More Knowledge, More Wealth Ep. 204 - Real Estate

[00:00:00] Good day. This is Gabriel Shane certified financial planner and your host of more knowledge, more wealth here on every weekend talking about all important topics of personal finance. My goal is to give you the knowledge you need to increase your wealth. Now to the listener, you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning.

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[00:01:19] We already have over a million views in just under nine months. Now, I'm the president of Falcon Wealth Planning. We are fee only, non commissioned, true fiduciary folks, where we help all clients on important topics in personal finance. It doesn't matter what it is or where you are today, how retirement looks like, investments, insurance, estate planning, taxes, folks, you name it.

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[00:02:02] I wanted to talk about housing housing is now residential mostly commercial We've already talked about commercial and we said that most analysts thinks that the price is coming down and we talked a few episodes away that could be the case for some areas like very urban areas like the Chicago's the New York's and the San Francisco's and LA's out there and but suburbia seems to be doing just fine in real estate Here our headquarters here in Inland Empire is ranked the third Third lowest vacancy in the country.

[00:02:30] But that's not what I'm talking about. Most people don't invest in commercial real estate. They invest in residential real estate. Why it's known to them. They think that, Hey, worst case we can live there. If something happens to the house, they can touch it. They could drive by it. They understand the residential.

[00:02:45] Real estate agreements versus a commercial real estate agreement. So I get it. And quite frankly, it's roughly the same. What's called cap rate as well. The difference is there's less supply in the commercial world, which makes it at times more of a demand. Now that's what we're seeing right now. A lot of States like in Arizona, Areas in California and some others like Texas and so on is seeing a low supply.

[00:03:13] This increases the demand, right? There's still people that are moving to the states that we're discussing because of jobs and they want to buy a house and not rent. They see themselves for a long time. Some people graduate, they have additional people that enter their family, like kids, sometimes parents, and so sometimes newborns.

[00:03:34] So they want to be able to enhance their experience. Some people get a new job where they're needing a new office, which means an additional bedroom. So there's multiple reasons why people are going to need to move. But now if the supply is not as much, that means when you see a property that pops up, You have to run to it and it's not just you, it's everybody else in all those different scenarios that I just discussed.

[00:03:56] So what does this mean? Well, what this means is for you that wants to invest in real estate, is it the best time? Now, most people, historically speaking, all you needed was 20 percent down. Maybe 25 percent down on a 200, 000 house. You needed 40, 000 bucks. That's not crazy. A lot of people had equity in their home or was getting a home equity line of credit to get the down payments.

[00:04:19] Now, I don't agree with that personally. I'm just letting you know, that was part of the conversation when they could borrow at three and a quarter percent. Well, now that three and a quarter percent is eight and a half percent. So my comment to you is it's just not as. It's feasible. It's not as easy to do.

[00:04:35] So a lot of people out there sitting in cash saying, I'm waiting for the market to go down so I can buy a bunch. Because when the market crashes, real estate people, banks out there, investors, they don't want to be the mortgage of a declining real estate environment. For example, they bought a house for 500, 000 and the mortgage is 400, 000, which means 20 percent down.

[00:04:56] Right? Yes. Well, if the home prices drop 30 percent in value, that's not good. That means your house is worth 350 and your own mortgage of 400. I don't want anything to do with that, which is why most people in 2008, 2009 walked away from their homes. So the idea is that ideally people would like to pay cash for the home.

[00:05:17] So cash buyers, that's a big deal. So what is the rule for that? Now historically speaking, and I have a video on YouTube talking about the 4 percent rule. Well, that seems to be dated because Interest rates are no longer 4%. Now interest rates are 6 percent if you're lucky in the 6 percent range.

[00:05:34] Realistically, 7 percent has been this high in 20 years. The 6 percent rule, what does that mean? That doesn't mean you buy a 500, 000 house so you should be happy with 30, 000 in rental income. No. Why is it a no? Well, because there's expenses, let's use LA County, for example, because they're one of the worst in property tax costs.

