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Episode 238: Advantages of Owning Real Estate

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Show Notes

Buy land, they aren’t making it anymore. In this episode, David Dodge and Michael Slane explain in great detail the advantages of owning real estate. There are tons of advantages but if you need more reason to own real estate, just keep on listening!

Things that will cover in this episode:

  • Cost of materials use in Real Estate increases
    • Lumber
    • Air conditioners
    • Inflation
    • Depreciation
    • Appreciation
    • Cashflow
  • Passive income
    • Leverage

Welcome back to the Discount Property Investor podcast. Our mission is to share what we have learned from our experience and the experience of others to help you make more money investing like a pro. We want to teach you how to create wealth by investing in real estate, the discount property investor way. To jumpstart your real estate investing career, visit freewholesalecourse.com, the most complete free course on wholesaling real estate ever. Thanks for tuning in. 

David: All right guys, welcome back. Today Mike and I are going to be talking about the advantages of owning real estate. 

Mike: Man, right now there are a lot of advantages. 

David: There are, especially with the government printing two trillion dollars in stimulus. 

Mike: You read my mind Dave. 

David: Damn. 

Mike: You read my mind. 

David: I mean, there’s really no better hedge against inflation than the scarcity of real estate. I mean I say that because it’s very scarce. They’re not- we’re not making any more of it. Some people will argue oh they’re doing that over in Dubai. Well, that’s fine but the cost to create it is way more than to buy existing. 

Mike: And they’re not actually creating. 

David: So that is a bull- that is a bullshit excuse. Land is land guys, they’re not making any more of it. Yeah, they want to- yeah, you want to dump a bunch of dirt into the ocean. 

Mike: The ocean and raise the water- 

David: And raise it up, that’s fine but you’re going to spend a billion dollars doing that so good luck to you and that dumbass argument. So, moving on. They’re not making any more land. 

Mike: How do you really feel about it? 

David: That’s how I really feel about it. It’s the stupidest thing I’ve ever heard. 

Mike: Well, they are cool though. Those islands that they build, make like little palm tree shape. They’re freaking cool. 

David: They’re really neat man but that’s not- that’s not happening in Missouri, right? Where we’re investing. 

Mike: Anywhere in the US, I don’t think so. 

David: No. 

Mike: Yeah, I’m not seeing it. So, advantages of real estate,  I love that you brought up- 

David: Haha, how do you really feel? Haha. 

Mike: I love that you brought up the government printing money because that is a huge thing on my mind and I know a lot of other people’s minds right now. 

David: I just bought some Bitcoin mining machines this morning man. 

Mike: Yeah, we’re going full crazy man. We’re buying gold, we’re buying silver. 

David: Yeah, that’s right. 

Mike: Stocking up on ammo. 

David: That’s right, and of course always real estate guys. 

Mike: Of course real estate. 

David: Never stop that. 

Mike: Ans that’s just  it, so real estate is comprised of a bunch of different materials, right? You’ve got the lumber, you’ve got the concrete, you’ve got the land itself, you’ve got the roof asphalt shingles, you’ve got the copper wiring, the pipes, the- all this stuff so all of those things as the value or well let’s not talk about value, let’s talk about the price of those goes up, what happens to a piece of property? Well, the cost to build that piece of property goes up as well. 

David: Man lumber, speaking of cost man, lumber is way up right now, like almost 200 plus percent, maybe even 300 percent. 

Mike: Let’s talk about that man, so it used to be about $10 to put a 4 by 8 sheet of plywood. It’d be about what you pay, about ten bucks for a 4 by 8 sheet of plywood to be delivered to your roof via some of our contractors. They charged me like $25 last time. 

David: Hey look at this, actually pulling up in NASDAQ Market Activity Commodities report for lumber and this is a one-year chart, so you guys aren’t going to be able to see this but- 

Mike: Pull up five. 

David: Oh you want to do a five year chart? Okay, but we’ll explain what we’re looking at here, so basically five years ago, the- this is probably- is this a future’s thing? I think this might be future’s when it comes to commodities but either way. 

Mike: [inaudible] hundred percent?  

