Let’s take a look at what goes into making real estate an investment. How do we evaluate price, timing and developing a healthy portfolio.

Episode Highlights: 

• 
  
• How investing personal labor into property improvements can significantly increase the value of real estate and lead to equity gains.
  
• Why real estate is often overlooked by financial advisors and how it can play a critical role in diversifying a financial portfolio, providing stability, and contributing to wealth management.
  
• The nuances of property valuation, market conditions, and the importance of understanding real estate investment from a business perspective.
  
• Capital gains tax exemptions for primary residences and the strategic financial choices involved in property investment such as the potential capital gains tax exemption when selling a primary residence.
  
• Journey towards real estate ownership, the responsibilities that come with being a landlord, and how state-specific laws can impact the landlord-tenant dynamic.
  
• Concept of making extra mortgage payments early on to reduce interest over time, leading to financial stability and freeing up funds for further investment opportunities.
  

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TRANSCRIPT

00:00:00 When you say sweat equity, what do you mean? 

00:00:00 I’m talking about you’re willing to do some work to improve the house. You’re sweating it out, right? Like you’re the one swinging the hammer and chopping the wood. But if you have, if you’re at all handy and you can put some work into it, you might gain equity. So if you bought it for $100,000, maybe you put 20,000 into it and then you can turn around and sell it for 150, you have 120 into it and you sell it for 150, that’s a $30,000 gain. There’s your equity.

00:00:00 Alright, it is that time of week, the time where we complain about the music and then we get started with the True Wealth Radio show. I am your host Dave Littlejohn, joining me in studio today. 

00:00:45 Matt Dickson. 

00:00:46 And today we’re going to talk about all of the things that we don’t really do directly in our office. 

00:00:52 Sure, but it’s going to be fun to talk about because why not? 

00:00:55 It’s going to be fun to talk about it because why not? Actually, it is fun to talk about. It’s just interesting because so many financial advisors tend to steer away from this as a topic. 

00:01:06 Why? Just because it’s outside, kind of their scope of knowledge like they just look.

00:01:11 Well, I disagree.

00:01:12 Really.

00:01:13 I think it’s because they don’t get paid. 

00:01:14 There you go. 

00:01:17 But I’m like, you know real estate, something you do somewhere else, the financial advisors not getting paid. 

00:01:21 Well, the real estate agent, you know, they… that’s kind of their field a little bit. But they might not have, kind of, the intricacies. 

00:01:29 Well, it’s something you don’t typically manage unless you’re a property manager, right? You don’t, once you buy the real estate, the management is, well, you got some taxes, but you got physical management of the property. That’s not what advisors do. 

00:01:43 No. 

00:01:44 Right. And the other thing is– 

00:01:45 And if they’re getting you into real estate. It’s probably a proxy for real estate. You’re not really holding the asset directly. 

00:01:51 I know. Here’s a soundbite for you. Consider the fact that, most advisors, the way they get paid is usually for assets under management and real estate is not typically under management.

00:02:01 Right. 

00:02:01 Right. It’s outside the scope of. And so–

00:02:04 Less money to build on. 

00:02:06 Exactly. And so I think that there’s a big financial undertone to this. Now, do I think that we should ignore that as advisors? Or I mean–

00:02:14 Well no, because, yeah, it’s its own thing and historically it’s done well. 

00:02:19 Look, if to me, part of having a good stable, total financial picture includes, you know, there’s checking and savings, right. In the form of emergency reserves, you have real estate as part of that component, you have tax deferred investments as part of that, and then there may be specialty things that you’re particularly good at that we’re going to talk about, right? Maybe you’re really good at restoring classic cars or something, so you could find something, fix it up and sell it for a profit, right? So that’s a form of business, so that’s entrepreneurship, and so I think that financial advisors should be talking about the total financial picture, there are plenty of people that niche down and just say, well, we’re retirement advisors. 

00:03:03 Well, I mean, you’re talking a little bit about, kind of, catering to the individual, right? You have a skill set in this area, go ahead and explore that and let that add to your portfolio in its own unique way. 

00:03:14 Well, or maybe what I’m talking about from the profession is that some people are just more channelized, right? They just, they kind of stay in their lane. So the financial advisor that says, well, I really kind of do retirement plans and 401(k) rollovers. That’s just the business that we do. You know, okay, well, what about, you know, do you do insurance analysis for somebody? I’m not saying you have to buy the insurance, but do you make any financial planning type recommendations or tax management or anything like that? And that’s like, well, I mean, if it comes up, but mostly we just kind of manage the retirement plans. Okay. Then that’s a really specific niche, right? It’s a popular one, by the way, because it’s pretty straightforward. Hey, we can help you manage your IRAs and your 401(k)s and that’s how we get paid. At full disclosure, right? That’s something our office does all day long. A lot of clients that we help them with that. 

00:03:59 Right, but this is the real estate show. 

00:04:01 Exactly. 

00:04:01 So tell me a little bit about–

00:04:02 Well, it’s the more show, right? Comprehensive planning, this is part of it. 

00:04:07 Okay. 

00:04:07 Right? And so, look, in full disclosure again, you’re listening to somebody that also has investment in real estate. Didn’t start that way, right? But as my portfolio grew over time–

00:04:19 It kind of naturally drifted a little bit into real estate. 

00:04:21 Yeah, and so that’s why I say comprehensive and balanced because one thing about real estate that’s nice, is it’s less correlated to the stock market. They’re not non-correlated, right? They’re not totally independent of each other. Like strong economy tends to be good for both. But they’re less correlated because real estate tends to not be traded when, stock market is. And so you tend to have longer natural time horizons. And I’ll tell you what real estate does really cool.

