Real Estate Investors….You Can Win The Single Family Rental Race With Us!

Real Estate Investors….You Can Win The Single Family Rental Race With Us!

Angel Oak specializes in loan options for real estate investors. In fact, we provide many resources for real estate investors helping them to build their portfolios. This episode of Your Mortgage Matters is all about real estate investing today, the single family rental market, and how to beat the competition. This is perfect for seasoned investors, those just beginning, Realtors and anyone just interested in what this market looks like right now.

Hear from an expert on the subject, Financial Advisor Ryan Finch talk about all the opportunities and how to capitalize on the market.

Angel Oak specializes in loan options for real estate investors. In fact, we provide many resources for real estate investors helping them to build their portfolios. This episode of Your Mortgage Matters is all about real estate investing today, the single family rental market, and how to beat the competition. This is perfect for seasoned investors, those just beginning, Realtors and anyone just interested in what this market looks like right now.

Hear from an expert on the subject, Financial Advisor Ryan Finch talk about all the opportunities and how to capitalize on the market.

Hey guys, welcome back to another episode of Your Mortgage Matters brought to you by Angel Oak Home Loans. I’m your host Michael Chabot. Today’s show is all about real estate investing and how it fits into your financial plan. The single family rental market is booming, rates are low home prices are soaring. It’s the perfect storm for an investor. A growing number of people are renting instead of owning due to current market conditions. And the bottom line is that there’s ample opportunity from potential returns by investing in rental properties. Whether you’re growing your portfolio completing a 1031 exchange transaction, or beginner in property investing, this show is for you. Today’s guest is Ryan Finch. He’s a certified financial planner. Ryan’s professional and personal experience, combined with his passion for finance, and specifically real estate has culminated into founding of tangible wealth solutions, and it’s unique and comprehensive service it provides for its clients investing in real estate. Ryan has worked in various dynamic areas of the financial services industry over the past 15 years, including commercial real estate underwriter at US Bank, a financial analyst analyst excuse me for Mackenzie house LLC, special assets banker for co biz financial, and a financial advisor at co biz wealth. As president and founder of tangible wealth solutions. Ryan stepped out on his own to start and found and found tangible wealth solutions to provide a sophisticated approach to advising clients on the real estate portion of their overall portfolio. Ryan, welcome to the show.

Thanks, Mike. appreciate you having me here.

Yeah, it’s gonna be a lot of fun today. I really want to roll up the sleeves. You know, I was fascinated when we first met and chatted about what you do. I think it’s, I think our listeners today are in for a real treat. So before we get started just a few statistics that throw out on the market. single family homes ranked number one in investment prospects according to the 2021 emerging trends and real estate report issued by the Urban Land Institute. As reported in Zillow home value trends report over the past five years single family resident prices have increased by 42%. They’re projected to grow another 13% over the next year. And according to an article on NASDAQ comm rents on single family homes are soaring rents increased 5.3% in April 2021 year over year, which is the largest gain in almost 15 years. Alright, so now that we got that out of the way, the elephant in the room is how did let’s let’s just kind of walk through how you got to this point, and how you became to specialize in real estate within the financial planet.

Sure. So my professional background, it looks like I did it on purpose. But I was always interested in taking jobs that I was interested in and can get get experience I was told actually by my dad that said, hey, I’ve worked with people that say they have 30 years of experience. But then after I get to know him, I find out they did one year of experience 30 times and they never really got better at their job. So he said try and find jobs and roles where you can get more years of experience in your one year of working. So for me for real estate, I was I was fascinated with it while I was in college, and got a position as a commercial real estate underwriter at US Bank. And then I was looking at the balance sheet of our clients and I was like I want to be that guy or that woman. And so after a few years of underwriting, I got an opportunity to go to a development company called McKenzie house and moved over there and we were building senior housing and apartments. And then I had a front seat you know, view of the first financial my first financial crash that I was able to view where we had all this value on paper for our real estate, but no cash flow to keep the lights on. So that company crashed, went bankrupt. And I had to go back to banking, and went back to banking as a special assets analyst and banker so I was working out prom commercial real estate loans. So I was in the middle of seeing what went wrong. You know, there’s a lot of people in deals they didn’t even understand and they just ended up being the last person that was willing to take our call to negotiate and work out the loan. And when I would ask people like Well, do you have anyone helping you? Do you have anyone on your side there was no one on the other side of the table. So after several years of that I was very interested in how do I get on the side of the client and help them avoid some of these major issues I just saw. So I did level one of the CFA got my CFP became a certified financial planner and then moved over to the wealth management side for the company. I was at Kobe as well. And then I was helping people with comprehensive financial planning and real estate was really my differentiator. I love that component. And then after several years, decided I wanted to go out on my own went to everyone I worked with and said hey, if I don’t compete with you for stocks and bonds, and I just help people with real estate, would you be willing to send me all your clients I’ve been helping everyone I worked with their clients on real estate anyway. And I got the thumbs up from everyone said yep, if you do just real estate don’t compete with us in our space. We’d be happy to work with you all the time. So when on my own with the goal of helping people invest In real estate in a methodical logical way, and, you know, really figuring out, not just Is it a good real estate deal, but is it a good real estate deal for me. And so matching those things I felt was really important because there could be a really good real estate deal, but the way it’s structured and what it is, doesn’t make sense for this person. So I feel like I’m out there, fighting the good fight, trying to just help people get, you know, statistically get things in there on their side, so they have a better chance of success, we can never guarantee it. But, man, there’s some stumbling blocks that we can help people avoid to really increase those chances.

