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Episode 10: Real Estate: The Second Source of Residual Income
157 Plays8 years ago
Of the 7 Sources of Residual Income that Uncommon Wealth Partners champion, real estate may be the most obvious source. It’s one of the first places your mind goes when you think “residual income.” But this is the Uncommon Life Project, so the way our co-hosts talk about real estate probably holds some surprises.
For Phillip Ramsey and Bryan Dewhurst, the uncommon path leads to a rewarding life. That’s why they have dedicated their financial services practice to help clients define their goals, implement a plan, create wealth, and ultimately create time freedom.
In this podcast we’ll take a close look at what rental property can do for you in terms of financial security, tax advantages, and long term financial health and freedom.
What you’ll learn- Understanding interest rates, cash flow, and tax favorable income
- Just what exactly a cap rate is
- Tax advantages of owning real estate
- Why leveraging other people’s money – especially when interest rates are so low – can be very beneficial
- Not to downplay the maintenance and other expenses associated with income properties
- A granular level look at a 401(k) investment compared with a rental investment
- Having some sort of business entity to run these properties through – for tax savings.
- Email: phillip@uncommonwealth.com
- Email: bryan@uncommonwealth.com
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Transcript
Introduction to The Uncommon Life Project
00:00:02
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:27
Speaker
a life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Philip Ramsey. Hello, everybody. My name is Philip Ramsey. And I'm Brian Dewhurst. And we are coming back at you with another podcast with the Uncommon Life Project.
00:00:42
Speaker
El Proyecto. And we are advisors at the Uncommon Wealth Partners.
Exploring Real Estate as Residual Income
00:00:48
Speaker
We're glad you're here with us and we have a lot to cover today, but today we're talking about the second source of residual income as we see it, and that's real estate. This is going to be a higher level approach to real estate and want to cover some technical terms, some strengths, weaknesses,
00:01:04
Speaker
and give you actually a download as well if you want to enter into some basic math and calculations.
00:01:13
Speaker
Yeah so this is going to be covering like Brian said a lot but we hope that this gives you guys some kind of understanding of the way we look at real estate and the way that you can leverage it and take control of your money instead of maybe putting it in your 401k and so maybe half the show will be talking about what's the differences between putting it in your 401k or leveraging it with the bank and buying a real estate.
00:01:38
Speaker
Yeah. So let's jump right into it. The first thing we're going to talk about is the strengths. Why do we like it so much? We like it for several reasons. One, OPM, other people's money, leveraging other people's money, not only the bank for coming up with the other part of the purchase price of the property outside the down payment, but then also the rent.
00:02:02
Speaker
We're kind of in a weird point of history where interest rates are historically very low. I don't know if you can remember, but I remember my parents buying their first house and their interest rate was super high, talking like teens.
00:02:21
Speaker
So we have a really cool opportunity now as this generation to talk about maybe leveraging other people's money. That being said, there have been people who've used interest rates and then interest rates jack up. So we do have to be aware of that. But using other people's money is a powerful way to leverage.
00:02:40
Speaker
And I think it's important that we talk about interest rates for the most part in this discussion. We're kind of just assuming because interest rates are so low, you're buying a property with like a 15 year or 30 year fixed mortgage and you're fixing that cost, not letting it go on a variable rate just because rates are so low. So we're kind of assuming that with this podcast. Great point. Second point of the strength is capital appreciation. Once you buy the asset, chances are real estate,
00:03:09
Speaker
goes up. Now it doesn't have to, right? This is, we've seen this in 08, 07 I would say is that can go down. It can go the opposite direction, but because there's such a limited amount of resources, chances are those, those prices do appreciate. And if you do this for the right reason, which for what Brian, I would say is cashflow and the longterm and the longterm chances are you're going to get out of it when it's, it's appreciated in value.
00:03:38
Speaker
Definitely three would be tax favorable income or you know, depreciating a building or setting up a business to expense different items. And so we won't get too technical in that, but there are some tax advantages obviously of owning real estate. And so we will touch on that.
00:04:01
Speaker
Yep. The fourth thing we've already mentioned, but it's just cashflow. Getting your money to work for you at a point where you can use it today.
00:04:08
Speaker
We'll talk about that later about how you can tell if it's a good investment or a bad investment, but rent and cashflow is a big... Yeah, and that dovetails into kind of the next point. Obviously, if you are leveraging a bank to purchase real estate, part of the expense is really of having a mortgage. You're paying down principal on that note and someone else is doing that for you if you're doing it correctly and you're accruing equity in the property over time.