David: It’s- there’s a number here. So basically if we were to go back five years, you’re looking at 236, I would assume that’s per contract, right? $236 per contract. 

Mike: No idea what you’re looking at. 

David: And just recently we had an all-time high it looks like of 818, so 2, 4, 6, 8, that’s a 400% increase over five years. That’s my point. 

Mike: Yeah, so if you don’t believe that inflation is happening or is real because the CPI or Consumer Price Index doesn’t reflect it, it’s because the basket of goods in that consumer price index is artificially kept lower. 

David: That’s right. 

Mike: Because the government decides- not the government necessarily, but whoever is determining what is in that basket of goods gets to kind of manipulate the numbers. The government also incentivizes and decreases the price they threw different taxes, tariffs and other programs. They can keep the prices of certain goods lower and they can have the price of other goods go up through tariffs and things like that. So, there’s a lot of manipulation in those things but the cost of air conditionings Dave is going through the roof. 

David: The air- has it? 

Mike: Air conditioners, we’ve replaced so many AC’s. 

David: Yeah I know we do, I don’t keep track of these. 

Mike: Like 4 grand, I can’t even get it- 

David: What was it like 2 years ago? 

Mike: Like 2500 maybe. 

David: 27? 28? 

Mike: Like if you get a cheap one for [inaudible]. 

David: So that’s up 25% too. 

Mike: And again, I know that again, people take advantage so hey prices are up, I’m gonna add a little more to my service- my labor cost but they should. 

David: Yeah. 

Mike: Yeah, if they’re- long story short, going off on a tangent. There’s definitely a lot happening in finance right now. 

David: Yeah. 

Mike: In the stimulus packages and like Dave said, two trillion dollars worth of money being printed. They’ve created it so- Dave you had mentioned to me you’re reading a book called- 

David: It’s a brand new one, well not brand brand new but it’s Robert Kiyosaki’s book and it’s called ‘Fake’. I just started reading it yesterday and it’s- so I don’t really know a whole lot about it cuz I’m not that far into it. I’m maybe you know 10% into the book at this point, but the summary of it is a personal finance book and it’s basically trying to simplify a complex and often confusing subject of money as well as investing and yeah Robert Kiyosaki, he challenged this- challenges conventional wisdom and he asks the questions that will you know, help readers sit through today’s information overload- sift through the information overload, you know, to understand how money works and he calls- the title of the book is actually ‘Fake’ and the subtitle is ‘fake money, fake teachers. fake assets’. So again, I don’t want to get off on too much of a tangent here, but it’s- it aligns very well with what we’re talking about here. 

Mike: Right, so it’s basically, it talks about how the dollar is a fiat currency. So, we went off the gold standard a while ago and now- 

David: And this is relatively new guys, April of 19, so less than a year ago. 

Mike: And it’s talking about Robert Kiyosaki’s book ‘Fake’. 

David: Wait, what year- We’re in 21, aren’t we? 

Mike: Originally published- yeah. It’s a year. 

David: About a year give or take, yeah that’s great. 

Mike: So again, that’s Robert’s book ‘Fake’. It’s pretty interesting on the topic as well. So we were talking about the advantages of real estate and we went down this tangent on the fact that inflation is happening or the value of dollars decline and this is something that happens when you kind of tame it down a little bit. We know this happens, it happens slowly and sometimes it happens more rapidly so t’s a- it’s an ongoing thing that you’re going to deal with and real estate has been a proven asset class that hedges you against inflation. 

David: Would you- is that referred to elastic or not? Ain’t that what they call that? Yeah. 

Mike: [inaudible]. 

David: I don’t think it’s elastic. I mean, meaning that you can’t really make more of it, right? So either way. 

Mike: Again man, I kinda minored in economics and my brain just- I don’t remember. 

David: That’s right. 

Mike: I don’t remember the- yeah. 

