REIal Talk Podcast | Flipping Vs. Turnkey Vs. Syndication | Real Estate Investing | EP. 2

Hey, Flippin Danny here.

Hi, everybody. It is podcast number two that is called Real talk, which is real talk for real estate investors. And in typical fashion for Flippin Danny, we have notes. Yes, we want to stay on track. We even brought in a whiteboard. We're in Flip's office today so that we could, you know, kind of summarize this for you. So for anybody that's actually watching the video instead of listening in the car, then you'll get to see some cheat sheet notes. Are we ready to roll, Flippy?

We are.

So today, yeah, we're talking about real estate being the true wealth builder. We're comparing three strategies as you're going to see up here. Flipping real estate is one strategy, turnkey real estate is another, and syndications is another. We all know there's a ton more, but these are the three that we're talking about today.

Right now, Danny's been on a podcast with Keith Weinold, and she's been on there a couple times. And there's a couple things he likes to say. Number one, savers lose wealth. Number two, stock investors maintain wealth. And number three, real estate investors build real wealth. And so that's one of the reasons why we want to be talking about this so that we can at least hopefully help you build wealth. Over the last 120 years or so, real estate has outperformed the stock market consistently and hands down and provided a better return with less volatility. Of course, any 20 year period, it's possible, you see, the stock market beat the real estate, but in terms of consistency and growth, nothing beats real estate.

Real estate wins every single day. Well, not every day, but I would say most days. Most days, depending on what part of history you're looking at. All right, so we want to define a couple things for you. Most of you who are listening already know all of this, but for those who don't or are new, we're going to define it. So here we have flipping real estate. So this is a strategy in which you're doing all the work. You're gonna have to find the deal, rehab the deal, sell the deal. This is active income right here. So you'll notice there's blue and red on this board. Anything red, we're viewing as a con. Anything blue, we're viewing as a pro. Depending on who you are, you may change the reds and blues as you see fit because it might be for you personally different than it is for us. So this is one of the cons for us on flipping is it's active. So you have to keep on doing it again in order to continue to make money. Now, turnkey real estate, this is done for you real estate. It's already acquired, rehabbed and rented. And it's passive income. I put semi passive simply because we're going to compare it to syndications and it's important to know and understand the differences. You're going to get monthly checks with a little bit of work. You are also managing this asset. And then lastly syndication over here. This is when you're going to pool investor funds together to do a larger deal than you could do on your own. Now you, you will also share the risks and the rewards. It's passive income. You get monthly or quarterly checks with little to no work yourself. So there you have it. I'm letting flip take over.

So of course Flip's gonna take over the flipping part. So now we again, we've got a lot of this in red. Womp, womp. And that doesn't mean that it's bad for everybody. Of course. Every single flipping show out there on tv.

It's yay.

It's great. It's awesome. So let's talk about this. Number one, you have to go out and find the deal. That could be considered a con for a lot of people, unless you've got deals just landing in your lap. Number two, then you have to rehab the deal, then you have to sell the deal. So again, and rehabbing the deal, I kind of didn't want to gloss over that too much here. But again, it depends on the deal. It could be a four week rehab, it could be a two month rehab, it could be a six month rehab.

We've had rehabs take a year.

Yes. So it could be any length of time. And then once it's done, now you have to sell it. So now when you're selling the property, was your ARV correct? Were your comps correct? You know, do you have an appraiser that's coming back at $20,000 under what you thought it should be at? You know, so there's a lot of, lot of cons with selling the deal. You take all of the risks. So again, this is, this is important because everything you're doing everything here, there's no one else involved. It's all you. And then, well then you got to find the next deal. You know, you just did all this and you got done with this one. But now you don't have another deal. So now you got to find. It's. So it's rinse, wash, repeat, it's going back and back and back. Then you have the net net profit, all this little frowny face. So you got the net profit. Now that's, that's the net profit from the deal, but then you got the net profit after taxes.

Yes.

And so again, was that fun? Really? Was it. Was it fun?

