Disclaimer: Transcripts were generated automatically and may contain inaccuracies and errors.
That’s kind of like with real estate, you’re in the driver’s seat with some other forms of investment. You’re in an Uber and you just hope that the drivers gonna make good decisions, right? I mean, that’s kind of right. It’s like you still feel like you’re in control like I’m choosing to take this ride with this Uber and this Lyft driver…
What would your life look like if you could replace all of your working income with simple and conservative investments that could do it for you?
Over the last 13 years, we’ve helped thousands of clients transact over half a billion dollars in simple and conservative real estate transactions, allowing them to begin replacing their working income with real estate investment income.
Each week, we’ll be pulling back the curtain on the ins and outs of real-time retirement based real estate transactions that will transform your financial future, even if you have no real estate experience. This is Replace Your Income with me, Kevin Clayson…
And Steve Earl.
All right. Hello, everybody, and welcome back to Replace Your Income. Thank you for coming back again! If this is the first time you’re hearing our podcast, we’re so thrilled to have you. And if you heard it before, and you came back, that’s even better, because it means we haven’t scared you away yet. As always, I’m here with my amazing friend and co-host Steve Earle, What’s up, buddy?
How’s it going? Glad to be here this morning.
Yeah, man, this is good. Now, today, what… At the end of the last episode, we teased you a little bit with this thought about how real estate, in our estimation, anyway, is better than a lot of other investments out there. And we’re not going to sit here and say that real estate is the only thing to invest in. I mean, for us, it’s the best thing to invest in. I mean, there’s other good things out there. And we don’t want to discount those by saying you should never invest in the stock market. And we did a whole episode on how traditional retirement is broken.
We’re just saying look, we love real estate for a lot of reasons, but we’ve given you some of those reasons and today we’re going to double down and give you a bunch of reasons why, based on our experience and what we’ve seen why we like real estate compared to other types of market-based investments.
Yeah, there’s nothing quite like real estate. When you think about it, Kevin. This country was founded by landowners and business owners, and all of the rules, all the regulations, all the tax code, all those things were designed to benefit those types of individuals.
And that has held true throughout history and even today, and so there’s lots of benefits that we’ll talk about today. And the fact that, you know, our nation was founded on real estate and ownership is a pretty powerful concept that we’re going to explore a little bit more today.
Yeah, let me tell you what I miss about our nation’s founding is I know that they used to wear powdered wigs and as a bald man, I kind of think we ought to bring that back.
Maybe we ought to.
Because let’s just be honest, I think I’d look awesome in a powdered wig
Yes, you would.
And you know who doesn’t like the smell of baby powder? I wonder what kind of powder they used, we should do an episode on that, let’s jump into the historical background of powdered wigs.
They also used wooden teeth, teeth replacements. So that’s one of the things that maybe is a good thing that we could have moved on from.
So talking about real estate. So we love real estate for a lot of reasons. And as I kind of mentioned, we’re going to tell you today we wanted to share with you for the things that we look at when we think about how real estate is better than other types of investments. Now, I come from a background, you guys have kind of heard my background a little bit. I didn’t come from a real heavily entrepreneurial or even investment-minded background.
I’ve kind of figured this out as I’ve gone a little bit but Steve, being somebody who’s a little bit more entrepreneurial. I also know you are not somebody who’s really heavily relied on the stock market even before we got into really doing real estate heavily. So what was it for you? I’m just curious about real estate Combined or compared to other forms of investment that drew you to real estate, when you started to think about those things as you were starting your business and as you were looking to your future?
Yeah, that’s an interesting question, Kevin. I think it goes back to when I was like a kid, right? I’ve never really had a real job per se. I’ve always kind of just done my own thing all the way from when I was pretty young. I remember I had a paper route where I delivered papers. And and I actually hired my friends to deliver my papers for me.
I was an entrepreneur, right. And I just kind of skimmed off the top you know, and I sold ice cream from one of those bicycles with the bells I don’t know if you if you probably weren’t alive when those things It was like a refrigerator on wheels I drove it… only existed in Canada. I don’t think they were allowed here in America. I’m kidding.
