CW 1008 FBF - Refi Or 2 For 1 On Highly Appreciated Properties To Buy In Linear Markets – Client Case Study With Brian

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Hey, I want to welcome one of our clients to the show. He's got a great case study, if not as a real estate investor, then as a podcast listener, because he's been very loyal and I'm very grateful for that. He discovered my podcast back at episode 50 of the Creating wealth show. So he's been with us a long time. He has some investing ideas and questions and started his own website around it because he likes the asset class so much. And I want to just walk. Welcome. Brian, how are you?

Excellent. Thanks for having me on.

Good. It's good to have you on. And you're located in Palo Alto, California, is that correct?

Actually just moved up to San Francisco a couple years ago.

So you really like low priced real estate then, I take it, Right?

I like paying high rent. How about that?

Yeah. May I ask how much is your rent and do you know the value of the property you live in or comparable value for it? Because I bet you're getting a pretty darn good deal, believe it or not.

Yeah. Yeah. Well, my rent is 2,500 for a nice two bedroom here in San Francisco, which is actually a pretty good deal.

But it's. Yeah, it's a two unit building. I think last. It might be like 1.4 million somewhere around there.

For your side or both sides?

For both. For the whole building, yeah.

Okay. All right. Well, that's still a good deal. So if yours is worth 750, then you have a 0.33 RV ratio, approximately about 0.33. So that's a great deal. Congratulations. Even if you feel like it's not that great a deal. Yeah. Good stuff. Well, hey, you discovered my Creating wealth podcast back at episode 50. Thank you for listening all these years. What got you interested in real estate investing?

Tracing it all the way back. I actually think it was a book I was assigned in high school to read, which was Rich Dad, Poor Dad. And I don't, you know, know, didn't think much about it at the time, but I feel like those ideas really sank in and yeah, kind of coming out of college and finding my first, first job, I was, you know, wondering what I should do with my money and kind of revisiting a lot of. A lot of what I picked up way back in high school.

I have to say, Brian, it's kind of amazing that they actually assigned that book as high school reading. Are you somewhat amazed by that?

Yeah, absolutely. It was a one semester econ class that everyone had to take and there were I think three books we gotta decide between and that's the one I chose. And I've gotta say it was a good decision. Not sure if I knew it at the time though.

Yeah, the other two were probably like the Communist Manifesto and Socialism for Dummies. And you picked the right one. I'm just making a jab at our school system and our educational system, but nevermind. Okay, so Rich Dad, Poor dad, that's been the inspiration for a lot of real estate investors for many years now. So that's fantastic. Tell us about your journey. You bought a couple of properties and when did you start and just wherever you want to take it?

Absolutely. I started.

Listening to the podcast, did that for probably a couple years before I connected with your investment counselor, Sarah.

Really? She did a great job of kind of holding my hand through the process. I probably one of the more needy clients she worked with, but ended up buying my first property in 2011 in Atlanta and then waited a few more years until my next one, but 2014 purchased in Memphis. That's where I am at this point.

Yeah. Fantastic. Tell us about your experience with. With picking the properties and dealing with renting them, managing your managers. Good, bad, indifferent. Share it with us if you would.

Absolutely. It's a little bit all over the map.

As far as the property management side, but the, you know, working with the local market specialist went really well. I feel like I was able to get the type of property that I wanted and happy with the price and the rehab job and the tenants have gone well, the property management. Still learning because I don't have too many years of experience and don't have too Many data points to look at. But in Atlanta, I'm working with a very small property management team. Two people who do everything.

Yeah. And that can be good or bad. The bad part of small is they don't have as many resources. The good part of small is hopefully you're getting some really good personalized service and ambitious person who really wants to grow their business. So, you know, that can. That can kind of be one way or the other, right?

Yes, yes, I know who to talk to, which is really nice.

That makes it easy.

The flip side is the Memphis properties.

Through more of a large, more institutional manager.

Yeah, exactly. And they have, I don't know how many, 50 people on their team who do everything and it gets moved from.

Division to division and, you know, you're not sure exactly who to talk to when it's, you know, they're doing the walkthrough and then they're doing the rehab and then someone else is. Is showing it to tenants. And there's not, you know, there's not that one person who, you know, has the whole vision of it, so.

Right, right. They've got that sort of delegation of labor type concept. Yeah. The bigger company idea.

Yeah, yeah. So still learning the pros and cons of each and. Which I prefer and definitely early in the. In the journey, but it's good to get these two different viewpoints.

Yeah, yeah, definitely. So did you have some questions about refi or 1031 exchange, or did you just want to kind of share some of those experiences with our listeners?

Yes, I want to ask. I have, you know that property that I purchased in 2011 in Atlanta, and quite a bit of equity has built up, which is a good thing.

