In this Facebook Live broadcast, Jorge and Rafi explain 2 ways to harvest profits from rental properties and defer taxes. They also discuss how these techniques allow real estate investors to grow their portfolio of properties more quickly, and make more money.
00:03 Rafi: Good afternoon and welcome to Graystone Brown Bag sessions. I am Rafi, Chief Operating Officer for Graystone Investment Group.
00:13 Jorge: That’s so long, Rafi.
00:14 Rafi: I know.
00:15 Jorge: I’m Jorge Vasquez, CEO of Graystone Investment Group.
00:19 Rafi: Excellent. Graystone Investment Group, we’ve been doing this for close to 15 years, hundreds of transactions in real estate investment. And where can they find us?
00:29 Jorge: They could always find us, Rafi, at homes4income.com, that is homes, the number four, income.com.
00:36 Rafi: Excellent. And we want to thank some of you that share the content last week. I know Xaviel, Vasquez shared it. I had Posita, Dalia, Josie shared it too. Dario, also shared our video. So please, if you are watching, please share this video on your timeline so other people can benefit from this content. So it’s very important that you share, and also that you follow us, like here, there. Just follow us, that way when we go live, you get the notification. And big shout out this week to one of our investors, Gina Clark. Gina, thank you very much for your loyalty to the program. What, like, 10 properties, something like that?
01:28 Jorge: Yes, so far.
01:29 Rafi: She’s awesome. She’s awesome. So Art, and Gina, thank you very much for trusting Graystone with all your real estate investment. Now again, if you come in, I see that we have three people in. Please make sure you comment, that way we know that you are with us, and we can answer your questions. Any questions that you have there, please make sure that you also answer that in the question. You see, Josie joined. Vaya, Josie. We had fun at the place, so let’s do it again. Now, you see some balloons back there. You see these balloons? Guess what, this is a very special session. You know what?
02:12 Jorge: It’s Rafi’s 50th birthday. Happy birthday. [laughter]
02:15 Rafi: Actually… No, no, no. It’s my birthday weekend, so we turn…
02:22 Jorge: Rafi, can we say it? Can we say?
02:24 Rafi: Actually, yeah. It’s home4income. Four, four. 44.
02:31 Jorge: That’s awesome.
02:35 Rafi: So, these again, we’re going to have a lot of fun. Thank you, Josie. We have to party this weekend, big, big, big time. And again, thank you Jorge. And we have back there in the background, Stephanie. Stephanie, say hi.
02:48 Stephanie: Hello. [chuckle]
02:51 Rafi: Did you hear that? No. Stephanie, say hi.
02:53 Stephanie: Hello!
02:54 Rafi: There you go, Stephanie, back there, the best admin in the world. She’s helping us this week with the Facebook Live sessions. So again, make sure that you appreciate… Wow. We have eight people have joined. Jason Fix joined. A bunch of people joined. I don’t even know who that is… Jason joined, Josie joined, and a lot of people out there joined. So, the topic today, it’s very relevant. We are in tax season. Do you like taxes?
03:20 Jorge: No.
03:21 Rafi: I don’t like taxes. Do you like taxes? If you like taxes, please don’t make a comment, because this is not the one for you. [laughter] But for those of us that like to, “Hey, I don’t want to pay less, but I don’t want to pay more taxes than what I need to,” this is the perfect post for you. Jason Fix is in Jacksonville. That’s right. And Jason, let me tell you, he loves taxes. Jason likes to pay taxes, a lot of taxes. He’s a tax maniac. Not. So anyways, the topic today, it’s very, very relevant, again, during this tax season. The first thing I want to put out there, it’s we’re not CPAs. We have a great CPA, Bob Graham. Bob, shout out to you. We’re not CPAs so we’re not giving here any tax advice in terms of what you should do. Make sure that you check with your CPA before you make any tax related move, but we have done several transactions, again, like I said, where we have had to deal with tax implications, and that’s what we’re going to share with you. And with you we want to share today, again, two ways. Two ways to be able to get out profits from your rentals, minimizing… You see that? I say, not paying, but minimizing the impact to your taxes. Now, there’s two. What would be the first one in terms of doing… Again, taking profits out of rentals and minimizing taxes. What would be the first one?
05:05 Jorge: Rafi, that’s a good question. I think that the topic, really, the subject should’ve been how to defer taxes. How to defer taxes, ’cause there’s no way to avoid taxes. So we wanted to be very clear with that.
05:20 Rafi: There you go.