00:04:48  It hides that up and down price movement or you don’t feel it so much. Like–

00:04:53 Well I was gonna say–

00:04:53 Because you look at your IRA balance all the time, right? And you’re like, oh my gosh, it’s up, you know, $5,000 today. And then the next day, it’s down 8,000. 

00:05:04 Yeah. And then real estate definitely doesn’t incentivize actively tracking the price because there’s not a way to do it. 

00:05:10 And plus it’s just kind of worth what someone is going to buy it. But that’s the same thing with the stock market. 

00:05:16 Right. 

00:05:16 Now a lot of people don’t get that.

00:05:17 Oh, look at that. You got to snuck into that. 

00:05:19 Yeah. I walked into that one on accident. 

00:05:23 No, it’s super true, though. Like, in the end of the day, whatever you own that you’re trying to sell is only worth the buyer that is willing to buy it from you at the price that you guys can agree upon. That’s it. Right? And that’s all the things. Okay, I mean it’s always, involves a transaction like what makes stocks interesting is you got this huge marketplace where there’s tons of participants And so it’s, price discovery, is usually pretty easy.

00:05:47 Hey David, did you see in the news the other day that there was very few sellers of GameStop? 

00:05:54 It–

00:05:55 Shot up like 86%.

00:05:58 Oh, no. 

00:05:59 It’s back. 

00:05:59 Memeing all over.

00:06:00 We are memeing all over again. The guy that started the Reddit board search came back into the light and started, you know, there was rumors that he was going to start. 

00:06:11 I heard this about him. I don’t remember his handle. 

00:06:14 And on the coattails, AMC followed. So you saw both the meme stocks regain traction. But I bring that up just to say, you know, what happens when you flood the market with tons and tons and tons of buyers and no one knows, selling? Well, it can shoot the price up a lot.

00:06:35 Right. Well, but that it’s funny because you’d think it’d be the opposite, right? You know, a bunch of buyers and sellers don’t drive the price up. But what drove it last time was that it really needed sellers and nobody would. 

00:06:48 Right. 

00:06:48 That’s what happened is just the brief history of GameStop that made it funny. A few years ago, somebody on a Reddit board sort of deduced that hedge funds had shorted GameStop. The problem was they shorted more stock than existed. 

00:07:06 Right. So it’s different this time around. Everyone thinks it’s the same and all these news articles are more difficult. 

00:07:12 But when you short more stock than exists and you have to go buy the stock back and somebody found out and they told everybody don’t sell it.

00:07:21 Right. 

00:07:22 Do not sell because the more this price goes up, the more in trouble the short sellers are because they’re gonna have margin calls which just means that they borrowed money, they borrowed stock, and then the stock price moved against them. Because the short sell means you sell low and you buy it back even lower. You expect the price to go down. Price starts going up, then you go, you borrowed money to do this. You need to pay us back this money. And so where does the money come from? And they’re like, well, you have to close the short position and return the stock. But there wasn’t enough stock in existence to return it. 

00:07:53 So they’re all buying it to repay. 

00:07:56 Right, and nobody would sell. The price shoots up and then they have to pay exorbitant amounts to try to close this position or they got to find a loan somewhere else to close the position with. Well, all of this ended up in real controversy when a few key players, Robinhood being one of them, actually locked buyers out and only let people sell what they couldn’t buy. And they did it to the retail customer. And there was a big scuttlebutt about this and how damaging that was to the reputation of the firm. I thought they were, like Robinhood, maybe done over it. Well, everybody’s back and they’re doing it all over again. 

00:08:28 Right. 

00:08:28 Which just goes to show that the retail sector has short term memory. 

00:08:33 Absolutely. 

00:08:34 So we get off topic. Let’s get back to real estate here. So Matt, what are some of the things that you think our listeners are really interested in about real estate? And I have some ideas, but what do you think? 

00:08:45 I don’t know if this is a super interesting point, but one of the things that I like to remind people of is real estate. It does matter how you buy and how you sell, timing, right? Like timing in real estate is a big deal. You can ask that to anyone going back to the 2008 housing crash. I hear so many people say that, you know, housing, just buy it and you’re gonna make money, right? I’ve heard that way too many times. 

00:09:11 But perhaps if you have, like a 40 year time horizon. 

00:09:13 Right, but a lot of people don’t think that way. They just think, well, if I can buy real estate, I’m guaranteed to make money. 

00:09:20 All right. 

00:09:20 And then I challenge people like you just said, think about the time horizon, you know, are you going to plan to just buy it and resell it in two years? Because that’s a pretty short time horizon and interest rates can really, really affect how real estate, you know, is moving. And–

00:09:34 So I’ve distilled this down to first and foremost, real estate is an asset, not just the purchase of a house. 

00:09:40 Right. But it’s not just a guaranteed profit like so many people think that. 

00:09:44 Yeah. Oh, yeah. That’s for sure.

00:09:46  That’s my greatest point.

00:09:48 Okay, so that’s one of the things here. Here’s where I think we ought to talk, for all of you out there listening. First, let’s talk a little bit about, and when I say I’m a fan of real estate, right, I think it’s an interesting one. I’m not making a recommendation when I say it, so I have to be careful about that the way we phrase stuff on the radio, right? But let’s just say, you know, for the sake of like, hey, you know why I’m a fan of real estate? And we want to kind of break this down a little bit on the show today. One, it’s got a unique tax treatment compared to a lot of assets. 

00:10:15 True. 

00:10:16 It has some things in common and some things less in common. So why is real estate sort of interesting from a tax perspective? 

00:10:23 Well, can we depreciate? 

