Don't Cosign for your kids!

Well, if everybody will throw. I mean, some of you are local, some of you are not. So if you're local, throw local in the chat. If you're out of state, where you from? And we'll get started here in just a second. Whoa. It wasn't that exciting. That was totally Elliot's kid in the background. I see Elliot just got on. Sorry, dude, Lindsay's jamming out. Muting myself speaking. Elliot. Elliot's got a new podcast called Happy and Jacked. It's actually pretty interesting. You should check it out. The guy eats like, I don't know, 9,000 calories a day. He's a moose. Dude, your arms are looking big. I noticed you've been hitting the gym. Dude, way to go. 75 hard baby. Day 65. I won't lie, it's been a really long day. So I did take some pre workout before pre zoom call tonight. Should be interesting. Just. All right, it's 6:02. I'm going to give it another 60 seconds and mute everybody. Here is how I like to do this is I'm just going to kind of teach. If you have questions as we're going through it, throw it in a chat. Wendy's going to moderate the questions so it doesn't kind of interrupt my train of thought because I have a tendency to chase squirrels. And we'll just kind of roll through this, take a lot of notes. I didn't really do a PowerPoint presentation. This is really to give you the idea of what's possible in either partnering with your kids, ways to do it. You know, I've seen a lot of clients over the years, and I wished I had actually thought about this years ago where, you know, a child needs a co signer or a gift fund or something of that nature, but the parent just goes in and does it. But there's no partnership agreement in it. There's nothing that's there. So if somebody's going to rent your credit to help them, I think that there should be a different way to do it as far as creating a partnership. And here's the ultimate benefit of it is that, you know, if you want to invest in real estate, you can do it with your kids as owner occupants. It's the cheapest way to start it as far as you can watch something.

For a little bit while I'm listening to this.

All right, Garrett's got it. So it's. It's the easiest way to potentially start in real estate and maybe even teach your kids alongside with you as to how we're going to keep that house as a rental, as a family, you know, if they're ready to move on to the next one. So it's a great stepping stone and just kind of that teaching process. And maybe you haven't done it and maybe this is an opportunity to do it from that standpoint. Because a lot of people, you know, they get into the myth of, well, I can't invest or I don't have the 20% to put down right now. There's so many different ways to do it. And some of you have kids that might be a couple years out from college and it's a great space to consider. Like where are they going to college? So like in Arizona, if they're going to NAU or they're going to Tucson or to asu, can you partner with them to potentially purchase something and then show them how to run a business by renting it out room by room, creating some cash flow. So there's a lot of different opportunities here to create wealth, teach your kids something and get them started on their investment career as well. And I'm sorry if I cough here and there. I'm getting over chest cold. I always turn away from the screen like it's going to help on the microphone's attached to me, but anyway. All right, all right, Everybody's in. Is going to be in. If they join in late, well, if they were realtors, that's typical. Ten minutes late is on time, but we'll go from there.

All right.

