Latest / The Jon Sanchez Show / How One Rental Property Can Become A Multimillion Dollar Portfolio
Transcript
- Jon G. Sanchez: Welcome to the John Sanchez show on Newstock seven eighty KOH with ⁓ Dwight Millard on Q Home Loans and Aaron Clark of Adrility. ⁓ right. With ⁓ once again, very volatile session. ⁓ more so on the Dow side. Even though the Dow finished with a modest loss or excuse me, with a modest gain, the Nasdaq again was under pressure, but had nothing to do with this ⁓ situation, as I said. ⁓ overnight, ⁓ to finish up on this story, overnight the ⁓ Iran I ⁓ ⁓ military they haven't claimed that they've done this yet, but the US is saying it finally. Trump said no, it wasn't Iran and Now they're saying that it is. Iran ⁓ downed a ⁓ an Apache helicopter again. The ⁓ two crew members ⁓ got rescued by a ⁓ a US military drone boat, ⁓ so they're safe ⁓ back at home. But Iran said a f ⁓ about an hour ago foreign forces in proximity to our territory are at a constant risk on account of their own human errors, plane accidents, or potentially being caught in crossfire. ⁓ to reduce risk, best solution is for them to leave. Adding, we prefer language of diplomacy, but speak other languages too. So again, this news broke during market hours. Market just brushed it aside, thought for sure it would be a catalyst for it to go down. It didn't. matter of fact, oil price, I it really is. Oil prices actually plummeted today, ⁓ down $3.10 to a close of $88.16. So once again, very Teflon, i.e. resistant market. Aaron Clark, Edge Realty: That's crazy. Jon G. Sanchez: Here's how we finished up for the day. Dow gained 86 points after again being down triple digits, up triple digits, finished just with a you know very small gain of 50,872 was the closing level. NASDAQ, we saw it and it happened mid-morning, no news behind it. All of a sudden the chips reversed the chip stocks, the semiconductors, just like we saw on Friday. It looked like it could very much be almost a bloodbath, like we saw on Friday. NASDAQ ended up reversing. Chip stock still finished down dramatically. Again, no news behind it. ⁓ but the Nasdaq finished down two hundred and fifty one points, ⁓ one ⁓ excuse me, point nine seven percent loss to twenty five six seventy-eight, and the SP down nineteen points a quarter percent to seven thousand three sixty-five. Gold prices down seventy-two dollars and seventy-six cents to ⁓ four thousand two ninety sixty an ounce. And ten year treasury, Ms. Millard, two basis point decline, four fifty-three was your tenure close. How did we do on the ⁓ to the ⁓ thirty-year mortgage? Dwight Millard: Well, yeah, so John, I mean, go figure when you miss a day on the on the radio, you c everything goes backwards, right? I mean, we're we're at w so we we're unchanged is the good news, but six point six eight on the thirty year fixed average. I mean, i i you know, we I think it was just a week and a half ago, John. We were talking, ⁓ we might get inside that six and a half. You know, now we're at six point six eight. I mean you a and ⁓ it was on a day that was actually okay. You know, we didn't get Jon G. Sanchez: You're right. Yeah, yep, yeah. Dwight Millard: I mean the mortgage backed securities were okay, but it so on an okay day we go up. Jon G. Sanchez: So so let me let me let me the the how how did you how did you and I don't remember on Friday, I have to go back to my notes how the 10-year treasury yield did on Friday when we had the big market sell off. ⁓ I'm thinking you you probably saw rates, believe it or not, going up. Do you remember? Okay. They did go up. Yeah, which again, yeah. Dwight Millard: We did. W rates did go up. Yeah. Yeah. I don't I don't remember what the tenure did, but yeah, rates went up. ⁓ yeah, it was i it's been no. Jon G. Sanchez: Which again makes no sense because it should have you know, Friday was like I said, a bloodbath. It should have been a flight to quality, which by the bonds yields go down, but the opposite happened there. So let me ask you this. Let's say, as I keep saying over and over again, I don't see a quick end to this war. I just I don't trust i ⁓ Iran, obviously. I don't trust their relationship with Israel. They're they're good they they're it's gone too far, they're too deep. Something dramatic is gonna have to happen. ⁓ and I hate to say this, but this is my own personal opinion. Let's say this conflict escalates, Dwight. What's the mortgage