00:10:25 Okay, so we’ll get there, right? But there’s some other elements to it, right? That it has utility value, okay? It’s something you can use, a use asset. 

00:10:34 True.

00:10:34 And so that I think is interesting and that we wanna talk about that. And then three, it has income generation potential. 

00:10:40 That was the one I was going to touch on. You can have, if you do it right, someone else can pay for it for you.

00:10:45 So really it all falls under, and this is very appropriate for any of you guys that listen to the show for any amount of time, kind of know that this is sort of a sweet spot for me. Running, real estate is kind of like buying a little business. Okay. It’s a simple business in some respects. It still has costs and headaches and so forth, but it’s interesting when we view real estate through the lens of not just buying a house, but are we buying a business? And if we’re doing that, we need to understand a little bit of like, how does it get valued? And then we talk about, well, where’s this coming from in the marketplace, right? So I think there’s a lot of cool features to real estate that people don’t necessarily know because it’s not taught anywhere in school. And it would be really useful for us to understand as investors. So why don’t we talk about that? 

00:11:34 Do we want to talk about some of those keywords, stuff that you kind of need to understand before we even dive too deep into this? 

00:11:42 Oh, I bet you we cover it as we go. 

00:11:44 Okay. 

00:11:44 But the first thing we got to do is get our first obscene profit break.

00:11:48 Let’s do it. 

00:11:49 Coming back as soon as possible, just cut the music off. 

00:11:51 Are you ready to talk about– 

00:11:52 Yeah, welcome back.

00:11:53 Real estate and everything in between. 

00:11:55 Yeah, welcome back to the True Wealth Show. Dave Littljohn and. 

00:11:58 Matt Dickson.

00:11:59 Remember guys, you can grab this as a podcast if you are missing out on the fun. Today, we are gonna talk about real estate. Matt has an agenda. 

00:12:07 I wanna stick to it. We got a lot of stuff to get to. 

00:12:09 I am so bad at agenda on these things. I mean, we really do some prep on this stuff, but it’s also, I’m just a cowboy, it’s the worst. 

00:12:18 Eh. Well, right off into the sunset. 

00:12:21 Okay. All right. You’re on your own. That’s got this show on lockdown. 

00:12:24 Right. 

00:12:25 Hey, for a lot of you out there, we did want to talk about the concept of real estate as an investment. Now, before we do this, let me frame a couple things up. Let’s start with talking about real estate with the most familiar terms that I think our listeners are going to typically come across. Right? Your home. Okay. I don’t want to like, have the debate about like, is this or isn’t an investment. There’s authors out there that say, your home is not an investment. It’s the biggest liability you have. To which I go, hooey. Right? Like, no, I disagree with that. 

00:12:57 You tell them off, David. 

00:12:58 Right. But I do think that homes can be a significant distraction in many cases. And it’s tough to navigate because there are some risk elements. So we’re going to talk about a few components for homeowners today and why homeownership is a really interesting one that I do think it’s something that I would encourage most people to get into. Right. Now, there are scenarios when renting may be better than owning a home, especially if you’re not sort of long-term sticking around an area. Right? And there’s no hard and fast rule of this, but if I were to ask you to venture, I guess, Matt, how long do you think somebody should live in a home at a minimum before it’s like, well, if you’re not going to stay at least this long, you may want to rent it instead. It’s literally a guess. There’s no right or wrong answer. 

00:13:48 Yeah, I mean, if you’re going to be in a place for less than five years, I’d say probably renting is okay. 

00:13:53 Yeah, and I would say maybe three, but it depends on the market. 

00:13:57 Yeah. 

00:13:58 You know, you got to have enough appreciation just to cover all the cost it took to acquire something. However, right, what people forget is it’s oftentimes a store of value. Okay, now I don’t think of a house as an ATM. 

00:14:11 Well, especially if you’re going to put a little bit of money into fixing it up. Right? If it’s in a decent location and it’s a little rough and you can just put some sweat equity into it. 

00:14:21 Right. So first, I’m going to just ask you, can a bunch of our listeners know what we’re talking about? Some don’t. 

00:14:27 Right.

00:14:28 Some people are going to watch this on YouTube. What, when you say sweat equity, what do you mean? 

00:14:33 I’m talking about you’re willing to do some work to improve the house. You’re sweating it out. Right? Like you’re the one swinging the hammer and chopping the wood. But if you have, if you’re at all handy and you can put some work into it, you might gain equity. So if you bought it for $100,000, you, maybe you put 20,000 into it and then you can turn around and sell it for 150, you have 120 into it and you sell it for 150, that’s a $30,000 gain. There’s your equity. 

00:15:00 Okay, so in this case–

00:15:01 But you don’t even have to sell it to have the equity. 

00:15:03 Well, here’s a definition. We use the term equity all the time in the financial field, right? Especially in the investment landscape. Equity is often referred to, like stocks are often referred to as equities. Why? 

00:15:16 They store value. 

00:15:17 Well, they are a representative of ownership. Right. If you own one share of Apple as a company, you have equity in Apple. Like you have an ownership stake. So when you have a home that you’re purchasing and you have a mortgage on it, right, some of that home is owned by the bank. 

00:15:35 Right. 

00:15:36 Right. The percentage that you have paid for already, that’s the amount of ownership that’s yours. That’s your equity. And so sweat equity is the idea of say, if I can get a hold of something and then I can do improvements through my own labor, then I’m not paying somebody else for labor input. I’m the labor input. If that labor input improves the value and it goes up, I have improved my equity position. I made money off of my effort. So I got more ownership. 

00:16:05 Some people, they don’t understand sweat equity though, and they just sweat. And go negative on the equity side. 