00:04:35
Speaker
Totally the last thing is it's just a good inflation hedge so when interest rates Let's say stay the same or go up. It doesn't matter but we do know that inflation does come into play for
00:04:51
Speaker
retirees and just for people on the street today. Yeah. So this is a way that you can now increase rent, increase cashflow to help you hedge inflation. And so you can be on the other end of that where inflation actually helps you.
Understanding Real Estate Investment Metrics
00:05:07
Speaker
So Phil, you, we've done a good job covering those things. Let's dive into the capitalization rate or cap rate as you see it.
00:05:13
Speaker
Yeah. So the cap rate. This is something that I think people really, they talk about, but they, I don't really think they really understand what that means. And so what we thought we would do is just kind of define that and you would have to calculate the yearly gross income of that investment. So if it's spitting off, let's say on a hundred thousand dollar unit, it's spitting off, let's say $12,000 a year, that would be the gross,
00:05:40
Speaker
income of that property then you have to subtract the operating expenses associated with that property.
00:05:49
Speaker
And when you come down with that, now that could be property taxes, insurance, maintenance, marketing of that property, or if you have a management company handling that stuff, you have to take that number out of the gross income because that's not coming in to you and your bottom line. And so at the end of that, that is your net operating expense. That's when you take that number and you divide it
00:06:16
Speaker
by the purchase price that you bought the property. So net income, which would include all the expenses taken out of the gross income, then you divide that by the amount that you purchased the property.
00:06:31
Speaker
Now this this will give you a percentage. We say that you want to be normally I would say the higher the percentages the better the investment could be for you and your bottom line. But that's not always the case depending on if you have let's say a rental property that has
00:06:49
Speaker
history behind it, that's cash flowing very consistently. You might be getting a lower cap rate than double digits, but you have kind of a known commodity. So they'll take down that rate of return for you, but you know that you're going to be getting this in the long run as a consistent level of income. So that's really how you handle the cap rate.
00:07:11
Speaker
I think the discussion at this point, because we're talking about people leveraging their money, what would you say for people who will have to use a bank and have a mortgage payment associated with that? What would you say with that?
00:07:23
Speaker
Yeah, I think we look at it as two prong, like if you're in the accumulation phase where you're buying assets or if you're in the deleveraging phase where you've bought a bunch of stuff and you just want to pay it off. So I'd say it also comes down to how much cash you have on hand and how much risk you're willing to take.
00:07:43
Speaker
And so we think, you know, obviously with rates being as low as they are right now, leveraging the bank's money is something that makes a lot of sense if you want to add properties more assertively. Yep. So if you had $100,000, like in our example we were talking about,
00:08:00
Speaker
and you had it in your, let's say in your checking account, you could go out and buy a rental property for $100,000. Cash. Cash. Yep. Then you would take the expenses off of that number and then whatever amount that's at the end of the rainbow would be yours coming in. Yep. Or what Brian is talking about is taking that $100,000 and maybe buying. Trying to buy five properties. Or let's just say, let's just start with one. Brian just did the prize. Yep.
00:08:28
Speaker
Go a little big. A little aggressive, but you get the point. You could do that. You could take 20% down on five properties. 20% down on $100,000, $20,000. Yep. Great math. And then you could buy five rental properties and now you have five assets and they may or may not be cash flowing better than the first one you buy. Right.
00:08:49
Speaker
it just depends it's all about numbers but that's what we're talking about about leveraging and using other people's money which right now interest rates like we talked about it could be a smart idea. Okay great so that's how you do cap rate this is a really cool way just to be able to.
00:09:06
Speaker
I would say compare different investments, having them on the board and just talking about cap rates. Now, there's a lot that goes into that, more than just a percentage amount, but it's a good way to start in this space and something good that people can do right at home. I think it's kind of like, you know, you look at a stock and you look at the dividend rate. I think it's kind of like the dividend rate of a stock is the cap rate of rental properties.
00:09:33
Speaker
And that's a good way to, yeah, like you said, compare different assets that you could buy and seeing what you could generate in terms of income. Yeah. And again, this isn't the end all, be all. Yeah. And I think too, the other thing we're talking about inflation is your property might start at a 10% cap rate or a net cap rate of 10% or 8%.
00:09:53
Speaker
But over time, over five to 10 years, and you raise the rent every year, let's just say even 2%, you're over a 10-year period, compounding increasing the rent over 20% from where it is today. So if you're getting a loan at a fixed rate, but you can raise rent annually, you're now
00:10:13
Speaker
you know, leveraging correctly in the power of inflation is now more on your side because you have an asset that's producing cash flow and protecting your inflation risk. Totally. And on the same side of that, your knowledge that you put into the investment can also change your cap rate
00:10:32
Speaker
to the positive. So let's say you do the numbers, the calculations, and it comes up to an 8% cap rate, but you know you can go in there, you can raise rent, you can do this, you can do that, and at the end of the rainbow, and when all's said and done by the knowledge you can give, you can make it to 11% cap rate. So those are all factors to just think about.
