Jorge and Rafi explain why rental properties are a great investment in terms of ROI, taxation, and the cash needed to start investing and producing profits.
00:01 Rafi: Okay. Good afternoon everyone, it’s 1:21 PM. We’re late bro.
00:07 Jorge: Yes.
00:08 Rafi: We’re late. We said noon first.
00:10 Jorge: I know.
00:10 Rafi: Then 1:00, then 1:20.
00:15 Jorge: A lot of deals going on.
00:17 Rafi: A lot of deals?
00:18 Jorge: Yeah.
00:18 Rafi: What were you doing this morning? So you had meetings?
00:21 Jorge: Pretty much. Okay, I guess… Yeah, I met with a good client of mine. He lives in Montreal, so he flew in to look at some properties today.
00:35 Rafi: Nice.
00:37 Jorge: He currently owns like 15, 20 properties. He’s doing very well and he wanted to get started again in 2017, continue buying, so we spent some time at that. We spent some time looking at a flip, also as well, talking to a couple of private lenders as well on the phone and staying pretty busy, 2017 has been so far, so good.
01:00 Rafi: Awesome, awesome. Well, welcome to Graystone Brown Bag Sessions. Well, I’m Rafi.
01:09 Jorge: This is Jorge.
01:10 Rafi: And our glasses look cool. [chuckle] The purpose of these sessions… We’re gonna try to have them every Friday around lunch time. So we’ll try noon, but sometimes 1:00. And the purpose is to answer one question from our viewers. Just one, uno. That way it’s easier for you guys to use the content, join us for 10, 15 minutes. We promise we’ll keep it to 10, 15 minutes. I will make sure that I don’t talk that much. And at the same time, we can engage you guys in knowing a little bit more about what we do. First, where can they find us? If they want to contact us where will they go?
01:54 Jorge: The best way to contact us is Homes4Income.com. That is homes, the number four, income.com.
02:00 Rafi: Homes4Income.com. Then you go to the ‘Get Started’ button there, there’s articles, there’s testimonials, a bunch of stuff there where you can learn a little bit more about what we do.
02:13 Jorge: A lot of people ask me how I got started in real estate, and we’ve put so many articles out there on Homes4Income, Rafi. And a lot of them are professionally done from scratch, it’s not a duplicate that we got from another website. It’s something organic, and I encourage people to read them. There’s like 50 or 60 of them right now.
02:34 Rafi: And they post them almost on a weekly basis, right?
02:36 Jorge: Weekly basis.
02:37 Rafi: There’s new articles there. So that’s good. So again, send us your questions. You can put the questions there, comments. I see that Tomas… I think Tomas in Kansas City, one of my friends. But send us your questions and we can answer them. Now, today the question we have is from Raymond. And it’s very, very simple. Why rentals are a good investment in real estate? A lot of people… You see these shows in HGTV about flips, the guys hammering down, all that kind of stuff, but we believe that rentals are a great investment and a great way to get started in real estate. So the question from Raymond is why rentals are a good investment.
03:19 Jorge: The question back will be, “Why not?” Why not? One of the reasons buying rental properties as an investment is good for a lot of investors is because it’s a tangible asset. So you have a house versus a piece of paper when you buy a stock. And also the cash flow, the cash flow. A lot of cases… The best case scenario, you can net a 10% cap rate on your… Or 10% return.
03:48 Rafi: Wait, 10%?
03:51 Jorge: 10% a year.
03:53 Rafi: Ah, I know a banker in my family, Dahlia. I think the banks are paying a little bit less than 10% right now. I think it’s like 1%. They pay 1%… Wait, wait, wait. I just got a text. They actually pay 0.08%. That’s punto, zero, ocho percento. That’s…
04:21 Jorge: That’s crazy.