Yeah, especially when you’re first starting out, right? It’s a daunting process. So you’re basically taking that learning curve and squashing it down, which I love. Is there anybody else in the industry that does what you do?

I haven’t run into any other financial advisors that do solely investment, real estate. So we’re very unique in that niche. We have some who do some of it, but not not the way we do it. And so yes, we’re pretty unique. With how we’re set up was really focusing on…

Yeah what I love is that you know, you you were a real estate, you know, you you underwrote loans, so you understand that side of it. Yeah, you’re a financial planner, so you understand the overall financial plan and how to grow wealth. Yep. And then you come in and specialize, which I just absolutely love it and fascinated by it, that you just come in and specialize and say, Hey, we want to help you grow that real estate portfolio. Because, you know, especially after the market crash of 2008, real estate kind of got a bad name. But I think you would agree that real estate is still a phenomenal investment for long term wealth.

Absolutely, I love it, it has a lot of advantages to it. And I thought was interesting. I’ve been invested in single family rental properties, I bought my first property when I was 19, in college, and I’ve always just really liked it, it’s felt very tangible to me, which is how I named my company. And what I was amazed is Oh, eight through about 2011. I got all kinds of questions. Why do you still like buying those single family homes in illiquid and you got to deal with tenants and, you know, it’s all the negatives and challenges of real estate, which those never doesn’t go away. And it’s just fascinating is then, you know, bought some really good deals in Oh, eight 911 12. in Denver, we saw incredible appreciation, incredible rent growth between 2012. And now, and I don’t get near those questions very much anymore. Just you know, a few people who got burned or hurt in real estate, may ask those. But now, you know, we’ve come through that we’re in a different part of the cycle, and people are much more positive. And those things haven’t gone away. I feel like there are things you need to do to plan around those and to mitigate those risks. But it is interesting, because yeah, there was a couple years there where everyone looked at me like, I was crazy. And you know, how could you deal with that. And I was like, man, but this is, I like when people are questioning because this allows me to buy good deals, as opposed to when I’m looking for a deal. And there’s hundreds of other people just like me trying to find the same one.

So let me ask you this, that prompts a really good question, right? Because everybody who wants to invest in real estate, especially first timers, they want a good deal. They want the greatest deal? I I don’t know, you know, as a mortgage professional myself, I don’t know. And that’s why I’m asking you. Can you still get into the market? Now if you’re you’re just starting out because of where appreciation is prices are and turn a profit and be profitable?

Yeah, I do think so. I think one of the things you have to do is, if you’re not looking for, you know, home to move into and become a rental in the future, but purely buying an investment property is I think you have to open yourself up to other markets. Because I do think that if you’re myopic in the market you live in which I mean, there’s a lot of arguments of why that’s a little that’s easier. But in Denver, for example, we’re, you know, if you want to buy a home, you’re going to be paying four or 550 600,000 for a house, and it just got to rent for 20 202,000 a month, maybe 2500. And when you do the math, taxes, insurance, takeout Prop, takeout maintenance reserves, there’s really no actual cash flow there. And now you’re just banking on appreciation. Well, if you’re getting started and you’re planning to build a real estate portfolio, if you buy those types of properties, the only way to get additional cash, and to build and buy the next one is to continue to lever up. So I got a lever up take advantage of my increases in value. And then I buy the next one. Well, it’s a really slippery slope because you keep levering up, but you never quite have that cash flow behind you to support you. And when things go south and don’t work, cash flows, your number one thing to protect you your number one insulator, and so I’ve seen enough people where they did that, and they didn’t have the cash flow and cash flows really, I mean, that’s what took down the developed large development company I was added is the lack of cash flow. And so I feel like you need to open up to other markets for cash flow, maybe look at ways to increase cash flow. You know, one of the best strategies I’ve done that we continue to do is buying around universities where you can add bedrooms, so I took a property in Denver, that was a two bed, one bath rented for 1500 a month, added three bedrooms and a bathroom in the basement bumped rents to 2600. And you know, was able to get a quick payback on my construction costs. But that’s that’s kind of how I view that as I think you want to open it up to other markets. And don’t try and force a deal just just where you live.

You know, I love that, by the way, I have a client who just bought a property, University of Alabama, and I think it’s University Alabama anyway. So they, they bought like a four unit property, right, and they’ve got their their child living in one unit, and they’re renting out the other three, and it’s paying for itself, it’s cash flowing. So I love that idea. You know, I’m gonna go off script a little bit, and I apologize, but I kind of want to end it, I just want to walk through maybe at a 30,000 foot level, what? When somebody comes to meet with you, and they want to get started on building a real estate portfolio? What are the things you talk about some of the questions you ask, and then when you identify properties, and I’m going to pause there for one second, go back and say, I agree with you, probably most of the investment opportunities now outside of some of the bigger cities. You know, I do business in California, a lot of my clients are investing outside of the state because it’s become so expensive. It’s hard to generate cash flow, like you said, Denver Metro area, same thing, it’s getting more and more expensive, harder to generate cash flow. So the first part of my question would be is kind of walk through the process the steps, if somebody comes to you wanting to get started out, and then maybe we can talk about an somebody who has an existing portfolio? And then maybe some of the areas that you’re looking at that net people are looking to invest that have bigger growth potential for cash flow?

