Disclaimer: Transcripts were generated automatically and may contain inaccuracies and errors.
If I understood real estate investing from this context of what it’s doing for me on a monthly basis based on a five year picture, I’m like, you would do it all day long, every single day to make that happen, regardless of what the interest rate is. As long as those numbers are what they are, it’s literally makes sense.
To take a closer look and to see if this way of investing makes sense. 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 work income with real estate investment income.
Each week we’ll be pulling back the curtain on the ins and outs of real. 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, well, hello everybody and welcome to Replace Your Income with Kevin and Steve.
How’s it going, Kevin? Good man. What’s going? I’m just digging your shirt. Yeah. Okay guys, you need to see this. You can’t, but maybe one day you will. I have really wanted like a bunch of DFY swag, right? So I went and got some hats made cuz I love rocking DFY stuff. And I really wanted, like, so we’ve got this amazing marketing team and they’re amazing designers.
And so Tisa and Matt, they, I was like, let’s do some like really cool like shirts and they did this like eighties retro like DFY vibe shirt and it’s amazing. And I had at least three people in the office today be like, How do I get one of those? And so, ladies and gentlemen, stand by. We. With, I’m gonna call it right here.
Within the next year we are going to have a done for you real estate store with all kinds of cool stuff. It is gonna be there. Well the first thing you need to put on there is that shirt. Cause I love it. Yes, I love it. I know it’s awesome. It’s like Miami Vice and done for you real estate had a baby and that baby was a shirt.
That’s what happened. It’s incredible. Well dude, it’s good to be with you. Yeah, good to be with you. I’m excited about our topic today. Oh, this is gonna be awesome. So you and I, before we jumped on though, I got, we gotta share this story with the world because I was talking about how we’re gonna be driving to Disneyland and I, and I bought these TVs and I’m really happy cuz it’s not just a DVD player, right?
It’s like, It’s like these TVs that, that, that sync the same image. But I can hook my laptop or my phone through an H D M I into the TV so I can download movies on like Disney Plus. And my kids can watch whatever they want. We don’t just have to carry around a bunch of DVDs. And you shared with me you did something very similar for your kids when you would drive to Canada.
Oh yeah. We were like totally high tech. So back in the day when we had our minivan and we’d take long road trips, we bought this little like mini television that had a built in cassette. Recorder, like could bhs, right? Like bhs, um, player in it. Remember those? And we literally, we would strap it between the two bucket seats of the, of the driver and the passenger side and it would sit there, we would like, I don’t know how we strapped it now, but we like bungee chords.
Like the thing weigh like 50 pounds. And so we’d strap it between the seats and our kid. That’s how our kids would watch movies on the way we. This is amazing. Our kids can watch television, the car while we drive, so from strapping TVs with built in vhs. To HDMI cables and downloadable Disney plus. That’s where we come here built into the seat in front of like the headrest, right?
Probably . Oh my goodness. I love it so much. That is amazing what you guys think. And I’m only 10 years older than you can. It’s like, I know you would think that I was like 150 years older. You based on that story, Listen, I do recall a time when my parents did something similar. We went to a timeshare presentation.
I remember this. We were in. I think we were in California and we went to this timeshare presentation. And if you remember, timeshare presentations used to give you like really cool gifts, right? So we got this, it was probably about the size of, gosh, I don’t even know. It was probably about 12 inches by four, um, like 12 inches wide.
And then the screen was probably like four inches by four inches wide. And it was this portable, you know, like the, with the bunny ear antenna? Yeah, yeah, yeah. Right. I can’t think U VH or uvf or whatever. And it was that, and you had channels and you were just receiving whatever TV signal was in there. And they, it was black and white and they used to, we used to bring that on car trips.
So look, hey, I’m, Hey, I’m still in the era, dude. Okay. Okay. Makes you feel better. Yeah. Good. Well, this is gonna be awesome. So Steve, and. We had Mike Chamberlain, who you all know, um, forwarded us an article that sparked a really cool conversation that we wanted to bring here to the podcast. And the, the article was talking a little bit about kind of how people are feeling a little bit locked in to their properties right now for the simple reason that.