00:16:12 Well, therein lies a huge issue, doesn’t it? 

00:16:14 Yeah.

00:16:15 I think one of the number one errors that real estate investors, especially folks in like the rental space, or if you’re looking at short-term rentals like an Airbnb or a VRBO or whatever you want to call it, the short-term rental marketplace where people are just doing like weekends or a few nights at a time or a couple weeks here and there, is the issue of when people spend money on the property. Is it really an investment or is it an expense? 

00:16:40 Mm-hmm. 

00:16:41 Okay? Like, providing coffee pods to your tenants may actually be a good thing because that additional service helps keep it rented. Okay? But it’s not equity. Okay? That’s a business expense as part of trying to make the rental more attractive so it’s easier to rent or because you can charge a premium for the rent, because the service level is more of a VIP thing, whatever it is, right? More luxury. But it’s not equity in the property, it’s an investment in making the business more profitable. It’s important to understand the difference. Right?

00:17:18 Right. And then there’s always that one person that thinks that they’re a designer, paints their house a hideous shade of purple, and puts in shag carpet even though it’s 2024. And they think that they have a really cool design and that the house should be worth more, but it’s probably worth less.

00:17:34 Right. And so that would be an example of putting money into it that you will never get back out. You actually decreased the value. 

00:17:41 We see that all too often. 

00:17:43 Yeah. And one of the things is you have to understand the difference between personal utility and marketability. 

00:17:50 Very different things. 

00:17:51 Right. Personal utility would be the idea of, I want to have a hot tub inside my house somewhere. Like, okay, you can do that. But it may not make the property more valuable to somebody else who wants to buy it. 

00:18:06 Especially when you put it smack dab in the middle of the living room. 

00:18:09 Yes. So you put a hot tub in the living room and you forgo a traditional stove to put in place like a wood stove. And I’m like, okay, you’re just making life harder for somebody else to buy it from you because they’re going to probably undo that and do something more conventional. And so when you put money into really unconventional things, it’s possible you won’t get your money back. 

00:18:31 I’m not kidding you. When we went to buy our house, the owner of the house was like, hey, before I sell it, I need to make some updates to it and renovate it a little bit before you buy it. And in the preview of the walk through the house, I’m looking at some of the materials, and I stopped him. I was like, you know, what did you exactly plan to do? He’s like, oh, well, you know, the spot here in the kitchen really needs some wood paneling and I’m like, we’ll pump the brakes. I’m like, let me do you a huge favor. Go ahead and return that to Home Depot, get the money that you were gonna spend into fixing this up, and I’ll just love it how it is. You can skip adding the wood paneling. He actually thought that that was something he needed to do to make it more desirable for me to buy it. I’m like, I’m gonna undo 90% of what you did. 

00:19:23 Yeah.

00:19:23 Don’t waste your money. Just go ahead and sell it to me–

00:19:26 How it is. Yeah. And so therein is the critical, like, you know, are you doing something that’s only you want, or is it something lots of people want? Right. And there are other elements at play too, that you just have to recognize. Sometimes you’re doing things that are stylistic and they don’t actually improve the value. They don’t detract from it either, but you could spend a lot of money on designer things and nobody cares. 

00:19:49 Right, because you think you’re gonna put $1,000 in and magically the house is gonna be worth 10,000 more. 

00:19:54 Yeah, it’s to go, well, hey, we have white laminate or black laminate. It doesn’t matter if the person’s gonna tear it out and put in granite regardless. They don’t care about that feature. 

00:20:04 No. 

00:20:05 Okay, and so, yes, and it all gets back to how exactly, are you trying to build equity in a property. Now, let’s get off of the basics there and into kind of the next level of home ownership here. So we’ve now talked about the idea that you’re building equity and that’s the portion that you own. Okay. 

00:20:24 What happens when you go to sell a place and there’s a bunch of equity in the package that you’ve put together? 

00:20:32 So this is a great question. Home ownership so far in the current tax regime, and I say this because you never know. 

00:20:39 It changes. 

00:20:40 Well, I mean, if you’re watching this and this video is five years old. I say that because we’re going to, it’s being recorded. Right. So, or if you listen to this as a podcast from five years ago, I don’t know what the laws are like now. I know what they are today, which is 2024. Right. So what? May 14th of 2024 today, I’ve got dated the show officially. Yikes. But you have a certain amount of capital gain that you can have on a personal residence and the capital gain is profit, right? Above and beyond how much money you put into the property. Okay. Not how much you just paid for it. 

00:21:13 Do you remember off the top of your head, like how much equity you can have in the house when you go to sell it without having to pay taxes on that equity? 

00:21:20 Yeah, I’m a financial guy. That’s what I do. 

00:21:22 Perfect. I’m setting you up. How much is that David? 

00:21:25 $250,000 per person. 

00:21:29 Oh, so if you’re married, now you have $500,000. 

00:21:31 You have $500,000 if you’re married. So think of it like per tax unit, right? Now, if you have, if you’re two people and you have some kind of joint tenancy or tenancy in common and you’re going to share based on your proportion as long as it’s your primary residence. 

00:21:46 But in most scenarios.

00:21:47 Most scenarios–

00:21:49 You buy a house for $200,000–

00:21:50 For a single, $500,000 for a family. And what it means is if you have profits that are within those parameters and you sell your property, you pay no capital gains.

00:22:03 You bought it for $200,000, you sold it for $700,000, that’s a $500,000 gain, you’re still at the very, you know, max part of that total. 

00:22:11 At the top of that, how do you qualify? 

00:22:13 You have to have lived in the house for, I believe, two out of the last five years. 

00:22:18 Correct. 