00:10:51
Speaker
What's now, we've kind of made this sound rosy and like everybody should do it. Let's talk about what could go wrong.
Managing Risks in Real Estate Investing
00:10:57
Speaker
Yeah. Before we dive into a specific example. Yeah. And I think the biggest thing is that you're dealing with people, renters, or, you know, like, here's the deal. At the end of the day, you just have to figure out what your
00:11:10
Speaker
capacity is or what your risk tolerance is. If you don't want to deal with renters, there's ways around that. But at the end of the day, you just can't factor in. You can do all the numbers crunches as you can. You just can't factor in what people are going to be like or what they're going to do, which kind of gets me excited. But other people, I mean, shy away from this right away. Yeah. So I think obviously that's a great point.
00:11:34
Speaker
You know, we've heard a bunch of stories about just the unexpected or unintended expenses of maintenance, pipes burst, renters leave the stove on, you know, we've, we've heard dozens, if not, you know, hundreds of stories about what can go wrong. And I think too, that's real. We don't want to downplay that financial risk of a pipe bursting or not being covered by insurance. Um,
00:12:02
Speaker
But that's also what insurance is for. That's also why you need to have excess cash. That's why you got to maintain your liquidity when you start setting out being entrepreneurial and developing multiple streams of income. As things can go wrong, you're taking a different risk than just putting your money in the stock market or what have you.
00:12:23
Speaker
I think that is a real unknown if something could go wrong with the property. Yeah, and it does prohibit people from jumping into this space. I would say that we would categorize this as not a liquid investment and we would tell and coach our clients to know your exit strategy going into it. And if it's for cash flow, then keep it for cash flow.
00:12:45
Speaker
Now, that's not being said that they might not have another asset later down the road that they feel like is even more powerful that we can now sell this, but it wouldn't be something that I would say, yeah, your money's liquid for you. You'd have to sell it or just that and the other. So that would be, I would say, a downside. And then managing a property.
00:13:06
Speaker
is real, you've got to get it rented. We do recommend people setting up an LLC for the property. So that obviously takes some upfront work and expense, having maybe a different set of books for the accounting, going and showing the property to however many different people you have to show it to to get it rented.
00:13:26
Speaker
You know, something goes wrong here and there. You're going to have to deal with it. Renters trash the place. You got to do new carpet, new paint, whatever. All those different things are real and do take bandwidth capacity mentally and emotionally and not only that, but financially. And you can hire management companies to litigate all that for you, but they charge a fee and that could then, that could go into your cap rate.
00:13:53
Speaker
So, we've heard I think from a lot of the clients that we have that own real estate, we've heard the cap rate on average is as low as about 6 to 7 would be the lowest we've heard up to 10 to 11% of gross rent. So, let's just say a house gross annual rent is 10,000, then they're going to take, you know, $700 to $1,000 a year from that property for managing that property. That's how they calculate that.
00:14:20
Speaker
Yep. Good. Yeah. So just know your exit strategy. And then I would say the last maybe challenge or something to think about would be property taxes. Those things can go up. Definitely. And so something that you can really, you should factor in. It happens from time to time, but it's something that you should probably be thinking about for the downside of real estate.
00:14:44
Speaker
Okay, so now let's go into the part of the program where it's going to get a little bit numbers heavy, but we hope we do a good job of talking about these in something that you can understand in your
Real Estate vs. 401k: A Comparative Analysis
00:14:56
Speaker
head. And the reason why is because we want to talk about basically the same individual and two different paths for that person's money. Those paths are
00:15:08
Speaker
The 401k, the 401k, the beloved, the beloved 800 pound gorilla. Yep. And then going our route or a route that some people go down and that's rental property. Why would they do it? What are the numbers associated with it? Yeah. And talking about like real numbers so you can grasp that.
00:15:27
Speaker
So I think one of the things we've gotten feedback on and the concept we're trying to put more content around is the idea that when you're putting money in your 401k, you're really trying to buy the last year of your life and working backwards.
00:15:43
Speaker
Whereas when you buy a rental property, you're actually trying to buy the next day of your life and working forwards. And so that cashflow starts month one, you know, ideal, you get the place rented that you own the property. And so that's really where I think we've had a lot of success or where we resonate with people is we want you to have more money tomorrow, not 30 years from now. And if you solve for that, you should have more money 30 years from now. And that's what we want to try to prove.
00:16:13
Speaker
And so, we've created a simple download that goes to this podcast that highlights these two scenarios of the person is, you know, we just put their salary at $100,000 and let's say they're maxing out their 401K and we're assuming that person is under 50 years old because the max contribution on the 401K right now is $18,000.