What was it? See, 51% of Americans have less than a 4% interest rate or something percent, 4% or lower, which is 4%. Awesome. Which amazing. Awesome. Like, so that means that there’s so many people that took advantage of all of these lower interest rates, but then, so that’s part of the conversation, right?
Well, and it had to do with the fact that like, To the point of low inventory of available properties for both investors and primary buyers, whoever like this is, they’re anticipating that this is going to become a greater and greater part of why inventory stays low, uh, for the next number of years. Yeah, so we’ve talked, we’ve been talking for months, if not a year or more about low inventory, about like supply and demand, and so this is just another one of those things.
That is potentially causing a little bit of a, a, you know, a shortage, an additional shortage of supply. And we’ve seen it here in Utah. We’ve seen us slow. If, if any of you out there have your home listed or you’ve been around your neighborhood and you’ve seen that the for sale signs are lasting for a normal amount of time, right.
Um, or they’re, they’re not, you know, like at least in my neighborhood, I’m seen for sale sign up for a couple weeks. Right? It’s not like before there wasn’t even a for sale sign that would hit the lawn, like as soon as you put it. Like somebody was putting in an all cash offer that was kinda like the 50 above agent would like be walking up to the front of lawn to put the, the sign in the grass.
Yeah. And before they put it in the grass they were putting back in their car. That’s exactly right. So the market is swinging back to a little bit of normalcy, but then what we’re seeing and, and here’s the other thing that we’re seeing. So I’ve got people in my neighborhood, Steve, That bought their home.
They are listing their home and selling their home, and they are turning into renters now. Now there’s a couple things there. Number one, the reason that they’re doing that is because they wanna capitalize on all the equity that’s there and available to ’em. Because when else, they’re probably thinking, When else am I gonna be able to capitalize like this?
And they’re probably thinking, Well, if I sell today, I put all this money in the bank and then I wait for the market to, I don’t know what pendulum swing back. And then we go by like they’re pretty much projecting. They think there’s gonna be a crasher who knows what they’re. But what’s interesting about that is I think that there is a, You could easily see that nationwide people are selling homes to be able to cash out, and then if they’re becoming renters, that’s gonna have an upward pressure on rental demand, which is good for those of us that are owning single family residences.
But you still have this supply and demand conversation because maybe there’s less people looking to sell their home because they don’t wanna get outta the interest rate. And so that’s having an impact on the already constricted supply and demand. And it’s one of. Interesting environment. So as Steve and I were talking about this, anytime we have an article like this or we see something in front of us, Steve and I always have a conversation.
And then we love to bring the conversation here, which is what’s the prism that we look through? What’s the lens that we look through? And we started to have this really cool conversation, Steve, about the concept, which is what we’re naming the podcast today. And this is what we wanna dive into as well as we’re going to introduce a new type of number that we’ve been looking at and evaluat.
That frankly may be the best way to evaluate a long term purchase on a single family real, you know, investment property. We’re gonna introduce what that number is and how it’s calculated and how unbelievable it is when you put it into context of what these properties are doing. But we, we wanted to have the conversation of this, don’t step over dollars to pick.
Pennies or to pick up dimes or whatever, so, So let’s talk a little bit about that, Steve. Why is that the conversation when we’re talking about interest rates, when we’re talking about people not selling properties, we could maybe transfer that over to maybe somebody feeling a little fearful to, I don’t know, do a refinance on a property.
So why are we talking about don’t step over dollars to pick up dimes? What does that ultimately. What we’ve experienced in the last, you know, year and a half or so with falling interest rates is there’s a lot of people, Not only did they get below 4%, they got below 3%. Yeah. Individuals with two and half percent.
I got under. Yeah. I’m under 3% on. Yeah. Same thing. Primary residents with my primary residents, where I feel like that in and of itself is an asset. It is. It makes me feel like. I never wanna, like, I wanna figure out how to not lose that interest rate. Right, Right, right. For as long as possible. Absolutely.
Because it is an asset. But I think sometimes we can begin to have kind of tunnel vision, and this is the concept of stepping over dollars to pick up pennies because it almost becomes like almost like. Bragging rights. It’s like, Oh, what’s your interest rate? Yeah, I got a 2.99 and you’re gonna tell me I a two of honor.
