Build A Passive Income Empire With Rental Properties (Here's How)

Wealthy people buy rental real estate because it makes sense. As I do pay the mortgage or the tenant pays it, for me, the mortgage is going to go down. So I'm building equity without putting any more money in there.

We love rental real estate. Why do we love it? Because we get to add assets. We're talking about this for the long haul. We're not talking about flipping a property. We think the most successful real estate investors go for the long haul. Let's be honest, you have other investment opportunities you could put your money into.

Why are you buying this rental?

Welcome, everyone, to the Main Street Business Podcast. This is Matt Sorenson, joined by the great and powerful Mark J. Kohler. Today we are talking about should I buy this rental or not?

Between the two of us, we have done 20,000 consults. We've been helping clients make these tough decisions. And we see really successful clients doing real estate, clients that are moderately successful doing real estate train necks. We've seen it all.

The good, bad and the ugly of rental real estate. We've seen it all. And I think for any of you that are like, maybe I'm a small business, own owner, or I got a W2 job and I want to start building assets, we talk about the trifecta. One of the most common recommendations we like, particularly for Main street business owners, is to just buy rentals. We love rental real estate. Why do we love it? Because we get to add assets. We're working so hard to make money in our business or in our job. We need to start taking that money and deploy into assets that can make money for us.

Today's podcast is more. Okay, you've decided you're going to buy real estate. Which one should you buy and how do you analyze it? And we know there's a lot of gurus out there teaching workshops this weekend that have done more real estate deals than Matt and I. On the flip side, I think we've maybe seen more real estate deals than they've seen and we see the tax returns and the legal ramifications that can be good and bad.

Yeah, but there's good deals and bad deals. And so that's what we want to kind of get at today is should I buy this or not? Just because rental real estate is good doesn't mean every deal is good. And so you want to know which ones to sink your money into. And let's be honest, you have other investment opportunities you could put your money into. Maybe you're investing it back in your small business. Maybe you're buying some stocks or some mutual funds or maybe you're doing an oil and gas investing in another company or I don't know.

That's crypto out of there. Okay, that's fine.

Yeah, I mean, you know, I mean, you know, you have plenty of options.

You have plenty of options. No, you do. And we've never been ones to say put all your money in real estate by any means. But in summary, wealthy people buy rental real estate because it makes sense. We've seen it over and over again. There's multiple facets to rental real estate. Now, it doesn't mean you put all your money there. There's times and seasons of life where it does or doesn't make sense. And what type of deals you enter into, of course, are a huge factor. But I think we need to look at it as an option and I think it's an important choice. Yeah, and let me throw this out too. If you're looking for a resource to analyze it and look at deals around the country, frankly, our most favorite right now for giving just deals to clients and walking them through options is real wealth realwealth.com with Rich and Kathy Fetke. They do a great job and if you go there, please mention our names. And we don't get any money out of it. We just want you to get a little extra tlc, which they'll give you. So if you're analyzing, you'll give them a call. They're doing deals just like this all over the country and helping clients of ours get into property. So I'm going to leave it there and we're going to say, should we do a deal?

Let's do a deal.

Let's do it. Okay.

Let's make a deal.

Let's make a deal. All right, we're going to throw out a few numbers of some examples and what we think the KPIs or key performance indicators really matter when you're looking at a real estate deal. But I think there's almost one that's a little bigger than any of the numbers. And that's your. Why, why are you buying this rental? Is it an area you'd like to vacation and you're going to check on it? You see an opportunity to create some immediate equity in it through some unique asset acquisition strategy or some sweat equity. Is it where your kids are going to college and they're going to rent from you? Self rental?

Yeah, self rental, definitely. For any of you business owners, you know, it's like, would I buy that commercial property and do that deal? If I was leasing to some other dentist, probably not. But if it's leasing it to me, there's a lot of business reasons why the location makes sense and that adds benefits besides just the financial stuff. And so the self rental could be one. I've always like, of course, like you know, the rehab projects and we certainly have come across a lot of those clients that they like that stuff. You know, that's not a Matt Sorenson deal. I do not want to buy fixer uppers. Okay. But there are certain clients who can make that instant equity. But this is also, I'm adding in some time in my work. But that.

But again, was that a dig on me? Was that a dig?