Perfect. Yeah. So first question is, yeah, when we sit down with a client initially, we want to ask them, you know, what are your goals? What are you trying to do? So we have, you know, several, we’ll say, hey, I want to retire in 10 years, and then manage my properties. So we want to know what the goals are. So we set that out. Yep, I want to have, you know, that it’s when it’s, it’s easier when it’s a cash flow goal, because we can go to that, and someone’s like, I want to $20 million in real estate like, Well, why? What do you want $20 million in real estate for just to look at your balance sheet at night and go to sleep with a smile, or, you know, I want to live this lifestyle and to do these things, I want to be home home with my kids or I want to do this? What is this investing in real estate open up? So we try to get past that, Oh, I just want a big balance sheet, we want to see what do you need it to do? And a lot of times it’s cash flow, right? We want it to provide the cash flow. So I don’t have to work, or I can work part time. But when you tie it to cash flow, it just makes it much more, you know, you can see the blocks to get in there as opposed to like, I just want a whole bunch of money. It’s like, Well, why. And then once we do that, then we want to understand what their what their time capacity is, you know, do you have time to manage the property yourself? Do you have time to manage the property management company if it’s out of state, so what’s your capacity there, we do have quite a bit of clients that come in really wanting to invest in we do a lot of single family small multifamily. They come in really wanting to do that. But their lifestyle, you know, they’ve, they’ve got their job is, you know, incredible amounts of time. They’ve got family commitments, church commitments, they’ve got all these things in life, and you’re like, where are we going to carve this out? So you know, we’ve had we do a, we do a much better job now of identifying that because we have had clients where we help them invest. And then they’re like, gosh, is taking a lot of time. Like Well, we talked about this now we’re way more upfront, like we make sweep, right? Yes, four or five times are you sure you want to spend time doing this because it’s not easy. Everyone who’s made a lot of money in real estate will not use the word easy.

You know, if you’ve only been in it for a year or two, maybe you got lucky on your first one or two but easy, there’s something’s always going to happen. So once we’ve established the goals, their capacity, then we start talking about their financial capacity, you know, how much can you put down? Where is your current revenue coming from? So if if my whole entire revenue is coming from, you know, I’m a realtor. You know, I may want to put a little bit more aside in non real estate, as opposed to being you know, my job, my income, everything comes from real estate. Now I’m investing in real estate. So I think it’s good to invest in what you know, but then you probably want to carve a percentage out and put it into something else. So then we want To know the financial capacity, because that’ll also allow us to figure out which type of properties. So it’s one nice thing too is going into other markets allows you to get involved invest in your first property when you may not have the full capacity to in Denver. So in Denver, if I need 25%, down on a $40,000 house, and 100 grand of cash, which people have a really hard time coming up with $100,000 of cash or your average person, where when we look at some other markets where the purchase price is 100 150, okay, now you’re talking about 25, grand, 35 grand, it’s much more attainable for more investors. And also, you don’t have such a huge percentage in one property where you could have these big swings, right? So. So those are kind of the three that we start with. And then we go through the different investment types that we do. So hey, are you comfortable with student housing, here’s the you know, they turn over a year or two years, you kind of have these weird things, but usually the parents guarantee, and you know, here’s the benefits, here’s the negatives, would you rather? Or are you comfortable investing in an area where Hey, the perception is this is a really rough part of town. And, but we believe the perception is going to change, there’s a bunch of government money going into the streets in that area to bring in more businesses, make them look better, they’re improving the schools, that kind of stuff. Are you comfortable with that, but that’s a different type of tenant that’s going to be you know, have its own volatility, or, hey, here’s a neighborhood with you know, everybody mowed their lawn, great schools, you’re going to pay a premium, you’re going to get great tenants, your cash flow is going to be squeezed, because you’re gonna have to pay so much for that home, but you’re probably not gonna have a lot of turnover, we’re gonna have a long term tenant. And so then we go through that to kind of gauge what the, the investors appetite is or what their comfort level is, with different types. And it’s interesting working with couples, because they come in, both ready to go. And then sometimes those questions you realize, like one’s like, Oh, I love that. And the other one’s like, I would not want to do that ever. And so we try to vet that out, especially when we have partners, or, you know, husband and wife working together to do the investment. It’s interesting, where they both thought that they were on the same page, but then that helps us come to agreements like, Hey, what about this? Are we both comfortable? So So that’s kind of where we start, and then narrow it down?

That’s a great answer. I love it. I wanted to just go back and revisit a couple things. But before I do that, just a couple of questions. So I’m guessing it just depends on the individual kind of like you’re saying, you know, is it a SFR? Which is a single family residence? Is it a multi unit? Do you do commercial apartments? Do you do you have clients that own some of those bigger properties as well?

We do. We have some clients that will help we have one to attend to and they sold a apartment building in California, we helped him buy a medical office building in Kansas City, Missouri, they were able to really push up their cash flow. Some Yeah, we do a lot on the single family side. And then I know there’s a lot of arguments for buying bigger multifamily indoors and there’s a lot of people that present in charge to go to their seminars about this way of buying as many multifamily as you can. And a lot of that has to do with leverage and growth. But it’s kind of one of those bet you know, you can bet big and win big but you can also lose big you forget about the other side of the spectrum so so we do look at those, I think single family can be a great way to do it. You know, commercial has its benefits and its negative. So sometimes, you know, I could buy a commercial building, I could get you know, a good solid tenant in there. So on the triple net lease, so yep, bought this and now there’s a Papa John’s in there for 10 years, and I’m getting my income. But because it’s a larger, you know, a chain like that you’re gonna pay a premium, so your cash flow could be a lot lower, it’s a lot harder to add value in that situation. So you know, I can’t really do much to increase the rents if I’ve got a Papa John’s in there, right? So, and then with commercial, depending on, you know, how big your balance sheet is, one thing that can be a challenge is if, you know, if I only have 2 million to put into real estate, and I leverage and I buy a $5 million building, I can just have these huge swings where it’s, you know, I’ve got it all on one property, but now I’m exposed to one tenant. And if they go out, you know, those in Colorado, especially commercial real estate taxes are so high, you know, you could be having an 80 $120,000 a year carry just on my property taxes. So, so it’s interest. So we’d like to sit with clients and figure out what makes the most sense for for a lot of our clients, when they go to invest in commercial or something like that. We think sometimes it’s better to do through a syndication where you’re, you’re one of several investors in a larger deal. So now I can have exposure to a $20 million commercial property, but I’m only $200,000 of my ass. I like that and And they’re professional and they know, multi tenant office or they know, industrial, or they know that. And so it’s really important to find the right sponsor, but to where I, you know, understand those, and I’ve lent on them, but that’s not my expertise. And so if I’m going to invest in something outside of single family and multifamily, I want to put it with a person, you know, a man or woman that’s dominated that space knows that space understands it way better than I could and say, Okay, here’s my capital.

