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Keith Weinhold 00:00

Keith, welcome to GRE. I'm your host. Keith Weinhold, reviewing some terrible economic predictions and why it matters to you. Then the President of the Mises Institute joins us. Does capitalism still exist in the US and what would happen if we ended the Fed, today on get rich education.

00:24

Since 2014 the powerful get rich education podcast has created more passive income for people than nearly any other show in the world. This show teaches you how to earn strong returns from passive real estate investing in the best markets without losing your time being a flipper or landlord. Show Host Keith Weinhold writes for both Forbes and Rich Dad advisors, who delivers a new show every week since 2014 there's been millions of listener downloads of 188 world nations. He has a list show. Guess who? Top Selling personal finance author Robert Kiyosaki, get rich education can be heard on every podcast platform, plus it has its own dedicated Apple and Android listener phone apps build wealth on the go with the get rich education podcast. Sign up now for the get rich education podcast, or visit getricheducation.com

Corey Coates 01:09

You're listening to the show that has created more financial freedom than nearly any show in the world. This is get rich education.

Keith Weinhold 01:25

welcome to GRE from Syracuse, Sicily to Syracuse, New York, and across 188 nations worldwide, you're listening to one of the longest running and most listened to shows on real estate investing. This is Get Rich Education. I'm your host, Keith Weinhold, now a lot of media companies and pundits and influencers like to make predictions. Listeners like learning about predictions and by engaging just a little of that each of the past few years on one of the last episodes of the year. Here, I forecast the national home price appreciation rate for the following year, many media outlets, pundits and influencers have made terrible, just absolutely terrible, predictions about interest rates and other financial forecasts. Last year, a majority of Pro prognosticators firmly forecast six or eight Fed rate cuts this year, for example, well, we're going to have far fewer, and that's because high inflation kept hanging around. Then there's the 2023 recession that never happened, yet both Bloomberg and the economist actually published some rather ignominious headlines, as it turned out, they published these in the fall of 2022 Bloomberg, big headline was forecast for us, recession within year hits 100% in blow to Biden, well, That was false. That didn't come true. I mean, 100% that doesn't leave you any room for an out. And then also published in the fall of 2022 The Economist ran this headline why a global recession is inevitable in 2023 All right, well, they both believed in a recession, and they believed in it so deeply that it got fossilized. Well, an economic archeologist like me dug it up.

Dr Thomas DiLorenzo 03:31

We are going to die

Keith Weinhold 03:35

well, but I didn't risk my life like Indiana Jones did there. This archeology, it only involves some Google searches. Well, here's the thing. What's remarkable about America staving off a mammoth recession and leaving all the other g7 nations in the economic dust is the fact that merely predicting a recession often makes it come true. Just predicting one often turns a recession into a self fulfilling prophecy. Yeah, recession forecast headlines alone, they can spook employers from making new hires and slow down manufacturing, and it can also disillusion real estate investors from expanding their portfolios. Well, the US economy grew anyway, besides the farcical prognostications about myriad interest rate cuts in a quote, unquote definite 2023 recession that never happened. You know, there's also a third forecast that so many got wrong. And you probably know what I'm gonna say. I've brought it up before, because this hits our world, those erstwhile and well still ever present housing price crash predictions. I mean this facet of the gloom boom really ramped up from 2020 One until today, even a global pandemic, new wars and a triplicate mortgage rates couldn't stop the housing price surge and the rent surge. A lot of doomsdayers just couldn't see, or they didn't even want to see that a housing shortage would keep prices afloat. They didn't want to see it because they get more clicks when they talk about the gloom government stimulus programs also buoyed prices, and deep homeowner equity cushions will still keep prices afloat. Ever since 2021 here on the show, I've used that rationale and more to explain that home prices would keep appreciating, but that the rate of appreciation would slow down, and it has slowed down since 2021 see YouTubers tick tockers. They notoriously use woe begone housing crash headlines, because that gets more clicks and then some of the rationale behind this. The reasoning is just dreadful, like, what goes up must come down, all right? Well, this is like, why does it matter? Who cares about wrong predictions anyway? What's the point? Well, people become misinformed. People waste their time on these things and see no one loses money on dismal economic predictions. But the damage is done, because when investors don't act well, then they didn't get the gain that they should have had. Businesses didn't get the gain that they should have had when they could have made new investment and hired new employees sooner. And of course, a recession is going to happen sometime. They occur, on average, every five to six years. It is just a normal part of the business cycle will collectively these three faulty economic predictions, rate cuts, a recession and a housing price crash. I think if you bundle them all up combined, it could be as bad as one doomsday prediction about worldwide starvation or the Mayan apocalypse. Remember that the wide to K bug, the acid rain, even that the internet is just a fad that ran a buck 30 years ago. World War Three is eminent, robots overtaking humans, or how about running out of crude oil. I mean, we're definitely all supposed to have jet packs in flying cars by now, right? But yet, did anyone have the clairvoyance to predict the stock market crash of 1929 or September 11 terrorist attacks, or Trump's surprise, 2016 presidency or Bitcoin hitting 70k A while back, or the coronavirus. So really, overall, the bottom line here with predictions is that no one knows the future. Control what you can maintain equanimity, add good properties, gradually raise rent, reduce expenses, create leverage and expect inflation truly the best way to predict the future is to create it in just that way. Well is the USA capitalistic nation today. That's what we'll discuss later with this week's guest. When Chuck Todd hosted the show Meet the Press, he interviewed AOC about this. Yes, I'm talking about us. House Rep from New York, Alexandria Ocasio Cortez, what she say? You

08:34

have said you are democratic socialist. Can you be a Democratic socialist and a capitalist? Well, I think it depends on your interpretation. So there are some Democratic socialists that would say, Absolutely not. There are other people that are democratic socialists that would say, I think it's possible. What are you? I think it's possible. I think you say to yourself, I'm a capitalist, but I don't say that. You know, if anything, I would say, I'm I believe in a democratic economy, but.

Keith Weinhold 09:03

okay, well, I'm not sure if that clears it up at all. And I've listened to more of that clip, and it just makes things more confusing. But I think that most people have trouble drawing a line between capitalism and neighboring economic systems. Where exactly do you draw that line? I don't know exactly where to draw it. When I think of capitalism, I think of things though, like removal of interventionist central planning and allowing the free market to run with few guardrails. And then there's an issue like labor unionization. I don't really know about something like that. This is a real estate show. I'm still forming an opinion on a topic like that. In you know, some of this gets political, and that's beyond the scope of get rich education. The Fed was created in 1913 that central planning, its central banking from 1987 to. 2006 Alan Greenspan reigned as Fed chair. Those were his years, and he became even more interventionist. And then his successor, Ben Bernanke, maybe even more so with quantitative easing and such. Let's talk about, should they end the Fed and capitalism with this week's expert guest. You very well may have heard of the late, famed Austrian American economist Ludwig von Mises today, the Mises Institute carries on his legacy, and this week's guest is none other than the President of the Mises Institute. He's also the number one best selling author of how capitalism saved America and his newer book with a title that I love, The Politically Incorrect Guide to Economics. Hey, it's great to have you here. It is. Dr Thomas DiLorenzo.

Dr Thomas DiLorenzo 11:00

pleased to be with you. Thanks for having me.Th

Keith Weinhold 11:02

Well, Dr DiLorenzo, for those that don't know, just tell us a bit in an overview about Austrian economics and what Ludwig von Mises stood for.

Dr Thomas DiLorenzo 11:02

Well, Ludwig von Mises was the preeminent critic of socialism and fascism in Europe, and in his day, he fled the Nazis literally hours before the Gestapo broke into his apartment in Geneva, because he was the preeminent critic of fascism and socialism, and he was also Jewish, and so he had to get out of town. And he miraculously ended up after wandering through Europe with his wife in New York City, and he taught at New York University for many years, until he died in 1973 and but the Austrian School of Economics is a school of thought. It has nothing to do with, necessarily, with the Government of Austria, the country of Austria, just this the founder of a man named Carl Menger happened to be from Austria, but probably the most famous or well known among Americans would be Friedrich Hayek, who won the Nobel Prize in 1970s he was a student of Ludwig von Mises and critics of interventionism, critics of socialism. We teach about free markets, of how markets actually work and how governments don't work. And that's in a nutshell, that's what it's about. And you could check out our website, mises.org, M, I, S, E, S.org, you can get a great economic education. We have a lot of free books to download. Some of them are downloaded 30 or 40,000 times a month. Still, it's even Mises old books like human action, first published in the 1960s and so you can get a great education just by reading our website.

Keith Weinhold 12:42

Well, congratulations, that's proof that you're doing an excellent job of carrying on the Mises legacy into the present day, a lot of which is championing capitalism. Do we have capitalism in the United States today?

Dr Thomas DiLorenzo 12:59

I was an economics professor from 40 years before I got this job as President of the Mises Institute. And I used to say we had islands of socialism in a sea of capitalism at the beginning of my career. But now I'd say it's the opposite, that we have islands of capitalism in a sea of socialism. And socialism, this data is not defined anymore as government ownership. That was, you know, about 100 years ago, the socialism. It's basically government control of industry and in addition to government ownership. So the instruments of the welfare state, the income tax and the regulatory state, is our version of socialism, or central planning, if you will. And it's the Federal Reserve the Fed, which is a government agency that orchestrates the whole thing, really, it's a big, massive central planning industry that controls, regulates basically every aspect of any kind of financial transaction imaginable. They list in their publications over 100 different functions of the Federal Reserve. It's not just monetary policy. It's a big regulatory behemoth, and so that's that's what the Fed is. That's what I think we have today. A friend of mine, Robert Higgs, a well known economic historian, says our system is what he calls participatory fascism. And fascism was a system where private enterprise was permitted, but it was so heavily regulated and regimented by the government that industry had to do what government wanted to do, not what its customers wanted it to do, so much, and a large part of our economic system is just like that, and we get to vote still, so that's where the participatory and comes in, and the pin of Robert Hinz.

Keith Weinhold 14:41

yeah, maybe at best, I can think of today's system as capitalism with guardrails on but the guardrails keep getting taller. And I think of guardrails as being, for example, regulatory agencies like the Fed in FINRA. In the FDA.

Dr Thomas DiLorenzo 15:01

It is the beginning of my career. You know, I studied economics and a PhD in economics, and there was a big literature on what's called regulatory capture. And it was sort of a big secret among US economic academics. There was all this research going on and how the big regulatory agencies created by the federal government in the late 19th, early 20th centuries, were captured by the industries that they were supposed to be regulating. Right? The theory was they would regulate these industries in the public's best interests. But what has happened from the very beginning is they were captured by the industries, and they benefit the industry at the expense of the public. But today, that's caught on thanks to people like Robert Kennedy Jr, frankly, has been a very popular author. He sold a gazillion copies of his book on Anthony Fauci, and in it, he explains in tremendous detail how the Food and Drug Administration was long ago captured by the pharmaceutical companies. And he's not the only one. I think that that is being more and more recognized by people outside of academic economics, like me, and that's a good thing, and that's sort of the worst example of crony capitalism. It's not real capitalism, but crony capitalism making money through government connections, rather than producing better products, cheaper products and so forth.

Keith Weinhold 16:21

I watched RFK Jr speak in person recently, and I was actually disappointed when he effectively dropped out of the upcoming presidential race. And I do want to talk more with you about the Fed shortly, but with all these regulatory agencies and how I liken them to guard rails. You know, I sort of think of it as a watchdog system that's failing. You mentioned the FDA. I know RFK Jr brought them up an awful lot, the Food and Drug Administration that are supposed to help regulate what we put inside our own bodies in our diet. But these systems are failing. We have regulatory agencies in industry, industry in regulatory agencies. I mean, look at the obesity rate. Look at all the ultra processed food that's allowed. Look at all the seed oils that are allowed in food that people actually think are healthy for them. So this system of capitalism with guardrails is failing almost everywhere you look.

Dr Thomas DiLorenzo 16:22

I wouldn't call it capitalism. I wouldn't use the word capitalism at all, other than crony capitalism, people can relate to that. You know, a lot of these regulatory agencies were lobbied for in the first place by industry. That while the very first one was the Interstate Commerce Commission, it was in the 1880s it was meant to regulate the railroad companies. The first president was the president of a Railroad Corporation, the head of the Interstate Commerce Commission. So talk about the fox guarding the hen house. That was from the very beginning. And so in a sense, this word capture theory of regulation, which Kennedy has used, they weren't really captured. They always were created by the government. The same is true of all the so called Public Utilities. It was the corporations, the electric power companies, the water supply companies, that lobbied for governments to give them a monopoly, a legal monopoly, in electricity, water supply and all these things that were called natural monopolies, but there was nothing natural about them. There was vigorous competition in the early 20th century in telephone, electricity, water supply, and that was all set aside by government regulation, creating monopolies. For example, in electric power, there's an economist named Walter primo who wrote a book some years ago showing that always have been several dozen cities in America that never went this way, that always allowed direct competition between electric power companies. And what do you know, better service and lower prices. As a result, they did dozens of statistical studies to demonstrate this in his book.

Keith Weinhold 18:58

Okay, well, that's a great case study. Why don't we talk about what things would look like if we took down one of these agencies? We're a real estate investing in finance show. Sometimes it's a popular meme or hashtag to say, end the Fed. What would it look like if we ended the Fed?

Dr Thomas DiLorenzo 19:18

Well, the Fed was created in 1913 in the same era, with all these other regulatory captured agencies were created, right? And it was created basically to cartelize and create a cartel for the banking industry to make it almost impossible to go bankrupt. They've been bailing out foolish bankers for 111 years. And of course, the biggest example was that as the crash of 08 after they they handed Goldman Sachs and other big investment banks billions of dollars. That was a direct assault on capitalism itself, because capitalism, as you know, is a profit and loss system. It's not a I keep the profits. You pay for my losses system. You're the taxpayer. But that's what happened with that. So the Fed would. Fall into that the Fed is actually the fourth central bank in America. We had three other ones. First one was called Bank of North America. Its currency was so unreliable, nobody trusted it went out of business in a year and a half. And then we created something called the Bank of the United States in 1791 same thing. It created boom and bust cycles, high unemployment, price inflation, corrupted politics. It was defunded after 20 years, and then it was brought back to fund the debt from the war of 1812 and so we had a Second Bank of the United States. It did the same thing, boom and bust cycles, price inflation, corrupted politics. Benefited special interest, but not the general interest, and President Andrew Jackson defunded it, and so we went without a central bank from roughly 1840 until 1913 so we've had experience of that. And what we had been was competing currencies, and that would be sort of a stepping stone. If we got rid of the fed, we wouldn't have to abolish the Fed altogether. We could amend the charter to the Fed to say you're no longer permitted to buy bonds. Can't buy government bonds anymore. That's how they inflate the money supply, right? By buying bonds. That's totally unnecessary. And we could just just that would be a great step forward, and we would sort of whittle away our $80 trillion debt, if you count again upon count the unfunded liabilities of the federal government,

Keith Weinhold 21:26

if we did end the Fed, what would the price of money? Which are interest rates really look like? Would a new market rate be sent by individuals and companies on the free market like Bank of America, with a customer or borrower settling on an interest rate that they both agree to.