How many have kids? I guess I should ask that question. How many have kids? Right. All right. How many have too many kids? I could like waiver like one too many kids. Hey, Wendy's. Including me and the three kids. Some of you know me that I am the third child without a doubt. All right, let's start out here. Okay. Your children have this piece where I'm going to use Christian, my oldest, as an example right now. He's had a good job, has some good income right now. Is he ready to move out yet? Probably not, but we're working with him on his credit. You know, he's got his first credit card. We're watching that and helping him make sure that it's being paid off every month and kind of building his credit now. And Andrew, if you want to chime in on anything as well, Andrew's one of our preferred lenders. You know, in this scenario, you know, let me know. Andrew. So Christian's got good credit and he would be a first time home buyer that might qualify for different Things based on his current credit and income. Now, he might need a co signer and he might need a gift of down payment. But rather than gifting something like that, the conversation should be, as parents, how do we get you into homeownership? But not just homeownership, how do we get you to the investment path? Because I bet if I asked the question amongst all of you, I wish somebody would have done this with me when I was 18 or 20 years old and showed me how to keep these properties. Because I believe we would all be in a different spot at the ages of 50 and 60 with our kids now. Right. I know I would be, even though my dad tried, but it wasn't in this direction. But showing them the path. You know, right now I've got some young guys that I'm working with on their path where they're buying their first home at age 25. But they're not just buying their first home, they're actually buying their first investment property. Some of them are renting out rooms. One guy I'm working with right now, he's renting out three rooms in a house that he just bought. He's actually going to cash flow 3, $300 a month on his mortgage in the house that he's living in by doing it this way. So some people will think, well, I can't afford it. And it's not that you can't afford it, it's that we have to think outside the box and show them there's a different way and work with them. And if we're working with them in the partnership, which is, hey, I'm more than happy to help you get into a house that is going to be a family asset or a partnership. And we're going to work through this together in order to create this wealth for our family or for both of us. And it's helping you get started because I know that a lot of parents will gift. So when you're, when you're in that FHA conventional, you can get a gift of a down payment from a family member to help them get into the house. So some of us do have that little bit. And by the way, that the down payment on FHA is about 3 and a half percent in the current market, we can typically negotiate the closing costs into the sales price. So in a 3 to $400,000 home, it's going to cost somewhere between 9 to $12,000 in out of pocket cash to get in. Now that's if your children, you know, this is part of the equation, they've, they've had income or they've had a job. And Andrew, do you want to chime in for a second? Just as like job history, is it still that one to two years of job history or what does that look like? So we look, oh, so we look at, we look at a two year job history. But the nice thing with kids is we'll actually use like a diploma or like a certificate, like let's say they went to, you know, a trade school. We'll use a certificate or a diploma to suffice for employment history. So you literally could graduate college and get a job in day one with a W2 income salary or hourly and use that income right from day one. Awesome. Perfect. Thank you for answering that. So the other thing too is that with a co signer, so that's one way with a gift, right, that they could qualify on their own. Now let's say they only qualify for 200,000 and they need a cosigner of a parent in order to increase the income. And take, take that over. That's where you might come in with a cosigner, where we can actually buy a higher price point house still with a minimal down because they're still the primary on it. And then you're just a co signer on that. But then you're trying to work with them as to how this is going to work. It's not just their house. Same thing with the gift fund when it comes down to getting them into that mindset of this is what we're doing as a business opportunity and a long term opportunity. So one of the ways to explain that, which, you know, a lot of us, I don't know about you, but you know, for me, I really didn't start thinking about like what retirement was going to look like and things were going to look like until about seven years ago. And there's more and more kids that I'm trying to have conversations with in their 20s about what it would look like in their 50s if they owned a couple of rental properties that would be really close to being paid off. And I think we can all agree that a lot of us wish we had taken that path and somebody would have had that conversation. And that's why I wanted to do this with you guys is to show you what the path is to help your kids not just see getting into homeownership, but getting into owning real estate as a means to an end for retirement. And it's just, this is just the starting conversation, right? This is planting the seed and the idea for you so that you can start having those conversations with your kids. And somebody like Andrew and Andrew, if you'll put your information in the chat, can have that conversation, like, hey, what do my kids need to start doing? What does it look like for them to go through this process if they've had a job or they're getting a job? And, you know, this is where we start looking at, you know, how many parents are contributing towards dorms, apartment rents, all these things that is just putting money in somebody else's pocket. Right. But if you could use this plan, you could potentially not be wasting money and partnering with them and having an asset on the other side. And so here's the other benefits of that, is that you've got some tax benefits, right? So the child is actually getting, depending on how you take title. And there's some other things we'll talk about in a second. There's some potential tax benefits as well, going forward with it, depending on how title and some of those other things are utilized in this situation. So I want to open it up for a second because we just kind of went through a lot and see if there are any other questions. When is there any questions in the chat? No. Everybody good? Okay. So let's, let's just kind of work through two different scenarios. The first scenario is when you do this with your child. I want you to consider your child a partner. Okay. We're not talking about, you know, all of our jobs is to get our kids to 18. After that, you know, it's like, hey, now we're going to partner on something. I don't owe you anything. My opinion, Wendy's opinion, that's where we're at, you know, that I don't owe you anything after that. But I do want to partner with you to help give you the step up in this. And this is how we're going to do it. And so it's kind of laying out a plan, discussing with it and knowing, you know, can they be responsible with this piece? Because it's going to be both of ours. Now, some kids may be like, ah, you know, I don't want anything to do with that because then mom and dad have a say. So and things, you know, those are all discussions to have, right? They're. They're really important. You know, it's kind of like when you create a partnership, the best thing to start a partnership is with the end in mind, which means what happens when it's over. Right. So when we get divorced, or we break up this partnership. What does it look like? Right? And the end goal for this as a family is to really look at it as, hey, I'm going to help you get into the first home, which is going to be our first investment property. I will put up the down payment as a gift, which means I'm getting an equity position in it. And if I'm co signing on it, I'm also part of this and part of the say so. Now with that comes the partnership agreement. So what happens with that partnership is you start to create documents or checklists or something of that nature of hey, I put X amount of dollars into the house and you need to match it or, you know, whatever that looks like. So you're really keeping tabs on what's happening. And it's kind of like a monthly meeting or a quarterly meeting about what's going on with the house, what does it look like, collecting roommates, rent, those types of things, and teaching them how to operate that business. Because they're going to want to move their friends in and their friends are going to do the typical oh, sorry, I don't have any money or whatever the case may be. Well, they need to understand what that responsibility is and this is just a great way to do it in teaching them how they potentially could live for free if they learn how to operate this business. So that's, that's one of the main things there. Now let's. Then you have the other piece of it which is your co signing. Okay, well let me back up. You're doing the gift and they're being able to buy on their own and they qualify on their own, then that gift is still the same thing as creating that partnership. They can still close on it and you can still be added on to title afterwards. As far as protecting that interest, which is just an agreement that, hey, once this closes, you're going to add me on to title and now you have 50% ownership in it, depending on how you take title. And that can be done after the fact.

That.

And again, that's kind of an upfront agreement that this is how we're going to operate, that that gift is a gift, but I'm going to take 50% ownership of the house and its future equity because we're going to do this as a partnership and as a partner. Sometimes people bring money to the table and sometimes people bring credit. So in this case, the child is bringing credit, you're bringing money. That's where the partnership's being created now, helping them create the structure. So let's say, you know, they, they're able to qualify for a $300,000 three bedroom, two bath house and they have two rooms that they want to rent out. Now it's helping them understand renting the house to two other people, typically it's going to be friends, right? They're not going to put a sign out in the yard, room for rent. At least. I wouldn't advise that to anybody. Right? But we've all had those friends that we probably had as roommates that we wished we would had some sort of informal or formal in writing agreement with them on how the lease to work, right. This is where we start to teach them the business part of it, which is they have different room lease agreements, which is kind of about common areas when rent is due, late payments, all the things that you would normally do. It's kind of like being, you know, an apartment manager where you're collecting rents, this is when it's due, these are responsibilities so that if somebody starts to violate the lease, you can legally terminate their lease and remove them from the house. Believe it or not, it can be a little rough when you're trying to get somebody you don't want in the house that's making a mess or not paying the rent out, right? It becomes a problem. These are documents that we can legally put in place, like I have a in lease in writing roommate agreement. This is what it is, this is what they violated. But they also have to track that stuff and be very conscious. Again, this is part of operating the business that you want to help them as a parent. Hey, you know, so maybe that meeting is on the 5th of every month with you and your business partner or your child and going, okay, what does the rent look like? What do we collect? What repairs needed to be made this month and kind of working through that in an operational factor, right? So that, and my advice is on roommate leases is you do 30 day leases, right? It's a month to month lease that renews every month automatically unless somebody else gives notice. That way you're not tied to somebody being there for a month and then violating things or whatever the case may be. It's just easier if you do that on 30 day increments. Oh, Garrett's got a question. Oh, I didn't show you the question, sorry. Oh, she's got to show me the question. Haha.

