I didn’t accidentally hit caps lock, and I’m not yelling. The IDEAL in investment is an acronym. Today we’re talking about identifying real estate investments that work for you. Listen now on Spotify or Apple Podcasts!
About Indestructible Wealth: I’m Jack Gibson. I’m your wealth strategist and I’m here to help you make some money. The Indestructible Wealth Podcast is for young entrepreneurs who want to make, keep and grow wealth to enjoy now, and for years to come.
Episode #20 – The Ideal Investment
Welcome to the Indestructible Wealth Podcast. This is the place where we help young entrepreneurs to make, keep, and grow wealth that you can enjoy now, and for years to come. I’m your host Jack Gibson, a serial entrepreneur, founder of multiple seven and eight figure businesses, and wealth building strategist. Each week I’m going to share my tips, resources and secrets, to help you create a plan and build the life you’ve dreamed of.
Hey guys today, I’m going to talk to you about the ideal investment which is for real estate and ideal, what it stands for is, and actually it’s an acronym so I’m going to walk you through that. What I want you to do is I want to direct you all to my Instagram. I am absolutely dominating reels right now on Instagram.
So I would like you to take a look at this particular reel on this subject so you guys can actually see the numbers. I’m sure a lot of you are at the gym and just you’re listening so you don’t get to see the numbers that I’m going to illustrate here. So go to my reel because I’m absolutely dominating the Instagram game and I would say influencer status approaching celebrity status type at this point, I’ve pushed out four reels and my first one got like 4,000 views and then it’s bombed since. So I’m totally kidding. I think they’re good though I think they’re good. I just haven’t got the algorithm yet, so I’m just going to keep after it and this is the way that I’ve been studying. That reels is where Instagram is throwing all the algorithm and all the action because they want to compete with Tik Tok. I’m figuring this out so I can get more eyes onto my podcast and to my platform. So anyways this is just my username is indestructible wealth there’s not that many reels on there well maybe by the time you listened to this because I’m doing one a day, I’ll be stacking it. So it’s the one. Yeah, I just watched them all and they take 30 seconds yeah. Yeah. I was totally scared about doing the reels because, A, I don’t know how to edit anything. I don’t like it, I don’t enjoy that part. And B, I really can’t do much of anything successfully in 30 seconds or less. Just ask my wife lol. I’m slightly here to entertain you. Okay. So otherwise you’re not going to come back. Sorry Kira. And so anyways, back on track.
Bailey. Okay. My dog camps out underneath me and the desk. And then occasionally I don’t know she just goes nuts. So sorry about that. I’m not editing out shit anymore. I’m just tired of that. Let’s just be real and authentic and you guys can deal with it. So yeah. So what we’re going to talk to you guys about is we’re really going to look at why real estate is the ideal investment. And exactly I want to give you guys an actual scenario, so you can see why this is so powerful in terms of growing your overall wealth, most millionaires you guys have been built through real estate. Let’s just be honest with the numbers.
Okay. The numbers show that real estate creates more millionaires than any other asset class. Now, stocks are certainly more popular in terms of the propaganda and the media coverage and what people talk about. But real estate by far is trumping it. It’s not even close. So why is that? Why is it not talking about what we’ve talked about before wall street gets their fees off you for investing into the market? So that’s what they’re going to push out. They have huge propaganda machines that push out the whole buy stocks hold for the long-term. Okay, great. That’s certainly one way to build wealth. I got it. I’m not saying that it doesn’t build wealth because it is part of my portfolio. But it’s just not the only thing, man. It’s just not the only fucking thing. It just gets so tired of that whole deal that’s been pushed and promoted and isn’t actually really all that true in terms of how people really actually grow well.
This is so the ideal is an acronym. So I’m going to go through the different parts of what that acronym actually means it stands for. So just going through the overview so the I is for income the D is for depreciation the E is for equity the A’s for appreciation and the L is for leverage.
