RPF0119-Schaub_Interview
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00:00:30.000 | Today on the show, I have an interview for you with renowned real estate investor and author,
00:00:34.400 | John Schaub. We're going to talk about how to get rich with real estate,
00:00:38.640 | but we're going to do it in the non-sleazy way. Just straight up information, a little bit of
00:00:45.600 | inspiration, but not based on grandiose stories, but on straightforward facts. Enjoy.
00:00:52.400 | ♪
00:01:08.560 | Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets,
00:01:12.000 | and today is Monday, December 15, 2014. Today, we're going to spend some time on the investing
00:01:19.360 | side of the three-legged stool that we talk about all the time of income, expenses, and rate of
00:01:26.480 | return. We're going to talk about how to maximize your returns and grow your wealth with real
00:01:31.520 | estate investing.
00:01:32.640 | ♪
00:01:41.600 | You know, I've learned over the years to actually tread very carefully in the world of real estate
00:01:45.360 | investing. I learned the hard way, which you'll hear about a little bit in today's show. But I've
00:01:50.400 | learned the hard way, and I really respect and admire, though, people who can share information
00:01:56.720 | about real estate investing and who can do so in a straightforward way where they can share
00:02:03.920 | ideas, strategies, tools, tactics, techniques, and most of all, encourage you toward action.
00:02:12.160 | My guest today is one of the good guys. He is the author of actually my most recommended real
00:02:18.400 | estate book. He has a book that he wrote called Building Wealth One House at a Time. He has
00:02:25.040 | several books. His book, Building Wealth One House at a Time, is my go-to resource for somebody who
00:02:31.200 | says, "I'm interested in becoming a real estate investor, but I haven't done it, and I don't know
00:02:35.280 | much about it, and it is my best go-to introduction." John's a really great guy. He's a class act in
00:02:41.680 | every way, and he brings a wealth of knowledge and experience to the table. So sit back, grab a pen
00:02:48.560 | and a piece of paper. You're going to want one for today's interview, and enjoy this interview
00:02:52.240 | with John. John, welcome to the Radical Personal Finance Podcast. I appreciate you making time for
00:02:58.080 | me this morning. Thank you, Joshua. I'm happy to be here. I brought you on to discuss one of my
00:03:03.360 | favorite topics and topic that you're an expert in, which is real estate. I've got some specific
00:03:09.120 | lines of questioning that I want to pursue, but would you start by sharing a little bit of your
00:03:14.720 | background with real estate, how you got into it, and what your experience has been over the
00:03:19.120 | decades as a real estate investor? Yeah. Well, I got into it. I had, as a kid, like many folks did,
00:03:25.600 | had several different jobs. I worked in restaurants. I worked in construction. I went to
00:03:30.000 | college. While I was in college, I managed an apartment building, and I got lucky one day,
00:03:33.920 | a guy came along and wanted to buy it, so I sold it to him. I collected my first commission back
00:03:38.240 | when I was in college. So, I got my real estate license early, and I was in the brokerage business
00:03:43.200 | for a few years, but decided I didn't like the brokerage business, and then started investing
00:03:47.680 | back in the early '70s. I still have the first property that I ever bought, bought in 1973. I
00:03:52.800 | still own it. Through trial and error over the last 40 years, I've been buying and managing
00:03:59.120 | properties and learning which ones were the easiest to manage, and which ones made me the
00:04:03.680 | most money, and which ones had the least amount of risk, and gave me the best lifestyle. I'm kind
00:04:09.280 | of a lifestyle guy. I'm in favor of owning properties free and clear. We pay cash for
00:04:16.240 | our house, and we bought it back in 1980-something. I've encouraged kids. I wrote a book back in the
00:04:22.160 | '80s called "How to Own the House of Your Dreams Free and Clear." So, I'm a guy who likes to be
00:04:29.040 | free of debt, but I do understand leverage, and there is a safe way to borrow money in the real
00:04:34.320 | estate business. There is safe leverage, and I know it's hard to accumulate a lot of money without
00:04:39.600 | using some kind of leverage, but you have to have your head on straight about it. There are some
00:04:43.280 | people who are just totally anti-leverage, and I respect that, but it is very hard to accumulate a
00:04:48.320 | large capital base unless you use some leverage to start with. So, that's it in a nutshell. Today,
00:04:55.200 | I own and manage my own properties. At one time, I had a lot more property, and I had a large staff.
00:05:01.040 | Today, I operate just my wife and myself, just the two of us, and we manage our own properties,
00:05:05.520 | and it gives us quite a lot of freedom. We travel a lot. My daughter lives in Australia,
00:05:10.400 | so we're in Australia quite a bit, and I can manage my properties today from any place in the
00:05:14.240 | world because I have good long-term tenants, and it's like family. Everybody likes everybody.