It's actually from Terry. She says, are you having an attorney drop your documents or doing it yourself? And are you creating an LLC or a partnership?

Okay, hold on before we get to the partnership LLC thing. Documents on. As far as. So you might be asking two different questions. The partnership with the kids is something typically we do just kind of drafting. It's just an operational agreement on. We haven't talked about losses yet, which we'll talk about in a second. That gets a little bit more complicated. As far as the roommate leases. They're pretty prevalent online to grab a roommate lease from something. We haven't found anything. Great. Because I haven't rented roommates, but it's something that my new clients are actually finding some different documents that they're using for the roommate leases.

And I would add to that, Terry, I think it really depends on what your relationship is with the person that you're doing it with. If it's a, a stepchild, um, or if your relationship with your kiddo is kind of tenuous, or if you've got, you know, issues with family, you know, that are not necessarily super copacetic, then you may want to have an attorney put together what your agreement looks like. But normally I think we would probably just write something up between us and everybody.

This is my wife Wendy. She is chiming in for, I think the first call. This is the third one we've done, her fourth one. But she, she's chiming in and giving her expertise. Since we're going through this with our own kids right now. Thank you, Tricia Carver. As far as. So that's one way on the operational piece. And Terry, to answer your question, when we get into LLCs and partnership structures, there's a couple of different pieces of advice here. One, you need to talk to your CPA as to how the tax strategy is going to work. And two, you know, putting the child's home into an LLC may or may not be a good idea. Why they're owner occupied. I would suggest moving into an LLC once they've left the house. But while they're owner occupied, it may not be a great idea. And you know, when we talk about that liability wise, the other thing too, that would be a really good idea for you as the parent and the child. When they get homeowners insurance. And all of us should have some sort of umbrella policy in our insur to cover anything that's outside of normal scope of liabilities. It's just a good idea. Umbrella insurance is really, really inexpensive to get to give you like an extra million dollars of coverage over and above different circumstances. The trust. Yeah, the trust is a great suggestion. And again, that's kind of looking at an Estate planner. We have a trust that certain things are in and certain LLCs and it gets really complicated. So it's a team of people that's helping you. And I would say that first off, if you're going to buy the house with a child, you know, or whatever that looks like, we kind of look at the title situation as to how you're going to take title if you're a cosigner. If you're a cosigner, you're on title anyway. You're going to be there because you're liable for it with your credit as a cosigner. And then once you own the property, you can determine whether or not do we want to put in an llc. But remember, when you're, when your son or daughter is, you know, occupying it, there's going to be tax benefits as an owner occupant with interest write off and things like that. So shifting it to an LLC may create some issues with that. So while they're owner occupant, we don't want to do that. Right. We do want to account for the rents as far as income goes, but we don't want to go through and do an LLC early on that comes in. This next step is that, you know, when the child is ready and this rent really well. And that's part of like looking at cash flow. And the other things is like, hey, we want to do this again. Imagine if you were able to do this two times during their time in college. You had one house they lived in, they managed and then they moved out. You guys kept it as a rental. That is going to be the time that you potentially want to create an LLC and put that property into. Because now it's a different, different entity, different asset. Because now it's a full time rental and there's going to be depreciation and other tax benefits that come with owning that rental and then. Sorry, and then moving it and then doing another owner occupant where you might be co signing and being joint on that. Does that make sense? So the point to all of this is to really have those conversations with your kids and thinking about it versus rent. Because if you look at the average price of a house to rent right now, it's about $2,100 a month, you know, so yes, they could go get three friends and go rent a house, which we see a lot of right now. There's a lot of cohabitation happening. Because if you look at the average apartment, it's probably about fifteen hundred Dollars a month. And you think about, well, we can rent a house that's bigger and we can get an extra roommate. All those roommates have to be on that lease. And a lot of times, or sometimes I've seen it, where one roommate really ruins it because if they can't pay their portion of the rent, everybody's in trouble. This way, you have a little bit more control over it and you own the property, right? And if somebody's not paying the rent, we get them out, we move somebody else in. So that's the ultimate piece of the partnership. And we're really looking at real estate wealth, life and legacy. And if we can get this into our kids early on, along with helping them, it's creating something for both of you to enjoy in the future as far as something like that goes. And that's why, you know, we've gone through it with our kids to show them, hey, when we're at that point, we're not ready for them to leave the house, right? But when we get to that point, we want to look at how we partner with them to do that. Right? And so that we can help them get a leg up on life and we can help them start looking at retirement down the road and understanding the power of real estate and owning it. And I say that because Wendy and I, like, one of our biggest regrets is the little house that we owned at 7004 West Phelps at 69th and Bell. I bought it when I was 19 years old, 20 years old, I paid 107,000 for it. The interest rates were 8%, by the way. So those of you that are freaking out about interest rates right now, I bought at a higher interest rate in 1999. And granted the prices were like a third of what they are now. So, you know, the interest rate was 8%. We did keep that until 2005 as a rental, but then the prices shot up and as a 23 year old kid, I was like, hey, sweet, we can cash out a hundred grand. Nobody told me the tax ramification of selling it, so I had to pay some taxes on it. And to this day, I still don't know where the money went from that house. Wendy could probably tell you, maybe it's in Pyrex. But if any of you don't know, my wife has an insane Pyrex collection. I know we compare.

Money went. And we don't want to talk about it here.