Yeah. Makes a lot of sense. Thank you. That’s a great answer. So I wanted to ask you a couple other questions. You know, it sounds like with real estate investing, and I know this is gonna sound cliche or whatever, but it’s really crawl before you walk. Right? Start small start cautious, you know, don’t don’t overspend and overbuy. So that’s the first part of question. And the second is, do you recommend most clients don’t manage their own property?

You know, if you’re close by, you know, if you’re not ready out of state, I think sometimes, if you manage it yourself first, with the goal of building a portfolio that you can take a step back, if you’ve managed it yourself, you’re going to know what’s realistic, what, what it takes. And then when you’re questioning the property manager, and they say, Oh, well, you know, it’s just so hard to rent it this time a year, and it just never happened. So it’s going to take us 90 days, and like, Well, no, I, I manage this property, and I rented it out just fine. And I did this. So I think if you’ve done it yourself, you can ask those questions a lot better. And you can manage the property manager a lot better, where when they say, hey, look, this is how it is, you can call them on it. But if you haven’t managed it yourself, it’s gonna be harder for you to identify a bad property manager, someone is lying to you. So I think it’s, it’s how I learned I did it myself until I was able to build it, built my own management company, and then now sold that and now manage the management company. But I do you think you get a lot out of managing it yourself? And so I think for that first, first property, I think, I think if you can and have the capacity, I think it’s it’s a good idea. And then to have a mentor or somebody that can kind of coach you through managing it yourself. Yeah. Because I do think you get a lot out of it.

I love that answer, by the way. Phenomenal answer, because I think a lot of my clients come to me, you know, I handle the financing side of it. And they’re like, yeah, I really want to do this, but I don’t know, I’m afraid to manage. So I love your answer. I think that’ll be my advice to them moving forward. So thank you. One question that I wanted to ask you, which is not on on my list of questions is, what do you say to somebody who says, well, Ryan, I already have a financial planner? Right? Yeah. How would you answer that question?

Her so I, so when I worked at the COVID wealth, we had a portfolio managers manage the money, and then the cfps, the planners, we put the plan together, and there was always this, who’s in charge of the relationship. And so what I like to say is, Hey there, your financial advisors, the quarterback, this is what we specialize in. Let us do this. And then we’ll make sure what we’re talking about in real estate works with your financial plan that we’re doing. And so let us collaborate with them. So we’re not coming in to replace them. We’re not coming in to be two quarterbacks, we’re coming in to say, hey, look, you’re the quarterback, we’re the receiver or running back, but like we’re working together, and we’re gonna do this part, right? But we’re gonna make sure if the advisor is like, gosh, we really need growth, we don’t need cash flow, that’s going to help us when we’re looking at real estate to say, hey, look, I know you really want to buy these properties. But this is more in line with your financial plan. So I would say that hesitation is Yeah, we’re not here to replace the financial advisor. We’re here to, you know, collaborate with them, and help them in a way that, you know, this is really where we specialize.

And this is a general statement, but most financial planners, they don’t really do a lot of real estate stuff, right?

Correct. Most will, you know, stick with equities and bonds. You know, it’s something that understand insurance, but there’s just it, there’s so many assets out there. And there’s so many investment opportunities, it’s hard to be an expert in anyone. And so a lot of them just don’t have the experience within real estate, or, you know, they bent when you come into the financial planning, you know, you learn a lot about equities. And that’s just a lot of what’s passed down from the people above you as you learn to do it. And so real estate is kind of set set aside to kind of just figure out on your own, or they put you into a read and then the difference with reads is they tend to track more like the stock market than the net asset value of the real estate underneath. And so you know, to actually buy the hard assets of real estate.

Yeah, I love that you’ve taken your knowledge, your passion, and turn it and specialized in it and turn it into a niche that nobody else is doing. I just, that’s that’s phenomenal. Thanks. So let me ask you a lot. A lot of my clients asked this question like, Who’s renting? Is there still rental demand? Because we’re reading and hearing that millennials are now wanting to buy houses? I’m worried that there’s not going to be enough rental demand. I would love to ask you that question. What are your What’s your opinion?

Not enough. Not enough people wanting to buy the properties are not enough renters?

Not enough renters?