Mark likes to put the tool belt on still and go to his rentals. You know, I see him on the weekends. He's like, he's just got a little chip in me. Yeah, a little chip.

Yeah, chip gains. So I'm going to say it this way too. When you look at the why I want to say what is your strategic advantage in this deal? I really think if you're just going to look cold heartedly at what might be called turnkey properties, I'm just going to go buy this property just for the numbers. I trust the promoter, the seller or the realtor that's helping me acquire this property. I'm just looking at cold hard numbers. Those are hard because you're relying wholly on that. I like to have an X factor and I think if you ever have a strategic advantage to a deal now, it doesn't mean it makes the deal a go. Oh. But it makes those numbers a lot more understandable. And because we have some other factor, again, it could be rented to ourselves, our kids, an area we're confident in. There's a unique strategy where we know we're going to have some equity right out of the gate. I think that X factor has to exist for me on a deal generally.

Yeah.

Not all the time, but I really like that.

Yeah. And I think a lot of successful real estate investors do get very location specific. I was even talking to Jameson Manwaring, CEO of Neighborhood Ventures. They have, you know, they put to apartment buildings and all this. And he's like, we are not buying anywhere else right now. We have a team here, from contractors to property management. We know where rents are going to go, we know when we're going to raise them. We understand what's going on with the local economy from a short term to long term perspective. It's like that strategic advantage. Exactly. To like someone Else is buying in some random market.

You know, how many times have you seen this? I've had clients come in so many times over the years. Hey, I just bought some rentals. I need some llc. I'm like, okay, well, I bought a rental in Dallas, I bought one in Ohio. I got one in Miami, and then I bought one where my grandma is in Minnesota. You bought all those this year? Yeah, yeah. Who's your property manager? Well, I don't know. I'm going to do this. I'm going to do. I'm like, oh, my gosh. We set up 4 LLC in four states. Property management's already a train wreck. But they're like. But the deals were so good when you look at them on paper. Okay, that's great. But how in the hell are you going to manage this? And it created a strategic disadvantage.

Yeah.

Because that shotgun approach. Yeah.

And I always get the answer. Well, I wanted to diversify. You're going to pay the price for that? Yeah, that's. You're going to be doing all the work. Okay, all right, let's dive into it. And I think we did.

And that's my first point. First point is if you're analyzing a real estate deal, I want to hear your strategic advantage. That's and. And how you're going to manage it more efficiently, how it's a great deal, how you're going to have equity out of the gate, how you're going to help defer some of the risk because there's a rent internal rental. And maybe some of you. Are it just because you want to teach real estate to your family. We're going to do this as a family. I mean, whatever that strategic reason is, you better have one.

Yeah.

Or I'm going to be like, okay,

that's number one other thing. I'll just almost say a couple other points here, too, is we're talking about this for the long haul. We're not talking about flipping a property. We think the most successful real estate investors go for the long haul. Real estate is very cyclical. Okay. The real estate market, cyclical. It goes up and down. Rates are all over the place right now. It's has a significant impact on the value of a deal when the rates are shifting so much. The other thing I would say is we're not going to be talking about, like, the real estate, you know, the realtor that might be showing your properties. We don't care if it looks cute. We don't care if it's like, you know, in the best location. Yeah, we care if it's priced right because the price is going to how much you're going to have to put down on it. And your mortgage, we're going to be caring about the interest rate you're going to get on it and we're be careful about what's the rent you're going to receive. We are going to get very specific to the numbers and that's maybe the tax lawyers in us, we just want to pencil this out and just do the numbers make sense? Because let's be honest, at the end of the day, this isn't a house you're going to live at. And that's one thing I, you know, this is a house that's going to produce income for you and whether it's rent or appreciation gain when you sell it. So I, it's all about dollars and cents to me. This is numbers. That's why we're going to focus on numbers here.

