HOUSE HACK! How To Turn Your Primary Residence into a Rental

Well, the good news is, is we've got a good mixture, about half and half of real estate agents and potential investors that want to do this. And this is one of the things that I really enjoy about my career right now, is that, you know, I'm sharing the knowledge that I have with my industry so that they can help others do the same thing, which is really kind of my pride and joy that, that my dad left me with. I will. So that's, that's one of the things that really excites me is just kind of having the mixture so that everybody understands what they're doing. And one of the awesome things that I kind of want to break the myth that you hear a lot of people say in the guru world is become rich by owning real estate. And the reality is you're creating wealth by holding on to real estate. Wealth is created by holding it, not selling it. And that's why this is such a great starting point for a lot of people. Because a lot of people when, when you think about selling your house, it's like, well, where do I go to really get information as to whether I should keep it as a rental? Who knows the numbers? And you know, that's kind of the great thing again is that, you know, there's a lot of real estate agents on here that, that want to know this information so they can share it with their clients and hopefully they're doing it themselves as well, like Beatrice said. Right. So it's, it's something that. My biggest regret honestly was the very first home I bought in 1999. Early on, my dad convinced me to keep it as a rental. It did really well for the first three or four years. But then like a 23 year old with no knowledge, I'm like, cool, I can cash out height of the market and make $100,000 and be done with it and move on to the next thing, you know. But that $100,000 had some tax consequences to it after being a rental. And my regret on that is that right now that house has tripled in value and it would have been paid off had I just kept it. So that's one of those things that this is really important just to understand that, you know, time in real estate is really what helps create wealth. And yes, there's going to be some ups and downs in it, right? You're going to have broken AC units, you're going to have some of those things. So what I really wanted to do tonight was just give you like the basic level of knowledge of how we built a portfolio. Wendy and I currently own right around 80 single family homes here in the Phenix market, some up in the Flagstaff market as well. And we did this one at a time. Right. We didn't do it by house hopping that many times, but it's where it starts and it's where you start to create equity and it's just having that basic knowledge so that it's an option in your head to really explore from that standpoint. So we're just gonna, it's gonna be very basic level. And then what I want to do is really go through this. Did everybody get their, their notes emailed to them to take notes on? If not, we can put a link in the chat if you want to click on it to get the notes. But the outline here is the same as the slide deck that I'm going to go through. Hey, look, my wife's on finally. So, you know, we're going to go through this and give you some basic information and then at the end we'll open it up for, for Q A. So whatever you guys have, you guys have questions, throw in the chat so you don't forget or write it down on your notes. And, and we'll go through some of those things. Cool. Give it about, you know, another 60 seconds to see what's happening. Hey, while we're waiting for a few other people to join, if you currently own a house and it's your primary, what's your current interest rate? Just type the number in the chat. All right, interest rates 4.5. There were some people that said they didn't get the notes. I just. It's in the chat. Okay. All right, cool. All right, let me pull this up and let me. I mean, some of you do know me, some of you got this from Facebook. Maybe it was shared. So let me just give you a quick background on me. I've had my license since 99. We've been investing in real estate since we started. But the reality was it really didn't stick until about 2015. My dad passed. You know, that's, that's a long story in itself, but that was really when I started seeing ways to generate wealth and kind of break the chains of my family background and even some of Wendy's family background of like, how are we going to create wealth and retirement through what we do and the way we can help other people or our clients help them create wealth with the knowledge when it comes down to it. So, you know, we've, we've been in the investment space and the traditional real estate space. You know, 24 years in traditional and then another almost 10 years in the investment space. It's what we really specialize in, the traditional. You know, I always tell people traditional real estate is like riding a bike. You can do it. And so we still do that. But a lot of what we're doing is helping people strategize with their homes like we're doing tonight, so that you have the idea. And that's, that's really our goal is to help people build wealth and, and provide strategies for them so they understand it and at least know the option. So thank you everybody for joining. On this Wednesday night, we'll dive into it. And by the way, this is the greatest house hack out there. And this is, this is why it's the greatest house act. When you buy a primary residence, you're getting a lower interest rate, typically a point, maybe even 2% on your interest rate, lower than what an investor or if you were buying a house as an investment would actually, what you would actually get. You're going to have the lowest down payment possible. So, you know, like when I bought 99, it was 3% down. So I think the builder paid my closing costs and the house was $107,000. So I got in my first home for 3200 bucks. I missed those days. So now you, you have little to no money to get into it. You're getting a lower interest payment. There's also more loan programs. So for a lot of people, you know, if they're working with a great lender, they, they may have a lower income, they may qualify for some government programs. That's a no down payment. You can use your VA loan. So there's more programs available when you're buying owner occupied versus I want to invest in real estate. And for, and so then you go on to when you're buying these homes, you're buying your first home. It's having the mindset, which is what we teach our first home buyers, first time home buyers, is you are going to buy your first rental property and you are going to live in it for a couple of years. So you're looking at the house with the end in mind. This is going to be retirement, this is going to be future wealth, this is going to be future income. So I'm not going to be too worried about how like awesome this house is. Obviously you want to buy in a great neighborhood and those types of things. We're going to go through that in a few minutes. But it's having that vision of what this house is going to look like in 20 or 30 years. And I'm not talking about the vision of raising your kids in it and all those things because we all know that the average seller or, you know, owner, they're moving every five to seven years. I, I run into very few people that are still the original homeowners from 30 years ago. Right. It's a different generation, different time. So we want to kind of look at what the end in mind is. And by the way, if you're an agent, what it does do when you're doing this is that you're setting the standard with your client to come back and help them do this, which is creating another sale, which is great. But you're also helping those people build wealth. And so you're not coming back for the sale. You're actually helping them to create a strategy to build wealth down the road. I mean, there's a lot of people out there. When you look at it, how awesome would it be in your early or late 20s, maybe in your early 20s, depending in your early 30s, if you started the house hack like this and you were able to get to five homes that if you never touch the equity or anything else, they were paid off by the time you were 60, producing about $7500 a month in cash flow, along with owning more than a million dollars worth of real estate free and clear, how does that change life for a lot of people? The problem