No, I don’t know what you’re talking about. But I’ve never driven one. I can’t say that. I’ve done that. Although I kind of want to right now.
Yeah. So being you know, being an entrepreneur. It kind of gives you You know, it’s a little bit of a double-edged sword because I love and respect and honor those who have a W two job, you know, entrepreneurs couldn’t live without individuals who were kind of those intrapreneurs and those individuals who, you know, provide the brains and the, the knowledge and the skillset to make and help entrepreneurs be successful.
And but as an entrepreneur, you know, there’s kind of, there’s a little bit of a control factor and there’s the sense that you want to be able to have some say in what goes on with your business and, and that’s what real estate really allows you to do. Because when you just invest in the stock market, and I do have some money in the stock market and in mutual funds, that kind of thing.
But the lion’s share of what I’ve invested in are my own businesses, and in real estate very heavily in real estate. And a big part of that is again, because of the control factor when I invest in real estate, there’s some things that I get to do that I can’t do in the stock market number one after I make a purchase.
I mean, I can refinance it, I can rent it out and create cash flow, I can tear it down and build something to create the highest and best use of that real estate, I can sell it again, or I can partner with it, I just have a myriad of things that I can do that I can’t do with the stock. And I like the idea of having that kind of sense of control and having the options in front of me, based on my current situation. And based on what my future plans are real estate just has so many different avenues.
I like that. And so for me, I think why real estate really started to become very interesting to me is I started to realize some of the same things when it came to real estate is that there’s this additional bit of control. And, you know, when we think about the stock market, or we think about other traditional investments in general, they’re largely managed by somebody who’s not you like you have some management right like you think most Americans when it comes to the time when you’re, you know, going to get a 401k with an employer.
You get to pick You know, the moderate growth or the aggressive growth or the conservative growth and they kind of tell you, there’s maybe more risk or reward with this or that or the other, but you’re not really picking your stocks and you’re not really you’re just kind of saying, Okay, let’s go, we’re gonna do this thing and you’re sort of forfeiting control over to someone else. That’s kind of like with real estate, you’re in the driver’s seat with some other forms of investment.
You’re in an Uber, and you just hope that the driver is going to make good decisions, right? I mean, that’s kind of right. It’s like you still feel like you’re in control of I’m choosing to take this, this ride with Uber, this Lyft driver, but I know you and I’ve been in New York, and we’ve had some interesting drivers. And sometimes I kind of think about that. I’m like, Am I crazy right now? I just put my life in somebody else’s hands. And that, I don’t know, I’m just meeting them, but their face on the app matches their face in real life.
So I think I’m safe. But you know what I mean, and that’s kind of we do that a lot with our financial lives. It’s like, Okay, I’m just gonna, I’m gonna get in this car. And I’m just gonna hope that I’m gonna get to where I think I’m gonna go. Right We don’t always know, can’t always anticipate. But with real estate, there are still things that are out of our control. Just like when we’re in the driver’s seat of our own car.
There’s things that you can’t control every facet, but you are in a lot more control when you’re the one behind the driver’s seat, or when you’re the one in the driver’s seat behind the steering wheel. And I feel like that, in general is kind of a good analogy for real estate versus other things. So you think is that…
Yeah, no, that’s, that’s a great analogy. Because even as like the owner of real estate, you don’t always make the right decision of right time. However, you get to make the decisions and you get to reap the rewards of, you know, of your decisions. I mean, there’s, there’s a phrase that I absolutely love, and it’s called and it goes like this decisions, determine destiny, love it.
And sometimes our decisions take us down a path that you know, that don’t work out so well, but at the very least, you got to make that decision and choose your path. And you got to learn something to help you correct. And maybe make a better decision next time.
Yeah. I love that phrase to decisions determine destiny. There’s a man that some of you may be heard of by Tom Monson, who taught me that principle and he’s a man I have a lot of love and respect for. So okay, so decisions determine destiny, you’re in the driver’s seat, you’re the one kind of calling the shots when it comes to real estate.