00:05:20.160 | Everybody benefits from being a part of a group here. People who live in my houses, I own nothing
00:05:26.160 | but houses. The people who live in my houses want to live in my houses. They respect the houses.
00:05:30.720 | They respect me, so we don't have any big issues, and that's totally different from where I started.
00:05:35.920 | I started off buying apartments and duplexes and commercial buildings and all sorts of
00:05:40.720 | different kinds of income properties, and I can tell you that end of the business is a constant
00:05:45.840 | battle because people are always coming and going, which requires you to work a lot as a landlord,
00:05:51.920 | and then the other side of it is many of them are trying to beat you out of your money,
00:05:55.520 | and they negotiate all the time, so you're fighting with folks, and that's not a situation
00:06:00.160 | I'm in today at all. We have team players as tenants, and if they don't want to be on the team,
00:06:06.000 | it's not a problem. They can leave, but the only people that live in my houses are team players
00:06:10.000 | who respect the property, who respect me, who pay on time, who take care of the property,
00:06:14.640 | and who stay for a very long time. My average tenant stays eight or ten years, so
00:06:18.080 | that makes life better, and that's a different model than most people are used to. Most people
00:06:24.320 | think of landlords as somebody who's charging too much rent and extracting too much for folks
00:06:28.800 | and taking advantage of them, and that's not our game plan at all, so that's it in a nutshell.
00:06:33.600 | You must be one of the leading champions of at least the advantages of single-family housing.
00:06:40.080 | I remember the first book of yours that I ever read was Building Wealth One House at a Time,
00:06:44.560 | and it really, I thought you made a compelling case for single-family housing versus other
00:06:50.960 | forms of real estate. What would cause somebody to look at other forms of real estate instead of
00:06:56.800 | single-family housing, though? You just made a little bit of the case for it, but what would
00:06:59.920 | send someone in the direction of looking at apartment buildings or other ways of investing?
00:07:04.400 | Well, if you had a lot of money, if you're trying to invest billions of dollars,
00:07:09.520 | the hedge funds are investing billions of dollars in houses now, but this is the first time I've
00:07:13.440 | ever seen that kind of money come into the house market, and they won't stay in it very long
00:07:18.160 | because the management style that they are using is not going to work for them. Their expenses are
00:07:24.800 | going to be a lot higher than they projected, and they're going to have a lot more turnover
00:07:28.240 | than they thought because they don't operate like I do. They don't have this team. They're
00:07:34.560 | trying to extract as much money as they can from their tenants, and that's not a good plan long
00:07:38.640 | term. But I have owned other property, and if I had to invest $50 million in a year, I wouldn't
00:07:45.040 | buy houses. I'd have to go out and buy something bigger, probably land or maybe a large-income
00:07:51.200 | property that would be professionally managed. But for the little guy getting started,
00:07:54.960 | I started with no money. I was a little guy. I didn't inherit a bunch of money or anything, so
00:07:59.680 | when I started buying property, I had to buy with a relatively small down payment, $500,
00:08:05.280 | $1,000 down and find somebody who would finance it for me because the banks wouldn't let me any
00:08:09.680 | money. And I learned over the years that there are a lot of people that would do that, that would
00:08:14.240 | finance a purchase of a property, and especially people who didn't want properties. And some of
00:08:19.840 | those, of course, were kind of rough. They needed work. They were harder to manage. So if you wanted
00:08:25.680 | to get started in this business, you can buy all the run-down houses and duplexes and apartment
00:08:30.640 | buildings you want that are mismanaged. You can buy those properties easily with owner financing
00:08:35.760 | today, but they're a job. It takes a lot of work to manage those. So the key long-term,
00:08:41.360 | your strategy long-term, if you want a good lifestyle, is to end up with some properties
00:08:47.040 | that sort of self-manage. And I don't want anybody to believe that there's no work at all involved
00:08:53.520 | here, but I can do everything I need to do to manage my properties with my cell phone from
00:08:57.440 | Australia. And I do it with email. I don't even have to talk to folks. So if something breaks,
00:09:02.160 | it's easy to email somebody and get it fixed. And somebody does move out when I'm far, far,
00:09:07.600 | far away. The house just is empty for a month until I come back, but that's part of the price
00:09:12.240 | I pay for my lifestyle, and I can live with that. But I resist the temptation to get into bigger
00:09:18.000 | properties for a couple of reasons. One is liquidity. If you look around most markets
00:09:23.200 | today, you'll find there's still quite a bit of empty commercial building. And same thing with
00:09:28.400 | office space. And these buildings sometimes become obsolete. The markets change, and there's no need
00:09:34.560 | for them. So it's not unusual to see a building sit empty for a year or two, or even somebody
00:09:40.080 | tear down a 10-year-old commercial building just because it's obsolete. A house is a whole
00:09:44.480 | different animal. And if you buy houses in neighborhoods that are stable and improving,
00:09:49.920 | those houses will probably be there 50 years from now. And there's neighborhoods in most
00:09:54.160 | towns that have been there 50 years, and some of those neighborhoods are getting better and better.