[00:05:58] So if you have a home for 500, 000 that you buy, assuming that you get 3, 000 a month, that's 36, 000 a year. That's not what you pocket. You still have to pay property tax for a 500, 000 house. That could be a 6, 000 a year property tax. So you're 36, 000 that you're getting every year in income. We have to minus 6, 000 from that, right?

[00:06:20] Yeah, so you're not netting 36, 000. You're only netting 30, 000. Well, there's still insurance costs. That could be 2, 000. HOA costs. 2, 000, let's just say. That's 10, 000 of expenses. So if you're bringing in 3, 000 a month, well, 1, 000, almost, is going towards expenses. Long story short, if you're bringing in 36, 000, you net 26, 000.

[00:06:44] a year on a 500, 000 purchase. That is a 5. 2 percent return on your money. Now, before you're like, yeah, that's great. I'm not getting that in the bank. Well, the question is, are you not getting that in the bank? Because you should be getting that in the bank. You got high yields right now. Uh, not high yield bonds, but high yield savings accounts.

[00:07:05] FDIC insured. Earning 4 to 5%. And you don't have to do a thing. There is no call at midnight about the water overflowing. There is no vacancies. There is no repainting after somebody moves out or recarpeting. You get what I'm saying? There's no late payments. There's no evictions. So I'm not trying to say don't go into real estate.

[00:07:30] I personally like real estate. I own real estate, residential and commercial. I love it a lot. But I also, if you're talking to somebody who doesn't have any, not one of his properties has over three and a half percent rate. So now I'm not buying real estate. It just doesn't make sense financially to do so unless you can get a 6 percent return.

[00:07:52] So that's a cash on cash 6 percent return net of all fees. That's what cap rate is. So for example, if you buy that house for 500, 000 and your property tax is 6, 000 and you owe another 4, 000 between HOA and insurance, you net 26, 000. That's a 5. 2 percent return. Well, you need to get a 30, 000 net a year to be happy with buying a house for 500, 000.

[00:08:19] This assumes you're paying all cash. If your interest rate is higher than 6%, that means your payment's going to be higher because not only do you have interest, but principal as well. You have a negative cashflow. You're really going to buy a property with negative cashflow. You put 100, 000 down for what?

[00:08:39] To lose money every month? That makes little to no sense at all. So I'll take it a step further, okay? Because this is where it really gets interesting. By the way, folks, hold on. If you're just joining us, you're listening to Gabriel Shane, Certified Financial Planner, and your host of more knowledge, more wealth here on every weekend, talking about all important topics of personal finance.

[00:08:57] Today, we're just talking about housing. And really, there's some other issues you have to look out depending on where you're located. For example, if you have property in the state of California, I don't think it's crazy to think with the amount of such small supply, I don't think that I, excuse me, I personally think we're going to see rent control statewide and not just on condos, but residential properties as well, which would hurt residential real estate prices as an investor.

[00:09:22] I wouldn't want to invest in that. You get what I'm saying? Something that restricts the amount you can raise rent? And already this state has one of the worst states of the protection for landlords, all the protections for the leasees, for the renters. I'll take it a step further. So yes, we talked about the rent control and so on, but what about with Prop 19 coming out, when people, when mom and dad die, and they had, because of Prop 13, they had a fantastic low rate.

[00:09:54] A property tax. The host could be worth a million dollars, but they might only be paying 800 a year. When they pass away, unless you move into the house and make it your primary resident, the property tax gets readjusted so that million dollar house is no longer 800 a year, it's 12, 000 a year. Most people are going to sell.

[00:10:10] Which was part of the reason the government did that, is to increase the supply. Well, we have a massive amount of baby boomers right now, and eventually in 10, 20, 30 years from now, they're going to be passing away at a very fast rate. What do you think that's going to do to the real estate market? A surplus of supply that might be driving the price down.