So now what we want to talk about more specifically is I promised you that we’d give you four ways in particular, that real estate we think is kind of better than other versions of investing or, or things that we think are where real estate stacks up in a better way. And by the way, stay tuned to the end of the episode, because I’m going to give you a website, and you’re going to be able to go and download an infographic that illustrates these four things, these four ways that we like real estate instead of some other investments.
And that way, you’ll kind of have it, it’ll be on your computer, you could print it and put it on your wall or whatever. So stay tuned to the end of the episode for that. Here’s the deal, right? We all know real estate’s powerful, it’s a fight. It’s a weapon in the financial arsenal. But I feel also that there’s people who kind of think, well, I’ll get to real estate at some point in my career, right? There’s a lot of people who I talk to people every day on the phone, that are thinking about coming and working with our company.
And a lot of them I hear it often that like, I’ve always thought about real estate. I didn’t know when the right time would be. Maybe now’s a good time. And it seems like real estate is the afterthought, right Real Estate’s the thing that you’re supposed to add to the portfolio at some point when you’re wealthy enough to be able to do it.
But I know Steve, you and I, we take a little bit of a different approach when it comes to where real estate fits into the investment, I guess, picture and how would you rate real estate in terms of looking at someone’s financial future? Where would you rate real estate in a level of importance for their personal financial life?
Well, look, it varies for everyone. person, right? Real Estate is an ownership investment. And so it requires a little bit of time. Sometimes it requires taking a little bit of pain, it reset it, you know, requires some decision making that kind of thing. So, depending on your stage in life, depending on, you know what your career is, we’ll make the difference, right between, you know, whether it’s the bulk of your investment portfolio, or whether it’s, it’s an arrow in your quiver.
I like it.
So for me, obviously, you know, for individuals who are more ownership heavy, you know, they, they want to be a little bit more involved with their investments, then then you want to go a little bit heavier, I think. And then of course, if that’s not quite your mentality, then I think it’s still an absolutely powerful opportunity and tool that you ought to have in your tool bag. But maybe you’re not gonna be quite as heavy on real estate.
And the way I look at real estate is real estate, almost more than anything else gives me the greatest shot at replacing my income with some kind of an investment income. And that brings us to what are the four things that we like. And when we look at real estate compared to other things, the first one is this.
And this comes right to this idea of replacing your income. And it’s that real estate does this really cool thing where it predict if you do real estate the right way, the kind of real estate that I know you and I really like seeing that we’ve been able to help a lot of our clients do, it generates this thing called cash flow, right. And we like that. And I always think of it like this, you know, if I’m gonna go put money into a nest egg, we talked about that with traditional retirement that, you know, what a lot of people do is they’ll build up a nest egg, and then you know, they’ll kind of deplete that nest egg they have to sell it off in order to live on it for retirement.
But here’s the cool thing with real estate is is you’re still building a pile, but the pile is inside of something tangible, and we’ll talk a little bit about that in a second. And this pile does not have to be depleted or diminished in order to generate an income.
So like If you had a couple hundred thousand dollars in stocks, the only way that you’re going to be able to live off that money is you’re going to have to sell off portions of the stock, it becomes taxable at that point for a lot of people, it then becomes real cold, hard cash, it’s income. With real estate, though, you’ve got money sitting in an investment, and then it’s generating cash flow on a monthly basis.
And that cash flow, which is generally coming from the fact that your mortgage is less than what you’re renting it for, if you’re using leverage the difference between those two, those are checks that come back to you now, we always think it’s a pretty good idea to just reinvest that back into paying down the principal because there’s a bigger long term benefit however, nonetheless, that investment is generating sometimes this there’s this term, kind of in the real estate coaching industry in the entrepreneurial industry, where they say mailbox money and it sounds cool, right?
Because you open your mailbox and there’s money. That is true. I like that general concept. I just don’t like how that comment Sept has been kind of used over the years by people trying to get you to buy their stuff. But in general, the idea that I can invest in real estate, and that real estate then generates a monthly cash flow for me that I could choose to spend, if I want to, is something that is quite a bit different than investing into a mutual fund investing into the stock market, putting money into a 401k, where the account balance may grow and fluctuate, but it’s not generating monthly cash or monthly checks for you on a consistent basis.