00:09:58.320 | So I tend to buy in those neighborhoods. It's certainly a simpler way to buy real estate.
00:10:03.840 | And again, for the person who's getting started and wants to own maybe five or 10 income properties
00:10:10.800 | that'll produce enough income to support their lifestyle, it just makes more sense to me.
00:10:16.720 | If you're sitting down having a cup of coffee with a bright, energetic, young high school graduate or
00:10:23.360 | college student, and this young man or woman is saying to you, "Mr. Schaub, can you give me some
00:10:29.040 | advice of how I can be rich and financially independent like you?" What would be the path
00:10:34.880 | that you would lay out for this person of how to go from nothing to wealth?
00:10:42.320 | Well, if you're going to do it in real estate, one of the keys is management.
00:10:46.080 | So you have to learn how to manage people, how to talk to people, how to recognize folks who are
00:10:52.320 | going to do business with you if you're buying property, and how to recognize a good tenant,
00:10:57.760 | and then how to attract that potential tenant. So probably it wouldn't be a bad idea. I have
00:11:02.720 | three children, by the way, so I've given this advice before. It wouldn't be a bad idea to get
00:11:06.640 | involved in some business where you're managing other people and develop that skill, because that's
00:11:11.440 | a very valuable skill. From a real estate perspective, it's important to know where
00:11:16.400 | you're going to be. Buying property far away from where you're going to live is not a good plan.
00:11:20.720 | So you have to -- and the challenge I think most young people have is they're not sure where they're
00:11:25.120 | going to live for the next 10 years or who they're going to live with, and a lot of things are going
00:11:28.720 | to change in their lives. So for most people, probably I wouldn't recommend that a 20-year-old
00:11:34.720 | go out and buy property unless they were confident that this is the town they're going to stay in
00:11:38.720 | for the next five or 10 years. Because if you buy it and have to sell it next year,
00:11:42.560 | you're probably not going to make any money. But once you establish that, then
00:11:46.800 | a systematic accumulation of good properties -- if I look at the mistakes I've made,
00:11:53.360 | and I've made many mistakes, it's generally buying something that didn't turn out to be
00:11:57.120 | a good property from a management standpoint, or that I thought it was in a path of progress,
00:12:04.160 | and progress never came, or I got involved with some bad financing. So I teach people,
00:12:09.680 | when I teach classes or I teach people the danger and the advantages of borrowing money.
00:12:17.120 | But you have to be careful when you borrow money. People get excited about asset protection,
00:12:22.000 | about getting sued, but very few people go broke because they get sued. A lot of people go broke
00:12:26.800 | because they borrow money and can't pay it back. So debt is the enemy. That's what you have to
00:12:31.600 | worry about and understand. And once you know how to use that properly, then it's a terrific tool
00:12:37.200 | for you. When someone is getting started learning about real estate, my experience in the real
00:12:46.400 | estate education business has been that there are a lot of scam artists selling information
00:12:52.320 | that may or may not be accurate. How can someone who's interested in learning learn to detect
00:12:58.960 | the scam artist information versus the solid information from wise and experienced investors?
00:13:05.520 | And that's a good question because you're absolutely right. There are a lot of smooth
00:13:14.240 | talkers out there who are not actually in the real estate business, don't actually own anything,
00:13:19.200 | but they will sell you their system or their idea. And generally, one sign is they'll charge a lot
00:13:26.160 | of money for it. I've been teaching seminars for nearly 40 years and I think the most I've ever
00:13:33.040 | taught charged for a seminar, for a three-day seminar, is about $600, about $200 a day.
00:13:38.960 | So if you find someone that's charging you thousands and thousands and thousands of dollars,
00:13:42.640 | you know, $20,000 or $30,000 for some secret, they're just ripping you off.
00:13:46.720 | There's a lot of legitimate education taught by people who are really in the business who
00:13:53.680 | don't charge that much because they don't have to. It's not their main business. They're not
00:13:57.040 | paying somebody a large commission to get you in the door. I would think that unless you have a
00:14:02.720 | referral from somebody who has heard somebody speak and thinks that they're legitimate and
00:14:08.240 | thinks that they know what they're talking about, I certainly wouldn't write a check.