You know, I think they’re set there in general, there’s a big supply constraint. And I don’t think that’s because there’s a lot of people that have to rent for a lot of other reasons. And so they’re always be renters and buyers. So I, I don’t anticipate that. I think that would, you know, there’s always been renters throughout history. And so it’s unlikely that Yeah, we’d become an ownership society plus, how many people you know, live paycheck to paycheck. Even people with very high incomes that live paycheck to paycheck, agree, they can’t get a downpayment, their credits bad. So there’s a lot of barriers to entry, that just bad habits, there’s there’s a, there’s plenty of people with really bad financial habits, then that I don’t think that would ever crossover, a significant percentage where, where now everybody owns a home, there’s just, I mean, just think of how many people you’ve met over your life that are just not responsible enough to own a home?

I agree. Do you think that today’s market is an ideal opportunity for real estate investors.

Um, it’s kind of like, there’s never a terrible time to buy and there’s never like, Oh, it’s always just going to go up. I think this is still a very strong time to buy real estate. But I would be cautious on what I was buying and how I protect my downside. One of that is through the cash flow, but it’s they, the government is pumping so much money into the economy that just assets in general are inflating, being pushed up. But if I were to invest in an asset that I really know that has a use, so you know, the real estate, someone can live in the industrial building, they can store stuff and distribute the retail building as a restaurant in it that someone goes to. So there’s a use to the real estate. And so what i’m also seeing is there a lot of other assets that are inflating that, that don’t have a use to them. And so those are the ones that I would I’m very skeptical of where the real estate is, I know long term, this has a use and a value. You know, one indicator that I look at is trading cards right now our trade is selling at just crazy amounts are like oh record for this baseball currently for this baseball card. And so to me, that’s really interesting that there’s enough capital out there, that people are seeing that as an investment, and then, you know, other than sitting on a shelf or something like that doesn’t have a use that I could do with it. So. So I do think now is a good time because we’re seeing an influx of asset prices in general. But I do think if there is stability or support to the prices, I think there’s more support to real estate than a fair number of other assets.

And I think you answered this question already. But we’re even though housing prices are inflated, it’s still a good opportunity if the cash flow is there, correct? Yeah. That’s really the differentiator correct? It’s it’s really about the cashflow.

Yeah, I would say that’s my number one. And then you have other markets like, where, like Denver, for example, I think there’s a lot of support to pricing, because if prices in Denver dropped much, you have a lot of people waiting to move here. Correct. That got a little bit more affordable. Agreed so so within Denver, we may not have the cash flow, but I wouldn’t say Oh, then you don’t invest in Denver, but I think we’ll see still good appreciation. But there’s a ton of support to the pricing. Yes. So that so there I’m like, Yeah, I feel good about that. Were there other areas where what we saw on the financial crisis, you know, in Florida, and places where they were building and people were buying, and there was all these vacant homes, and then eventually you had this gas, this and this, there’s this ghost supply of homes, that eventually are going to need to be, you know, scooped up over time. And the only way to for that is for prices to drop dramatically. And so we don’t have that currently, we have a lack of supply and we don’t have all these vacant homes out there. So I think the chances of that are much lower.

Yeah, California had that same issue. And I know in speaking to some real estate agents in the Denver market, they said that even during the the mortgage market meltdown, the financial crisis that Denver really only dropped about maybe 7% at the most at the worst part of it, whereas places like California, we saw drops of 45% you know 50 percent. So that’s a great statistic. I want to I know commercial is not your specialty. But I want to ask you this question because I want your opinion on it is with the pandemic, and more people learn to work from home and corporations, learning people can work from home more, do you think we’re going to see more of a trend of like co working spaces where companies don’t need these big, huge commercial buildings where they can have maybe shared workspaces or different things? I just would love to hear your opinion on that.

Yeah, yeah, I think, you know, in my opinion, is the office market is going to evolve and change. But like, it’s not going to have a demise. Like I, I have to come to an office just mentally, it’s what I’m used to, you know, my kids don’t understand when I’m working from home, so I got to have a separate place. So I think there’s a lot of demand there, I think people are going to be more strategic with their office space. I know for us, you know, instead of having our own conference room, there’s a common conference room in a building that we reserved. And it just man, when you think of that month, you know, that price per square foot, how big a conference room is. So I think that a lot of that stuff will change. And then you’ll and I think you’ll see certain positions can work remotely certain positions, you just need to be in the office. But I also found when we’re when my employees and I are working all remotely, a lot just doesn’t get picked up from just the conversation. I just pop in someone’s office and say something so. So I think there’s, you know, benefits of like, Oh, yeah, you may not get interrupted, but there’s like this energy or vibe that you that kind of people pick up on and things happen in the office environment that you don’t get working remotely. So I think it will change over time. But we still, you know, I still like to see people face to face. I like the idea of, you know, being able to go downstairs walked to block to lunch, go to lunch with people. So agreed, I think it will be evolving and changing. And I do think the need for huge amounts of office space, I think they’ll be fewer companies that need that. And also just the hub hopping on a zoom call or doing something a video call is, is my people are much more comfortable with it.

Agreed. Agreed. Alright, so I want to thank you for that answer. I want to change directions here, I want to talk about the thing that I get the most questions about, which is 1031 exchanges. Explain to our listeners if you can, what a 1031 exchange is. And then we can talk about, you know, all the nuts and bolts. But first, let’s just you know, layman’s terms, like what is it? Perfect.