05:20 Jorge: So how do you defer taxes? And the word deferring means, how can you push paying those taxes to a day in the future, or that is three years, 10 years from now, whatever the case might be. So, in regards to deferring taxes, and I’m very passionate about this one. Number one, way to do that is by doing a cash-out refinance.
05:44 Rafi: A cash-out refinance.
05:45 Jorge: Cash-out refinance. Yes.
05:47 Rafi: Okay. What is that?
05:49 Jorge: Pretty much is, to put it in perspective, when you do the… When you’re buying a rental property, and let’s say you bought the property for $50,000 back in 2010, now it’s 2015, your property is worth 100, the equity that you have in that property, let’s say you wanted to pull out $20,000, you’ll be able to do that by getting a note from the bank.
06:15 Rafi: Okay.
06:16 Jorge: And getting those $20,000 from the equity in your property.
06:20 Rafi: So basically like a normal refinancing of…
06:22 Jorge: Normal refinance, yes.
06:23 Rafi: Of your mortgage, you have a high interest rate and you say, “You know what, I want to get a lower rate.” So you refinance and then you get cash-out but you get cash-out though the equity, is that what you’re basically saying?
06:35 Jorge: Absolutely.
06:35 Rafi: Okay.
06:37 Jorge: At the same time, you got to be very careful with doing this, you want to be very careful that you don’t over-leverage yourself.
06:44 Rafi: Over-leverage? Yep.
06:45 Jorge: You don’t over extend yourself by pulling all the equity out of it. So the best way to describe it is, so you have your property up 50, right? You have your rents, let’s call it…
06:56 Rafi: Up 50, you mean $50,000?
06:58 Jorge: $50,000.
06:58 Rafi: Okay.
07:00 Jorge: And let’s call the rents, just to make it an even number, your rents are 500.
07:05 Rafi: Okay.
07:05 Jorge: And let’s say it’s 2010. Now let’s say that now it’s 2015, five years later and now your property has gone up from 50 to 100 and your rents have gone up from $500, maybe to $1,000. You always have to make sure that if you’re going to pull some money out, first that you don’t tap into all of your equity, because you want to leave a little bit of a spread in case that there’s a correction in the market. And that you also don’t tap yourself into the rental part of it, because you want to be able to be flexible also if the market shifts and stuff like that. And it’s not so much that we want you guys to take the money and buy luxury stuff, buy a Rolex with it.
07:48 Rafi: Yeah. Unless it’s my birthday gift, then buy the Rolex. [chuckle]
07:51 Jorge: Well, the main idea is, once you finished buying Rafi’s Rolex, is to transfer equity from one property to the other.
08:00 Rafi: Okay.
08:00 Jorge: Meaning leveraging and buying, taking out some of the equity when you’re buying property.
08:05 Rafi: So, for example, again, using that example of the 50, and again, we’re using that number to make it easy for the math. If I get 40 or 30 out of that refinance, then using that $30,000 to buy another rental, okay. That way now you have two income producing properties, but basically just leveraging the equity from one to then buy the other.
08:30 Jorge: Exactly.
08:30 Rafi: Okay. Excellent.
08:31 Jorge: And there’s no taxes.
08:32 Rafi: And because it’s a refi, there’s no taxes. Now, like he said, it’s very important, again, that you make sure that you don’t over extend. That money, you should flag it to get another income producing property, that’s our suggestion. And then, watch out, there’s origination points when you make that new loan. There’s loan fees, so there’s some expenses related to refinancing, but we really believe that if you play it right, again, by refinancing, you’ll be able to grow and create a snowball. Because what happens is that, you have two properties… You have one property, you do this, now you have two properties. Then two years, three years later… Five years later, to use our example, now you have two properties that increase in equity, both properties. You refinance, cash that out, now you can buy probably instead of one, you can be able to buy two more, and now you have four. And kind of rinse, repeat that way. And, again, leveraging everything that you do, and from that perspective you grow. Now, Jason has a very good comment, you can write off from your taxes, fees and points, so, Jason, great point. But still, you need to understand that you need… That’s something that’s going to come out of that refi.
09:48 Jorge: Absolutely. Absolutely.
09:49 Rafi: If you do a refi and you think you’re going to cash out 40, you maybe cashing out 32, 33, that’s something that will be in the heart when you refinance. But just be aware of that when you do it.
10:01 Jorge: And Jason brought up a good point. The conventional thinking is that people are going to… The conventional thinking is, let’s pay off your home as soon as possible. That’s okay with your primary property, but when it comes to investment properties you’re going to want the tax deductions, you’re going to want the… Because your mortgage payments are going to be tax deduction, like he said, fees and stuff like that. So you might not necessarily want to pay off that note too quick.