00:14:12.240 | I might go listen to somebody, but my advice to people if they're going to some of these
00:14:16.320 | come-on seminars, you know, free seminars, is to leave your checkbook at home because
00:14:20.560 | they have some very good salesmen in the back of the room at those seminars. And I've seen them
00:14:24.240 | sign people up for credit cards and then book their credit cards for thousands of dollars.
00:14:28.000 | Those are common. So stay away from those outfits. There's a lot of great books written on real
00:14:34.240 | estate investment. I mean, one of the first ones I read was Bill Nickerson's book, "How I Turned
00:14:38.800 | $1,000 Into $1,000,000 in My Spare Time." And he's rewritten that. It goes dead now, but he and I
00:14:44.640 | shared the same birthday. We were friends years ago. Jay DeSima's written some good books. Donald
00:14:49.360 | Trump's first book, "The Art of the Deal," is good. Bill Secondor's book is good. I think my book is
00:14:53.840 | good. Al Lowry, who was Bill's partner for a while, wrote a couple good books. And Bob Ross
00:15:00.960 | wrote some good books. He's a student of mine. Bob Allen is a student of mine. He's written a
00:15:04.960 | couple good books, and I'm going to call nothing down. So there's a lot of stuff you can read out
00:15:08.880 | there that'll get you started. But then it's trial and error. I mean, the lessons you're going to
00:15:14.480 | learn the best are when you make a mistake and it costs you $1,000. I can talk to you about the
00:15:20.800 | mistakes I've made. They cost me a lot more than that. And you'll probably remember some of it,
00:15:25.120 | but when you make a mistake, you will remember. So the answer is that you have to get into the
00:15:31.760 | field. You have to go out and take some chances. And that's why I've always encouraged people to
00:15:35.760 | take small chances. I taught a class for years I called "Making it Big on Little Deals." And I
00:15:41.920 | explained to people that you're much better off doing five little deals a year than one big one,
00:15:46.960 | because you're going to make some mistakes in there, but the chances are pretty good if you
00:15:50.240 | make five deals. If one or two of them will turn out really good, and then if the three other ones
00:15:54.480 | are not very good and you're just beginning, that they don't cost you much money. You don't lose
00:15:59.760 | much money. You're still in business. But if you get into one big deal and it goes bad, you're
00:16:04.000 | probably done.
00:16:07.520 | The real estate education industry, I remember when I was in college, I went to a seminar,
00:16:13.440 | and it was a Russ Whitney seminar. And I didn't know what I was doing at the time,
00:16:17.760 | but I just remember being so hot under the collar to sign up for the $35,000 coaching package.
00:16:26.160 | And I was at the back of the room, ready to put it on a credit card. And they're like,
00:16:30.880 | "You got to do it now." Well, I had to, "No, I got to wait." And thankfully, I'm so thankful,
00:16:36.080 | one of the biggest, it would have been one of the biggest financial mistakes I ever made.
00:16:38.960 | Thankfully, I let my dad talk me out of it, and he talked a little sense into me. I'm so grateful
00:16:42.800 | to him now that he did so. But just that, there's something about the real estate industry where
00:16:48.320 | it seems as though people take the statistic and say, "More people have become self-made
00:16:53.680 | millionaires in real estate than just about anything else," which is probably true.
00:16:58.000 | And they twist that into a sales seminar that is heavy on hype and low on density of information.
00:17:05.920 | And I'm so thankful I avoided that now. But it's sobering to realize how close I was to
00:17:12.000 | wrecking my financial life at that stage in life.
00:17:15.200 | Well, keep spreading the word because high-priced education, and it's not just in the real estate
00:17:21.200 | business. I even think that some colleges are going the wrong direction, charging people
00:17:27.120 | more money than $35,000, sometimes hundreds of thousands of dollars for a degree that they can't
00:17:33.280 | use to get a job. People think just because they get education, they're going to get a paycheck.
00:17:40.960 | Obviously, that's not true. So it's a challenge. It's a challenge. But again, I got all my college
00:17:49.200 | education in the public school system. I went to a junior college here in town. I went to University
00:17:53.440 | of Florida, both good schools, but a lot cheaper than going to some private school. And I feel
00:18:00.720 | like I've received a good education. And so I encourage kids. I've been on boards of schools.