Well, if I can speak to that just for a second, Kevin, that’s one of the most powerful concepts of purchasing, income producing real estate is this concept that it is generating a monthly cash flow, and like you often say, spendable cash Yeah, and I know you’re going to talk about this in a minute. But in addition to generating and kicking off what I’ll call a dividend or cash flow, is the appreciation side, and we’ll talk about that in a minute.
But just to share with you like a simple concept that are in vestment should benefit us yes in the future. And yes, the investments that we make today are about preparing for the future. Now, having said that, there’s something about living in the moment, and being able to take advantage of the cash flow today, if needed, or even sometimes if wanted, because, you know, sometimes we have needs and we have once, and sometimes there’s some things that we want, that can be very meaningful, just to share with you, you know, one simple instance. So it’s about 10 years ago, I’ve ridden motorcycles my whole life, and I love riding motorcycles…
Which makes you both cooler and more manly than me.
Yes.So, so about 10 years ago, I went to my wife as like, Hey, you know, I really want I found the perfect bike, I want to buy it. And she was like, Well, how are you gonna pay for it? Where’s the money gonna come from? And I was like, Well, you know, let me think about it. And I came back to her. I was like, Look, one of our properties is cash flowing, you know, X amount of dollars that we’ve been accumulating This cache, and it’s in this one property has accumulated to X number of dollars.
And it’s sitting there. And it’s it’s earning interest and it’s growing every month from the cash flow that’s coming in. I was like, Look, the cash was gonna keep coming in, and it’s gonna, it’s gonna replenish the account. If I take X number of dollars, and I buy this motorcycle from the cash flow from this property, like, I could go buy the motorcycle, and the money will keep coming in and it’ll keep doing its thing.
And, you know, she looked at that she’s like, yeah, that look, that’s that was a good event. That was a good decision for you to buy that, you know that property and it’s been cash flowing for several years, you’ve been accumulating the money and so on. So I took that a portion of that cash, and I went and paid cash for this motorcycle.
And so when we talk about decisions determine destiny. When I bought that property many years prior, I wasn’t even thinking about a motorcycle. I was thinking about, you know, different things. But my destiny was this motorcycle and it’s a really special Small and maybe even a silly, you know, illustration, but the reality is I was able to buy that motorcycle with the cash flow from this property.
And by you know, I was able to convince my wife that that was a good move. So we can benefit today from that spendable cash flow, whether it’s to buy groceries or whether it’s to buy a luxury item like I was able to buy a few years ago based on that, that cash flow.
Yeah, and that’s why I love the term cold hard spendable cash, right, because I feel like that’s what real estate can generate. It’s like, here, here’s the deal. If you’re if your real estate needs to buy a trip to Walmart to get a whole bunch of groceries, it can if it’s producing cash flow, your your 401 K’s not gonna do that unless you are able to take money out of it after 59 and a half and then you have to pay taxes on it or you take a little loan out of it or something like that, but the real estate can do it.
So I love the idea that real estate can even do something like buy you a motorcycle, right? Because it’s cold hard spendable cash. And what’s interesting is I use the analogy online. Last episode that so many of us spend like 30 years, building this nest egg, and I use the analogy that imagine spending 30 years building your, you know, Dream Home board by board, brick by brick with your own two hands.
And then once it’s completed, you started to rip it apart board by board, brick by brick, nobody would do that. But it’s what we do with our financial lives. And that what’s cool about this is, if you were to build your dream home board by board, brick by brick slash your nest egg for retirement, you don’t have to pull it apart and take it apart in order to benefit from the things that you want out of it. Right.
That’s, that’s what’s awesome about real estate is does gives you these additional options. And, you know, here’s the other thing is that real estate is not going to be the same sort of, I guess, subjected to the same kind of volatility that you see in the stock market, right. That’s another thing that you really like. It’s like, you’ve got appreciation that happens in Real Estate almost without you having to do. I mean, you can kind of bank on the fact that over time, your real estate’s gonna appreciate there are going to be fluctuations. But anybody who’s had their money in the stock market can see half of the value evaporate overnight. And then the thought is, let me just, I’m just going to ride this thing out because it should bounce back. With real estate, we generally don’t see that happen.