Yeah. It’s a total badge of honor. So, and with good reason, right, because it’s historical. Yeah. The fact that, you know, interest rates got so low and that we got to take advantage of those along with so many other people. But the thing that we need to be careful of is that we don’t get so tied to that interest rate that we begin to think that that is the.
When in reality you need to take a look at other factors, right? It’s like what are you missing out on? Because a number of people may have at some point, hundreds and hundreds of thousands of dollars of equity in their. That they’re leaving untapped, they’re not taking advantage to it. It’s just really expensive bricks right in the house.
Yeah. That, that now have all of this equity and they’re, they’re missing out an opportunity to take that equity and move it into additional properties and opportunities that at the end of the day, the cash flow, the returns on investment far out Yeah. Benefits, uh, that low interest rate. Yeah. So, so it’s important to like, look at that interest.
Protect it, but but not put yourself in a situation where you get so tied to it that you miss out on opportunities that you otherwise would be looking at. Yeah, and I think because at the end of day, sorry, real quick, is that the difference between a 2.75% interest rate or a 3.5% interest rate in a 5.5% interest rate from a cashflow perspective on an investment.
It’s nominal, it’s maybe a few hundred dollars a month compared to what you could do. Leveraging, you know, potential equity is tens and maybe even hundreds of thousands of dollars. Just last night we’re going through the manuscript of our book that’s coming out, and I was just going through with a fine tooth comb.
We’ve got an entire chapter on leverage. Right. And it, it’s one of my favorite chapters in the book because it really puts. Into perspective what real estate could do that is so different than other things because of the aspect of leverage. But what’s interesting about it and what the concept that you’re talking about, Steve, I’ve had conversations like this with folks recently.
In fact, I just had a conversation with an amazing client of ours. We talked for the first time in February of 2020. Okay. When we talked, it was right as Covid was starting to be a thing. Okay? And he was like, Uh, I don’t know. I just, he had capital. I was ready. He was like, I just don’t know. I don’t know what’s gonna happen with interest rates.
I don’t know what’s gonna happen with inventory. I don’t know what’s gonna happen. So he called me last month and he’s. Okay. I guess I shouldn’t have waited those two years. Let’s go now. And he understands the perspective that just because you maybe missed some kind of a boat or some kind of an opportunity, maybe he missed out on 3% interest rates.
He’s not letting that get in the way of what he knows the real estate could do moving forward. And I’ve had this conversation with a number of people lately, which is. So let’s say that in your ideal world, you would love it if you could still be in a 3% interest rate range on an investment property. We would love it, right?
Everybody. We’d high five each other. We’d eat cupcakes. It would be lovely. But you’re not gonna get it today. Okay? Today, as we’re recording this podcast, you’re gonna be in the high fives, low sixes, okay? That’s what you’re gonna be on an investment property. Now, here’s the deal, the difference. So if you wish that you could have a 3% interest rate, we can all wish that, but you can’t get it today.
So the question is this, What is the payment difference between like a. You know what? Five, seven, 5% interest rate on a 25% down investment property versus like a three and a half percent interest rate. I don’t have the calculator in front of me, but I’ve done the math. It is a couple hundred dollars, right?
Let’s even go so far as calling it $300 a month. Okay? We wish we were going to get that $300 a month back because we wish we had a lower interest rate, but we’re not gonna get it. So here’s the question. This is the concept of why would you step over dollars to pick up dimes or pick up pennies. Because I’ve been thinking about this for myself as, you know, I’m getting ready to purchase a property here and I’ve been thinking about it for myself, right?
Like, how am I gonna leverage my equity and how am I gonna, you know, get this property that I’ve got coming up? And I’ve been going, Okay, well, sure, it’d be great if the interest was in the threes. It’s in the fives. If my difference in payment is, call it $300 a month, that’s $3,600 a year of payment difference.
Okay? So if I were to sit on the sideline and go, I refuse to pay a 5.75% interest rate on an investment property because I wanna save that three, $4,000 a month, but the question becomes, what does that property produce for you over time? Now even with that increased three or $400 a month in payment, call it an increased of $300 a month of.
If I’m still cash flowing positively, even just a hundred dollars. Okay, so my payment is 3,600 more than I want it to be, but even if I am cash flowing and I don’t even have to be cash flowing, but let’s assume for a moment I’m cash flow positive a hundred dollars a month. So would I rather sacrifice not paying the additional 3,600 a month, sorry, a year or, and trade the increase of 12 so I could sit on my.
