2067 FBF: Dr. David D'Ambrosio Client Case Study - Equity Stripping, 1031 Exchanges & Market Diversification

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Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show and thank you so much for joining me. This is your host, Jason Hartman with episode number 738. 738. Again, thank you so much for joining us. Listeners from around the world, we are going to give you a client case study today. We love it when our clients come on the show and here one of our many doctor clients is on the show talking about his investing journey, the past, present and future. And we'll talk a little bit about equity stripping. We'll talk a little bit about 1031 exchanges. We'll talk a little bit about the investing mentality with Wall street, with other investments, with doctors and other professional and just a whole gamut of things. So I think that'll be interesting to you. But first, for the intro portion, I invited David, who is our client case study today, Dr. David D'. Ambrosio. I invited his investment counselor in to talk with me a little bit about him and help introduce him. Sarah, welcome. How are you?

Hey, Jason. Great. Thanks for having me.

It's good to have you back on the show. And you just closed on three properties of your own, I think, right?

I did, yeah. I went with properties in Memphis this time around and I was super excited and eager to get them closed. I want to get them leased up before the holiday season comes around and things are looking promising there. So, yeah, I bought two with one provider and one with a different one. So I'm going to try out two different property managers So I can compare and contrast and, you know, keep them honest.

That's good. That's a good plan. Yeah, we always like to try and have the customer experience. You know, I purchased a couple properties in Memphis last year. Couple more this year.

Year.

You know, we're practicing what we preach and having those same experiences that you're having. Interestingly, you would think, and this is oddly to mean, you know, it's just sort of interesting that this doesn't really seem to be true. You know, you would think we, us insiders, Sarah, you and I, would get like special treatment from these local market specialists. I don't think we do unless.

I don't know, it seems like a pretty normal experience. You know, I don't think they bend over back for me. They probably consider me to be a pain in the ass. Oh, I said the word, the A word.

Sorry about that.

Yeah.

Well, it's funny because I feel the same way. In fact, we probably get a little less attention because they expect that we know what we're doing. So it's kind of like, here, sign the contract. You're on your own. Counsel yourself. But funny enough, when I was ready to pull the trigger and I had my financing lined up and I was starting to look at inventory, I was looking in a few different markets and really my decision just came down to what was available. And I actually lost out on two properties to my own clients because I didn't pull the trigger fast enough. Someone came in from under me and asked for the contract before I did. So, yeah, definitely didn't get any special treatment. If anything, I learned how to make a quick decision.

Yeah, shame on you, Sarah, that your clients are more decisive than you.

Or maybe they just saw the deal before I did, I don't know. But the third one that I finally got, I remember seeing it hit our website in the morning and I hadn't even gotten out of bed yet. I'm notorious. I don't follow the rules. And I check my email first thing in the morning, which I know you're not supposed to do that, right? I do too. Yeah, guilty. So I was checking my email and I saw this awesome house and I'm like, oh, I'll just. Just call the LMS local market specialist after I take my kids to school. And then I thought, you know what? I bet you this one's going to sell. So I called him right away. I hadn't even got out of my PJs yet. And sure enough, right after I asked for the contract, he got an Email from somebody else that was interested. So.

It'S a little competitive right now to find that. Great deal.

No question. It definitely is. And, listeners, that's maybe one of the biggest things you learned from this episode today. Did you catch it, what Sarah just said? Sarah wears PJs to bed. That's the big takeaway from today's episode. PJs.

Is that a problem?

Yeah, I don't know. You know, whatever. But we want you to post a picture of your PJs on the jasonartman.com blog. Okay.

Okay. Yeah, I will do that.

We should put it in the show notes because, you know, who really says PJs anymore? That's not a kid or a parent talking to a kid, I guess you're a mom, so. Okay, that's funny.

If you're lucky enough to be one of our Venture alliance members, you might catch me walking around the halls in my PJs searching for a water bottle.

There you go. Yes. Us Venture alliance members, we're kind of a more intimate group for sure. That's no question about that. But that's what I love about it, too. It's great. Good stuff. Well, hey, Sarah, you wanted to share an opinion that you have on rate locks on when someone should lock in their mortgage or if they should at all. Right. When they. In other words, when they apply for a loan to buy a property, should they lock the rate or should they let the rate float? And you had something you wanted to share on that, right?