world predicting at this point? Are you seeing any modeling going on out there that says if this war escalates, this is what we can have happen? Dwight Millard: John, I think the best indication you get is from some of those ⁓ Fed members that are breaking away saying, hey, we may just have to raise rates. And I think that's kind of the sentiment throughout the mortgaged world is that, you know, w we may be higher than higher for longer than longer. Right. I mean, remember that's what we've talked about. I mean, it's the double now. ⁓ it I don't know. Aaron can speak probably to the activity. There feels to be some good activity, but I think it's more ⁓ Jon G. Sanchez: Right. Right, right. Yep. Yep. Dwight Millard: you know, hope and a prayer type of activity. You know, I'm gonna go out and hope that rates come down and pray that they do. So I I you know, I don't know p if they're getting solid and serious. Jon G. Sanchez: Right. Yeah, Aaron, that's I I wanted Dwight hit it right on the head. That was a question I was going to pose to you, Aaron. Is you're saying things are getting really, really busy out there right now. What are you hearing from people? Are you know, when it comes to everything from the price of the house to, hey, yeah, I'm pushing almost a seven percent mortgage, but hey, I can, you know, always refinance at that point. What are you actually hearing in the field these days? Aaron Clark, Edge Realty: So people that are margins where they're right on the edge or the cusp of being able to qualify for what they're looking for or not, they're getting pushed out because they're getting pushed all over, right? So a lot of those guys are just kind of sitting back on the sidelines right now and saying, Okay, I'm gonna wait till either things stabilize or the market changes 'cause we're kind of in the run up of the the the heading towards the busiest part of our season right now. So we d we have the natural ramp up that sort of gives us a little extra support. ⁓ but by no means is it crazy or anything like that. You know, good stuff is moving with a couple of maybe like multiple offers, but you know, two, three, four, nothing crazy. But the stuff that's pretty similar to everything else on the market, it might sit for a while unless it's competitive pricing or it's been updated or something like that. As far as, you know, go ahead. Jon G. Sanchez: Right, right. Mm-hmm. I'm sorry to interrupt you just real quick. I I had a ⁓ phone call today with a good friend of mine who's a yacht broker down in Newport Beach. I mean, one of the wealthiest areas, if not the wealthiest in the world or in the country, right? And he was saying, yeah, of course, higher fuel prices are are ⁓ are a problem. ⁓ but he's saying yacht sales, obviously you're dealing with the upper echelon of of economic society. He said they're just terrible right now. They're just terrible. People, exactly as both of you have said, people are saying to him. I'm just gonna wait a little bit. I'm just gonna wait a little bit and see what happens. ⁓ many of them being in California, the the the political side has just got everybody freaked out there. But on a on a more national basis, yeah, he said they're just a lot of people just sitting on the sidelines, you know, prices of yachts keep coming down, down, down, and they're still not buying yet. So interesting, not another high, high-level asset class there. Aaron Clark, Edge Realty: Yeah, exactly. And and we are seeing that with more of the higher end pricing homes where they're sitting longer and I and when I say the higher end pricing, I mean not the tier that probably isn't affected too much by anything, but you know, just below that higher price, you know, your your mid one, one mil, you know, two, you're seeing a little bit of pullback there. ⁓ and like when Corey was talking about ⁓ last week the the report Jon G. Sanchez: Are you? ⁓ okay. There you go. Right. Mm-hmm. Aaron Clark, Edge Realty: For the month of May, and how we're talking about the increase in the median sales price. So much of that is driven by just a few of those higher end homes that are still moving that are pushing those numbers because you just have so much less action. So it's really not a positive indicator as far as like if you know how to read the report of saying, ⁓ my gosh, the market's on fire, blah, blah, blah, blah, blah. Like you have to look at all the numbers, the new