Pay less. And in my mind I’m thinking that’s a gain. But the reality is if I’m willing to pay that extra 300 a month, 3,600 a year, and I’m just getting 1200 more in cash flow, I’m still in a net positive cash flow. And that’s not taking into account tax benefits. That’s not taking into account, you know, depreciation on the property, that’s not taking account, uh, into account appreciation.
And so here’s the concept. What if I go and I buy that property? I’m paying the 5 75, I’m paying two or $300 more a month than I could have if I bought it a couple years ago. Well, what’s that property going to produce for me over the next five years if that property is going to appreciate even at a small three to 5% appreciation.
Every year for the next three to five years. If I’m only cash flowing a hundred dollars a month this year. But I know that rents are gonna be increasing in order to catch up with inflation. So my, my cash flow potentially increases every year for the next little bit. Cause we’re seeing, you know, all of the projections that we’re looking at as saying rental prices are going to continue to go up and play a little bit of catch up with what prices have.
So if my cash flow is gonna increase, if I’m gonna get tax benefits, if I’m going to get appreciation, let’s say that if I were to sell this property that I maybe a second ago was going on, I don’t know if I wanna pay 5 75. I don’t know if I wanna pay more per month, but if I do, what if that property makes me just call it?
$50,000 of profit, right? Which frankly might be a little low, but let’s just say if that property were to make me $50,000 of profit over the next five years, I’m taking everything into account, cash flow, principle, pay down, you know, the tax benefits, the appreciation. This is where I wanted Steven. I wanted to introduce this new concept.
That’s kind of an interesting concept and something we’ve been thinking a lot about, which is this new number. That we’ve kind of affectionate, started to refer to ASI or monthly average increase. So here’s the deal. If I make fi, that’s about $10,000 a month, right? 10,000, or, sorry, $10,000 a year of net benefit, right?
I’m keeping it relatively low. Okay? If I divide that, so if I divide my $50,000 of potential increase on a property that I own, even with the higher interest rate that I’ve owned for five years, and I divide that by the amount of months that I’ve used. Or had it, I’m seeing a net monthly average increase on my property of $833.
So am I willing now that’s 10,000 a year. So am I willing, who in their right mind would not trade $3,600 to get 10,000 in return? That’s almost a 300% improvement. So let me just back this up. So we’re saying if you’re, you know, for me, and I’m thinking about this as I’m literally going through this math in real time, right?
If I don’t wanna pay the higher interest, Mike opportunity cost is $10,000 a year. That’s my opportu. It’s costing me money to not act right. But if I’m willing to pay an additional, and I, I’m guys, I’m using. Larger and smaller numbers than the reality here, right? I chances are, I’m not paying 300 more a month than I would’ve a couple years ago.
It’s probably closer to 200, but let’s, we’re calling it 300 if I’m willing to trade $3,600 of increased payment that I wish I didn’t have, but I’m going to have in order to grab this asset and that asset produces an annual average increase of 10,000 or a monthly average increase of $833. Am I willing to trade my increased $300 a month payment for a a monthly average increase of 833, or am I willing to trade my annual increase in payment of 3,600 for an average annual increase of 10,000 a year?
And so that’s the concept of don’t step over dollars in order to pick up pennies and dimes. Don’t sort of sacrifice and. I’m gonna wait. That’s just kind of the concept is yeah, maybe it’s not the ideal scenario as you paint it in your head, but are you willing to give up $10,000 of increase to save 3,600 in additional payments?
Yeah, exactly. And all day long, if somebody put it in into that context, and you could, again, look at it from this type of a perspective, it’s like, Oh, well, yeah, of course I’m not, I’m not gonna sit on my hands any longer. I’m, I’m going. Take steps forward because I can see the actual, the practical economic benefit.
Yeah, that’s a good way to put it, is the practical economic benefit. Right. A and the reason it’s a practical economic benefit. That number by the way, just so, so everybody knows kind of the way that we’re looking at that number is on our proformas and, and for those of you that are not working, You should still be doing proformas or somebody should be doing proformas on your potential investments.
