Unlocking Equity and Partnering with Family | The Real Estate Revolution | Episode 9

Coming up on this episode of the Real Estate Revolution.

All of our children have moved that way since becoming adults. And so we have one in Virginia, right on the border of Tennessee, one in Wisconsin, and whose husband works in Tennessee a lot and so they may end up there and then one in Colorado. So just kind of being somewhere that we think we'll enjoy and that will be closer to them.

This episode is so full of great questions and great strategies. You are not going to want to miss this. Make sure you listen till the end. Welcome back to the Steve D. Valentine Show. I'm here with my guest, Melanie Betafish. I did it. See, I see what happened. Melanie Abeda, she runs a med spa called Harmony Aesthetics in the Santa Monica area and she has some amazing real estate questions. So we're going to see if we can't throw some strategies together. Melanie, thanks for jumping on and, and agreeing to do this. And so I'm super excited to be here with you.

Thank you for having me. I'm excited to learn more.

How's the weather in la?

You know, we've had an incredibly, like, cold and rainy winter, so it's. It's hard to complain when you live in LA about weather, but we find a way to do that anyway. And so right when the sun comes, we appreciate it more. Right.

Awesome. Well, you can always come out here to Phoenix. We have plenty of sunshine. You're right.

I spent my early childhood in Arizona and I love it. I love everything about it.

Yeah, I. It's a great place.

It is.

So Melanie and I met recently through Chris Harter's Elite Mastermind and we talked a little bit about real estate. She's in the process of doing a massive ti on a new space that she's got in la. And my, my mouth kind of dropped when we were talking when she told me what the rent price is. So for those of you that are whining about the price of rent for your location, what are you paying for.

Rent on the new space will be $16,000 for less than 3,000 square feet. Right.

Welcome to LA.

Yeah.

Well, where do you want to start?

Well, I think, you know, we. I did start investing in real estate when I was young. I was probably 25, and my husband and I built a duplex. It was my idea. And we are like, we'll live in one side. We were both young and having children and live in one side and rent out the other, and that will afford us a lot more freedom. And so we did that. I think we only lived in that side for a year. During that we finished both basements because this is in Colorado where people have basements.

Right.

And then we were able to save, you know, money and buy our personal home. But since then, you know, we haven't really moved further with that. We still own that property.

Awesome.

I think it's yeah, like a little less than 23 years, 24 years, something like that, which is awesome. But you know, our really our goal was to like continue investing in real estate. But you know, life happened and that didn't happen. So I think we're kind of ready to do that so just finding the best way to move forward. So I think my first question was, you know, we do have a lot of equity. I think somewhere between $304,100,000 in that property. So and you know, you know, because we are spending so much of remedy now, expanding business like and wanting to get into more to real estate. Like do we take equity out of that property in order to buy other properties or do we just hang onto that one, pay it off and then buy.

Yeah, so, so let's just talk about future strategy. Is that, you know, what point in time do you and your husband, is it five years, 10 years that you want to start seeing that passive income being generated? Because obviously you have some passive income from it. But it's, you know, we've got cost of mortgage and those types of things. Right.

So I would say, you know, I'm 50, you know, I plan on working as much as I am probably like the next 10 years building this business. I have a new another location opening in Colorado and you know, kind of building during that time. And so like in 10 years starting to be more passive income.

Okay, well if you didn't know, I've released my first book and published it is available on Amazon Limitless Real Estate Strategies. I wrote this for anybody in the real estate business. I don't care if you're a real estate agent, lender, wholesaler, investor. This will help you change and break some myths that you think are out there. It will also change your life, change your legacy and ultimately help you build wealth while creating win win strategies. So pick it up on Amazon today. So where is. So you finished out the basements in those. And so what does each unit currently rent for?

So the smaller side it's about 1800 square feet and it rents for 2,400. And then the larger side is I think about 2,200 square feet and it rents for about 2,900.