Okay. So now you’ve got the broad view overview. Now I’m going to go through and dive into each one. Okay. So now income. So real estate offers you and me monthly cash flow income from renting out the properties that we own to good quality tenants. What I’ve learned the hard way is that chasing higher income yields on properties that attract lower quality tenants is certainly not the best long-term strategy and it’s not going to give you a good peaceful life. The key to real estate being successful you will largely reside in the quality of your tenants. Now, Hindsight being 2020, I gladly take a lower monthly cash flow on a property but have the same quality tenant that stays for 5 years. And isn’t consistently late with their payments or worse yet has to be evicted than a property that makes double that, but is a constant headache. We’re going to dive into property classes in other podcasts maybe. But you really want to be looking into the C plus maybe up to the B range. Those are the property classes to really maximize your cash flow but reduce potential headaches. An A-class property, those are like you’re really nice, super nice neighborhoods 3, 4 or 500,000 plus homes. Those are very very hard to cash flow because of the rents, you just can’t charge enough rents. That makes sense for your overall purchase price and what you have in them. It just, they just don’t cash flow very well, possibly a couple 3%, 2%, 3%, 4%. Maybe but those are really tough to make them work. B-class these are going to be properties that working class families, more middle income range to that kind of maybe even a little bit below middle income range. And they’re going to typically have a decent cash flow, maybe like an, a 6% to 10% net cash flow range you’re going to get a good quality tenant and you also have a chance for these properties to go up in value. C-class properties are going to be your higher yielding properties, but you’re going to have a tougher tenant class. These are going to be lower income type of tenants that don’t always respect your property. You’re going to have more evictions. But you can definitely if you get really good you can get much higher yields. In other words you can buy a property where you can cash flow 10%, 12%, 15%, even 20%. If you catch some good tenants. So why I like the C plus on the fringe is because I can get a little bit stronger quality tenant but I also have a really strong chance of the property appreciating like these can get these can go up quite a bit which I’m going to give you an example of one that I have, and I’ve got a bunch more like this that are in the same process.
What’s great about the income coming in is that the income as long as you’re purchasing. You make sure that you get inspections and you really trust the people that you’re buying from. You can get some nice cashflow coming in every month passive income wise and then that can start to fund a lifestyle that you don’t have to be tied down to a 9 to 5 job type thing. It also can give you if you’re an entrepreneur real estate can give you a secondary source of income and cash flow that helps to kind of balance out your more up and down stages of income that you go through as an entrepreneur, look as an entrepreneur, it’s not all sunshine and rainbows, your income doesn’t go up every month and it’s a little bit more bullet tile. You don’t have as much predictability as an entrepreneur from month to month. Having the cash flow in assets help protect you as an entrepreneur for those times where your business isn’t doing so well. Inevitably over the course of your entrepreneurial life guys I just don’t see how that won’t happen to you. So the great thing too, about income from real estate is that your tenants are helping pay down your debt payments and we’re going to talk about that as we go. What the D is depreciation. The government’s tax laws favor landowners. So within the complex of laws which if you ever tried to sit down and read the tax code you’ll need a lot of alcohol to do that. And you won’t last very long is a very favorable role that allows you to create a Phantom deduction and thus reduce the total amount of income you have to pay taxes on. Okay. So let me give you an example. Say I purchase a property for $100,000 and I rent out for $1000 per month. After all expenses I net out my cash flow is $2,400 per year. So I’d have to pay nearly $1,200 since I’m an almost 50% tax bracket of that to the government. With depreciation I can divide the purchase price by 30 years and that’s actually 27 years or 27.5 or something like that. I don’t know. My accountant does it for me. I know it’s about right there. It varies depending on a few factors too but for simplicity we’re just going to use that number. Let’s just go to 30 years, right? For simplicity. My total deduction would be $3,333. More than offset the income from this property. So even though I made real money I got to deduct it all and not pay any taxes for that year. Now what we must keep in mind is that what people don’t typically tell you when they talk about how awesome depreciation is it’s a deferral deduction. Okay. Deferring means putting off till later, right? So meaning that you sell the property you’ll have to recapture this and pay it later. But if you never sell the property and pass it onto your children then they won’t pay taxes on that property as of the current tax code right now that could change, but that’s how it’s been for a long time. And that depreciation will start over for them and your estate will never have to pay it. This is why the wealthy hold real estate multi-generationally. They can build multi-generational wealth by drastically reducing the taxes of their estate. Now the E is For equity, simply the value of an asset you own so equity is easily calculated by taking the total market value minus the total liability or the debt held against it. So if you own a house that’s worth $100,000 and your loan is $50,000 then you have $50,000 in equity. You guys all pretty much understand this concept through home ownership? Well works the same way in investment real estate. In real estate there are multiple ways to increase the equity in your properties. One particular great strategy by what’s called, I call it forced equity. So if I take a property and I make improvements to it, let’s say I take a dilapidated property, put a construction crew on it with a $20,000 budget and at the end of the property it is now worth $40,000 more. I just forced the value up by $20,000, which increased my wealth by $20,000. So another way is through the amortization of paying down loans. Amortization is simply the debt pay down schedule that you have with your bank. So if I borrow from the bank and then my tenant pays me rent, and then I take that and I pay the loan down, a part of that payment goes towards the principal. Although this is a very slow process because a very small part of the payment initially goes towards the principle. Every time that loan drops my equity or my net worth increases. So when you’re renting out the property and you get the income coming in and paying down that debt helps to build wealth for you, even though it doesn’t show up in positive cash flow.