And what are the numbers that we calculate? And we’ve even done a podcast episode on for us what the most important number was, which was an annualized percentage of the very number we’re talking about here. We just hadn’t put it into a monthly average increase context. But if you look at the total gain on a property, right?
So you, you combine appreci, With principle paydown with cash flow and tax benefits, and you were to say, if I were to sell this property in five years, here’s the net. Profit that I’m walking away, not the gross, right? But the net of the profit. So you sell the home, you get a check for, you know, your down payment plus the profit on the property, right?
So you’re getting, we, we put two numbers on our proforma. One is the amount to reinvest, which is the total check that you would get from, you know, from the title company upon the sale of a property. But then we have another number that’s really more the actual benefit of that property. And you would say proceeds on sale.
Right? If I. Sell this property in five years and 10 years or whatever. What would be my actual. Increase in terms of dollars. Right? Because what’s not part of that number is the depreciation. That’s right. Right. And which is, you know, a part of that number. It’s one of the, And it’s not reflected in the proceeds or in the annual, or the average annual return.
So if you just look at like what those net proceeds are, and you said, Okay, if I own this property for five years and I’ve got these net proceeds, X, and then you divide that number by the amount of months that you’ve owned that property. It will reflect a monthly average increase of what that property represented and did for you.
It kind of summarizes all of the cool numbers that we love to talk about, and it gives it to you in a monthly context. Now, not all of that monthly average. Is spendable, right? It’s not the spendable cash flow, It’s not the realized return on investment, which is the actual cash flow that might be generated by that property, but you’ve gotta look at it and go, Okay, what else on the planet is going to do that for me?
Right? If I invest. A hundred thousand dollars into a property and my monthly average increase after owning it for five or 10 years is over a thousand dollars a month. Right. And my principle of a hundred thousand dollars stayed intact. I mean, what else is doing that and doing it in a an environment that’s gonna give you the tax benefits?
Right. That’s kind of what we’re talking about here, but we could erase all of it if we just go. But I don’t wanna pay a higher interest rate. Right. And, and I think that’s the real key. You know, we talk about this all the time, Steve. It’s like, would you be willing to pay 15% interest if you knew you were at least going to get a 16% return?
You’d all of a sudden be looking at it very closely, right? You would. And the reality is, oh, well, if I can still make money on this transaction, then I’m probably willing to move forward. Now, if I just said, Hey, go get a 15% interest rate on a mortgage, you’d be like, You’re insane. And you’d think that, you know, we’re in the eighties, but who know?
I don’t think it’s gonna get up that high in May. I don’t know. But the reality is, what is it producing for you? And if what it’s producing is higher than what you’re having to pay, it makes for a profitable and good transaction. But you’ve gotta put it into. Context, and this is actually, see where I think that.
Hitting real estate singles mentality in the Moneyball mind and, and you know, kind of stacking micro wins in order to get millions comes in because I can still look at that and go, Okay, look, my interest rates higher than I want it to be. I could view that as a failure. I could view that as a dang, I missed a boat.
Right. I dug on it, I missed out. I could look at it that way. And if I’m looking at at it that way, I’m probably focusing on the scoreboard and saying, I’m not where I wanna be. It’s not gonna get me where I want to get to as quickly as I thought it would or whatever. But the reality is that’s a microwind.
That’s a little win that you can stack and say, All right, I’m gonna add to the real estate portfolio cuz who knows how that can multipl. In the future. And that’s just kind of the way that we like to look at these, at the real estate and why when we see an article that says people are locking up their homes and they’re not really selling because they don’t wanna get rid of their really low interest rate, we try to place that into context of, all right, well, what’s happening in the economy?
What does that mean for me as a personal investor? What does that mean for you guys listening as investors? And how do we put it into a context that makes sense? And as we’ve been thinking about it, this number of monthly. Average increase is an incredible way to look at a property and evaluate it with the right set of lenses, right?
Yeah, agree a hundred percent. Kip, I mean, for me, when we were sitting around the conference room table and you brought up this term and all of a sudden like, it’s kind of like when you. The camera zoomed out, right? Yeah. And I could see the whole picture and I could see what this really did for me. And then it immediately zoomed back into this monthly figure of, oh my goodness.