homes that are coming on, the homes, how long it's taking to sell, et cetera. Jon G. Sanchez: Right, right. Mm. Mm-hmm. Yes. Yes. Right. Well, like Corey said, if you throw out he said there was a handful of of those higher end homes, the you know, I I think you said one was five million or something like that. ⁓ yeah, if you throw out that probably that top what top five, ⁓ and then get down to the numbers, I bet we wouldn't have been at a record median price as the report indicated. Aaron Clark, Edge Realty: Yeah. No. We would probably be less than what we were, it would be my guess. Dwight Millard: Yeah. Jon G. Sanchez: Yeah, that's kinda what I'm thinking too. Interesting. All right. So you're now up to date what's going on a local basis, the mortgage side. Now let's get into some strategies when we come back. Once again, how one rental property can become a multi million dollar portfolio if you do it right and you watch the tax side of things. We're gonna share those strategies with you with Aaron and Dwight. Aaron Clark, Edge Realty: Yes. Dwight Millard: Yeah. Jon G. Sanchez: Welcome back to the John Sanchez show on New Stock 780 KOH with Aaron Clark of Israelity and Dwight Millard of OnQ Home Loans. All right, once again, a way ⁓ interesting day in the market. Let's just put it that way. 86 point gain on the Dow. NASDAQ lost 251 due to weakness in ⁓ number of ⁓ chip names specifically, drug ⁓ lot of the NASDAQ down, SP down 19 points. Now, let's get to our topic once again: how one rental property can become a multi-million dollar real estate portfolio if you follow the right strategies. So Let's get down to this, guys. There's a lot of things we need to cover. So remember, I'm I'm gonna use a saying why bigger can be better. Okay, I'm gonna kind of start this thing off. So, Aaron Dwight, here's the reasons, right? That you guys listed. Number one, most investors start with a single property, right? Kind of cut your teeth. It's easy to understand the financing. Management, yeah, not too bad, right? You got one property, you can most people can handle that. But you get into more properties, equals more maintenance, equals more repairs, equals more tenant issues. Apartment buildings and commercial properties often benefit from the economies of scale, however. Like I said, ten rentals you have, single family, that's ten roofs, ten AC units, so on and so forth. Get into a twenty, thirty unit apartment building, you only have one roof, and so on and so forth. Professional management becomes more affordable when you get into the commercial side and investor transitions from landlord to business owner. You just, it's a different mentality when you own commercial. Now, Aaron, I'm going to turn it over to you. Let's talk about what what you guys have highlighted is what's called the power of scaling. Talk to me what you mean by that. Aaron Clark, Edge Realty: Well, I mean, you know, when you're scaling through buying investment properties and you're going from buying, let's say, one single family residence to a multi-unit complex or whatever, ⁓ obviously the things that you hit are key perspectives, but you're not having to keep generating that down payment over and over and over again for ⁓ for multiple single family residence properties. And that's one thing that people Jon G. Sanchez: Great point. Great point. You're right. Aaron Clark, Edge Realty: A lot of people don't understand that is when you're buying a a four unit. I mean, if you can do it from the perspective, and and a lot of people do this even later in on in life, you can buy a four a four unit, twenty unit, whatever it is. ⁓ you can buy something that you're gonna also live in and you can especially with like a four unit, yeah, it's a great opportunity to come in with very little down payment to get into something. And then you can also take all of that, yeah. Jon G. Sanchez: Yeah, Dwight's gonna cover that. Mm-hmm. I I I want to stop you. I gotta stop you because you you hit on a point that I don't think you think is important, but it is important. That let's go back to the down payment. Okay. So let's go over the strategy once again, right? You meet with Dwight, ⁓ you buy your first single family, you meet with Dwight. Dwight, what are we looking at? Three and a half to ten, twenty percent, depending upon circumstances, kind of a kind of a range, right? Owner occup, no, non owner occupy a single family rental, single