Some people think it's fun. Yeah. That's why I put a question mark and a smiley face. Because this is literally one of our strategies, right? We do all three of these and we continue to flip because we're good at it. We're really good at it. We've systematized everything that we do. And we want to diversify. We want to make income in many different ways. And so we're still doing it. But for the average investor who's doing one or two a year, maybe five a year, well, we're going to show you some of the other ways that you can invest money and just try and open up your mind a little bit because this might not be the ideal way. Maybe still flip a couple, but, you know, consider some of the other ideas.

Right. And then Danny's going to go through these numbers later on.

Yes, numbers. I love data. There's sense in here. Everything all right? Okay, so we've gone through that. Let's go through turnkey pros and cons. All right, the pros. We're going to start there. I wrote semi passive because you're going to see a few things in here, especially when we get right there. But let's start turnkey. You're the sole owner of the property. You have more control because you get to make all the decisions. You can raise the rent, you can reduce the rent. You can work with a tenant, not work with a tenant, approve or reject a tenant when they apply. You can refinance the property at any given time if mortgage rates and interest rates go down. So you have a lot of control in a turnkey investment here. You've got the cash flow. Of course, that's why we all buy rental properties, is for the cash flow. So that's an obvious pro as well. It's backed by a hard asset. That's actually a good pro over here that I didn't write down. So just know that both of these are backed by a hard asset and tax benefits. So this is really where these notes come into play because I wrote down all the tax benefits between turnkey and syndications. And I was just like, you are not going to remember all of that off the top of your head. Write it down. So disclaimer. Not a cpa. Randy Brown is our cfo. He's a cpa and he's the one actually that talks far more intelligently about taxes than I ever will. But I'm going to do my best right here. So consult your professional cpa. Anybody else, and if you love Randy like we do, go call him. Okay, so mortgage interest payments, maintenance expenses, property management fees, travel, capital gains, tax deferral. If you're going to end up doing a 1031 exchange, those are some of the tax benefits. You also have depreciation that's going to offset your rental income, which is a recognized expense for the diminished value of an asset over time. See, that's Randy's speak that he just goes. And I'm like, I need to write that down. So for depreciation for residential real estate, it's 27 and a half years that you can take that depreciation offset. So here's an example that I wrote down. Let's just say it's a $100,000 house. You can't depreciate the land. So let's just say in this very simple math example, for Danny's sake, the land is $10,000. So now the house is $90,000. Let's say your annual cash flow is $200 a month. So that's $2,400 a year. And the depreciation now is 3,272 a year. Because we took the $90,000, we divided it by 27.5 because you take this depreciation on an annual basis equal every single year for 27 and a half years. So that's $3,272. So on paper you just lost money, right? Because I said you made $2,400, but you were able to expense $3,272 in depreciation. So that's really, really fantastic. Now some of this treatment is different based on if you're a full time real estate professional versus not, I don't know when that applies. That's why I have people like Randy. I surround myself with the best that know exactly what, when. So just know Again, that's why we tell you to talk to your cpa. This is also something that Randy had pointed out in the previous video how interesting it is that we get to take this depreciation on our assets, right? Because we all know as real estate investors our asset is actually increasing in value over time. So it's really nice that we get to take the depreciation of it while it increases in value. Ding, ding, ding. That's a win. Okay, then the last One here is 20% down. So I, I put that as a pro here because you're going to see over here there's a minimum investment. We'll talk about it in a second. But here, if you're using financing, you're only having to come up with 20% down payment, which in many cases is likely less than a minimum investment of a syndication. Felicity, you can take over.

I get to take over on the red letter.

Yes, you do.

