence of stop looking at property because I would say the same thing to our clients. Most of them love their jobs and should keep doing their jobs and let other people find the property for them. We talk about other people’s money all the time.

[08:16] What about other people’s time? I think O-P-T, I think that’s a new saying that we should come up with. That might even be more important than other people’s money. You can leverage their time too. There are people that are willing to manage your property for you and that’s not where the money’s made. And I’ve got another one, O-P-E, other people’s expertise, right? So do you think today is still a good time to be a real estate investor? That’s such a pertinent question, Kim, because some people see that real estate capital prices are higher than they were a few years ago and mortgage interest rates have begun to creep up. There are so many reasons why it’s a great time to be a real estate investor.

[08:57] And when we talk about return on investment later and you understand all the ways you’re paid, you’re going to see, well, what’s the alternative? What else would you invest in? For one thing, third-year mortgage interest rates, they’re still relatively close to historic lows. They were 18% in the early 80s. They bottomed down at 3.3%. So if you look at that span, they’re still historically low. And if you think mortgage interest rates are going to be 7% in three years, which seems to be maybe some people’s guess, you’re really going to be happy that you bought now and not in three years. And demographically, more millennials are entering prime renter age and they are the largest generation. They surpassed the baby boomers in 2015 as the largest generation.

[09:41] And another thing that’s going on out there is college costs are rising even faster than inflation. Well, that means that this big millennial age cohort, they’re saddled with this student loan debt. So with no way to form a down payment for a house, that’s good for people like you and I because a greater proportion need to rent. So that’s kind of a demographic component. There’s something else I would call a psychographic component of why today is a good time to be a real estate investor. And what happened is years ago, millennials, they saw their parents lose their home in the mortgage meltdown of 2009. Or they saw their parents get underwater on a primary residence where they weren’t able to move.

[10:29] So they were geographically locked into where they lived. Well, this happened during that millennial’s formative years. So I think a lot of millennials do want to own, but just not as many of them. More of them had this negative association with home ownership and that drives rental demand. And really back to demographics, this is something that so many people overlook, especially for those that were born and raised in the United States. It’s just the fact that the overall population of the United States just keeps increasing. We add more than two million people every year. That just drives the economics 101 of supply versus demand. And it’s so easy to take that for granted. But population losses in places like Japan and Greece and Spain,

[11:13] that all creates excess housing capacity right here. And look, even if the U.S. population stayed the same, we know it’s growing, so there’s more demand for housing. But even if it stayed the same, just look at how people live. Housing demand would grow even if the population stayed the same. And now why in the heck is that? Well, it’s again, because look, millennials are postponing marriage and household formation, unlike ever before. So now instead of two people living in one home, you don’t have two people living in two separate homes for longer. Well, that right there, that creates more housing need, even with a fixed population. And all these trends, they’ve resulted in the U.S. now having one of the lowest homeownership rates since 1965.

[12:02] And again, this drives rental demand. That’s why occupancy is high. You know, it’s interesting when you talk about the interest rates, because we’ve always used 8% as our dividing line between a quote good interest rate on a loan and not so good. So 8% and lower is a quote good. And yet if you got a loan today at 8%, you would think that was a high interest rate. And so people’s perspective, I think, has really gotten out of whack. And on the other side, when you look at the investment environment, if you can earn 8%, then that’s a pretty good interest rate too. And I know we’re going to get into making profit more than just the flat interest that we earn. And yet for a lot of our real estate investors,

[12:49] that’s really what they’re looking at is that interest earnings that’s going to pay consistent monthly cash flow unlike any other investment environment out there. I just love how consistent real estate is in that realm. And so just if people are thinking about the interest rates, I want to enable that good, abundant thinking, which is really what the wealthy do when they bring good thought processes to their money, at using an 8% as a guiding line. 8% and below for debt and 8% and above for investing. I’m also grateful that we’re past the days when everybody thought that they could earn 22% in the stock market, right? That’s right. That’s pretty difficult to do in the stock market. It’s not so difficult to do with real estate.

[13:38] And yeah, the power of borrowing is so important. That’s how financial leverage is created. And really one of the distinctions between the middle class and the wealthy is the way that the middle class aren’t thinking. You know, the middle class think, what could possibly be better than getting my money to work for me? I’ll just sock it away in my 401k. Oh, if I can get my money to work hard for me. I mean, there’s just nothing better than that. So I’ll just go right back to work. People spend all this time learning about how work works. They don’t spend any time learning about how money works. But yet money is the main reason that people go to work. So to someone that’s middle class and wants to be more aspirational,

[14:21] don’t just get your money to work hard for you. And you’re beginning to touch on it, Kim. Get other people’s money to work hard for you. And in real estate, you can ethically get other people’s money to work for you three ways at the same time. And I think it’s important to be ethical. Let’s provide people with sound housing, housing that’s clean, safe, affordable, and functional. This is something available to everyday middle class people to be a real estate investor. Well, wait now, how do you use other people’s money ethically three ways at the same time? Well, you can go back to when I bought the first fourplex building or with the way I buy single family homes or apartment buildings today.