You're not buying a house, you're buying numbers. And as we have heard it termed as well. Now, if any of you would like, I have a spreadsheet I send out to followers on my social media and in our network of tax pros. And if you want to email me markjkoler.com and just put in the subject line real estate spreadsheet. So I'll send you a spreadsheet that you can plug in some numbers and we're going to analyze these four or five factors here and one particular deal and just give you a feel for it. I want to say as we go into these numbers, here's my perspective. The second factor, other than a strategic advantage, is what is the cash flow? And what I mean by cash flow is what is your cash on cash return? You've got $100,000 to deploy. I think in this example we're going to do 80 grand. But let's say you've got 100,000 to deploy. Where else could you deploy that? Hell, I could put it in a money market at TD Ameritrade and get four and a half percent right now I could go do promissory notes, I could go do ETF and maybe get even 9 or 10%. So where am I going to put that hundred grand and compare it to if I go do this real estate deal? What is my, I want to start with cash flow. I'm going to, I'm pretty adamant about that. What is my cash flow going to be at the end of each month annualized out on that 100 grand. Now, yeah, I Might get appreciation and oh, I'm going to mortgage pay down. We're going to come to tax benefits too. Fine. But what's my freaking cash on cash return? Because at the end of the day, I don't want to have a negative cash flow problem and I don't want to be just rolling the dice on cash flow. Been there, done that. 2,000. 5, 6, 7, 8. I bought crap I shouldn't have bought. Music stopped. I'm left holding the bag with crappy cash flow. I learned some hard lessons, so I am a little jaded.

Yeah, you've been hurt. You know I got hurt. You know, I got hurt too. I had a. Anyways, we won't get into stories here. We got to get into the numbers. Cash is king. Cash is king. So that's we're going to look at and I think the probably the biggest thing I agree with what you said there on the cash is I don't want this to cost me me. I'm putting money into this. It better be sending me money back. If I got to start contributing money into this because it goes upside down or I got a tenant out for a month and I wasn't planning for this.

Emotions change.

This is not a good deal. Okay. And if you're like, well, it's going to appreciate one day, I will get to that. Let's talk about appreciation here in a moment. But you buy the deal because of cash flow.

Okay. And then I possible to do that, by the way. Yeah. And I'm going to say the third KPI or the third issue here is overall roi, which I'm appreciate. I appreciate overall roi After I've got a strategic advantage. I know the cash flow is going to be okay. Now show me that overall roi, which we're going to come to. Okay, so give us some numbers, Matt. Give us a deal.

All right, let's say you got a single family rental, 400k purchase price. You're going to put down 20%. Now, I know you could do some creative financing or maybe get a 5 or 10% down mortgage or something. We're just going to go with. Let's assume you get the rank and file 20% real estate investor loan. You got to put 20% down, which is 80k. Then we're at a 7% interest rate right now. Now we're going to come back to interest rate here because this is critical on a deal. But we're going to just price it right now what the current market will do at a 7% mortgage rate.

All right? Good. I'm going to put 7%, which gives us. Now PITI is an important concept, everybody. I'd just add to this. PITI is principal, interest, taxes and insurance. Piti, so what is this property going to cost me cash flow wise? Direct costs and we want to have a cushion for hoa, property management and maybe some reserves. So that PITI and those direct costs are what we're going to subtract from our rent. So this deal matches throughout $400,000 property, 20% down, 80 grand. What's our rent? What did you say how much rent would get?

We haven't said that yet.

Okay, so by piti, let's just go

to what it's going to cost to

buy this house, okay, and this number hold this property, okay, at 7%. Matt, you give them the number.

All right, 2,987 bucks. Okay, that's the, that's the total number. This is taking in principal and interest for your mortgage payment, property taxes, insurance on the property. And we've got about 4K and other contingency there, about 333amonth, which is, you know, maybe you have some repairs, some property management.

No rent one month.

Yeah, no rent one month. We'll come back. You might need to bump that up. But let's just say that we assumed 4,000 in contingency.

Now if some of you really want to, you engineers out there, we assumed 1.2% of the property value in property tax, 1500 and homeowners insurance and then that 4000 another cost. So when you add that up with a 30 year, 7% fixed rate mortgage, you're at 2987. So I'm going to put in 80 grand and I'm going to be out 2987amonth to keep that property with no tenant in it. That's it, that's my direct costs. I'm off to the races. But I want to rent it, man.