is, is that nobody teaches that house hack and here's how it works and this is what it looks like and helping them stay that line. So that's, that's why this is so, so important. So how do you know what an ideal rental property looks like? Now here's where the data came from. So like I said, Wendy and I own about 80 single family homes here in the Phoenix area. We started looking at the data from the property management company saying these houses in these areas and these sizes, the tenants are staying on average of anywhere from three to seven years. They rarely move, they're getting good rents and they're not as much maintenance and things as where other areas that we see. So we started doing is creating what we call our buy box. Well, this buy box can also be applied to your primary. Some of you on here might own a primary that, you know, maybe doesn't fit the buy box. It doesn't mean it's not a good rental. But if you're going to go into it with a mindset that hey, I'm going to go look for a primary. This is a good mindset. If you currently own your primary and some of these things are outside the buy box, I'll explain to you just what the, not the consequences, but some of the long term financial responsibility is going to happen with those houses. So it doesn't mean that it's not a good rental. And there's other things that can be done which we'll talk about here shortly. All right, so this is my ideal buy box that we've created in over 80 properties, right? So they're under 2,000 square feet. They're typically no HOA, but not mandatory single AC unit, no pools, no condos or townhomes. So now let me give you the reason behind this. If you're under 2,000 square feet every time a tenant moves out, you know, typically, I think on average our properties are about 1500 square feet, you start looking at your long term liabilities. So long term liabilities are the things that you're going to have to replace or repair that are going to take cash out of your cash flow or kind of set you back a little bit. You know, I call those days a bad day in the stock market. A lot of people are frightful of the real estate markets, like what if the AC goes out? I'm like, well you could put $9,000 in the stock market and it can be gone tomorrow too. So it just depends on what your long term plan is. Under 2,000 square feet, preferably. Because when a tenant moves out, you have to think about what do I have to repair or touch up. So I don't like bigger houses because if a tenant 2,000 square feet of paint and carpet, right? So it's a smaller home and it makes more sense from that standpoint. The single AC unit is because if you looked at the data and if you own a home with two AC units that is 2500 square feet and I and you have two AC units, the difference in rent that you are getting for a 2500 square foot house and a 2000 square foot house doesn't make financial sense. And now you have two AC units that potentially are a problem rather than one single AC unit. And by the way, don't fear the AC unit because most likely if you buy the house, you're going to replace the AC unit once in the time you own it, right? Because it might be five years old now, you replace it in 10 years and then it's probably going to last another 15 to 20 if it's serviced and maintained so, you know, it's a 5 to $6,000 expense and that's what we want to look at. And that's why I'm giving you guys this data is so that you really understand what it looks like. So that it, it takes away some of the fear and the myth of why owning rental properties is such a bad thing. Or you know, it's, it's bad to do, or there's bad days in it. People trash things they do. But it's not very common if you do some of the right things that we're going to talk about pools, the scary thing is, is that owning a pool and even in your primary house, it is like it's such an expensive asset with no return on investment because a pool technically will need to be replastered every about 10 years. You've got motors, pumps, things that break. The pool is actually way worse than multiple AC units. So having a pool will cost you over a 30 year period of time, about $110,000 to maintain. And you might get 100 to $150 more a month by having a pool for rental, but you're going to spend that $150 a month on a pool guy to maintain it because you really don't want the tenants maintaining it. So my joke with even the pool that we own at home, the only person that uses it, makes any money on it is the pool guy. That's it. Other than that, it's just a big hole with water in it that cost us a bunch of money every year. And you also have the liability with pools, right? So on. If you have a primary that has a pool, maybe you have an older home, it's got a pool in it. Doesn't mean it's not the perfect rental. Because here's the crazy thing. Did you know it costs as much money to replaster a pool as it does to make it go away? So right now, on average we spend about $7,500 replastering the pool. And I'm going to have to do it again. We spend about 65 to 70 $500 to implode a pool and completely take it out. So they, they implode all the concrete around it, they jackhammer the bottom of it, they implode it, and then they smooth out the yard and you just landscape over it. And now you've gotten rid of that liability. So, you know, we've done this on numerous of our rental properties and we have a few properties that have pools. But the minute that pool is outdated or needs to be maintained. When the renter leaves, we'll implode the pool and put it back on the market when it's done. So just kind of keep that in mind. Condos and HOAs, they're not bad in some circumstances. They're not my ideal, even though we own a few. And these are kind of outside the box one offs. But you usually have higher HOA fees and those higher HOA fees are paying for your tenants utilities. Right. Usually water, sewer, trash, those types of things. So you're paying for those things. You also have extra management because if you've got a bad tenant and the next door neighbor is an owner and they're complaining to the company. So those are some of the reasons that I try to stay away from the condos and townhomes. But like I said, you know, you might own a condor townhome and it's got some good equity in it. I wouldn't tell you to sell it, I would still tell you to keep it. But if you're going to look for something, you're guiding something, someone to buy one, you might want to have that conversation with them with what it looks like to keep it in the future. Now some people will make the argument, well, if I have a condo or townhome, you know, they're maintaining the exterior of it and those types of things. Well, how often do you really have to paint the exterior of a house? How often do you have to replace the roof on a house? Right. So if all of a sudden you're in a condo or townhome with a 200 or $250 a month HOA payment, how much further, how much money are you saving by not having that, that HOA fee? Right. So then you go into the no HOA. HOAs just sometimes can be a little bit problematic. I don't mind some of the HOAs that are 30, 40. Whoa. That scared the crap out of me. I don't know what that was. Geez, I don't know who that was. I got chills. Where was I? Oh, Vi, that was amazing. So the condos and townhomes, you know, when you go to looking at replacing a roof on a house, if a house had a newer roof on the last couple of years, you're probably not going to replace it for 20 years. Right. So that's really the only difference where some people, well, it's got amenities and things like that. Well, the more amenities it is, the more expensive it is. So you have to keep that in mind when you're, when you're weighing that process. But I'll put this in perspective. If maybe right now in the current market a condo or a townhome is something that you can afford to do because interest rates are a little bit higher to get you into homeownership and it can be a rental in the future. I wouldn't not do it. Right. But if you're going to go specifically looking for a rental, I might consider like at least look at it and look at the numbers and figure out what is that going to look like. The other thing too, that's real critical, you know, understanding homeowners associations. You know, I sit on my homeowner association board if any of you remember what happened in, you know, the downturn 2008, a lot of the ways, because people weren't