Sure, the Great Recession, there was a big decline in values. But in general, your real estate is not going to be susceptible to kind of the daily fluctuations, right that you’re having to deal with and the stress of having it in the stock market. So not only do you have a, an asset that’s creating cold, hard spendable cash, it’s also not as susceptible to kind of the market volatility and fluctuations.
And those are just, that’s one of the reasons why we like real estate as this kind of separate sort of asset class from what maybe is considered to be more traditional, anything you want to add to that point before we move on to the second reason why we like real estate?
Yeah, no, I mean, I agree with everything that you said there, Kev, I think you really did well.
Well, that’s because it was well stated, Steve!
It was very well stated.
Okay, so here’s the second thing, right? Real Estate allows you to do something awesome. And and Steve already alluded to it, it allows you to utilize leverage. Now look, there’s a lot of discussion about leverage is leveraged, good is leveraged bad?
Yes, you’re taking on a little bit more risk. But let me put it to you in these terms. If you wanted to go and buy $250,000 of stocks of mutual funds of index funds of whatever, okay, name your asset class, you would have to spend $250,000 in order to get the asset that is valued at $250,000. On the day that you purchase it Now it could go up or down, but you’re investing 250 in order to get to 50 with real estate and because you can utilize leverage.
You were not investing $250,000 in order to own a $250,000 asset. Now, some people may choose to buy real estate cash, that’s fine. But in terms of leverage, in general, you’re only putting down a 20 or 25% down payment in order to get this piece of real estate.
So if you In other words, if you’re buying a piece of real estate, that’s $250,000, your general out of pocket is going to be somewhere between 50 and $70,000, depending on what lending guidelines are, depending on if you could put 20% down or 25% down. So now your actual out of pocket is significantly less yet you still own an asset that’s still worth 250,000 that still has the ability to appreciate that’s still going to generate cold hard spendable cash.
So this idea of leverage can be a powerful piece of why we like real estate combined to other things. Steve, what’s your opinion on leverage? Because you there’s tons of people that say, you want to be careful. And by the way, I totally agree with that. But how do you view leverage as a real estate investor?
Yeah, so again, It depends on what stage you’re at in life and your career and in your financial situation. So ultimately, the ultimate goal is don’t all of your real estate free and clear, rightly generating the maximum amount of cash flow and that’s ultimately…
That’s real income replacement.
Exactly. At the end of the day, you’ve replaced your income you don’t you own these assets. But But getting there, you can expedite your ability to get there more quickly, if you utilize leverage for the very reasons that you just stated, you can purchase, you know, a 250,000 or a $200,000, single-family home with a $50,000 downpayment, right?
And now you have an asset that’s growing at the rate of appreciation if it’s 4%, or 10%, whatever it might be, like it’s this for easy numbers, let’s call it 10%. Got $200,000 appreciating at 10% that’s $20,000 a year, but you only invested $50,000. So so $20,000 versus 10% of $50,000 which would be $5,000 a year, right? Yeah, so that’s a $15,000 a year swing in additional benefit or, or additional value that you’re, you know, creating through leverage…
Meaning your return is going up quite significantly as well.
Yeah… it’s, it’s massive. So you know, whenever we look at our property, we look at three numbers right? We look at your cash on cash, yeah, which is the $50,000 that you invested versus you know, what, what net income you’re generating from that and so if you’re earning on that actual investment, you know, anywhere from five to you know, eight to nine 9% There’s your cash flow then you have your combined cash on cash return which includes, you know, your cash on cash return plus add back in the depreciation expense in your principal pay down yeah, and so you get an even higher number which is 12 to 15%.
Then you have your annualized where you simply add your appreciation on top of that, and with the single family type homes, that We purchase, you know, typically you’re in the 17 to 21%, you know, annualized return on investment when you look at that over about a five year period of time. And, and so you can see what the power of leverage does for you, when you add in the appreciation factor.