David: That’s right. Well either way, inflation is a big deal guys and it is happening more now or I should say this, we are about to see more inflation than we ever have at least in my lifetime and I’m mid-30s because we’ve never in my lifetime printed this much money and it’s- one thing I do want to make a note of is whenever I say printing money, it doesn’t mean it’s actually coming off of like a printing press, it really just means that it’s being created, right? So like if the government, you know, creates a 1.9 trillion dollar stimulus package, you know, yeah they may print a few billion dollars to actually, you know, get it out into the masses, but the majority of it is just created in the computer, you know, 90- 

Mike: Oh, it’s crazy. 

David: I think it’s 98% of all the money is just in a digital ledger, right? Either way, we’re making more money, that’s what the inflation comes in. Let’s talk about the other advantages of owning real estate. 

Mike: I can’t. I love this one. 

David: You’re stuck on this inflation, aren’t you? 

Mike: I’m stuck on inflation man, I’m stuck on inflation. So another one, and this is huge and we’re not experts on it so we get CPA’s to help us but that would be- oh you’re going a different direction. I would say the tax advantages man. 

David: Yeah, absolutely. So you know, well there’s a couple ways that works. 

Mike: [inaudible] that depreciation right there. 

David: Yeah, couple ways that that works, so you get depreciation which is basically the way I like to look at it is it’s a phantom. It’s a phantom expense meaning it’s something that you’re gonna able to you know, basically offset your income with. That’s what you typically do with expenses whenever you’re, you know it’s tax times, but depreciation allows you to have an expense that you didn’t actually have to incur and the way that it works with single families is you get 27 and 1/2 years to depreciate a property. So basically take, you know, the total value of a property, let’s say a property’s worth a hundred thousand and you divide that by 27.5, that means that every year you’re going to get about 3600 in change of phantom expenses. Now, the downside to the depreciation is it does affect your cost basis. Now I don’t want to get too deep into accounting but basically profits are determined when you sell a property and taxes are owed, alright? They’re also going to be owed on the cash flow every year, but when you go to sell that property down the road, you are going to have to pay taxes on any gain, okay? If you bought a $100,000 house for $100,000 and you paid full retail for it, your cost basis is going to basically be $100, right? That’s what you paid for it, but every year whenever you add this phantom appreciation, right? Or I should say this phantom expense, which is depreciation. I really screwed that up didn’t I? When you add that in, it’s going to reduce your cost basis by the amount of that expense, right? So after a couple years, your cost basis is no longer a hundred, it maybe you know, 94 or 95 thousand, right? After a couple years. Well, after let’s say ten years, you may have a cost basis of 70,000 and if you go sell that property for a hundred even though you are selling it for the exact price you bought it, taxes are due because that depreciation catches up to you and that’s what we like to call cost basis and the depreciation directly affects the cost basis. Now, rich people write the laws guys, and the rich people have made a loophole for this and they basically said well if you sell a property, there should be this way to exchange that property for another property or a like-kind asset and that’s referred to as a 1031 exchange and a 1031 exchange will allow you to kick that can of dealing with the cost basis down the road. So, another advantage Mike that we can add in here is 1031 exchanges, and the 1031 exchange, you know, it really affects, you know, the main reason that a 1031 is valuable is a) it’s to prevent paying taxes, but b) it allows you to use compound interest essentially in the real estate game because you’re not- cuz you’re being able to control assets that are larger than your current supply of money, right? Because you’re not having to pay taxes on it when you exchange so definitely a cool little thing and again, I don’t want to go too deep into the weeds on that, right? So depreciation is real and it- and you can actually depending- 

Mike: It’s awesome. It’s awesome while you’re doing your taxes, you’re in and you’re out. I just sold a property and it is great because it’s like oh yeah, I’m not paying as much taxes cuz I’ve got these expenses. I mean when you got to sell it, if you don’t do a 1031 exchange, it sucks.  

David: Yeah, so I just sold one of my- 

Mike: It sucks. 

David: One of the first houses I bought. I think it was the second house I’ve ever bought and basic math guys, I think I paid about 130 grand for it. I owned it for like 13 or 14 years and I sold it for about 180 grand so there’s about a 50 thousand difference from what I bought it and what I sold it for. However, the property got paid down by the tenants that were living there and I depreciated it alright? So what end up happening is, you would think like in a simple world, like you buy it for 130, you sell it for 180, that’s a 50 thousand dollar amount of money that you made. Well, the way that this really worked out, I owned it for 13, 14 years, I actually got a deposit of closer to 90 thousand dollars when I sold the property because I had paid down that property a ton. However, all 90 thousand of that- 

Mike: And that’s not even the number that matters there Dave. 