04:22 Rafi: If I move my sofa I can find probably more pennies there than 0.08%. [laughter]
04:30 Jorge: So Rafi, that’s one of the reasons why a lot of investors… ‘Cause I’m a former financial advisor. I was a former banker. And I know most of the needs that a lot of people have with their 401ks, their money markets, CDs. Money markets, like you say, are not paying anything. CDs, maybe at 2 years you’ll be paying 1% in annuities which a lot of people opt to do annuities versus a CD to be able to gain a little more, those are only paying 2%, 3% also as well. So in the worst case scenario with a rental property, you could do anywhere from… Let’s say in your worst case scenario you didn’t know what you were doing, you had a bad property manager, everything went the wrong way, you still will net more, 4% or 5% and you still have the asset. And we’re only talking about the cash flow. We’re not talking about the equity that’s built…
05:28 Rafi: The appreciation.
05:29 Jorge: The appreciation.
05:30 Rafi: The appreciation, got it, got it, got it. So in terms of, again, comparing to flips, people will say, “Okay, well, I put x amount and I get a big chunk back. Why then put that chunk of money in a rental?” Why would, for example, if I have a flipped opportunity and I had rent opportunity, why start with the rental? If I’m a real estate investor why do you think I should start with rentals and then do flips?
05:57 Jorge: I’m gonna say two words to you Rafi, it’s gonna be risk and the fact that it requires more cash. Okay? So the risk… The cash…
06:20 Rafi: From the risk perspective, why rentals are less risky than flips?
06:28 Jorge: Well, most flips require more money, more funds, ’cause you have the acquisition plus you have the repairs. Now, in a lot of cases, unlike a rental, you could do a minimum, carpet, minimum here and there to rent it, a quick turnaround. With a flip, nine times out of 10, you gotta bring value to that flip, it’s different.
06:53 Rafi: So even the scope of the rehab of a flip compared to the scope of the rehab of a rental, it’s a big difference there? Okay.
07:01 Jorge: So and if you’re a rookie, you’re starting with that, the payoff is more. So the chances of earning more money is there, but the chances of losing more money is there as well. So there’s more risk behind it.
07:16 Rafi: Got it, got it. So risk is one of those things that we think, for a beginner, a rental is better?
07:24 Jorge: Absolutely.
07:25 Rafi: The second point was?
07:26 Jorge: The second point is gonna be taxation. And I like that one better, because any time you flip, you’re gonna get killed in taxes, although that you get taxed on all of it, versus when you do a rental, you’re only getting taxed in that income coming in. So it’s a little softer than getting hit with a tax bill, a bigger tax bill than [07:52] ____. A lot of times people don’t do that calculation. They think, “Oh, I’m gonna buy a flip. I’m gonna make $30,000 versus making $10,000 on this rental.” But when you take the time you put into it, and the amount that you make for those six months and then you take taxation that people forget to add that, you’re left with $10,000. The same $10,000 that you were gonna get renting a property.
08:18 Rafi: Okay. And then you said that most of the time, because of the scope of the rehab, the entry level in terms of budget, it’s lower for rentals, right?
08:26 Jorge: Right, absolutely.
08:26 Rafi: Which was, I think it was the third point, right?
08:29 Jorge: Number three is, you need more money. To do a flip, you need money. So in other words, I would only do a flip, Rafi, if I have enough to do three. If I have enough money to do three flips, I will do one flip.
08:44 Rafi: Okay, okay. So if a flip is gonna be $150,000 you will not do a flip unless you have $450,000 liquid basically to [08:52] ____? Okay.
08:52 Jorge: Correct, correct. And the reason behind it is like anything. Let’s say one of them goes bad, you have the other two as a backup. But you can’t pretend… You could be locked into one deal and make it a homerun, but it’s like anything, you gotta have enough to… “Alright, I did one flip, a quarter. That didn’t work, maybe the next one works.” And you have enough reserves. You don’t wanna be put on a spot to… You put all your eggs in one basket, you did this flip, and then you’re pressured to liquidate the property too early and not get the money that you need to be getting.
