July 27, 2019

RE Investing Episode 3

May 13, 2019

Real Estate Investing: Episode 3

Jason Bramblett Real Estate Show Podcast 

Click here for link to podcast 

Jason:  Good morning, Triad.  I hope everyone is doing great on this Saturday. Last Saturday of July, I believe, if my calendar is correct.

Mikell:  Yes, it is.

Jason:  It is it.  Well, hey, more than halfway through the year.  It is crazy.

Mikell:  It is scary a little bit.

Jason: It is.  School is getting ready to start –

Mikell:  Yes.

Jason:  -- pretty quick here. I know my kids are going to be sucking up as much of the summer that is left as they possibly can.  I hope you guys are enjoying this beautiful weather and enjoying North Carolina.  So we are going to dig into our series.  We have been talking about real estate investing and where to put the money but also how to get started.  Last week, we talked a little bit about passive and earned incomes. So earned income was something that you did to actually earn the money.  Most people would call that job. And then passive income is something that you really were not involved with.  You did not have to do anything and money came into you.  There is a term out in the business world they talk about.  They call it mailbox money. Right?  It just shows up every month, which is a great thing, but it is also something that you want to strive for.  You want to create and leverage yourself, your time, and your energy to create this passive income.  That way, you are not physically out there having to do all the work and do not have to work all the way until they put you in another place.  So that is what we want to do.  We want to create that passive income with our investments. We talked about creating a spring of income, income that is coming in every month.  It replenishes itself, and it is something that just continues all the time.  So this week we are going to dive in a little bit deeper. We kind of set up what different types of investments there are and how they pertain to real estate.  So where to do we start?  We touched on this just a little bit about making your first home your first investment, which typically, this is really a discipline thing is what this is.  The first home you buy, normally, is set up pretty much perfect for rental, and typically because you are not buying a 6000 square foot house.  You are not buying a $400,000 home.  There are always a few anomalies out there, but most folks are not. Most folks are buying pretty close to maybe what they have been renting or somewhere in that. So the discipline comes in that is in keeping that house. So in America, we have come up with this system where we buy a home, we keep it maintained.  Hopefully, it gains equity.  We go to sell that house. We take that equity and we go buy a bigger, better deal. A bigger, better house.  The problem is all we are really doing is exchanging equity, and we are really not gaining anything.  You have increased your debt normally because you bought a bigger home.  So you may have only, we will just use an easy number since it is radio.  You had a $100,000 mortgage on the first house, and then you doubled to 200.  Well, you just doubled down on your debt.  Right?

Mikell:  Right.

Jason:  So whether you carried the equity for your down payment or whatever it is. So you are really not gaining a lot in that you are just swapping out your equity. And then we are going to talk a little bit about what is good and bad about doing that and what is good and bad about equity. Now, there certainly are other benefits to buying a bigger home.  One is keeping Mama happy. That is for sure.

Mikell:  That is most important.

Jason:  Yeah, there are lots of other things in life outside of having rental property.  Keeping Mama happy is good. And I get that, but it also comes back to that discipline of what I am attempting to do for the long term?  It is the little decisions that we make kind of early in the process that set us up for success down the road.  So it is the little daily habits that have the massive huge scale as we go down the road.  Typically, those snowballs keep gathering snow. They become bigger. The habits you create now, if you keep them throughout your lifetime, typically can turn out well.  You can also develop some really crummy habits, too.

Mikell:  That is right.

Jason:  And those keep you in the ditch as opposed to getting you out of the ditch.  Not that you are in a ditch now. Hopefully you are not if you are driving your car. If you are in the ditch, it was not my fault.

Mikell:  Do not blame us.

Jason:  Do not blame us.  Do not blame us. You have maybe swapped up in house and you now you have created this additional liability.  This is where the argument lies is that your home is an investment.  And we have talked about this.  It is an investment, but the acid test that we did last week is whose investment is it?  If you want to find out really quick, if you have a loan on your property and you stop paying it, you will find out quickly that it is no longer your investment.  It actually is the bank’s investment.