00:16:37
Speaker
And if you're over 50, it's 24,000. The piece that you can put in as part of your employee compensation or your employee deferral plus the catch up if you're over 50. But we're just using 18,000 for today. So if you put in 18,000. And you have an awesome employer. You have an awesome employer.
00:16:57
Speaker
who's going to contribute 6% the 6% match the free money as they say don't forget that you're working all year for that person to get that free money so I don't know that it's free but it's easy to say that it's free nothing in life I've learned is free
00:17:15
Speaker
But, let's just assume it's free. Okay, so we got $24,000. $24,000 going into your 401k. That's epic. Every year. Every year. Just like clockwork. Okay. Now, same person, but he decides to do the uncommon path.
00:17:30
Speaker
uncommon practices, I am gonna bet on myself with that 18 grand. So he takes that $18,000 that he would be contributing to his 401k and then he puts a down payment on a house which would 20% down which he could buy a $90,000 investment property.
00:17:52
Speaker
And we just had a client buy a $75,000 rental property and started renting it out month one. And they're getting, I think he's getting about $850 a month. So like this is pretty, this is pretty real. We're in Des Moines, Iowa. So that just happened a couple weeks ago. Yep. So when we, when we buy $90,000, I guess, asset, we're going to say that the total gross rent is $12,600.
00:18:22
Speaker
So we just kind of made that number up, but based on market rate and different things, we think that that number's pretty close to what it would be. And honestly, that part of it isn't as big of a deal as maybe what we'd want to compare two things. One,
00:18:43
Speaker
just that you've now secured a $90,000 asset. Now granted, we're talking about leveraging the bank for $72,000. You're putting $18,000 down and the bank's putting in $72,000, but you're now controlling a $90,000 asset versus
00:19:01
Speaker
the 401k where you only have a $24,000 asset. So I think that's important distinction. Yeah. And I think I do want to just go out and say that if he would have put $18,000 in this 401k, he would have had a deduction. So there's that. So I'm just going to test it.
00:19:18
Speaker
And that, you know, if this person utilizes their cell phone and home internet to rent their property, those now would be deductible expenses. Mileage driven to the house would be deductible. Any other additional funds put into that house, you know, painting, fixing things up, those would be deductible expenses against your income. So there's ways to mitigate the tax deduction of the 401k versus
00:19:43
Speaker
buying a property, but it's obviously a pure deduction, putting money in the 401k. There's really no ambiguity of that. Um, and so that's a good point. So the total annual expenses and we included the mortgage payment, we included it all. We threw the whole shooting match, shooting match and it was $9,372 a year for that $90,000. And we aren't assuming a management company though, cause I think that's important.
00:20:12
Speaker
We are assuming that you're doing this deal on your own. Yep, which could be or couldn't be the case. So, all right, so now let's just zoom back out. We've got one person, he's decided to do two paths. One, take his $18,000 put in his 401k, get the match of 6%, which is then put up to $24,000.
00:20:32
Speaker
Or go the other direction, the uncommon path, which would then be buy a rental property, put $18,000 down, payment on a house, get a $90,000 investment. That now is cash flowing $12,600 a year. And then his total annual expenses is $9,372. Yeah. Okay.
00:20:49
Speaker
So I think the other important thing or the other distinction we want to make is the free money because I love this argument. Well, my employer is putting in 6% and that's free money. Well, that's not really true because you have to put in your 6% to get their 6%.
00:21:06
Speaker
Now some retirement plans do put in or contribute money, even if you don't put in money, but most of them these days don't. And then the other side of it is, okay, you put in your 18,000, you're getting the 6,000. Let's just say you're thinking of that as a 30% return. But in our example with the rental property, you're getting $12,000 of rent. That's double the employer match.
00:21:30
Speaker
that's coming from somebody else that you've probably never met that's now renting from you and paying you money. So the 6% free money could be 12%, you know, or $12,000 in rent off the same $18,000 investment. And you could stop working at your current employer and buy this rental property, and you're going to get that cash flow into perpetuity, you know, assuming you manage the property well.
00:21:54
Speaker
So it's not contingent on you staying at your employer either to keep getting that match. And that's what we think is the powerful thing as we see people getting laid off, as the people, you know, the millennials are changing jobs like seven times before the 35, that type of thing. And so let's go now past one year.
00:22:15
Speaker
Yeah. Okay. So the next year you've got to keep doing it. Same person. We got to then kind of like flush this out in five years and then we want to flush it out at the end of the rainbow when he's ready to retire. So the next year you'd have another 24,000 that would be put in his 401k. Sounds so, so juicy. Delicious. And we're saying a 7% growth rate on that. Yeah. 7% baseline. And then we'll do another example.