09:32 Rafi: Got it, got it, got it. And I think it’s important too that, having that in mind then, even the flips that you buy you have that plan B of, “What will happen if I have to rent it?” So one thing that we like to do with our flips here, it’s “Hey, what will happen with that flip if nothing happens, if we have to rent it? Will we get something close to that 10%?” Because again, if we buy a flip that we know that we can’t rent, and let’s say that because of the situation, we can get maybe just 9%. Okay, that’s not bad, because, “Hey, we made the investment, and then it didn’t work out, we rent it for a year or two and then we come out at that time.” So even when you get flips, have a rental, have that plan B in mind where you don’t have to liquidate, like you say. And you say, “Hey, let me rent them.” You just had a property like that, that we’ve taken off the market, it didn’t work the way we wanted. But it’s gonna work as a rental. So in that regards, then we’ll go from there.
10:32 Jorge: And let me correct myself. Not that you need $450,000, that could be with lending as well. But you have to have enough, so if your lender is offering you 80%, you gotta have enough for the 20 repairs, 20 repairs, 20 repairs. I feel like if you’re going into flipping with the goal of doing one a year, that’s not gonna work, ’cause you’re gonna end up putting half of your year into it and when you do the net, it’s gonna come out to the same.
11:00 Rafi: And you could have had three rentals [chuckle] during that time for probably a similar investment. And I think the other thing with rentals is, again, once you have, let’s say six, eight rentals, then you can look at them and say, “Which one makes sense to do a major rehab and flip?” And you still have the flexibility of doing that.
11:19 Jorge: And to add to that, what I tell clients, “Let’s flip the rentals.” But typically when you flip a rental, you really wanna give it a couple of years to appreciate. But let’s flip rentals. If you’re gonna flip something, flip a rental. Have it, let it cash flow, do you understand the property, knows the ins and outs of the property, if there’s any issues prior of you selling it, you have proof that the property has been rented for X amount of time, a year, three years, and it’s very easy to take that to an investor and say, “Okay, I’m gonna sell it for an extra 20.” And that’s your 30 right there. You got 10 in rent, in another year, you sell for another 10 or two years for 20 that’s the same 30 you’re gonna make on your flip, but you’re not taking the risk of just that one property.
12:07 Rafi: Excellent. Now, let’s look at the comments. We have some comments here. We have Faye Walters. “Just have to say wearing sunglasses in the discussion takes away from your credibility. Guy’s playing poker.” [laughter] Actually, Faye…
12:22 Jorge: Well, that’s the whole thing. We have no credibility. Don’t take us serious.
12:27 Rafi: No, no, no. Thank you for the comment Faye. We were just thinking of something fun to do. But hey, hey, let’s do it. And put it back. Three, two, one. Here we are and we put them back. So thank you Faye. Sergio, “Hello guys, what about those programs where they teach you how to buy investment properties and charge you for the [12:48] ____. What do you think about those?” I’ve heard of those. They have these programs that they charge you $5,000 and go from there. What is your thought? And we have only one minute but…
13:00 Jorge: Bigger pockets. I listen to a lot of podcasts and I hear this all the time. There’s so much free stuff out there, once you finish dissecting everything that’s out there free and now you feel like you need to go to the next level, sure. But not until you do that first.
13:20 Rafi: And I think the other thing… And I’m gonna use myself as an example. I’m not a do-it-yourself-er. Dahlia can tell you that.
13:29 Rafi: If it’s something that it’s an electrician job, I’ll pay for that. I think sometimes the time and the money that you spend trying to be an expert in something is so much, when you can find someone that maybe has the expertise in that and you can, you know, “Can I change that breaker for less than $250?” Yes. The chances that I do it wrong, the time that I have to spend learning, sometimes it’s better to say, “Okay, let me see how much this person charges and then based on that… ” Bank on their expertise, they made the mistakes, so I’m basically [14:07] ____. That’s all for today. Thank you very much again everyone for joining today. And I see that Ovi Gonzalez. Oh [14:17] ____ Ovi joined. Thank you Faye for your [14:22] ____. We’re gonna be back next Friday lunch time again for Graystone Brown Bag Sessions. Where they can find us?
14:29 Jorge: For more information, more deals, private lending, wholesaling, don’t forget to visit us at Homes4Income.com. That is homes, the number four, income.com. Thank you, see you next week.
14:40 Rafi: Awesome. See you next week, Friday. Wendy’s time.
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.