We compare, yeah, we compare my car collection to her Pyrex collection and she usually wins. But hold on one second. I'LL grab that. But the, the thing about it is that we look back at it in that house. Even if we had wrote it through the down market when it crashed in 2008 and we wrote it back up to 2022, that house today is worth quadruple what I paid for it. And it would have been paid off had I just left it alone. And that's a big deal for any of us, right? So imagine if you know, any of your college age kids that you partnered with something, a property that quadrupled in value, that's now a couple hundred thousand dollars in equity that can be pulled out. By the way, you can refinance and pull cash out of it tax free and then let the tenants keep paying for the loan on it and then utilize that for other investments. This, this is what Wendy and I have been doing for ourselves and our clients is teaching like these are all the benefits of what real estate does outside of the other investment things that a lot of people invest in the stock market, the 401ks and the different things. This is one of the prime examples of what it looks like from a long term standpoint because you know, if we back up again, that same house, if I partner with christian on that 25 years ago and today it's worth 400,000, it's free and clear, we could easily go pull $200,000 of that and each of us take $100,000 and go invest into another home while the tenant is still covering the mortgage in it. And so this is the power. And by the way, when we pulled that $200,000 out, it's tax free. We don't pay taxes on that because we're not selling the property. We're just using as collateral to borrow money to go put into something else. So it's a really, really long train, but a lot of fun to build in that way. Gary, you got something else? Yeah, George, great question. So George asked about the cash flow. How do you account for the income for taxes? So if it's a partnership, it's 50. 50. Right. So you're collecting the gross income minus expenses. And you know, it's probably better off on the kids taxes. They're going to get taxed less. But either way it's passive income. So it's taxed at a different rate. It's not taxed at earned income, it's taxed, taxed at passive income rates, which is a little bit different. So yes, you would want to claim that from that standpoint, but again, you're Going to see where. If the. If we just take an example of like the client's house that he's doing, his mortgage payment is $2500 a month, all rents included. He's going to cash flow about $200 a month. Now that's probably not going to cash flow $200 a month by the time he pays utilities and things like that. So it's probably going to be about a break even or a wash because remember he has the mortgage that's got to be paid for which is mostly going to be covered. So you've got income and expenses. So it should level out to pretty much break even at the end of the year. So it's not going to be a huge cash flowing piece from that standpoint. College students we charge this semester.

We used to get all of our money up before they moved in. So they would sign their leases in June to move in when the semester started. And before they could move item number one into the house, we got semester number two paid in advance so we had higher. And then if they stayed for the summer, they had the option to stay for the summer or they and pay or they had to get completely out of the house and we'd run it to someone else for the couple months of the summer or we'd get in and that's when we do repairs.

That's great. One thing I might add to that. Thank you for that. One thing I might add to that with college is you do get a premium. You know we own one patio home in Tempe that that Wendy renovated and we actually converted from a three bedroom to a four bedroom and we converted from two baths to three baths. And that one we're getting about double market rent on. And you know, you kind of look at things, you know, in different lights with like in Tempe we were really looking for to appeal to the more female crowd because we knew they'd be a little easier on the property. And so we kind of made it Instagram pretty and we did a really well. Wendy did a really nice job but I didn't do anything. I just found the ugly duck. But that house we get about 3, 800amonth in rent from students. But here's the cool thing in college is that a lot of times, well most of the time you will get parents that will co sign on that lease so that they're responsible for the rents and things like that. So whenever you're dealing with college you definitely want to go after the parents to make sure that that's Secure from that standpoint.

Yeah. We had parents sign the leases.

Yep, absolutely.

But again, we were getting all of our money up front, so that's awesome. Until we got to the point that we were renting to college students that were post college or in their master's programs or whatever that they were doing. We switched them to month to month leases because they had jobs. You know, we knew they had jobs, but you know, most college students don't have jobs. And the parents were responsible.

Yep.

And we also made sure everyone had renters insurance because we ultimately ended up having a tornado that we lost that house, the first house. And you know, they thought that we ought to pay for their cars that got destroyed and we ought to pay for the things that got destroyed in the house. And it's like, I don't think so. You guys were supposed to have renters insurance and you should have insurance on your car, not we just lost an entire house, not our problem. So.

Oh, that's amazing. How did you guys. So did you do well with the college town stuff?

You know, we were three miles outside of town, so at first it was really great to the point that we rebuilt after the tornado and did not, did not have college students in our house anymore. But we ended up purchasing two other homes and when we did that, we. Yeah, it did well. But then the college built a whole bunch of on campus housing after that and it got a little tougher to get to drive three miles, so.