Dr Thomas DiLorenzo 21:44

You know, the Fed uses sort of Soviet style economics, price control. The economists and are all getting all over Kamala Harris for recommendations for price controls on rent and other things. Well, the Fed price control. They control the price of money. That's what they do. And so there's a big, kind of a comical thing that here you have all these economists, if they were to teach economics in the week one, they would teach about the bad effects of price controls, and then they get a job at the Fed, and they spend their whole career enforcing price controls on money, and the interest rate would be determined by supply and demand for credit and inflationary expectations. That's what the market does. And you wouldn't have these bureaucrats at the Fed tinkering around with interest rates, creating tremendous arbitrage opportunities for Wall Street investors. With all the movements and interest rates, you'd have much more stable interest rates, and and you wouldn't have this ridiculous system where the Fed says we need to always have forever at least 2% inflation. And of course, they never meet that, and they lie about it. I don't believe for one minute that the price inflation right now is 3% or under 3% that's ridiculous, right? And so things should be getting cheaper. Everything should be getting cheaper because of all the technology we have. My first PC I bought in the early 80s for $4,000 and it was a piece of prehistoric junk compared to my cell phone today, that almost for free. Almost everything should be like that agriculture, but the reason it isn't is the Fed keeps pumping so much money in circulation, that it pumps up the demand for goods and services, and that's what creates price inflation. And by its own admission, that's what it does, even though it's charter, it's original charter said they're supposed to fight inflation. All of a sudden, about 10 years ago or so, they announced, south of blue, we always have to have at least 2% inflation. Congress had nothing to do with that. President had nothing to do with that, and the people of America had nothing to do with that. It was dictators like Alan Greenspan and Ben Bernanke that just make these announcements. And where does that come from when we live under the dictatorship of the Fed? And of course, the people who are hurt the most by the Fed are elderly people are living on relatively fixed incomes and are forced to become Wall Street speculators they want to make any more money other than their fixed income, where, you know, during the days of Greenspan, when they're pursuing zero interest rates, maybe the mortgage industry like that, but the people on retirement income were starving as a result of that. So it's been sort of an economic war on the retired population.

Keith Weinhold 24:24

Things should get faster and cheaper to produce, like you said. However, there's definitely one thing that's not getting faster to produce, that's housing build times. Housing build times have actually gone up, which is sort of another discussion unto itself. But we talk about the Fed and then setting prices. People wouldn't stand for setting the price or having price controls on oil or lumber or bananas, but yet we set the price of money itself. People have just become accustomed to that. Yet it's that money itself that we use to buy oil and lumber and bananas the fed with that dual mandate of stable prices and maximum employment. If we did abolish the Fed, what would happen to the rate of inflation?

Dr Thomas DiLorenzo 25:12

Well, we would have less inflation. It's supposed to what we replace it with. There's some system would be a replacement, but we wouldn't have the boom and bust cycles that we have now. There's been research in the past 100 years or so of the Fed, and what the academic researchers have concluded is that the Fed has made the economy in general more unstable than it was before we had the Fed and price inflation. That's a joke. The dollar is worth maybe three cents of what it was in the year 1913 right when the Fed was created. So it has failed on all accounts. And so if we got rid of it, we would reverse that. The idea would be to start out with a competing money system. And I'll tell you a quick story is, you know the word Dixie from the south, you know land of Dixie that was named after a currency by a New Orleans bank called the Dix D, I x 10 in French, and it was 100% gold reserve. It was backed by something real and valuable, and it was so popular as even used in Minnesota. But that's why the whole south, the states in the South, were using this currency, because it was so reliable. But during the Civil War, the national currency acts imposed taxes on the competing currencies and taxed them out of business and established the greenback dollar, as it was called, as the Monopoly money of the country. We didn't get a central bank during the Civil War, but we got that. And so that's the kind of system that we would have. Friedrich Hayek wrote a whole book about this, about competing currencies, called the denationalization of money. He poses that as a good stepping stone to a freer market in money. And like you said, Money is the most important thing. Is most more important than bananas or shoes or any of these other things that we might have price controls on.

Keith Weinhold 27:01

All right, so we're talking about the case for ending the Fed. What is the counter argument? I mean, other than the government wanting control, is there a valid, or any academic counter argument for keeping the Fed in place?

Dr Thomas DiLorenzo 27:16

The Fed has an army. I call it the Fed's Praetorian Guard of academics. There was a research article published by an economist named Larry White at George Mason University several years ago, and he found that 75% of all the articles in the academic journals regarding money, monetary policy and so forth, are by people who are basically paid by the Fed, one way or the other. Either they're fed economists, or they've been invited to a conference by the Fed, or they're an intern some relationship with the Fed. The late Milton Friedman once said, If you want a career as a monetary economist, it's not a good idea to criticize the biggest employer in your field. So there's a lot of nonsense about that. And so yes, you'll have all sorts of rationales, but it basically comes down to this, that we think we can do central planning better than the Russians did under communism, because the Fed is basically an economic central planning agency, and there's no reason to believe Americans are better at it than the Russians or anybody else. And it basically comes down to that, you know, studying the past 111 years that's showing Well, yeah, they've been trying that for 111 years. They've made the economy more unstable, and they have failed miserably to control inflation. And why should we give them another chance? Why should we continue along this road? We shouldn't So, yeah, there'll be all kind of excuses the late Murray Rothbard, who was one of the founders of the Mises, who once answered this question by saying, It's as though people said, Well, say the government always made shoes. 100 years ago they took over the shoe industry. People would be saying, who will make shoes if the government doesn't make shoes? The government has always made shoes, right? But the government has not always monopolized the money supply. It's only like I said, we abolished three Feds in our history. In American history, they weren't called the Fed, but they were central banks. And the Fed is called a central bank, and we've done that three times. We've abolished more central banks than we have kept in American history.

Keith Weinhold 29:17

We're talking with Dr Thomas D Lorenzo. He is the president of the Mises Institute. About, is there really any capitalism left more when we come back, this is Get Rich Education. I'm your host. Keith Weinhold, hey, you can get your mortgage loans at the same place where I get mine, at Ridge lending group and MLS 42056, they provided our listeners with more loans than any provider in the entire nation, because they specialize in income properties, they help you build a long term plan for growing your real estate empire with leverage. You can start your pre qualification and chat with President Caeli Ridge personally. Start now while it's on your mind at RidgeLendingGroup.com, that's Ridgelendinggroup.com. Your bank is getting rich off of you. The national average bank account pays less than 1% on your savings. If your money isn't making 4% you're losing your hard earned cash to inflation. Let the liquidity fund help you put your money to work with minimum risk, your cash generates up to an 8% return with compound interest year in and year out. Instead of earning less than 1% sitting in your bank account, the minimum investment is just 25k you keep getting paid until you decide you want your money back. Their decade plus track record proves they've always paid their investors 100% in full and on time. And I would know, because I'm an investor too. Earn 8% hundreds of others are text family to 66866, learn more about freedom. Family investments, liquidity fund on your journey to financial freedom through passive income. Text, family to 66866.

Kristen Tate 31:11

This is author Kristen Tate. Listen to Get Rich Education with Keith Weinhold, and Don't quit Your Daydream.

Keith Weinhold 31:27

welcome back to get rich education. We're talking with Dr Thomas DiLorenzo. He is the president of the Mises Institute. You can learn more about them @mises.org and Dr DiLorenzo. Frederick Hayek, an economist that you mentioned very well known and a student of Ludwig von Mises, he believed that prices are a communication mechanism between a buyer and a seller. Say, for example, there's a new style of single family rental home that everyone wants to rent. So therefore the rent price goes up when other builders see that the rent price goes up, that brings in more builder competition, and with more competition, that brings rent prices down, and then the world is filled with abundant housing, rather than a scarcity of housing. So that's how I think of a free market system within capitalism as working, as defined through Hayek.

Dr Thomas DiLorenzo 32:22

You know, the consumer is king. Von Mises once wrote about the same point where he said that people mistakenly believe that it's the bankers and the CEOs and the businesses that control what gets produced and so forth, but it's really the consumer. You build a housing development then people don't want those houses. You'll find out real fast who's in charge. It's not the mortgage brokers. It's not the bankers. It's not you, it's the consumer. That's the free market system, and if you do without it, and not using the free market system, whether it's for money or anything else, is kind of like trying to find your way around a strange city with no street signs, and the prices are the street signs that tell us what to do, exactly like you said, if there's strong demand for a certain type of housing, that'll drive the price up, and that'll tell the home builders, we can make money building more of these. And they will do that. Nobody tells them. The Chairman of the Fed doesn't have to tell them that the President doesn't have to tell them that Congress doesn't have to issue a declaration telling them to do that. That was the Soviet Union where they tried that. And that's the great thing about the market, is that the consumer can tell the richest man in the world like Elon Musk, go play in the traffic. Elon Musk, if they don't like his cars or whatever he's producing, even though he's the richest man in the world. And he understands that he's a pretty successful businessman, I would say, and so so he understands that the consumer is his boss.

Keith Weinhold 33:53

Well, what else do we need to know? You have published a lot of celebrated books, from how capitalism saved America to the politically incorrect guide to economics. What else might a real estate investor or an economic enthusiast need to know today? Oh,

Dr Thomas DiLorenzo 34:10

well, I think everybody needs to be their own economist. You can listen to the talking heads on TV and on podcasts and all that, but educate yourself and become your own economist. Because a lot of the people on TV, as you might see on the news, they have an ax to grind, or they have a sort of a hidden financial interest beyond what they're saying, Be your own economist. And that's why I'm selling my website, which is everything on it, it's for free, mises.org, and there are quite a few others too. You don't have to go to school, you don't have to get a degree. You can get a good economic education, for example, on money. We're in the middle of giving away 100,000 copies of a book called What has government done to our money. I'm Murray rothbar. You go to our website, scroll down to the bottom, and you can fill out a form online, and we'll send you free books and. You can educate yourself that way. And so just in general, I think that's what people need to do. I taught MBA students for many years who are people in their 30s or maybe even early 40s, who didn't have economics degrees, but they were really into it, and for the first time in their careers, they decided maybe I should understand how the economic world that I live in and work in every day operates rather than going through your life and your career without you. Might know all about real estate sales, but it's also useful to know about the economy in general and how things work.

Keith Weinhold 35:35

And when one becomes their own economic student and they take that on, I think it's important for them, like you touched on to not just consume the economic news that's on CNBC or other major media, because that doesn't really tell you how to create wealth. It might inform you, but it doesn't necessarily tell you how to take action. For example, on this show an educational channel, you might learn about a story about rising inflation like we had starting three or four years ago. And here we talk about how, okay, if inflation is going to be a long term economic force, you may or may not like what the Fed is doing, but rather than save money, borrow money, outsource that debt service to the tenant on a cash flowing asset like a single family home or an apartment building. And that inflation that you're learning about on CNBC will actually benefit you and debase your debt with prudent leverage on a property, for example, so not just consuming the news, but learning and educating yourself and acting.

Dr Thomas DiLorenzo 36:34

Oh, sure, well It just so happens that last night, I was talking to a friend of mine who's a real estate professional. They're all talking about, Oh, are we going to have a slight drop in interest rates? And I reminded them that there will be a part of the market if they see it, if we do have a slight drop in interest rates, we'll look at that and say, well, maybe this is a new trend. And so I'll sit back and I'll wait. I'm not going to buy now, because I think the interest rates are going to go down even further in the next six months there were, there would be some segment of the market that thinks that way. And so that's just one little thing. Another thing I would mention is that one of the basic tenets of free market economics is that voluntary trade is mutually beneficial. People buy and sell from each other, because both sides benefit. And that's very important for any business person to keep in mind as you structure business deals, because you know about business deal that is successful is basically, I will give you what you want, and you give me what I want, and we're both happy. And that's that's one of the main tenets of how the market works. Voluntary exchange is mutually beneficial. So think about how to make it mutually beneficial, and you'll succeed in making a deal.

Keith Weinhold 37:45

Well, it's been an excellent discussion on Is there any capitalism left, and how would it look like if we turned the course and created more capitalism here in the United States? It's been great having you on the show.

Dr Thomas DiLorenzo 37:58

Thank you.

Keith Weinhold 38:05

Yeah , again, Learn more @mises.org or look up books by Dr Thomas DiLorenzo. His viewpoint is that there are now merely islands of capitalism in a sea of socialism where those conditions were inverted last century. We've got to end the complex between the government and corporations that these watchdogs are basically powerless when the fox is guarding the henhouse. Dr dilorezzo says we could change the Fed charter so that they couldn't buy bonds, which should reduce inflation. So he does offer a way forward there, a solution. In capitalism, he consumer is king. This is a good thing. You yourself are empowered because you get to vote with your dollars. So therefore what you buy more of society will see and make more of but a prosperous, progressive economy that should be able to produce goods and services that are constantly cheaper because they get more and more efficient to make with innovation, but centrally planned inflation makes them more expensive, at least in dollar denominated terms. So progress should make things cheaper? Well, then everything should take fewer dollars to buy, homes, oil, bananas, grapes, but it doesn't, and it won't anytime soon, like I mentioned in the interview, there single family build times are taking even longer. That's not more efficient, and they're sure not getting cheaper. In fact, the National Association of Home Builders tells us that from permit to completion in 2015 it took 7.2 months to build a single family home. By 2019 it was up to 8.1 months and then. Last year, the time required to build a single family home from permit to completion was 10.1 months. That's not the side of an efficient economy. So basically, therefore, in the last eight, nine years, the time to build a home has gone from 7.2 months up to 10.1 months. That is a drastic increase in a short period of time. Just amazing. And we now have data after covid as well, broken down by region. The longest build time, by the way, is in New England, where it is 13.9 months to build a home from permit to completion. Gosh, such inefficiency. But despite all that stuff that you might find discouraging like that, I want to go out on a good news note here some encouraging sentiment for you, if you champion free markets, then invest in us rental property down the road, there is no centrally controlled ceiling on what you can sell your property for. Most places don't have rent control. In fact, there's been no federal rent control on private property since World War Two. And somewhat ironically, you benefit. You actually benefit from government backed loans at these low fixed rates, and now they're moderate fixed rates. You often get these through Fannie Freddie or the FHA. See you benefit from that particular government backing as a savvy borrower for rental property. And on top of this, you use the GRE inflation triple crown to flip over that not so capitalistic inflationary force. You flip it upside down and use it to your benefit, profiting fantastically from inflation. So you know how to take the situation you're given and use it to your advantage rather than your detriment. Big thanks to Dr Thomas DiLorenzo today, longtime econ professor and current Mises Institute president, more ways to build Real Estate Wealth coming up here for you on the show in future weeks, as always, with the dash of economics and wealth mindset. Until then, I'm your host. Keith Weinhold, Don't Quit Your Daydream.

42:28

Nothing on this show should be considered specific, personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own. Information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of get rich Education LLC, exclusively,

Keith Weinhold 42:56

The preceding program was brought to you by your home for wealth, building, getricheducation.com.

Direct download: GREepisode521_.mp3
Category:general -- posted at: 4:00am EST

Mon, 23 September 2024

Keith discusses his journey from an entitlement mentality to realizing the importance of wealth creation through real estate investing and shares the real estate shockwave that nobody is talking about.

We are also joined by Caeli Ridge, President of Ridge Lending Group, as she explains the differences between owner-occupied and investor mortgage loans.