Mikell:  Absolutely.

Jason:  What the bank has done is created passive income.

Mikell:  Absolutely.

Jason:  I am going to loan you money, and you are going to send me money and interest.  That is passive.  They are not really doing anything.  There is no physical activity.

Mikell:  No sweat equity.

Jason:  No sweat equity there. Right?

Mikell:  None at all.

Jason:  So that is what you want to do.  If you really want to get excited when you go to buy your home, in two different ways. We used to call it the Truth in Lending, but it is basically your closing disclosure.  If you look at the numbers, there are two on there.  Most folks think that the buying of the house is the most expensive thing in the process.  It is actually the loan, and so if you look at the closing statement, you will see two numbers. One is what you are paying for the house and then one is what it is costing you. Those numbers are different.  Right?

Mikell:  Okay, okay.

Jason:  Now, it is not near as dramatic as it used to be when I started because the interest rates are so low. You look at money is so cheap right now.  You can borrow a lot of money for just a little bit of interest.  Fifteen, twenty years ago, and there are folks that are listening that can tell you about the good old days back in the 80s when interest rates were 16%.  You bought a $100,000 home, and you ended up paying four hundred grand for it.

Mikell:  Wow.

Jason: The cost of that money was ridiculous.  Now it is ridiculous in the other way.  It is really, really cheap. Now that does not mean just go borrow all you can. There are lessons to be learned there.  Make sure you can pay for what you borrow or have other people pay for what you borrow, which is a better idea.

Mikell:  Absolutely.

Jason:  The lie being told is your house is an asset.  Your house is a liability unless it is generating income.  Now, I have not figured a way to get my kids to contribute enough to the housing allowance to really turn that into a profitable thing. Some of you may have and you need to write a book. We can all learn from that.

Mikell: There you go.

Jason: But there are ways in which you can do it. You want to make sure that you have got the right vocabulary and that you are using the right terminology. So assets, a lot of real estate people, lenders, real estate agents, all of these folks out there will tell you that your home is an asset, but if you look at it on a balance sheet, not so much.  Not so much.

Mikell: Not so much. It is definitely a word that is thrown around a lot.

Jason:  Absolutely. Well, the term is you do not want to throw your money away.  Stop paying rent and throwing your money away. 

Mikell:  Okay. Yes.

Jason:  Okay. Maybe, but sometimes paying rent is smart money in that depending on financially where you are in your life, the great thing about, let’s just say $1000 a month rent.  At the end of the year, all you have lost is $12,000. It is 100% guaranteed.  You will not lose any more than that.  If you agreed to pay $1000 a month, and you paid $1000 a month, you have $12,000 gone.

Mikell:  Sure.

Jason:  If you buy a home, there is no guarantee of that.  Yeah, my mortgage payment may be $1000 a month, but what if my $250,000 house goes to $200,000.  What if the asset that I have or I thought I had, that I paid 250 for because I was excited about it, kept Mama happy, the market shifts and now all of a sudden, it is only worth $200,000?  Where is the $50,000 going to come from if I need to get out of that deal?  If you do not have the $50,000, you are stuck with two options:  stay and get over it, or you are looking at two other options which are, well three, I guess.  You could turn it into a rental.

Mikell:  Okay.

Jason:  You could do nothing and walk away, and it is the bank’s problem.  Or you could do another process called short sale.  So there are things you can do, but almost all of those are negative. Right?

Mikell:  Yeah, absolutely.

Jason:  So this is why we do not ever want to buy investments based upon equity appreciation, and we will dig into that.  But if you stopped paying your mortgage you would find out whose asset it is.  This is not a show in do not pay your mortgage. Not a good idea because you do not get to stay typically.  You can stay for a little while, but you do not get to stay for very long.

Mikell: And then your credit is ruined.

Jason:  Yeah.

Mikell:  It is not good.

