Let’s talk about five real estate advantages as an investment vehicle versus other investment vehicles out there. The first one is cashflow. When done right, real estate can produce cashflow on a monthly or quarterly basis back to you, real money that you can spend, you can buy food with, pay your mortgage, take your kids to the movies with, spendable capital. There’s a big difference because you might have a million dollar 401(k). How much money is that 401(k) paying you every month? Zero. Is it your money? Sure it is. But can you go get it? You know the hoops you got to get through to get that money. Is it really yours or you’re in some kind of weird partnership here with your employer where you got to leave it alone for decades?
Cashflow coming in every month or every quarter is a massive advantage, and that cashflow can be tax-free. That can be tax-free income. I’ll touch on that in a minute.
Second is leverage. The key to any successful enterprise is leverage. A company is leveraging the employee’s time. If you’re an employee, you are leverage for your company. As real estate investors, we have the massive advantage of being able to use the bank as our biggest partner. They might be lending 70 to 80% of the project at 4 or 5% or maybe 6% interest rates depending on when you’re watching this video. Hopefully not more than 6% but you never know.
We’re using the bank as our biggest partner. Now, if you’re going to go open up a startup or a franchise or something like that, is the bank going to give you 80% of the money to do that? Absolutely not. If you’re doing real estate investing, they’re going to give you that money because they know there’s dirt, there’s a building, there’s an income stream. They love lending on real estate. We love to use leverage from the bank because they’re a fantastic business partner and they’re going to give us the lion’s share of the capital to go do the deal, which is unheard of in any other kind of a business model. If you walk into Chase or Bank of America and ask them for a hundred thousand dollars to go invest in a stock, you’d get laughed out of there. But you go ask for a million dollars on a piece of real estate, it happens all the time.
Depreciation. This is a really exciting thing that we can do, and I’ll just touch on it at a high level. But let’s say you’ve got a building and we’re going to say that the value of that building is going to depreciate over 27 and a half years. Every year we get to take a little bit of a loss and that’s good because that’s how we receive that tax-free cashflow. If you’ve got a little rental house, you can take a little bit of depreciation every year, talk to your CPA about that. I, myself, I’m not a CPA attorney or dispensing financial advice. Just talking about my experiences here. But you can talk to your CPA about how to use depreciation to take a little bit every year as a loss on paper. But what we can do on these larger multifamily projects is really exciting. We’re going to take the building and break it down on all its component parts. We’re going to take that depreciation from 27 and a half year, we might take it down to five years or seven years.
Let’s say over five year ownership cycle on a multifamily property. We could take massive amounts of depreciation in the first couple of years so it’s not uncommon to receive money from a multifamily investment, the quarterly cashflow I was talking about, and also receive a giant paper loss on your tax return. It’s the best of both worlds and really this is the government’s way of incentivizing real estate investors to go out and do what we do. Obviously, it’s perfectly legal to accelerate this depreciation, but it’s really a magical thing when you can receive income and receive a paper loss.
If you’re a high income earner, you’re a doctor, an attorney, dentist, something like that, where you’re really getting slammed on the highest tax bracket, well, getting a loss, a paper loss from a real estate investment or a handful investment … I mean, I’ve got hundreds of thousands of dollars of paper losses from deprecation every year from my investments that come off of my income and it’s the thing of beauty and your CPA can walk you through all that. But I just talk to people that don’t know about that and it’s a real eye-opener. Huge advantage to real estate investing.
Tax advantages. There’s a couple here but two I want to talk about specifically. One is a 1031 exchange. This allows you to take profits from a real estate sale, roll it into another piece of real estate and not pay taxes. Now, it’s a deferment. Meaning, you’re just kicking the can down the road but that is an option. Now, is it complicated? Sure. But it is a tax advantage available to you in real estate that’s not available in a lot of other investment vehicles.
Another tax advantage is let’s say we go buy a property and improve it, we can refinance out some of the investor equity and take it back tax-free. That is a huge advantage to be able to return 20, 30, 40, 50, a hundred percent of investor capital after improving a property and give it back to investors tax-free. It’s a thing of beauty.
The last thing I’ve got here is appreciation. In general, real estate appreciates over time. Now, we know markets are cyclical. We’ve been in an upmarket for a very long time. Inevitably there’s going to be a downturn at some point. But over time real estate tends to appreciate. We’re also inflation protected here because as the purchasing power of the dollar erodes, cost of goods go up and cost of services go up and rent is one of those services that’s going to increase. If you are owning rental real estate, let’s say you’re part owner on an apartment complex, well, as the value of the dollar erodes, rents are going to climb naturally. Luckily we live in a free market society where the cost of goods and services can adjust themselves based on supply and demand. If the purchasing power of the dollar goes down, rents are going to go up. We’ve got an inflation protected investment when we’re investing in real estate.
High level overview, this is maybe for somebody that hasn’t invested in real estate before, but five of the reasons that we love to invest in real estate and we’re excited about continuing to do so. Thanks.