I think that is some Serious great rental for something that you bought 20 years ago. 25 years ago. That's amazing. What's the current mortgage payment on the property?

I think it's around 1100.

Okay, so we've got some serious cash flow on, on this one. So the question always is with something like this. So you said you've got 3, $400,000 in equity. Have you ever refinanced this or taken any equity out of it? Or is this the same mortgage from what?

We've never taken any equity out, but we have refinanced it.

How long ago do you think refinance.

It to have been like 10 years ago? I want to say.

Okay, do you know what your current interest rate is?

I don't know off the top of my head, but I think it's, it's, it's good. It's not probably in the fours, it's not anything high where we're like, yeah.

Okay, so here's the cool thing. When you have something like this $1100, I'm just going to say you're, you're roughly about $5000 a month in rent. So you're about $3900 a month in passive income from this particular investment. So the question is that money sitting there, if you refinance and you pull 300 grand out of it, you're obviously going to change your mortgage payments substantially. The good news is what it's going to do is that it's going to increase your ability to maybe go into another direction and invest in some more properties. Right. Because right now we're only getting the benefit of the cash flow and the appreciation and the fact that it's being paid off right now. But we just have one property. Right. But what if you guys were able to pull that money out? You're going to lessen your cash flow, obviously on a monthly basis, but you're able to put it into, say, three more properties that are being paid down. They're appreciating. And so now you would have technically four to five properties that you're writing off that you're creating some cash flow. Not a ton, but remember, cash flow we really want in about 10 years. But if you look at 10 years of depreciation and potentially appreciation, what does it look like for. For your future at that point? And so the hard part always is like, do we refinance or are we better off just saving some money and buying another asset and doing that over and over again down the road? Does.

Right.

Does any of that appeal as Far as if you had, you know, because it depends on where you're at. Because if you, if you take $300,000 out of the property, you're going to change your interest rate quite a bit in the current market, right. When it comes down to that. So if I look at numbers and again, there's. There's going to be some offset when it comes down to it. So what, what do you currently do you remember what you owe on the property, or roughly?

I believe it's a little over 100,000. Maybe like between 100 and 120.

Okay. Such a great investment. Congrats on that. So, so many people look back and regret, like, should have sold it or whatever. But I mean, for you guys holding it, that's amazing. So what do you think it's really worth right now?

I think at the height of the market, you know, kind of when everything. We kept getting offers for people to buy it, and I think we got around like 525at the high.

See, And I would say from a standpoint of like, even if you paid 6 or $700,000 for the rent that's coming in on that, that makes a ton of sense. So 525, I think, is low on the property just because of what it's cash flowing right now. And what part of Colorado is that in?

It's in southern Colorado. It's in a city called Pueblo west, which is like, actually surrounds a reservoir, you know, so it's a really nice family area.

So here's, here's what it looks like. If we were to actually be able to pull $400,000 out of a year, 100. You refinance for 500,000, your new mortgage payment is going to be about $3,500 a month, which still is going to allow you to cash flow about 1500-2000 dollars a month on the property. Now you have a half a million dollars. Now, question is, what do we do with a half a million dollars? Well, we want to try to increase some of our cash flow from, you know, hey, we're moving this money from one place to the next. But we don't want to just buy rental properties just to buy rental properties. Want to buy something that might have some equity in it, maybe it needs some work, those types of things. So we look at a half a million dollars, you can do one or two things. You could go out and say, like in the Phoenix area where I'm at, okay, well, can we buy a $350,000 house, put $100,000 down. Even in the current interest rate climate, you know, because non owner occupied, your interest rates are going to be somewhere in that, that's six and a half to 7%. And does it make sense right now to where, hey, we bought a little bit of equity and we've got a $250,000 mortgage, you're going to cash flow about maybe 150 to $200 a month. But here's the difference is that if you did that and you did it five times, so $100,000 per house, you would now own six rental properties which are going to adjust with some tax basis because you've got some depreciation. Now you have six properties equaling about right around $2 million, maybe, maybe closer to two and a half million dollars that are all being paid off by somebody else over this 10 next 10 year period of time rather than, okay, we have one one property that is definitely cash flowing but we don't have all the benefits because think about this. If you had executed this plan in 2017, yes, the duplex wouldn't have been as high in value. But if you'd gone and bought five more homes prior to everything going up, what would that portfolio look like? Right.