It’s like if I understood. Real estate investing from this context of what it’s doing for me on a monthly basis based on a five year picture. I’m like, you would do it all day long, every single day to make that happen, regardless of what the interest rate is. As long as, like you said, as long as those numbers are what they are, it’s like, it’s literally.
Makes sense to take a closer look and to see if this way of investing, you know, makes sense. And so we just wanted to jump on today and say, okay, look in context of interest rates and in context of kind of what’s happening, cuz we know there’s stuff going on in the economy. We are not afraid, Steve, are we?
We are not afraid. We are still going. Let’s go buy, let’s help our clients buy, We have actually probably more clients than ever saying, I’ve got a home under contract right now, as you know. Yes. Yeah, exactly. And, and I’ve got one coming up here real quick and, and I, it’s like, okay, how do we continue to make to move this thing forward?
Now, real quick, just a sidebar. If you do have a primary residence and it does have a low interest rate and you wanna view that interest rate as an asset, you don’t necessarily have to refinance your primary residence in order to access the equity. You could use something right now, like a home equity line.
A home equity line may give you a little bit of flexibility to access some of the equity of your home and still be able to go by real estate so that you’re still able to gain this monthly average increase utilizing some of the equity that’s locked up in your property, but even keeping intact that lower interest rate that you are loving, that you don’t want to get rid of on an investment property.
On a primary residence. So it’s just, you know, there’s a couple ways to look at this. The cool thing is we really wanted to jump on and say, Guys, don’t step over dollars in order to pick up dimes or to pick up pennies. Don’t let the idea of a low interest rate or a non low interest rate according to how you choose to view the world.
Get in your way of missing out on this monthly average increase of real estate and what it could be doing. And regardless of whether you’re working with us or not, I, I hope that you’re looking at real estate through this lens. We hope, we always hope when we come on that, that our Moneyball mindset, that the micro wins to millions mentality, that the replace your income approach that we take to real estate.
We always try to give. Slightly different, take a slightly different perspective and a way to look at the world and you know, this is all we do Steve. We only ever look at the world through these lenses cuz we’re constantly trying to make sense of the industry that we’re in. We always know there’s benefit and we love to come on and say, Here’s how we’re viewing the world.
Here’s how we’re viewing the assets available to us and the resources available to us and how we’re viewing the real estate market. And man, I still think. It is an incredibly exciting time and when you start to put real estate into the context of this monthly average increase, it starts to make more sense than maybe ever it than than it ever has before.
It’s pretty exciting. Yeah, I agree. In, in addition to looking at it from this perspective, just again, from a very practical perspective, interest rates are still at. Levels very similar to pre pandemic. Yeah, they totally, There’s still low, Yeah, there’s still typically, right now mid, mid fives, Yeah. To little bit, you know, 5.75, that kind of thing.
And guys allow yourself to have that perspective that interest rates are higher than they were, but they’re not high. Right. If, if you look at the world as, Oh, interest rates are really high, then you, you, it could spark a little bit of fear. It could keep you from moving forward. And what is that opp, That opportunity cost is still a cost.
It is still, it is still an expense. It might be a backwards expense, right? It may not feel like an expense, but is it is an expense. There is cost to not doing something and taking advantage of an opportunity that’s ahead of you and looking at these, these numbers, like these monthly average increases.
All right. Well that’s all we had for today, Steve. Anything you wanna. That’s it. All right, guys. Don’t step over dollars to pick up dimes or pennies. Take a look at your real estate through the lens of monthly average increase, and it just may continue to shift the entire financial trajectory of your lives.
Thank you guys so much for tuning in. We’ll talk to you real soon. I’ll be thinking of all of you as I sing that it’s a small world after all song, I promise you. And I’ll be thinking about you, Kevin. Thanks . See you guys. Thanks for joining us on Replace Your Income with Kevin and Steve. Do you wanna learn more about our company done for you real estate and to see if you qualify right now today to begin replacing your income with simple and conservative real estate investing done for you?
Visit dfy intro.com. Click the orange button, watch. Super quick webinar and fill out the little forum on the right side of the page. You’ll know within 60 seconds if you qualify to begin replacing your income right away. As always, please rate, review and share the podcast with friends and family. And until next time, just remember income replacement for you and your family may only be one property away.
See you next week.