I do, because I had some clients come up against this. And then it happened to me. And the problem was, so I put the properties under contract before the rehab was done, and that's happening more and more these days. And so the property was still being renovated, and the lender said, you know, when do you expect these to close? Okay. You know, the rate lock's good for 30 days. So based on the close date, you know, they locked the rates. I said, you know, that's fine. Well, what ended up happening was that, you know, and this happens all the time, the rehab took, you know, just a little bit longer, and, you know, you have to schedule your inspection, and then. And then things come up on the inspection report, and then you got to send the construction crews back, and then you got to send the inspector back out. And that all adds time to your. Your closing process. So that happened to me, and I was pushing up against that rate lock expiration, which kind of forced me into a situation where I was rushing to close, and it made Me a little uncomfortable with my closing because I ended up having to get the local market specialist just to put in writing that they're going to provide me with a clean inspection report after I close.

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Ideally, you want a clean inspection report before you close, so it just, I think it just caused a little unnecessary rushing around and stress to the process. And what I learned is that if I would have just not locked the rates, I probably would have still gotten the same rate. It only closed a few days later. I probably would have ended up closing, you know, maybe one week later than I did, and everything would have been fine.

So, of course, the risk, though, is if rates are climbing, you could end up paying a higher rate if you don't lock.

Right, you could, but you could also be paying extension fees on the rate lock. That's what I, you know, they charge, like a daily rate, so, you know, you get the. You get the lower rate, but then you're paying a fee. And, you know, I didn't. And take the time to, like, do the math and figure out what's the, you know, what the best way to go. Because the rates didn't go up anyways for me. But, yeah, that is the risk. The risk is, you know, your rate might go up a little bit. They go up and down a little bit every day, so.

Right. And basically what's interesting about what Sarah just said is that you see how, in essence, when you pay for a rate lock, you're in essence, renting the money or you're optioning that money because that money has to be available at that rate. And that's why you pay for it. You know, you pay a certain amount and then you pay a daily rate for extending it after that. Interesting. Yeah. Just wanted to have, you know, and really that goes to kind of my broader point, and we've talked about this on past episodes, listeners, but the concept of, you know, money just like anything else, and it shouldn't even be called money in our case. It's currency. Right. But it's just a commodity. It's just like coffee beans or soybeans or copper or anything, any or lumber, you know, everything's just a commodity. Okay? And that's how I want you to look at the world and just understand that all those commodities have a price, and those prices fluctuate. And there's a certain amount of demand for those commodities and there's, there's a whole supply and demand market for them. And, and when I talk about commodities that are the ingredients to a house or an apartment building, copper wire, glass, steel, lumber, concrete, petroleum products, et cetera, et cetera, et cetera, these are not, they're independent of any specific currency, whether it be the dollar or the euro or the yen or the real or whatever. Right. They have intrinsic value and we think that's a good thing. So just lest we get off on a tangent, but I just wanted to kind of bring that up again.

And by the way, I think this next episode for flashback is gonna be the Donald Trump episode. There's so much controversy about that guy.

Oh my gosh.

I think I'm gonna do the Donald Trump episode on the next Flashback Friday. Okay, so listeners, be sure to catch that one.

Do you know how many times I've like typed on my Facebook and then just deleted my comment because I just can't even. It's so ridiculous.

Yeah, it's kind of not worth all the hate, you know, so anyway, but I, Gary Johnson is looking awfully good. The Libertarian candidate. Folks, if, if we're ever going to have a third party, I know everybody's always concerned I'm going to waste my vote, you know, but we got to do it. Someone's got to do it at some point. Okay, we, you know, this two party system is just a total scam. I mean, look at both of these clowns we have running. It's crazy, but one's worse than the other. And I would happen to say that that's the Clinton clown. But they're both, I don't know, I think they're both problematic. Yeah, they're both pretty clowny, for sure. All right, so in addition to rate locks and politics and commodities and PJs. Anything else before we get to your client and share this case study, Sarah?

Oh, well, do I, do I go on another rant about Obamacare? I mean, I took my son to the urgent care yesterday and I didn't even stay and get him seen. I couldn't get a same day appointment, so I went to urgent care. I cannot believe how overcrowded and understaffed Kaiser was. It was unbelievable. And that was the rant that I typed. And then I just said, you know what, forget it, I'm not gonna post.