00:22:43
Speaker
later. Yep so but 7% is fairly conservative especially the last couple years but it also go negative but we never really we never talk about that it's just a 7% okay but then we got flip side the uncommon path he takes that $18,000 and then instead of paying that off that rental property we're gonna leverage to another asset. Another one. Yep and then we're gonna just assume the same numbers apply. Yeah so he does that for five years
00:23:11
Speaker
18,000 plus the 6% match, so 24,000 times 5%. That's 120,000 that he's put into the 401K. And we didn't assume any market growth rate, positive or negative. And when we look at this, we don't assume any growth rate on the real estate, positive or negative.
00:23:29
Speaker
So after five years, his five homes are worth essentially a total value of $450,000, five times $90,000. And his 401K is worth $120,000. So in five years, with the same cashflow, he's secured assets of $450,000 versus in his 401K, he has $120,000. Yup. And if you wanted to cap the 7% growth rate on that, it'd be $138,000.
00:23:59
Speaker
So this is kind of what we think is powerful. I mean, you know, you have $120,000 asset that you can't really touch unless you're 59 and a half, or you can take a loan against it.
00:24:11
Speaker
versus $450,000 worth of assets. Now we understand that there's debt against those properties. We totally get that. But in that, you're accruing rent now on five different properties at, we just assume $12,600 a year. So now you've got, what is that in rent? Like over 60,000 a year annually in rent? 63,000. 63,000.
00:24:36
Speaker
And when you look at the average person who's making $100,000 at their job, they're probably netting somewhere between five and six grand a month after taxes, 401k, health insurance, all that stuff. Well, in five years now, you have a gross cashflow of about what you need for your monthly net minus the debt expense.
00:24:57
Speaker
And the debt expense for that whole five properties would be $46,860. So we're mindful of that. But now this is where I think it gets interesting because those two paths, we're just going to assume that he continues down the path of the 7% matching or doing what he wanted to put in his 401k last five years. I love my job.
00:25:19
Speaker
if 18,000 gets the 6%, so we're just gonna assume that he continues to do that, right? And then now, let's pretend, and then we'll flash forward 15 years in a second, but now let's go over to the rental property guy, because now he's got five rental properties. He's got five. Yep, and he decides to shut it down. No more. No more. Let's just start
00:25:42
Speaker
Paying down the debt. Shredding that debt, figuring it out. And then let's now look at 15 years later, right? And remember that we're assuming 7% on the market. Rate of return on the market. No losses. Yeah, 401k path. No losses. At the end of the rainbow, he has... Oh, I mean, sorry. We're assuming a 2% inflation rate or growth rate on the value of the properties and the rent.
00:26:07
Speaker
So 2% inflation or growth rate, whatever you want to call it, versus 7% in the market. He only bought five properties versus contributing to the 401k for 20 years. So five versus 20.
00:26:21
Speaker
Yep. So at the end of the rainbow in 20 years, let's say he's down that path. He's been doing this path for 20 years. He has $983,892. So I mean, it's in his 401k. So let's just say it's a million bucks. Yeah. Let's say it's 984,000 close to a million, but that's what he has. Okay. Now it's all in his 401k.
00:26:45
Speaker
qualified account. Yep. It's trapped. Yep. Kind of trapped. Okay. Versus on the other side, we're saying that in the last 20 years, he'd be able to pay off that property. Yeah. That might, that might be assuming much, but we feel like.
00:27:00
Speaker
If he's been able to put in $18,000 for the first five years, he should be able to put $18,000 to shred the mortgage or shred that debt. So I don't think it's that outlandish. At the end of the rainbow, he has five assets totaling $630,000. That's the total of his portfolio of his investment profit. Which we think is really low, but that's, I think, safe. Yep. And then because of that, he has $88,000. Gross.
00:27:28
Speaker
Gross rent. Gross rent. Okay. Yep. Yep. Yep. Now he would have to take down maintenance and all that stuff. Yeah. Property taxes. Property taxes, all that stuff. But at the end of the rainbow, $88,000 versus a million dollars in the 401K. Now, I would love to walk up to somebody in the street and ask them, would you rather have $88,000 a year coming off of investment properties or a million dollars in your 401K? Yeah. What do you think the percentage of people would take the million dollars?
00:27:57
Speaker
Over 90. Yes. I think 9 out of 10. I think you're right. Because that number is so great. It's a big number. Yeah. What's your number? It's over a million. Thanks ING. Yes. But now let's really break that down from now our perspective as advisors, what can we get off of that million dollars conservatively to help them live for the rest of their life?