paying payments, they weren't paying their HOAs, they pretty much went defunct. Right. The parking lots got bad, they drained pools, the properties were in disarray. So what happened as people started buying those the way came back and initialized a special assessment. Right. And the HOA can do that where they need to do the parking lots and other things. And some of those can get pretty spendy. So you don't have any control over that. If they're not collecting enough fees over time to maintain their property. There's two main reasons for this. One, to reduce long term liabilities. If you only have one AC unit, it's only going to be a one time fix if it breaks or you have to replace it. Right. It's better than having two or three or whatever that case may be, you know, not having a pool. Same thing. I want to reduce as much long term liability as possible to where the only things we're really worried about after a tenant moves out is the typical maintenance things. And by the way, owning a rental property, as far as one of the myths people talk about things breaking and this, that and the other, the two most expensive repairs on a rental property is the roof and the AC unit. And both of those will probably only need to be replaced once in the time of ownership. And so you kind of got to factor that in. Like, okay, so those are the most expensive things. Then you go down to things like water heaters and appliances. They're not as expensive, but they're going to have to be replaced over time. But again, you know, we want to reduce the big long term liabilities. There's we, we get some referrals into our property management company where somebody calls and a client calls their agent and Says, hey, I was talking to a friend and I want to invest in real estate. And this is my thought and what I want to buy. And, and I remember one that came in, I think about a year and a half ago and my property manager is looking at me going, I wish they would have talked to you before they did this. You know, they went out and bought a $500,000 house in Surprise. It was 5,500 square feet, it was a good deal. And it's like seven bedrooms, four AC units and a pool. The problem is, is that my little house at 19th Avenue in Thunderbird, that's 1100 square feet with none of that, it gets $2300 a month in rent. That house was getting $3000 a month in rent. So it doesn't equate. When you look at the bigger houses, they would have been better off buying two smaller houses with less liabilities and they would have two houses appreciating rather than one and a whole lot less liabilities. So you think about, if you have a bigger house like that one, they're gonna have three AC units. Well, I'd rather have three units on separate properties than all on one property, if you know what I mean. So the other thing too about the smaller homes is we're looking at areas where the demographic is typically blue collar. And the reason I say that is because these are people that, that have jobs, they're using the bus system, they want to get their kids settled in school, those types of things. And so what happens is, is those people get settled into a property and if you're a really good landlord, they're going to stay there a while. And so we really pride ourselves in taking care of properties the way a homeowner should, which in turn, our tenants on average right now are five to seven years. So what does that mean for you as an owner of a rental property? Well, if we go back to what I originally said, if you want to own that home for 30 years and have paid off, imagine only having three and a half tenants over a 30 year period of time. We've got a couple of tenants that are almost going on 10 years, right? So those are really good tenants. And we want to keep those people because they settle in when they know that you're a good landlord and you're going to work with them and you're going to make repairs and you're going to treat them like human beings. They are not going to want to move, they want to stay there. It's their home. And some of these people, unfortunately, will never buy, but some of them don't want to. And they're good with just not having the maintenance and the headaches, and they're perfectly content with it. So that's really the goal and being a good landlord and taking care of a property. And the cool thing is, is that, well, I get ahead of myself sometimes. I do this. I just start rambling on things. So what are some other uses for rental properties for some of you that might own a bigger primary residence that doesn't fit what I was talking about? There's other options. We're not going to get into those. I just want to kind of give you some ideas that there are some other options to look at. We have several of our rental properties, which it doesn't bother me whatsoever. Some landlords like, no, I don't want that. Where we're renting it to group homes, right? So, you know, these are. These are not troubled kids, but they're kids, I don't know, foster kids, those types of things. We've got one at 45th Avenue in Peoria. It's been rented to the Same Ladies for three years now. They pay about 25% over market rent because they're running a business out of the house. I don't care if they want to run a business out of the house, because the reality is them moving is probably not going to be very likely, and they're going to keep running their business there for a very long time. And if I keep taking care of it, we're going to do that. That's kind of a funny story, because we couldn't sell it. This was back in 2019. And so we're trying to do a lease option on it. And this is where you want to be flexible as a landlord. And so they looked at it, they were all excited and they were going to rent it. And then when they went to have the city come and look at it, there were four windows in the bedrooms that were three inches too high for ingress egress for what they wanted to do. So I just looked at it. I called Wendy. I'm like, how much is it to put four new windows in and cut the block out? So in order to work with them, I'm like, we'll just put new windows in. It's a value add to us. They raise the rent a little bit. And they're still there paying over market rent because we put $1,000 worth of windows in. So sometimes you got to work with it and you got to look at the long term impact of it. Vacation rentals are a hot topic for everybody right now. To be honest with you, I didn't really like the vacation rentals. We owned a couple. There are a lot of work. You become a hotel, not a landlord. And there's a lot of people that bought properties during COVID that were going to go make a ton of money doing VRBO and they realized it's a lot of work and there's a lot of inventory and, and now there's a lot of state and city regulations that are coming down the pipe. So the vacation rentals that are doing really well are the ones that are themed, they're luxury. And I did hear recently that some of the really good, from a gal we met on the plane the other night that the 11 condos where you can do it are doing really well because a lot of the traveling nurses that need a place for three to six months so they're looking for something. Small problem with VRBO is you have to be careful with homeowners associations, the city ordinances and those types of things. But if you're doing more long term, like the traveling nurses where they're there three to six months, most of the ways have a 30 or 90 day minimum rental standard. So if you're doing that, it probably works out okay. But again, these are just things to think about for future or maybe you own one of these properties and just give you some ideas. Retreat, wedding venues. You know, Wendy and I are doing a four and a half million dollar renovation and purchase down on Camelback and 55th Street. We have looked at it 100 different ways and we actually designed it to be either vrbo, retreats, wedding venues, something of that nature. So we designed it with the end in mind and we're still working through that process right now. But there's different ideas and different things. So the world that I live in on the influencer world, where there's a lot of masterminds and women's retreats, men's retreats, these people pay a hefty dollar for a great luxury property to rent for a weekend as long as it's got enough bedrooms and bathrooms and things like that. So there's some other options there. If you do own like a gigantic