Hear about the ease of entering real estate investing with no formal qualifications or high income required.

Learn the concept of demographic shockwaves and how the aging population will influence housing demand in the future.

How to ethically use other people's money to build wealth for yourself before you even own a property.

Learn about the key differences between owner-occupied mortgage loans and investor mortgage loans, particularly the use of rental income in qualification.

Resources:

RidgeLendingGroup.com or call 855-74-RIDGE

or e-mail: info@RidgeLendingGroup.com

Show Notes:

GetRichEducation.com/520

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519: Threatening New Taxes You Might Need to Pay. Tom Wheelwright Explains.

Complete episode transcript:

Automatically Transcribed With Otter.ai

Keith Weinhold 00:01

Keith, welcome to GRE. I'm your host. Keith Weinhold, I'll discuss when I was an employee with a scarcity mindset, the real estate shock wave coming that no one's talking about, then, how you can ethically use other people's money to build wealth for yourself before you even own a property today, on get rich education.

00:24

Since 2014 the powerful get rich education podcast has created more passive income for people than nearly any other show in the world. This show teaches you how to earn strong returns from passive real estate investing in the best markets without losing your time being a flipper or landlord. Show Host Keith Weinhold rights for both Forbes and Rich Dad advisors, who delivers a new show every week since 2014 there's been millions of listener downloads of 188 world nations. He has a list show guests include top selling personal finance author Robert Kiyosaki. Get rich education can be heard on every podcast platform, plus it has its own dedicated Apple and Android listener phone apps build wealth on the go with the get rich education podcast. Sign up now for the get rich education podcast, or visit get rich education.com

Corey Coates 01:09

You're listening to the show that has created more financial freedom than nearly any show in the world. This is get rich education.

Keith Weinhold 01:25

welcome to GRE from Springfield Ohio to Springfield, Missouri and across 188 nations worldwide. I'm Keith Weinhold, and you are listening to get rich education. It's great to have you back for another week, and I genuinely appreciate your listenership, and I am grateful to have such a large audience. I've got to tell you, admittedly, coming out of college and in my first couple full time jobs, I wasn't always a good employee. I guess I had somewhat of an entitlement mentality. I'm not sure where that came from. I don't know that I can blame anyone else on planning it inside me. I don't know where I got this notion. It sure wasn't from my parents, but I kind of felt like somebody owed me a job just because I have a college degree and I'm good at showing up on time, yeah, like, I'm just a good representative for your company. I mean, now I can see that no one owed me a doggone thing. In fact, I owed my employer value. An employer actually takes a big risk on you when they hire you, paying you to train you until you're productive there. I mean, the hiring process itself is even expensive. Well, though I felt like someone owed me a job just out of college, somewhat Oppositely, I never expected any sort of high income at all, and I had quite a modest income in my first couple years out of college, just like a lot of recent college grads do, until it grew into something more. But my humble geography degree, it conditioned me to think lower income. I knew that going to college in Pennsylvania for geography in what interested me, I mean, that's what I went with, what interested me not what I could make money in well, then I couldn't find a job in my geography field at all. No one would really pay me to describe Asia's mountain ranges to them. So what I ended up doing is working under engineers at a construction and engineering firm, a few of them, one engineering firm really liked me and designated me as their new marketing person. Of all things, they wanted me to call prospective clients on the phone and meet them cold in person, because they just thought somehow, when they met me, that I could win new business for the engineering firm, just I guess, based on how I communicated with other people at other engineering companies, even though I couldn't even talk the language of engineering. Well, anyway, these disciplines engineering, and really it was construction inspection that I did for a while. You know, that stuff, even the marketing stuff, it just didn't fill my soul. And you must have felt this way at your job before. If you don't feel it perpetually, you aren't aligned with your purpose on this earth, and you're spending so many of your faculties and so much of your waking conscious life at that job. Well, motivation to escape that is what got me reading about wealth mindset and real estate investing. Since anyone can do it, no degree needed, no certification, zero formal qualification. And now I think I mentioned this to you before, but it's worth bringing up here again, a turning point is when I read one life changing sentence, just one little what is it? A. Five word sentence in a rich dad book, that pivotal paradigm shifting, course correcting sentence was, being wealthy is a choice. And when I first read being wealthy is a choice, I just didn't believe it. I thought that Robert Kiyosaki, the author, was wrong. Well now I know that he was right. I had thought that being rich is unobtainable. You had to be born into it, so unless you won the lottery, you can't achieve more than middle class. Well, I was wrong about that. Now I can't really say something like, oh, well, a college professor said that rich people are bad or, you know, I don't have that story. I can't blame anyone else for growing up with a limited, scarcity mindset, really, other than myself in the context that was created around me. I mean, growing up in Pennsylvania, I just knew that the carts family and the domileskeys, they had more than us. And that's just the way it would always be. It's sort of preordained, and other families had less than us, and these family trajectories were just cast in stone as to how it had to be. But the good news is that it's not, and this is still what makes America great, the fact that it takes zero formal training, zero risk parents, and not even a high salary for you to do something like get a three and a half percent down payment loan for owner occupied FHA fourplex or 20% down for a single family rental that produces income from day one in The Southeast or Midwest, you can plant that seed that get other people's money working for you seed in just that way, even if you're interested in something as unprofitable as geography. Now, a huge reason that people disparage the wealthy is rooted in jealousy and envy, and that is not good. There's no goodness in those emotions, and that is because people don't think it's obtainable for them. It's obtainable for almost anybody. Learning that it is within your reach that completely breaks down your resentment of the rich. Yes, indeed, being wealthy is a choice. Well, people are obtaining wealth in today's real estate market. Here, Redfin reported that through the latest quarter ended real estate investors bought fully one in four of the nation's most affordable homes. That's up 3% year over year. And as Redfin puts it, it's a sign that investor activity is stabilizing, and as homeownership remains out of reach for many Americans, real estate investors are coming out of hibernation to take advantage of robust demand from renters. So investors are buying a greater proportion of affordable homes, some of them through our marketplace, GRE marketplace. Now over the long term, let's think about how US housing is going to be positioned for sustainable demand. Demography is destiny. That's a quote attributed to 19th century philosopher Auguste coon Tay, it means that the size and structure of a population will influence its future. So then all we need to do is track the age of a population over time to sharpen and give clarity to a forecast. It is axiomatic that in 10 years, a 25 year old will be 35 No kidding. Well, what's important about the age of 35 is that is the average age of today's first time homebuyer. It's between 35 and 36 All right. Well, the US is peak birth year occurred in 2007 we know that just look at demographics. Well, then add 35 to it. Add 35 years to 2007 This means that, on average, they will buy their first home in the early 2040s a lot of people are going to be forming their first household, whether it's rent or buy around the year 2040, I mean, the peak in all of American history, a lot more people will need homes. In fact, more than 13,000 Americans are turning age 35 every single day for the foreseeable future for more than a decade. This year is the first year where we've ever had over 13,000 Americans turning 35 every single day. And that is projected to continue to happen every single year through 2035 and that's as late as the Census Bureau projection that I have goes on. On that stat this baked in demographic housing demand. Hey, if we don't get serious about building more housing fast, and it's likely that we won't, this will be analogous to a demographic shock wave that hits the housing market. The population aging into homeownership is projected to exceed the population aging out, as in the death rate for a long time. This will pump housing demand, and that's not all. I've only talked domestically so far. This doesn't even account for additional demand from immigration. And immigrants tend to be younger and are renters for a long duration, or just forever. On top of immigration, the average number of people per household is falling as well. In 1960 3.3, people live per household in 1990 it was down to 2.6 by 2023 it was down to 2.5 this means that more housing is required just in order to shelter the same population. But of course, the population won't stay static. So to keep piling on with the housing demand here, the overall US population is projected to grow as well, from 342 million today to 383 million in 30 years. That's per the CBO. The demographics for senior housing are even more bullish. And of course, when I use the word bullish like this, this bullish sentiment that's from the investor side. If you're looking to buy your first home or find a place to rent, this is all more discouraging than perhaps all of our perpetual struggles to live a balanced life or lose weight. This baked into the cake. Demand is almost perfectly predictable, and it's of seismic importance to the real estate market. And yet, despite that fact, you know, more investors curiously fixate for month after month on something like the Fed's interest rate decision or the next jobs report. I mean, this is both harder to predict and way less significant than the sustainable demographic demand for rental housing that you got right there. So really, to sum up, this segment demographics reveal that housing demand should stay high for decades, long term, then you should expect higher home prices, higher occupancy rates and higher rents. And you can benefit by owning many rental properties. And our guest and I are about to discuss how you can do exactly that own many rental properties, and how to do it efficiently with less cash out of your pocket, including how you can start using other people's money before you even own a property when you're trying to qualify for a loan on a rental property, in some cases, you can Use a portion of the tenant's rent income toward your qualification income. Let's talk with this week's guest. There's one place that's created more financial freedom through real estate than any other lender in the entire nation that's time for a big welcome back to their president, Caeli Ridge.

Caeli Ridge 13:23

Keith Weinhold, my friend, thank you for having me happy to be here, sir.

Keith Weinhold 13:26

Oh, it's so good to have you here. You're a longtime friend of the show and so many of our listeners that you've helped originate investor mortgage loans. Caeli leads Ridge lending group. They're an investor centric lender. She does such a good concise job of explaining specifically what real estate investors need to know in optimizing your loan positions. In fact, on a previous episode, she once broke down every single line of a closing disclosure form for us one by one, detailing each individual closing cost and prepaid item and in there, besides being specific income property loan experts, they're really thorough and helpful that way. Well, Caeli, tell us about the key differences between owner occupied mortgage loans for buying a primary residence and investor mortgage loans for a rental property.

Caeli Ridge 14:17

The key things are that on a rental property, probably the biggest difference is going to be that for a rental property, there's additional incomes that potentially we get to use to help offset that new monthly liability, aka the mortgage payment, p, i, t i, principal, interest, tax and insurance, we have access to income potentially to help offset that. So in the debt to income ratio category, it can be a huge boon or a huge benefit, depending on what the individual's qualifications are. Additionally, in that same theme, we're not just confined to a conventional Fannie Freddie loan for investors. We have things like the DSCR debt service coverage ratio that you would not be able to apply to a primary residence, but also allows for income to help identify whether the property qualifies for financing.

Keith Weinhold 15:04

So for prospective investor borrower is wondering whether we'll have enough income to qualify for that property or not. Is it a certain percentage of the tenants rent income that is used in the investor borrowers qualification income?

Caeli Ridge 15:19

absolutely, so conventional full doc mortgages they are going to receive in the acquisition year formula, because there's two formulas that will be used in underwriting. One is called the acquisition year. The other one is called the Schedule E I'll focus on the acquisition year. This is applicable from the date that they acquire the property and until that tax year's Federal tax return is filed. I needed to find up to in a minute they get up to 75% of the gross rents minus the proposed p, i, t, I, principal, interest, tax and insurance. Now I say up to because it depends on two primary criteria that the borrower must possess in order to get the full 75% so think about it this way. There's three buckets. Okay, the first bucket gets the full 75% of whatever the gross rents are. The easy math example that I give, let's say that the gross rents are $1,000 a month. The PI ti proposed payment is 500 a month. If they're in bucket number one, and they get the full 75% of 1000 they have 750 bucks, right? And from that they're going to subtract out the $500 of mortgage payment. In that example, it would leave them with a gain positive 250 so that individual came to us with a debt to income ratio of x as a result of purchasing this investment property, their DTI is going to go down because they're $250 richer monthly. So 75% is the maximum you can use in the acquisition year. That individual in that bucket has to demonstrate two things. One, they have a primary housing expense, whether that's a mortgage or they rent, either is fine. And then second, they need to be able to demonstrate that they can they've had 12 months of history in owning investment property. So if they have both of those two things, they get the full 75 if they have one or the other, they're in bucket number two, which gives us an offset. They cannot have the full 75% they don't get the full gain, but I can offset. So going back to my example, using $1,000 of income and $500 of mortgage payment, they can't have the 250 gain, but I can give them up to 500 making that a zero, right? It's covered completely the mortgage payment. It's not increased any debt or anything in the example. So DTI would stay exactly the same as where they began, when we started. And then finally, bucket number three would mean that individuals that have neither of those two things, no primary they live rent free, no primary house expense, and they do not have 12 months demonstrated history currently, of being an investor. They get zero of the rental income, so they've got to support the full new payment within their DTI and keep it within that 50% threshold. So that was a long explanation to the question, but I think that that pretty much covers it.

Keith Weinhold 17:56

Now, That's really helpful. Okay, that can help the borrower's debt to income ratio. I guess a lot of cases is going to be helping it out by a small amount. What if, say that investors buying a new build rental property and there is no tenant, hence no rent income there yet.

Caeli Ridge 18:11

I'm so glad you asked. So on a subject property basis, that is the property in which they're purchasing at the moment in time. It's called the subject property. Those properties do not need to be tenant occupied. We can use assumptive rental income from the appraisal on a rental property that will come with some additional forms. It's called a 1007, it's just the number on the page. Those are rental income comps. The appraiser has given us an average of what those rents are going to be, and that's what we're going to use the 75% calculation on.

Keith Weinhold 18:41

Okay, that's really good to know new build or resale rental property, that's going to work the same with either one there. Now I know oftentimes that one wants to qualify. When we look at non order occupied properties, rental properties with conventional conforming loans from Fannie or Freddie, typically, one puts 20% down on those properties we've talked before. I think one can put as little as 15% down, although they would have PMI in that case, or alternatively, rather than putting 20% down, last time I checked, they could put 25% down and get a lower interest rate. So can you talk to us about the interplay of the percent down payment for rental property.

Caeli Ridge 19:21

I'll start by saying, more often than not, when you do the math the capital expenditure, or in this case, the difference between 5% down 80 versus 75% divided by the monthly payment difference, you're going to find that the leverage is going to outperform the higher 80% will outperform the lower 75% but absolutely, to your point, the payment is going to be less for two reasons. At the 75% level, the interest rate will be lower because you've got more skin in the game. The interest rate, loan level, price adjustment for 75% is going to be more attractive than it will be at 20% down. So the rate will be lower. And of course. The loan amount is lower, so both of those combined characteristics are going to create better cash flow, it's true, and a lower monthly payment. However, the math that I always want to promote, that people are doing is looking at it side by side, all you have to do, and it's actually much easier than people, I think, assume. So you figure out the capital expenditure difference. Let's just use 100 grand, okay, because his math is simple. So you've got $5,000 in additional capital that you'd be bringing to the table for the 75% option, right? Versus retaining the five grand, the payment difference is 50 bucks a month. Okay? Whatever the number is, all you're going to do is take the five grand and divide that by the payment difference, and that will give the individual the number of months it takes them to recapture that capital for the savings. Generally, my opinion, per an investment property is that if that number is in excess of 36 months, it's going to take you over 30 or three years to recapture that capital versus the savings. I'd keep my money because I can do one of a few things with it. If I chose to, I could cash flow the 50 bucks myself every month for 100 months, if that was the math. Or I could apply that five grand and use it with some other monies, perhaps, and buy another investment property, or put it in different investment asset class that would provide a return so more often than not, when they do that math, my belief is, when I do it, I'd say even 95% of the time, the higher the leverage is going to be, the better return numbers.