00:28:19
Speaker
Yeah, so let's assume the book answer is saying now, financial planning, that you should be taking a 2.8%.
00:28:29
Speaker
withdrawal rate off of your pot of money. So if you had a million dollars in your 401k, that's 28 grand gross. That's before taxes that you could take off conservatively the million dollars without running the chance of running out of money. Now the old answer was 4% and you know, let's say you go up to 5%. So that'd be 40,000 or even $50,000 gross before taxes.
00:28:51
Speaker
Now, we're in the state of Iowa. If you're taking that plus your social security, and let's say you've got some other income, whatever, I mean, you're basically, if you have over 77,000 federal, you're paying 25%. In the state of Iowa, I think you're paying at least six or seven percent. So, you're at a 30% combined tax rate.
00:29:12
Speaker
on that money. So we for our estimate, we did a total state and federal tax rate of 35% and a 5% withdrawal rate. So we're assuming 50K basically off the 983 and then paying 35% tax.
00:29:31
Speaker
Yep. So that whole end of the rainbow number is 31,000 almost $32,000 a year that you just got off of that million dollars. Yep. That's the safe withdrawal. That's actually a kind of a risky withdrawal rate, by the way, too. But okay, so you got let's say $32,000 at the end of the rainbow. Okay. Versus the net income off these properties, those five properties.
00:29:55
Speaker
Yeah. So we have on our table that you can download, we had the expenses, we had the mortgages fixed because rates are so low and we had the mortgages stopping in the 20th year because we think the rent, you know, an inflation adjusted rent would more than pay off the houses in that amount of time. But when we factored in, you know, the property taxes, the insurance maintenance and marketing the properties, we factored that in a 2% growth rate.
00:30:22
Speaker
So, the expenses were about $33,200 and the properties were paid off. So, you have net gross profit of about $55,000 and then at our 35% tax rate to keep things apples to apples with the 401K, that's a net tax adjusted income of about $35,000, $36,000.
00:30:42
Speaker
And just for our example, I think it's important just to say, so the insurance we factored at $50 per month, the property taxes at 125, the maintenance was $200 a month, and then the marketing we thought was like $20 a month. So we just threw something in there. Yeah. Just so you guys know. Perfect. So that's the reason I think that's the good scenario for people just to wrap their heads around. Same person doing two different things with his money.
00:31:08
Speaker
At the end of the rainbow, I'd rather have the five rental properties, but again, that's why our name's on Commonwealth Partners. And I would say the fact that I would have a business to then write off some of these things, it's powerful. And we really do advise our clients in retirement, you should have some kind of entity that you have, some business, I guess. Yeah, protection. Protection for taxes and something that you can write off on. So I would rather have that.
00:31:36
Speaker
And again, so we have a download, if you want to see just kind of this case study, we're going to have a download on our website, not only uncommonwealth.com, but the Uncommon Life Project website as well for our podcast. So if you want to see that, you're more than welcome to download that, it's free. And we wanted to make that available just so we can be held accountable to our numbers and be transparent.
00:32:00
Speaker
Yep. And then so what rate of return would we have to get to net the amount of money that we'd get from those rental properties for that 401k path? Yeah. So assuming, you know, no expenses on the property, it would be north of 12%. So the 401k would have to get north of 12% return. Every year for 20 years. Compounded to get the same cashflow of the 88,000 minus the tax rate.
00:32:27
Speaker
When you factor in obviously the expenses, it's probably going to be closer somewhere to seven to 10% growth rate with no negatives. And that's also assuming no fees on the investment either. So yeah, basically a seven to 10% growth rate.
00:32:45
Speaker
for 20 years straight, no losses, to factor in the same type of potential income off of owning five rental properties. And again, this is for illustrative purposes. This isn't promissory or guaranteed by any stretch of the imagination. I want to put my compliance hat on.
00:33:01
Speaker
What it does illustrate though, I think is the power of real estate that you're getting gross rent off of the $90,000 house, not the $18,000 down payment. Whereas your return in the stock market, going back to a one year example, is only off the 24. And so getting that leverage off of the bank and off of other people's money for rent
00:33:24
Speaker
is really powerful. I hope our listeners are still with us. There's a lot of numbers. A lot of numbers. We geek out on that. Again, download that. You can see it. But here's the last kind of piece that we wanted to talk about is the transaction types.
Diverse Real Estate Investment Strategies
00:33:36
Speaker
What can you get into to help you in the real estate, I guess, residual income sector? The first one is just rental properties.
00:33:45
Speaker
You can buy single family homes, shout out to Drew. You can go that route, which is exciting. And it's something to dip your toe into. You can understand the expenses and maintenance and all that stuff. Several clients that own and rent single family homes.