00:22:19 Hey, golden star. 

00:22:20 Yep. It has to be your primary residence for two of the last five years. 

00:22:24 But in the event that you bought it for $200,000 and then you sold it for a million–

00:22:29 Then you would have 500,000 of exemption and you’d have another $300,000 of profit. And assuming you’ve lived there for more than two years at this point, it’s a long-term capital gain, which is going to be federally taxed and potentially state taxed, depending on the state. 

00:22:46 Is there any way that you can get out of paying taxes on that? 

00:22:51 There is, not to my knowledge. 

00:22:53 Okay. 

00:22:53 There is not. Not for a personal residence. Now if you have rental properties, different story. 

00:23:00 Okay. 

00:23:01 Different story because there is something known as a 1031 exchange. Now, before we get there, we’ll come back to that. We’ll hunt around at that as a concept. It’s really important for investors. Let’s stick to the idea of primary residence here. 

00:23:14 Okay. 

00:23:15 Suppose that you move out of your house. You’ve lived in it for two years. You move out and you start renting it and it’s been two more years and you’re living somewhere else as your primary residence. Okay. You can still sell the house that’s a rental and potentially get that capital gains exemption because it was two of the last five years. 

00:23:37 Right. That’s important to think about. 

00:23:39 Now, it does change the dynamic a little bit because once it becomes a rental property, you now are treating it like a business. Businesses have expenses and depreciation and other elements. And so what I will caution you is before you just assume you can sell tax free that you want to find qualified tax advice to make sure you’re navigating this property. Because you do have kind of a commingled property here. But odds are very good that you’ll still be able to sell at a profit and not pay capital gains. Okay. The question is whether or not you started depreciating the property and you have some recapture. Okay. The recapture again, not a subject for this program. That’s a subject you should go, what is that? I don’t know what that is. Yeah, if you don’t know what that is, you better talk to somebody who does. 

00:24:29 All right. 

00:24:29 Okay. That’s how that goes. Right. So anyway, those are the basics, around homes. Now homes are also interesting to value. Okay. What’s the number one way that most people end up valuing a home? 

00:24:43 Well, unfortunately, it’s probably they go on Zillow and take a look at what Zillow has.

00:24:47 And largely it’s going to be cost per square footage and comparable feature set in the houses around it. So you’re going to do a lot of comparison work and look for things that houses have in common and look at the feature sets in the houses. So it’s gonna be square footage, number of bathrooms. It’s gonna be the types of materials inside and they’re gonna come up with a ballpark price per square foot and lot size and location. 

00:25:09 Actually, I take it back. That’s not how I think most people evaluate real estate. 

00:25:13 Oh, good. How do they? This is about, I gotta hear this. 

00:25:17 I think over the last three years, it’s mainly been a, well, I just saw that held house down the street sell for $350, and I want to sell, so heck, let’s make mine $380. That house sells, and the next guy’s like, well, if that sold for $380, I’m gonna sell for $400. That’s how it feels, right? Like, everyone just looks at the next guy and is like, well, I can make more because real estate’s hot, and so the next person just one-ups the next. 

00:25:41 Yeah. You know, I wish that there was more, like, I wish I could say you’re wrong, but I don’t think you’re super wrong. I think it’s not the whole story. Right. 

00:25:53 Well.

00:25:54 But I think there’s a huge component of that going on is folks just going–

00:25:58 Well–

00:25:59 You know what? 

00:25:59 Here’s the thing. 

00:26:00 Prices are higher. Let’s do this. 

00:26:01 If the buyers keep showing up, it can continue. 

00:26:04 Okay. Well, there’s an element underneath this. That’s a consideration. 

00:26:08 Let’s talk about that. 

00:26:09 Yes. We’re going to talk about why, does the price of homes keep going up, especially here in Oregon, and then we’ll talk about, how can we get a sense of what homes maybe should be worth? But we gotta take our next obscene profit break. All right gang, welcome back to the True Wealth Radio Show. I’m here. It’s Dave Littlejohn, on the studio with me today is.

00:26:27 Matt Dickson. 

00:26:28 All right, so that’s as fast as I can talk. We’re gonna get back to real estate today. Remember you can grab the podcast if you’re just getting on board. We’re talking real estate today and we were talking about home ownership. 

00:26:39 What have we shared? What have the key, like give me the key highlights so far so if people are just tuning in, they can be like, okay, I know what you’re talking about.

00:26:46 Well, I mean, the highlights we talked about, you know, what exactly is equity in a home, right? That’s the percentage of ownership. Talk about how your home is not a straight real estate investment. Okay. Now, everybody in theory needs a place to live, right? And so you can rent or you can buy. So in a sense, you are converting cash as a stored asset into something in your home, right? Like you’re holding equity in there. So like you’re going to put money in and store the value there. It should be somewhat hedged against inflation. So typically homes appreciated, at least the price of inflation. So it’s a good placeholder, and you need a place to be anyway. So like all of those have some utility value to it. 

00:27:25 Right.

00:27:26 We talked about how investing in your home isn’t necessarily automatically an investment, right? That you really need to know the difference between an asset and a liability, or just a personal upgrade that you want that doesn’t add value to the home, it just adds to your use and pleasure, right? So there you go. And then we talked about the tax ramifications of home ownership when you go to sell. Your primary residence and the way that’s treated from a tax perspective, I’ll encourage you to grab a podcast if you want to get that sort of recycled. But somewhere between 250 and 500,000 of potential capital gains exemption, depending on how long you’ve lived there. But going forward, for a lot of folks, it’s not just about, great, so we own a home, but I want to figure out, please talk to me about rental property. That’s the big thing that so many people are saying, how do I get into a rental property because I want somebody else to help me pay for this thing. And, you know, like most of us, if you’re listening, you kind of remember like at some point you probably rented when you were first getting started and then you start acquiring properties and try to get them rented. And then we all heard the horror stories about, you know, how awful it is to be a landlord. But then we’ve all heard the stories about the people that made their fortunes in real estate. And so somewhere in between is probably, truth. I can tell you as somebody who’s been a landlord, I’ve had some pretty terrible experiences. We’ve had tenants that, you know, through negligence set fire to a place. 