family rental. Dwight Millard: R I just on an owner occupied on a primary? Yeah. No, not on Yeah. A at minimum you're gonna be fifteen, but most most traditionally John is twenty five percent down. That gets you that's the best, you know, terms. Jon G. Sanchez: Okay. So, okay, so Aaron, I want to go back to you because this is important. All right. So let's just let's make the numbers really simple. We said last ⁓ Thursday with Corey our median price now 615 and some change. Let's say we're at 600,000, just to make the number simple. Dwight says, okay, great, got good credit and everything, but you know, I need ⁓ 20% down. So I got to come up with 120 grand. Okay. That's just that's just the down payment. Not to mention the, right, Dwight, the closing cost and reserves and on and on and on. Okay, so I do that. I somehow, some way I come up with that. Dwight Millard: Yes, correct. Jon G. Sanchez: Now, I own it, a couple years go by, and maybe I'm making a few bucks on the cash flow each and every month compared to my mortgage and my other expenses. But man, my appreciation happened, right? That $600,000 house is now worth whatever, $7,750. And I go, hmm, I just made $150,000 worth of equity. Didn't cost me really anything. ⁓ I'm not making much cash flow, but man, I've got this appreciation and I haven't had to pay tax on it. Now, Mr. Clark, multiply us from there to your Aaron Clark, Edge Realty: Yeah. So now what we can do is we can take that approach and go into what we would call a ten thirty-one exchange, for example. And we can take that money as well as the sale of that property and we can parlay that, if you will, into like a two unit or a four unit or something like that. So now you're using that same strategy to grow. You're not selling the property and putting that equity in your pocket to where now you're gonna be paying Uncle Sam their X amount of percentage. You're taking that money and you're deferring the taxes. And The reason that the government gives us gives us this ability to do so is because when you parlay that into something greater, bigger, better, you're also investing more into the economy, into the city, into the tax basis and structure. You're bringing in more people for housing. So they look at it as like, well, you're benefiting. So you know. Well, of course it is. Of course it is. Yeah, no, but but that's the idea behind it is to why. Jon G. Sanchez: Mm-hmm. Come on, you cut cut the crap, dude. It it's about the lobbying efforts of your industry to to the you know, the the government's not gonna give us anything free, but ⁓ I Dwight Millard: Yeah, yeah. Jon G. Sanchez: Yes. At least that's what they tell the public. Aaron Clark, Edge Realty: We get to keep doing that. And and I've had people where they've they have five, six, seven homes that they've acquired over twenty years and now they're looking in retirement world. We sold all of them and bought a gas station in Texas that pays them twenty thousand dollars a month on a sixty year lease. And they have to do zero. Zero. They they didn't even pay to put the building on the land. That was it. Jon G. Sanchez: Yeah. Yeah. That's right. That's right. That's right. Zero. Zero. And again, Right. Right. There you go. Okay. You you you just moved us right into the ten thirty one. I thought it would be a little bit later in the show, but you've opened the can of worms, so let's let's explore this. Okay, Dwight, we've got to talk about the ten thirty one. Right, Aaron? Let's let's lay out the rules. If you're not familiar with it, ten thirty one is a tax deferred exchange. Many of you know about it, some of you may not. Very stringent rules you have to follow. So, Aaron, take it away. We got our forty five day, our hundred and eighty day rules, but what else do we need to do? And talk about light kind transfer, which is Not really the case. Aaron Clark, Edge Realty: Yeah, so I mean you have to you can't one, you can't roll that money into a property that you're gonna move into. Well a lot of people go, Well, can't I buy a vacation home in Hawaii? No, you can't do that. Also, you need to buy something that is an improvement from what you had. So you need to increase the the amount or increase the size or increase Jon G. Sanchez: Right, personally. And let's stop right there. You sell a house a pr a property, investment property for seven hundred thousand, you better buy something worth seven hundred