I love that. Well, the first one is tenants and toilets. Now, of course, maintenance, repairs, tenant issues, the GI Joe down the toilet, whatever it possibly could be. The not replacing the filters on the, on the furnace. And so the furnace stopped working whenever the miscellaneous or they turned off the hot water heater and now there's no hot water and they want to know why. So it's a nightmare. It's a long list of issues with tenants and toilets. Then you have also you have insurance claims, so you have more work for you, the property management and the accountant. Next thing, the five to seven year exit. Now, again, you just bought the property, you don't want to turn around and sell it a year later. You just paid closing costs, you just paid possibly real estate commissions. There's a lot of things that went into the property, so you don't want to turn around unless there was just a boom or something, you know, that you can turn around and sell it one year later. But typically the five to seven years of holding the property to make a good profit on the property, then you have the risk of losing money. Like I just said, it could have been a boom, it could have been a bust. You know, you could have just bought it for 200,000 and now it's worth 120. We've seen that before. And so there's a, there's always risk in real estate. It's never, always, always going to make money. There is a risk of losing money.

Well, and heck, you can have a pipe underneath the house first. Right?

We just had a pipe underneath the sidewalk going to the street that was actually closer to the street than it was our property. But the city still said it was our fault. And so we had to fork out almost five figures just to, just to get that fixed. And we had, we had no idea. Yeah, so that was a surprise.

Yeah, surprise. Not a good one. Not a good surpr happens though, then.

You have 100 vacancy. If you own one property, if the tenant moves out now you're at 100 vacancy.

Yeah.

No income, nothing coming in.

It's a turnover cost.

Yep, exactly. It's just maintenance on, on the, not maintenance, but the, the turn to get the property back up to rental ability. You can also have late payments as well. There could be attendant in the property and just not getting payments, which is almost as worse as the vacancy. But now the pro to that though is doing multiple properties, having multiple single family properties even or even, you know, a fourplex or a duplex where maybe one side goes vacantly, still got money coming in from the other side.

Right.

Or the fourplex is one person moves out, you still have rent for three people coming in. So at least that, that's, that's one.

Way to mitigate that.

It is, that's, that's one way to get rid of that kind. Exactly. And then you got loan approvals. Oh my goodness. So you got going through all the debt to income guidelines, going through all the credit checks and all the documentation. Documentation that has involved them going through your credit reports with a fine tooth comb. What's this? Something you, you applied for back in 1998. Seriously. So this, this can be quite a nightmare too, unless you've got the perfect lender, which you've got to go through about 20 to 30 of those to find that perfect. But that can also be a nightmare.

That is true. Okay, good. All right, so I'm going to take over now. We're back to the blue. Yes, we're back in the blue. You're welcome. I gave you red, I'm giving you some of these blue. Yay. So, all right, we're going to talk about syndications. Now. We already defined it. This is where you can pool investor money together. This is where the SEC gets involved, by the way, because anytime you pool investor money, then you have regulations that you have to follow. So the SEC is going to be involved in something like this. We're going to talk about that a little bit down here as to who can participate in things like this. You do not have to be accredited. There is options available for non accredited investors. We're going to talk about it in a little bit. But let's start at the top. So when you're in a syndication, you're going to be working with an experienced operator, somebody who has done larger apartment buildings before or storage units. And you're building it from the ground up or you're just fixing it or repairing it. But they have the experience. So you're not relying on, well, yourself over here. You're not relying on a turnkey operator necessarily to do it for you, or having the responsibility of ownership once it's now turned over and sold over to you. You've got somebody that you're relying on for the rehab, for the business plan, for the property management. Everything is being done for you and you're aligning with that person in that syndication. Then it's hassle free, less responsibility and no decision making. So again, when I say this is blue, this is a pro for me, some people could say that's a con. They want control, they want to have their hands in it. And I know from being a turnkey operator, when people say, can I do this to rehab? Can I customize this? I'm like, no, you're a hands on person. You go over to this bucket, you go find your deal, you rehab your deal. But you don't tell me how to do what I know how to do really, really, really well. This column over here is the exact same thing. They know what they're doing. So you have hassle free. Just depend on the experts. If you are somebody who doesn't like that, that is a con for you. You need to go in this bucket over here for the flippers. All right. And then preferred cash flow, it's better than just cash flow because in most syndications, many, I'm not going to say most, in many syndications you're in a preferred position. What does that mean? If you're in syndication with Flip and I and you are one of the limited liability partners, I think that it's called, you are going to get your cash flow first before general partners like Flip and I will get it. So when the investment is all said and done, even the cash flow part, you're getting paid, you're getting paid, you're getting paid. Flip and I are going, I want to get paid too, but we're not getting paid yet. You guys, you always be paid first. So preferred cash flow position again puts you in less risk, less liability, less everything because we're the ones running the show essentially with any partners that we have on that particular deal. And you're getting the rewards before we ever reap any rewards. So that's a great pro. You also get monthly or quarterly income checks from the syndications controller. That's a big pro because you're not even thinking about it. You're getting it every single month or every single quarter. That's usually defined in the investment when you sign up for a syndication. I think this is you now. Yeah.

