Welcome back. In this episode we are going to address the question, what is
the best way to own rental property? Well, I've helped a lot of people
optimize their assets on their non-owner occupied rental income properties.
Whether it's a single resident home they're renting out, a duplex or
multi-family unit complexes even commercial properties. You're going to be
shocked when you hear what I have to say. But I believe and what I've always done
is keep my rental properties mortgaged to the hilt. And I keep the equity
separated in a position of liquidity, safety. Earning predictable rates of
return at 2 to 300% greater than the net cost of the
mortgage. Because that's what protects me during the downturns in the market.
Because real estate markets are like the stock market they have ebbs and flows. So,
I'm going to share some stories with you of actual clients that didn't understand
what the rent multiplier was, you ready?
So, I'm Doug Andrew. And I've learned a lot of these strategies the hard way
through the school of hard knocks. And so what I have realized is that real estate
equity is not liquid when it's trapped in the property. When you need it the
worst, it's the hardest to get. That's why I believe in keeping the real estate
equity separated from the property in a position of liquidity, safety and earning
predictable rates of return far greater than the net cost of the mortgage on the
property. Number 2, I want to have safety of principle. So, that when we have
those recessions, the ebbs and the flows. And the real estate goes down in value.
I don't lose. Every time my house has gone down in value, I have not lost money.
Since the first lesson that I learned back in 1982. And then I like to earn
predictable rates of return. That historically have been far greater than
the net cost of the mortgage. Because interest rates are relative. When
interest rates are high for borrowing, they're high for earning. When they're
low for borrowing, they're low for earning. So, I want you to understand why
and how you can keep your money safe or any predictable rates of return tax-free
while you own the real estate. Because the real estate is going to do whatever
it does. It's gonna go up or down in value. But a lot of people have these
myth conceptions about the rate of return on the real estate because they
don't understand the rent multiplier effect. So, many people they want to get
the real estate paid off. Because they think their retirement is going to be
this paid off apartment complex or what-have-you. And it's going to create
this cash flow and they don't have any debt to service. Well, that may sound good
but they sell those properties. And sometimes they want to avoid the long
term capital gain. So, the best way to do that is in Section 1031 of the Internal
Revenue Code: You can exchange that for a like property. Now, when you do a 1031
exchange, there's certain rules you have to abide by. Basically you have to buy
another like property. It has to be similar that qualifies.
And you have to buy a property of equal or greater value. And it should have as
high of a mortgage or higher than the one you just did a 1031 out of. But that
way you can continue to postpone paying the long-term capital gain. Now folks,
In a tax on that property... Now, the problem is a lot of people think, "Oh I'm
just gonna keep doing that until I die. And then my kid to get a step-up in
basis. And they won't have to pay the tax on that gain." Well, that's sort of smart
in some ways. But folks, I've helped many people. Just bite the bullet. Pay the
capital gains tax of let's say 15% federal. And 5 or maybe up to
10% in the state they live in. And they came out far better. And they
didn't have to be a landlord anymore fixing the toilets and evicting the
tenants and taking out the trash. And they had greater cash flow out of their
LASER fund than they did out of the property. So, I'm gonna give you a few
examples of this right now. But let's go into that rent multiplier. This is the
amount that you receive in rental income gross divided into the value of the
property. Now, I'm gonna use an example in the San Francisco Bay Area. I have a
national radio show. I have a huge listenership down in the San Francisco
Bay Area. And I know this couple that they bought their home in Palo Alto for
about $230,000 about 40 years ago. And they
improved it, expanded it. It was a 5 bedroom home. And they probably ended up
putting 5, 6, 700,000 into it. So, that was their basis. And when
they finally decided to retire. They sold that house for 4.8 million
dollars. Now isn't that amazing? A five bedroom home in the Bay Area worth
4.8 million dollars. Location, location, location. Now, here's the problem.
I find a lot of people have a 2 bedroom homes. I know another a woman
that I talked to here a few weeks ago that had a 2 bedroom home
was worth 1 million 50 thousand dollars. A 2 bedroom home. Now, folks...