It's only gonna get worse. I mean, my insurance cost has gone up about 35% since Obamacare. Look at if you regulate or tax something more. And you know, in this case, regulation. But regulation is just a form of tax. Okay? Because it's a burden, right? If you burd something more, you're gonna get less of it. And so this means we're gonna have a lower supply of healthcare in all its forms, whether it be equipment, pharmaceuticals, actual practitioners, you know, doctors and so forth. And it's interesting, we're interviewing a doctor, right? You know, he's gonna have a lot of opinions about this. Our case study today, it's Obamacare is. It's, it ain't gonna work, folks.

Even good old slick Willy Bill Clinton said Obamacare was a mess. I thought that was interesting coming from the same side of the aisle. Even Bill Clinton. So what'd you say, Sarah?

I just said that it's just one of my biggest fears is the healthcare industry. And it's a scary thing when you take your kid into the er. I mean, this was last year. I remember taking Alyssa into the ER with shortness of breath and she has a history of asthma. But back in the day, when you take a child into the ER and they have shortness of breath, they get seen right away to decide if they need urgent care that moment, or they can wait 20 minutes. I had to wait 30 minutes just for the initial triage, I guess they call it. So it's really like, it's really scary to me with kids and a family and I'm sure it's scary for a lot of other people, but what does this have to do with real estate? I don't know, I just.

Well, it has to do with the cost and political issues and people that say politics. I get these like, I got this review. I thought this was funny. By the way, Mr. Reviewer, I'm sure you're listening, who posted a review on itunes and said fox News for real estate investing. I thought that was totally creative. So thank you for the review. You know, it was kind of a half hearted compliment. I understand that. But you know, this is not. I mean, I don't. I'm not a Fox News guy. I don't even have tv. So number one, I don't watch Fox News except when I'm maybe in a hotel room. I'll watch mostly CNN because that's what they have, political stuff, you know, it influences. It's a big part of real estate investing, folks. So, you know, this is not irrelevant stuff. I know most of you that it's relevant, but a few people think it's irrelevant and it's not. It's very relevant. Obviously, it's an election time right now, so we won't always be talking about it that much. But you know, it matters. It's something that definitely matters. So anyway, without further ado, let's get on with our show here and shut up and quit rambling before people write me more, more reviews about FOX News for real estate investors. I thought that was hilarious. So and that was very creative, I must say, very Creative. Check out jasonhartman.com We've got the new website up. It does have several bugs. It launched just yesterday. The property section, we're going to dramatically improve that, by the way, that's on our roadmap here and dramatically improving a bunch of other things and functionality and so forth and doing a lot of things with the website. So look forward to that. We've got a really good web development company helping us nowadays. Check out the educational products in the store there or@hartmaneducation.com and then we've got another Venture alliance meeting coming up at the beginning of December. So check out venturealliancemastermind.com we're pretty sure that's going to be located right here in beautiful Scottsdale, Arizona. So that's an easy, easy trip for most people. I know a lot of you out there have been asking me about the Venture Alliance Mastermind Group and considering joining. And I tell you, it just keeps getting better and better. The comments from our last meeting in Seattle, people said to me, Jason, you really up leveled this one. The speakers were great. We had some awesome speakers come in and we're just going to keep trying to make it better and better. There are some really big names in real estate here in the greater Phoenix metro area. So for our Scottsdale event, I'm going to try and get a couple of them to come in and talk with us. These are people who have been on the show who you've heard of, you've probably read their books. They're quite famous. And nobody is confirmed yet, so I can't mention any names. But I just tell you I'm working on it. Okay, folks, I'm working on it. All right. So Sarah, thank you for joining me for the intro. Let's get to our case study and talk to your client, David and hear about his investing journey.

Yep.

Thanks, Jason.

It's my pleasure to welcome one of our clients to the show. It's David d' Ambrosio and he is located in New Jersey and has an interesting story about his journey as an investor and some of his next plans and talk a little bit about his recent 1031 exchange and so forth. David, welcome. How are you? Great.

Jason, thanks for having me on.