thousand dollars seven hundred thousand and one dollar or greater. Yes, or the deal's blown. Yes, sir. Aaron Clark, Edge Realty: And one. Yep. Correct. Dwight Millard: Can I ask a question real quick, John? So Aaron, if you take the seven hundred, can you ten thirty one a single into let's just say you're gun into a multi multifamily and you can't live in one, correct? But you can't live in one. Is that correct? Yeah, okay. Wanna make sure. Yeah. Right. Right. Yeah. Jon G. Sanchez: Absolutely. Aaron Clark, Edge Realty: Yes. How no, you can't. Cause you're then then it's no longer an investment. It's you're you're breaking, you know, it's like the whole what is it? What's the term? Br ⁓ crossing the corporate veil or whatever. It's kinda like you're doing that whole thing. ⁓ you're intermingling your personal with your business. So no, you can't do that. ⁓ so yeah, you so you again, you take that ten thirty one money and you roll it into multiple properties or whatever. You can also attach a loan with that ten thirty one money. Dwight Millard: Mm-hmm. Yeah. Jon G. Sanchez: Yeah, br yeah. Bring yeah. Aaron Clark, Edge Realty: So a lot of people go, well, if I only have three hundred thousand dollars in equity and I want to parlay that into a a gas station or whatever or complex, ⁓ I don't have enough cash because it's a million dollars and I only have three hundred thousand. You can get a loan for the difference of what you don't have is in that money that you're transferring over is still tax deferred. Dwight Millard: Hey John, I wanna I wanna t touch on that real quick because Aaron is absolutely right. Why people ten thirty one into something like that and don't expand that denomination of cash? I mean, you've got maybe four or five separate down payments into multiple properties, but they get hung up, right, Aaron? They get hung up. ⁓ I 700, I gotta go buy. No, use it you can get a loan on all of it. There's your down payment. There's every and I can use and I get to use the rent credits against the payment. Jon G. Sanchez: Mm-hmm. Mm-hmm. That's right. That's right. Aaron Clark, Edge Realty: Yeah, you can use that three hundred thousand and Jon G. Sanchez: Exactly. Yep. Yep. Aaron Clark, Edge Realty: Yeah, and you can use that three hundred thousand in our hypothetical situation of equity, and that can just be a down payment on a multi million dollar twenty five unit complex that's that's paying the pay. What's that? Jon G. Sanchez: Right. Did the client pay a dime of tax for that strategy, Aaron? Did the client pay a dime of tax for that strategy? Zero. Goose egg. That's exactly right. So the flip side of it is we have what's called boot, right? So in our example, we, you know, client made a $300,000 profit, they ten thirty-one exchanged it into a big commercial property. Cool, we understand that. But let's say they couldn't find ⁓ you know, let's say they sold at seven hundred, so they gotta buy something ⁓ Aaron Clark, Edge Realty: Goose egg. Yep. Jon G. Sanchez: you know, over seven hundred thousand dollars. But we all know and and we all have clients that where we're seeing this. We're seeing people coming out of California, Silicon Valley, et cetera, San Jose, et cetera. They bought their homes, their their rental properties. They built up a real estate portfolio. I'm dealing with one right now back in the 80s. Cost basis is like next to nothing. They're rolling these multi-million dollar, you know, usually two, three, five, who knows however many properties, and they're coming here. And the dollar goes a long ways. What I'm seeing is and Correct me if you guys are seeing the same thing or not. They're not able to spend enough money, right? Because you got to remember, folks, let's make the number simple. You come out of California, let's say that that your whole portfolio is worth ⁓ $10 million, $10 million and 10, $10 million, $200, right? Yeah. Or 10 10 million, yeah, $200, $10 million, $200,000. They come here, let's say they're able to buy a great portfolio of $10 million. That $200,000, they don't know what to do with it. Now what happens? That's called boot. They got to pay income taxes on that money, capital gains, which again starts at 20%. And you can add another little over 3% if you're in a higher income bracket. But they got you the depreciation recapture tax, which is 25%. Easy bottom line, if you're in a state that has taxes like California, easy, you