00:28:48 Right. You’ve been a landlord. This is interesting. You’ve been a landlord to both like the Airbnb type rental and also to the long term renters, right?

00:28:57 I’ve done long-term and short-term residential and they’re done commercial. 

00:29:02 Okay, do you wanna kinda talk about some of the things that you’ve seen as maybe some pros or cons in all three of those different arenas? 

00:29:09 Sure, sure, and it’s interesting, it’s a great question and let me just kinda clarify too. I’m gonna speak from my experience as a landlord, but not necessarily as a real estate professional. 

00:29:22 Okay. 

00:29:22 Like I’m not in the profession of real estate. Like we do investment management and so one of the things I tend to be pretty good at is valuing real estate, because I know how to use a lot of the same metrics that we apply in the investment marketplace toward real estate as an investment. 

00:29:38 Yeah. 

00:29:39 But the idiosyncrasies of, like contract law and that kind of stuff, I still have to work with other professionals to help pull this off, but let’s talk, high level. So, one of the lower maintenance things that you can have between commercial and residential. The interesting thing about residential, it’s usually easier to get into. Okay.

00:30:01 Okay.

00:30:02 But there are some dangers to it, right? So oftentimes you can get into a residential property. Maybe what you do is you use, you first buy it as your own home, right? So you can use certain government programs to use fairly low money down to get in and occupy and start building up some equity in a home. And then you may intentionally do a cash out refinance if you’ve built some equity up. Use that equity to go buy a new home and then keep the existing home that you have and turn it into a rental. It’s one of the most common pathways that people get into real estate ownership. And at that point, you’re probably in long-term real estate. Okay, so long-term tenants, which just means that you’re not talking about short-term contracts, you’re talking about actual leases, whether it’s month to month or a year at a time or something like that. But somebody’s gonna live in your house and you’re their landlord. Okay.

00:30:49 Okay.

00:30:50 The terms of the lease are going to determine how much they pay and some of the responsibilities. But generally speaking, the tenant has the responsibility to not, like destroy your place and to notify you if things are broken. 

00:31:01 Right. 

00:31:01 And the landlord has the responsibility of showing up and making sure the place stays livable and the things that are broken because they weren’t like abuse or negligence. You know, like the stove breaks and the tenant didn’t break it. It just sometimes stoves break. Okay. Landlord’s supposed to fix that. Right. 

00:31:18 Right. 

00:31:19 The roof is leaking. Landlords, supposed to fix that. The toilet backs up. Well, why did it back up? Well, it backed up because of misuse. Okay, well, there’s some issues here. But sometimes, like the tenant has some culpability, sometimes not. And so, but bottom line is you’re going to collect monthly rents.

00:31:40 Right. 

00:31:40 You’re usually going to have some kind of security deposit. And that’s so that there’s a certain amount of contingency that if the tenant is destructive. You have a little bit of cost recovery when they leave. So the pros are once the tenants in, they’re a good tenant. It’s relatively low maintenance for you. It kind of just works. And you don’t have to do a whole lot of hands on other than the typical sort of maintenance that may come with the property, right? 

00:32:03 Right.

00:32:04 You decide whether or not you have yard service or the tenants, going to do the yard, right? Trash service or not, those sorts of things. Lots of pros and cons, not the subject of this show, but relatively easy to collect the money. Some of the dangers, though, varies by state. We’re in Oregon, okay? Oregon tends to be very tenant–

00:32:22 Protected. 

00:32:23 Favorable. 

00:32:23 Yeah, favorable is the word. 

00:32:25 And so the landlord tends to bear a lot of risk if the tenant becomes adversarial. 

00:32:31 Right. 

00:32:31 Right? Tenant refuses to pay. The eviction process is fairly long and drawn out. Tenant starts to destroy stuff. It’s pretty difficult to, you know, get people out of the way. So you can have some pretty expensive tenants if you get the wrong kind in there and it’s hard to get them out. And law enforcement in many cases, their hands are sort of tied by again, regressive laws that, and again, we’re talking to, you know what, I don’t even care. If somebody’s out there going, no landlord, screw everybody, like shut up. Like I’ll just say it, like I’m on hand, shut up. Because everybody that says, no, everybody buys everything up and makes everything expensive. It’s like, no, there’s a shortage to begin with. 

00:33:14 Yeah. 

00:33:15 Everybody’s looking for investment all over the place. Why don’t you take it up with your politicians, why it’s so doggone hard–

00:33:20 To build. 

00:33:20 To cut through the red tape, to build at an affordable price point. Like, why don’t you take it up there instead of like, telling me how landlords are screwing the world over. There are bad landlords and you know what? Shame on them. 

00:33:31 Right. 

00:33:32 But there are terrible tenants out there too. And absolutely shame on them. Okay? If not everything is, you know, capitalist pigs screwing over the little guy. 

00:33:40 Yeah. 

00:33:40 Just shut up. If that’s your attitude, shut up. Don’t listen to this program and tell me how you’re trying to become a landlord and do it the right way. And how the whole system, like the system’s broken in lots of places. So there you go. I’m… totally ranted about it. Probably make YouTube. 