So I look at the pay down of the debt from the tenants that is for me I look at that as essentially like income because that’s building my net worth. Now leverage, the L is for leverage. My favorite part about real estate. This is the one asset class that the bank will lend you money to buy. Try going to your banker and say, Hey, I want to borrow money to buy stocks or crypto or gold or silver. They’ll look at you like you’re crazy and you actually would be crazy. With real estate I can borrow money and buy more of it then I have the cash to do on my own. So this creates a fantastic opportunity to drastically increase the returns on my actual cash invested and gives me the opportunity to own more units which can go up in value.
So in that, which leads me to the next and the final part of the idea. Formula. No it’s not the final part. Sorry. Second last part. Appreciation. Wait a second. No, I just did these out of order. Sorry. It is the last part. I just did them out of order. Oh my gosh. Okay. Okay. All right. So I can spell I just didn’t spell correctly here.
So appreciation is an additional way to create equity so when the property goes up in value as the overall market goes up. Our net worth goes up right along with it. This is generally the speculative part of real estate investing which I never bank on nor can I predict but I absolutely know it’s going to happen if I get myself in the game with enough properties. So if my property is doing the I D E L part and the A doesn’t happen, do you get it? I D E L. So the A was just left off. Am I all that upset? No. I’m actually totally happy, content peaceful and loving life because I got the income, I shielded it with depreciation, I built equity often through forced measures, and I leveraged the asset. As long as on a monthly basis I’m not losing money in the hopes of speculative appreciation. I could hold onto that property for years if needed.
So I’m going to give you guys an example. I bought a property back in September of 2015. So we’re going on almost it’ll be almost 6 years now that I’ve owned it and I purchased it for $60,000. Now I live in Michigan and this property is purchased in Arizona City. That’s quite a ways from home. I’ve never physically laid eyes on this property and I really don’t care to go there to see this property at all. I’ve seen pictures. I’m good with that. I bought it from a guy who was doing a podcast. I listened to this guy’s podcast multiple times. He seemed like he knew what he was doing. We had a phone call, a consultation and he said, I got this. This is the deal I’ve got. I think this will be good for you and I said, okay, let’s go fire away baby. So I bought it for $60,000 and then he told me it would take about 20,000 rehab which, is about what happened. So my total cost of purchasing the property, with purchase price plus repairs was $80,000 to get it tenant ready. Now I wasn’t getting it ready for a sale like MLS. I was getting it ready to rent out. So I didn’t put, like to get it ready for a sale put $30,000 into instead of $20,000.
Okay. So then I got it appraised so that I could do what’s called a cash out refinance. Think of it as cash out refinance; everybody has trouble with this concept. It’s just doing a mortgage in reverse. So normally when you guys go to buy a house you go to the bank first, get pre-approved and then when you go to buy the property and close on it you put your down payment you give your down payment, whatever that is. I don’t know, 20% typically, to avoid PMI, but not everybody does that. Not everybody has to do that, but let’s say you put your 20% down, and you own a $100,000 house for $20,000, you get an $80,000 mortgage from the bank. So they fund that right to the seller right then. Okay, so they take your 20%, take their 80% and they pay off the seller that’s how normally it gets. In this case I purchased the property in cash and then I went to the bank and said, I want to get a loan against this property so it’s just a reverse, you’re just doing it in reverse, buying cash and then pulling your money back out with the loan.
So it got appraised for $90,000, which I was disappointed in at the time, believe me, I thought it was going to force a lot more equity than $10,000. So I was disappointed. I haven’t looked at selling the property at that time because I’m like this sucks. I want to get out and do something else. Plus it only ran it out initially for $800. So that wasn’t even 1%, but that was 1% of my cost of $80,000, but it wasn’t that great because I was getting better rental numbers in other markets. But anyways the owner of the property management company just convinced me to keep it. He said the properties are going up in this area and that I would regret it later if I sold it now. Which he was absolutely correct. So I rented it out and I’ve just held it and the loan payment maintenance altogether is about $500 a month. So I’ve cash flow at about $300 to $400 per month. Rents have gone up to $950 now which is not crazy, but total cashflow since purchased is probably around $18,000 to $20,000.