Yeah, so let's, obviously that was the whole point here. So let's say, and we're trying to be reasonable here, you can get 3500 bucks a month rent. This is a long term rental, we're assuming. By the way, I've had a lot of clients that have done short term rentals and you know, I'm doing one right now. Mark's got some short term rentals. One thing I like to do when analyzing a short term rental, I talked to a client about this the other day. He was like, man, this, the income on this really fluctuates even from the last owner they were buying it from existing owner. Like what does this rent for in a long term? Let's just analyze it a long term deal and then you can decide whether to short term rental it because your fallback of a short term rental that doesn't work is always to long term rent it. All right, 3500 bucks a month though in rent. So we're assuming you're going to make $513 a month in cash flow, that's

6150 a year annually. And here's the magic equation. What am I going to make in annual cash flow divided by my cash investment assuming I'm not going to put any more money in. So I put in my 80 and I'm going to walk away with 61:56 at the end of the year, all things considered with a little bit of contingency there. And we know it's not a perfect world. Sometimes you get lucky and get better. Sometimes there's some hards and some bumps in the road. Your, your cash on cash return is 7.6%. Now that's respectable to me. I like that. I want to be over 5%, bare minimum because then I'm going to get into my other benefits and our total roi. But I know I want to make sure at least I'm maybe 5, 6 or 7% in cash flow. With some really conservative assumptions. Now we can play around. You ran some numbers with a lower interest rate.

Yeah, let's say, and let's say that you could get this at a 5% rate. Maybe you buy this subject to, to the existing rate that's a little bit lower, May maybe in two years rates are down to 5 and you can refi on this. Maybe there's some pay down of the rate at the time of purchase. I know you've seen some of those deals.

Yeah, new builds, contractors are buying down rates to get people to buy and things like that. So some of you are freaking out going you can't get 5%.

Okay, we've seen it. Yeah, we've seen it. But we were trying to do the easy one 7%. So let's say it was at a 5% rate. Well now this takes my mortgage payment

to only 17, 17 and total PITI 2576.

Yeah. So now I'm making my, now my cash flow goes up by 5,400 a year. Okay, 5,400 a year, which means I've got 11,556 because I've reduced my interest cost. I've increased the Amount of cash flow.

That's the theory.

5400 is not going to the bank anymore. That's now income to me. So now I'm taking home 11,556, which if you divide by 80,000, because that was my cash I had to put down. Now I'm getting a 14% return back on my cash flow.

I mean, you're turning me on. All this talking numbers here. This is like, so sexy.

That's pretty hot, right?

Yeah, the room is heating up here. So 14%. Now, I think this is really, really powerful because we can start with our spreadsheet, which I'll email to you guys if you want. Just email market. Kohler put in real estate spreadsheet. And you want to have this spreadsheet and look at rental after rental after rental and start tweaking these. One thing that Matt, before the show started, he goes, well, let's drop one month's rent out. Let's say we don't get rent for one whole freaking month.

Yeah. And we already had some contingency in the first model of 4K. But let's just say on top of that, we have another a month, bad month.

Then our ro. Our cash on cash goes down to 3.32. Now, that's on the 7% assumption of interest rate, but 3.2, not good.

But at a 5% rate, that takes me down to 8,000 a year in cash flow, which on 80 grand is 10% cash on cash returned.

Yeah. Now, Matt asked me when we played with this, he goes, would you buy this rental? And I said, no, not without a strategic reason. It's good, but it's not great. See, it's almost like you go to the store. Have you ever done that? You go to the store and you're like, gonna buy a pair of jeans. You're like, I look good, but you take them home. You don't wear them. Yeah, but you got it when they're in. When you put them on in the store, they better look great or you're never wearing them. Yeah. And so this is one where it's. It's good, but I need a reason to make it great. Now, some people, and this is where Matt and I may differ a little, will go, well, let's look at the overall roi. Yes, there's mortgage pay down. This. This is going to appreciate. I'm going to get some tax benefits. Now, you can see I'm a little. I'm okay with that. But that doesn't get me over the hump. Yeah. I got it. I want to go back to my first reason. Tell me, but let's go to roi.

Here's. I would do this deal.

Okay.

I would do this deal. I would do this deal. Let me give you a number of reasons why. Now, first, let me say some of the negative things.

I'll send over the REPC contract. I've got this one this afternoon.

Someone's got one of these deals. Send it over. I'm a buyer right now.

I'm buying. Okay. All right.