Good. Hey, thanks for coming on. It's great. How long have you been listening to the podcast?

Probably a little bit over a year. So I've listened. I went back, though, and I listened to the older. The older ones that I could get my hands on as well. So I probably listened to maybe, I would say probably about 300.

Wow, 300 episodes. And you're not sick of me yet. Well, thank you.

That's great. Good stuff. Good stuff. Give us a little bit of your background and tell the listeners what you do for a living and kind of, let's just dive into your journey as an investor.

Sure, sure. So I am a physician. I'm an oncologist, a radiation oncologist, specifically, and I'm the son of an immigrant, so I feel like I'm living the American dream. As long as that's going to last, who knows? But I always have had an interest in investing in general and educating myself about different types of investing, and I've always kind of come back to real estate in general because of all the things that we discuss on your podcast all the time. And I've read a lot of real estate books, and I think a lot of people probably talk about that Rich Dad, Poor dad book, which opened up some new thoughts in my head, especially the 1031 exchange they mention in that book. And my medical partner, Joe Lattanzi, is the one that actually turned me onto your network because he had invested with you, and that's how I came specifically to your podcast. I spent a lot of time educating myself before diving in. And.

The method that I had started my investing with you was through this 1031 exchange.

So you were interested in investing and you had a great immigrant story. I love that. And by the way, just to comment on your American dream, as long as it lasts comment. I think we all, unfortunately, and it really is no laughing matter, see the country taking the wrong direction in so many ways. But, you know, at the end of the day, it's all a game of comparison. Right? It's not a question of whether America's gotten better or worse. Yeah, you know, that's. That's part of it, but it's just, you know, compared to what is always the question. It's always a relative thing. Where is your family from, by the way?

So we're all. We're from New York City originally. My father. My father came over on a Boat into Brooklyn. And then I grew up in Queens and I live in Jersey now.

Yeah, but where originally, like you say, the immigrant story. That's why I asked.

Oh, what part of. What part of Italy? My father was from a little town north of Naples.

Good stuff. Well, fast forward now. You learned a lot about investing. You listened to 300 of my shows or so, so thank you for that. And you did a 1031 exchange. Now, so what did you sell and what did you buy in that exchange?

Sure. So that story, the story with that was actually the house that I had grown up in. My parents had retired a few years ago, and they were looking to sell the house. And my original plan was they were selling it to me. Obviously, I was getting a sun discount, but my plan was actually to keep that house and rent it in New York City. And I would have had maybe a little bit of cash flow if I had done that, but that's when my eyes were opened. Kind of at the same time, I was listening to your podcast and I realized that if instead of renting that long term, if I sold it and did a 1031 exchange, that I would greatly improve my cash flow and also my overall investment by instead of just having one, switching that over to multiple properties.

So you sold that property, and when did you sell it?

The end of last year. Towards the end of last year.

And you did a 1031 exchange on that, right?

Correct. So I transferred that into four properties in Orlando that I bought with your group.

You know, the cash that I got out of that and put into those four new houses was enough that I was able to put even more than 25% down. So it was really. It was really a very good deal for me. And obviously not having to pay the tax on it was a big thing too.

Right, right. Yeah. Good. Good stuff. So all in Orlando now. It's interesting you didn't want to split those up and get like, get into two different markets there. I know you've got some other properties. Where else do you own? Or did you feel you were diversified enough already?

You know, I have. I have four properties in Indianapolis as well. I really. I really like the Orlando market because I feel like we're in a unique situation there that the value is so good for cash flowing. And I think there's a lot of upside potential for appreciation. I ascribe to your philosophy. I'm not an appreciation investor, but I thought that it was a good idea for me to try to split myself up by putting more of my portfolio there.

I think I'd like to get into one more market, but things are still settling down with that. But that was my thought process with Orlando. Seemed to be a nice combination of good cash flow, but also the potential for some appreciation down the line, Right, absolutely.

And I think that's a good decision. One more market, get into three total, you'll just be super nicely diversified. Yeah, that's definitely a good idea.

The other issue with that Too is these 1031 exchanges, when you're doing in general, are a little complicated. But when you're trying to go from one property to multiple properties, it can get pretty hairy. And if I was trying to make sure that I had places set up in more than one location, I think it really would have complicated things for me with all the deadlines that are involved.