home, that's, that's a possibility. Halfway houses and three quarter houses. These are typically houses for men or women that are recovering, coming out of jail, they have to rent a room. Those are good businesses to rent to. You know, you're, you've got a lot of different paperwork to do with it, but they're stable tenants and they're usually paying more money for those things. And then charities, you know, we recently rented one of our homes in Muns park. While we're doing design plans on it for a future build, we actually rented it to a. It's called Mothers of Justice, which is a charity that helps mothers get out of abuse situations. So we were able to do some different stuff with that, working with the charity because they're giving us a bigger donation for less money in rent. So we offset, giving them a great deal on rent, but they're giving us charity donations to offset it and give us actually more rent than we would actually be receiving on the open market. So there's creative ways to think outside the box. When you do own real estate, you just have to look at it from a number of different ways and get some different advice and perspectives on not what can it be but what. Or what it is, but what it can be. Right. So we got to look at it from a bird's eye view. Foreign. So not all properties are meant to be long term rentals, but there's other sources of wealth creation through these, which are more complicated steps required. That's why I said, you know, those five things, there's more complications than those. But some of you might own a primary that doesn't fit what I talked about, which gives you the ability to maybe think outside the box and go, well, could it be this? Could it be this? And we work through that strategy to see what the best option is. Okay, this is the fun one and I've got, I'm going to go through these bullet points and I've got some other things to show you. So right now some of you bought. And actually if you'll just type A1 in the chat, if you bought a house in the last three years or four. Thanks. So here's the deal. If you did, you probably have really cool interest rate. Actually I should have asked you. Or if you refinance, right? So one of those 2 or 3% interest rates, I would never get rid of that mortgage. They're an asset in themselves, right. I keep the property, you know, even if it was a little negative cash flow on it because you know, it may be a long time before we see those interest rates again. So that, that loan itself is a, is a huge asset to you if you understand the financial pieces of that. So here's what it looks like. You have a really good mortgage. You bought something probably in the 2 to $300,000 range. Because back in 2018, 19, we could actually do that. Your payments are super low, your interest rate's super low. You probably have a good amount of equity. But you're like, I really don't want to sell in the current market. It's going to take longer. I don't do these things. This is where we start converting it to a rental. But there's steps to do this which we're going to cover. You're going to have better buying market or better, better buying opportunity in the current market. So what do I mean by that? It's interesting that a year ago this month I was working with a client that, you know, we were battling on a $500,000 house. They ended up paying 554. Right? They had to, they had to draw cash because it didn't appraise all the other things that went with it. It got a really good interest rate, which is awesome because the affordability on it's better. But if you can stomach a little bit higher interest rate in the current market and work through it and understand that, hey, the same house, if it goes on the market, you know, we got 550 for it or they paid 550 for it because of competition, not because of value. Right. So they, they not overpaid for it, but they paid what they were wanting to and it was for rental purposes. So it's long term. But what if today you go out to that same house, same neighborhood, and the house is listed at 500, but now you can buy it for 475. What changes? Well, yes, you have a higher interest rate, but you have more cash in your pocket and you have $75,000 less debt on property that you purchase. So that's, you know, there's more negotiation room right now the sellers are willing to do more repairs, they're cleaning more things up. They're willing to negotiate closing costs. There's a lot more opportunity as a buyer. There's only one negative thing and that's the interest rate. So we have to get over that negative and look at all the positives in this current market. Foreign. So here's how we overcome the negativity, right? We need to know that they're temporary. There's, you know, in my opinion, we're probably going to see sometime this year maybe they're saying maybe Q2 where we'll start to see the interest rates come down. I think last time I checked on an owner occupied with good credit, depending on down payment, somewhere between six and six and a half. So we're not that far up. Yes, they creeped up over the sevens, they came back down. So, you know, we're watching those close. But just imagine if you took advantage of the market right now, even though the rate's a little bit higher and you got a good deal on something and then all of a sudden in Q2 or Q3, the interest rates come down to 4 or 5 and you can go refinance, drop that payment down versus what do you think is going to happen if all of a sudden in Q2 or Q3, the interest rates start to drop to that 4 or 5, guess what? All of us are picking up the phone going, hey, let's get back on the horse. It's time to buy the interest rates. So now you're going to have a flood of people coming back in and taking advantage of the interest rates. They're not going to have as much negotiation room. We might not have as much inventory. So you got to look at the, the positives of the interest rate being a little bit higher right now. If you can stomach that higher payment or qualify for it and realizing you might be better getting a better deal in the current market. It's kind of Warren Buffett. You know, one of my favorite sayings is, you know, when people are scared, be greedy. And people are greedy, be scared, right? So when you look at that and you're like, hey, you know what? People are scared, they're not buying. I want to go find the best deal in the market that I can because it's going to be my first home. I'll do some repairs on it myself and it's going to be a rental property. And before I turn to a rental, when the rates come down, I'm going to refinance it and it's going to make a cash flowing asset for me, for my future. So there's a plan and a strategy to everything that we're talking about. And it's also, you know, breaking the myths and creating that mental stability of this is why I'm doing what I'm doing, right? So think about it, you know, and I'm not trying to pressure anybody into buying something. I'm just saying if you can stomach it, imagine what happens if you look back five years from now and go, man, I'm really glad I bought one. I did. And I took that advice and I stomached the extra two or three hundred dollars a month payment for six to eight months to get what I got right. And for those of you that might still be having PTSD of 2008. Yep. There's also the possibility it could go the reverse. Could the prices come down a little bit more? Sure. If you're planning for long term, it doesn't matter what you paid for. The only thing that matters is I'm holding it for long term. Somebody else is going to pay that asset off and it's going to create wealth in my retirement down the road. That again, that's where the positive thing lies and we just have to stay that course. You know, it's very similar to the way, you know, financial advisors look at the stock market. Like, hey, don't worry that you lost 20% of your retirement this year. Just keep it in there and it's going to get better. Right. Because we have these ups and downs and trying to get a time to come back. Real estate's the same way. The only difference is, is that in the stock market, if I want to go buy $300,000 of Tesla or a $300,000 home, well, you have to have $300,000 of my Tesla stock. Right. And that asset is going to increase, decrease, increase, decrease. Right. For retirement. What you can't do with Tesla is you can't buy a $300,000 home for $9,000 and get 6% appreciation on the year.