Now, if you own that property, cash, if you paid cash for it, that annualized return is going to go down significantly, your cash on cash is going to go down significantly. Now your actual cash flow go is dramatically higher. Right? Right. So when you look at those different things, the power of leverage is something that you ought to seriously consider, you know, in your earlier years, or when you’re in the growth process when you’re starting out.
And you want to have multiple properties that are appreciating for you. So at the end of the day, you can then you know, have them all paid off cash flowing free and clear.
Yeah, I love it. And there’s a there’s this little thing on our website we’ve got there’s this like little presentation that I do and I kind of go to the whiteboard and I draw something out talking About leverage, I’m gonna try to describe it verbally, I don’t know if it’ll be as effective. But I look at it, I look at it like this.
And by the way, this was born of me trying to really wrap my mind around leverage, because, you know, coming from kind of a conservative financial background, and my wife coming from a conservative financial background, you know, I’ve really had to kind of wrestle with the questions of what makes an investment, a good investment, what makes it so that it’s not as risky for my family. And this idea of leverage is one of those where it’s like, Okay, well, I’m taking on a liability, right?
That’s how it looks on paper, I’m gonna put certain some money in the bank’s gonna put in the rest, and then I’ve got this obligation of payback. And is that more risky than it should be? And how do the numbers really break down? And so I this is what I had diagrammed out and I shared it with others, but it helps me kind of understand the principle of leverage. So imagine that you had 100,000. We’re going to use super simple numbers.
These are not realistic at all. We’re just it’s just a just a basic example of numbers to kind of illustrate trigger point. So imagine you had $100,000. And you could buy a home. For $100,000 you spend the hundred grand you got on the home that generates $100,000. And let’s say, in five years, we’re not even going to talk about cash flow.
Let’s just say in five years, you could sell that home for 150 grand, okay, you invested 105 years later, you’re selling it for 150 grand, you made a $50,000 spread plus you got your hundred thousand back that’s pretty good. That’s usually that’s if you’re buying cash and you’re just kind of letting it right now what have you leverage, take that same $100,000 by five of the same type of $100,000 property with 20% down on each so now you’ve got your hundred thousand dollars divided by five because you’re going to put 20,000 into five equal type of properties that are all equally going to appreciate from 100 to 150,000.
Over the next five years, and let’s say you’re going to sell them all then your same hundred thousand that bought you one home that you then sold for 150 Now bought you five homes using leverage because you put 20 grand into each. And then let’s say you sell all five of those homes in five years each for $150,000 the same money just quintupled your return just because you utilize leverage.
So the same money in the same type of real estate just gave you additional opportunities and possibility, assuming that you’re making good decisions, and it’s the right type of deal in the right kind of market. And you have to take all of that into consideration. But that’s some simple numbers that for me, helped me understand the value of leverage.
Yeah, and in that case, so let me even simplify that a little bit more, Kevin? Because I think some of our listeners are just beginning out in life, they’re younger, and they’re thinking to themselves, it’s like, oh, my goodness, it’s gonna take me you know, 10 years to save up, you know, 20% for for a home.
Well, here’s, here’s the great thing is that your very first investment can be your first primary residence. It’s also remember you can and you can get into a property For 3% or less depending on the type of loan like an FHA loan you can get in for about three 3%.
So if you buy you know $150,000 home for 3% down, you know you’re only having to come up with less than $5,000 you know for a down payment and and different loans allow you different things and you can be gifted money by you know, parents and so on to kind of help you. But just to bring this home just a little bit, the very first home I bought back in 1996, I bought it for $82,000 and I literally it was an FHA loan put 3% down, but here’s the cool thing about that leverage that 3% down, I got into it literally for a few thousand dollars, right.
My payment on that house like 650 bucks a month. And within three years, my home it appreciate not a ton. It appreciated enough that I sold the home and I walked away actually with about $30,000 it’s awesome and so for 20 something-year-olds Like that was life-changing. So I sold this little is literally it was a two-bedroom home, one bath, and my wife and I, we moved in there. And we lived there for three years.