The 1031 exchange is one of the biggest advantages to investing in real estate that most other assets don’t have. So what 1031 exchange allows me to do is sell one investment property. And as long as I follow these steps, I can buy another investment property without recognizing a gain. So I bought a property for half a million dollars, it’s now worth a million, I can sell it. And now that million dollars goes in is held by a Qualified Intermediary. As long as I don’t take receipt, I don’t create the taxable event. So now that Qualified Intermediary holds the money. And I have 45 days to identify my replacement properties, what I’m going to invest in next. So now I’ve got my 45 days at the end of 45 days on the 45th day or before, but no later than I named the properties, potential properties that I’m going to invest in. And as long as I invest in those properties, or one of those properties, and I spend all million dollars, I avoid, defer my taxes. So that is the gist of it. So I have 180 days total to buy those properties. The first 45 days is my naming window. And then I defer. Now if you take that into the how the math works is if now I have a half a million dollar game, now I can put a million dollars to work for myself. Well, if I were in a different asset, say I had a stock or stock that went great. Now I don’t think the company has as much upside and I want to switch horses, I want to go to a different stock. Well now I’d have to pay, you know 25 30% taxes on that half a million. And so now I’m you know, now I only have 700 or 800,000 or 900,000 working for me going forward, then take that over a 2030 year investing career and it is a massive difference. And so a lot of wealthy people or people have built a lot of wealth through real estate. One part of that is just the math. You don’t have to get dinged every time you switch and move to a different investment. And so that is the power of the 1031 exchange. But it’s also challenging because there’s a lot of rules around it and what you can do, but in general that’s the beauty of the 1031 exchange where you bought in this neighborhood. It skyrocketed and peak now you see another neighborhood that could do the same thing. A different property type, you can sell an exchange. And so that’s that’s one of the big benefits of the 1031. Exchange.

I love it. Great job. So let’s, let’s break it down. Let’s get nuts and bolts. So let’s talk basics. Right? So I’ll ask you some questions and you answer. So on the real estate investor, I have a property I sell it for $500,000. Now, the the the gain, the tax is only on the game, correct? Correct. So if I paid, I’m just using hypothetical here, and we’re just chatting through this. So if I paid let’s say, $350,000 for a single family residence, and 10 years later, I sell it for 500,000. The differences between and I know there’s what you can talk about it, but the differences between what I purchased it for and what I sold it for correct. And then elaborate on there certain things like if I put upgrades into the property, etc, right?

Yeah, you’ve increased your basis. So yeah, we just look at your tax turn that stuff would be in there. So yeah, so I bought it for you bought it for 250, you’ve put in 50, or basis is now 300,000. sold for 500. That gain that you’re trying to defer? Is that $200?

Right. So now the next step in that question would be Alright, so now I sold this property for 500,000. I’m looking to identify another property, does it have to be like property, meaning another property for $500,000? Or more? How does that work?

Sure. So the like kind is a super broad definition. So you could sell a townhome and you could buy agricultural land, you could sell an industrial building and buy an apartment building, you could sell at a hotel and buy vacant land, as long as it’s held for investment purposes, it counts. So real estate is pretty exchangeable that way, right? And so that’s, and then whenever you exchange the number of properties doesn’t really matter. But you have to spend what they say equal or up. So you have to buy $500,000 worth of properties to complete the exchange and, and defer all the taxes. So you could buy two for 250. You could actually buy two for half a million each. Because you can go up, you just can’t go down. If you go down, say I only buy $4,000 worth of property, that 100,000 is considered boot, and that will be taxed.

That’s the taxable portion. Yeah, right answers, by the way. So let’s talk about something that I found fascinating that I didn’t know. And when I met you, I was like, wow, this is really good stuff. Because the big the hardest challenge in today’s market is and you talked about it is you have 45 days, that window, right to identify a property. It’s really hard right now to get an offer accepted, and there’s just so much demand. So a lot of my clients are freaking out because they’re selling an investment. They’re trying to find a replacement property. And they can’t and I’m gonna stop talking and let you share. There’s other opportunities. There’s other options. Yes.

So yeah, so some could be within the strategy yourself is, while you’re under contract to sell your property is trying to get profit, the next property is under contract and get as far along that way as you can, so that you can give yourself as much runway as possible. There are two other options that are lesser known. So one is called a DST. So it’s a Delaware statutory trust, that is institutional real estate that you could be a fractional owner up so I can sell my townhome in Aurora, Colorado, I intend 31 exchange and be a fractional owner of an Amazon distribution center in Texas, or a Class A apartment building in Florida. And so they’re sponsors or companies that specialize in structuring a DST. And then you can tend to do one exchange in, you give up control, but you’ll get passive income, typically paid out monthly, those are available to accredited investors only. So you have to have either a million dollar net worth not including your primary residence, or income of 200,000 if you’re single and gross income of $300,000, if you’re married, so there’s that one, but it’s an either or thing. And also, a lot of people when they’re calculating that don’t realize how close they get to that because you can include gross rental real estate. So if you have several rental properties, that rents for 24 22,000 a month, that’s 24,000 a year, that 24,000 gross goes towards that calculation of the income side, and then you’ve got the network side. So that’s for accredited investors. But that is a great option. Sometimes we will help clients where they’re trying to buy one property and they’ll name a DST as a backup. So if it falls through, they can go into that one. And then the third, even less known is oil and gas mineral rights is an option. And so with mineral rights, that that trades like a real estate transaction, because you’re getting a deeded interest in the mineral rights, and so you do not have to be an accredited investor for those and those pay cashflow, and that they have a bunch of unique, you know, components to them as well. But that is to other 1031 exchange options. They’re like, well, how does oil and gas qualify for real estate? Well, it’s a deeded interest in the property. So they, the government sees it as Hey, the building is on top of the land, and the mineral rights is below the land, but it’s the same, technically counts as real estate. And so those are two other options. The other is say, you know, you sold your 500,000 property, you found 4000, that’s perfect. What do I do with this extra 100 grand, that’s perfect. For what we say the leftovers what you can put into a DST are oil and gas, mineral rights, but it’s just when you know you have all these options, it can make it a little bit less stressful, because there can be backup plans and different moving parts and you’ve got more options than you think.