Keith Weinhold 21:27

We're philosophically aligned that way. We're leveraged proponents here, typically the smaller down payment, 20% is going to be better for you long term than 25% even though you'll get a somewhat lower interest rate on a rental property, putting 25% down rather than 20% when we pull back, we look at the interest rate difference between an owner occupied property and a rental property. What is the spread between the interest rate? Of course, you're going to pay higher interest rate on a rental property because it's a lot less likely that the borrower is going to walk away from their own home than they would a rental property.

Caeli Ridge 22:02

exactly and this is a great segue into those LLPAs that I always like that we spend some time talking about. So llpa, loan level, price adjustment. So for the GRE listeners, this is a more complicated concept, so I'm going to try and quickly break it down. Keith loves it when I get so wordy. So llpa is a positive or a negative number that associates with the individual characteristics of the loan transaction. So one of those characteristics, obviously, is occupancy. The loan level price adjustment for a primary residence versus an investment property is quite different, and for the reasons exactly that you described, there's a lot less risk in a primary then there will be in a rental. Because if an individual needs to choose between defaulting on where they live and an investment property, if it came down to that, obviously they're going to maintain, yeah, so they got to choose. So skin in the game, risk, etc, generally speaking. And there's all those other variables too, credit score, loan size, loan to value, property type, purchase versus refi, those are all unique llpas That will have their own unique number. But in general terms, an owner occupied where you live is typically going to price out an interest rate about one percentage point lower than you would find on an investment property, generally, if we're comparing apples to apples.

Keith Weinhold 23:15

talking about that risk difference for the lender, just like in the 20% versus 25% down. Example, there's less risk for the lender when you put 25% skin in the game. Hence the lower interest rate there too. Caeli, tell us about fitting the right mortgage type to the borrower. And of course, there are so many types. There's 30 year versus 15 year, fixed rate mortgages versus Adjustable Rate Mortgages, interest only, DSCR loans like you touched on. So tell us about getting that right fit for that individual borrower.

Caeli Ridge 23:49

This is a bit of a rabbit hole. So what I would start by saying is we do at Ridge take a lot of time on the front end and identifying not only what their needs are, their goals are, but obviously what their qualifications are, and marrying all of those things together and coming up with a roadmap that I like to call it, depending on where the individual is in their journey of real estate investing, as the tax returns may continue to be filed, and how aggressive they want to be with their deductions, maybe some cost segregation. I know I'm getting a little bit technical here, but because we maintain and have all of those products, it's very, very uncommon, or very rare, that we find an investor, potential client, that we do not have some sort of loan product to satisfy what their end game or end goal is. And you know, maybe we continue to graduate them. Let's say that they start in a DSCR because they can't qualify for Fannie Freddie today, but that is their ultimate goal. We're going to provide them with the insight and the background or the feedback that plants the seeds and gets them to that place in six months or a year, or whatever. So I hope I answered the question, depending on their individual needs and goals and qualifications, of course, really will dictate which one of those is going to be applicable.

Keith Weinhold 25:00

We've got a lot more to discuss, including, is it easier to approve w2 incomes from a day job versus 1099 from contract or gig work? And more, we're talking with the nation's foremost expert on income property. She is the president of ridge lending group, Caeli ridge. More, we come back. I'm your host. Keith Weinhold. hey, you can get your mortgage loans at the same place where I get mine, at Ridge lending group and MLS, 42056, they provided our listeners with more loans than any provider in the entire nation because they specialize in income properties. They help you build a long term plan for growing your real estate empire with leverage, you can start your pre qualification and chat with President Chaley Ridge personally. Start now while it's on your mind at Ridge lendinggroup.com. That's ridgelendinggroup.com. Your bank is getting rich off of you, the national average bank account pays less than 1% on your savings. If your money isn't making 4% you're losing your hard earned cash to inflation. Let the liquidity fund help you put your money to work with minimum risk, your cash generates up to an 8% return with compound interest year in and year out. Instead of earning less than 1% sitting in your bank account, the minimum investment is just 25k you keep getting paid until you decide you want your money back. Their decade plus track record proves they've always paid their investors 100% in full and on time. And I would know, because I'm an investor two, earn 8% hundreds of others are text family, 266, 866, learn more about freedom. Family investments, liquidity fund on your journey to financial freedom through passive income. Text family, 266, 866

Robert Kiyosaki 27:00

This is Rich Dad, Poor Dad Author Robert Kiyosaki, listen to get rich education with Keith Weinhold, Don't Quit Your Daydream.

Keith Weinhold 27:18

Welcome back to get rich education. We're talking with Ridge lending Group President Chaley ridge. These discussions are great, because debt, through leverage, builds wealth even faster than compound interest, as I've discussed, and Caeli is really the linchpin in her company, and help makes that happen with reliable income property loans and Caeli today, there are a lot more people with sharing economy income, gig economy income, or doing contract work, and they're paid with a 1099 form that shows their income for that year, versus a w2 employee wage job. So can you tell us about whether it's easier to approve those that have a w2 income and that versus the 1099

Caeli Ridge 28:03

I don't know that I would classify it as easier as harder. It's just different. So on the 1099 first and foremost, if you don't have a 24 month history of having that kind of income, you're not going to get a conventional loan. And assuming that we're going to kind of keep on that path of Fannie Freddie's. Because remember, guys, if you can't fit into those boxes. We've got 10 others that we can look to to get the financing for. But if we're in the Fannie Freddie, that's really where this is applicable, the 1099 and the w2 I mean, they're really equal in terms of the overall process. The difference would be that with 1099 you must have that 24 month history. The calculation is that we're going to take an average, it gets a little bit convoluted, like anything else that is leverage or financing related, but a 24 month average of 1099 unless we can show that that individual, let's say that they're self employed and maybe a Schedule C, and they've got their 1099 coming in through that way. If they can show five year history of having license or being self employed that way, that instead of having to use a 24 month average, we'll use a 12 month average, and that may be to their advantage. Let's say that the most recent year filed is in a bit of a decline from the prior year. Let's just use 2022 and 23 let's say 23 is a little bit lower than 22 a 24 month average is not going to be as big a number than if I were to just to be able to take the 12 month average of the most recent year. So if that individual can demonstrate they have five years of being or receiving that kind of income, then instead of being a 24 month average, I get to choose and just do the 12 month average. So that would be one thing about the 1099 that I would say otherwise, yeah, they're just different. I don't know that one is harder than the other. As long as the qualifications are there, they're there.

Keith Weinhold 29:43

When I think about this, I guess it does make sense from the lender perspective. If you're paid and shown income there on your 1099 from sharing economy work, gig economy work, or being self employed, that's more volatile work than having a day job. Um, as an employee.

Caeli Ridge 30:01

Sure, absolutely. And if you can demonstrate that you have that history and you've been able to consistently earn and have those numbers, it's okay, yeah, but without the 24 months, you're not going to get a conventional loan. You're gonna have to look at DSCR or something else.

Keith Weinhold 30:15

We're talking about what it takes to qualify for income property loans today with Ridge lending Group President Caeli Ridge, when we talk about that qualification bar that needs to be met. Caeli, you see so many loan applications in there. You have a team. You look at and deal with so many situations when you're free, you even pick up the phone, sometimes yourself, and you will talk to individual borrowers. So what do you see in there as the top reasons for not qualifying for an income property loan.

Caeli Ridge 30:42

The top reasons for not qualifying for a conventional loan probably is debt to income ratio, yeah, more often than not of the three basic criteria, which are assets, enough cash to close or reserves, credit and then DTI, I would say it's the DTI category that more often than not, is the culprit for qualifying or not. And it may be as simple as how they filed their last year's tax return and saying, Okay, before you file 2024 don't do that until you send Ridge a draft, so that we can get ahead of what you may not have known to look for last time. They could be very simple, little easy fixes. And you know, sometimes maybe it's they don't want to pay the extra taxes, which sometimes that might be required. In which case we say, okay, let's pivot over to the DSCR options. In which case, by the way, just as a quick sidebar, I'm finding that gap is starting to narrow a little bit to the point that it's a lot more affordable in terms of the investment property and what cash flow is expected than it used to be. The differences between a Fannie Freddie rate and a DSCR rate is starting to narrow a little bit. So if you have to be DSCR, I would not shy away from that just because you assume I think it's going to be more reasonable for cash flow properties.

Keith Weinhold 31:52

Yeah, I'll tell you, when I was an employee as a day job worker grinding in my eight by 10 cubicle, as it was back in the day, and I was buying income properties. Yeah, the main thing I would get held up on is that my debt to income ratio, my DTI, was too high, and my salary was pretty strong, although not fantastic, not astronomically high, but I felt like I was a guy that was pretty good, pretty prudent with my finances. And yeah, it didn't feel good to be told hey, Keith, to lower your DTI. You need to pay off your 3% automobile loan that's at a nice fixed interest rate. I didn't want to have to do that, but I was willing to do that to retire the small loan in order to qualify for the big loan.

Caeli Ridge 32:36

That makes sense. I might just offer a comment in that regard. What you may have experienced at that time could have been what we call an overlay in the industry. So, yes, like anything, right? Lenders aren't created equal. Because we're so investor friendly and focused, we are going to go by the purest form of those Fannie Freddie guidelines. It's called a seller's guide. And as an example, let's just say that Fannie Freddie gives you 75% of the subject properties, gross rents, whereas B of A or I'm just picking on B of I don't know why, but some other lender may impose an overlay. It's like layers of risk and saying, No, we're not going to give you any rental income credit whatsoever, even though the guideline says that we can do it, our overlay says, No, we can't. So depending on who you're working with, credit unions are a little notorious for that being a little bit more restrictive in their box of guideline. So it may not always be what you think. So if you've had a lender, tell you DTI wise, you don't qualify, but you feel like this is not quite right. You should double check that, because it may be an overlay.

Keith Weinhold 33:34

Everyone is interested in interest rates. It's been so interesting with what's happened the past few years, ever really, since the covid Emergency cut took place in 2020 and the volatility that we've seen in interest rates, then we saw interest rates max out in this cycle at about 8% almost a year ago. What does this declining interest rate environment mean at a mortgage loan company? And what do you see for the future of rates there?

Caeli Ridge 34:02

Well, rates have been coming down. If you guys are watching the headlines, you're seeing those sound bites. We have started to see some more refinance activity than we were seeing before, certainly additional purchases as we start to see interest rates come down, I am of the opinion that we're going to continue to see some improvement in the rate department, dependent on some of the jobs reports that we'll be getting soon, so we'll see. But My money is on that, we'll continue to see some nice tailwind in the rate department throughout the rest of the year, and who knows what's going to happen? I mean, this is our election year, etc. We'll see how the rest of it plays out.

Keith Weinhold 34:33

How does a prospective borrower get their financial house in order themselves before getting a hold of you and your team there, what are some of those checklist items that they should do themselves at home first?

Caeli Ridge 34:47

like I said a bit ago, so you've got those three primary criteria. If you're wanting to qualify for those conventional full doc loans, think about your credit Do you know what that credit score is? Now, depending on some other variables, it doesn't have to be 800 Credit scores to qualify. I mean, we've got clients as low as 650 that are able to get financing conventionally, because they've got compensating factors, similarly for assets on the investment property side, the down payment and the closing costs and the reserves, none of those things can be borrowed or gifted. And that's very different than if it was an owner occupied, gifted and borrowed funds are okay for an owner occupied, for an investment property, they have to be sourced and seasoned, meaning your own funds over the last 60 days. So think about that. What your down payment is going to be an estimate of closing costs and make sure that you have the appropriate amount of capital. And then finally, that debt to income ratio. That's a slippery or one to try and calculate that for yourselves. But if you think about your minimum payments on your credit report. That's really all that goes into it. Minimum payments, not the debt load. The minimum payments on the credit report divided by the monthly income, gross income, you should be able to come up with a number, and 50% is that threshold. So if you can kind of just take that kind of mental back of the napkin of your own, you should have a pretty good gage on whether or not you think you're going to be in this box, or if getting into the game, or continuing to be in the game, is going to require some alternative loan types.

Keith Weinhold 36:05

Inflation has been such a story for the past three or four years, but some people aren't aware that there's actually been credit score inflation. Last time I checked, the average credit score had been slowly rising in the United States. What's the highest credit score that gets one the lowest rate.

Caeli Ridge 36:22

We're staying in the Fannie Freddie department, 760 and above is all the same bucket, if the individual qualifications are identical, if this one has an 850 credit and this one has a 760 credit, exactly the same in the interest rate department.

Keith Weinhold 36:35

And then, once they've engaged with you, what about locking in their interest rate. What duration did they have prior to closing? Tell us about that timeline.

Caeli Ridge 36:45

So an interest rate can be locked on a 15 day lock, a 30 day lock, a 45 day lock, even a 60 or 90 day lock, typically it's a 30 day lock that's the average. The shorter the period of lock, the better the rate and or points that you would pay. And the longer is the adverse right? The higher the rate of the higher the points. I like to look at locking an interest rate, usually when we get the appraisal back, because an appraisal can be the piece that might delay or there may be some issues. So I generally like to see the appraisal first. We've been in such a volatile area with interest rates and what might be happening in the ups and downs, etc. I've broken that rule quite a few times over the last couple of years, I would say today, floating may be to our advantage, just because we feel like rates are on the run and that they may continue to improve. Keeping in mind, once you lock in your interest rate, it is locked. Ridge does have a policy that if interest rates were to fall five, eight of a percentage point or point 625, you would have a one time automatic float down option. It's highly unlikely, and that's why we can kind of put that in there. But if it happened, we would honor that. Otherwise, when you're locked, you're stuck with that rate. You can't expect that if an eight through a quarter point comes off of or rates come down that much, that you're going to get a different rate. The only way to do that would be to let the existing one expire for 30 days and then relock market, which is not advisable.

Keith Weinhold 37:59

Yeah, you the investor, has to think about how important a lock really is to you in this declining interest rate environment, almost everyone expects mortgage rates to fall more slowly than they rose. They spiked up so fast in 2022 Caeli, how does our audience engage with you? Get Started and go on their path to getting investment property loans.

Caeli Ridge 38:24

Three ways to reach us. Obviously, we've got our website. Please check us out there. There's a lot of good information, ridgelendinggroup.com you can email us at info@ridgelendinggroup.com, and then finally, toll free is 855-747-4343 855-74RIDGE is that easy way to remember, and we'll be here on standby. Thanks, Keith.