And when we sold it, we walked away at about $30,000. But that got us into our next home that we bought for $200,000. within seven years, the home that we bought there, had appreciated. We sold it for it was like almost $300,000 and so we so and plus we’d paid it down because you know, we’re like financially careful.
And we were paying putting extra money down that kind of thing. And so we went from that house, from our first house to that house. Were there for three years, the first house seven years, the second house, the third house, we actually built what was kind of like our, what we considered our dream home.
And between that the first house and the second house, like that was the money that we use for the down payment for that third house. So you can see again, the power of leverage and even just start Getting out small like literally starting out with with practically nothing, that the power of that leveraged allowed us to kind of just gradually over the course of several years move into what we ultimately considered like a you know, this is kind of like our dream home.
And so again the power of leverage appreciation and these weren’t even that’s not what obviously wasn’t cash flowing home because we were living in it right. And so for those of you who are just getting started, when you think about it, if you look at even your first primary residence, that is your first investment property and the power of leverage is what can allow you to get into that first property.
That was a big switch for me that got flipped when I started to kind of look at real estate and realize that my first primary residence what I did is my first Well, the first primary residence I ever bought. I ended up moving out because I was able to do that for 100% financing right like that existed when I bought that home.
I moved out of it turned it into a rental. So now I was generating cash flow from the first home and then I was able to put a small amount down on my second home, which I then rented out the basement. And so now I own two homes both producing rent for me simply because of leverage, right.
And so that’s a great way to get started in something that I really needed as I was kind of like starting out so so Okay, so we love real estate because it acts differently. It generates cash flow, and it’s not as susceptible to market volatility. We love it because real estate allows us to utilize leverage. Those are two of the reasons so what’s the third?
Well, we’ve been tap dancing all around it. And if you pay close attention, we’ve already talked about it, which is this real estate has multiple profit centers. It’s not just one way right the market going up the appreciation that we’re talking about. That’s only one profit center.
Cash Flow is another profit center. Steve talked about some earlier he talked about depreciation so tax benefits. See real estate has multiple profit centers and gives you multiple ways to generate money. Steve also talked about that with your real estate. You could choose to refinance it Put some capital out to grow your investment portfolio.
Or if you wanted to, you could knock the whole thing down and plant corn on the on the, you know, on the lot. Whenever real estate has multiple profit centers, where it’s very think of what else can you think of anything else, Steve, that really gives you multiple ways to make money simultaneously off the same exact investment?
Yeah, I mean, the goal for real estate is to always find its highest and best use our form of real estate investing, obviously single-family homes. Yeah, so and so we’ve kind of determined that creating a rental property is its highest and best use. Now, having said that, sometimes things change, zoning changes, laws change, regulations, change, highways get built.
You know, as government does things, things change. And so the highest and best use of a property can change I can, I can think of one really quick example. I bought an older property, single-family home, renting it out, some things changed the zoning change. The law was big enough that I actually could put another property on on this lot.
So I literally I tore the home down, subdivided the lots, and built two brand new construction properties and then sold them awesome for a decent profit. And so so things changed. And so you always got to kind of be aware of the different opportunities that exist. But that’s one more example, you know of a profit center as as opportunities kind of present themselves.
So real estate has the ability to be very dynamic and generate profits for you in multiple ways, all tied into one single investment, which is awesome. Okay, so let’s summarize. We like real estate because it earns revenue for us or generates profit for us in multiple ways. We like it because we can utilize leverage.
And we also like it, because and by the way, we didn’t even talk about this with leverage. Sometimes I think about leverage and I think about the fact that if you use leverage like today, interest rates are really low. If I lock in my interest on a piece of have real estate at a really low interest rate doesn’t matter what the market does over the next 30 years. I’m locked in at my interest rate if I did a 30 year fixed, right, and and utilizing leverage. So… Kevin, that’s one of the massive benefits of real estate. Yeah, you talk about a hedge against inflation.