Yeah, that's true, that's true with the exchange. Did you have any trouble fulfilling your exchange? Were you worried at any point? I mean, the last two I've done, I did, I did. Well, I did two of them last year, actually, I should say the last three exchanges, I've done two of them last year and one this year so far. It's been kind of difficult. I've been worried, you know, coming down to the deadline on those exchanges. I did make it on all of them, thankfully. But I was worried that I might not because it was a little bit hard to find properties.

Yeah, I was definitely worried about it. But what I did was you're allowed to name, I don't remember the exact rules. I think you're allowed it to name 250% more value of additional properties, not just the ones you take. So when I made my list, I picked about 10 properties, six more than the ones that I actually wanted. So in case any of them fell through for whatever reason, I could still pick up the other ones so I didn't have to lose out on any of it.

Yeah, I know they keep you. The IRS won't let you just identify the whole world. I wish you could just give them a big list of properties, but they're too smart for that. They only let. Yeah, I think it's 200%. Possibly it might be, I don't know, it might be 250. I can't remember. So in other words, if the value of the Exchange is say $500,000, just to use a semi round number example, then you could identify $1 million worth of property if the rule is 200%. By the way, don't quote us on that because neither of us are sure, we can remember. And then you only have to close on 500,000 in other words, to meet your requirement. So in other words, half of the deals could fall through and you would still meet the requirement and make the exchange without paying any capital gains tax and you would have that nice deferral in there. So.

Yeah, right, because you only have 45 days to do the identification, which you have six months to close. So you could test a wide net and then narrow it down later.

Exactly.

The other thing I didn't realize about the exchange was I thought that the cash that you had to reinvest, I thought it was only the capital gains, but it's actually all the cash that you get from the sale. So I had put some money into renovating that house while I was renting it. And I, not that it was a big deal, but I just for your listeners, you have to spend all of the cash. You can't take any cash out from that sale. You have to spend it all even if it's not a gain. And you have to use at least the same amount of debt that you had on the initial sale.

Well, it's pretty awesome. Tax advantages, what do you see in your profession with other doctors and so forth? Are they really into real estate? You know, this is something that, I mean, highly paid professionals like yourself have just got to build real estate portfolios because obviously you have a giant tax problem and thankfully you have great income. But I see a lot of professionals, doctors, lawyers. Well, lawyers don't even make that much money anymore a lot of times, unfortunately for them. But they're just not really doing this. They're not getting tax breaks for themselves and giving 40 some odd percent of their money away to the government. It's just tragic, really.

It's extraordinarily frustrating to try to educate people. These are people, men and women, that devote such a large amount of their time to educating themselves and to helping people, but they don't really have any, any real financial iq. I can't tell you how many times I hear people talking about I called my stockbroker and this market crash and I just sold a bunch of stock. I feel like half the time I'm on a soapbox telling them you have got to invest in real estate at least two or three times a day. I'm talking to people about it, trying to get other people involved. It really is an absolute no brainer with the tax advantages, not to mention. And these returns that you're getting on your cash when you leverage it are just, they're better than anything else out there, and particularly.

They sure are. Yeah. Leverage can become very addictive, that's for sure. Yeah, it's really incredible. Were you one of those people, though? Because your partner in your business, the other doctor you work with, approached you and said, hey, you should be real estate investing, or were you really open to it? Or were you one of the skeptical doctors out there?

No, I was. I was always open to it. I just wasn't sure how to go about it. And he's really. He introduced me to the concept of, of your model where you don't invest locally. I was always thinking I would buy some, some houses near me and you can't cash flow in New Jersey or New York. It's. The property taxes here are ridiculous.

Tell us about that for a moment. Yeah, your, your taxes in New Jersey are some of the high. I think you have the highest property taxes in the nation, don't you? Oh, we do.

I'm embarrassed to even say how much my property taxes are. My property tax on my house that I live in is a mortgage payment on. Boy, it's a mortgage payment on probably.

Six of my houses altogether.

Wow. That I own. Yeah. Yeah, it's bad. That's crazy. Yeah, it really is. Anyway, what were you saying before I got you on the tax tangent, the property tax?