Yeah. So that's much better.

Right. So if we look at over the next 10 years, yeah, we're in a place right now where the market's down a little bit, which is a great place to be buying is when there's motivation and can we build the rental portfolio so that hey, if all of a sudden there's another upturn and if there's not another upturn and you're getting 5% appreciation on two and a half million dollars versus 5% appreciation on $500,000, what's the difference as you go forward in that 10 years? So that's really what it looks like to pull that equity out, you know, and it's kind of in a season where like, oh, I really don't want to touch it. But as an investor or non owner occupant, there's really only one way to pull that cash out. You can't do a home equity line because they, they don't do HELOC against non owner occupy. There's some banks that do, but it's super expensive when it comes down to the heloc. So you're better off taking this and refinancing it into a long term note. Now one of the other pieces of advice that I would have on this particular one is you could do standard refinancing where you have to provide tax returns and income statements and all that other stuff. And you're self employed. Is your husband self employed?

He is.

Sometimes this is like a pain in the rear end for those of us that are self employed. Right.

I've heard.

But they have this program that's called DSCR's debt service ratio coverage for rental properties to where they are lending based on 75% loan to value. They're lending based on the cash flow that's coming in. And it's very, very simple qualifying when it comes down to pulling that cash out and you can do cash out up TO I think 70% loan to value, so.

Oh, okay.

So it's, it's a fairly streamlined process and it's specifically what they're doing is they're lending their asset based lending. So they're based on the value of the property and the rental income and that's what they're basing off. They're not so much basing it off your tax returns, income or any of those other things. They're doing asset based lending so you pay a little bit higher interest rate.

Okay.

But it's a streamline. It's a very easy process to get through something like that. Then you have your cash out and now you start looking at okay, where do I want to deploy my cash that is going to make it work? And further rather than just sitting there. Because the only return it's getting is the cash on cash return that you have, which is extremely high in comparison to what you guys paid for it. Right. Because if you're looking at what we paid for, the cash on cash return we're getting is great. But if you look at the cash on cash return in what the value of the current property is and what you're getting for it, it's still good. But can we push it out and make it make more sense? Right.

Okay, that makes sense. Yeah. I didn't know about the asset driven loans either, so that's really good information.

A lot of people don't, but they're, they're great to utilize especially in your situation where it's, you know, two self employ incomes we don't want to go through.

Right.

All the bank statements and all the income and all the other things that goes with it. The only penalty to this is that the interest rate is a little bit higher. But for those of us that are Entrepreneurs, I did 40 of these last year. We refinanced everything. It was so much easier than doing all the bank statements and leases and all the other stuff. So. So it is something there. But again, you pay a little bit higher rate, but if we can move, you know, and create some advantages to paying that higher rate, and the good news is in your property, you're still going to cash flow on it, even though you're taking that out.

Very cool. And now, so Joe and I don't own a primary residence. Right. When we moved from Colorado, we had our home still, but it was kind of, you know, when life happened. And so ended up just in order to keep our head above water, like selling that and, you know, so we've just been renting here. And so I, I'm not sure we want to buy a property here because as you know, everything is just so. And we don't plan on staying here, like, after retirement. So it is. Would you suggest, like, just going ahead and like, starting with the rental property or. I don't know. I guess it seems a little bit strange to be like, buying properties when you don't own when you live it.