So higher returns now this is typically a higher return than these other strategies. It's, it's, again, we're not going to say exactly what the percentage is for each one because every single one is different. So but it definitely, definitely higher return than those very timelines. Now, again, we said earlier on the turnkey, five to seven year exit, this one's varied. It could be three, it could be five, it could be seven. We don't know because every syndication is different. And then the limited liability, you're just one of a pool of many. It's not, you're not the only one doing the flipping. You're not the only one in the turnkey. This is, you're in, in a larger pool. And it's. So it's, it's a, it's, it's stretched out amongst all of the other investors as well.

Yep, that's right. All right, here we go. Let me be Randy Brown for a second. Tax benefits. All right, so tax, tax benefits that flow through the entity to you, such as an expense related to the property. What that means is many times you're investing in an llc, so those tax benefits are going to flow down to you. Even as a limited partner. You also have straight line depreciation, which includes normal depreciation write offs. But get this, this is a big, big, big deal. And we're just doing this on our apartment building right now, so we're getting personal experience on this one. Commercial buildings give even better tax benefits. Depreciation write offs become increasingly better because you can do a cost segregation study, which is basically an engineering report that breaks down the value of the entire building and allows you to accelerate depreciation and maximize tax benefits in year one, which allows you to reduce, if not eliminate your entire tax burden. These tax benefits are typically shared with all the investors in a syndication. Big, big, big deal. If you have not read the book Tax Free wealth by Tom Wheelwright, I am on round number two right now because I want to talk as intelligently as everybody else talks about taxes in this realm. I want to be the Randy Brown of knowing all of that stuff and really understanding and grasping it. So Tax Free wealth is an incredible book. Tom Wheelwright, I believe, is the CPA or financial advisor to Robert Kiyosaki. Rich, dad, poor dad. So a very credible resource. I recommend getting the book and learning right along with me. All right. And then also less volatility of the investment due to the volume of doors. One vacancy doesn't mean 100% lost rent. It's only a small Percentage. So that is a pro of a syndication over if you only have, say, one or two single family residences over here in the turnkey column.

So less work. There's all these other. The experienced operator, number one is doing a majority of the work.

Yes.

You're just watching. You don't really need to do a whole lot with that at all. And then, of course, no loan approvals. There's a ready to go. Yeah. So there's no credit. There's no credit checks.

Correct.

Yeah, no credit checks. There's no, there's no application. There's no. It's not somebody sitting there going, what's.

Your debt to income?

And what's the. What's. You applied for a Victoria's Secret credit card in 1998. Yeah. So again, you don't have to go through all of that.