Right.

So that, that's kind of what we're talking about here. And somebody else is going to pay that house off over time to where? The Tesla stock. You had to earn that money, you had to put it in, you had to risk it with a mortgage and somebody else paying it, somebody else living there. That's where your benefits come to creating wealth. Because it's kind of crazy that you can control a $300,000 asset. You can get the appreciation on it, the cash on cash return for nine grand. Right. It, it's the craziest piece. If you look at it. When I show you this example, it'll make sense. All right, let me pause this real quick. Okay. I just want to give you an idea, an example of what happens over time when you have this mindset of investing in real estate, buying your first home and then turning it in. So I took an example from a client that bought a House in 2018 and here's what it looks like right now. So I want to give you a couple different things. As a rental property in today's market, it would rent for $2,100 a month. This house is at 39th Avenue and Cactus, it would rent for 2100amonth. Here's the actual fees, right? So we've got property management in there. We've got real estate taxes, and we've got rental property insurance. There is no hoa. Right? And I'm going to go with the fact that because I knew this client, they've remodeled it, they've gone through it, it's really nice. Everything's in great condition. So it will make a great rental property. They don't have to put a bunch of money into it. Here's the crazy thing, and just pay attention to the column one here, column B. So a desired cap rate is a return on your money, right? So in reverse scenarios, like, hey, if I go get a CD at the bank, they're going to give me a 4% cap rate on my money, which is a 4% annual rate of return. That's what a cap rate is. So that's, you know, you can put a desired cap rate in here and say, I really want to get 7% on this one. 5%, you know, is okay. They paid $260,000 for this house. Their actual cap rate is 8 and a half percent, which is really good on this particular property if they converted to a rental. So their down payment. Actually, I need to shift this real quick because their down payment was 10%. Okay? So they put 10% down. Their loan amount was 234,000. Their closing costs, all the things, right? But they had an actual interest rate of 3% of that time. Here's the crazy part that will blow your mind if they rented this right now, if you own one of these mortgages, what it looks like, remember I said your, your ROI or your cap rate, your return on cash, this house, because of that 3% interest rate. And when they bought, their monthly cash flow is $854 a month with property management, which is a 31% rate of return on the down payment that they put on the house. You're not getting that in the stock market. Sorry. Unless you're really lucky or you bought Bitcoin just before, or sold it just before it went down, right? You got to get really lucky for that. This is not luck. This is just understanding the financial analysis of it. So that's what you know. And this is a thing for, for those of you that are agents, this is something that you should be going back to your clients, going, hey, this might be a really good idea. You should consider it. It's a way to contact them and talk to them about that. So now we're still talking about, well, why, why Would I buy Tom in the current market with high interest rates when I have this watch what offsets here? So I just went to the same neighborhood and said, okay. Oh, and by the way, let's go back to their primary right now because this will make more sense. The current value is $400,000. 80% loan to value is 320,000. Because when you do an equity line, we're not refinancing, we're doing equity line. They're going to make you keep 20% equity in it. Okay. Their current loan is 234. They can get an equity line for about $86,000 right now. So why is that important? Because if you live in your primary right now, once you move out of it and it converts to a rental, once you put it on the market as a rental, or once you put it on the market for sale, getting an equity line is going to take some seasoning. It's usually about six months because they don't want to see that you tried to sell it, rent it or any of those other things. And once it becomes an investment property, you can't go get an equity line on it. I mean, you can, but it's very expensive and through different banks I'm talking about, you could call, if you own this house, you could call today Bell bank, which is who we use for our equity lines, and get an equity line about 10 days for $86,000. Explain, explain what that is really 30 second view of the, of the equity line. So the equity line is a. Basically it's a credit card tied to the equity in your property. Right now, the equity line interest rate floats. So it's usually about 1 to 2 points above prime, which right now it's probably about 6 to 7%. What this does for you is it gives you a reserve. It also gives you the ability if you need the down payment for the next house, you can pull it from this. Just remember we have to factor the payment in on anything you take out of that. The key is, even if you don't need the equity line, have it set up anyway, it's done. You don't have to use it. You don't pay for it if you're not using it. And again, it's kind of like credit cards. You want to draw from it every now and again and pay it back so it stays in use. Helps your credit as well. But what this does is it gives you some reserves, it gives you some liquidity, and it gives you a safety net, really. Not that I want to rely on it, but it's there if you need to. Right. Remember that AC unit we talked about? Well, if you had to go tap an equity line at 6% versus a credit card at 20%, the AC unit, that's probably a better use. Right. So the equity line is important step in this. Right. So if you're even thinking about keeping your house as a primary, just go set up the equity line. Not going to cost you much. And it's done, you know, in about 10 days. Right. It's a very simple process. When I send out the email in the next couple of days, or when Grace sends out the email, Bell Bank's contact information will be in there. If you're looking for somebody to do a line of credit for you or at least explore. Okay, so let's jump over. What I did is I looked at the same house that they own and I said, oh, look, there's a house four doors down that's on the market for $400,000. So they're just going to make a lateral move down the street. Maybe they love their neighborhood. By the way, I don't advise living two doors down for your tenants. It's just not a good thing. Right. So I did the same rents, same expenses. Right. The only thing that I changed here was the purchase price and the interest rate. So let's take today's market. It's on the market for 400,000. These people are motivated. They end up taking an offer for 375 and the seller paid their closing costs on top of that. But. And they're buying this owner occupied. But they've got a six and a half percent interest rate. Right. So their monthly mortgage payment, principal and interest is right about 20, 20, $600 a month. This is just showing principal and interest. So here's, here's what happens. You're like, well, what, what if you can't afford that monthly increase in payments? Well, what if your rental property is offsetting? You know, so you've got $900 a month that you can now apply towards your new mortgage and you increase your. Your net worth. Right. So they've got, they still left, remember on the first house, they still left $60,000 in equity, even though they have the equity loan. Right. And even if they didn't take it out, they still have $140,000 worth of net worth in that property still sitting there. And it's cash flowing, $10,000 a year. So if you can support that for a short period of time until the interest rates come Down. By the way, it's easier to refinance something owner occupied. And you have that great mortgage on the first one. So this is why it's really important. Like look at the game. Can we afford to take, and I don't even want to call it a risk. Can we stretch ourselves? Right. We've all heard all the people talk about, right? One less dinner a month, one less movie a month, whatever that looks like. Right. However you want to stretch it. And a lot of times we stretch so that we can move forward. So that's one of the advice. So let me show you one more thing here. That's what it looks like. Oh, this is a comparison. So if you look at this, I ran this at a 6 1/2% interest rate and their payments about $2,700 a month. So yeah, we increase technically our mortgage payment by seventeen hundred dollars a month. Right. But we're going to offset that with the cash flow that we got. So technically it's about $700 a month. Yes, that's a big stretch for a lot of people. And again, maybe you're not going and buying a $400,000 house. Maybe buy something smaller or less money, whatever works out to, to what you can qualify for. But here's what happens when you go and refinance it. Let's say the rates go down to four, right. Then you go back and refinance that owner occupied. It knocks it back down to that twenty two hundred dollars a month. Now here is the great piece to it. Go back here real quick. Watch what happens when I change this. So now they refinanced it. Oops. Not 400% interest. That would be terrible. So now with their payments and everything and what's going on, they actually have another cash flowing asset. Once that happens. But for a little while you're stretching it. So now you have two homes. If they decide to rent this one out and go do this again, they're making $12,000 a year or $1000, almost 1100 dollars a month in cash flow from those two properties by doing this. But again, the only thing that's scaring people from doing something like this is either lack of knowledge or the talking heads on the media about interest rates. And the sky is falling in, the market's going to crash. So let's just take it and dumb it down a little bit and just make it super simple. What happens if that client of mine, they do that house hack one more time and they have those two houses and they're both free and clear and they never increase in value. They're both worth $400,000 right now. Somebody else has paid them off over that time and now they own $800,000 worth of real estate free and clear at the age of 60 or 65 and they've got $4,000 a month of passive income. It only takes a couple to create that. Right. So, you know, I always like to challenge people is what's your dream? Right. How much passive income would you like to create? By the way, Passive income either comes from, you know, work or it comes from owning something free and clear. And sometimes getting something free and clear just takes time. So if you can stay the course, even with two homes, you can create a source of income when you get to that age and a source of equity that can be utilized for other things. And there's a lot more strategies that can be played out on this that we do when we start getting a little crazy