Keith Weinhold 38:43

Ridge is the same place where I get my income property loans. It's been great having you back on the show. Thank you. Yeah, strong. Well laid out material from cheyley here, as always, let me give us a perspective on creating value by having a good loan rather than not having the debt. Remember that just four weeks ago, here on Episode 516 it was the episode about is every debt worth paying off? And the short answer is no. I got a couple questions from listeners of that episode basically asking the same thing. Well, just say that interest rates are 6% and basically they're asking, well, if I pay all cash for a property or for a car, it doesn't matter what it is, then I avoid paying 6% interest. So right there is my six points of arbitrage. Well, to that, I say, okay, but look what if you think you can achieve a 12% investment return? Borrowing at six to invested 12 is a 6% spread. That's 6% arbitrage as well. But here's the thing, you've got a big advantage of doing this with the loan rather than the paid off condition. This is because. With the loan, you still have the use of your money. You haven't given it away. You still have your money, plus the six points of arbitrage in the paid off condition. You've got six points of arbitrage and you don't have the use of the money any longer. That's the big difference, and that's the value of having a loan, as long as you can service the payments. Getting back to mortgage loans, in today's episode, there are so many loan types for property, conventional, Fannie, Freddie's, dscrs, Portfolio loans, bridge loans, rehab loans, recourse and non recourse loan types, balloon loans, arms and a lot more. Caeli and I didn't discuss their all in one loan, which is like a big, flexible HELOC that you can put on your property. It's such a good product that can help you. You can ask about their all in one loan. When it comes down to what are the factors you need to be most attentive to? They are your assets, reserves, credit, income and debt to income ratio, unless dependent on the loan type that you want. So much attention is paid to interest rates, and some attention is warranted. They surely matter. Be mindful, though, that a quarter of a percent interest rate change on a 30 year loan per 100k borrowed that is just a difference of about $15 in monthly payment, $15 if you go from, say, 6% down to five and three quarters percent, so it takes a rate drop of a full 1% for a savings of about $60 then once you have some of Your finances in order, you can go ahead and do just what I've done for my own properties. For your next income property loan, you can give them a call or start at Ridgelendinggroup.com Until next week, I'm your host. Keith Weinhold, Don't Quit Your Daydream.

41:58

Keith Weinhold 42:18

The preceding program was brought to you by your home for wealth building, getricheducation.com.

Direct download: GREepisode520_.mp3
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Mon, 16 September 2024

Tom Wheelwright is back by popular demand, our most recurring guest in GRE show history. He’s a CPA, an International Authority on Tax, and Best Selling Author of “Tax-Free Wealth” amongst many other titles. We focus on the potential unrealized capital gains tax, which would tax the increase in property value even before sale. Tom explains the implications of this proposal and the broader impact on tax policy.

We cover the Democrats' proposal for capital gains tax at ordinary income rates, capital gains on gifts, and capital gains when you die.

The proposal for a billionaires tax, which would tax unrealized gains at $100 million, could potentially extend to lower net worth individuals over time.

Real estate income can result in a negative tax rate, increasing cash flow after taxes.

Learn about the benefits of working with a knowledgeable tax advisor.

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GetRichEducation.com/tax

Show Notes:

GetRichEducation.com/519

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518: Is Now the Best Time to Buy Real Estate?

Complete episode transcript:

Automatically Transcribed With Otter.ai

Keith Weinhold 00:01

Welcome to GRE. I'm your host. Keith Weinhold, this week we're talking about the value of the raw land that comes along with your property, the importance of an as built survey in real estate. Then it's tax topics with pro Tom wheelwright, the specter of an unrealized capital gains tax, higher capital gains tax rates, how gambling is taxed, and how to permanently reduce your overall tax burden. Today on get rich education,

00:33

since 2014 the powerful get rich education podcast has created more passive income for people than nearly any other show in the world. This show teaches you how to earn strong returns from passive real estate investing in the best markets without losing your time being a flipper or landlord. Show Host Keith Weinhold writes for both Forbes and Rich Dad advisors, and delivers a new show every week since 2014 there's been millions of listener downloads of 188 world nations. He has a list show guests and key top selling personal finance author Robert Kiyosaki, get rich education can be heard on every podcast platform, plus it has its own dedicated Apple and Android listener phone apps build wealth on the go with the get rich education podcast. Sign up now for the get rich education podcast or visit get rich education.com

Corey Coates 01:18

You're listening to the show that has created more financial freedom than nearly any show in the world. This is get rich education.

Keith Weinhold 01:34

Welcome to GRE from Essex County England to Essex, Massachusetts and across 188 nations worldwide. I'm Keith Weinhold. You're listening to get rich education before we talk taxes, let's talk about the land, the raw land, the lot that comes along with your property. Investors don't spend much time thinking about it. Yet the land is sometimes worth more than the home or structure that's on it, per the FHFA, land constitutes 32.2% of the value of the average US single family property in a metro area. Now the inexpensive land prices nationally, they are predominantly in what I'm classifying it as three US areas, the Midwest, the southeast and Appalachia well, where you have inexpensive land. Oh, that also happens to be where the cash flow for long term rentals resides. Land costs more by the water because people want water activities, water proximity and water view. So the lower costs are inland, and land also costs more by the water, because coasts and shorelines constrain development, sprawl that limits supply and a limited supply of buoys up prices. Consequently, the highest land values are mostly in the Northeast Corridor, from Boston to DC, Miami, coastal California and Honolulu. Yes, Manhattan values are flat out extortionate for raw land now, Seattle, Madison, Wisconsin and Boulder, Colorado. They are three places with really high land values as well. Seattle and Madison are on geographic isthmus. And isthmus is a narrow strip of land with water on both sides. It's interesting how Nashville's nascent population influx made its land values surge inside a cheap sea of southeastern US land values now costly land areas like these ones that I've been talking about on the coasts, they could work well for short term vacation rentals like Airbnb and VRBO, your classic waterfront and beachfront weekly rentals, but they do not work for long term rental cash flow. Texas Land values are sort of low to medium. Land near the Mississippi River and its major tributaries have low costs because rivers are efficient transportation networks, prohibitively high land costs. That's one reason, actually, why alternative building methods just really aren't as cost effective as some people think. I'm talking about things like 3d printed homes, prefabbed homes, tiny homes and shipping container homes, well, all of them have got to sit on land, just like conventionally build homes do. And there is a land cost. Talk to a tear down specialist, and they'll tell you that in some older homes, 100% of the total value is in the l and. And in practicality, it's actually even more lopsided than that. The structure can have negative value because demolition is not free. So for you to get an idea yourself, your property tax bill, it's going to show you your split. That's where you'll see the assessed values broken out for both your structure and the land. So the bottom line here is that cash flowing properties have low land values, typically 25% or less of the total property value. That's generally what you want to look for. And I swear the only thing that's more barren than raw land is the creative naming process for new developments. There is such a lack of creativity in these development names. I'm talking about names like Willow Creek Estates, stone bridge crossing, or what else do they name a new housing development? How about VISTA, view heights? They all have these idyllic sounding names that somehow just all sound like each other. Well, we're talking about raw land when you get in contract to buy a property, the seller side is expected to provide you with an as built, it often still comes in the form of an old fashioned piece of paper and as built survey, what it is is a plan view, a bird's eye or aerial view of your property. It's not a photograph, but a drawing, and it shows you the dimensions and the placement of structures on your property, and it includes things like fences and other features like easements. Now, lenders don't always require an as built before granting a loan, but it's a good idea to ask to see one before you wrap up your next deal. If you want to in your offer, you can even require that a recent as built be done by a surveying company. All right. Well, what exactly do you look for on an as built once you have one in hand, first see that the house or apartment building that you're buying is properly set back from the property lines to meet zoning requirements. If the six foot side setback is only five feet 10 inches, then you'll have to address that before you buy even if it's five feet 11 inches. Now it's possible that the jurisdiction that you're buying in will grant a letter of non conforming status, but if not, the structure is going to have to be adjusted. Another item to look for on an as built are encroachments. This is where part of a neighbor structure protrudes over the lot line and onto your property. And encroachment is really only acceptable if you're willing to grant the neighbor an easement in perpetuity for their encroachment onto your land. But why would you want to do that? The third thing that I want to mention that you should look for an as built is the existence of easements. An easement that just means that another party has a legal right to come over onto your land and use it. Yeah, and easements are actually quite common. It's not as threatening as it might sound. A common one is that as your as built would show, say, a five foot wide by 60 foot long easement. Is there that a utility company has access to. Well, that's something that makes sense. It's for the common good, but just be mindful that an easement cannot have a structure with a permanent foundation built on top of it, alright, because an electric company or a water company might have to excavate there. Most people think of easements on the raw land, but there are also aerial easements, for example, an overhead power line where the roof eaves are not allowed to intrude on that airspace. So to review what you learned so far today, the best cash flow properties typically have low land values, often about 25% or less of the tolerable property value. And an as built survey is an aerial view drawing of your property and its dimensions on an as built look to see that it meets zoning requirements like setbacks and look for encroachments and easements. It is resale properties where it's more important to look at as builts than it is for new construction properties. As we're about to bring in tax pro Tom Wheelwright shortly, business owners and real estate investors really get so many of the best tax breaks in the US Code. But you've got to know. How to find them, or else work then with a CPA that does know how to find them, that really knows how to navigate their way around the tax code, people that make high salaries pay high taxes, as much as 50% you remember I did that episode a few months ago, high salaries don't create wealth. Taxes are one big reason why, say, for example, a chiropractor makes $1.2 million a year in salary. But if that chiropractor becomes an investor by buying and selling other Chiropractic Clinics or investing in real estate, their tax rate will drop by half or more, and that's because capital gains tax rates are about half of ordinary income tax rates. So see, you don't want to be a super earner. You want to earn enough money to invest and become a super owner, but tax policy could change Tom and I will discuss that first. Then we'll talk about reducing the amount of tax that you pay. Today is a new punishing unrealized capital gains tax coming that you will have to pay. What this means is that if you have a $500,000 home, and it rises in value to $550,000 well, you would have to pay tax on your $50,000 of profit, but you haven't sold your home. So this feels so wrong, because you haven't realized any profit at all. This is what unrealized capital gains tax is. And also, where are you going to get the cash to pay the tax on your 50k of profit just because your home rose in value yet you didn't realize it? I mean, might you have to sell your home in order to get the cash to pay the tax. And then what if you though could pay the tax on your unrealized capital gain so you do pay it, but then the following year, the home goes down in value. Well, would you get a refund then? So the unrealized capital gains tax proposal is a mess. Let's learn about it and more. This week's guest is a best selling author, CPA and an international authority on tax. He's brilliant because he actually makes taxes fun, easy and understandable. He's familiar to you because he's the most recurrent guest in show history. Welcome back to GRE Tom Wheelwright.

Tom Wheelwright 12:48

thanks always good to be on your show.

Keith Weinhold 12:50

Tom probably with more than 30 show appearances here now you are 6% of GRE episodes.

Tom Wheelwright 13:00

That's a little scary. But you know, taxes are your single biggest expense, so why not?

Keith Weinhold 13:05

It's appropriate. And yeah, I guess all these appearances are certainly an endorsement of how much you help our audience. It's also a reflection of how tax and legal are not my strong suit. So it really helps to have you here absolutely the all time, assists leader in GRE history then and Tyler. An awful lot of timely tax topics going on that are probably first and foremost in more people's news feeds than they usually are. As we're here during presidential campaign season, the one that it really seems to revolve around the most is this potential tax proposal on unrealized gains. I've been around long enough where I seem to see this proposal come up more often, but it never seems to go anywhere. So first, why don't you tell us what unrealized gains are?

Tom Wheelwright 13:51

it actually goes beyond that. Interestingly enough, what the Democrats are proposing is, first of all, they're proposing capital gains rates at ordinary income rates. So they're proposing doubling the capital gains rate. That's actually as important as anything else. The second thing is, they're proposing capital gains on gifts. So if you give it, if you give your business to your child, you have a capital gains ordinary income rates. They're proposing capital gains when you die. So not only an estate tax, but also a capital gains tax. So then you get taxed twice when you die. So about 80 to 90% of your estate goes to the government when you die. If you're a business owner, as an example, then they're proposing eliminating the 1031 exchange, which would mean that on a trade of real estate, you'd have a capital gains tax at ordinary income rates. Then they're talking about this unrealized capital gains so if you do nothing but build your business or your real estate, the increase in value is subject to capital gains taxes at ordinary income rates. Now you know their proposal is, we have this tax. Tax when you're over $100 million that is not seem to be in the news feeds right now, but that's what it is. They call it the billionaires tax, and they're calling it an alternative minimum tax on billionaires. But clearly, 100 million is not a billion. That's only a 10th of a billion. And the biggest issue, of course, is if you tax unrealized gains at 100 million, soon you're going to tax them at 10 million, then it's going to be 1 million. Because history. That's the history of our tax law. The history of our tax law. Remember, in 1913 when we passed the 16th Amendment, it was passed because it was only a tax on the rich, right? It would never have passed if it was going to be a tax on the average person. And yet it passed. Because great, we're okay taxing somebody else, as long as it's not our tax. We're okay taxing somebody else. That's pretty much what's going on with this unrealized gains tax is, oh, well, it's on somebody else and they have enough money. It's no big deal. Therefore, I'm okay with that, because why shouldn't they pay more tax? That is what this is about. The challenge is, is, as we saw with the income tax, eventually it will reach the average person, or at least the average entrepreneur, real estate investor. Because think also, let's say that you build your wealth in real estate, and then when you retire, you say, Well, look, I don't want to be doing active real estate anymore. I'm going to trade my single family homes or my apartment building. I'm going to trade for a Walgreens a triple net lease, well under their proposal, that would be taxed because, again, no 1031 exchanges over $500,000 so that means that if you accumulate your wealth through business or real estate, you pay a much higher tax rate than if you accumulate your wealth by investing in Wall Street through a 401k because if you invest in Wall Street through a 401K, you only have to pay tax as you pull that out, you're not going to be paying tax on the value. Now that's assuming that they don't tax the increase in value of your 401K, which is also obviously a possibility. Interesting enough people talk a lot about the constitutionality of this. The challenge with that is that we already have taxes unrealized gains. If you're a dealer in stocks, in securities you do mark to market, that is meaning that you're going to pay tax on unrealized gains. And so there is actually precedent for this, and that's the scary thing, is that they could point to that precedent and say, Well, wait a minute, it's just an income tax, it's not a wealth tax, that's what they're going to say. They're going to say it's an income tax, not a wealth tax, because it's on appreciation, and appreciation is income. That's how they're going to go down this road. Will it start at $100 million Absolutely, that's where it will start. Will it then drift down? Who knows? But likely that's the history of our tax system. Yeah. I mean, we've talked before about the phenomenon of the camel getting its nose under the tent. However, in this case, I didn't realize there's already precedent for unrealized gains, in a sense, as potentially, if this is approved for those with $100 million net worth, and in next it's 10 million net worth, $1 million net worth and so on, like you described there, when you talk about capital gains tax rates being stepped up so that they're at ordinary income tax rates. It's actually somewhat of an interesting philosophical discussion, in a way. It sort of makes sense that a person's gains from investment could or should be taxed at the same rate as one's income when they go to their day job. However, why don't we do that by lowering income taxes rather than doubling capital gains? Wait a minute, no, because it's a double tax. Let's say that you're a business owner. Why does your business increase in value? Well, because you're making income, but you're already being taxed on that income. It's called income tax. What we do in this country, which a lot of countries don't do, by the way, is we tax it a second time. We call that a capital gains tax or a dividends tax. We tax it twice now. Now we're going to have that second tax at the same rate of the original tax. So if you think about it, you're being taxed on the same income twice because it's your income that determines your value, so you're being taxed twice. It's really not the same. It's fine if you're invested in the stock market, and that's where your capital gains are. That's a hard one to argue too much, although it does take liquidity out of the market, because the problem with capital gains tax is being taxed over 28% it's about 28% is that you actually lower the contribution to the Treasury because there will be fewer capital gains. There will be so many fewer capital gains that you actually lose money. The Tax Foundation, taxfoundation.org, I'd refer people to, has done lots of studies on this, and it's very clear. Here that high capital gains rates actually reduce the amount of money that comes to the government. So this is purely political. This has nothing to do with let's generate more revenue, one of the challenges so you have to score this, right? So that means that you're scoring what's the revenue that's going to be produced? You have two types of scoring. One is called static scoring. The other is called dynamic scoring. Static scoring means that we're going to look at the capital gains we already have, and we're just going to, if we double the rate, we're going to double the revenue. So that's assuming that we're going to have the same number and amounts of capital gains as we add at the lower rates, right? Dynamic scoring means that we're going to take into account how people behave motivationally when you double the tax rate. Yeah. Well, let me give you an example. So I'm a business owner. My wealth is in my business primarily. Do you think, really, I'm going to sell that business and take the capital gains immediately and be done with it? But if I have a high capital gains rate, I'm going to sell this over 20 years. So I'm actually going to defer my capital gains as long as I can, because I don't want to pay those high capital gains rates. So that means less money to the government. That's what it means. So it actually reduces on a dynamic scoring if you look at truly how people behave and have behaved in the past. So this isn't a new thing, right? We've had high capital gains rates before. It's not like we don't know. It's not like we haven't seen this before. It's that, for whatever reason, politically, they've decided that, wait a minute, the rich are out of favor. We need to tax the rich more. That's a very popular line, and therefore this is a way to do that, even though it by all calculations that are dynamic, it would actually reduce the amount of funds that come to the Treasury.