Got it. Well, awesome. Thank you for sharing. So the other piece too with the child and the prepping is some of you have college age kids, some of you might be in a position that maybe you've got younger kids. Right. And so, you know, here's just some food for thought. Is potentially buying an investment property now that's kind of labeled for that child down the road. You know, it's. It's something that Wendy and I keep looking at our portfolio and go, which house would work potentially for them? And it's something that you might have as, not as a gift, but as something you can partner with them at that certain price at that point that you're kind of preparing for. So it's another thing to keep in mind. You know, maybe you own a small house now that you want to move out of and keep that as a rental as for a child, for a future child, whatever it is, and then move on to your next owner occupant, because that's the cheaper way to do it. So that's, that's another portion of it. When it comes down to it. So the other piece on partnering besides kids is that, you know, I get a lot of, a lot of people that talk about wanting to own second homes or they want to get into the investment space, right? And this was part of the partnership conversation, right? This is how Wendy and I, you know, got into our first second home as we partnered with another family. We bought the house together, we shared the expenses, and we had all those conversations of what happens in the end. So any of you that, you know, maybe vacation with the same family over and over again, you get along with their kids, you get along with the adults. And, and maybe it is a partnership conversation about, hey, we'd really like to own a second home. What if we did that together? And that, that is something that's a great possibility no matter what you're doing. Or maybe you, you're a parent that has another parent that you guys can partner to buy a house for the kids to rent and live in and create your own partnership from that standpoint, maybe the kids aren't ready to be part of it, but maybe you as parents could partner with another parent to buy a house at ASU to put your kids in. So again, if you're going to be paying for rent or for dorm rooms, well, what if we figured out how to buy a house, right, and shared the expenses and created that partnership? So sometimes we try to take everything on our own because nobody's helping us. Think outside the box and help us go through those strategies of this is possible and can we partner with somebody or multiple people to buy that investment property? That's going to make sense. If you think about like, you know, in the last five years, and granted, you know, three of it was a little crazy, but think about if you had a child going to ASU in 18 and you had bought a house and they graduated in 21, what would that house look like, you know, from, from that partnership standpoint or buying it from that standpoint? So it's thinking about not just what it is now, but what it could be in the future from an investment standpoint, right? So we look at like our Tempe one, you know, could it be a furnished midterm rental? There's a lot of traveling nurses. Can we go in and furnish it and create a different investment type on it if we had kids there? So there's all kinds of different investment strategies, not just the long term rental piece, although I feel that's the easiest, most hands off type type rental. But you can get in Some other lucrative things with VRBOs, long term or midterm rentals where you're just furnish, renting it out, you know, month to month or three months at a time, six months at a time. So there's a lot of different things that real estate can help you with and accomplish on the wealth building side. And more importantly, it's, it's a great asset class to be invested in. When you look at all the different types of economies. I mean, housing has remained steady throughout it all. You know, you go back to 2008. You know, if you owned a home in 2008 and you had a regular loan on it, yeah, it went down. But if your payment stayed the same, it really didn't make any difference what the value was because you're going to have to pay somewhere. Right. And those people that rode out the 2008 storm, they did just fine when it came back into, you know, the next decade once we were out of it. So that's, that's some of the benefits of owning real estate is just letting it ride because majority of the time the, the payments are covered, the mortgage is covered. Yeah, you're going to have some bad days in the stock market. That's what I call it when an AC unit goes out. But we try to, we try to save for reserves. And for those of you that might be concerned about big expenses on rentals, you know, one of the things I've realized over time is that there's really only two major expenses in a rental property. It's the roof and the ac. Unless you buy something really old and you might have some plumbing issues with underground plumbing, but the roof and the AC are you two biggest concerns. And a roof on a, on an average home is probably about 10 to 12 grand if it's comp shingle. And an AC unit on the average home is about five to six grand. Those are your two biggest expenses. And if you replace either one of those or both of them, you're probably only going to do it once in your lifetime of owning that home. Unless you get a 2010 hailstorm like we did here in Phoenix, and it trashes everything and you get it all replaced. All right, so I have spilled the beans and giving you the idea. So now kind of open it up for, for Q and A and just anything that comes off top of your head. And it doesn't have to do specific specifically with this. If you have other questions related to real estate, I'm more than happy to take the time. We're here until seven. That gives about 20 minutes of just Q A. And. And what else can. Can I help you guys with?

Hey, Steve, before you start, I thought you were going to touch on it real quick, and you didn't. But do you want to talk about people that have smaller children and kind of like we did with Taylor and David and looking at that second home or that investment property as their college fund and not buying it for them to stay at while they're at college?

Yeah, great point. And this goes for. I know that many of you on here are real estate agents, right? This is one of the things that. That we help our clients see. So we've got really good friends, kind of adopted family, Wendy's friend Taylor and David. And so they were playing a random game of dominoes with us when we told them, like, stop renting. You need to buy something. But the conversation with them was, hey, we're buying a house that is going to be an investment property. So you're buying your first rental, and then we're going to come back and do this in about 12 to 18 months. Now, from the time they moved in, she got pregnant. And now we have our niece Malia, who I think Wendy loves more than me at this point. And she is cute. So the goal with them, as we walk through it, some of us are given the advisement of, yeah, you should, you know, put some money away for 529B plan, which is the government college savings plan, which gives you crappy returns. And the money is tied to only school, trade school, those expenses. Right. So what we talked to David and Taylor about was planning ahead for Malia and Elijah. And so the first home they did really well on, we kept it. We sold them another one, and they've gained. You know, they did that and they did the second one. And now each one of those homes has about $100,000 in equity in it. They're both cash flowing. They just unfortunately moved back to Texas. But now what we've talked to them about is like, hey, the equity in these homes, we just let this ride. Malia's two and Elijah's not even one yet. Those homes will both be able to pay for college if their kids decide to go to college. And how is it going to pay for college? Well, they're not even going to pay for it. The tenants are going to end up paying for it because in 20 years, those homes will be almost paid off. They could refinance and pull cash out and pay cash for school if the kids decide to go to school. And then they're increasing their mortgage amount, which the tenants are still covering. And so this is a great way to kind of look at how do we utilize real estate for a college savings plan, rather than putting it in something. Because here's the deal. In order for you to get to God, what does college cost these days? Like $25,000 a semester or I don't know what it is. Something crazy, right? I don't know. Trish would know. She does all this stuff, right? So you think about it, you're like, as a parent, you know, and you're the one wanting to pay for college, you are going to have to put a substantial amount of money away over that 18 years to get to a point of saving to be able to pay for college real estate. It's kind of like borrowing it in reverse. Imagine if your kids are going to cost you $150,000 in college and you could borrow that when they were born against a house, and let somebody pay that $150,000 off over that 20 years and then go borrow the money out of it to pay for college. It's kind of a weird way. It's kind of how Wendy and I kind of looked at retirement. We went and borrowed all the money we wanted for retirement, and now we're letting the tenants pay off the properties over time, and it'll be there when we're ready for retirement. So it's a different way to look at it. And one of the things that we like to utilize real estate for, and plus all the tax benefits from it, you know, as long as we own it, you know, we can pull money from it. We can. We can secure it with other loans. There's a lot of different flexibility with it. And with a 529B plan, if you're putting money into it, you. If you don't use it for school and you pull it out, you're taxed on it. So it is one of those things you want to talk to your financial advisor or cpa, like, what is the best situation for you to look at? But the good news is, if you bought a house and they decide not to go to school, you don't have to do anything with it. You just let it sit and keep doing its thing in that. That regard. Good point. When.