In fact, inflation becomes your friend, yes, from an appreciation standpoint, but also from the fact that if you lock in at a low interest rate, and let’s say your payment is $750 a month, well guess what rents do over time, the longer you own the property, the greater your cash flow is going to become, because rents increase, but your payment is fixed for until the home is paid off.
That’s right. And that’s the fourth reason why we love real estate because real estate can act as a hedge against inflation. So it can create actual real cold, hard spendable cash flow, and it’s not as susceptible to market volatility. We love that we can use leverage.
We love that it has multiple profit centers. And the last thing we’re going to talk about, we love real estate because it can act as a hedge against an And Steve just demonstrated that if you can lock in your interest on a property at a low interest rate, and over time real estate always goes up. If you listen to the last episode, we talked a little bit about my parents story, how they bought a home for real cheap and sold it for a lot more.
Real Estate always goes up over time. So if again, there’s a little bit of fluctuation that can happen, but over time, it always goes up. So if you can lock in your interest on a property at a low fixed interest rate, and then let inflation do what it’s going to do, by the way, inflation today, right now, as we sit this is 2020.
There’s no way inflation is not going to have a massive impact. When you look at how the government has been printing and spending money left and right, it will happen. And so what’s cool about real estate is it’s tangible. Because it’s tangible. It means that over time as things cost more, so does labor so does lumber so do nails right so it costs more to build homes over time, which has an impact on the overall value of homes.
And like you mentioned, Steve rents go up over time, incomes go up over time, but you’re locked in on an interest for a certain amount of money that you invested using leverage, however, many years ago at a certain interest rate that’s going to be fixed for the next 30 years. And so real estate now, kind of like you hear about it with gold or other tangible things. Real estate is itself a hedge against inflation, which is another reason why we love it.
And Kevin, not to sound like a cheesy salesman. But… “And that’s not all!”
“And that’s not all!”
There’s one more thing that we need to add to this whole equation. And that is the intangible benefits of the tax benefits, right? It’s something that oftentimes, in real estate doesn’t get fully taken advantage of, because people don’t really understand or know.
However, there are a few things on the tax side that you don’t really get to see other than on your tax return or your taxes on it on an app. annual basis. One of those things is depreciation. Another one of those things is being able to write off your interest expense.
Another one of those or multiple of those things is that when you own an investment property, make no mistake, if you are a business owner, or if you own one piece of investment property, you are a business owner, and you’re entitled to all of the benefits of writing, you know, off expenses related to that investment.
Yes. And so all of those things combined, reduce your tax burden, which, as you, you know, entered new tax brackets and that kind of a thing. These benefits become so valuable, and the intangible becomes very tangible when your tax bill goes down because you happen to own real estate.
So true. So guys, look, we’re going to conclude this episode. We sure hope that it has been beneficial. To recap, why do we love real estate? Because it generates cash flow and it gives us real cold hard spendable cash flow. It’s not as susceptible to market volatility. We love it because we can utilize leverage.
We love it because it has multiple profit centers, including tax benefits, and cash flow and appreciation and control, being able to make multiple decisions on how you want that investment to interact with your life and your financial lifestyle.
And then finally, the last thing we talked about is real estate can act and is a hedge against inflation. So we know we shared a lot with you, we hope you’ll go back and listen to the episode. But if you go to dfy-realestate.com, that’s just our main site, dfy-realestate.com/infographic. So you go to dfy-realestate.com/infographic and we’ll put the… We’ll put the link in the show notes. But if you’ll go check that out, we’re gonna put the infographic up there that kind of shows real estate compared to like Bitcoin and the stock market.
And just kind of some of the things that we like about it, so that you could just have this for a quick reference. We hope you think about it. We hope that you’ll join us on our next episode where we’re going to be talking about something else really cool, which is, what if net worth doesn’t matter, but income replacement does? We’re going to talk about that on our next episode. Go into detail on it. It’s a huge piece of this Replace Your Income equation. But we are so thankful to have been with you here today. We hope it was beneficial. Please share this episode with anybody and everybody you think could benefit from it. And we cannot wait to join you next week for the next episode of Replace Your Income. For now. This is Kevin, signing off!
Steve Earl, signing off!
See you guys.
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