00:34:01
Speaker
all over multiple states they're doing it and the cash flow is powerful and managing it seems fairly straightforward and they're doing it successfully. Yeah so single-family homes the next thing is you can buy a condo you can you can buy a condo I would say on that the caveat is you have another expense called the HOA fees homeowners association that
00:34:25
Speaker
can get you. That also can go up along with property taxes. So you just got to be careful with that. And those are just like basic renters. You have renters that are giving you a monthly payment for that.
00:34:38
Speaker
The second thing that I think I would talk about, instead of that, if you're worried about squatters, as they're called, is you can Airbnb your properties. Depending on where you're at, you're gonna wanna buy a cool location for those, and you're gonna have to do a lot of due diligence to see if there's a lot of, I guess, demand for Airbnb at that point, or VRBO, or same kind of thing. But you can do that as well. And the reason why I think a lot more people are doing that that way is you can attach a,
00:35:07
Speaker
cleaning fee to it and you can also use that property. So it's not just something you sit over in a corner, you can actually benefit from that. And so a lot of people that we've been working with are looking at something like that in places that they've always wanted to travel to or they've traveled to a lot. Now they have a place where they can block out for those two weeks and that's their time to react. Yeah, I've been amazed as we talk about rental properties with our clients and how many people have stated
00:35:36
Speaker
that they stay in an Airbnb. I think we're just as a society and as an economy just starting to scratch the surface with Airbnb. And so the multi-use, mixed use, the power and potential of Airbnb to leverage an existing property or potential rental property is
00:35:59
Speaker
is going to be really neat to watch and I think our clients and our listeners should really be exploring that avenue soon if you're interested in this space. Yeah and we've had clients that are like, I don't have money to put a down payment on an investment but I do have an extra room and they've Airbnb'd that room and they don't have to do it often and they've had great reviews on it and met some great people.
00:36:26
Speaker
And then we have lots of clients that own duplexes. You know, obviously it's like, uh, two units sharing a common wall and then multifamily apartments. So like a four unit, six unit, eight unit, 24 unit. Uh, we have clients, you know, that have even above that, which is more like an apartment building, uh, or complex. But one I want to touch on those are, you know, pretty common, but the one I think that's uncommon and your family has experienced this Phillip is, is mobile home parks.
00:36:53
Speaker
Yeah, so we have, my grandfather purchased a mobile home park when his family was very young. We still have that in the family today. My mom runs it along with her sisters and it's been a valuable asset to the whole family. From when he started it to now, it's still continuing to do that. And if he would have had a 401k, if he would have been that individual that put in the 401k, we would not have any of that.
00:37:17
Speaker
And not only that, my mom takes great pride and ownership in that park, being able to invest it like her father did. There's just some intangibles that you can't even put a price tag on for us, and it's been a rental property. And for them, it's been a mission field too, talking to those renters when they come in with sob stories to be able to pray with them, to be able to talk through stuff with them. They love it.
00:37:40
Speaker
And that's also made me think about those in my future, whether me buying one that stands alone or maybe having the opportunity to buy that at some point. Who knows what that'll be, but I'm way more open to that when I think a lot of people would just shy away from that.
00:37:57
Speaker
I want to dive in a little bit more just real quick because I think I never really thought about it until I met your family. But there's kind of two ways to make money on a mobile home park. You have the actual land that you're renting out, correct? So you have this acreage, if you will, and you've got spots on it and they can park a trailer on it. And you're charging lot rent.
00:38:22
Speaker
per trailer, correct? Yep. And you, you got to parcel that acre out in such a small area so you can get a lot of them. You can get a lot of them in. Then, and this is kind of one thing that I think your grandfather was doing and then obviously the people that have helped him and the family run it over time, but then you have the actual trailers that you can either own, flip,
00:38:45
Speaker
refurbish. Can you talk about that a little bit? Yeah. So that I don't think was the number one reason my grandfather got into it, but it ended up being kind of a... It's another profit source though. It's another profit source. And so what would happen is he would hear of somebody who needed to get out of their property.
00:39:01
Speaker
And he would do this multiple ways, but sometimes what he would do is just give him cash, right? Like, hey, we need $10,000 to get out of the property. At that point, it's kind of a fire sale. You can kind of work through that, negotiate that. But a lot of times you can get those at a discount. And then he would rent that to the next person. You'd sell them on contract for what amount of money? Yeah.