00:18:06.800 | I really encourage kids to get a good education at a reasonable price. And that's why I continue
00:18:15.680 | to teach. You mentioned leverage and the advantages and pitfalls. I'd like to come
00:18:21.920 | back and ask you to expand on that a little bit, because this is one of the biggest debates and
00:18:27.520 | concerns and questions that people face. How would you give an outline, a framework of a way to think
00:18:33.920 | about leverage and to appreciate the advantages of it and the disadvantages that would help somebody
00:18:38.960 | think through their situation and see what would be best for them? Well, I've written a lot on this,
00:18:45.040 | so it's going to be hard to condense it into two or three minute answer. But the short answer,
00:18:50.720 | I guess, is whenever you borrow money, first of all, I don't think you should borrow money unless
00:18:55.600 | you're buying investments. I don't think you should borrow money to live on. I don't think
00:18:59.120 | you should borrow money to buy a house to live in. I don't think you should borrow money to buy
00:19:03.600 | cars or get into credit card debt. I think personal debt is just an anchor. It's going to drag you
00:19:09.840 | down. So unless you can afford to buy that car for cash, unless you can afford to buy a toy or take
00:19:15.760 | a trip on cash, I'm against it. Now, I know that's not that popular. Most of the world operates on
00:19:22.240 | credit nowadays, and people who have jobs can pay those credit card bills back, but I've never been
00:19:27.440 | a fan of personal credit. On the other hand, investment credit's a different animal. If I
00:19:33.760 | find somebody who will sell me a house and will sell it to me with a down payment that I have
00:19:38.880 | today and will carry back a note, will carry back the financing with payments that I can afford to
00:19:45.760 | make with the rent I collect after paying my expenses, that's not a high-risk debt to me.
00:19:51.120 | If I lose that house, and I will say I've never lost a house in a law like that, but if I did
00:19:56.560 | lose that house, I would simply give it back to the people I bought it from. They would probably
00:20:01.360 | be happy with that transaction, but they haven't been hurt. I mean, they keep my down payment.
00:20:06.480 | They get their house back. They haven't been damaged, and the law is pretty clear on this.
00:20:12.080 | If I finance a house, if I buy a house from you and say I buy a $100,000 house, and I give you
00:20:16.960 | $10,000 down, and you finance $90,000 for me, and the payments are going to be $500 a month,
00:20:23.120 | and I can afford to rent that house for maybe $950 and pay the taxes and insurance and maintenance
00:20:29.040 | and still have $500 left to pay you and maybe a little bit for myself, if I can't make those
00:20:34.720 | payments and give that house back, I don't owe you the $90,000. You've received the house back,
00:20:39.360 | so there's no debt to pursue there. So I see that kind of leverage as a totally different animal
00:20:46.880 | than either borrowing cash from a bank to go out and buy property or to borrow from a credit card
00:20:52.640 | company or a car dealer to buy a car or something else. So it's important that people understand
00:20:59.840 | that difference. If you go borrow cash and then use that cash to buy a house, it puts you under
00:21:06.480 | some pressure. I've seen people do that. I've seen people refinance maybe their personal residence or
00:21:11.280 | some other property they have, and now they have $50,000 cash in the bank, earning 0.6%,
00:21:16.960 | and they're under a lot of pressure to use that $50,000 cash to go out and buy something,
00:21:21.920 | and they're paying interest on that $50,000 cash. Well, that's not a strong strategy.
00:21:26.080 | It's a much better strategy, and I will say something that will make sense to some of your
00:21:30.160 | listeners, not to all of them, that you make your best deals in this business not when you have a
00:21:35.280 | lot of money. You make your best deals in this business when you're broke, because when I find
00:21:40.320 | somebody who wants to sell a house and I want to buy that house but I don't have any money,
00:21:45.120 | the only option we have is for them to finance it for me, and they will. If I have $50,000,
00:21:50.800 | then I can give them $50,000, and that makes the deal maybe better for them, but it doesn't make
00:21:55.760 | it better for me. It puts me at higher risk. So when you're leveraging an investment property,
00:22:01.920 | and you've got to get your head around this, but the more you put down, the more you have a risk.
00:22:06.720 | It is safer to buy that $100,000 house with $5,000 down than it is with $100,000 or $50,000
00:22:13.520 | down, because if I put $50,000 down, I have $50,000 I can lose, and if I mismanage it or
00:22:20.160 | something goes wrong with the real estate or something goes wrong with the real estate market,
00:22:23.280 | I have a lot more risk than I do with $5,000 down. I'll tell you a story. I've sold a bunch
00:22:28.320 | of properties here. I buy and sell. I mostly buy and hold, but we sold a property to a young man
00:22:34.160 | here a couple years ago before this last downturn. He paid me a price for it. It was a retail price
00:22:40.240 | at the time, and I financed the house for him, and then the prices of the houses dropped. In my
00:22:45.920 | town, they dropped almost in half in some areas. So this house went from about $250,000 to about
00:22:51.120 | $150,000 in value, and he came back to me and he said, "John, it's not worth $250,000 anymore.