Well, not necessarily because you're, you're in a place where the taxes are high, the prices are high, and it's probably cheaper to rent than it is to buy, right? So, yes, you're probably better off renting when it comes down to it, because if you start looking at maintenance, repairs, all the other things, like, great, I own a home, but it's costing me, you know, it's sucking the life out of me right to where if you rent where you're at, it's easier just to let the landlord take care of all those things. So, you know, I'm a huge advocate of if you're in a super expensive place like LA or New York City, rent something there because it doesn't make sense to actually purchase, you know, when it comes down to the mortgage payments. Now here's where it does make sense. So have you guys thought about, like, hey, when we're done here, where are we going to retire?

Yeah, we have. We're not exactly sure, but probably Tennessee. All of our children have moved that way since becoming adults. And so we have one in Virginia, right on the border of Tennessee, one in Wisconsin, and whose husband works in Tennessee a lot. And so they may end up there and then one in Colorado. So just kind of being somewhere that we think will enjoy and that will be closer to them.

So if you think about, like, planning for that, like, hey, our dream is to move to Tennessee, right? Obviously, kid, things change. All that other stuff. The cool thing about this is what if part of the plan was pulling some of that cash out and buying the property now that you eventually want to retire to in 10 years. Right. So you buy something in Tennessee that you guys really love. That's more of a, hey, we're going to buy something smaller that we really enjoy, or maybe it's something bigger, who knows? Whatever, whatever you guys are thinking about, but it's buying with the future premonition of we're going to be here. So let's buy something that even if it needs a bunch of work, but somebody can live in it as a rental. You let somebody rent it, you do the absolute minimal repairs to be, you know, to house human beings. Obviously, don't be a slumlord.

Yeah.

But then think about this. In 10 years, you're like, hey, our dream is to move into this place. We bought it for ourselves. And, and when that 10 years comes up, the tenant comes out and now you can renovate it based on current trends, based on what you want. And you knew that was the plan. The only difference is right now that house is paid off 10 years, you might refinance it because if the rates go down or when they go down, we'll want to refinance that into a longer term plan. And so we want to watch that over the next 10 years. But even if it's a break, break even asset, that eventually something you guys can move into, renovate and keep for what you want, it's a great potential plan. And if you never end up moving there, oh great, you have a rental property in that place. But it is a way that I see some doctors and people doing it, you know, in your professions, like, hey, where is it that I want to live in the future? So let's go ahead and buy there now. Secure a good interest rate, secure a good property, let it be leased, and then we know that is part of the plan and if the plan changes, that's okay. We still had a rental property.

Yeah, no, that makes good sense because that's definitely one of the things we were considering. So it's good to have clarity around that, you know. Yeah. And so I think one of the other things that like in real estate that I had a question surrounding is helping my kids. So, you know, because we did do some real estate investing when they were young, they kind of get that idea. And so we've had actually two of them come to us and be. And you know, ask, you know, they're young kind of getting started, like if we'll help them do that. And so we haven't moved forward on that yet. And I just want to know like, what is the best way to help them? Because you know, we want to help our children, but we also don't want to give them over give. Right. And, and get ourselves into trouble because of it. Yeah.