00:39:23
Speaker
I've also heard people who have no space of owning a rental or mobile home park, but they've actually started investing in the trailers because they get it at such a reduced rate and get a pretty good rate of return right off the bat and it's a low barrier entry and some people Depending on the situation instead of giving them cash upfront. They'll just say hey, I'll give you $400 a month for the next
00:39:49
Speaker
Yeah two years or a year or whatever and a lot of times these people just need cash right now and so they're just excited about getting the cash and you get the asset and then you can rent that out. So that's definitely a byproduct of it that you can think outside Pox and scale it and a lot of times to your point when you get into the real estate environment
00:40:09
Speaker
you start thinking of different ways that you can scale it and make it more profitable. Um, but it takes you actually having a property. You got your hands in it. Yep. Um, so that's mobile home parks. I think, uh, you can buy college houses. I'd love you to talk about this because this week geek out on this one.
00:40:24
Speaker
Yeah, this has been one that we've had several people do. I think it's really neat too when you talk about family economics, which I don't want to get into on this podcast, but it's something we definitely have to talk about down the road. And what family economics is, is just multi-generational
00:40:42
Speaker
entrepreneurial business. I think it's biblical. I think it's a lost art in terms of leading and shepherding your family and bringing your kids up in being an entrepreneur and being a business owner. But simply stated is your child is going to go off to college and the typical thing is to let them live at the dorms or just rent from somewhere and you're paying the bill.
00:41:05
Speaker
Well, the other thing you could do is buy a house and then working in concert with your child is to get their friends to rent from you. Well, now you have an asset at campus that produces cashflow and can help offset the expenses of sending your child to college. Two, it makes them responsible for the property and it gets them into a marketing type role of, hey,
00:41:31
Speaker
you know, come with me and my parents are buying this house and you know, it gets them to take ownership. And then from that standpoint too, there's another part we can talk about and that's a kitty loan where you actually get the child on the loan to start building their credit. That's kind of like a, you know, next level idea.
00:41:55
Speaker
But yeah, it's the standpoint too of if you have, let's say you've put money away in a 529, well, you can take money out of a 529 account legally for rent. And so you can take money out of your own or a grandparent's own 529 to pay rent to yourself. And that's a qualified expense.
00:42:20
Speaker
And each college or university publishes like an average student rental rate. And so you can take that rental rate out of your 529 or A529 for your child as a qualified expense. So it's another way to get money out of these, you know, we call them kind of one trick ponies. The 529 really is only for college. And so we have a lot of parents that overfunded those and they need to get the money out.
00:42:47
Speaker
And it's not going to be as expensive as they projected because their kids are getting scholarships or they went to a state school or what have you. And so they need to get money out of these accounts. Well, this is a great way to do that and, you know, build rent, build that responsibility. And now not only that final point and I'll stop.
00:43:06
Speaker
is every time you go visit your child at college, that's a deductible expense because you have a property at that college. And you're going to check not only on your student or child, but your property. And so now your cell phones and your home internet that you're using to talk to your child at that property,
00:43:28
Speaker
are legitimate deductible expenses and then obviously the travel costs to get to said property is a deductible expense. So if your child is going to school out of state or out of city, it's a great way to mitigate that expense of schlepping them down there.
00:43:43
Speaker
every semester and then you're not moving. You know, I remember when I was in college, I think I moved, I think I moved every year. I moved four times. And so think about the expense of moving your child four times versus having them stay in a house for four years. And then, you know, last point, I've said that now twice, but last point, if you have multiple students, you know, if you have multiple kids that are going to go to the same college, it becomes an absolute no brainer because you could be talking about covering
00:44:12
Speaker
six to eight to ten years of rent across multiple kids and having that money come back to yourself and so anyways it's a powerful strategy it's one that we've leveraged you know numerous times and seen at work and so we'd love to chat about that with you if you have interest in that and I'll stop from
Conclusion and Listener Engagement
00:44:32
Speaker
there.
00:44:32
Speaker
Yeah, this has been a fun conversation guys. You obviously know how passionate we get about this because it's an easy way to jump into the seven sources of residual income and can impact you and your financial course. And so if you guys would like more, I keep saying guys, if you would like more information about what we do or how we do it, we would love to talk to you.
00:44:54
Speaker
Set up an initial consultation. www.uncommonwealth.com is where you can find us. Again, if there's any questions from this podcast or any other podcasts, please feel free to reach out. Yeah, definitely. Please subscribe to our podcast on iTunes, Stitcher, or Google Play. And also look for our free download on this real estate example that we gave. And yeah, continue to look at the opportunities in the marketplace.
00:45:22
Speaker
for sure. And lastly, not only subscribe, but give us a good rating because I feel like we never talk about that, but it would really mean a lot to us if you guys gave us a good rating. That'll give us in front of more people and we can just kind of reach more people with this uncommon path. So guys, thanks again for listening and we hope you stay tuned for the next one. Definitely. Thank you very much. Bye.
00:45:43
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.