00:22:58.480 | He gave me a small down payment, and he owed me the money." And I said to him, "We'll make a deal.
00:23:03.840 | Rather than you walking away from this, we'll adjust the payments so you can afford to keep
00:23:08.240 | making me the payments," because the house was rented and it was making money. But then we
00:23:12.640 | stretched out the loan so he could pay me back years down the road when prices went back up,
00:23:18.080 | and they had to come back up. So now he's got a profit in this house, and I'm going to recover
00:23:22.800 | my money at some point, and it's been a good deal for both of us. Well, that's a conversation
00:23:27.840 | that it was easy for me to have with somebody because I sold him that house and carried the
00:23:31.520 | financing. If he would have borrowed the money to buy that house from a bank and gone down to the
00:23:38.160 | bank and tried to have that conversation, it wouldn't have worked. He probably lost the house.
00:23:43.200 | So there's some major advantages to learning how to do this right, and the people that do master
00:23:48.160 | the idea of buying property and having sellers finance it for them buy a lot of property,
00:23:52.960 | but they're not limited in how much they can buy, and they make money every time they buy something.
00:23:57.120 | - You made an astounding statement in one of your books where you said that in many decades
00:24:04.560 | of investing in real estate, you've never borrowed money from a bank to buy property. Is that true?
00:24:09.920 | - It's absolutely true. It's absolutely true. If you've had that experience, if you've had
00:24:16.960 | experience of going down to a bank and borrowing money to buy a house, you know how aggravating
00:24:22.640 | that can be to start with. They want all your financial information, tax returns, and here's
00:24:28.720 | the really bad part. The paperwork you sign when you borrow money from a bank gives them a lot of
00:24:34.240 | power. They can weigh a lot of your rights. They don't even have to, that they can foreclose pretty
00:24:40.800 | much when they want to because if they feel like they're collateral is in jeopardy or you're not
00:24:48.160 | maintaining the house for a lot of little reasons, they can foreclose if they want to. Now, as a
00:24:53.040 | practical matter, banks don't want houses that are not going to foreclose unless you stop making
00:24:56.880 | the payments most of the time, but it puts you at risk. And also, you know, in a state like Florida
00:25:03.760 | and a lot of states that do have personal liability when you borrow money, the bank,
00:25:09.360 | you can get what's called a deficiency judgment. You know, if you borrow 200,000 for a month and
00:25:14.320 | your house sells for 150, and most times, there's been some unusual times lately, but most times you
00:25:20.320 | would still owe that other $50,000 and the banks would pursue you for it. So if you had a savings
00:25:24.960 | account or other assets, they wouldn't forgive that $50,000. They would make you pay it back.
00:25:30.000 | So it's the most dangerous money you can borrow from a bank. And because of paperwork and, you
00:25:36.640 | know, the other part, if you're an investor and you own a lot of properties, you may not want to
00:25:43.280 | buy a bank statement every time you buy a house and show them everything you have. I certainly
00:25:47.040 | wouldn't. So in all my years, I've never borrowed money from a bank to buy a house.
00:25:51.200 | My listener base of this show varies from very experienced to very new. And so to the experienced
00:25:59.280 | people, what you just said would sound fairly normal. And I recognize that I think real estate
00:26:05.040 | financing strategies is better taught with a book. But could you just mention to the listeners who,
00:26:11.440 | "That just sounds crazy. How can I buy houses without borrowing a bank?" Could you mention
00:26:15.280 | just a few of the ideas in general that have been helpful? You mentioned seller financing.
00:26:20.240 | Just give a brief overview on seller financing to explain to somebody how that works. And then
00:26:27.440 | also some of maybe the other strategies that you can use to avoid borrowing from a bank.
00:26:32.080 | Well, I'm looking at a house right now. I bought three houses this year. I'm looking at another
00:26:38.800 | one right now that folks have had for sale for more than a year. It's been empty for more than
00:26:44.560 | a year. Their mother owned it and the mother has moved far, far away now to live with the children
00:26:50.160 | in a different state. So they thought they were going to sell this house. Our market's pretty
00:26:55.440 | good right now. But they have not been able to sell it. And so I'm making them an offer,
00:27:01.040 | asking them to carry back the financing for the next 20 years. The mother is in her late 70s.