David: That’s not even the number that matters, the number that matters is the difference of the cost bases which was decreased from 130 to let’s say 100, and then I sold that property for 180 so now I owe taxes on 80 thousand not 50, and you would think again, you bought it for 130, you solid it for 180, that’s 50 but every year I depreciated that property reducing the cost bases so I actually had to pay taxes on about 80 of it. 

Mike: So that’s- 

David: So that’s fun. 

Mike: That’s the nuts and bolts of depreciation. That’s why a lot of people do 1031 exchanges, you have to be exchanging them though and man they got complicated. 

David: Well, just use a lawyer or a title company. 

Mike: And that’s exactly what our- 

David: They facilitate the whole thing. 

Mike: That’s what our accountant just told us. She said I used to do them- 

David: They’re actually really easy if you let them do it. 

Mike: Oh yeah. 

David: Yeah. 

Mike: Well that’s what she said. She said it’s- they’re really complicated, they got complicated so I’m out, I [inaudible]. 

David: Yeah, go to your title company and say here’s what I’m selling, here’s what I’d like to buy, give them all the confirmation, they’re gonna handle it for you. That’s typically what they do, it’s how they get paid, right?  

Mike: So that’s depreciation 1031. 

David: That’s depreciation so there’s a flip side to that though, appreciation.  

Mike: And let’s use your example Dave that you just said. 

David: Okay. 

Mike: So Dave bought this house for 150 thousand dollars. 

David: 130. 

Mike: Oh I’m sorry, 130 thousand dollars but he was able to sell it for180 thousand, what happened there? 

David: 13 years later.  

Mike: What happened? 

David: I sold it for 180 thousand, it was 50 thousand dollars higher. 

Mike: That’s appreciation. 

David: It has a little bit to do with inflation too though, right? Like the amount of dollars that you’re- or the amount of goods that a dollar can buy decreases o you need more dollars to buy the same amount of goods over time, and I think we’re gonna be really getting into a time frame here Mike and it may not be this year or next but I don’t see how it’s humanely possible that within the next 5 years that we don’t go into a double digit inflationary period.  

Mike: Yeah, it’s in 3 to 5 years. 

David: I just don’t know how it’s gonna- how the government can pretend that. I mean, maybe not high double digits but like I just don’t see how it can stay in the single digits, I really don’t. 

Mike: I think it’s best case. 

David: I think it’s best case yeah. 

Mike: Yeah, and I think we will see some significant inflation and I’d say 3 to 5 years. 

David: Yeah, it’s definitely gonna be delayed but not 10 years. 

Mike: Yeah. 

David: It’s gonna be closer to 3 to 5 for sure. 

Mike: Everything in economics takes a couple years to manifest itself and that’s why each party gets to blame the other one for whoever was in power 3 years ago and they say but this guys doing this and yeah it’s just a mess. 

David: So the definition of appreciation is really just the value of an asset or really just the value of anything going up with time. 

Mike: Yeah, the increase of value. 

David: Yeah, it’s an increase in value with time. Now depreciation isn’t the flip side, that’s where it’s confusing. It doesn’t mean that the property is actually decreasing in value, it’s a phantom expense. Depreciation is more of a tax language term whereas appreciation is referred more to the value of an actual good.  

Mike: Yeah well it- but it- it is the flip side though Dave. So, appreciation, you’re talking about 150 thousand or- a 130 thousand dollar house becomes worth a 135 the next year in the appreciation model- 

David: Yeah, according to the tax, yes, it does- yes. 

Mike: In the depreciation model, your 150 becomes 145. 

David: Right. 

Mike: So you’re depreciating your cost basis. 

David: Cost basis. 

Mike: And you’re actual value is appreciating, so again, it’s very- yeah, it’s complicated. They are reverses, they’re not exactly the same. 