I like how you chose Victoria's Secret. Oh, my baby. Okay, let's keep on going. All right, so we're in the red now. Okay. I transferred to the cons so you have less control in the syndication. So we talked about that here, right. If you're somebody who likes control, this is going to be a con for you. Sorry, yes. This is a con for you because you want more control. It is a con for me because I don't or I like it. I like less control. I'm confusing myself at this point. So. Yeah, so less control is a con. For people who want the control. There is a minimum investment. So it's typically 50 to $100,000 for investment into a syndication. And that's, you know, that's fantastic. But if you don't have 50 to $100,000, you're probably preferring that. There's only 20% down required over here and it's going to take you time to get that next 20% down payment. But at least you can get involved in a real estate asset here sooner. Maybe if you don't have that 50 to $100,000 minimum that's required to get started right here. And then let's talk about being accredited. So I said at the very beginning that this is SEC regulated. So anytime you pool funds together, then you're going to have the SEC involved and that's a big deal. And you have to follow their guidelines. So there are two different types of funds that are common and that I'm personally aware of, that is the 506C as in cat and 506B as in boy. So the 506C is for accredited investors only. You cannot be non accredited to be to participate this, you do get vetted through there. I think it's I am accredited.com or accredited investors, something you have to go through a process to actually vet or you have to have your CPA write a letter on your behalf stating that you are an accredited investor. So 506C must be accredited. 506B, however, is a friends and family type fund where a percentage of that fund can be non accredited investors and another percentage of that fund must be accredited investors. There's also some other rules that I won't go into because they don't really apply to what we're talking about here. But I wanted you to know, non accredited investors, you can get involved if it's a 506B as in boy. So. But if you are trying to check your accreditation to see am I accredited investor, here's the rules. You need to have an annual income of $200,000 or more for the last two years and you expect to make the same for the next year. Or if you're a couple like Flip and I, we need to have an annual income of $300,000 a year for the last two years and expect to make the same next year. That is one test. If we pass that test, we're an accredited investor. There's a second test and you can pass either one. So let's just say Flip and I didn't pass that test. Well, now we have test number two to see if we pass that one. Test number two is if we have a million dollars in assets minus liabilities, not including your primary residence, we are an accredited investor. So if we didn't pass the income, but we passed the asset test, we would be an accredited investor. If we didn't pass the asset test, but we passed the income test, we would be in a credit. You don't have to do both, you just have to do one. If you don't do either, there are still some special exceptions that have recently come out, I believe in 2020 that you can dig into to find out if you qualify for any of those to be considered accredited. But I'm not going to dig into them here in this video. Just know that even if you're not accredited, look for those funds that are 506B. They're friends and family funds. You have to have a relationship with the person that is running the fund. So those of you who have relationships with me, if you want to talk to me about 506B funds and which ones I have available, we already have a relationship, then yes, I can Talk to you about those, but I cannot advertise 506B funds. You're not going to see a fund like that on Facebook or anything. I have to have that relationship with you first before I can invite you into a fund like that. That's part of those SEC guidelines that I was talking about. Go ahead, Flipper.

So, in summary, back over here, you've got flipping. Now, flipping is active income, not passive. Again, flipping. You're doing all the work. Your money isn't always deployed because you're looking for the next deal. And even if you're good. Yeah, there's the findings. Even if you're good at what you do, you can't turn the same amount of funds twice a year. It doesn't compare to the returns of the other strategies. Now, this is where you were going to talk about numbers.