[00:10:34] I mean, you got maybe some affordable housing projects coming up right now. Well, what are you doing there? You're building ghettos. You're only saying maybe certain income people with standards can live in those places. Well, that's not very appropriate. That doesn't seem right. I mean, we can continue down this path more and more, but as interest rates right now are four and a half to five plus percent savings accounts, why would you waste your time to get a rental property now?

[00:11:05] The answer is you wouldn't. Investors are not investing in real estate right now. Maybe novice people, maybe those who aren't really experienced are, are wanting to buy residential real estate because that's all they know that that's not very wise. But, that's not being diversified. This is where you should talk to a professional, folks, and this is why we're offering a free financial assessment.

[00:11:30] What I was talking about was just Los Angeles. It's not talking about Orange County or other counties, Riverside, San Fernando. It's not talking about other states. Arizona is very different than Nevada right now, New Mexico, Texas, Florida, New York, Pennsylvania, Connecticut, Illinois, Midwest. Washington, Oregon, they're all different markets and they all have different situations.

[00:11:57] Some state have a state tax. Other states do not. Some states are in a bubble right now. Other states are in a boom. It all depends. This is why we're offering a free financial assessment assessment folks. Give us a call. We would love to help. We can help relate the show to your specific situation and see what you should be doing.

[00:12:15] Our phone number is 855 963 2526. That's 855 96 Falcon. Like the bird or visit our website at falconwealthplanning. com. That's falconwp. com for short folks. We're going to go on a quick break. We'll be right back after a few words.

[00:12:32] ​

[00:12:32] Welcome back folks. This is Gabriel Shaheen certified financial planner, and your host of more knowledge, more wealth here on every weekend, talking about all important topics of personal finance. Today I was talking about real estate seems to always be a big conversation of what you should be doing My comment is this and I'm gonna kind of flirt with the opinion side of things and the opinion side of this is real estate You can envision to be very volatile, especially depending on the location that you're in For example, Nevada is having some tough times in certain areas right now where they've seen a reduction of some areas over 10 to 20 percent There are certain areas in Arizona, or excuse me, in California that have been the same way.

[00:13:57] Arizona has been a very stable market. Still, if there was a mild decline, but now we're seeing that increase right now, you're seeing multiple areas where there's in Texas, Tennessee, Ohio, as well, where there was affordable housing there that you've seen some slow down in certain areas and some pickups and others as well.

[00:14:15] So the recommendation I made earlier, if you're an investor is to look for that 6 percent rule, but historically speaking in States like Ohio and Tennessee, you want to look for a 10 percent return because historically speaking, the property taxes are too high. And values tend to stay low. And that's why Texas historically doesn't appreciate well and has good yields on residential real estate.

[00:14:37] Where historically the price doesn't go up because the price of property tax is just too high. It's like 3 percent in some areas. California is 2. Excuse me, 1. 2. Let me give you an example, 500, 000 would be 6, 000 in LA County for property tax. In Texas, a 500, 000 home could very easily be 15, 000. It can be expensive and that's like kind of normal.

[00:15:03] It can be higher than that as well. There's multiple different property taxes over there, uh, from an assessment point of view. So the idea of investing in real estate right now could be worrisome because also continuing that conversation is yes, there are also issues with. People doing 1031 exchanges.

[00:15:24] These are investors that sell and want to go into another project. Well, let's say they started that project, and it was 3. 5%. And now they need to do a 1031. Let's just say, they owed 500, 000 on, excuse me, the property is worth 500, 000, but they had a 300, 000 loan on it. Well, now they got a 1031 into another property.

[00:15:42] They only have 200, 000 folks. They only have 200, 000 of equity. We're not even talking about what they bought it for. So 200, 000 of equity. Well, they only have 200, 000 to still buy a home of equal or more value to complete the 1031 exchange. Which means they have to still get a loan of 300, 000. Well, the new loan of 300, 000, the rate isn't 3 percent anymore, it's 7%.