I was just talking about how a lot of, you know, a lot of physicians are just not educated, educating themselves about finances. And, you know, I try to, I try to talk to friends and colleagues about getting involved in this. And. Oh, I think you were asking about how I got interested specifically. I would. So I was, I was saying I was always interested in real estate, but I wasn't sure how to go about it because you can't cash flow here. And my partner, my partner Joel at Tanzi told me, you know, check out this Jason Hartman guy.

So I, you know, I started listening to your podcasts and I, I haven't stopped, but the whole, you know, go into buying houses in other cities where they make sense, just. Well, first of all, I was on. I was. When I first looked at it, I couldn't believe how much cheaper it is to live in other parts of the country. Growing up in New York and living in New Jersey for the. Some of the houses that I own in Florida would, you know, would probably be four times the amount if they were here.

Yeah, it's really incredible. I always wonder why doctors have that rap. They say doctors are notoriously poor business people, and I think it's because they're is it like the science? You're a scientist and scientists just don't think usually. I mean, some of them do, obviously, like yourself, but they don't think in the world of finance and money, it's just a kind of a different. It's kind of a different thought process or something, right?

Yeah, I think that's part of it, but I think the other part of it is the whole way doctors typically think, which is that it goes unsaid and understood that we have a fiduciary obligation that we do the right thing for our patients. And I think we assume that people that are trying to help us invest our money are looking out for our best interests and they don't have the time or the inclination to really delve into that and educate themselves about it any better than they do unless they have somebody that turns them onto it.

Yeah, that's an interesting point. And Wall street just does such a better job of marketing than the real estate industry does. I mean, my industry is terrible at marketing. They have the most historically proven asset class. You know, the real estate people, they've got the best asset class and they're just lousy at marketing it. And Wall street has a really mediocre to terrible asset class and they're fantastic at marketing it. So I think that with professionals and with highly educated people, the Wall street world kind of, it just appeals to them because it's, you know, you can go see a guy wearing a nice suit and you know, he's got a degree from a good cause, whereas a lot of real estate people, they didn't go to college or they're certainly not dressed professionally a lot of times. And you know, it's sort of like a mom and pop industry. But it's, it's such a good investment. It's such a good asset class. It's just a strange part of our society. It's always baffled me to some extent, you know.

Yeah, really, it's, it's not, it's not sexy like the, you know, the guy on Wall street, you know, spending a thousand dollars on a bottle of champagne. But I bet you if you look at his account versus an account of one of your clients, you're going to see a lot more wealth in there.

I agree with you. Unless the guy buying the thousand dollar bottle of champagne on Wall street is an insider. Now, he probably has a pretty good bank account and he probably owns a lot of real estate.

That's the irony of it, you know, the irony of these insurance companies that sell annuities and products like that is that they're all investing in real estate with that money. Exactly. Just, it's just such an irony to me that they take their insurance premiums and buy real estate, you know, especially office buildings. They seem to love office buildings. You know, large institutional investors, obviously. And I just thought that was really kind of, kind of just a total irony, you know, the way that, that works. But it is the way of the world. It is the way of the world. Well, do you have any questions for me that maybe, you know, some of our listeners might want to. Want to get answers to as well?

Well, you know, I think a big question for me is where do I go from here? You know, I'm almost at my limit with traditional mortgages and I know that there's some, you know, there's, we always talk about or you always talk about, and I read about how there's these portfolio lenders that will lend you above 10, but it's almost like this kind of black box where how bad are the rates when you go above 10 and should I just stop at 10 and wait and just keep doing 1031 exchanges? That's kind of what I'm struggling with right now is where to move from here.

Yeah. So if you're at your 10 limit, if you're married and your spouse can qualify, your spouse has to have income and so forth, then you can do 10 more. That spouse can do 10, up to 10 more, which is, which is great. But whether or not you can do that and you get to 20 properties that way, there are still some pretty good portfolio loan options out there, some community banks that will finance you. And I tell you the rates aren't bad. I just talked to one this morning actually, that will finance pretty good rates. Now it's only fixed for seven years in their case and I think they're somewhere in the high fours. I mean, I don't know. That's not bad. Okay. It's certainly not as good as is 30 year fixed at 4.5%. I know, but it's certainly not bad. I mean, to have a seven year fixed and maybe by then you do a 1031 exchange or there's a refi opportunity or if the rates are insanely high and you have cash, pay it off. Which, you know, I'm not a fan of paying things off, but there are some times when it can potentially make sense.