Keith Weinhold 22:00

That does make sense about the double taxation. Case in point, with an apartment building, if you increase its noi, you have more income than pay tax that if you increase the noi, therefore you've increased the value of the building. Consequently, the capital gains tax that you might have to pay down the road Tom, maybe current capital gains tax are higher than I thought, is the 28% capital gains tax. Number You mentioned, current or proposed. What is that?

Tom Wheelwright 22:24

Well, right now we have a 24% capital gains tax, okay, we have 20% pure capital gains tax, plus we have a 3.8% net investment income tax. Doesn't apply right now if you're a real estate professional, but applies to everybody else under the Harris proposal formally adopted Biden's plan under the Harris proposal, then you would get a actually 39.6% rate, plus 5% net investment income tax, regardless of whether you're your real estate Professional. So that is 44.6% that's the 45% the 28% number I threw out is that's the number the Tax Foundation says is the maximum you can raise it to without losing revenue.

Keith Weinhold 23:11

That puts things into perspective, as real estate investors, for a long time, we've appreciated substantial tax shelters. What are they being the 1031, tax deferred exchange, like you mentioned, that's been around for more than 100 years. Does that have any realistic shot of being shot down? Of course, Trump shot down substantial parts of the 1031 outside of strict real estate investing.

Tom Wheelwright 23:32

He did, and he actually set the precedent for eliminating it. So by doing that, because he eliminated it on everything except real property, right? I mean, actually, and even before that, there was a time, and there's still ways you can do it with paper assets. But it's not a 1031 exchange. So 1031 exchange has it evolved. It's gotten it's shrunk. It keeps shrinking. Even three or four years ago, no realistic possibility of eliminating 1031 exchange. The challenge, of course, is it would have an impact on the liquidity of the market. However, big deals never do 1031 exchange. Ever you don't see big multifamily developments sold in 1031s. The only time you see that happen is when they've used the Delaware statutory trust. And then you've got some of the investors who use it. And some of them who don't, you can do that in the Delaware statutory trust, but the regular developers, I haven't seen a 1031 done by a syndicator in years. So could they eliminate? Yeah, they could.

Keith Weinhold 24:33

yeah, that would be concerning. Are there any other presidential hopeful proposals that have to do with taxes that are germane, and our audience should know about?

Tom Wheelwright 24:41

my heavens. So the Democrats want to raise taxes by $5 trillion they want those taxes to all be on investors. And the reason I say that is because typically, people who make less than $400,000 which is their threshold, are not major investors. Most of their money goes to spending. Money. If you're making under $400,000 you can easily spend $400,000 a year. Oh, yeah, okay, that's not that hard, especially in today's world. It's a transfer from high net worth individuals who invest their money in long term projects like real estate, like energy, like business, and it's going to be a transfer to people who spend the money and they're going to spend it, my prediction is that if the Democrats get their way, we enter into a long term period of stagflation, high unemployment and high inflation. Because if you transfer $5 trillion from people who aren't spending it in the first place to be able who do spend it. You've got $5 trillion of new money going into the marketplace. Now it could depress asset values. So that could be good for investors, okay? Because you don't have as much cash available to the I'll call it the investor class, to go into real estate. If that's the case, then you have $5 trillion less, right? I mean, it's not a huge portion of the market, but it's big enough. If you take $5 trillion out of investment capital, then that would put a downward pressure on asset prices, which would include real estate.

Keith Weinhold 25:29

we're talking about potential changes to the tax code. It's always a germane discussion, because taxes are the biggest expense in your life. We're talking with Tom wheelwright. We come back, we're going to talk about the real estate tax laws as they are now, for example, how your rent income is taxed differently than your job income, and also, what are taxes like on sports, gambling. You're listening to get rich Education. I'm your host. Keith Weinhold.

Keith Weinhold 26:45

hey, you can get your mortgage loans at the same place where I get mine, at Ridge lending group NMLS 42056, they provided our listeners with more loans than any provider in the entire nation because they specialize in income properties. They help you build a long term plan for growing your real estate empire with leverage. You can start your pre qualification and chat with President Caeli Ridge personally. Start Now while it's on your mind at Ridgelendinggroup.com that's Ridgelendinggroup.com

Keith Weinhold 27:16

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Blair Singer 28:29

this is Rich Dad, sales advisor, Blair singer. Listen to get rich education with Keith Weinhold. And above all, Don't Quit Your Daydream.

Keith Weinhold 28:48

welcome back to get rich education. We're talking with tax pro Tom wheelwright. He's been talking to us about some of the proposals that presidential candidates have here in a campaign season, and whether these things become true or not. Sometimes it seems like just the fact that they're proposing. They're proposed, or if they get instituted at a small level years down the road, it can blow up into something bigger. So Tom tell us more about some of the proposals that are on the table.

Tom Wheelwright 29:12

So we talked about the democratic proposals, which also include things like a $6,000 tax credit for babies. It also includes an enhanced Child Tax Credit. Also includes some other there's lots of provisions in there, right? So it's a transfer. It's just a transfer of money from one group of people to another group of people. On the Republican side, we haven't talked about that now they want to extend the 2017 act. They've been very clear, that's what they want to do, which is an estimate $4 trillion so the other direction. So basically, you're talking about a $9 trillion swing between the two parties. We've never seen this before, ever in a presidential election. Now, that big of a difference, one major tax increase, one party proposing major. Tax increases, the other proposing major tax decreases in the same election. It's something that I'm glad people are paying attention to, because it's a little overdue in this election cycle. Because really, when you talk about policy, that's probably the biggest policy difference between the two parties.

Keith Weinhold 30:18

Now one thing we've learned over time from talking with you is these presidential wish lists, if you want to call them that. Well, these tax changes are things that require congressional approval, and we have a divided Congress currently. So what do you think the prospects are of really any of these things becoming new law?

Tom Wheelwright 30:36

First of all, remember, most of the 2017 act expires at the end of 2025 so something will have to be done next year. They don't have a choice, either that or is just expires, and then we're back to what we had. We have smaller standard deductions, we have alternative minimum tax again. We get a deduction for state income taxes, right? That comes back the one. We lose our 20% Small Business deduction, the only thing that stays permanent is the corporate income tax rate that was permanent in the original bill. So there is going to be something, you're right, if there is a divided Congress, and I say that if, because if one party sweeps, then, especially on the Democratic side, the Republicans don't seem to be as cohesive as the Democrats are on these things. And if the Democrats sweep, I would say, remember, we don't have Kyrsten Sinema, we don't have Joe Manchin from happening. And so would the Democrats sweep all these through, not all of them, but you're going to see a major tax increase for sure, on the Republican side, would you see the 2017 act extended? You'll probably see it, but you're right that otherwise, if it's a divided Congress, we're going to have something in between. We thought we would get a divided Congress in 2020 though, remember and we didn't. So I would not count on a divided Congress

Keith Weinhold 31:59

erstwhile 2017 Trump tax cuts in JOBS Act brought the highest marginal income tax bracket from 39.6% under Obama down to 37% as I remember it. Some thought Biden would take it back up to 39.6 but he hasn't and it's just stated 37 All right, so if Republicans stayed in power, presumably that 37% would go ahead and carry on. That's what we think about as our w2 income. Tom, why don't we talk about the taxes that actually exist today? I think a lot of real estate investors just don't understand the difference between how your w2 job income is taxed versus your taxes on real estate rent. Can you talk to us about that?

Tom Wheelwright 32:42

The reason it's confusing is because they're both considered ordinary income, right? The difference is, is that one is business income and one is non business income. Your wages are non business income. You don't get deductions against non business income, but you do get deductions against business income. So your rental income is considered business income for purposes of the Internal Revenue Code. What that means is you get deductions for taxes. You get deductions for interest, you get deductions for maintenance, you get deductions for depreciation. That's why, when you have your income from your rentals. Typically taxed much lower than your income from your salary, because you get no deductions against your salary like you do against the rentals.

Keith Weinhold 33:30

Maybe it would help to introduce an example here. I don't know if this will complicate things too much or not. If a real estate investor has, say, a single family rental property with $2,000 of rent, income, $1,000 mortgage, $800 in operating expenses. How is that tax that leaves them with $200 of cash flow?

Tom Wheelwright 33:50

You have $200 of cash flow, but then you probably have depreciation on top of that, which is a non cash deduction. And so let's say your depreciation is $500 that means you actually have a $300 loss that, in many cases, you can use to offset income from your w2 so you actually have a negative tax rate. In other words, you're making money from taxes. So actually, is that an increase to your cash flow? So it's a way to think of it is, I have $200 of cash flow from my tenant, if I have a $300 loss for tax purposes, let's say I'm in a 33% tax bracket. I have $100 of income from the government. So that means my cash flow is really after tax. Cash flow is $300 not $200 whereas if you have the same $200 of income from your wages. Let's say you have just the net, right? Let's start with the net. You have $200 well, you're going to be taxed. And let's say that again, your 33% tax rate, that means you're after tax, right, is going to be roughly $125,000 okay, under $30 so $130 we're. $300 so it's like twice as much. In fact, all of that difference is because of the tax law.

Keith Weinhold 35:06

Gosh, that was a great breakdown. I'm really glad that I introduced that example, $2,000 in rent, minus $1,000 for the mortgage, at $800 in operating expenses, again, leaving you with $200 in cash flow with that example. There's probably more going on here with taxes. Because, of course, with that $1,000 mortgage amount, some is going to be principal, some is going to be interest. In part of that interest can be tax deductible.

Tom Wheelwright 35:31

I'm assuming it's all interest, because if it were not, we'd have a higher taxable income. Remember, your principal payment is not deductible. So in your example, I was assuming that the $1,000 mortgage payment was all interest. If it was only $800 then you'd have $400 of income before depreciation. You don't have $100 loss, because, remember, your principal's not deductible, so therefore you have to add that back into your taxable income.

Keith Weinhold 35:58

Will you talk to us about how to apply depreciation to this income versus expenses. Example, is there anything else you can speak to when it comes to that $800 of operating expenses in this example, and those expenses include things like property insurance, property tax itself, maintenance repairs and utilities.

Tom Wheelwright 36:19

Right but also, for example, you might run your rental real estate business out of a home office in your home so you could have a home office deduction. You might have your use your car for the rental purposes, and then you get a deduction for your car. So there are additional expenses that aren't even in that $800 that you could pick up that would not otherwise you'd never get a deduction, and you're really not spending any more money. You're just using it for business, and therefore getting a business deduction. So it's really all about what do I get to deduct? Remember that if you own a home for yourself, you don't get to really deduct the taxes. You have a limit on how much you can deduct. So taxes are limited in deduction. Mortgage Interest may or may not be limited. Remember also that if you have a mortgage, you're limited to how much a $750,000 mortgage being deductible, whereas if you it's a rental property, it could be a seven and a half million dollar and mortgage, and you still get the deduction, so you're not limited like you are. On top of that, again, it's a business, so let's say that you put solar panels on your personal home, you'd get a 30% tax credit, but you'd get no depreciation deduction. If you put solar panels on your rental house, you get the same 30% tax credit, but now you also get a depreciation deduction of probably another 30 $40,000 in the first year. So there's always more deductions in a business setting than a personal setting.

Keith Weinhold 37:56

Well, real estate has been around a really long time. Often laugh when people talk about non conventional investments and put real estate investing in their real estate's about the most conventional investment that we can possibly think of. It's been around a long time. We think about a newer thing that people do with their money, but I sure don't call it investing. That's sports gambling, and it's something that you and I haven't talked about before. Here Tom in 2018 the Supreme Court opened the way for states to legalize sports gambling, and at last check, 38 states, plus DC and Puerto Rico have legalized at least some form of sports gambling. So now it's a more germane conversation for you and I to have than it was a few years ago. Can you tell us about sports gambling, taxes and how it's treated.

Tom Wheelwright 38:41

So remember, all income is taxable. So that includes gambling winnings. They are taxable. In fact, you'll get a 1099 just like you would if you rendered services, you'd get a 1099 or you have interest income, you get 1099 you get 1099 from gambling. What you actually have to show is that you actually have gambling losses. So you have to track those gambling losses to show the IRS that you got gambling losses. But your gambling losses can never be more than your gambling winnings. You never get to generate a tax loss on gambling. What that means is, is that if you win $10,000 during the year, and you can prove that you lost $8,000 during the year, you're going to be taxed on $2,000 but if you can't prove the 8000 you're going to be taxed on 10,000

Keith Weinhold 39:33

so you the gambler, have the burden of tracking this, and I guess tracking your losses. I'm not a gambler. How would one track their losses?

Tom Wheelwright 39:42

I would keep detail ledger. Personally, I probably have a separate bank account just for gambling. Gosh, I'm not a gambler either, so that's what I would do. I would have a bank account just for gambling, by the way. It's also a good way to budget your gambling so they, you know, get in trouble, right? So just set up a separate bank account. Don't put whatever money you say, I'm comfortable with this money, I'm going to gamble with this money put in that bank account, and then you have a ledger that shows the money that went in and the money you lost, the money you won, and don't do anything but gambling in that bank account.

Keith Weinhold 40:15

Hey, that separate account's a great way to hide it from your spouse, not that I'm suggesting. Not bad.

Tom Wheelwright 40:22

Interesting. You went there.

Keith Weinhold 40:23

I'm not a gambler at all. Can't even believe I was thinking that far ahead. What are the gambling tax rates like?

Tom Wheelwright 40:31

They're ordinary income tax rate. So gambling winnings are just ordinary income. They're the same as your wages. They don't have social security taxes their income, just like any other kind of income, nothing special. And this all applies to whether it's sports gambling or general gambling, like lotteries and sweepstakes? Just remember, all incomes taxable unless the government says it isn't all income, okay? And then there's some types of income that are taxed at special rates, like capital gains, but gambling has no special rates. By the way, gold also has special rate for when you sell gold, it has its own tax rate. Gambling has no special tax rate, so it's just your ordinary income rates.