David: Yeah, they’re just on different playing fields. One’s on a tax playing field, the other is an appraisal, evaluation playing field. 

Mike: And it’s all made up. 

David: Hahaha kinda sorta. 

Mike: It’s all made up just like who’s line is it anyways and the numbers don’t matter. 

David: Right. All right, cool. So guys inflation, we talked a lot about that, this episode is all about the advantages of owning real estate so inflation I think is really a big deal because it is a hedge. So an advantage of owning real estate is a hedge, right? against inflation, right? We talked about that, we talked about depreciation and how it’s a phantom expense and how you can avoid it with 1031’s. We talked a little bit about appreciation which basically just means that over time it is going to be- it is going to cost more money to buy it, right? The value of that asset is going to increase. Now, before we move on to let’s say cash flow and a couple other advantages, right? Let’s talk a little bit more about appreciation. Not everything appreciates, in fact most things in life depreciate. Cars are not assets, they are liabilities unless there is- there’s people out there that are gonna have that argument of what if I buy an old car that has value or something like that? 

Mike: A sports car like a Ferrari or a Lamborghini. 

David: Right. Don’t disagree, right? Don’t disagree but typically there is- this is a fun fact, there is 900 million cars on the road today so I’d be willing to say that you know, 899 million of those cars are depreciating. 

Both laugh. 

David: You may have a million out there that are collectors items right? but the rest of these are depreciating, right? Clothes, depreciating assets. 

Mike: Wives, depreciating- wait a minute. 

David: Hahaha wait a minute. But most things that you buy are going to be worth less like think about it, if you wanna buy something and you have the option of buying a brand new item versus a used item and they’re the same cost, you’d always pick the new item, right? Whenever something’s lightly used or it shows worn or it you know, whatever, it’s gonna be worth less. 

Mike: Everything. This microphone that we paid 300 dollars for. 

David: Yeah, you could sell that right now for probably about 100 bucks, right. 

Mike: Best case. 

David: Best case, but the thing about real estate is it doesn’t always appreciate. It doesn’t always depreciate either, but as inflation kicks in, it forces the appreciation. So again, it is the best hedge against inflation that I am aware of. Some people might argue that it’s gold or that it’s silver but the thing is about gold and silver is you can mine more of it. Real estate, unless you’re in Dubai, you can’t really make more of it. 

Mike: Yeah and I mean there’s counter- like you can build more houses and yada yada but it’s all the assets that comprise that piece of property, they’re all going up in price so yeah it’s gonna cost more to even build more.  

David: Love it. 

Mike: So yeah, it’s a- yeah it’s interesting. 

David: There it is folks, there it is. 

Mike: Let’s talk about cash flow man. 

David: Cash flow, this is probably the most fun. 

Mike: This is the simplest one and I think the main reason why people are like oh, I want rental properties, I want some cash flow right? I want to generate income. Like that’s the easiest one to understand. That’s what- yeah, I mean I think that’s what gets people excited about real estate when they first get into it [inaudible]. 

David: So Mike, I think the easiest way to define cash flow is what is left over after all the expenses are paid, and when I say all, I mean all because sometimes you may not have a monthly bill for insurance or taxes, right? So cash flow is really I think the easiest way to calculate it is on an annual basis. You also have to factor in vacancies into your property. So, without getting too much into the weeds guys, cash flow all right. You make cash flow on properties that are income producing, period. If a property doesn’t have any income, there is no cash flow. It doesn’t work that way, you have to have properties bringing in dollars and cents in the form of rent payments or leases or it could be something, you know, outside of that even like easement or whatever else, agreements, but it essentially has to be bringing in income and if it is bringing in income, if the income is higher than all the expenses, what’s left over is called cash flow. So, you can rent a building out to just a- like a- let’s say it’s a single family home, well you could rent it out and you’d have tenants living there and they’re gonna pay you rent. You could also rent out raw land to a farmer, right? and he’s gonna pay you to be able to farm his crops there. You could also have a commercial building or a strip mall or even a big office building and again, you are renting. You are trading the time in that space for money and that’s rent so that’s bringing in income. Well, all these things, commercial buildings, land, single family homes are gonna have expenses. Some are gonna have more than others but you’re gonna have taxes that are gonna be due on the land. You’re gonna have taxes that’s gonna be due on the improvements to the land. You are going to have to have insurance, especially if you have a loan. If you have it free and clear and paid off, then you may not need it or want it but if you have a building on it and there’s debt due, any lender is going to require you to have insurance. 