Well, these local lenders though, my impression is that they really tend to want to lend to local people. Like would they lend? Let's Say for instance, I wanted to buy a property in, what is it, the Quad Cities there. Would they lend to someone living in New Jersey but was buying property in their state?

Well, no, you're probably going to go to a bank in that market. Okay. Where you're buying. Yeah. And these are these local community type banks that make really, a lot of them make really sensible loans. They do financing that's just logical. It's not dictated by the government and. Well, the government sponsored entities, Fannie Mae, Freddie Mac, you know, the sort of pseudo governmental entities. I'll say it's not dictated by them in that sense. They'll do some really logical loans with usually 25% down and they're not going to be 30 year fixed because they can't sell them off on that secondary market. But seven year fixed, maybe 10 years if you're lucky. And, and the rate's very reasonable. I mean, I think this is a very good option. And then after that you can decide, do you go to a B2R or Lima 1. We had a representative from Lima 1 at our last event in Phoenix. They do some really logical, sensible loans too. They can do some good things for you as well. And there are some good options out there. It takes a little more digging and they're a little more fragmented, if you will, in terms of the choices and making decisions. But they're not too bad at all. Not too bad at all. Still good.

When you say seven year fixed, it's still a 30 year amortization.

Yeah, 30 year amortization and it will become adjustable rate in seven years. And the reason they have to do that is because they're not selling it off to the secondary market. They're probably keeping it on their books or they're selling it to another investor rather than this big secondary market of Fannie Mae and Freddie Mac that has very specific guidelines.

So let's say you did something like that and you wanted to do a refinance of that into a more. Can you do something like that where you refinance into a more traditional loan? Are you still constrained by that same 10 property limit?

Oh no, because we don't know what the rule will be in four years or seven years or five years or six years or anything in there. Right. So the lending climate may become more liberal by then or it may become more conservative by then. But the nice thing is you've got seven years to watch and evaluate and you're hopefully going to get a really nice return on your property for those seven years. You could sell the property. You could refinance anywhere in between there. You know, in the old days you could get an unlimited number of Fannie Mae and Freddie Mac loans. But post financial crisis they first cut it down to 4 and then they raised it to 10. And they've stuck with that 10 number for quite a while. But who knows, that may become liberalized. You just never know what the future will bring in terms of financing options and the other. You do have a risk though, obviously. I mean, it goes without saying, but I'll say it, you have interest rate risk, right? So the rates could go up and then you'll be paying a higher rate. But if they do, and again, there's always lag time in here, but if they do, you'll probably see substantially higher rents and lower inventory of new housing being built. The problem is there's an adjustment period. There's a lag time to this. So for example, if rates spike up tomorrow, it'll take a couple of years for rents to adjust, inventory to decline. And that's the part that kills investors. And this is why the prudent investor in the long run, I believe, always wins the game. Because they can ride out those adjustment periods, those storms where the people that bought high rise condos in Miami or San Diego or overpriced property in California or the Northeast, they don't have that luxury that they can ride out that adjustment period, that storm, that lag time when everything is adjusting. But it ultimately always does adjust. It just takes a couple years to see it happen.

Do you think that it's prudent or sensible to do a cash out refinance if you can get significant money out due to the debt paying off or it appreciates a little bit if that means you're going to take away your cash flow on a monthly basis? Or is that more of a personal decision, I guess?