Here's why. When you run this model, one thing I've noticed over the years myself, investing in rental real estate is this initial rent payment is just what I'm going to get. Now, one of my last rentals, I started at 950amonth in rent. In the year two or three when I was renewing the leases, that first tenant moved out, I was at 1200 bucks a month rent. That is pure cash flow on the model that I already had in place because my mortgage didn't go up, maybe my homeowner's insurance went up a little bit. Property taxes nominal went up, but my rent significantly went up. So now I was almost doubling my rate of return just on the cash.

On cash.

So as a landlord, you get the benefit of the rent's going to go up over time. So the longer I hold this property, I can get more cash flow.

Okay. I'll get on your bandwagon. I would say too, you're going to look at hopefully refine and getting a lower interest rate. And one might argue you have a strategic advantage because you may say, well, over the next two years, I'm going to put the yard in or I'm going to put in another RV pad on the side.

I'm not going to. You are, though.

But here's what I'm saying. How you're going to. How you're going to exponentially increase rent and is to maybe you see some sweat equity opportunities. The fence is falling apart, the landscaping sucks, the house needs to be painted, and you can still get 3,500. And all that's going on. See, that's strategic advantage to me. Yes. Because even if I hired a contractor to go knock it out.

Yeah.

Now I'm increasing the rent exponentially. So. But okay, you like it because you just by natural rent increases.

Yeah. And I'm still just on just the cash flow from the rent is because I do think over time your rents go up and you get the benefit of that. And I'm assuming you're buying fixed Rate mortgages where you're not affected when rates go up, but you get the benefit of refiing when they go down. So you don't want to lock yourself into the adjustable rates where you can lose on the way up, get them fixed and you can always refi on the way down. Of course.

Gosh, this is so good. Because now the blending between the overall ROI and your long term play and your strategic advantage, they go hand in hand. Because another factor is you're going to say, well, this is an area where some big Fortune 5000 are moving into the area. There's going to be a drive up in rent rates. Number two, this is a new build. Let's say you're like, I'm not going to have any repairs for eight years at least before even appliances are going to be a problem. But if you look at this one and holy crap, this is a 40 year old house, there's going to be issues. Sewer, furnaces, roof, driveway. So then you're like, oof, I better have more of a cushion, the deal falls off the table. So I think again you can say, well, I'm going to just buy this rental where my kids are at college and they're going to be my tenants and they're going to learn how to manage property together. And so for five years I've already saving, paying rent to someone else. Strategic advantage, which will change your roi. So tell me some of your favorite roi. Do you like appreciation more or mortgage reduction?

I'm definitely an appreciation kind of guy. You know, I'm, you know, I like to appreciate things. So no, appreciation is awesome because I'll be honest. And this is again the perspective we get in talking to clients over the years. That is where they've really made their wealth. They got cash flow from the rental that maybe helped them buy more assets or live a better lifestyle. But they really built wealth by the appreciation over time. And that happens because real estate goes up over time. Here's the one thing, that's the counter to the s and P500. A lot of people might have said that. Hey Matt, that 7.6% that you did on that first model, cash on cash at a 7% interest rate for the mortgage. I know I can get 8 to 10 in an S&P 500 fund over time. That's pretty predictable and is zero work. I got to type some letters into a computer. Why would I do that? Well, because I'm getting, I can get that in the rent plus the appreciation.

Okay, my counter to that. And I Agree.

And let's see, you're in it for 10 to 20 years.

Yes.

That piece of real estate, this 400k piece of real estate in 10 years is going to be 800.

Okay, well this is where you have to analyze the deal carefully. For example, I have two deals where I've had no appreciation in 10 years. For example, I've got a little low income housing rental in South Chicago. Great cash flow, no appreciation.

Yeah.

So I went in with my eyes.

But it's a high cash flow.

Yeah, yeah. This is why and I'm not, I'm not disagreeing with you. If you bought the rock property. If you bought a property cash rental. Yeah. You know that there's going to be a new. Well I'm going to come to that in a moment but. Oh, you mean all cash, no mortgage rental. I was going to come to that

meant the tenants only painting.

Oh yeah, there you go.

They're only paying a paper sack.