10:32 Rafi: Okay.
10:33 Jorge: And what happens… And I’m not saying… Listen, if there’s an emergency you have two options. You could tap into your equity and potentially get a good rate because it’s backed up by a tangible, or you could go and get yourself a credit card and pay 20%. So there’s always an option for using it for emergency purposes, but equity sitting in your home is giving you a zero return.
11:00 Rafi: Right.
11:00 Jorge: It might make you sleep at night better because you have $200,000 in equity.
11:04 Rafi: Right.
11:05 Jorge: But what is that $200,000 doing for you, especially if you have those $200,000 sitting there for 10 years? You know what I’m saying?
11:12 Rafi: Well, and again, investors, we like to take risk, calculated, managed risk but we like to take risk. So if we have $200,000 in equity doing nothing, you don’t take any risk, you’re not getting any rewards back, but you don’t take any risk. So we want to make sure that we use that in a judicious way. Don’t go out $200,000 and spending it on Rafi’s next happy birthday gift, but use it to invest again and go from there. Big shout out to Aixa.
11:41 Rafi: Puerto Rico, thank you very much, make sure you share…
11:44 Rafi: The video.
11:45 Jorge: And then, the last thing I want to say is create a matrix, figure out, “Okay. I never want to be above 80% of the actual value of the property,” to create a matrix on the rents, “I don’t want to be above X in rents.” And as long as you stay along within those numbers, remember guys, this is the best rates in the past 40, 50 years, the best rates out there.
12:14 Rafi: Yes, you don’t want to get underwater if the market goes down, but again, if you’re using them for rentals, even if you get “underwater”, you still have income-producing properties, and that’s what we’re trying to… How we can get to that point, that tipping point of properties in your portfolio, which, by the way, we think that tipping point where the portfolio starts feeding itself is ten properties. So that should be your goal. Once you get to ten income producing properties, it almost starts feeding itself and things start running much, much faster. So what we’re trying to work on today is how we can get faster to that, without tax implications. So the first one is re-financing on your income-producing properties. The second option is one that, I’ve heard about it… It’s one of those things that you go…
13:07 Rafi: But it’s one of those thing that you’ve heard about it, and you go, “1031 exchange? I’ve heard but is it real? Is it legal?” But it is. So if you can talk a little bit more about the next one, which is completing a 1031 exchange. And 1031 is the name of the form, the IRS code, what is it?
13:29 Jorge: 1031 exchange is an Internal Revenue code.
13:34 Rafi: Okay. It’s a section in the IRS code, so that’s why they call it 1031. Okay.
13:38 Jorge: And pretty much what it allows you, once again, now that you’re going to get profits we know taxes is more of a defer option. It’ll allow you to pretty much exchange one property of a lesser price to another of a higher price, and you could do that up to 200% of the original property. So let’s say…
14:05 Rafi: Up to 200% of what? Of the value? Oh, okay.
14:07 Jorge: Of the value of the original property. So if you have a property that’s $50,000, you can potentially buy a property that is $100,000 with it. You can exchange it. The whole idea behind that is, you bought a property for 50, now it’s worth 100, you know you’re going to get killed with taxes, because you have an appreciation of $50,000. Rather than doing that, you hire this third party company, you put the funds in escrow, identify the next property, you have about 90 days to do so, and you transfer those 50 to the next property, then to the next property, and to the next property.
14:46 Jorge: A lot of investors, what they do is they’ll start with residential properties. Once they get to the point where… At one point you’re going to have too much equity to buy a residential property. At one point you’re going to have four, five hundred thousand in equity to exchange, at that moment you move into an apartment complex or something like that, commercial or something like that. You could do that. I know investors, Rafi, that have been doing that for 25 years without having to pay one single penny of taxes. Obviously, you always going to ask your accountant about it.
15:19 Rafi: Yeah, and again, I’m going to give my disclaimer again, we’re not CPAs, so definitely it’s something that you want to check with your tax expert. Bob Graham, Juan Navarro, he’s my personal CPA.
15:34 Rafi: And go from there. And one thing, I want to shout out to Antonio Koto that made a comment there, it’s not easy, guys. That’s why we definitely say, check with your tax advisor, your tax expert, these are tools that we have used and you definitely, like Antonio’s saying, you need to make sure that you are informed, you’re well informed, that you have experts on your side, on your team, in the acquisitions side, property management, financing. Make sure that your banker’s aware of how you’re doing things and what you are doing, to see what kind of support he can give you, because it’s not easy. Definitely, I agree with you Antonio. It’s something that you have to have the right tools. The good thing is that, if you’re watching this, you’re ahead of 90% of people that do it without even getting information. So, watch our videos, do your research online, call, contact us at, where?