00:33:55 Do you feel a little bit better now that you got it out though? 

00:33:57 A little bit.

00:33:59 Get more out, David, I’m enjoying this. Let’s make this into a little bit of a therapy session. 

00:34:04 Oh, boy. I think the frustration level, I wish landlords would own up to the parts they’re responsible for. Within reason, you call somebody at three in the morning because you got in a fight and broke the sink and you got a leak everywhere, or you don’t say anything and you flood the place, you have serious liability. You damage a place as a tenant and you don’t tell the landlord and you try to cover it up. That’s straight up negligence, right? 

00:34:29 Yeah. 

00:34:29 I mean, that may as well be treated as a crime. I mean, if my kid breaks something, like they get in trouble later, if they try to hide it, okay, they may be in trouble for telling me too, but it only gets worse when you hide it. And so like, they’re these basics of, like human decency and let’s start with that. Right. And landlords do not need to gouge people, but landlords are just as big a pickle as everybody else. Half the real estate out there in the market is uninvestable as a landlord. They’re completely uninvestable because the amount that you can actually charge someone in rent won’t be enough to cover the cost of the property. 

00:35:04 It’s staggering if you actually run the numbers. Like, hey, here I am. I have some money. I want to invest it in real estate and make a little bit for my time. You start running the numbers, especially with housing costing what it costs today. 

00:35:18 Right.

00:35:18 Like you’re saying, it is very, very difficult to make stuff pencil. 

00:35:22 Yeah. And one of the ways that we try to do it is you see higher density stuff. And a lot of people are like, but I want a house. I don’t want to go, live in an apartment that’s got 20 units in a building. I know. And yet that’s the cheapest way you can build it is at scale, right? It’s cheaper for a builder to build 20 units at a time. 20 cookie cutter units is way cheaper than one custom unit. 

00:35:43 Right. 

00:35:43 So why all the custom homes go up? ‘Cause people will pay enough money for custom home that the builder can afford to do it. 

00:35:50 Right. 

00:35:50 We actually had, it’s been probably a year, year and a half ago, but I had a guest on the program named Barry Robinson, did a great job of breaking this out for us and talking about how expensive things have gotten and that the average builder couldn’t afford to build because of these cost issues. That’s a supply side issue of the availability and the ability to build more real estate. Why is the price so high, especially in Oregon? The demand is there. And it’s tough. And so that’s why I get back to, again, if your rent is like landlords are hosing everybody because they’re buying up properties, the demand is there either way, whether the landlord buys it or somebody else does. But it’s, also let’s stop assuming that a tenant is ready to buy. You need to be qualified. You can’t just say because I want something, a bank should trust me to loan me money. 

00:36:37 What do you say to the person who’s kind of gotten through that space? They’re no longer a renter. They bought that custom house. They have a mortgage. Do you have any, like tips or tricks for the person who has taking on that–

00:36:49 I feel like you’re leading the witness. What do you want, Matt? 

00:36:51 No, I’m just saying. You know, that was one of the questions that we had dialed up for today was, you know, what do you say to the person who has a mortgage? And they’re like, hey, you know, I want to maybe pay this off a little early, or I want to try and, you know, really leverage my money to the max. What do you say to the person who’s got the mortgage? And they’re trying to move forward and be better financially. 

00:37:14 Okay. I like this question a lot. Okay. And knowing that we have limited time. So here’s what I want to do. We got to take our last break. So we’ll set that up. But I think there’s some things that our listeners can… like if you’re in home ownership and you’re like, how do I pay this off? So here’s the thing, whether you own a home or not, okay? 

00:37:34 Are you going to give some wise words? 

00:37:35 We’re going to talk a little bit about how mortgages work and how you can, it’s not that you can beat the system, but how you can do something about it to improve your position. 

00:37:43 That’s what I want to hear. 

00:37:44 Yes. So let’s do that when we come back. Hey, welcome back to the True Wealth Show, where Matt and I are just going off by the seats. 

00:37:52 That better make it into a YouTube Short.

00:37:54 Yeah, we may end up having the off air stuff just shows up on YouTube for this session, because we’ve been kind of, I guess I’m schooled up. 

00:38:02 Basically what we’re saying behind the scenes is, if you don’t like your situation, maybe you should try working a little bit harder, because we’re tired of everyone just saying, wave. 

00:38:11 I’m gonna pause it for a second. It’s not just the work harder. 

00:38:14 It’s smarter. Work smarter. 

00:38:15 It’s not just the work smarter. Like you do need to make different choices. I agree that things are hard and things are expensive and that it’s mismanaged at a high level that’s produced lots of inflation. And there’s been a lot of things where, like decisions were made out of politics instead of what was best for people. And the net result was that we all pay more. I actually do think it’s harder for a young person today than it was 20, 30 years ago. Like I really do. 

00:38:40 Yeah.

00:38:41 The cost of education, all these things, super high. Food and energy, super high. I’m not telling you that it’s not hard, but what I’m telling you is you can’t make some harmful decisions and blame everybody else for it. 

00:38:54 Right. 

00:38:55 Right. Like as you said, you can’t go put the Xbox on a credit card and then spend 10 hours a day gaming and then complain that you can’t hold a job down. 

00:39:04 Mm-hmm. 

00:39:04 Right? Because like, you know, you only got four hours a day of actual work time left. 

00:39:09 Right. 

00:39:09 Right. You still gotta sleep and eat and some other stuff. You can’t do those things and then complain like the world owes you. 

00:39:15 I saw it all the time when I was a teacher. You’d witness it. The parent who was in poverty and they just, they couldn’t delay any gratification. The minute that they got some money, they’re like, well, I’m gonna spend it and at least have a little bit of fun since I can. 