I think. I think too when you're looking at this is commercial doesn't appreciate as fast as residential. I've got a commercial property that's been wonderful and that's a different model with commercial. It's cap rates. It's commercial buildings are not skyrocketing in value as you'll see their demand for residential housing, which is there's a shortage in residential housing in the United States right now. You could argue there's a surplus of commercial space. So. So not all deals are going to appreciate the same. So you want to say what area am I buying in? What region? What strategic advantage would give me more appreciation as it's near a golf course. They're going to be remodeling soon.

La la la la. Let me say this too. The, the properties that seem to appreciate the most in the real estate market that seemed at the most appreciation are the tightest on cash flow. They just seem to be like even a lot of the Midwest stuff. You know we both own properties in the Midwest as rental properties. Great cash flow markets. Excellent cash flow market. Terrible appreciation markets here in Phoenix where we're at kind of a tight cash flow market, particularly for long term rentals. Awesome appreciation market at least for me on a number of my properties. And so. And you got to time it right. You got to time the real estate cycles. Right. Of course. But so keep in mind you don't have to hit every one of these. You don't have to like win on cash flow, win on appreciation.

Like you're not gonna hit a whole run. You're Just base hits. Exactly. I'm sorry, let me point at you.

We just want to get on base.

Okay. Thank you. I'm Brad Pitt in that one. Jonah Hill. Thank you. Now I want to throw Moneyball. Now I want to add a couple other. I agree with you entirely. We can't get all four quadrants every time, but if we can hit a double, get a couple quadrants, a triple. Great. I will say this too. Let's throw in a couple of variants. Let's say it is a self rental for your business. I do this every day and on Sunday. Because if I'm already paying rent as a business owner for a commercial building, a warehouse, storage, you may be having four. You might have four storage units for your company. Like, holy crap, I'm going to buy a storage unit facility. Maybe a smaller one. A mom and pop. There's a lot opportunity there. You just spoke up in Boise. What's his name?

I'm going next month.

Oh, is it next month? Yeah. Great Conference. Coeur d' Alene again.

Yeah, Coeur d', Alene, Idaho.

Yeah.

Self Storage Summit.

Yeah, it's really good. Now, another factor I'd throw out that I would go the other direction is I was telling Matt about a console I had with these clients out of San Clemente, California. They were like, we got our house and we just moved into a new one. We're going to rent our old house. And I'm like, oh, okay, tell me your argument there. They had close to 800 grand in equity. We won't dive into the numbers in full detail here, but they had about 800 grand in equity and they were going to pay off the mortgage like that with a little influx they had, and they were just going to sit back and collect rent and they thought it was the cat's meow. And I said, really? You're going to get maybe 36 grand net cash flow out of this, maybe 40 grand, and you got $800,000 in equity that could be deployed somewhere else, maybe three or four rentals and get some leverage going. And they're like, oh, my gosh, no, this is. And I said, that's a 5% return. You're making 5%? Well, it's going to appreciate. You're in California. You're at the top of the last cycle. California is cyclical. What was the last low? You're at the top right now. You're sure you're going to get another 400 grand in appreciation before there's a drop. You want to marry this for another 10 years lucky. And they're like, oh, we didn't look at it that way. And so I have concerns now. It doesn't have to be your prior residence, but whenever you pay off a property, you say, well, I don't want a mortgage. I'm going the Dave Ramsey route. I'm not going to have any mortgage on this rental. You're a rent collector for leverage is out the window. Your ROI starts to plummet.

Yeah, it's really hard to win on rental real estate just with all cash. It is now, right now, when rates are a little high. You know, even Grant Cardone's talking about this right now. Buying properties with all cash because rates are high and there's a cost of debt right now. We're definitely fans of leverage. I had Jaron Bergeson on. He's one of the partners in our law firm. Stop Choosing to be Broke is his book. Awesome book. He made one of the greatest comments about when to get debt is when it's an appreciating asset.

Hold on. Macy's, when they ask you at checkout if you want the card and save

10%, if it can be 15%, you go for it.

Okay. But at 10% is Memorial Day special. It makes.

Yeah. Or that's when you go to triple points.

Okay.

If you get the triple points, then you.

That's when you do it. Okay.