Yes. So there's a difference in helping our kids and partnering with our kids and giving to our kids. Right. We've all seen it where the parents are like, yeah, I'll co sign for you, I'll give you a gift and down payment. So basically you've just rented your, your credit and you've given them a gift for down payment. And to be honest with you, you really don't get anything in return. And one of the things that I've really been teaching people is helping them understand is like, hey, if we want to help our kids in the real estate space, then let's partner with them so that we can help them make those decisions. And for instance, you could co sign with one of your kids on a house that they are going to live in, knowing that, hey, we are partnering with this, which means I'm going to put up the down payment, you're going to pay the payments and when you're ready to move, we're going to do this again. And if I need to co sign for you, we're partnering on the houses, which means you guys are 50, 50 owners in it. You're now helping them and you're, you're gaining some equity, you're gaining some tax write off and so now you're partnering. So maybe you do that two or three times with one of your kids and now you guys have a little miniature rental portfolio that helps. And so here's how it helps both parties, okay? For, for your child, it helps them from the standpoint of okay, mom and dad are going to help us, they're going to co sign, so I might be able to buy a little bit larger home and you're going to be either gifting or putting up the down payment for the property, which you will get back when that house is sold or whatever the case may. Right. So it's a piece of equity in the house. You're not giving it up to them. You know, I'm not giving this to you. We're going to partner and that's how I'm willing to do this. If not, I'm not willing to do it at all. So now let's just look at that from a standpoint. So now your son or daughter has a property that maybe you Help them buy a little bit larger. And they're going to get some roommates to live with them, or maybe they're married. So whatever the case may be, you're like, okay, so this is how we're going to create this business. You know, if it's going to be roommates, you're going to. You're going to, you know, put out, you're going to put your friends in here, you're going to collect rent, and then we're going to have a monthly or quarterly meeting about the money that was collected as far as the business goes, right? So now we're running a little bit of business. They're able to purchase owner occupant, which is a benefit to you and them because it's the lowest amount down. So they might be able to put three and a half to 5% down. And the interest rate is typically going to be cheaper because you're not buying it as an investment. It's. So now you've done all that and your partners on it, you can take title together on it. And now you're helping them get into the real estate space. But the goal is to have the conversation with them is that, hey, one of the things about real estate is it's going to increase in value and equity and some other things. And so we want to continue to do this without pulling out equity until there's a certain time that we can do it and grow it further. But even if you and your child didn't and you bought one, two or three properties together, think about how that changes their life and their retirement down the road. And they can always buy you out of it. But there's this piece like, hey, we have this as a family asset, right? So together we're building this little miniature business. They get to learn about it. You also get to benefit and partake in it, rather than just like the gift. And so it allows you guys to kind of run that business and create that. That little piece together. So that's how I would do it. And that's exactly how Wendy and I are doing it with our boys, is talking to them like, hey, we've got this house. We're going to partner with you on it. We're going to keep some of the equity in it. You're going to get some equity. You're going to run it as a rental property even though you're living here. And when you're ready to move again, which we're going to help you, we're going to do this again because they can move owner occupant to owner occupant. I can't, but I can co sign with them or I can provide the down payment even if I don't have to co sign for them.

Okay. I see. Makes a big difference in how they treat something when they have more skin in the game as well.

100.

Especially when they're young. Right.

It also takes some of the emotions out of the purchase of, hey, I want to help you buy your first home, but it's actually going to be your first investment property. And you know, we're not looking. You're not going to nest here, you're not going to do these things. The business plan is we're going to buy it, you're going to live in it, you're going to do some paint in it, you're going to do some of the little nitpicky projects, and then we're going to keep it as a rental and we're going to revisit this in 12 months and figure out if you're ready to go on to the next thing. And then we're going to do this again. And now you have this little business where you're helping them understand the value of exactly what you and your husband did. Like, you think about your kids right now you're like, well, we can't afford to buy something. You know, the payments are higher this, that and the other. But if you can do it together, are you creating or helping them create the same value that you guys were able to do 25 years ago?

Right. Only keep moving. Moving forward with it rather than stopping where we did it? Right. Yeah.

Correct.

Yeah.

This is the only time that having 10 kids is an advantage over those of us that have two.

Right. I just got three. Ten new.

So that's, that's, that's awesome. Okay, that's a great strategy there with kids. Yeah.

Yes. No, that's really helpful. And yeah, like I said, we really do want to, like, help them, but not give, not give too much. Right. We're, we're don't have enough in retirement or whatever, you know, so that's really helpful. Yeah, I like that. So I think, yeah, I talked, we talked about living in la. Yeah. So, yeah, looking in other, I would say, like, buying real estate where we're at is probably not an idea. It's better to look in other places that are, you know, are better markets. So we talked about like one being Tennessee just because we think we might end up there, but like just looking in other markets outside of California just because.