I would have to say thank you for sharing that in hearing it again. The second time, I’m still blown away by it, because I would say 90% of my clients who are who own investment properties, have no idea those two options exist. Yeah.

And, and then I’d say one other one is a reverse 1031 exchange, which with a reverse 1031 exchange, I can go and find the property I really want now. And I can buy it, and then I work with a Qualified Intermediary. They go on title with me. So if you picture that, you know, it’d be Ryan Finch, and then it’d be title company, LLC 123 as tenants in common, so they kind of put this placeholder there, then I can go back, sell my property that I needed to sell. And then that property 1031 exchanges and takes out the placeholder that the Qualified Intermediary is and then you buy the property in reverse, it’s the same deadline. So you have 180 days to complete this, okay. And there are certain banks that will lend on something like that. But reverse 1031 exchanges are much more common for large institutional real estate. Because if I sell a $20 million office building, the chances of negotiating and finding a $20 million office building in that 45 days is pretty slim. Yeah. And so we see the reverse 1031 exchange, you know, pretty common in the larger stuff, but you can do it with the single family, small multifamily smaller stuff, and you just want to balance that the cost is higher. And so you want to balance the cost benefit. But that’s another option in this market, a reverse exchange, if you have the financial capacity to do it, because that means you got to be able to do the downpayment or, you know, get a fair amount for the purchase. But is there is another option. So yeah, so those are kind of the world of tender exchange, where a lot of people don’t realize there’s there’s a few more levers to pull to get to get to your goal.

Great stuff, by the way. Question for you. So I’m a real estate investor, I don’t know you. So I don’t know these other options exists. What happens if I don’t make the timeframe?

Sure. So it just creates a taxable event. So it’s not the end of the world, but you don’t hit the timeframes. Either the whole 1031 exchange is nullified and you pay taxes on all of it, or, or you’ll pay a tax on a portion of the gains.

Which nobody really wants to have that happen. No. Let’s be working for you. Yeah, as we’re so we’re talking about taxes, which are basically it’s capital gains, right? Is that what we’re talking about here?

Yeah. So you’ll have the two big ones is you’ll you’ll pay capital gains. And then you know, if you live in a state like California, you’ll also have California state income tax. So that goes on top of your gains. Correct. And then the other part, one component that a lot of people are aware of is depreciation recapture. So when you bought the property for half a million, and you took $5,000 of depreciation each year, so you went from half a million to 495 to 490 to 485, that depreciation, gets what’s called recaptured. So I bought it for 500,000. I depreciated it down to 400,000. I sell it for 600. So from from 500 to 600, that’s capital gains. And then now I depreciated, and that’s now that 100 grand, this is always taxed at 25%, depreciation recapture. So that’s where someone’s like, I don’t have a lot of gain, but I held it for 20 years that depreciation recapture can be a significant tax, and Wow, that’s awesome times where you’re like, hey, the 1031 exchange makes more sense for you. And it’s regardless of income tax of income tax bracket. So you know, I know somebody that they sold a condo after 10 years for basically a wash. And they and they were in a much lower tax bracket and they were just shocked at how much they had to pay and I had to explain that the rules of the depreciation recapture and why it’s so painful so well and see these you want to be aware of the gain and if it’s a long Time, you might have been appreciating that quite some time. And that’s that’s pretty painful that 25%.

These golden nuggets of information are the exact reason we have you on the show today. This is great stuff I want to transition into the current administration is talking about making a lot of changes. And I know nothing is quite yet written in stone. Correct? Correct. But they’re they’re looking at, and you correct me if I’m wrong, they’re looking at changes to 1031 rules, and they’re looking at Capital Gains changes, correct? Yes. Would you mind elaborating on that a little bit for us?

Yeah. So I know, one of the big things they had been talking about the 1031 exchanges, and with the big stimulus packages and everything, my understand is they come up with a list of PE fours, like, Where’s that money gonna come from? So whether it’s increase in taxes here eliminating, you know, this tax, you know, it’s, they say it’s a tax loophole if somebody else can do it, but it’s a tax strategy, if you can do it. So eliminating tax loopholes is what they’ll say, Well, on the most recent presentation of what was sent to, I believe, the Senator, I can’t remember but who gets it first, but it did not have 1031 exchanges in there as a pay for. And so as of right now, 1031 exchanges are sitting in a really good spot, which all Can, can change as it as it goes all the process. But based on what was being threatened for a long time of eliminating 10, zero exchanges all together, then that kind of has gone away, and it’s more will will limit it to a half a million a year of gain that you could exchange. That’s kind of now the worst case scenario. But it’s looking like that is not going to be the case, but we won’t know till everything’s finalized, but it’s not on the pay for list. So we’re getting closer to getting past the 1031 exchange being modified, fingers crossed. So yes, exactly. And then yeah, they’re looking at increasing capital gains, rates as well, I believe that is still on the table. So it’ll be interesting to see, you know what comes of it but but that those are definitely things to be aware of out there.

There’s some talk about lowering a threshold, right? Like the amount?