can wipe out 40% plus of your gain. 1031, you can't. But remember, if you don't invest every single dollar, whatever you don't invest, that's called boot. But when we come back, I've got a strategy for you that. And I'm not saying this to criticize you, boys. You know I love you. That Aaron can't do and Dwight can't do, but I can as a registered investment advisor. And I'll share that with you when we return. Great point, boys. go. Welcome back to the John Sanchez show on News Talk seven eighty K which let's get some phone numbers going, boys. Mr. Edge, let's start with you or Mr. Edge Mr. Clark, let's start with you of Edge Reality. I'm looking at Dwight and I'm saying your name. I ⁓ wait a minute here. It really is. Yeah, yeah, kind of. Aaron Clark, Edge Realty: Six seven three six seven three sixty seven hundred. Dwight Millard: It's the same number. Jon G. Sanchez: Beautiful. Mr. Millard. Dwight Millard: two four zero two zero two two. Jon G. Sanchez: Perfect. All right. We're talking about how one rental property can become a multi-million dollar real estate portfolio. We need to do a show, guys, as we were discussing during the break. We need to do a show just on 1031 tax deferred exchanges because it's it is ⁓ very important. Now, I gotta be really careful what I'm about to say because this is a very compliance sensitive area. But I gave the example. So in 1030, 1031's a, you know, portfolio, it doesn't matter how big, I just use $10 million, but they sold $10. $10 million, $200,000, $10.2 million they sold, but now they only bought $10 million worth of properties, right? They just could not find for that smaller amount. Well, if they want to pay taxes, capital gains, meaning depreciation recapture, et cetera, on that $200, they're more than welcome to. But a lot of people don't, right? They want to do a 1031. So we in the industry, you have to be a licensed financial advisor. And I mean, like we are, a SEC registered investment advisor. ⁓ some broker dealers offer this also. ⁓ Is what is called a Delaware statutory trust. And I promise you, we need to do a show on this and probably a separate podcast because there's a lot to know about them. But what they are essentially is you are pooling your money in this example, that 200,000 that that you know Aaron couldn't find a home for, right? He got your $10 million invested, but he couldn't find a home for that $200. So we 1031 the $200,000 in this example into a DST or Delaware statutory trust. What that is, it's a portfolio, a institutional level portfolio managed by an institution, right? Institutional investor, ⁓ institutional real estate company. What they're doing is they're then pooling that 200,000 with other investors. And depending upon the size of the project, ⁓ you know, if it's a hundred million dollar project, I mean, you could see 50, 100 other investors. You have to be an accredited investor, meaning a certain net worth, a certain income, which you know, a lot of people can qualify for. It's not that hard. ⁓ but it's a way to get a 1031 exchange without physically going into another piece of property. So you take that that 200, you 1031 it into the DST, they then take it and they will then pool your money with everybody else, and they go out and they buy investment real estate. Generally, they already already have a project. Usually, like Dwight knows about this one. Dwight's spent some time last year at in Oklahoma, and ⁓ we recently did one ⁓ some student housing. ⁓ in that area. So it really varies. We have another one that we've done, ⁓ what was an Amazon fulfillment center. So the problem is you're locking your money up usually five to seven years, but in most cases, you're getting a monthly check. But the most recent most important thing, you're tax deferring, you're 1031 exchanging that money. I have some clients, right? My clients are tend to be a little bit older. They don't want to do real estate anymore. They just want that monthly check coming in, no phone calls. DST can work with that. Again, there's pros and cons to it, like anything else. ⁓ if you got any questions, just give me a call on that and we can discuss it. But guys, this is how it's done, right? and do I you know, I you what? I want to follow up on this topic on Thursday because get into the financing side and we didn't get a chance on that side. So beautiful job, boys, as always. We will do it again tomorrow on the John Sanchez show.