Okay, we've got a question. What are some strategies to get around the down payment? We've looked into moving into a duplex so that we can avoid the 20 down, but that limits us to our local town. What are. What strategies have you all used to help with the down payment. Because I see others scaling quickly. Do they normal have millions of dollars set aside for down payments or are there investor friendly solutions?

There is investor friendly solutions. It takes a lot of creativity. It's the one thing that I think that Wendy and I have mastered and how we built our portfolio the way around down payments. I'll give you the short version. This is really kind of a private strategy session because it's, it's very in detail with what it is. This can get really complicated really fast. So I'm going to try to be easy on it. Next part is for specific situation. Okay, hold on, let me get this first one. So in order to create down payments, it's all in the purchase of the property. So if you're buying something below market, off market, you could potentially do what's called hard money. So private financing, capture the equity that you bought at below market and then refinance it into a normal loan. And again, this is, this is how people scale quickly is like for instance, Wendy and I don't buy properties just to buy properties. We're finding that something that might need work or it's at 60 or 70 cents on the dollar, we're buying that with what's called hard money or private money. And at that, 60 cents on the dollar. So let's say $100,000 house, that's what it's worth. And we're buying it for 60,000. We're going in and doing little repairs. We're paying 10 to 12% interest on it. But then we're refinancing it and the bank comes in and appraises it for 100, and they're looking for a 20 to 30% loan to value. So if it appraises for 100 and we borrowed 60 to buy it, we bought our down payment in that. And that's, that's really where it comes from. So it's being patient while you're saving for a down payment, you're also being patient being prepared for the opportunity and knowing how to capture that opportunity in the investment space. A bit outside.

Oh, sorry.

Go ahead, hon.

Oh, I was just going to read the next question.

Okay.

A bit outside the general topic, but in a situation where both the parent and the child both own a home already and you want to go into a partnership to buy an investment property together, what's the lowest down payment that you can make in a partnership?

Partnership like that, somebody's got to move. You're drawing straws. Who's going to move and keep the other house. So that is, that's the greatest house hack in the world. If you can stomach living out of boxes or realizing that, hey, I'm going to move. So for anybody in this situation, it's a, it's a house hack where, and Andrew and I have done this a lot with clients where you're buying a home, owner occupied, which is your lowest down payment, 3 to 5%. Sometimes you can negotiate your closing costs and things into it. You're going to live in that home for about 12 months and then you're going to start looking for the next home that you're going to move to as an owner occupied. Now there's some financing things that we have to deal with in there because if you buy fha, you can't go buy another fha, you're going to have to refinance this one. And if you refinance it, owner occupied, you've got to wait 12 months. So there is a strategy in this. It's not just, yeah, we can go do this. There's carefully thought out planning and strategy all the way through it. But it is the greatest house hack is that you buy one, you live in it. So in your case, if you own a home and your child owns a home, somebody should keep that existing home and then go and buy another owner occupant and keep that one and move that into a partnership, however you want to do it. Now let's, let's expand on that just a little bit. So for those of you that haven't heard my buy box spiel as to what the ideal rental property is, be very careful with this. So mom, dad, if you guys own that home, do not keep a rental property that's 4,500 square feet that has a pool and four air conditioning units. That is not a good rental property. It's a terrible rental property. The reason being is that it has too many long term liabilities, pools, AC units, those types of things. But if child owns a 1300 square foot house, it's a three bedroom, two bath, no pool. That's the ideal property to keep as a rental. So we're going to move that out. Now here's where the hard part comes, is that if the child is putting that into the partnership, there's got to be an evaluation at the time that's put in the partnership because that's their equity. Unless you had something before so, you know, you want to look at like, hey, we want to keep this right now it's valued at 250,000. So that is the baseline of where the partnership starts. Right. Because that's still their equity in the property that they want to keep and utilize. And by the way, the other step to that, which we did on, I think it was the call before last, was this exact thing, and you can, this video is on my YouTube channel, was the nine steps to keeping your primary residence as a rental before you convert to a rental property. Because one of the things that's really important is that if you have a lot of equity in an owner occupied property before you move from there, you want to set up an equity line on it. Because once you move out, it's really hard to get an equity line on an investment property. But owner occupied, you can set that equity line up. It doesn't cost you anything. It doesn't cost you anything for it to sit there. It's a line of credit attached to the house. We just want to not use that to consolidate debt and buy boats and things that people were doing in 2008. It's there to be able to move the equity from one asset to the next. And it gives you some down payment and some reserves if an AC goes out or whatnot. So that is one of the steps. If you do own a owner occupant home before you move, you want to set up that equity line.

It's almost like you're psychic because the next question is we own a home outright, so free and clear. Currently it's rented out. It's passive income. You touched on it a little bit ago. Could we put a loan on that one and use it to buy another one that might be a good rental or flip.