Jason:  It is not good.  It is not good. So you can also gain equity in the property.  That is different than an asset. So you are gaining equity.  If you really want to look at what real estate is, the home that you are living in, the right, I think, mindset to have is it is a really, really crummy savings account. That is what you have created.

Mikell: Okay.

Jason: You have a shelter, which is, we all need shelter.

Mikell: Absolutely.              

Jason:  All right. And then you have created a really pretty poor savings account in that you are paying down principal, so it is forcing you to save money.  Every single month you make a payment, unless you have an interest-only loan, you are paying some principle down. So it is forcing you over time to pay that debt off.   All right? So it becomes just pretty much that.  A really poor savings account.  What you do not want to do is get to the very end and then all you have is that paid-for house. There are many, many people that we help in the Triad that that is exactly what they have.  They get to that retirement age and they still need the money, but all their money is in their home.  So they get into a situation where they are physically maybe not able to work any longer, not able to bring in income, and so they need to sell their home. Surprisingly, most of them do not want to do that because they have been there for 20, 30, or 40 years.  It is home.  It is the nest.  They do not want to get rid of it, but they have no choice because they do not have any other type of passive income, money coming to them.  Let’s face it.  Social Security, although it is something, it is not enough –

Mikell:  Absolutely.

Jason:  -- for most people to keep their head above water or to live.  You are not going to Aruba on Social Security more than likely.

Mikell:  Not at all. 

Jason: You gain some benefit of owning a house in that you have some tax deductions, which those typically are debatable.  None of that is good, bad, or indifferent.  I am just not attached, so I will leave the tax guys up to that. But you are creating a savings account, which is not bad.  Now, if you did that with your first home, let’s just say it was a 3-bedroom, 2-bath, 2-car garage, a very rentable home in our market for sure, now you can flip that property into becoming an investment and now all the math changes.  Instead of you paying for the house, now we have a tenant paying for the house. Now, it has actually become a true asset.  Other people paying for my stuff.  And if the house is paid off, then it is pure profit. If there is still a loan on it, then they are paying your debt plus profit.

Mikell:  Absolutely.

Jason: Which is not a bad thing.  So why we do not want to hedge on appreciation is because we do not have control over it.  It is kind of like putting the money in the stock market and thinking you are going to control what it does. 

Mikell:  I love that.

Jason:  One person does not do that.  Right. Yeah, one person does not matter.  The same is true with real estate.  If you hedge only on appreciation, there are too many factors outside of, you cannot control.  If the market drops $50,000 and you were hedging on $50,000 in appreciation to do whatever it is you wanted to do in your life, you just lost.

Mikell:  So Jason, let me ask you a question.  Say I buy a house.  I finance it for 15 years and I want it to become an asset. I want it to become a rental property. Tell me what do I do, where do I stay now.

Jason:  Right.

Mikell:  If you can explain that next process.

Jason:  The benefit of the owner-occupied home and loan is it is less money down.

Mikell:  Absolutely.

Jason:  Right.  So what you have to do is, typically what happens is in that first home, we start to make more money.  Right?  It is that entry-level house. 

Mikell: Okay.

Jason:  And so hopefully, my income is increasing. All right?

Mikell:  Okay.

Jason: And what I have to do is save my down payment for the next home outside of that.

Mikell:  Okay.

Jason:  I cannot use the equity.  Right?

Mikell:  Absolutely.

Jason:  I need to save it because I want to keep the equity in that because I want that thing to be paid for someday.

Mikell:  Exactly.

Jason:  Or at least paid for by somebody else.  So what I want to do is save that money and then hopefully, I qualify for whatever the next loan may be. A five or a ten or a three-and-a-half-percent-down loan, which is a lot better than an investment property where you are putting 20-25 or 30 depending on the bank and all different situations. So it allows you to move into another property by converting the other one to a rental. All right? So that is what you have to do.  You have to have that discipline.  You have to have the income.  You have to be able to do that. It is not attainable for everybody.  So just as there is a certain percentage of homeowners that do not need to own a house, there is also a percentage of people that do not need to be landlords. Okay? 