This couple that had a home worth 4.8 million, rented it out for a
little while for $10,000 a month. They were like, "Look at this, we're
getting 10,000 a month in rental income." Divide 10,000... Well, first
of all to make it easy. Let's take 10,000 a month times 12 months is 120,000.
Divide that 120,000 into 4.8 million. They're getting a pathetic
two and a half percent return on their money. "What? two and a half percent! And
they were bragging about it." Now, see? They didn't realize there are cities... As I'm
speaking they're cities like Memphis, Orlando. Where a five bedroom home is
worth about 300,000. And it rents for 1% of the value. In other
words a $300,000 home rents for 3,000 a month. That is a 12% annual
gross return. If that home is really worth 4.8 million and I
sometimes question that. It should be renting for 48 grand a month.
But it's only renting for 10 grand a month. They're earning two-and-a-half
percent in cash flow. See? cash flow is the real king. There's not this piece of real
estate that's worth 4.8 million That's just a number on a sheet
of paper. I've seen a lot of people see a 4.8 million dollar home
drop in value by 30, 40 or 50 percent in a recession. That wasn't safe.
That's why I keep my equity separated. So that when it hit the high-water mark of
4.8 million. If it goes down in value to 3 million.
I don't lose because I got my equity out and it's earning a rate of return
greater than the cost of the mortgage. So, I'm in control. Not some mortgage company,
not the economy. But here's the key. We help that couple sell that property. And
they took 600,000 and built a retirement home in another state. And
that $600,000 home was twice the home they sold in
California. We took the net even after paying some capital gain tax. And they
own 25 homes now in cities like Memphis. And by leveraging, they resurrected tax
deductions by using that leverage. But they
have 25 homes now, renting for 1% a month. Do you know what that money... Even net
after-tax, I think they ended up with 3.6 million to do that with. That 3.6 million
at 1% is generating 360,000 a year of tax-free income
or net. Folks, how much more is 360 than 120? We tripled their cash flow on the
same real estate equity by doing a 1031 from one home into other homes in
another location and we tripled their cash flow. But not only that, they have a
newer set of properties than the old home in California, which was built 50
years ago. We have done this so many times. The woman I mentioned, that
recently sold a 2 bedroom home in San Francisco area for a million 50 thousand.
Now owns 5 homes, 3 in Memphis, 2 in Orlando. And she has tripled her cash
flow by doing that. That is the smart way to own rental properties. And you don't
pay cash for the new one. If I were you, I would leverage it, I would take it and
put a down payment if you have to. And then you borrow the difference and as
long as your new mortgages equal to exceed the previous one, you can tax
deduct the interest. You don't have to pay a capital gain tax. It's incredible
the amount of wealth you can create by increasing cash flow and having several
properties that will likely double or triple in value over the next 15 or 20
years compared to a 4.8 million dollar home doubling or tripling
in value? I think that's going to be tough to achieve. So, what are the key
takeaways at the smart way to own rental properties in my opinion, is to always
maintain the equity in those properties in a position of liquidity,
safety. So that when the real estate goes down in value you don't lose. And you
earn predictable rates of return. The property is going to have the greatest
cash flow if you understand the rent multiplier. And reposition
properties into those areas that are generating more like 10 to 12 percent
annual rates of return, not 2 and a half. But by having your money earning
double or triple than the cost of the mortgage. You have cash flow on the
property and you have the property appreciating and you're earning by
becoming your own banker a 100 to 200 to 300 percent
more than the cost of the mortgage. When I say this people go, "Wooh!" Because they
were just looking at the property as a rental income piece of property to
generate cash flow. Can you begin to see opportunities that you've never seen
before? So, click on this episode so you can understand how this all comes
together "Why the rich get richer and the poor get poorer," with concepts like this.
And then take advantage of getting a copy of my latest book "The LASER fund." So,
that you can take a deep dive or even a masterclass. And I'll send the copy to
you free. Just cover a minor shipping and handling fee. And you can become
empowered and learn lots of stories like the one I just shared with you