00:39:30 That is the single biggest determinant in financial success is your ability to delay your gratification. 

00:39:35 One hundred percent.

00:39:35 I’ve been talking about all this other real estate stuff, but if you can’t delay gratification for 10 minutes, then you’re done. And yes, I’m being sarcastic, about 10 minutes for those of you who are literalists. But you better be able to delay gratification for real. 

00:39:47 Yeah, and sometimes for years, because it’s not gonna just be fairies and pixie dust. You’re gonna have to grind and sweat it out. 

00:39:55 I literally, for the first two years of my career, I paid to work to learn this craft. I worked nights so that I could afford my errors and omission insurance. making less than my insurance costs while I learned this profession. 

00:40:08 But you were betting on yourself and you were betting that over time. 

00:40:09 Yes, and this industry in the direction it was going. 

00:40:12 Yeah. 

00:40:12 So, all right, rah rah rah, it’s not about me. Let’s talk about real estate. Look, if I leave you guys with one last thought, so all you out there listening, Matt, you set the table. 

00:40:21 Did I? 

00:40:22 Right, it was, hey, if you own a house, you’re still paying out a mortgage, you’re trying to figure out what to do.

00:40:25  Yeah, that was the question. 

00:40:26 So the number one thing is can you accelerate payments on your mortgage? Okay, now there are two schools of thought, we’re gonna take the straightforward. One is, keep as little equity in your home as possible so that you have that asset available to be invested elsewhere and be productive. That is a higher risk proposition. Because it puts your whole–

00:40:43 Yeah, and you better be really good at whatever it is you’re investing in. 

00:40:48 So there are lots of reasons for it. We just aren’t gonna go into that. We’re gonna keep it straightforward, okay? Let’s say that your goal is to get your house paid off and then to take your discretionary income because you no longer have a mortgage and you’re gonna start buying other assets at that time. Hey, why does it help to start paying extra payments, even if they’re little, on your mortgage as soon as possible? 

00:41:08 Well, if you can get rid of the high interest that you’re paying, like if you’re losing four, five, six, seven, $800 a month to interest, and you can whittle that down, that frees up money to where you can invest that back as a whole. 

00:41:19 Here’s what happens in very simple terms, we tend to overcomplicate this and it’s not that complicated. 

00:41:25 No.

00:41:25 If you borrow $300,000 to buy a house, you’re paying interest on $300,000. 

00:41:31 Yep.

00:41:31 Your first payment pays almost only interest and you get a little bit of principal. So the next payment is a little bit less than the first principle-wise, or you owe a little bit less, so you still have the same payment, but the way they’ve calculated the mortgages, your payment stays the same, and then each month, as you gradually whittle down at your principal that’s owed, more of that payment gets applied to principal and less to interest because you’re starting to have a smaller loan value. 

00:42:01 Right. 

00:42:02 Right? It’s actually that simple. So, if you make extra payments that don’t go to interest, then what it does is it takes the lifetime average daily balance of your mortgage and lowers it, which means more of your standard payment goes toward interest, which means you’re accelerating the rate at which you lower your lifetime average daily balance of your principal and your loan. That’s really the issue. Just go listen to that part again. If you’re listening to this or watching YouTube– 

00:42:34 I was actually gonna record.

00:42:35 Go do it again. Listen to what I said because your average daily loan balance drops faster when you can apply more principal early in your loan. And that lower average daily balance means you have to pay less interest. This is the same thing. There’s some programs out there advocating for accelerating mortgage payoff by using a home equity line and basically putting your whole paycheck in your home equity line and then gradually borrowing it back out. All they’re really trying to do in that scenario is lower your average daily balance. It’s just harder to execute than you think, right? Like there’s not a lot of programs that work very effectively to do that. But you know, the person with the whiteboard will explain it to you. It’s like, oh, look, it’s magic. No, lower average daily loan balance. So, accelerating payments does what? Gets into your principal faster. 

00:43:22 Right. 

00:43:23 You’re making more payments per month, like, oh, let’s just do two payments a month, and then like every three months, we make an extra payment, right? All that’s doing, chipping away at the principal sooner. Because you’re getting to those tweener payments, tweener meaning in between the normally scheduled payments when the interest gets charged, and you’re hammering down your daily average balance. That’s what you’re doing. Right. Okay. So that’s the magic of getting your house paid off faster. I cannot believe how fast today went. I thought we were going to talk about how we value rentals and how you analyze cash flows, depreciation, amortization. 

00:43:54 We’ll turn it next time. 

00:43:56 There’s so much more about real estate. I guess we’ll do another show. 

00:43:58 Yeah, why not? 

00:43:59 So, okay. Well, crazy enough, we are at the end of the day time-wise. So Matt, let’s kind of do what we always do. How do folks reach us if they’ve got more financial questions? 

00:44:09 You can call us or text us at 541-375-0898 or go to the website at littlejohnfs, as in financial services, dot com. 

00:44:19 Right, and do keep in mind, we talked about real estate today. We think real estate is a healthy part of a comprehensive investment strategy. That includes retirement planning, and it includes healthy estate management, includes risk management, all that stuff is in there. But today was the real estate shift.

00:44:37 I like it. 

00:44:38 All right guys, well look, that’s the music, so you know what time it is. Once again, just want to say thanks for tuning in. Get more information at littlejohnfs.com or give us a call at 541-375-0898. Until next time, I’m Dave Littlejohn. 

00:44:50 And I’m Matt Dickson. 

00:44:51 And you’ve been listening to True Wealth on News Radio, 93.9 FM and 1240 KQEN.