Keith Weinhold 41:11

To me, it seems like it's hard to break even with gambling over time, and then when you take the tax adjusted earnings that you get from it, you know, over the long term. I just don't think Harris and Bally's Casino is really incentivized to inform gamblers on how punitive this can be with ordinary income tax rates applied to gambling winnings.

Tom Wheelwright 41:30

No, but they will send you your 10909g I guarantee that, that's for sure.

Keith Weinhold 41:34

Well, Tom has helped business owners and real estate investors permanently reduce their taxes. He does it like virtually no one else in the world does by keeping it simple, by helping you find deductions that other CPAs can't do. You can learn more about how Tom and his team can actually help you. You can get a free consultation. You can do that at getricheducation.com/tax. And Tom tell us more about the importance of a business owner or a real estate investor or anybody else really being connected with the right kind of tax professional that can permanently reduce your taxes.

Tom Wheelwright 42:12

So remember that if you want to change your tax, you have to change your facts. It's that simple. What you have to do is you need to know what facts you need to change. That's where a good tax advisor comes in. Is what facts do you need to change in order to change your tax now good news is, wrote tax through wealth. So you got an idea of what that is, but the tax law is very detailed. You must dot your i's cross your t's, so to speak, so that you make sure that you meet all of the rules, such as documentation, for example, for your business expenses. When you do that, you're going to get a better tax result, especially if your tax advisor is also preparing your tax return. Because really, your tax return is just part just how you implement your tax strategy, right? That's how you do it. So we launched, just recently, a franchise of tax advisors, and now we actually have much, really good control, quality control with our tax advisors, and they use our software system. It's very important that you have somebody, if not us, find somebody who you know you can actually give tax free wealth too, and say what cares make sure that we're doing it this way. But if the easy button is really the getricheducation.com/tax.

Keith Weinhold 43:27

Tom Wheelwright, It's been valuable as always. Thanks so much for coming back onto the show.

Tom Wheelwright 43:33

Thanks, Keith.

Keith Weinhold 43:40

Yeah, key insights from Tom as always, taxes are complicated. Tom's Network helps sort it out for you. We've already covered a lot of ground on this week's episode with raw land values as built, proposed tax plans and how to reduce your tax burden within the existing tax system. Tom and I talked, and he will be back yet again with us later this year for more tax wizardry. Now, just recently here, Kamala Harris proposed a smaller capital gains tax hike than Biden. She's starting to put sort of her own policy spin on things, breaking with the President on the size of a proposed increase on the capital gains tax rate that is a 28% top tax rate when investments are sold for those that make a million dollars plus. So that's more than the current 23.8% top rate, but less than the 39.6% rate that Biden had supported all income is taxable. Therefore it is axiomatic that the fastest way to increase your ROI is to work with a tax advisor that can find you all of the biggest deductions right away. You can read Tom's book Tax Free Wealth, get a good system of documentation going and get connected with Tom's team. At the end of an episode at times, I like to leave you with the most actionable resource on the topic that we covered. You can schedule a free call to see how Tom's team can help you out. At getricheducation.com/tax. That's getricheducation.com/tax. Until next week. I'm your host. Keith Weinhold, Don't Quit Your Daydream.

45:33

Keith Weinhold 46:01

The preceding program was brought to you by your home for wealth, building, getricheducation.com.

Direct download: GREepisode519_.mp3
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Mon, 9 September 2024

A prominent Florida Builder and #1 Wall Street Journal Best-Selling Author joins us to discuss the benefits of build-to-rent properties, including affordable housing and attractive mortgage rates.

He has already done all the work for investors, offering new build income properties that are sometimes rented.

We discuss the importance of median value and affordability index in choosing profitable areas for long-term real estate investments.

Learn about new build income properties with rate buydowns as low as 3.75%.

Important market dynamics and investor strategies, including the trade-offs between cash flow and equity growth.

Show Notes:

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517: The Future of Homebuilding with George Gilder

Complete episode transcript:

Automatically Transcribed With Otter.ai

Keith Weinhold 00:01

Welcome to GRE. I'm your host. Keith Weinhold, a great way to forecast the future of the real estate market is to look at the level of new building. I've got a surprise to reveal there then a focus on one of the hottest in migration states. That's popular because it promises cash flow for real estate investors today on Get Rich Education.

00:24

Since 2014 the powerful Get Rich Education podcast has created more passive income for people than nearly any other show in the world. This show teaches you how to earn strong returns from passive real estate investing in the best markets without losing your time being a flipper or landlord. Show Host Keith Weinhold writes for both Forbes and Rich Dad advisors and delivers a new show every week since 2014 there's been millions of listener downloads in 188 world nations. He has a list show guest top selling personal finance author Robert Kiyosaki. Get Rich Education can be heard on every podcast platform, plus it has its own dedicated Apple and Android listener phone apps build wealth on the go with the Get Rich Education podcast. Sign up now for the Get Rich Education podcast, or visit getricheducation.com

Corey Coates 01:09

You're listening to the show that has created more financial freedom than nearly any show in the world. This is Get Rich Education.

Keith Weinhold 01:25

Welcome to GRE from Plains Georgia to White Plains New York and across 188 nations worldwide, you are listening to Get Rich Education. I'm your host. Keith Weinhold, we are an educational platform. And if you haven't yet, I really suggest that you spend 100 hours learning how to invest in real estate. The average person works 2000 hours a year for 40 years. That's 80,000 hours of working for money. I implore you to spend 100 hours learning how to keep it and grow it and leverage it and create income and tax advantages from it. 80,000 hours of lifetime work, 100 hours learning real estate investing. Now, when someone like a presidential candidate produces, still vague talk about building 3 million starter homes in four years. That actually appears just about impossible. Within the existing structure. We would need 2 million housing starts per year from 2025 to 2028, in order to overcome our existing shortfall. And we haven't exceeded 1.8 million in any year in the moderate era, and that's even when demand was extraordinary and interest rates were low. Just you know, look at the reality of what home builders need to actually do, and this is even if they don't have any excessive not in my backyard. Pushback, builders have to procure land, meaning they need to lay out cash far before building, and then they need to jump through zoning and building hoops in counties and cities, in towns, in communities, and sometimes those hoops can reach preposterous levels with substantial delays. Builders need to secure financing, and for most, interest rates are still in the 9% plus range. And then builders need to acquire a whole local network of contractors and subcontractors, and then they need to keep those contractors and subcontractors busy, or else they're gonna lose those workers. So builders have to work to maintain their teams once they found them. And if that's not enough, this is all amidst a historically bad skilled labor shortage, meaning those workers can be enticed to go work for somebody else. As you know, skilled worker demand far exceeds skilled worker supply. So for builders, it takes years of planning and development. In a lot of cases, they sit on land for many years before the market conditions are right for the actual build. Well, look, at least there is finally acknowledgement among our highest elected officials that we do need to address the core problem, but our elected officials proposals aren't really so good, and our country's housing problem is largely a regulatory issue. Later today, we'll talk to a builder that's already done all of this for you, so it's not preconstruction that has new build income properties complete, available sometimes even rented already, and they help you buy down your mortgage rate to a level that's really low. You'll soon learn about it. But first, let's talk more about adding new housing supply in the larger apartment segment. It's something that can help you see the future here, but it isn't getting enough tension outside of multifamily industry circles, and that is the fact that apartment starts are plummeting to 11 year lows. And this is a real surprise to some people, multifamily completions are outpacing starts by the widest margin since 1975 and I mention this because, you know, you probably keep hearing and reading about how apartment construction is at all time highs, but really, that is a story from two years ago. It takes about two years to go from an apartment construction start to a completion. Well, today we're seeing that huge surge of apartment starts two years ago morph into completions. That's the piece to be aware of here. And to give you some idea about the new apartment building, slow down through July, we have completed 314,000 multifamily units, and we started just 193,000 units. That's all according to census stats that year to date. Start total is the nation's lowest since 2013 when we were just building our way out of the global financial crisis. Also a larger share of apartment supply. In this next cycle, it's likely to be affordable housing, because that's where the tax incentives are in the last wave of apartment construction a few years ago, it was more higher end stuff, and the result is today, apartments are oversupplied in a lot of markets, leading to falling apartment rents, or just somewhat stable and frozen apartment rents in heavily overbuilt places like Austin, Texas and a lot of others. But this slowdown in New Starts of larger apartments is why some have bullishness on the multifamily outlook for 2026 and beyond supply is the biggest headwind for apartment investors today. While it is an enormous tailwind for renters, it's good for them, but those dynamics appear likely to shift again. It took an almost perfect storm of variables to push apartment construction to 50 year highs, and it's difficult to see a scenario where construction could re-accelerate back to those peaks. Today's apartment completion levels could mark a high. It's generational. You may never see it again. So to summarize, in the world of large apartments, supply is still up, even outpacing demand in a lot of markets. It all came from a big building wave that began when interest rates were low two years ago. They're mostly upper end places. Apartment syndicators also got hit with higher rates that reset on them, and you've seen the value of some apartment buildings fall 30%. It is bad. But long term, I expect that apartments are going to be fine. New lease ups are absorbing what's out there. The demographics show that renters will continue occupying apartments. Interest rates have already fallen and they're expected to keep falling, and you don't have very many new apartment starts, it's that last piece that a lot of people aren't aware of. So that's the forecast over the next few years for five plus unit apartments. When it comes to the market dynamics for one to four unit properties. I'm going to discuss this with one of the voices of GRE marketplace today. They are a build to rent provider building new construction, single family homes, duplexes and fourplexes for tenants that they sell to investors. Hey, I'd like to welcome in a home builder and property provider serving Florida, basically statewide, known as North America's leading build to rent property developer, and he believes in what he builds and offers others, because he's been a real estate investor himself for more than two decades. Hey, Jim, welcome back onto the show.

Jim Sheils 09:45

Keith, good to be here. Thanks for having me.

Keith Weinhold 09:47

Jim, we have a lot of exciting things to talk about. What you're doing in Florida. You've really helped out a lot of our investors and followers so far. You have some really interesting things to tell us about. Rate buydowns and just how low those rate buydowns are on some new build properties. And I sure want to get to that. But first, why don't we just pull back big picture, and from the 30,000 foot national view, before we talk about Florida, what are some of the important dynamics you see in the real estate market here in late 2024

Jim Sheils 10:16

Yeah, it's been interesting. The media is always late to the party, as you know, Keith, I've seen some interesting stats. You know, affordability nationwide has gone from 480,000 about eight months ago, and now it's down to about 405, so we've already seen the affordability index come down nationwide, and it's hit really well here in Florida. One of the reasons why is there's definitely been some price adjustments on higher priced property in Maine markets, Miami, Orlando, Tampa, areas that we don't build because the numbers didn't work. So that's been really good to see that affordability also, rates are just starting to drop. But here's an interesting thing. A year ago, Keith, the average mortgage payment for the average person buying a home, was 57% of their total income. Now that has dropped to about 44% of their total income. So I'm always looking at affordability and overall median pricing, and that's been a really, really good thing for us. As I had said, second tier markets where you can get affordability, but also great amenities, great lifestyle is where we've always focused on building, and it seems like that is really continuing to have a solid pulse. I love visiting some of those bigger markets, you know, taking my kids to Disney, but I'm glad we stayed out of there, because it seemed a little more temperamental, and we're glad we're in the more second tier markets.

Keith Weinhold 11:39

You cited an affordability index there earlier. Now, affordability still, historically, is not that good, but it's not as bad as it used to be. Tell us more about that index.

Jim Sheils 11:49

Yeah, I always have looked at, you know, the affordability index. Let's just use an example, Orange County, California. I think the median value of a home there is $1.1 million. In Jacksonville it's 305, and so you get a score for based on what is the average family income per price of the home. And it's kind of like your report card. And there's certain areas that have an A, and there's certain areas that have an F. You know, we have lots of investors come to us with you guys too, from New York or Seattle or Orange County. And this is something I look at, what is the affordability index, and just know how they figure out the score on your affordability index. What's the average price of the home in that area, and what is the average family income for that area? And the correlation of those two numbers shows whether you have a good score or bad score.

Keith Weinhold 12:39

And now that we've looked at the national picture somewhat, you mentioned some of the major metro markets in Florida, some of which you specifically stay out of, and that's simply because the numbers don't work for long term rentals. They don't provide cash flow. Tell us more, just in general, about some of the areas that you've chosen and why is there profitable for long term real estate investors?

Jim Sheils 13:03

Yeah, this median value, this affordability index, is so key when we're able to get into home still, you know, Jacksonville is barely over 300,000 as the media now, we're able to cash flow right off the bat. So like Jacksonville is still as the population growth, the economic growth is occurring. It's desirable coastal community, and supply and demand is in our favor. We don't have enough housing, so that's where we focus all of those factors, not only here, but on a smaller scale, in Palm Coast, in Ocala, where we've done a ton with the GRE community. And then southwest Florida. We don't go to Southeast Florida, too expensive, too overbuilt, too high on insurance, but that Greater Fort Myers area, which did experience the highest growth anywhere in the country during the pandemic, which was interesting to watch, we're still seeing a lot of good fundamentals down there. And again, at that affordable range, it makes a big difference when you're buying at a medium priced home is, let's say 320,000 opposed to 580,000 makes a huge difference to whether it will cash flow off the bat or have a negative cash flow. And as you know, Keith, even though we're doing new construction high growth areas, we want to see app cash flow right away.

Keith Weinhold 14:13

Now, you are a builder, you are adding much needed inventory to the national housing supply, where we've had a shortage of millions of units per years, depending on what source you cite in quote there, a lot of the estimates as to the housing shortage really are all over the place. But many sources state that Florida inventory levels just statewide. Here they are back about to pre pandemic levels. So they have recovered. They are back to about 2019 levels. And I think one important thing for people to remember is, well, 2019 was a pretty good, balanced housing market.

Jim Sheils 14:50

It was a normal market. We liked 2019 you know, that was a good market. There was growth, but it was sustainable, more predictable, steady. So I'm happy to be back in 2019. You know, 2020 21 levels there were, there was less than a month's worth of inventory on the MLS that it was dire. Yeah, it was just such a skewed thing. And you've studied this for a long time. So everyone if you say, Oh well, it went from this to this. I love how you talk about 2019 because by all statistics that was a very normal market here in Florida. So we're happy to get back to that, because you have to have a certain amount of inventory level to balance the playing field. We want to see growth, but I'm more of a long term player, as you know, we don't need to see huge spikes, because that can get a little volatile.

Keith Weinhold 15:36

Now, as a builder, talk to us about builder sentiment since, like we talked about before, we are in a falling interest rate environment, mortgage rates are already down about one and a half percent from the recent highs, and the Fed hasn't even begun lowering rates yet. So talk to us more about what those lower rates do to build their sentiment. And we're not just talking about rates for buyers here, which matter, but it's the rate that builders like you that have to pay the typically factory in here too.