16:34 Jorge: Homes4income.com.
16:36 Rafi: Homes4income.com, that’s what? Homes?
16:37 Jorge: The number four, income.com.
16:39 Rafi: Exactly. So…
16:40 Jorge: And I want to add something to his comment.
16:42 Rafi: Yeah.
16:45 Jorge: We’ve been doing this for about 15 years, when there’s the desire, there’s the will to do it. You find a way. We have always found a way to finance a deal. We’re not talking about primary homes, we’re talking about buying investment homes.
17:01 Rafi: Exactly.
17:02 Jorge: There’s also off-market lenders, there’s private lenders that you could do this with. And as long as the numbers make sense, because some of you will say, “Woah, a private lender’s going to be 12% to refinance,” but as long as the numbers make sense, and you’re taking… Remember all you’re doing is, when you’re buying the second home, you’re not necessarily taking away from that property, you’re transferring that equity to the next, diversifying, like you were saying. So it’s not really like you’re getting yourself more “in trouble.” There’s options out there, Antonio, there’s private options, but you have to really do your research.
17:44 Rafi: You have to do your homework, this is not something… Most of us were in that 2006, 2008 collapse. The real estate, most of the people that got burned were people that didn’t do their homework. Those that did their homework, they got hit, believe me, because some did get hit, but they were able to minimize the impact and they were able to come out stronger on the other side. So, yes. Definitely something to check with your banker, like Dalia for example. Check with your banker and make sure that you do the homework there. That said, there’s really no excuse if you prepare yourself, if you do your homework and really look at your options, there’s no excuse to not be able to start investing in real estate if you are ready. Again, don’t come in and say, “Hey, I have $5000 of equity. I want to do something.” No. Or, “I have $2000 in savings.” Go buy yourself a car at CarMax. But if you save and you do the right things, definitely there’s different ways that you can take advantage of this process, and again, be fair and minimize your taxes while doing it. So that’s great. Let me see if there’s any other questions. I know that Antonio had that comment. That was a great comment. Dalia says that she can help. Absolutely. Teresa Rodriguez from [19:05] ____, my friend. And we’re going to ask our admin, our fabulous admin Stephanie to see if there’s any questions out there. Stephanie! Any questions?
19:14 Stephanie: No, no questions. That’s it for…
19:16 Rafi: Guys, no questions today?
19:18 Jorge: Let’s give it a couple of minutes. Come on, guys.
19:20 Rafi: There were some good questions there. Antonio. But let me tell you, while we get the questions. Antonio’s point was very good. I think a lot of people think that it is easy, and that you just get into real estate. No. Do your homework. Again, listen to us. How many podcasts you listen on a daily basis? Probably two or three?
19:38 Jorge: Two or three. At least 300 in the past.
19:39 Rafi: And he’s an expert. He knows. And he still continues learning.
19:45 Jorge: And Rafi, how many banks do we interview? How many private lenders we interview?
19:50 Rafi: I’m tired. These guys makes me…
19:52 Jorge: In a daily basis.
19:53 Rafi: I think on a daily basis, at least I talk to one. Emails, we get like 10. And some of them work for some things. Actually, right now we have, we’re working with three different lenders because the properties, some lenders have some requirement for properties that say, you know what? The property has to be at least $100,000 for me to do deals with you. Some of them don’t have that requirement, but then say, “Hey, my minimum loan is $500,000.” So, that means that you have to give him six, seven, eight properties. So, the key thing here is do your research. Check out experts. Graystone Investment Group is one of them. There’s others out there that definitely, they do their thing. And then go from there. Great question by Jason. Man, Jason’s on fire today. Jason’s on fire today. “Should I own property in my name or LLC for tax purposes?” I’m going to say my disclaimer again. Check with your CPA. He’s the tax expert, tax advisor. But in your experience, property in your name or LLC?
20:55 Jorge: Based on my experience, I would say 99% of the time it’s been an LLC. What does that mean? Not much. Because that depends on you personally, financially, where you are financially, to make that decision with your CPA. But nine times out of 10 you don’t want to have a property under your name.