Well, I'm probably going to say absolutely yes. But here are the questions I would have. What is the rate on that underlying mortgage you're refinancing compared to what are the rates today on the new loan you would be getting? And you might well get a lower rate or a similar rate. And then I would say definitely take the cash out because the point is not, and this may sound really odd and it takes you kind of got to get your head around this, listeners, okay, because I know a lot of you are going to say this is imprudent and it doesn't make any sense. And what are you talking about? I've heard it all before, but In a way, it's not really about cash flow. Oddly, what it's really about is rent to value ratio. Okay, so for example, if someone told you you could control $100 million of real estate tomorrow, that had very good metrics, very good rent to value ratios. It rented for 1% per month, but because of the financing on, was fully encumbered and had zero cash flow, would you still want to own the hundred million dollars worth of real estate? Absolutely, yes. I hope you'd say that. Right. The reason you'd want to do that is because you have other multidimensional things that will make you wealthy. With that real estate portfolio, you don't have to get monthly cash flow. What you really want is a good rent to value ratio. And this is going to be a bit of a long answer, as my usual answers are. I know I've never been accused of being short winded. But, but in the old days when, before the Great Recession, some would say I was imprudent recommending this strategy. But we used to talk about something that I called the deferred down payment. And the reason there would be a deferred down payment is number one, the market was appreciating very quickly and rents take a while to keep up and adjust to the appreciation. They lag appreciation, which always seems to happen faster. And you could buy properties with no money down. Okay, so the question was in this equation, and I used to show this at my seminars on a spreadsheet I use, you know, and I don't have it in front of me, and I don't remember the exact example, but the concept is this, that, you know, if you put 25% down, for example, the property could yield you maybe $300 per month in positive cash flow. But if you put nothing down, you would be zero cash flow or you might even have negative cash flow. Now the lenders won't even let you do this anymore, but in the old days they would. And a lot of people listening will say, well, Jason, isn't that the reason we had a crash? Well, not exactly. Not on these types of properties. That wasn't the reason. The reason was, is that people were using this strategy to buy stupid properties in Southern California or elsewhere that never made sense anyway, okay? Because they had bad rent to value ratios. That's how you can tell if the deal makes sense, not by the cash flow, but by the rent to value ratio. Okay, so the time horizon on this equation, this deferred down payment equation, was that it was basically about nine years. So if you get your $300 a month or you get zero per month.

In the difference in the amount of money you put down, if you just kept that money in the bank and drew on it at a rate of $300 per month, and you know, I don't remember the exact number, so you may be doing the math and saying, well, Jason, that's not nine years. But the example I used to show, it was nine years based on the interest rates back then and based on the rent to value ratio back then, and based on the down payment options back then, it was basically a nine year break even point. So I would rather have my 25% in the bank. In other words, your cash out refi, you have control of that cash than have that $300 a month in positive cash flow. I mean, that's an easy decision for me to make in that way. I would rather have the property more leveraged with less cash flow, but more money under my control and in the bank, or giving me the ability to buy more and control more real estate. Does that make sense to you or do I sound like I'm crazy?

No, that makes a ton of sense. Absolutely. That answers the question.

Sure, you always really want to lean in favor and it depends on the climate and the market, so no answer is ever completely simple. But you always want to lean in favor of the idea of equity stripping, pulling the money out of the property, having control of the cash and still having control and ownership of the property. That's the beautiful thing about real estate. You can acquire the asset, put some money down to acquire it, and then later get all your money back out and still own and control the asset. I mean, where else can you do that? Yeah. And you don't have to pay tax on that borrowed money that you took out. It is an absolutely beautiful, beautiful asset class. I absolutely love it for not just that reason, but many others, as you know.

So good stuff. So what are your plans next? You're gonna get into a third market, it sounds like, right?

Yeah, I'm gonna think about it. I listen to the, to the podcast on the Quad Cities, so I'm looking at that a little bit. I'm probably gonna pump the brakes. Pump the brakes since I did so much this year and maybe, maybe do something early next year. But I don't want to wait too long because I know the interest rates at some point are going to start going up.

It seems like they would have to, doesn't it? It's just I've been saying that for five years I've been saying it for 10 years, so I've and I've been wrong on my interest rate predictions. But I tell you, interest rates are very, very difficult to predict because they're basically, they're basically set by fiat by Federal Reserve and government policy. Overall, the best place I want to get them on the show, I don't know if it's the best, but it's well known in the world of interest rate and banking is a newsletter called Grants Interest Rate observer. And I want to get a representative from that group on the show. Haven't done it yet, but they seem to have some pretty good insights into interest rates. But again, it's a roll of the dice. Nobody really knows. Not even Janet Yellen at the Federal Reserve. She doesn't even know what she's going to do next quarter, always. So we shall see. But David, thank you so much for being on the show and just sharing your story with our listeners and your experience and we appreciate your business and just want to wish you continued success and happy investing.

My pleasure. Thanks for having me on.

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