[14:59] Number one, you use the bank’s money for a loan and for leverage. And to your point, the interest rates are still great. Secondly, you use the tenants’ money for the cash flow in that passive monthly income stream, making money follow you wherever you want to live, not where an employer wants you to live, but where you want to live. I have passive monthly income streams following me wherever I choose to live from multiple markets across the US. And then the third way you’re using other people’s money is the government’s money. And you’re using it at scale for things like tax depreciation or a 1031 tax deferred exchange, which means you legally never have to pay capital gains on your gains. So you’re actually using other people’s money

[15:44] three ways at the same time, the banks, the tenants, and the governments when you invest in real estate and provide others with good housing. We always have fun with those investors that have learned about the 1031 exchange, talking to them about what I would consider kind of the final step, because you 1031 a property when you’re ready to exchange one property for another, and you don’t want to pay capital gains as you indicated. And you do that again and again and again and again, and you have a very, very large property with a very, very low basis. In other words, a low amount of money in. And so there’s a strategy called a charitable remainder trust that can be very effectively deployed when you’re in your 70s or 80s,

[16:27] and you are done doing those 1031 exchanges. And yet the charitable remainder trust is most effective when it’s inclusive of life insurance, particularly life insurance that you have already bought. In other words, do the charitable remainder trust in your 70s and 80s, but by the life insurance using some of your real estate income in your maybe 40s, 50s, or 60s. So it’s a great strategy of combining the two things, real estate and life insurance to get that final count of completely tax-free sale done on that real estate property when you’re in your 80s. And not only do you not want to deal with real estate anymore at that point, maybe, who knows, maybe it’s 90s or 100s, but you probably don’t want to deal with your property manager either.

[17:19] So we find at some point that final step needs to be taken and a charitable remainder trust is a great strategy to do it. Well, you bring up some great points and it’s called a 1031 tax deferred exchange, but I think we all know that if we structure it properly, there are no limit to the number of deferrals we can do over and over again as we continue to roll our capital gain forward and put it into down payments into larger and more expensive properties. So although it’s technically and actually a tax-deferred exchange, it can effectively be a tax-free exchange 100% legally. Yep. And I love your emphasis on the legal aspects, the ethical aspects, because I think that’s important as well. Tell us a little bit more about those extra ways

[18:10] that real estate investors can get paid. You hinted at a few of them. Can you elaborate a little? Real estate investors are actually paid five ways simultaneously, typically. Most people only know about three or four of them. In fact, most real estate investors don’t even understand all the ways that they’re paid. And it goes even beyond that. Most real estate investing educators cannot even describe all the ways that they’re paid. So let’s just briefly explore each of these five with a simple example. And we’re going to add up your five return sources to see how much you’re paid at the end of year one. And this is nothing high flying or risky. This is just old fashioned buy and hold real estate investing

[18:54] we’re talking about here. So you’re going to learn right now how real estate has made more ordinary people wealthy than anything else. And there’s a good chance you’ve never heard this. So let’s use an example. Just say you’ve carefully purchased a $100,000 rental single-family home where the rent income exceeds the expenses. Yes, you actually can still find these in the US Midwest and South typically. So with a 20% down payment, that leaves you with an $80,000 loan. And when you purchase it, the property is already tenanted, renovated, and under management. That’s called turnkey real estate investing. OK, so the first of five ways you’re paid is just typically over the long term is with appreciation.

[19:36] Well, say in year one, your property appreciates from $100,000 up to $106,000. And that’s just commensurate with real estate’s historic appreciation rate of 6%. Now that right there is not very thrilling, a 6% gain. But look, here’s the thing. Your $6,000 gain is based on your down payment of just $20,000. That’s your ROI formula, 6K divided by 20K. That magic of leverage means your return just from the first of five ways you’re paid is 30%. And this is sort of a leveraged light bulb moment for a lot of people. Now, if you can understand this way that you’re paid, you can understand the other four ways. Some people are like, wait, how did that happen? How did a 6% gain go to 30%? Well, you bought the property with just a 20% down payment.

[20:28] You’re leveraged five to one. I know you understand this, Kim. But the reason that you got a 30% return is because you got a 6% gain on both your 20K down payment and the 80K borrowed from the bank. That’s the first way you’re paid. The second way you’re paid is with cash flow. Now, say your rent income on this property minus all of your monthly expenses, mortgage principal, mortgage interest, vacancy, insurance, maintenance, taxes, utilities, management. Just say that only leaves you with $150 of residual income left over. Well, that’s 1,800 annualized divided by your 20K down payment. That’s another 9% return. That 9% return, that’s the portion known as the cash-on-cash return. So far, you’ve got 30% from appreciation plus 9% from cash flow.