00:27:08.560 | There's a good chance she's going to live 20 more years. And the fellow told me one time it's
00:27:13.120 | inconvenient to run out of money before you run out of life. You know, you're going to take a 10
00:27:17.200 | year loan if you're going to live 20 more years. You want that income to come in forever. So I'm
00:27:21.680 | going to make them an offer and asking them to finance that house over the next 20 years
00:27:26.400 | at today's interest rates. Now, a major advantage we have is today's interest rates, I think,
00:27:33.440 | are below what they should be. You know, when you can get a house loan, a 30 year house loan,
00:27:39.200 | for some place in the 4% range, that's unusually low. I've been doing this for a long time. And
00:27:45.200 | you go back and look at historical interest rates, back as far as you want to. They're all online,
00:27:49.520 | of course. And you'll see that 4% doesn't seem to be normal. Normal is more like 5% or 6% or 7%
00:27:54.800 | or 8%. So I think when you can borrow money at a rate like today's rate, 3% or 4%, it's a terrific
00:28:02.000 | deal. Well, if I can borrow money, if these people, and I'm not trying to, you know, understand,
00:28:06.800 | I'm not actually borrowing money. They're not lending me money here. What they're doing is
00:28:10.800 | financing the sale of this house. If they will finance the sale of this house for me with a 4%
00:28:16.240 | interest rate over the next 20 years and let me make a down payment that makes them comfortable,
00:28:21.840 | and you know, my first offer is going to be 5% down, but I'm willing to put up to 20% down if
00:28:27.360 | the deal works for them. But, you know, the reason people hesitate to finance sales of properties
00:28:34.720 | is one, they're not sure they're going to get paid back. Well, you can tell them stories about
00:28:39.920 | how you've lived in this town all your life and you've always paid your debts and they can check
00:28:44.000 | you out and that'll probably make them feel somewhat better. But what really makes them feel
00:28:48.080 | good is for you to put down a bigger down payment. So if I can afford to put down 10% or 15% or 20%,
00:28:54.960 | then they're pretty confident that after that kind of investment that they won't get the house back,
00:28:58.720 | that they won't get their payments every month for the next 20 years. Well, you know, you have
00:29:02.720 | to do the math now. You have to know what a house will rent for. You have to know what your expenses
00:29:07.280 | are going to be, your taxes and insurance, and then you have to estimate maintenance.
00:29:10.960 | I would caution you not to buy houses that are in really poor shape. I like to buy houses that
00:29:18.000 | are in good shape. I buy houses sometimes that are brand new. I bought 20 or 30 brand new houses.
00:29:23.520 | I bought a number of houses from folks who have rehabbed them and done a nice job.
00:29:27.040 | If somebody has rehabbed the house, check it out carefully and make sure that they have done
00:29:32.000 | the wiring and the plumbing, up the code and the air conditioning, the heating, working on
00:29:36.960 | stuff so everything works well. Because sometimes people rehab things themselves and they'll cut a
00:29:42.560 | corner. You don't want to buy something that has a bad, bad wiring. But if you're buying a house
00:29:48.960 | in decent shape and you're buying it with payments that are low enough to cover it so you can rent
00:29:54.560 | it and your tenants can pay back the payments plus the taxes, insurance, and maintenance,
00:29:58.480 | and you can buy it with a relatively low down payment, your rate of return on your investment
00:30:03.120 | is good. I hold houses until they at least double one time in value. That's my policy.
00:30:10.240 | Most houses I own have doubled two or three times in value. But if I buy something for the short
00:30:15.520 | term, and sometimes it takes seven or eight years, sometimes it takes 10 years for a house to double
00:30:20.160 | in value, if I buy a house with 10 or 20 percent down and I hold it until it doubles in value,
00:30:26.000 | let's say this house is a $300,000 house, if I buy it with $60,000 down and wait for it to go
00:30:32.320 | up to $600,000, which could take 10 years or so, my $60,000 is going to turn into about $300,000
00:30:38.640 | profit. You can calculate how much of a return that is if you'd like. In addition to that,
00:30:43.920 | of course, I'll be collecting rent during that period of time. In addition to that,
00:30:47.280 | I'll be paying down the loan. Those types of investments, if you compare them to other
00:30:52.560 | things you can do with your money, generally will outperform anything else you can do.
00:30:57.120 | That's why I continue to do it.
00:30:59.280 | Interviewer: Probably the missing piece of information for somebody who's a novice is
00:31:03.280 | the art of—correct, make sure I'm accurate in this—but the art of real estate investing,
00:31:08.880 | probably the primary skill is being able to find and negotiate and set up the deal. You can't do
00:31:15.760 | that on a retail house where you have a young family that's moving from one town to another
00:31:20.160 | and they need all the cash up front out of their money to fund the down payment on their—out of
00:31:26.320 | their equity to fund the down payment on their next house. But if you can find the deal where
00:31:30.160 | it can work—and maybe you can make a deal like that work if you can get it at a wholesale price
00:31:33.680 | and use an alternate form of financing other than seller financing—but the key is to find those
00:31:39.360 | deals. That's what, one out of ten? It's not nine out of ten, it's one out of ten that you can find
00:31:44.400 | to make it work without needing a bank loan. Is that accurate?