and a little wild depending on your, your risk assessment and, and your income. Right. But this is something that we're, we're showing our kids how to do already. Like this is going to be the plan period, so that they know. Because I'm giving them all my regrets and my knowledge and saying this is why, this is how and this is what we're going to do. Pretty much the same thing that we were just talking about. And like I said, I just went faster than, than my slide deck. So I do want to add something to this that's really cool. I love using this as an example. The other thing too that's really crazy is that, and actually I want to make two points here. If you have a 401k or an IRA, you might contribute a couple hundred bucks a month to it, right? Some people do, some people don't. Here's what happens. What if you contribute that same amount or you didn't do 401k and you did it into, you know, the negative cash flow on a rental property. Right. You're paying down that asset. Here's what the difference is. If you want your money out of your 401k, yes. You can get a loan against it that's short term or you can take it out and be penalized. Right. Those are the only two ways to get it out with real estate. Let's take that same four hundred thousand dollar house we were just talking about. And that client has two little kids right now, let's say in 18 year, let's say 15 years, little Johnny wants to go to college and they go and use that $86,000 line of credit and they pay cash for college, no student loans, no anything. They probably get a discount for it. And guess what? The tenant is still paying for Johnny's college. And now there's no tax consequence in pulling that equity out. And you can do that over and over again. And until you sell that house, you're not going to have a tax consequence for pulling the equity out unless you know, the government changes something. But right now that's the way it is. You can borrow equity, you can sell and capture the equity if you want to. You create passive income or you can 1031 exchange for like kind property, right? Which means that you could take those two houses, sell them at the same time and go buy another house somewhere else or two more houses, or three more houses with that equity and create the same thing without a tax consequence. It's a great thing about real estate is there's a lot of different ways to move the equity, sell things without having a tax consequence. Because if you didn't know your primary residence as long as you've lived in it for the two of the last five years, you are free and clear if you're single up to $250,000 in capital gains or $500,000 remarry. Now keep this in mind, that's a total gain. So it's the $500,000 or whatever you sold it for, minus all the expenses and improvements you did to the house is where your gain really is that you can be taxed on. So you have up to $500,000 and then anything over that you would have to pay capital gains tax on, which is 20% when you sell investment properties. This is one of the advantages to it. Got ahead of myself. One of the advantages to it is that you can that when I lose my train of thought, okay, oh, that's where I was going with it. We talked about college and those types of things and the fact that you know, you can borrow it, you can move things around and you can't do that inside your normal retirement accounts until you get a little bit more complicated with self directed and some other stuff. So you know, it's crazy to kind of think about, you know, you borrowed $225,000 in 2007, put down 7, $500. And what I'm showing you here is the fact that this was in the height of the market, which is where some of you are right now. Well, it's, it's the top of the market and everything's chaos. And I don't want to do this right. So anybody that would have bought at the top of the market in 2007, they borrowed, they got one of those crappy loans, but maybe they got refinanced and maybe they have a 5 or 6% interest rate on it. They put 70, $500 down to control $225,000 asset and now it's worth $450,000 today. The difference is it's almost paid off and they've gotten a 38% annual rate of return based on the money that they put down. That's just in the equity piece. Right. We're not talking about cash flow or rent or anything else. This is where we start getting into the nitty gritty of understanding the long term play of it. And those are some of my regrets about not keeping some of the stuff that we bought early on. And it's certainly one of my regrets when we lost everything in 2008, you know, we got foreclosed on, we had all kinds of debt and we didn't have the mindset of being prepared for what happened from 2008 to 2011. You know, there was houses, you know, you could buy and we sold houses for Fannie Mae and Freddie Mac for 20 grand. We could have put a fence around and they would have made all kinds of money in the market last year. Right. So it's being mentally prepared to understand when markets start to shift, how you can take advantage of them. So this is just, you know, what we just did was kind of, you know, relating it to standard retirement and what that looked like in the natural progression. So think about it in reverse. Think about how much income or passive income you'd like to have when you retire and at what age. So let's say it's 65 and you want to retire at 65 and you want $8,000 in passive income. How much money do you need to borrow and how many houses do you need to own? They get paid off in that time frame to create that $8,000 a month in retirement income. That's kind of a great way to look at it, right? If you move to the financial advisor, they're going to tell you how much money you have to save. And I'm asking you how much money do you and can you borrow over a 10 year period of time against real estate? And yes, it's going to go up and down. That's the nature of the beast. So the stock market, the only difference is I have a bunch of tangible assets and so do you have that create long term wealth. Somebody's renting out the debt and paying the debt down. It's not what happens in the stock market. You know, I, I look at it real closely. Wendy and I looked at her dad's retirement and it's, it sucks. Last year, he's on his last year before he retires, which he did this week, and he lost 20% of his retirement in one year. Right. What if that same money was invested in real estate over the 40 years he had been putting in his retirement? And for a lot of us, we understand real estate, but some of us are not applying all of it that we can. And, and that's, that's really my goal is to help you understand and realize it. Because some of you may or may not know, dad was in the business for 40 years. My dad built some major portfolios in that 2008-2012 time frame. But what he didn't do is he didn't do it for himself. He was educating people, but he didn't do it for himself. And so what happens when he passes at the age of 63 from sudden terminal cancer? You know, there wasn't much there that was left. He left me a ton of knowledge, which has been better than any assets he could have left me. But it's still one of those things where we're trying to go through and break the chains. And you're going to have to figure out what chains you want to break, you know, for your generational wealth, for your kids, for all those different pieces as you go forward. So when we send the follow up email out, so by the way, this is all recorded in studio. You're going to get a YouTube link, you're going to get the contacts for Bell bank, some follow up. And the invite for February 15th, same thing. I'm going to do these once a month. I don't have all the dates lined out, but I'm just going to keep sharing things. Right. It's something that I really enjoy doing and really giving you guys a platform to ask questions and kind of go through things. There's a, there's a checklist, right, that we created that you can use. It shows you exactly the stages of doing this and we have to have a strategy when we do this. So let me give you this last piece on this. If you currently own a primary or maybe you're working or thinking about talking to your clients about it, here's the steps. So we walk through this for our clients. So if you have a client like hey, you know what? We talked to you about buying this as an investment property. Here's the steps. You're going to buy it owner occupied. And right now part of this step is going to be maybe as soon as the rates start to change, you want to contact that client, go, hey, remember the rates are changing. So we want to get that rate down so that we can execute our strategy of creating a rental property. So we want to get that out of maybe an FHA mortgage or conventional and back into a conventional mortgage so that they can move forward. Maybe they wanted to use another FHA loan for the next step. So we want to free up that FHA loan. So it's really important that we know what kind of loan they're using and the step to getting out of it and refinancing it. So it's kind of like a follow up thing for you to create either in your drip systems or whatnot to send those reminders out and keep in touch with those people and kind of go through that process. So now the step there is, is now there may be in the house for a year. If they refinance as owner occupied, they're gonna have to wait 12 months for that to season. They can't. You can't go out and buy another house. Owner occupied. When you just refinance. Owner occupied. So you have to be at a time season. It doesn't mean around month nine that you don't start the process of looking at the market, looking at another house, looking at what's next. Right. Because that's what we're going to do. We're doing this in steps and stages and we just keep doing that. We rinse and repeat. And the same thing is in that time frame, you know, let's say they put some money down or the equity increase, whatnot. That's also the time frame after they refinance it to go through and maybe do that equity line. So, so there's just multiple stages in going through this and there's a checklist that we're going to send out in the email that is for you to utilize. Right. It's a great checklist. It gives you some different things and some different food for thought to just consider as you're, you know, going down the road of considering either investing or helping other people invest through this house act, man, nailed it. Right? Of an hour. All right, so I know that is a lot of information. So on Gary, if you want to start with what's in the chat, is there questions in the chat or you guys just want to open Mike this. Let's open Mike it. I know you had lost your train of thought talking about cap gains on investment property. Not that you need to circle back to that, but I think it'd be great to hear what people got out of it, what they think, what they need, what are their next steps. So I just want to open it up for questions and then I'd love to open it up for takeaways. Right. I really want to know what kind of impact, you know, this has on, on your future plans. And I appreciate you all being here. So Mike's open. See Anna here.