Congratulations.

Yeah. And looking to put that to use. So sometime maybe in the next six months thinking about either doing a refi, pulling some money out and putting it back into another property, or maybe a 1031 exchange where again, sell that property and purchase two more and that gets to be.

Yeah, this is one area, Brian, and I'm really glad you brought this up for a listener because I have mentioned it on a few of the more recent episodes of the show. And, you know, I've always promoted the idea of Refi Till youl Die. It does have a minor flaw to it, though. And the minor flaw is that when you have the good news of a highly appreciated property, like your property in Atlanta, where equity has really built up, usually the rents, of course, don't keep pace. That's the typical way that it works in real estate. And your Rent to value ratio gets out of whack. So the question is, do you do the refi till you die plan, which is still a good plan, or does it make sense to do what I'm calling the two for one plan? And that's where you sell that property on a 1031 tax deferred exchange and buy two more? Now, we had a guest on the show recently who works with us who bought three more. I've done the two more several times. Recently I sold a big apartment complex and bought another big apartment complex, a bigger one, and a mobile home park. And that was last year. I did that with one of our clients who's my partner in that deal. I did an another property owned single family home and purchased two more and then I'm doing that again right now. So that's the two for one plan. But you know, you might even make it three for one. Who knows? Tell us about your Atlanta property. What do you pay for it and what's it worth now?

I paid about 82,000 for it. 82. 5. And it's. I haven't run, you know, good comps or anything like that, but I'd say it's probably in the range of 100, 105,000.

Maybe higher, but Zillow is certainly higher, but I don't think it's much beyond that.

I bet in the next six months you're going to capture some more appreciation because I don't think that screams you need to do anything yet. I think that's still just hang tight and don't do anything quite yet. You said 105,000, right? Right. Just want to make sure I heard that correct. What's it running for? Is it running for about 850? 900?

It's at 9:50.

Okay, 9. You know.

Remember, you're listening to Flashback Friday. Our new episodes are published every Monday and Wednesday.

That's pretty good.

And did you put a lot down on that or do you have a lot of equity? What's your loan balance?

Loan balance is 60,000. Yeah.

Okay. So if you did the refi, you could buy one, maybe two more properties with that refinance. I think you need to let it go a little bit longer. And I know you said you were going to do another six months or so in it, maybe longer than that before you do anything. Unless you have an adjustable rate loan that you want to get rid of or a high interest rate loan on that. That is not screaming that you need to do something yet, but I think it's good that you're thinking about it for sure. Is there a, is there a reason that you're really thinking you want to do something or are you just kind of thinking about it?

I'm really just thinking about it. How to, how to get into more properties and put that, put that money best to use. It's. Yeah, I mean, as far as the equity is probably over 40%, you know, getting to 50% and that's probably right around the time I would want to think about. There doesn't need to be that much equity in this. Let's, let's put that better to use.

Right, exactly. And here's one of the other things to consider when people are either considering the refi till you die or the two for one deal. And that two for one is, you know, obviously just an expression. Right. It could be three for one, could be one for one. You know, I'm just giving an example when I say that. But on the two for one deal, when you sell the property, you really will have all of that equity available to you to buy more properties. On the refi, you're going to be limited to the refinance, cash out, refi, loan to value ratio, which is probably going to be around 75% LTV. So you're not going to get much money out of it on the refi till you die. But on the, on the sale you'll free up all the equity except the transaction cost, obviously. And you probably need to bank on somewhere around 8% for that on the sales side and then your transaction costs on the purchase. Depending on the type of financing and the area in which you buy the properties, somewhere in the neighborhood of three, three and a half percent about there probably. And so that's what you lose on the transaction cost, but it's less than what you don't get on the loan to value ratio limits on the cash out refi. I'm sure you've thought of that. Right, right.

Another benefit of doing the refi is to get a lower interest rate.

Maybe it wouldn't pull. Maybe I'd get 15,000 or 20,000 tops back, you know, spending cash out, but would also have a locked in lower interest rate, which is appealing to me as well.

Right, right. Okay, so that's, I'm glad you brought that up. That's a very good point. So what is your interest rate now? Do you know it offhand? And have you looked at rates for new financing? Because getting a lower rate, when you do the two for one, you automatically get to refinance Right.

So I believe that one's at 5.5%, so should be able to get under five right now.

You should be able to do better. Yeah, right. Yeah, absolutely. Good. Good stuff. Yeah. Yeah. You know, I think it's good that you're thinking about it. And what are you leaning toward? Do you have a preference?

For simplicity's sake, I'm leaning towards the refi. But the 1031 is appealing too. Especially, you know, if I were going to purchase right now, I probably wouldn't be looking in this Atlanta area. I feel like, you know, it has had some pretty good appreciation and might be looking at slightly more. I know it's not a cyclical market, but maybe more linear types. So you know that that would be another advantage there.