Yeah, and some of that, Some of that too. You can also couple, you know, if you bought something in Tennessee or in Phoenix or Sedona or something of that nature, you can also buy something like that as a second home because your primary residence, even though it's a rental in California, you can buy something as a second home and you can utilize it as a second home and you can also rent it out as well. And that comes with a little bit cheaper interest rate and a little bit less down payment as well versus buying the, you know, investment property where it's just down.

Oh, okay, so second homes, it is a better interest rate than rental property.

Yeah, a little bit. Yep.

Not as good as primary, but correct. A little bit better. Okay, what are some good markets right now? Like I know you're in Phenix, but what are some other good markets?

The markets are all different depending on what you're looking for. So when you're looking for investments, you're trying to look at a couple of different things. One, what is, what is the potential appreciation or growth in that area? You know, like Phoenix is, is ever expanding and growing and those types of things. Right. So there's potential upside here. Right. It's speculation, but you're going to see it happen. We've seen it continue to happen over the last two decades versus, you know, some people I talk to like, hey, I really like Detroit because they're cheaper homes and, and they cash flow and we can do these things. But you may be lacking the appreciation. You also might have a harder time collecting rents. So it's really looking at different areas that kind of have a combination of maybe some growth and you know, are you going to have long term tenants in that area versus some people might want to buy like the cheapest rental property possible because creating cash flow to where, you know, my opinion is, is like, yes, you can go to Detroit and buy a $50,000 home and you're getting $500 a month, which is a 10% rate of return or close to it, but there's no appreciation over time. But you are creating cash.

Right.

But what if you bought something that was $150,000 that didn't cash flow as much, but it's getting 5 to 6% appreciation a year. Right. I'd rather have the appreciation than the cash flow as far as, because cash flow is taxed, appreciation is not. And you can also, but you can always borrow from the appreciation tax free down the road when you're refinancing or growing. So I think market is, you know, the different markets. Florida's hot market. Carolina is a hot market. But it's really getting familiar with what the different markets are doing and what's happening in the rental market there as well. So, you know, my advice would be like, hey, I like a couple of cities. So you talked about Tennessee, and I like Memphis, I like Nashville. Then the next step is like either getting a hold of which I can connect you with an agent in those areas, getting a hold of an agent and having some conversations, but then also talking to some property managers in those areas to get a feel for rents. Like, hey, how's the rental market? Is there a lot of vacancy? Was it hard to collect during COVID And my advice would be don't buy anything in the areas that are on. I guess I want to say, what are they? Red states, you know, because the red states tend to be more tenant proactive. So that's the hard part is that when they're tenant proactive, when you go through. We experience in Covid, the tenants weren't paying rent, but the landlord still had to pay mortgages. Right. So you want to, you want to stay with one of those states that is going to be more landlord friendly or at least, you know, they're going down the middle. Right. They're fighting for both. Right. They're not just fighting for the tenants for free rent and those types of things.

That makes sense. Hopefully we don't ever have to go through that again, but we gotta be prepared.

Right. It's happened once, it may happen again or happen different.

Right, Right. Yeah. Okay. Very. That's very helpful. I really appreciate it.

Absolutely. Well, thanks for coming on and sharing those questions and hopefully it's some advice. And if you guys want to get together and do a strategy session and kind of look at connecting on, you know, the DSCR program for the Colorado, we can do that. And then also just kind of figuring out like, hey, what does the next 10 years look like? And how do we create a.

That's amazing. Yes, I love that.

And if you're at Santa Monica, where can they find you for, you know, some. Some Botox and some other. Some other fun stuff.

All the good beauty and wellness needs. Harmony Esthetic Center. We're on Santa Monica Boulevard in West L. A.

Got to be close to the Ferris wheel in the pier, isn't it?

Very close.

Thanks, Melanie. I appreciate you joining Anthony.

Thank you. Bye. Bye.

If you are looking for a real estate strategy or coaching, mentoring or a community to belong to, pop over to Steve D. Valentine and let's connect. This is a place where everything lives and I am hoping to help you build your real estate, wealth, life and legacy.