Thanks so much. That was great information. Are you able to share the, the spreadsheet that you have for investment properties? Yeah, that'd be awesome.

Yep, I'll be happy to do that.

Thank you.

So you'll get that fun spreadsheet too. It's fun to play with the numbers on it. And I asked a quick question. Thank you, Lauren. And ask quick question, will the strategy work if with a VA loan, the strategy will work. So what happens is you are going to use your VA loan to buy your primary residence. And then during that, you know, after, you know, you've been there six months, a year, you want to start the refinance process to get out of the VA loan into conventional. Not that you have to, but here's the reasons why. If you get out of the VA loan and now it's conventional and hopefully, you know, the house has picked up a little bit of equity and you can refinance it that way. Now you've opened up your VA loan to go buy another primary house with it. Right? Because if you leave the VA loan in your primary and you move out and you go do a conventional on the next one, you're going to have to refinance your primary residence with a VA as a non owner occupied loan, which is going to cost you a lot more money and you're going to have to have more equity in it or put more money into it to get out of it. So it's really critical that in that step and I'm glad you asked, is a great question. VA is just, you know, it's an awesome thing to use. So you know, jump in, use it. But we definitely want to refinance out of it. So you have that eligibility again. Right. The thing is that right now I have, I believe it's like a 3.2 interest rate. I bought my house like I think like three years ago.