Yes, yes, you absolutely can. The hard part is, is that you do own it free and clear. So it's, it's creating income. And I'm just going to take the baseline on this. So if we took the medium home price in Phoenix and let's say your house is worth $450,000, it's free and clear. You might swallow at the fact that. Or choke. Sorry, not swallow. You're going to choke on the fact that the interest rates are like 7% on investment. Andrew, am I close to that right now? Okay, so if we walk through the numbers, you take a $250,000 home and you go and borrow against it. And let's say that house is a 2000. You're getting $2,000 a month rent and you go and borrow 250,000. At 7%, your mortgage payment is going to be about break even. Because now you've got a principal and interest payment of 1663, plus taxes and insurance. So your break even there. But my question is, is where can that $250,000 be placed in other properties? And I think we're in a market where there's opportunity. The prices have come down a little bit. They're not dropping. Just so everybody knows, no Chicken Littles in here. We're not. We're not heading for a crash or anything like that. Here's the crazy thing. If you had that availability of $250,000, tenant is still paying down that property. But now you can go utilize that and technically 250 grand, you probably get to almost three down payments on two to three more rental properties. Now, some people like, yeah, but we had passive income over here. Well, let me ask you a question. If you're working and you're not relying on that passive income, how good is that, say, $18,000 doing for you every year? Right. How fast is it growing? Are you able to put that $18,000 somewhere where it's growing by 5 to 6% a year? Well, $18,000 at 5% annual is $900 rate of return. Okay, now, if you take that 250,000, you divide it, let's just say, into two properties, and now you have three total properties. And think about this. If you were in this position back in 2019 or 2020, and you had done this and you had executed and you bought two more homes, you would have seen like a hundred percent return on your money because of the evaluation of the homes and the price that went up. See, I'm not so concerned right now, and I'm completely different than a lot of people. I'm not so concerned with a huge positive cash flow right now as I am. Time is on my side for houses to be paid off while I'm still working, even if I have to contribute a little bit to those properties right now. Because while I'm working, I still have income that I can put into those investments, which I kind of consider my 401k. Right? But time, as it goes on, and properties appreciate and you get the tax benefits of depreciation on those properties. Imagine having one home free and clear versus four homes that are leveraged, and they all of a sudden are going up at 6 to 7% a year. You have one $400,000 house, or you could have a million dollars worth of houses gaining 6% a year. There's a big difference. So it takes a long time for that cash flow. That passive income that you're getting to equal what potential appreciation could be. Now, you can argue it one way or another. Well, what happens if the market goes down? What happens to go up? There's no perfect timing the market. The key is to understand that somebody else is paying off that debt on that house over time. And it doesn't matter what's happening because eventually that home is going to be paid off by somebody else. And then you own a couple million dollars worth of properties that's free and clear. And now you can go do whatever you want with it, but it's keeping people in there and understanding that that debt is being reduced every month. So if you don't need that $2,000 a month passive, and it's not a big deal, and you can move it into other assets that sometimes might offset. Right. You might be able to find a condo or a patio home or something that might offset and still give a little cash flow, but they all might be break even. But again, I'd rather have the multiple assets and the multiple benefits of owning those, especially from a tax benefit standpoint, because you're depreciating all of these properties, not just the one. Plus you're getting the appreciation of them going forward. Hope that answers the question in the uncomplicated way. No, it makes a lot of sense and I appreciate it. I never thought about it that way because it's just been sitting there and the guys are, you know, they're. It's my brothers that are renting it out. It's just money coming in, which is great. But I'm sitting here thinking, what can I do with it since we own it free and clear? There's homes down the road that need a little bit of upgrades that we can, you know, potentially buy and, you know, grow our assets. I've been following you a while now and I see what you talk about and figured I'd ask a question since, you know, I'm not probably not the only one thinking about it. Yeah, I mean, that's. That's all. Congratulations. You own a free and clear home, by the way. That's pretty awesome. That's. That's something to be said. So, you know, but it is one of those things where I really try to get people to understand that, you know, owning a free and clear home is great, but. But when do you want to own that free and clear? And, you know, while you're working, it might not be the best time because I just consider a debt equity. It's kind of like your situation you know where I hear somebody, they've got, you know, a half a million dollars in equity in their primary residence and it's sitting there doing nothing. I mean if you looked at in the last year, it's actually gone down in value. But if they had moved that money in an equity line or a cash out refinance like what Wendy and I did, you know, it could have been working capital. Even though it raises your mortgage payment, it's working capital to go make work in other places. Right. And so we were super blessed this year or last year when we did it. I don't know. When do we refinance that house, Andrew? A year and a half ago.

Yeah, about.

So our primary, you know, we refinanced it, got it down to a really good rate and then we were able to use the equity to actually purchase a home free and clear. You know, huge tax strategy for us. For Wendy's parents up in New York, by the way, I would never, I know Melissa's on this call, but I would never buy another house in New York if you paid me. I've never seen such ass backwards people. Melissa. But. So Melissa's hiding under username, that's why she's giggling over there. But it's. And Melissa was our realtor in New York. She did an awesome job. But the process up there is crazy. It took three months just to do title because they seriously still use microfiche. Don't get it. But anyway, some of you aren't even old enough to know what micro fish is. That's how old I finally am. All right, we got more questions. Hun.

I had a, I had a thought. One of the things that Dave and I have been thinking about doing is the possibilities of purchasing something with my two kids and his nephew. And it probably, you know, wouldn't, it would be almost like shares, you know, if they have $2,000 to put in or this one has 4,000 or this one. So we'd have to figure out. When you talk about a partnership and taxes, I'm guessing the taxes would be a nightmare. But you know, we would have to figure out how many shares each of us has in this property and you know, ultimately what to do with it. Say it again.

Percentages.

Yeah, yeah, yeah. So I mean if you just like take easy numbers for a second. So, so you and your husband would be 1, 1 percentage ownership, 2 nephews and a son. Right?

Sons and a nephew.