[21:22] We’re up to 39%. The third way you’re paid is with loan pay down. Now, unlike your own home, your primary residence where you’re paying down your principal, well, your tenant pays the monthly principal portion of your $80,000 loan on this property at a 5% interest rate and a 30-year mortgage. That’s $1,176 that the tenant pays down for you annually. Divide that by your 20K of skin in the game. That’s another return of 5% for you. The fourth of five ways you’re paid are with tax benefits. Now, we touched on the 1031 tax deferred exchange, Kim, and this gets a bit hazy and difficult to calculate. We’re talking about things like the mortgage interest deduction and something called depreciation that basically means

[22:11] that you don’t even have to pay tax on all of your rent income. This gets pretty fuzzy. We’re just going to call it an additional 3% return per annum. I know I had Tom Weirud on my show not long ago, and he would say that number is way too low with the bonus depreciation and everything else, but we’ll just very conservatively call your tax benefit 3%. And then the fifth and final way you’re paid, this is one that almost everyone forgets. Just like you would not want to keep $1 million in the bank and just let it sit there and rot away because at 2% inflation, your million bucks is only going to have 980K of purchasing power after the first year, 960K after the second year, and so on. Just like inflation erodes the value of your lump of savings,

[22:59] inflation also erodes the weight of your mortgage debt balance just the same. That’s your 80K loan in this case. So your 80K loan that you take out in today’s dollars, it has its drag kind of diluted over time because more and more dollars circulate in the economy. Wages are higher. Prices are higher. It gets easier to pay back. We know that the tenant’s actually paying that down at the same time, and some people say, well, wait, what about the interest? No, your tenant pays that loan’s interest in a cash flowing property. So we’ll call this benefit another return of 2% since that’s about the consumer price index figure today. So let’s add up your return from the five ways you’re paid and see what your year one return is.

[23:46] So you have 30% from appreciation, 9% from cash flow, 5% from loan pay down, 3% from your tax benefit, and 2% finally from your inflation hedging benefit, that one that’s so commonly forgotten. And your year one return from this income property culminates in a whopping 49% rate of return. I love the math. It is an eye-opener for many, many people, I think, when you look at the unbelievable capability that real estate can do. And inside the Truth Concept software, we have a actual real estate calculator that can get you just the cash on cash return because sometimes even that alone is hard for people to get their arms around. They’ll feel like their particular real estate property is doing good,

[24:40] but they don’t have the ability to put a digit on it, and a numerical example, not even an example, a numerical answer to the question, what rate of return are you earning? And that’s a great point because this really comes down to, Kim, what we’re talking about here is keeping score. When you know how to keep score in your real estate, that is so key. And the reason is, is because some people in real estate investing think that they’re winning, but they’re actually losing, and there’s some people out there that are losing, or they think that they are, but they’re actually winning. Yeah, absolutely. And when you know how to calculate your ROI, now you know what to buy, now you know what to sell,

[25:19] now you know when to sell, now you know when to do a cash-out refi, now you know when to do a 1031 exchange. If you don’t know how to keep score, you don’t know what your next move is going to be. And let me just note a couple limitations in the example. We did not factor in your buyer mortgage loan closing costs, but the seller can often help you pay those yourself. And if you buy a property in a losing job market or hire the wrong property manager, your entire investment could go south, kind of like we were talking earlier with the strategy, and the property is only the fourth most important thing. But look, with a 49% ROI, even if one-third of things went south, you’d still have a 33% return.

[25:59] Yeah, that’s amazing. So if people are interested in learning more, how do they get a hold of you? What kinds of things do you offer? Help us know that. Oh, we talk about how to invest in real estate all the time. And we do a lot of that on the Get Rich Education podcast. There’s a good chance that you’re already listening to that show. It’s where we simply and actionably build real estate wealth with an abundance mindset. And we really talk about how to optimize those five ways that you’re paid and how to avoid the pitfalls. And you really want to learn from someone that’s actually out there doing this stuff, not just teaching it. And I’m about as active as a real estate investor possibly can be.

[26:41] And on our podcast, we’ve had Robert Kiyosaki on the show a number of times. The Rich Dad advisors are regular guests because I’ve written for the Rich Dad advisors myself. So it’s the Get Rich Education podcast and getricheducation.com. Fabulous. All right. Listeners, thank you for spending the time with us today. And Keith, we appreciate the knowledge that you’ve shared. I think if there’s one big thing that we can all think about is that we just need to separate our emotions from the facts and from the real numbers. And you clearly walked us through that. So thank you so much for taking the time. And for all of us listeners, make sure to leave a comment, leave a rating, and also check out his podcast and the Get Rich Education.

[27:32] 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.