Mikell: I understand that.

Jason: This game is not for everybody.  If you do not like that risk or you do not like that upkeep or whatever it is, then probably real estate is not the right vehicle for you.  Maybe it is annuities.  Maybe it is stock. Maybe it is whatever. I do not know. That is your choice, but there is a product out there that you need to put something into to ensure that you have some passive income down the road. The downside of being a human is these bodies do wear out eventually, and we do not want –

Mikell: This is true.

Jason:  -- to do all the things that we were able to do when we were young, and some of you I know are in great shape. 100 years old, running marathons, awesome.

Mikell:  Vegan.

Jason: Vegan. Whatever it is.  Whatever you are doing.  That is great, but it is probably a choice in which you want to do, and not a choice in which you, well, you have no choice. It just has to be the way that it is. As we age, I am finding out that my body does not want to move or do the things that it did 25 years ago.

Mikell: Okay.

Jason: I am using some wisdom and discipline thinking if it is this way now, in 25 more years, I probably will not want to be doing what I am doing today to earn money. Right?

Mikell:  This is true.

Jason:  So you have to have that plan.  We are going to dig into that. We are going to do this. We are going to take a quick timeout. Grab your pen.  Grab your paper. You are listening to the Jason Bramblett Real Estate Show. When we come back we are going to talk about some of the reasons why we would want to do this. Why we want to invest outside of just getting old and tired.  We will be right back.

And we back.  You are listening to the Jason Bramblett Real Estate Show.  So we have been talking about real estate investing.  Basically been setting this up for a couple weeks just to make sure you understand the process.  There are a lot of decisions that go into creating investments, and you want to make sure you create the right kind of investment. A lot of what we are taught unfortunately growing up going through school is not exactly 100% accurate with what, it is not that it is not accurate.  It just does not meet up with a lot of your goals that you may have for creating passive income.  If you want to get a job, school is a great thing.  If you want to become wealthy, not so much.  You might want to start switching your education and learning from wealthy people.

Mikell:  Absolutely.

Jason:  Wealthy people do not do a lot of physical activity for earned income, but they own a lot of things that pay them money. So that is what we want to share with you and show you there are ways out there that you can do that. We talked about our first home becoming our first rental. Typically that is a 3-bedroom, 2-bath, maybe it has a 2-car garage, maybe it does not. You should at least have three bedrooms and 2 baths. We find that 2 bedrooms homes typically have one bath. A lot of them were built in the 60s. They really do not appreciate at all. Most of them just ebb and flow with the market.

Mikell:  Okay.

Jason:  The other thing is rents are typically lower because the homes are smaller. So the floor plans are different. They are not exactly what people are looking for today, so if you are going to invest, invest in a 3-bedroom, 2-bath would be our recommendation for sure.  Then what you want to figure out is okay, the other products that are out there. Condos and townhomes. Condos and townhouses can actually be very good first-time investment properties.  If you started in a condo, you may want to consider keeping it. The only rule of thumb I have for that is you need to make sure it is managed well. Right? Because that is something you do not control. One person in the HOA, so one owner of one condo in a 100-unit building does not have 100% control.

Mikell:  Right.

Jason: They have 1%.  Right?

Mikell: Right.

Jason: They have one vote.  That is all. If the other 99 are idiots and they keep changing things and raising the costs, it is going to affect your investment over time. So what I look for is a well-managed HOA and below market or below normal HOA dues, what you pay every month. So my benchmark is kind of $130 a month or less is what I look for in investment properties.  I like condos and townhomes because if during that transition when the tenant moves in and out, I do not have to worry about the exterior maintenance. I do not have to worry about getting a landscape guy over there.  If you are a do-it-yourself person, you do not have to schlep all the way over there with your lawnmower and cut the grass and do all these things.

Mikell:  That’s very true.