[00:16:07] It doesn't make it as economically feasible. This could cause issues yet again for real estate prices. The investors are no longer in the business, especially if they're looking to do a 1031 exchange. We had a previous episode talking about commercial property, how something crazy, 40 percent of all debt is going to be coming due in the next two years.

[00:16:28] That's kind of alarming. What do you think the trickle effect has on residential? when that happens. You have arms. People are investing in arm loans. There was an episode I did maybe a few months ago that said, maybe it makes sense for you to get an arm loan. What is an arm? Well, you could do a 5 1 arm, which means the rate is normally lower than a 30 percent or excuse me, a 30 year mortgage.

[00:16:50] So instead of maybe paying 7%, maybe they'll do it at six and a half. But in five years, that loan matures and becomes variable. So it's still a principal and interest payment over 30 years. But then at year five, month 61, it gets reassessed to whatever the rate is at that time. Well, the idea and logic is number one, you might not be living there.

[00:17:09] And number two, what if interest rates drop within that five year period? You can always refinance and lock in a 30 year at that point, you saved half a percent saving half a percent on 500, 000 is 2, 500 a year that you're saving. Now it's a little different because the amortization schedules paid off principle, but you get what I'm saying.

[00:17:30] My point is, is there still could be some issues behind that that affects real estate prices. I still think that with the generation, yet again, now going to my personal opinion is there is a new generation of people that love living as a nomad. And COVID enhanced that. Why? Because they were able to go to Hawaii and live there and work for a year, sometimes two years.

[00:17:52] Or anywhere else. They love that flexibility. They don't want the burden. By the way, the liability of owning real estate. I'm not agreeing with it, by the way. I'm just telling you. Which means the demand. There's already way more baby boomers than there are of Gen X and Gen Y's. So, they're going to be selling.

[00:18:14] And quite frankly, might be going into a retirement community. Quite frankly, they might hold onto it, but their heirs can't afford it because of reassessment of property tax in states like California. And they're looking to sell it because the kids don't want it, which, oh, by the way, now you have a supply issue.

[00:18:29] Maybe real estate, maybe we're seeing these long term cyclical places where real estate does poor for long periods of time. That is a very reasonable outcome. I'm not saying, this is my opinion. Everything is supply and demand. We know that from Economics 101 that we learned at 19 for those who are business majors.

[00:18:54] What I'm talking about increases supply. And by the way, these homes are getting older. By the way, this was before a lot of these regulations, you're gonna have to re, you're gonna have to buy a house for market value just so you can go in there and renovate the whole thing. That becomes expensive. Does that make sense?

[00:19:11] Does the future of these new developments will states like Arizona, California, Nevada, they grow outward. It's not like New York and San Francisco where they grow up. That's why public metro systems work really well in certain areas in the East Coast. Not in states like the Southwest or North, uh, uh, West.

[00:19:32] They do not have the best public systems. San Francisco is maybe okay because that specifically is very dense. But the idea. And the assumption that real estate only goes up, you have to kind of check yourself and real estate is not considered liquid. I mean, you could define liquidity as something you can get your money in, in 14 days.

[00:19:56] You can't always get that in real estate, and if you do, you don't know the price you're going to get. This is why some investors like real estate investment trusts. They call them REITs, not the REITs that are sold to you at free dinner seminars where you're paying 10 plus commissions, uh, 10 percent plus commissions.

[00:20:10] I'm talking about the ones that are publicly traded where you can sell in and out of every time and there's professional management doing it. for you. By the way, folks, if you're just joining me, you're listening to Gabriel Shaheen, certified financial planner, your host to more knowledge, more wealth here on every weekend, talking about all important topics of personal finance.

[00:20:28] And there are some REITs out here, which I was just discussing that are residential REITs that are commercial REITs that yield 6%, right? Because that's what the rental income is getting. And to define itself as a REIT, the best part about it is they have to kick out 95 percent of what they collect and hold on to 5 percent reserve for themselves.