So I really wouldn't want to and.

It'S, it's with a VA loan.

So I wouldn't want to refinance.

What do you advise? Or, or there's no way around it. No. So there's, there's no way really around it when it comes down to it, because you've got that rate. The question is, is how much? You know, I'm just going to, I'm going to use the same numbers that I used on that example just to make it easy. You know, you've got $140,000 in equity. You're better off going, getting an equity line, leaving the VA alone and doing a conventional or even an FHA loan to go into your next house. You know, it just. And that is the hard thing, because that 3.25, even though it's VA, I would, I would hold on to that for dear life because it's going to make your, you know, your property cash flow from that standpoint. And we're probably not going to see the threes, you know, for a very, very long time, if ever. So I would go the equity route and then look at doing an FHA or a conventional loan going forward on your next home. But you just know that, you know, your VA is just used. You can. The VA doesn't care if you've got a VA loan. It's rented out. That's fine. You're not violating anything there because you bought it as an owner occupied. So you just really want to look at that and, and look at the numbers. So with the information that's being sent out, just kind of think, you know, do I really need to use my VA loan again? Because the other thing to. Is that when you do use the va, you get that funding fee, which is super expensive that they tack into the loan. Right. So, you know, it's something that we really don't see. It's great for, for veterans. And by the way, thank you for serving or if it was your husband, whatever it was. So I would keep it there and I would try to go to the route to doing conventional for your next house. Reason why is maybe you put 5% down on or occupied. You really don't have to refinance that again if the rate is good or those types of things. So we kind of skip a step as to what we were talking about before. Thank you for that. You're welcome. Foreign.

I just want to jump in and say thanks so much, Steve, for talking about this. I think that this is such a powerful tool to use. I've been obviously following you on social media for a while and I'm actually of course buying one of your properties that you have listed and that's going to become my new primary and we are house hacking and we, my boyfriend and I actually have two rental properties between us. So we're going to keep doing this, rinse and repeat. Our goal is to, if we don't have kids, we're buying a house. So that's awesome.

Thank you for that. I really appreciate that. That's, that's amazing and I'm grateful you're here and you're following the process. So that's awesome.

Absolutely. Thank you guys. It works, I'm telling you. Like the two properties that we have, we're making more than what the expenses are on it. So it's a no brainer. And even if we broke even or even if we had to give up now a couple hundred dollars a month to buy the next one or we're taking a small loss, as long as the interest is covered, you're making money because you're going to, you're just moving your essentially your cash into a print to your principal or your equity. It's not really a loss as long as that, as long as the interest is being covered. So, and that's not the case right now, rates are low enough still that you're being able to cover the expenses place plus some and you're making money on any property that you're buying right now.

So good points. Thank you for that. Barbara asked, you know her question there is. I live in my primary residence and considering moving in a year and a half. I'm unsure I want to sell or make an investment. Property I owe 120 on it is currently worth about 630. What would you do? Sell or invest? Well, there's a lot of different things. So you've got a lot of equity in that property. Right. So there's a number of different things you could do and it's, it's really one of those pieces where you know there's about $500,000 in equity there. You could do an equity line, you owe 120 on it. I don't know what that interest rate looks like. And if it's worth 630, depends on is it a bigger house, what the area is when I keep it and if I did an equity line, depending on where you want to move, could you take $500,000 in equity and spread that out over another primary and maybe another rental property and keep all three or four? There's, there's A lot of different strategies that. And it depends on the interest rates and again, the condition of the current house that you live in. Does it need work? Does it need to be updated? Are you worried about maintaining it? And the other piece here is that, how long have you lived in it? Because. And what did you pay for it? Because that's going to determine, you know, what your capital gains are going to be. And if it's not a great ideal rental property, it may be more ideal just to sell it and get the money out because it's going to be tax free from capital gains and then start investing it from that standpoint. So there's, there's a lot of strategy to cut up in something like that, you know, and I would, I would really have to, you know, look at addresses and different things and kind of work through that strategy with you on really showing the details on that. I think she's on mute. You're on mute, Barbara. It's not working. Sign language.

Steve, I have a question. The spreadsheet that you did, if somebody does take a line of credit, where does that liability get absorbed on your spreadsheet? Or did or is it. Do you follow me?

Yeah, good point. Right. So if you do, I didn't have a place to absorb it in that particular spreadsheet. So if you would have to take it, it's like, let's just say you pulled 20 grand out of it, you know, and the equity lines are typically interest only, so let's just say you pull 20 grand out of it and you've got to pay 100 to $200 a month on that payment. Okay. Right now you're just subtracting that from what that cash flow was at the bottom line. Got it.

Okay. Thank you.

Yep.

And I too, appreciate your insight. You break things down. So what? Because I'm probably the exact person you're talking about. I have owned and sold since I graduated college. And I look back and I'm just like, why did I sell? Like, why did I sell? I made a ton of money before I had kids, before I got married. Now I'm married, I have two young kids. And it's like the tightest we've ever been financially. And it's, you know, it's so frustrating. But you, you spell it out in easier ways to implement, and it's, it's helpful. So thank you.

You're welcome. Well, you know what? You just gotta have, you just gotta start sometime, right? Somewhere. And that's, that's the ideal part of it. It's just having the knowledge is the important part. And. And now you do. So now you can have the mental to just kind of like, okay, well, maybe I should be doing this, or what do I need to look at differently, or should I look at it differently? Right. Sometimes it makes sense, sometimes it doesn't. Well, anybody else have anything else to kind of go through there? Awesome. Thank you, everybody for joining. We'll get an email out to you next couple of days and we will connect and you can email me if you need something and we'll go through the process. So thank you all for being here.