But depreciating assets, like a car loan, he's like, I'm just not a fan of that. A car is a depreciating asset. You shouldn't get debt for a depreciating asset, but an appreciating asset, whether this is a home or a rental property, it makes sense to get debt and leverage it. Because now I'm increasing my purchasing power and I'm getting the benefit of the appreciation, not just my cash, but the bank's money that's sitting on the property. I'm obviously getting the benefit, the appreciation. Now can we hit mortgage reduction?

Can we haven't flushed it out. Go ahead. Okay, let's flush it.

I do like mortgage direction. And I don't know if you've looked at this. Mark and I own a commercial property in Utah that our law firm rents from.

Yeah.

Okay. We bought this 15 years ago.

1415.

We actually assume the mortgage from someone else is loan. It's got like, like three years left on the mortgage. Our mortgage payment right now, like $100 of 4 grand is going to interest because we're on the back end of the mortgage. We've held it so long. So that mortgage payment, that payment we send every month is really just paying down the mortgage. I mean it's, and so this is again why long term vision on this stuff, my ROI really starts to increase on this. And, and so I do like mortgage reduction, but don't think about it as helping you now. You have to be like, if I'm going to own this property 10 years, that mortgage production really starts working in my favor. Because you look at any amortization schedule now, half your mortgage payment is going to pay down the principal versus interest.

And I'm going to say this two points. One is, I'll just quick definition for those that are still scratching their head. You've got your cash flow, your, your what is the cost of the property and my rent minus those costs, what's my cash flow number? Two, how much does this property going to appreciate over time? And third, as I do pay the mortgage or the tenant pays it for me, the mortgage is going to go down. So I'm building equity without putting any more money in there. That's what we're talking about with mortgage reduction. And it's very easy to calculate because you're going to have an amortization schedule that's going to show more and more that mortgage going down over time. So the fourth benefit will come to taxes in a minute and our opinions on that issue. But on mortgage reduction, Matt, one thing that you said that I really liked and I want to reiterate, when you analyze a real estate deal, it's at least a seven year play. I think you really need to say I'm going to hold this at least seven. If you're going to do three to five, you're almost talking about a fix and flip.

All the transactional costs from the realtor fees to the title insurance and escrow and the I, it's just, you're not gonna, it's tough to make money in that.

Yep, yep. Okay. Now tax benefits. This is an interesting one because as you folks can imagine we get a lot of phone calls with people, I need to buy this rental. The tax benefits are incredible. I'm like, okay, so I'm just gonna throw this out. The first thing we do when someone says that is we verify if the tax benefits would benefit you. If the tax benefits are incredible, those are two different issues because sometimes a cost seg analysis or the depreciation or some factor on the tax write offs that year are going to be great. But if you don't qualify for those tax deductions, you're not getting them and that. And so it makes the whole question of what the tax benefits are irrelevant. So I want to ask my clients, are you a real estate professional? Are you doing a short term rental? Is it a self rental? Because those are going to be different lanes on the freeway where you might get the benefits, tax wise or not. And this is where it pisses us off that we have these cost seg companies that are, you know, pushing cost segs on everybody. Clients walk in with a cost seg and look, I got 100 grand of depreciation I can take. Yeah, if you qualify. But you don't. You're not in one of these lanes. So first point is be really, really careful focusing on the tax benefits if you qualify at all and what they are. And then the third piece I'd like from your point of view as Matt, I don't buy a deal for tax.

I don't buy. I don't buy a deal for tax. That's probably one of the most oversold benefits of buying. I buy it for income. Like I want to make money on this thing. The tax benefit is another thing down the road. Security on the top. Yeah. You might be surprised as a tax lawyer, we're not leading with that. That's the last thing here. Now the most oversold thing we get is a lot of high income professionals. Doctors are notorious for this. They go out and buy a bunch of rental real estate and they think it's going to help them on their business or their W2 and it does nothing for them.

Or it does. And then they're stuck with real estate they don't like.

Yeah, it's most likely it doesn't help because they think it's going to offset their business income or their high income. W2. But here's why I like it. Okay. I do want to say why I do love it.

Love tax.

Yes, love the tax strategy on this. And why I think it's better than what again, you can get in the stock market or even if it's the money market.

Okay.

Let's go back to that same deal we talked about 400k purchase price. Okay. And we ran that deal. Let's say we were making 11,556 a year in cash flow on that.