[00:20:49] My point is this can make a lot of sense for you and by the way, uh, a, a property manager charges 10 percent right, right. Your rental property of 3000 a month. They're going to take 300. You're going to think you're going to negotiate a five good luck with the quality of that. But even if you do, maybe it's a friend or family, whatever the case is.

[00:21:12] You're still paying 150 a month. My point to you is that there are other alternatives out there. I'm not trying to say buy REITs. You gotta know what you're buying into. Some of them are illiquid, by the way. Some of them have very bad debt, very bad portfolio, very bad papers. So I know a lot of people like private debt and we use private debt here at our client for at our firm at Falcone planning for some of our clients, but that might not make sense for everybody.

[00:21:40] Each situation is different. The question you have to ask yourself is what are you trying to achieve? Are you trying to play the game of monopoly where you just literally own real estate? Or are you trying to supplement income? You're trying to simplify life. You're trying to be comfortable going on a trip.

[00:21:54] For two to three weeks or even two to three months without having to worry about what's happening in your specific demographic of real estate with supply and demand and law changes like when prop 13 now have molded to something that's prop 19 in the states like California. These are why I mentioned.

[00:22:11] It's important to understand your situation, what you're trying to achieve, and folks, that's why we're offering a free financial assessment to take a look at your situation where we'll give you one to two meetings, one to two hours of our time folks at no cost. And it doesn't matter where you are. We have offices all across, I've been talking about Southern California because that's where I live.

[00:22:29] That's where our headquarters are. But we have offices all over folks. We help people nationwide, folks. Give us a call. We would love to help. Our phone number is 855 963 2526. That's 855 963 2526. 96 Falcon, like the bird or visit our website at falconwealthplanning. com. That's

[00:22:55] falconwp. com for sure we can relate this show to your specific situation because this may be the time others will supply to do something with your real estate because a lot of people right now, even if they're looking to upgrade and they can afford it. For, to upgrade and pay that premium of no supply.

[00:23:08] They're holding onto their real estate properties. Why? Because they're getting a low rate, but what sometimes they have to reanalyze is if you sell that home, you get $250,000 tax free exclusion based on what you paid for and net of costs. And if you're married, that's 500,000. You get to do that tax free.

[00:23:26] I would rather have you sell your home and buy your neighbors home. You get what I'm saying? So you have to understand your situation and the type of home that you have in the location. If it's a million dollar home, are you happy with 4, 000 a month? Who cares if your mortgage payment is 1, 500? No. It has to make sense financially.

[00:23:45] You're netting 2, 500 on maybe 800, 000 of equity. Okay. That's 30, 000 a year. Okay. Like, is that a good cash on cash return for you? Especially if you ever decide to pay it later, you're going to have to pay a ridiculous amount of capital gains. Depending on your situation, these are the reasons you have to get these analyzed.

[00:24:06] And yet again, this is why we're offering a free financial assessment. Folks, give us a call. We'd love to help. It's not as simple as it seems. Falco Planning's goal and agenda is for planning to be made simple. That's why we trademark planning made simple. My comment to you is talk to a professional that does this every day, not doing it as an amateur.

[00:24:25] It could cost you. Thousands, tens of thousands, hundreds of thousands, and in certain situations, millions of dollars. Typically the people that it would cost them millions of dollars have advisors is ready already. But my point to you is, let's not just have the rich continue to get rich. We're offering a free financial assessment that can help you.

[00:24:42] And we don't charge an arm and a leg. If you decided. That was a fast, fast show. I want to thank you for tuning in with me. You can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is 855 963 2526. That's 855 96 Falcon, like the bird, or you can visit our website at falconwealthplanning.

[00:25:04] com. That's Falcon, WP. com for short, where you can get this episode or any one of our previous episodes as well. And feel free to join our podcast and our Spotify. For the podcast of this. And we have our knowledge center on our website where you can go click on our YouTube channel and get a bunch of information as we've had over a million people have used to our content in just under a year, folks, this was a fast, fast show.

[00:25:27] We want to thank you. We want you to enjoy your weekend. We want you to have a great week and God bless.