#103:
What This Episode Is About
There’s a reason why the wealthiest people in the world own real estate: it pays exceptionally well.
What are some of the ways real estate can help us create wealth?
What are profit centers and how do we lock into them?
On this episode, real estate investor, Tal Simpson shares some of the surprising places we can earn a profit in real estate.
Here’s what we covered in the full episode:
Profit centers that real estate provides, will be good for people just starting out in real estate.
Once Tal realized the money that could be made in real estate, he understands why the wealthiest people invest in real estate.
Debt, taxes, inflation are the three main reasons Tal believes real estate is a great investment.
5 ways real estate can pay you – he does real estate long term buy and hold.
5 ways – Cash flow, appreciation, depreciation, amortization, inflation
Cash Flow – what you have left over after expenses from rental income.
Typical $100K home, operating exp (taxes, insurance, property management, vacancy, repairs) which is usually around 40%
He usually puts down around 20%, 40% goes to debt repayment.
40/40/20 Rule – making $200/month cash flow
9.6% cash on cash return if you put down 25K.
Asset Appreciation – Annual appreciation around 3.4% average
3% appreciation on 100K investment, 3000 appreciation on top of the $25K downpayment an additional 12% return
Year one already at 21% return
Depreciation – You can depreciate real estate, standard 3.6% of improvements
$2909/year you can write off – paper loss at 35% tax rate, $1018 deduction (extra 4% ROI)
New tax plan, you can now add bonus depreciation to rental homes with cost segregation study. This allows you to accelerate the depreciation of a rental home. Larger commercial buildings make a lot more sense to use this deduction. It is a little more difficult for single family residental homes. https://www.kbkg.com/costsegregation Great reference to learn about cost segregation.
20% of the $80K – $5600 write off for year one
Amortization – Pay down on the loan, only @ $98/month goes toward principle initially but grows over time. With the paydown you will get another 4.7% return on your money.
1031 exchange – capital gains roll into another investment
Inflation – 30 year fixed loan, monthly payment is the same over the course of the loan. 40% cost goes to the debt payment, 3% inflation each year.
Year 1 – $4800/year ($400/month payment)
Year 30 – with inflation the payment should be roughly $11,600/year for the same asset
Rent also rises with the inflation – payment for the loan stays the same. Inflation will help…..
A lot of investors don’t care about the cash flow portion because of the inflation and tax benefits.
Tal invests for cash flow reasons. Going into a recession, still buying property, the appreciation could work against you but you can ride this out over time.
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