Yeah, step up in base. So they’re, they’re talking about eliminating the step up in basis, I believe that’s not as much of on the forefront anymore like that. But the lowering the estate tax exemption, which is somewhere around like $11 million, a person, crew, husband and wife could transfer, you know, over $22 million of assets before the estate tax. So they are talking about lowering that estate tax threshold. So if they lowered it, I was at a presentation, I believe they said three and a half million, I don’t know if that presenter had pulled it out of nowhere. But you know, if they lowered it to there, that would affect a much greater portion of the population, then at this $11 million, so read, I could see them adjusting that. But, but that’s still to be determined. And it’s just interesting, because, you know, the government has, you know, the employees that they pay to write these bills and stuff. But then on the private sector, you have incredibly people with a lot of financial means that didn’t hire the smartest, brightest people that to figure other things out. And, you know, there are ways with trusts and life insurance and other there are ways to transfer assets to the next generation to, you know, to still abide by all the rules, but where more money can transfer. And so it’s just, it’s just interesting there, sometimes it’s, you know, politically driven, where they want to show that they’re doing something correctly, the people just go over here. So I don’t know how effective it will be. I think it’ll kind of hit those my own opinion is kind of hit those people that are in that middle that can’t afford the planning or don’t know how to plan through this. More than it would affect you know, the people that they’re truly wanting to go and taxis are not allowed to pass well through.

So a couple more questions before I let you get to your day, buddy. So I get this question a lot, you know, they put a moratorium on on rents and you know, forbearances and all that kind of stuff. What do you in your opinion from what you see, when that comes to an end? What do you think the ramifications are in the single family and multi unit market? Do you think it’ll open up more opportunities for investors?

You know, for renters is one thing, you know, the portfolio of single families I bought in my funds, you know, it’s about 5% of renters, you know, stop paying rent. I’d say most of them could have paid, but just decided not to. I thought that was a lower percentage than I was expecting when when things started happening. Sure. So I do think we’ll see a fair amount of evictions but You know, there was there’s a lot of government support to help these people and the people that in our funds that were evicting didn’t apply for it. And once we’ve had to remind a, they’ve sent a screenshot, and they have not clicked submit in three weeks. And we’ve emailed them that they have to push the submit button. And so it’s just stuff like that. So I, I from from an investor standpoint, I think this is going to help Finally, like you can, you can, because you can work with good people, and you can get these people out of the unit, I don’t think there’s a lot of sellers that are going to be forced to take big losses, because we’ve had such appreciation, agreed. And when you think of a percentage of appreciation relative to like, what that person’s back payments would be, it’s a big difference, like, you know, their property may have gone up 40 grand, and they’re, you know, they’re behind 15 grand on payments. So you know, they’re, they’re in a safe position, they could refinance, they could sell, you know, they I think there’s a lot of flexibility. I also think banks learned. And I think a big part was the, this is just my opinion, but regulators, I think learned from the last downturn of one of the things I saw working in special assets on the bank is they basically came out and said, No more lending on land Now, everyone can only only lend this much on land, well, then every bank had to get rid of all the land. And then nobody could lend on it. And so it created this huge race to the bottom Yep. Where if they would have been patient, and not push so hard. Some of that could have been and I think in this case, which we’ve seen how we’ve had quantitative ease, and a lot of the ways that governments has reacted since 2008. Financial Crisis, I think it’s less likely that they will be so heavy handed. And who knows, but to just say, all of these have to be repaid right away, because I think they saw what happened when they, you know, kind of created their own major issues, and not say there were things wrong, but like, if you tell all the banks, they can only lend this percentage of capital on land, and there’s nowhere for those land loans to ever go, the only thing is to sell, and then no one can buy that land because there’s no one that will lend on it. And you have this cascade effect down so so I don’t anticipate I’m not planning for that or saying, Oh, we need to raise a bunch of cash to buy these homes. I think that’s highly unlikely. But that that’s just from my experience. And vantage point.

I agree, buddy. Well, I want to be respectful of your time I thank you so much for today, you shared so many golden nuggets. The reality is guys is you know, again, this is Ryan Finch, he’s a certified financial planner specializes in real estate. His company is tangible wealth solutions. Ryan, we’ll make sure we put your contact information in the show notes, in my opinion, in the in the times that I’ve talked to you and knowing you, if you own rental property, or you’re looking to own it, you got to talk to Ryan, before you do it plain and simple. This is what he specializes in. Thank you for your time today. I always like to ask this last question, which is Is there anything that I didn’t ask you that I should have asked that you want to share with the audience?

I would just say in general is there’s a lot of noise out there in the investment world and real estate and seminars and people saying you got to do this, you got to hurry up. And so there to give a presentation, there’s two people we tell you to avoid. And the first one we is called Tina, where there is no alternative. And so don’t think that you have to invest in this because there’s nothing else to do. And when there’s fewer alternatives or fewer things to buy, you know, people can kind of get forced into an investment. So if you see Tina’s starting to talk to you, and you’re doing a real estate investment, kind of take a step back, take a breath. And then the other one is the FOMO the fear of missing out so you know, everyone out, you know, the markets going crazy. What do I do? How do I get in? is really take a step back? Does it make sense for me? Did I think through it logically, you know, am I pulling the trigger at the right time. So the balance between that and then also the paralysis by analysis where you just, this could go wrong, this could go wrong, and you never pull the trigger. So try to be an investor that’s in between those two ends of the pendulum and I think you’ll do okay.

Well, you finished with a home run there, buddy. That’s good stuff. Hey, guys, thank you for listening to this episode of Your Mortgage Matters. Again, I’m your host, Michael Chabot, if you found value in this, please share it like it. Tell your friends about us. We’ll be back to you with more information. And like I said, I will share Ryan’s contact information in the show notes. Please, please, please reach out to him if you’re thinking anything to do with real estate investment. Ryan, I thank you so much and look forward to having you back again real soon.

Thanks, Mike. I really appreciate your time, too.

All right. Thanks again.