Mike: I’d probably get insurance either way. 

David: Either way. I don’t disagree, I’m just speaking in black and white here. Next you’re going to have utilities. Now again, if it’s a farmland, you’re not gonna have that per se but you still may have to have additional insurance for your crops, right? But if you have a building that’s a residential house or a commercial, you know, building or a strip mall, something like that, you’re going to have utilities. You are going to have maintenance and then you are going to have a vacancy which basically is an opportunity cost. A vacancy just means that it’s empty and that it is not bringing in money. So again, you want to factor all these things in, so you know, cash flow can be looked at daily, weekly, monthly, annually. I like to look at cash flow in terms of annual expenses and the reason is because you may not be paying your insurance company or your taxes weekly or monthly, they typically come out at the end of the year, right? So cash flow can be skewed if you’re not calculating in every expense so it’s very important that you understand that cash flow is what’s left over after all expenses are paid. 

Mike: Well said man, well said and I tend to agree. I think it’s easier it’s easier to calculate it over a year period and that’s how we like to figure it but then I like to look at it on a monthly basis. 

David: Oh yeah, I wanna see. Am I making 50 bucks a month or am I making 650 a month, absolutely. 

Mike: Yeah, to me that’s just- yeah, I don’t know. 

David: But the problem with that though is if you need a new HVAC like Mike had mentioned earlier and it’s 4 grand, well that’s gonna eat up assuming you have a property that cash flows 400 a month, 10 months of cash flow. So yes, you definitely want to know your monthly numbers but at the end of the year is really gonna be kind of, you know, the truth. What was the actual cash flow cuz it’s one of these things where you can never know in real time. 

Mike: Yeah, well and- 

David: It’s always something that’s gonna be trailing. What was the last year’s cash flow? 

Mike: Right. 

David: And that’s a fixed number. You can’t change it once time’s passed, right? 

Mike: That’s a great point and I think that example, the air conditioner, that’s something that happens. Man, we replace a ton of air conditioners. So you’re- 

David: Roofs, trees falling down, all types of stuff. 

Mike: Your cash flow on a monthly, even on a property basis is pretty hard to determine on a single family house. 

David: Yeah, but you can estimate it really really easily. 

Mike: So what we do is- yeah, we’ll use a 10% vacancy so basically take your entire cash flow then take 10% off for vacancy cuz again that’s maybe 1 month vacant, right?  

David: Yeah, it’s only 1 month that’s right. 

Mike: Take 10% for your capital expenditures, so that’d be something like an HVAC. 

David: Roofs, trees falling down, sewer lines getting clogged. 

Mike: Yeah, so those are other things that- 

David: Big ticket items basically. 

Mike: And general maintenance, another 5 to 10 percent.  

David: Yeah, I’d say maybe yeah, 10% right. 

Mike: Just give it 10%, make it easy. So there’s about 30% right off the bat for things that you- that most people aren’t really factoring in when they look at their rental income versus their mortgage payment. 

David: Great point Mike, great point. 

Mike: So again, if you have a rental payment of a thousand and a mortgage payment of 700, your cash flow is not 300. 

David: No, not at all. 

Mike: Now if your 700 factors in your insurance and taxes, that’s great. 

David: And CapEx and vacancy and maintenance, but it doesn’t though. 

Mike: Yeah. 

David: Yeah, right. 

Mike: So that’s why a lot of people end up being very very cash poor despite having a bunch of assets because they’re not actually cash flowing over a period of time. It looks like it, they think oh I should be making 300 dollars a month on these 6 properties I own. When in reality, every month there’s an AC or a roof that needs replacing or a vacant property that they have to pay the mortgage on and they’re not collecting rent and the- you know, all- yada yada yada. So it’s very very important that you do not- Dave you’re typing the words I’m trying to say. 