Okay.

We did the 5% rate. So we're getting 11,500 bucks for the year of income. Now that's going to hit my 1040 as rental income. But there's an expense on here for tax purposes.

You get called, we're Talking the big D. And I don't mean Dallas, the big D. It's a great country song, by the way.

Yeah, we got some big D energy coming in here. Depreciation. So depreciation. Now here's the cool thing on this deal. This numbers just work this way. Now depreciation is a $400,000 purchase price. Let's assume the building percentage of that is 320k.

Okay?

Because you don't get to appreciate the land.

Take 20% of land off, okay?

Divided by 27 and a half years, okay? That's what you get for single family rentals, right? The 320,000 I get a depreciated over 27 and a half years, that comes out to $11,636. In other words, on this deal of 11,556 bucks, I got 11,556 bucks of cash flow. It's in my bank account. I made 11 grand. I'm going to pay zero taxes. I don't have to be a real estate professional. It doesn't have to be a self rental. I get it so it saves me. I pay no tax on the cash flow.

Oh, and by the way, on our amortization schedule on the. Because you looked at the 5% first year's interest deduction. 15,893. So boom. So now we're cashing in on that building.

This I didn't even need to carry forward loss.

Yeah, but you're going to carry this loss forward. And everybody, I want you to know this too. I mean, I talk about buying rental real estate for tax benefits in my books, but it can be a delayed gratification too because if Matt wipes out the cash flow on that, the tax on that cash flow right out of the gate with depreciation, then we've got the mortgage interest deduction. Travel, home, office repairs, maintenance, Home Depot, Lowe's, the kids. I'm writing off everything under the sun. I might have 20 grand in additional write offs. And Matt said, well the doctor do you get that write off? Oh, he didn't get it this year, but he'll get it when he sells. So all those losses carry forward. And that passive loss carryforward is extremely valuable. You may not even have to do a 1031 exchange down the road. So I'm be very clear here. I am hopped up on the tax benefits. I want you to extort every tax strategy you can out of this. But you may not get it this year and you and it may not. And I Don't think it changes the equation nine out of 10 times on whether you buy or not. Now if you're going after some cost seg on a short term rental for one year and you've got a long term plan to do more of that. Okay, I'm listening. But we do not want to let the tax tail wag the dog.

Yeah. And I think that even if I could get all those great tax deductions, tens of thousands of deductions, and I got these losses on my return, you only buy the property if it makes money. Like you can give money to a charity if you wanted and get a tax deduction. Let's not have a rental property that's a charity just so I can get tax deductions. I want it to make me money, which it can do. On this example we showed it can cash flow. So I'm actually getting money in my pocket because of the depreciation write off. I'm having no taxable income. I'm building wealth through appreciation. The mortgage is getting paid down a little bit now. Over time, it could really make a difference. So that's why I'm going to do this deal.

Okay, well, Mark Cuban, you can do that. I'm going to walk away from this one.

Okay, so where are you?

You can do the deal in the back room at the Shark Tank with these people and done, done, done.

I didn't want to have to compete on this deal. It's perfect.

Well, everybody, we hope this was helpful and lots of, frankly, I think great takeaways. And this is coming from again, guys that buy real estate, invest in real estate and consult with clients, hundreds and thousands of clients every year about this. So please keep up the good fight. Continue to please listen to this podcast. And by the way, our podcast over at Directed IRA is about how to use an IRA to buy real estate. So that's our sister podcast, the Directed IRA podcast. Please get over there and listen to that. On using your IRA to do the same analysis. We're going to go through the process over there, not going to do the analysis. And so it's going to be the sister podcast. And I think doing it in a retirement account is incredible.

Yeah. So any of you looking to do this in your IRA or 401k or rollover an old IRA or 401k to a self directed IRA to do this? We've, I mean, every hour we have a client doing that here. So get over to that podcast. We go through the mechanics on doing it and this is the one to just think of the number. Should I do the deal or not? There's a lot of reading and education, of course you can do in real estate. We've had some great guests on. I know you've had Rich Fetke on and we'll have some other great experts on on real estate stuff so you can continue to learn from them.

Thanks, everyone and appreciate you being here this week. And we'll see you next week for another episode of the Main Street Business podcast.