Jim Sheils 16:06

Yeah, it's an interesting market right now, Keith, and here's something I want to give great encouragement from as you know, we do build some for the institutions and the larger groups. The little guy, the small investor, has the guerrilla warfare advantage over them right now, because, as you know, we right now have announced financing. We're able to have this builder forward commitment where we're buying large tranches of money for residential mortgages. That means, you know, individuals like we work with all the time, Keith, that buy a few properties, we can get them this incredible financing right now, at 3.75 we're beating the market. You know, you go into a B of A and try to get a duplex finance, you're probably looking at six and three quarters. And we're able to do that because it's residential real estate. Some of our bigger guys, they would buy all of our inventory. But we can't get a institution qualified for these individual investor loans for residential real estate. They have to go to the commercial world. And as you know right now, Keith, the commercial world is screwy. People aren't lending. The rates are really high, and even these big guys have to sharpen their pencils and do their numbers and they go, Gosh, it's not panning out until rates drop. So that means these bigger groups are on the sidelines. And we all hear the complaints, all the big guys are buying all the properties they own 40% well, they're on the sidelines, and our little troopers and investors are building their portfolios in ways they cannot so it's exciting to see now for us too. What's lucky and unlucky is a lot of good builders out there that we're friends with. They can't get financing. The banks have gotten so stringent. So they might even have a good balance sheet and a good track record, but the banks are getting really stringent where Chris and I are. As you know, we were partially acquired by Sumitomo forestry about a year and a half ago. They're a 331 year old company, and when we decided to team up with them, they said, We love Florida and we love build to rent, go, and so now we have zero bank debt, and they've given us a green light to build out all of our inventory. We have five, over 5000 lots in Florida, and we don't have the bank slowdowns. So to find a good builder, you have to make sure they have financing in place, because they're going to be a great builder out there that just can't get the funding to do the job for you. So that's another thing you want to look for.

Keith Weinhold 18:16

Right. And last time I checked, you've got more than 925 current independent income property investors, many of those whom are GRE listeners. Well, we're going to talk more about just how low those rates are. Who participates in the buy down? I already know that most of it's the builder, and just part of it is you, the investor. You're listening to get residuation. We're talking about Florida, build to rent property more when we come back, I'm your host. Keith Weinhold Hey, you can get your mortgage loans at the same place where I get mine, at Ridge lending group NMLS 42056, they provided our listeners with more loans than any provider in the entire nation because they specialize in income properties. They help you build a long term plan for growing your real estate empire with leverage. You can start your pre qualification and chat with President Caeli Ridge personally. Start Now while it's on your mind at ridgelendinggroup.com That's ridgelendinggroup.com Your bank is getting rich off of you. The national average bank account pays less than 1% on your savings. If your money isn't making 4% you're losing your hard earned cash to inflation. Let the liquidity fund help you put your money to work with minimum risk, your cash generates up to an 8% return with compound interest, year in and year out, instead of earning less than 1% sitting in your bank account, the minimum investment is just 25k you keep getting paid until you decide you want your money back. Their decade plus track record proves they've always paid their. Investors 100% in full and on time. And I would know, because I'm an investor too, earn 8% hundreds of others are text FAMILY to 66866, learn more about Freedom Family investments Liquidity Fund on your journey to financial freedom through passive income. Text, FAMILY to 66866.

Garrett Sutton 20:28

This is Rich Dad advisor, Garret Sutton, to grow your wealth. Listen to the always valuable. Get Rich Education.

Keith Weinhold 20:45

Welcome back to Get Rich Education we're talking about half of progress real estate investing in high growth Florida, with a renowned build to rent provider there. And I think a lot of this really comes down to trust with the fluctuating interest rate environment that we've had, some people don't trust certain builders or that investor to go ahead and put down a deposit on a vacant lot and wait 12 months or more for it to be built. But we're not talking about pre construction here.

Jim Sheils 21:16

No, no. Since we steamed up with Sumitomo, you know a lot of good builders again, they can't even start the project until they have a a buyer with a deposit down. That's the requirement for the bank to give them the money to start building. We don't have bank requirements, so we're building on our own dime, and so we are having properties completed before you even have to make an offer on them. So these are finished properties, sometimes a tenant already in place. I know just this month, there's been a few GRE people very happily stepping into pre rented homes. So you don't have to wait that period. If you're ready to move your money or have a 1031 exchange, we can fulfill those no problem, and close within 30 days Our in house financing, Keith, which I know we're about to go over, I want to make sure people know this is for not only our single families, but our duplexes and our quads as well.

Keith Weinhold 22:02

Tell us more about that in house financing that's something of great interest to people, and especially with these mortgage rate buyouts.

Jim Sheils 22:09

Yeah, everyone says, Oh, I wish I had locked into a mortgage before June of 2022 right? I mean, for every time we heard that, Keith, well, now you can and what we're able to do since we have the balance sheet we have now, with teaming up with this bigger company, banks will allow us to do what's called a builder forward commitment and buy large tranches of money. We're in the money buying business, I guess, now, and we have to commit to large amounts of money, but by doing that, we're able to pay fees upfront to buy down the mortgages. So right now, our most popular rate is 3.75. You as the buyer, and these are called discount points, which I've heard Keith talk about. You're bringing in a little under two discount points to get the 3.75 rate. And you say, Okay, well, Jim, we're bringing in a little less than two points. What are you bringing in? We're not really supposed to talk about that, but here's what I can tell you, do this test, go to one of your mortgage friends, or your B of A or Wells Fargo, and ask it what it will take for you to pay to buy down a rate for 3.75. Now, first of all, they will not allow you to do that much. We are on a more high volume schedule that will allow us to do that, but let's say, if they would, here's what the feedback we've got. If you were to try to do this on your own, Keith, you or I just walking into our bank, you would have to pay anywhere from 12 to 15 points to make this happen. Gosh, and that was the advantage of working as a collective group like we do together, you and I in our investor community, because now that we're able to do volume, it benefits us

Keith Weinhold 23:39

all. No one really knows where interest rates are going to go. I think it's pretty foolish to try to predict them, but very few people think they're ever going to drop to the levels that we saw during the depths of the pandemic, 3.75% if you get locked in there, it's pretty unlikely that the future market is going to meet that down the road at all and tell us more about that product type, the single family homes, duplexes and fourplexes that this is available on. And of course, they're all new build.

Jim Sheils 24:09

Yeah, we do a combination of new build on all of these. We found, Keith, a lot of build to rent. Companies really only focused on the single family home, but we found, you know, to increase rental yield and overall returns. There was really a lack in the market for duplexes in residential areas and quads, again, and those are close to commercial deals, without the commercial financing, they allow more affordable rent in more residential areas that people can afford and want to be in. And we found through the pandemic, these had a greater calling to them than, let's say, a large apartment complex. You know, people want to be a little more spread out, have their own yard, like in a duplex, and they get that there, but they get it at a fraction of the price that a complete single family home would be at. So we found, as you know, most of our investors, our average client, buys three to eight properties with us, and no surprise, they. Buy a mixture of single family duplex and quads. I know we agree on this. Keith, the single family home has had the best history of all of great equity appreciation, and the duplex might lag behind that a little bit, but it's got a better cash flow. So I will always do little trade offs and combo my own portfolio to make up for two of those. And that's what our counselors usually coach our people. I know yours do as well.

Keith Weinhold 25:23

Yeah, the economies of scale for the real estate investor really can be there long term with duplexes and fourplexes, and you're really helping fill a need. Some months ago, I talked about the mmm multi families, missing middle, about how so few duplexes, triplexes and fourplexes are being built today, as compared to when you had about three times as much construction in those property types that you did in the 1980s a lot of that's really gone away. You're really bringing it back. We talk about some of the areas where these are built. You know, Jim years ago? Well, really about 10 years ago, when I began this show, I was often talking about how I want to be invested in Metro statistical areas that have a population of at least 500,000 to 1 million people, in order to get a diversity of economic situations there, because you do need rent paying tenants. But so much has changed since then, starting four to five years ago, with the work from home movement, I'm more open to more outlying areas than I had been previously. So tell us about some of these areas that you choose to build in. In Florida.

Jim Sheils 26:29

yeah, you know our hub market where we started doing rehabs many, many, many years ago was Jacksonville, Florida. Yeah, and we still are headquartered here, but Jacksonville, again, is the most affordable coastal city, I believe, still on the East Coast, which brings great fundamentals. It hits both of your things, Keith, where it is larger, but it has more of a sprawl and that larger population and the fundamentals look really well again, that overall median price is still very low. And we branch down to Palm Coast, which is a little more of a higher end area, but a bedroom community, to Jacksonville, the silent soldier, the one that really surprised us the most. I think you remember, this was Ocala. In fact, when Christopher said, Do you want to go start building Ocala, and this is about a decade ago, I said, Wow, Ocala, isn't there only, like, some horses out there? Yeah, now he's a horse guy. So he laughed, and he said, Oh, sure enough, I put my foot in my mouth. But Ocala, the amount of growth that we've seen out there has been incredible. And Ocala is really well placed because it's just below Gainesville, where the, you know, there's the medical centers, the university, and it's just north of the villages, which is the second largest retirement community and growing. Not only that, it has its own economic infrastructure, but it's really well placed in the difference of a price of a home for a starter family in Ocala compared to like Northern Tampa. There is no comparison. You're talking half. So we like that. And also with rents, it's got a great lifestyle. And then southwest Florida again, Southwest Florida, Keith, we're very lucky that we took some risk there. A lot of builders would like to be building down there, but as you remember, we took some big risks in 2020 we talked to some of our friends and said, this can be really good or really bad for real estate. We went with the really good and we loaded up on, well, a lot, over $20 million worth of land at the pre jump prices. Now we're into land right down there so we can get them built right for you guys still make a margin for ourselves that other people that they're trying to get land today, they just can't do and Southwest Florida has been a really good market for us. Had that hurricane there a few years ago, and all of our new construction properties did well. In fact, of almost 300 properties that were under construction, we had four that needed insurance claims, and those four, Keith, well, we had just put up the freestanding walls. We hadn't been able to tie the roof on before the winds and the winds knocked the walls over, and that's it. But there was no flooding, and that's why you get an insurance break. And all the markets that we're in, we always hear, Oh, you can't get insurance in Florida. And I kind of giggle and say, on which properties? Because there is a very different treatment for a new construction property built 2004 or newer, compared to a property built 1957 on lower ground.

Keith Weinhold 29:02

Yeah this is such an important thing to bring up. Property insurance premiums have been hiked substantially on Florida, existing, older build properties, not the post 2004 ones like Jim is talking about here and yeah, for those that don't know, Ocala, there in Central Florida is known as an equestrian area for horses and your business partner, Chris, that's his big hobby. So yeah, when you first went there, you were with Chris. You were like, are you just trying to get there because you want to be around horses more and what? But now there's actually a good fundamental reason for this, where it makes sense to build there. Well, Jim, why don't you talk about how you've specifically helped one of our listeners, or the typical buyer there in how that process looks, including an approximate timeline to get them from the time where they submit an offer all the way through to closing.

Jim Sheils 29:52

Yeah. Well, you know, our team and your team work together. We want to make sure we set people's goals and expectations. Up front. What are you looking for? What are you trying to get into? If someone says to me, Look, I'm looking to get into a great starter home with the lowest basis and highest cash flow, I'm gonna say, Okay, let's look at Ocala. They say, Look, we're looking more long term. I'm more of an equity growth player. Yeah, I want cash flow. I'm gonna say, Okay, let's look at Palm Coast, or southwest Florida. Together with our teams and our property counselors, we try to assess what are your needs and where are you wanting to go. Now, all of our vehicles will get through there, but some a little better than others, depending on the plan you want to put together. And so once we do do that, what we like to do is go through properties that seem to match what they're most wanting. We'll go through the performance. We'll look up the site maps, we'll go through the different fundamentals of that direct area, and then, if it seems to make sense, first thing we got to do is get you pre qualified with our in house lender. All is that a go? Well, then we can make an offer, get it in. We have a whole onboarding process. You know that we've done hundreds and hundreds and hundreds of time, and now we're over. I know I laugh because we talked recently and you said, I think you're at a 925. Investors, we're over 1000 now, so we're continuing to grow. But again, we've tried to make it fluid, where our people are part of the process, but never alone. We answer the questions on the financing help get you the directionals on the insurance now, you can use whatever insurance company you want. 99% of them use the company that we recommend. We have no financial affiliation with them. But everyone asked years ago when Chris and I started this, well, who do you use for insurance? Who do you use? So we just gave them who we used, and this person usually undercuts and better coverage than most. So all those pieces Keith with going through that and again, this is about a 30 day process of getting qualified, once you pick the property, submitting the contract with your 10% deposit, doing your onboarding for Property Management and Insurance pieces. And then, obviously you don't have to come here to see us for closing. We do all of our traveling closings for you. And most important thing I like to set up with PM is, where do you want the money wired?

Keith Weinhold 31:59

That's a great question. Well, yeah, I mean, this is a great answer for so many of our listeners, those super attractive rate buy downs. And then the big thing is, is, in many cases, you're not waiting and waiting and waiting months for the build to take place. Well, Jim, before I tell our listeners how they can connect with you over there, do you have any last thoughts overall with anything that we did touch on or did not.

Jim Sheils 32:22

I want to encourage people, if they're not looking to get in the next to real estate in the next two to three years, not a big deal. But if you're looking to get in sometime over the next year, then I would really look at what's happening, things you talk about with the rates and the interest, because I do believe that institutional money within the next six months, it'll be interesting when we reconnect, Keith, that are going to start coming in and buying up more residential real estate. However, their hands are tied right now. They cannot get the financing that the smaller guy can. So whether it's with us or someone else, take advantage. Take advantage. David and Goliath, this is a great opportunity where the big guys cannot keep up with you, because they can't get the financing and insurance rates that you can so take advantage.

Keith Weinhold 33:03

Well, I specifically wanted to have you on today because it is an opportunistic time. They serve Florida with new builds. Learn more about their properties and even get some under contract. If you so wish, you can do so by contacting your GRE investment coach. If you don't have one yet, you can do so at GREmarketplace.com it is free or at GREmarketplace.com/florida. Jim, it's been great having you back on the show.

Jim Sheils 33:32

Thanks having me. Keith, good seeing you.

Keith Weinhold 33:39

Yeah, an excellent update on Florida build to rent properties. A lot of our listeners are asking about these new build properties with 3.75% mortgage interest rates, and you are not the majority participant in the rate buy down either. Next week, who I consider the foremost tax authority in the entire world will be back here with us. Tom Wheelwright is going to discuss presidential candidates, tax plans, whether you should be scared about a tax on unrealized gains and a lot more. Also on a future episode, I'm going to talk about the land that is the vacant land that comes along with your rental property, what to look out for and what to avoid. It's really a little discussed subject that we haven't talked about here before. To learn more about Florida, build to rent property with those attractive rate buydowns, start at GRE marketplace.com Until next week, every host, Keith Weinhold, Don't Quit Your Daydream.

34:45

Nothing on this show should be considered specific, personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own. Information is not guaranteed. All investment strategies have. Potential for profit or loss. The host is operating on behalf of Get Rich Education LLC, exclusively.

Keith Weinhold 35:13

The preceding program was brought to you by your home for wealth building. Getricheducation.com

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Mon, 2 September 2024

Futurist, Technologist and Author of many titles including the classic “Wealth and Poverty”, George Gilder joins us to discuss supply side economics and the transformative potential of using graphene material in various industries including real estate.

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