21:15 Rafi: There’s a couple of scenarios. Definitely there’s the tax scenario, where you can get additional advantages there. From my perspective, I think the most important one is liability. You want to separate liability from what you own as a person, and what your LLC and your corporation owns. So if someone trips in one of your rentals and it’s not under the LLC, guess what? They’re going to go after your personal assets. If you have an LLC then you protect that under your LLC, and they can go after the LLC taxes. Again, I’m also not a lawyer so check with your lawyer.
21:57 Jorge: Now that you’re talking about liability, sometimes, believe it or not, and I’ve talked to a lot of lawyers about this, sometimes having a note, a mortgage in your property, avoids somebody from suing you. Because they say, “Okay,” or if you have your property paid off they’re going to say, “Okay, this guy has the property paid off. I could put a first lien on the property.” But when you have a lien on the property already, collectors or whatever the case might be, it’s going to be harder for them.
22:29 Rafi: It’s a deterrent.
22:30 Jorge: It’s a deterrent.
22:31 Rafi: It’s a deterrent. So if I know that someone has the money to pay, I’m more likely to go after them. But if I know that I have to go after the bank because he has a note or something like that, then it’s a deterrent. We’re not saying do it just because of that, but hey, it’s like putting that sign, that big sign outside your house that says big dog, watch out. Same thing if you do something like that.
22:56 Jorge: The only time that people do not use an LLC is when they want to buy for lending purposes, because they want to go conventional, and they have the income. But I’ll suggest to the one or two, then immediately, you got to have an exit strategy from your personal basis to your business basis.
23:14 Rafi: I think with the liability, that plus the liability, I would definitely say we have to, I will suggest LLC. But check with your expert CPAs, check with your expert lawyers and they’ll be able to tell you. I saw a comment from Antonio. Antonio, I’m glad that we were able to clarify that. That was great, but great question, great comment. Oh, look at that, even my son joined. So, hey Davido. Bye. So that is it for today. Again, make sure that you join us every Friday around noon time. Noon, one o’clock, lunch time actually.
23:49 Jorge: Please share.
23:50 Rafi: Make sure that you can share. Oh wait, we have a last minute question from Antonio. How can you get a liability, protect your property, to protect for any suit… Trying to understand the question a little bit, Antonio. How you can get a liability for protecting your property, to be protecting for any lawsuit, I’m assuming it is.
24:14 Jorge: Even, you know what, I had that question, for whatever reason, I’ve had that question asked two times in the past couple of weeks from people that I know in the past. All you’re doing here is putting layers. It’s never going to be a bullet proof thing. So you put the LLC as one layer, like you were saying. You put an umbrella policy as another layer. Having a mortgage on the property, believe it or not, is another layer. And those are some of the things you do. Even having another, once you have 10, 15 homes, maybe having a holding company. There are so many different things you can do. There’s not one answer for that.
24:50 Rafi: And Antonio, what I suggest is again, you go to our website, which is…
24:55 Jorge: Is homes, number four, income.com.
24:58 Rafi: That’s homes…
25:00 Jorge: Number four, 44, maybe that?
25:02 Rafi: No, that’s my age, no.
25:03 Jorge: 44income.com.
25:05 Rafi: Yeah. Fill out an investment profile there, and someone from out team will reach out to you. And again, check with your CPA, check with your lawyers, they are definitely the qualified experts to do that, but great, great, question. Again, see you next week. Remember the purpose of these sessions is to answer one question from our viewers, so if you have any questions regarding investing in real estate, make sure that you make a comment on the video down there. Go to our website, homes…
25:33 Jorge: Please share it.
25:34 Rafi: Homes4income.com. Then again, like Jorge said, make sure you share the video on your timeline, that way we can see that you’re interested and reach out to you. Now again, thank you very much for joining us in this very, very, very special session of Graystone Brown Bag, because it’s my birthday back there. We’re going to Pican later to eat something and celebrate. But again, make sure that you join us next Friday, I am Rafi, chief operating officer of Graystone.
26:02 Jorge: I’m Jorge Vazquez, CEO of Graystone. Thank you.
26:04 Rafi: Back there we have Stephanie. Say hi, Stephanie!
26:07 Stephanie: Hello.
26:08 Rafi: Oh.
26:09 Stephanie: Hello.
26:10 Rafi: That’s her. She doesn’t like that, that we put her on the video, so that’s okay. Not a problem. See you next time and have a great day.
26:18 Jorge: See you.
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in Tampa Bay. We serve clients who flip homes in as little as 30 days, as well as clients who hold high cash flowing rental properties.
Unlike other wholesaling groups, we provide clients with a turnkey process at no extra charge. We find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years.