Sons and a nephew. Okay, so four total partners. So you're looking at, if you guys put in $10,000 and they each put in $5,000, there's a percentage. Okay. So whatever that percentage works out to be. Now, when you file taxes, if that's a rental property, Everybody's getting a K1 distribution to their percentage for depreciation and things like that. So it's all. It's all filed. One of the things you have to be really careful with on how you do that with title and everything, and you can do this in the deed restrictions and on the deed for specifics is one of the things that's really crazy is looking at how you structure it. And I, I did this the wrong way. When we bought our second home with a partner, we created an LLC and put our names in the llc so it was just one entity. The problem was when we sold that Property, we couldn't 1031 exchange it, our portion of it, because it was all in that one. So unless the entity bought another one. So you really want to think 10 steps forward of, okay, if this partnership dissolves and there's $100,000 in equity and somebody wants a 1031 and not take the tax hit. We want to think about that, you know, with our cpa with how to structure that to make sure we can sell it and divide it up. And if somebody wants 1031, great. If somebody doesn't, no big deal. But you only have that ability if you are all on the title in that way, with your percentages.

Okay. Yeah. Because I, you know, the thought of one of my kids moving into an actual property is probably not going to happen. So we would just be purchasing it as an investment property, which I'm assuming is 20% down. So if everyone's throwing their share and we can do that, and they happen to all be contractors. So if it needs work, that's easy.

Yeah. So in that, though, like, in that type of partnership, it's going, hey, where do we go find the biggest piece of crap? And your contribution to the partnership is trading work for shares. Right. So they're bringing up the value and they're doing sweat equity in it, you know, which is great. You know, make them work towards it, because they're going to do the things knowing that, hey, the work that we're doing is increasing our shares and our value in the property. So it's not just work. It's stuff that we want to be proud of. And it's something that we're going to own and have equity in this. So it does give them a purpose in doing that. So if they're all contractors, keeps them out of trouble too. I mean, there may be a few too many beers at the house, but you know, I'm sure you could get a YouTube channel started on that.

Right?

You might have a question. Can you, can you do that on a deed?

Can you do like 49 ownership, 51%?

Yep. Okay. Yeah, you can do specific deed deed restrictions and partnerships on that stuff.

Okay, one last question and you could probably do a whole call on this. Another off topic question. Would you recommend taking money that is in a Roth IRA out and invested into real estate as a down payment on a property? I think I had this call with Tricia Carver this week.

So this is a really good question. It really depends on the tax ramification that you're going to have. So it's understanding, you know, if I take, If I have $100,000 and I pull it out, am I going to have a $25,000 tax liability? And remember, you've got to pay that $25,000 in taxes. Now if you've got a good CPA or tax person and let's say you didn't make as much income this year and you could offset that loss or that that tax, it might be a good idea. But you want to be careful with what that looks like. I do know that there's some programs that you can borrow against your Roth or your IRA that might be beneficial. Look at the other thing is that you potentially could convert your roth or your 401k into what's called a self directed, which you can do some real estate out of, but you have to have a certain amount to go in there. And there is some different classifications that I don't know. And again, you're really going to have to check with CPA or a tax advisor to see like what's the benefits. If I pull 100 out and I lose 20 and I've got 80 left, can I make up for that 20 by owning a house versus what I'm gaining in? You know, my IRA, right. Because I know some IRAs lost 20% last year, right. So you know, you got to be careful with what that looks like. So here's kind of some numbers on that because when you're investing in a Roth, if I remember correctly, sometimes I get these confused, right? It's, it's before tax, right? So you're going to get taxed on it down the road when you retire and you start pulling out. Now the other way around, other way.

Around, all the way in tax on.

The way in on A Roth tax on the way out on non Roth. This is exactly why I'm not a CPA Roth.

You can take money out of up to. You can take money out that you've put in, but you can't take money out that they've given you an interest.

See, there you go. Answer solved. So if you've got in a Roth, you've already paid taxes on this. You're not going to have a tax ramification unless it's matched by a company. So, you know, you. You want to look at that from your CPA tax advisor, get some advice on that before you do it.

So Dave is saying, too, that you can pull the money out.

You don't pull the money out. You throw it into a cd, you.

Put it in a cd, and then.

Against the cd, you pledge the CD for your. For your note. All right. Paper is a lot better than a building. I mean, you know, if you lose paper, you lose paper. If you lose a building, you're screwed. You're not in a place to live. Right. Most. Last question, babe. Was there another one? No. No more questions.

When?

That's it.

Cool. Okay. When. He doesn't know this, but I want to let you know. I mean, you guys have all signed up. You've got the email list next month. I don't know the exact date, actually. I'm just going to set it because Wendy and I are both here.

Is this apparently something Wendy should also put in her calendar?

Yep.

Okay.

The April 12th is a Wednesday, because I do these calls on Wednesday. Wendy and I are going to go through renovations, fix and flips and some costs that you might want to know for the things that you're doing and just some things to help you understand what it looks like in the renovation process or rentals or flips and some of the different things we've experienced. If you guys don't know, Wendy's the licensed GC that runs everything on the back end for us. She's the one that makes everything look pretty, and she's the one that knows all the numbers when it comes to construction and moving things around. And so we're going to open that up and. And give you guys some insight as to how we're operating on the renovation side and what we've put into houses and what we've learned the years with doing this one, which might be some great insight for you guys there. Solve it, Garrett. All right, some of you have hidden behind the camera that.

April 12th. For that.

Yeah, April 12th. And you'll get a You'll get a replay of this call. You'll also get a reminder of the next call as well. Since you guys have signed up here, a couple other things that just some announcements I wanted to make. Here is the other place that you can go for lots of different updates and things that are happening. Coming up is Steve D. Valentine is my coaching and private site. You can subscribe there. So we've got a lot of different announcements coming up there that you'll get by email and then not totally released yet. So I'm telling a few people. But my first book is done called Limitless Real Estate Strategies. It's launching in June. Super excited about releasing that to everybody as well in the upcoming future. And I would love it if, if you guys would show out a a shout out on social media on Instagram. You know, tag me in it if you got anything great out tonight. And I appreciate you all for showing up. And Instagram Steve D. Valentine, that's where you can follow all the shenanigans here and follow Wendy for the pretty stuff off at Wendy Valentine on Instagram.