Now I know the market’s been strong. So I went back and contacted my property manager and this property has been rented out almost every single month in the last 6 years or actually 5 since it took a few months to get it renovated and then leased up. But it’s been producing every month since then and so it wasn’t really that excited about selling it. But he told me that my comps listing price would be $210,000 and it would get overbid to probably $230,000. Dang. Hello. I had a property that I put $80,000 in. I’ve got a note against it for only $68,000, which is now down paid and the debt pay down is down to $62,000. Okay. So that’s $6,000 that the debt’s been amortized or paid down since I owned it the last 5 years, which isn’t crazy but that’s nice and so the rent being only $950 it’s nowhere near, the rent is nowhere near what the value of the property is. So it doesn’t make sense to hold this for me anymore.
So I’m selling it. Okay. I’m going to take the money and I’m going to put it into other things where I can get a higher yield on the value of that money. So it’s just too much capital sitting into that property not making enough yield now. So I’m going to sell it and expect sales profit after closing costs and all seller fees, paying out the realtor all of that is right around $135,000. Give or take probably $10,000 with the rental cash flow plus the sales profit it’s an expected profit of around $150,000. I took so that you guys think about this, how much money, how much cash did I have into this property the last 5 years? $12,000. $80,000 like total all-in cost and I got $68,000 back when I refinanced the property. I’ve had $12,000 in this property for the last 5 years. That then turned into $150,000 profit now. Will every property go like this? no it doesn’t. I’ve certainly had some properties that I made mistakes on and purchased wrong or whatever, and been lost not huge for most of them. I’ve had some dares but I’ve also had a lot of wins. I’ve had more wins than losses and that’s what you’re trying to go for. You’re trying to make more wins than you do losses. This is an example of the beauty of real estate and this is why it’s the ideal investment. Now, this property has been very passive. Like I almost just forgot about it. I see the money come in and out mostly comes in every month from the rents but I didn’t really put much, I haven’t really given them much attention or thought. I just kind of got it done renting it out, like totally forgot about it. It’s been very very passive now. Not every property is because some there’s tenants, toilets and trash guys. That’s the nature of real estate so you got to put up with that on C plus even B properties, it’s just part of the game. If anybody ever tells you that real rental real estate is passive. They’re selling you a house of cards, it’s not, it is not passive. It’s mostly passive but it’s not a 100% passive by any stretch. So if your eyes lit up when you heard this and you definitely need to go to my reel, so you can look up the numbers and you can hold it just pause it and just look it out this all played out.
So you really understand it. And if you’d like to get involved with the power of real estate investing you’re in the right place. I created a turnkey real estate investing company that gives you access to quality single family owned properties we’re now in several markets across the Midwest. So just Book call with Nicole our head of investor relations. Just go to highreturnrealestate.com and you can book a call with Nicole and she can help you to figure out how to do this successfully. Now I just got a secondary line so if you’d like to text me like questions that you have of how this works. I’d be more than happy to answer your questions. So my text number is 2 6 9 2 4 7 2 8 8 1. Again that’s 2 6 9 2 4 7 2 8 8 1. That is a separate line from my personal cell so do you want to think you got ahold of my personal line to text me any trolling like messages. I don’t have any trolls, not for a while. I will have them when it gets bigger, but you can text that and I promise I will answer you directly. But yeah Nicole’s really good. So I would most likely you to like book a call with her if you’re really serious, but if you just want to generally understand this better then hit me up with questions. I have no problem doing that.
All right guys. So this is again, I just really want to issue the disclaimer that there’s no perfect investment no matter what you do so this is not, there are definitely challenges to real estate and you got to know that going in. It’s also remember it’s, like in the stage 3 of your wealth building journey. So first stage is investing heavily into yourself through books and paid coaching and seminars, masterminds, and then step 2 is going to be really focusing on increasing your income, building a business. But you know I’m an entrepreneur, so I’ve been heavily believing in building your own business that you can have a 100% control over. That’s how I built the majority of my wealth. And then stage 3 is you take the excess cash flow from stage 2 and stage 1. And you put that into cash flow producing assets like real estate. So this is stage 3. Some of you may be still on stage 1, and this doesn’t really apply to you where you’re at or maybe you’re in stage 2 and you’re still just need to focus on investing into your own business which is great.
But guys, if you really want to build million-dollar multi-million dollar wealth safely, and more predictably then you’ve got to add real estate exposure to your portfolio so you do need to understand how this works. So do this once again if like you’re not for sure of some of the kind of concepts or things that I talked about just listen to it again and then text me questions and let’s get this down so that you guys feel competent or more like maybe not confident, but more understanding of what it is that you’re going to be doing and how your strategy is going to unfold. Okay.
All right, here we go. Let’s grow some wealth. Have a great day you guys!
That’s a wrap for this episode on the Indestructible wealth podcast. Before we part ways,
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