Yeah. And I would classify, and I'm sure you've heard me say this, I would classify Atlanta as a hybrid. Now, I wouldn't have before, I would have said it was linear, but it, it obviously had some pretty good appreciation. And you enjoyed that along with many others. I would currently say it's really kind of a hybrid market. So you'd get into a more linear. You'd improve your cash flow and like looking at the analysis of that if you bought two more. So you've got 950 now in income. I'm just saying gross. Obviously there's expenses, mortgages, debt service, et cetera. But just if you look at it from a very simplistic point of view, $950 per month now. What'd you say paid for it again?

82,500.

82,500. You could buy two more on the refi and I bet you could bring that, that gross income up to about eighteen hundred dollars per month. You're probably, you're probably looking at properties on our site and thinking the same thing, I bet. Right, right. Yeah. Yeah. Good, good stuff. Okay, well, any other thoughts or questions about that particular scenario?

No, it's really a win win. I'm just trying to figure out which, which way is best.

Tell us a little bit about your website and what you're doing with that.

Yeah, so I started website rentalmindset.com just to share my experience. What I'm learning.

Hopefully can show it's not too hard to become a real estate investor and that more young people get into it because I feel like it's really the best place where someone with a 15, 20, 30 year timeline.

Can really benefit.

And it's a lot better than the other options out there, isn't it?

Absolutely.

It's really scary. I've been listening to on audible some of the rich dad books recently and I've had Garrett Sutton on the show several times. Tom Wheelwright's book Tax Free wealth is pretty good too. I really have been enjoying that one lately. Although taxes are never, you know, like my favorite subject. But we've all got to pay attention to it. And it's amazing how anti retirement plan those guys are. They're just not into any sort of qualified plans really. Tom's a little bit more into the Roth plan, but I think overall, at least my take from it is that they don't like the plans at all. They would just say go out and buy investment properties and you know, keep it at that. I'm not quite as down on the qualified plans as they are, but I do see their reasoning for it and it makes sense. One of the things I've always said is that with real estate, in a self directed ira, you basically have a tax efficient vehicle inside another tax efficient vehicle. And of course you can't, you can't get really desirable financing inside your plan like you can outside of it. But you know, it's not bad. And I don't know, I just, I don't know that I would go so far say I had $100,000 in a self directed IRA, right. I don't know if I would go as so far as is cashing it out, paying the penalty, paying the tax and then investing with that money. They're pretty against it. I was kind of surprised at how anti qualified plan they are, you know. Have you read any of the other books?

No, I really haven't.

And let me make a recommendation to you and the listeners. Garrett Sutton's book Loopholes of Real Estate is excellent. At our last Venture alliance meeting, I gave that book to everybody, all our Venture alliance mastermind members. We're all kind of reading it together. We have sort of a book club where we sort of examine different books and that's been enlightening to get other investors take on it. But yeah, I'd recommend it.

I'll have to read that one. Yeah, I'm hoping to do some, some of the book reviews on my website as well. So yeah.

Oh, that's a, that's a great idea. Great idea for content. And the one thing I would say is that some of the ideas Garrett has in there I don't agree with. I think they're a little, no offense, Garrett. I think they're a little old fashioned. But, but you know, by and large, I think It's a great book. It's really, really interesting. And I love the way he writes and tells stories and gives funny examples of different people in situations. And he always kind of gets his little, little jab at the government in there. It's really funny to sort of notice that. So, yeah, good stuff. Any other thoughts or questions you want to share, Brian?

That's it. Thanks for having me on.

Okay, good. Well, hey, thank you for being on and thank you for being a client and a listener since episode number 50, way back there. This episode will air in the seventh 700 range on, on that show and we might air it on some of our other shows as well. You also attended Meet the masters back in 2010, it looks like. And did you attend our Atlanta property tour and Memphis property tours or are those just the properties you bought?

Those are the ones I bought. I've still, still never seen them, actually.

Oh, okay. Yeah. How do you feel about that, by the way? And how did you feel about that initially when you bought? Was that scary to buy sight unseen?

That first check is definitely scary. I mean, I'm not going to say it wasn't, but yeah, I can rationalize it and I'm not a real estate expert and so I don't have to do the property inspection and I hope that I am hiring people who are experts and double checking that. So, yeah, I think it's worked out great and I'm going to continue to do it.

Yeah, good stuff. Good stuff. Well, Brian, thank you so much for joining us today. Good luck with your investing journey and your website and it's great that you're an evangelist spreading the word about the gospel of real estate investing. So we all appreciate that because it's a great thing. And thanks for joining us.

Thanks. Have a good one.

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