Yeah, yeah. And to clarify, even if you're good and you can turn your funds twice. So a lot of people that have. Let's just use this example. $186,000. A lot of people who have this. Maybe they have it. That's all they have. So they're gonna flip one deal, and then they're gonna get their cash back out, and then they're gonna go do another one. So if you're good, maybe you can do two a year. Right. Because standard, I would say, most slippers, six months is a good timeline we all anticipate. Okay, I want to get in and out of this in six months. It was rare that we had something last a year. The city. Thank you, the city. But like Flip said, you're up here trying to find the next deal. So you've cashed out and you're now looking. That might take two months. Finding a deal is not easy, especially in a market like we're in right now here In April of 2021, when the market is so dang hot, it's hard to find that deal. So you don't have your funds constantly deployed in a situation like this. And you're lucky if you're going to do two deals in a year. And this is what this. This example is going to actually talk about. So I got this example. Not from me. Steven Lippman is my partner in some syndications that we're starting to do together. I love him. I've been listening to him, watching his videos and all this stuff. He actually went through a real deal on one of his videos, and I was like, I'm stealing that. So then I can throw it in this podcast, share it with Other people. And I didn't have to go and figure out all my own numbers to share with you something from us. I'll do that in a future one, probably with Randy. All right, so he was flipping a deal. His purchase price on that deal was $152,610.25. That's a bottom line HUD number. The repairs that he did was $7,500. The costs incurred in the deal was $26,780. What do those costs include? They include real estate commissions, taxes, financing costs, utility costs, staging, et cetera. All the costs that are involved. Those add up. He factors in 13% on every single deal when he's looking at those types of items when he goes to purchase a deal because he knows that they're going to add up and that that's what they're going to equal on average, based on his experience in flipping. So $26,780. That was his cost. So what does he have into the deal? You're going to add up the purchase price, the repairs, and the costs associated with it. He's got $186,890.25. I'm a data person, so I never round I have to say it all, 25 cents. It's 25 cents. Data makes me happy. So he ended up getting an offer on that property for $206,000. The profit on that ended up being $19,109.75. And then he said, let's be generous and just say I paid 40% of taxes between federal and state. So in the end, my net net profit, which is why we put a little friendly face, was actually 11,465. Now he said, which is exactly what we just said, if I'm good at what I do, I can do two of these a year. So if he did two of these a year, his net net profit is $22,932. Now let's take that same capital and cost that he incurred here on this flip, $186,890.25. Let's times it by a 12% annualized return. That equals $22,426. Not a huge difference. Less, but not a huge difference. And what was the benefit here of doing a syndication and 12% annualized return? None of the work, hassle free. He didn't have to find the deal, rehab the deal, sell the deal. He didn't take all the risk and he didn't leave his money undeployed because he was now finding the next deal to be able to even work and be able to do two deals a year. So I thought that was so powerful that I just started writing down. I'm like, I'm taking these notes I'm putting on the whiteboard. He adds this. So he said he didn't have to manage contractors, no fires, because as real estate investors, anybody who's rehabbed a property, let's just say there's fires.

Yeah.

And there's fires all the time, especially the more you do. Then he had a K1 loss, so I thought this was interesting. He had a K1 loss of $70,000 that's going to now help offset other flips. And he said if I wasn't full time, I couldn't have taken all those tax benefits. That's why we say consult tax professional cpa because everybody's personal situation is different. He also recommended Tax Free wealth by Tom Wheelwright and ended that video saying, I made less, but I kept more. And it was completely and totally hands off. So I hope that really kind of gives you that nice overview of what this looks like versus this looks like in an example with real numbers. I thought that was super powerful. So I wanted to share. Thank you, Stephen.

So, and syndications and turnkey here, they involve an investment in real estate that gives you the great tax benefits and builds long term wealth. Again, turnkey properties, you are the sole owner and decision maker, effectively making the investment more active in nature. The syndications, you're working with an experienced operator and are not needed for the day to day decisions or management. Or management. Effectively making the investment more passive in nature.

Yeah. So I hope that you guys got a lot of value out of this. I've never personally put these all side by side. I've never seen anybody put these all side by side. I hear somebody talk about syndications, I hear somebody else talk about turnkey real estate. I hear somebody else talk about flipping real estate and never have I seen it right there. So it took quite a few hours to kind of dig into this, just ourselves to be able to share all this with you. Thus the notes. Because I'm like, this is a lot of information. I'm totally going to get off track. I'm going to be telling a story and go, what was I supposed to be saying? And have I said this yet? So I hope you're getting value out of this. We love sharing these and we really appreciate anybody who is listening, even if it's one person. We start off by helping one person, and I'm excited about that, too. So we're going to close this up with what we like to say at the end of every video, and that is invest smart, live happy. Thank you again for being with us today. We appreciate you guys. And if it is adding value, please add a comment wherever you're listening to it below. So below or on the itunes or wherever it is so that we can start sharing this kind of stuff with more people. Thank you again. Bye.

Bye.