David: That’s right. 

Mike: That you do not over leverage yourself meaning you don’t want to take out a loan that’s too high, driving your cash flow down. You have to make sure that you still cash flow on your properties. That’s the only reason to buy a rental property is to create cash flow. That is the- I’m sorry, not the only reason, that is the number reason to buy it. Yeah I mean again, to me everything else is icing on the cake. The cash flow is number one, the depreciation is icing, the appreciation is icing, the tax advantages are icing on the cake. To me, cash flow is the only thing that I mean it really really really matters. 

David: Yeah. 

Mike: Like you have to have to think about that. I can’t-  I don’t know, I can’t say it any differently. 

David: No absolutely. So guys, couple more advantages of owning real estate is that your cash flow is taxed as passive income. So if you don’t understand what this is, let me just try to explain this to you very very very simply, right? So according to the IRS, there are a few types of income, okay? And these income- types of income tax, let’s actually pull this up here. Looks like there’s 3 basic types of income, okay? And the differences are how you earn it, so the first type of income is taxes on what you earn, right? This is basically what you’re doing and when you trade time for money, okay? The next type of taxes are gonna be taxes that are gonna be based upon how you earn it so if you are earning money from your money making you money or your real estate making you money, that’s actually defined as passive income, and then the other type of income and there’s probably a couple more here but the other type of income would be income that’s gained- that is earned from like you know, capital gains and/or dividends for the most part, but the cool part about real estate is that income is defined as passive income and again, laws are written by rich people to protect rich people. Guys, if you have not heard me say that before, I’m gonna be really surprised because I preach this all the time. You know, people that work at Taco Bell or McDonalds don’t typically end up in Senate or the House of Representatives, you know, on committees voting on bills. What ends up happening is rich people decide that they wanna up their game and they run for public office and they have to spend a lot of money to get all those votes, so it’s very rare that somebody that is in office, you know, doesn’t come from some sort of means or they’re just very very resourceful. So, rich people, they tend to make a lot of their money not working for it. They let their relationships make them money, they let their assets make them money and more importantly, they let their money make them money. Well people aren’t gonna- but people aren’t gonna shoot themselves in the foot so what are they gonna do? They’re gonna make laws that say well if you work for your money, you should pay the most amount of taxes on it, and if you’re like me, the rich guy, and you make you know, 70, 80, 90 percent of your money from your money making you money, then we should be taxed less. I don’t necessarily agree with the way that this is designed and the way that it’s carried out but I acknowledged it and I’m gonna play the game the way the game’s gonna be played.  

Mike: Don’t hate the player. 

David: Don’t hate the player, right? 

Mike: Hate the game. 

David: Hate the game, that’s a great point Mike, right. So with that being said, there is a massive advantage of making money or cash flow from real estate because you are actually taxed in a whole different bucket than all of your earned income, right? So it’s funny because everyday when I wake up- and I think Mike has the same mindset but our goal isn’t really to make more money because that means that we are gonna have to pay more taxes. Instead, we’ve changed our entire mindset to say how do we control more assets? It’s a whole different ball game than saying how do you make more money because here’s the cool thing about controlling assets, you build wealth and wealth isn’t taxed my friends, income is. Woah wait, say that again. Wealth isn’t taxed my friends, income is. 

Mike: Yeah, it’s crazy, really crazy. 