Jason:  You can, of course, pay someone to do that, but it raises your costs.  I find the transition in townhomes, condos to be much simpler to keep the property up. Properties that are vacant unfortunately go down really fast.  It does not take that much time. If you leave a house vacant, you would think well, nobody is there. Nothing can happen.  Well, there is stuff there.  It is just typically things you do not want like spiders and stuff that take up residence.  A vacant home can go down in value or just down in maintenance really fast if you do not stay on top of that. We are not attempting to create another job for you, right, where you are pushing a mower around all the time. So you may want to take a look at condos and townhomes.  Again, they need to be well-managed.  I look at some of the HOAs out here, and we have got the same exact product. A two-bedroom, two-bath condo in one area of town and the dues are $219 a month, and then in a different area, it could be right down the street, and those are $140.

Mikell: Wow.

Jason:  What is the difference?  It is the management.

Mikell: Okay.

Jason:  Or lack thereof, I should say, of management, which increases those things. The other thing, too, let’s face it. Not all tenants are created equal. Sometimes they quit mowing the grass before they move. The yard ends up looking like something you do not want to deal with. It takes a lot of time, energy, and effort.  So condos and townhomes can be very good long-term investments.  Now, they do typically not appreciate as much as single-family homes. But again, what is our goal in the investment?  Are we buying appreciation or are we buying cashflow?  I am always going to move first to cashflow. Appreciation is basically the gravy. I will take appreciation, but I am not going to hedge any of my bets on appreciation because again it is too big of a number in which I have no control over. If the real estate market crashes today, you will have no control of your equity unless you sell, cash out as fast as you can. And then you have a whole bunch of money with what to do with it. Right?

Mikell:  Right.

Jason:  And typically what happens is people sit on the sidelines and they wait to find the bottom.  The problem with finding the bottom is nobody knows where the bottom was until the market starts to go back up. Right?

Mikell:  That is true.

Jason:  It is a lag measure. So it is nothing you can predict because it lags the real reality of the market.  We do not know the market has rallied until it has rallied.  Right?

Mikell: Right.

Jason: And we have metrics there.  We do not know the real estate market has improved until well, it has already improved.  It would be nice if we could just set an appointment and say, on August first it is going to be the bottom.  Everybody buy that day and we are good to go.  It just does not work that way.

Mikell:  That would be awesome.

Jason:  It would be awesome. Probably the returns would not be as great because there would be predictability in that.  There are lots of ways in which you can look at investing in real estate.  The key thing is to have a plan and to actually do some studying.  Read. The great thing about real estate is that it has been around forever, and there are hundreds and hundreds of books on it. Many, many people, you probably know people that own real estate, and it is a great way to learn.  Get out there and talk to people that have actually done what you want to do, which is always a good thing.  That way you are kind of not the guinea pig.  Right?  Because most people do not like to be the guinea pig.

Mikell:  Not at all.

Jason:  As you get out there and you start talking to people you will see wow, there are more people than I thought that actually owned real estate that are investors. Again, we want to buy for cashflow long term.  You cannot necessarily live on appreciation long term because it does not keep happening.  Appreciation is a one-time thing.  I only get the benefit of it when I cash out of the investment.

Mikell:  Right.

Jason: Now I have the cash, but unfortunately what we lack with cash a lot of times is this thing called discipline.  Right? And we have big pile of cash and no discipline, and then we end up with no pile of cash.

Mikell:  That is very true.

Jason:  Lottery winners prove this theory all the time. How do you win $140 million and not only be broke in three years, but bankrupt? You actually owe money.

Mikell:  Worse than you were before.

Jason:  Worse than you were before. There is always an exception, but for the most part, that is how it works.  So we want to have a cashflow plan. Next week we are going to dig into getting that cashflow coming to you every month, creating that passive income. Tune in next week. You are listening to the Jason Bramblett Real Estate Show. You can go to Jason Bramblett dot com for any questions and or to search for houses.  We will see you next week.

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