David: So if you could spend all year working on building 3, 4, 5, maybe even you know, 500 thousand, maybe even a million dollars worth of wealth and you didn’t sell anything, you wouldn’t actually have any taxes due. But if you spent your whole year trying to increase your salary from 50 grand to 200, 30, 400 thousand, you are gonna 5, 6, 7x the amount of taxes you’re gonna pay too. So really the goal isn’t to make more money, it’s to control more assets therefore creating more wealth because wealth isn’t taxed. So passive income is a tax classification and you get that via real estate investing, right? And there’s really one more thing that I’d want to touch on with the advantages of owning real estate and here’s the thing guys, there’s probably a hundred advantages. These are just the top you know, 5, 6, 7 that Mike and I like. And the last is leverage, it’s that simple right? You can go open up a stock account with a thousand bucks and the broker’s just gonna say hey we’re gonna give you money on margin and they’re gonna essentially let you borrow anywhere from- what’d I say? A thousand dollars deposited? They’re essentially going to say you can go buy stock worth 15, maybe even as much as 18 hundred dollars. So they’re actually gonna give you money to play with and they’re gonna charge an interest rate on that, right? But they’re not going to be able- they’re not gonna give you a 500% increase. Well with real estate, they will. You can go buy a hundred thousand dollar piece of property with only 20 thousand dollars and get a loan for 80, that’s 5x your money basically on the loan. We talked a little bit earlier in the last episode about using a virtual- VA loans or even FHA loans and that increases the leverage even more. Think about if you only have to put down 3-5% to buy an asset and you can get a loan for the difference whereas if you want to go buy gold bullion, good luck. You’re gonna have to have a hundred cents on a dollar most likely to buy it. Same with the stocks, right? And most people that I know that invest in stocks, they don’t even use margin, so if they only have a thousand dollars in their account to invest, that means they only have a thousand dollars worth of assets to buy. Well with real estate, it is so incredibly easy to use leverage. In facts bank- in fact, banks encourage you to use leverage. They say hey you wanna go buy this quarter million dollar building that’s 250 thousand dollars? Well, assuming that it’s a standard loan, you only have to bring 20% to the table which means if you have 50 thousand dollars saved up, you can go control an asset worth 250 thousand dollars so that alone is probably, mixed with the cash flow of course, is probably mu favorite reason that I like real estate and really there’s so many of these reasons but if you are able to control assets by using other people’s money and I’m sure you’ve heard that term before: OPM, then not only is it going to help you increase your wealth at a much faster rate, but it’s also going to allow you to buy and control assets that are kinda out of your price range essentially in terms of cash buying. 

Mike: What’s really neat about it though is that they all work together to help you build wealth. 

David: They do and that’s the beautiful thing. 

Mike: So what’s so so cool. So again, you- Dave had mentioned you’re going to use 50 thousand dollars of your own money to buy that 250 thousand dollar building, well guess what? You’re going to use that 50 thousand, the bank’s gonna give you the 200, the tenant in that building is going to pay the mortgage for you so then you’re done and your gonna cash flow positive. 

David: That’s right. 

Mike: What’s even more powerful, we talked about in the last episode is the BRRRR method. 

David: Love this. 

Mike: So you buy another one another year later, you buy another one a couple years later- 

David: Or even a couple months later. 

Mike: Then refinance the other one, you could pull all your money out so that 50 thousand you had to put into it, if that thing appreciated, now it’s worth 300 thousand then you get a 75% loan devalue or 80% loan devalue, you’re gonna pull out all your money. 

David: Yeah, so you can actually use leverage if you get good at it and you understand it and you can actually use leverage to not even have any of your own money in the deal, right? Now you don’t particularly own it when you have a mortgage, you control it, right? But that’s really what matters though. Do you need to own something? Not necessarily these days, it’s all about having the control. So guys, lots of advantages of owning real estate: inflation, depreciation, appreciation, cash flow, leverage and of course all of these things help when it comes to tax advantages with real estate being passive income as well guys. So tons of ways to have a- or tons of advantages of owning real estate. Guys, go- go ahead, please. 

Mike: I was just going to say check out the discountpropertyinvestor.com website. We relaunched our website, there’s tons of information on there, we got free courses on there, free books we give away. 

David: All of our podcasts are hosted there too. 

Mike: All of our podcasts hosted there. Thank you so much for listening, thank you for your support. Again, we’ll talk to you guys next time. 

David: Signing off. 

Thanks for listening to the discount property investor podcast. If you enjoyed this episode, please like, share, and subscribe to help us reach a wider audience to jump-start your real estate investing career, visit freewholesalecourse.com- the most complete free course on wholesaling real estate ever. We would also appreciate it if you left us a review on iTunes or Stitcher. Thank you in advance for your support and remember you make your money when you buy, you get paid when you sell. Now let’s go build some wealth.  

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