00:31:47.280 | David Morgan: Well, I'll tell you this. When I teach a class, I only teach it once a year. I
00:31:52.000 | teach it here in Sarasota, Florida, and I'll teach it this year on January the 31st and February the
00:31:56.240 | 1st. The students in that class actually go out. We have an exercise one night, and we go through
00:32:02.720 | neighborhoods in this town. I identify about a half a dozen neighborhoods or so. And they walk
00:32:08.240 | down these streets and they talk to people they meet, and they knock on doors, and they find empty
00:32:12.880 | houses, and they investigate the empty houses. And we look for situations where we can find a
00:32:19.680 | seller who will carry owner financing. That's our goal. And on a house that's in good shape,
00:32:26.080 | in a decent neighborhood, on a good street, a house that we can rent, so it's got to meet all
00:32:30.720 | that criteria too. And we've always found one. And we do that in two hours. So the lesson here is
00:32:38.160 | that there are always those properties available. And you have to do some work to find them. People
00:32:44.640 | aren't going to call you and say, "I want to sell you my house." I mean, I have had that happen
00:32:48.320 | because I've been doing this for a long time, and people know I buy houses. But probably if
00:32:52.240 | you're just starting, you're not going to get many phone calls like that. But you can go out and find
00:32:56.560 | a house that's been sitting empty for a while. And it's just, this is a common sense business.
00:33:01.120 | If you think about yourself, if you had a house that was sitting empty for a year,
00:33:04.880 | and you've been mowing the grass for a year, or shoveling the snow, or whatever you have to do
00:33:08.640 | in your town, and making the payments, and paying the taxes, and paying the insurance,
00:33:13.120 | at some point, you're going to wake up and say, "Let's just get rid of this house. We're not
00:33:17.120 | going to make any money on this house, but maybe we can make it back someplace else."
00:33:20.800 | And once you make that decision as a seller, if I can find you as a buyer,
00:33:25.280 | I can make a really good deal for me, and you'll be happy too. I have never had anybody that I
00:33:30.720 | bought a house from be unhappy. They're all happy. They are happy to get rid of a house,
00:33:35.760 | because that house is not doing them any good. I'm happy to buy the house, because I know what
00:33:40.640 | I'm going to do with it. I know I'm going to rent it, and hold it until it's free and clear,
00:33:44.400 | and continue to enjoy that income the rest of my life. And if my kids get in the business,
00:33:48.480 | they can enjoy it the rest of their life. I mean, that income goes on forever, and it goes up a
00:33:51.840 | little bit every year. So, there are opportunities out there in any market. And I guess there are
00:33:57.840 | probably some towns that are so small that it might be harder to find the right one.
00:34:01.280 | But if you live in a town of any size at all, and some of my most successful students come from
00:34:06.160 | towns of four and six thousand people, so they're making a work there. It works. There's always
00:34:12.640 | opportunity. And this is not a new idea. I mean, it probably goes back to the ancient Greeks or
00:34:17.680 | something. But I've talked to people who are my grandfather's age who have been buying property
00:34:23.280 | like this, you know, 50 years ago, 7,500 years ago. So, you know, this is not a new concept.
00:34:29.200 | People have been financing property when they sell it for a long time. There's a practical
00:34:33.120 | matter during certain times in the economy, that's the only way you can get rid of some properties.
00:34:37.040 | This show, we talk a lot about building wealth, and how to start, and how to build a wealth plan.
00:34:45.040 | You have the story of something I've mentioned briefly, but that when you were getting started
00:34:50.880 | on your wealth plan, you actually chose to rent your residence while accumulating
00:34:57.360 | investment houses. Could you explain why you did that, how that helped you, and why that might be a
00:35:04.480 | useful consideration for a young person getting started? That seems a little odd to many people.
00:35:12.800 | Well, if you think about what happens, most people, when they go to buy that first house,
00:35:20.080 | will buy probably the most house they can afford. And sometimes they buy a house they can't afford.
00:35:27.760 | They buy a nicer house than they can afford, and they really stretch to buy that house.
00:35:33.120 | And then, of course, after you buy a house, it's not over. You get to buy furniture,
00:35:39.600 | and then you get to fix that house, and then pretty soon you'll get to remodel that house.
00:35:44.240 | And what young folks find that go out and buy a house to live in early in their lives,
00:35:50.800 | is that house consumes all their money for a long, long time. And it can be forever. I mean,
00:35:57.600 | that may be the only property they ever buy. So you have to ask yourself a question. Is this house
00:36:02.640 | that we're buying to live in a good investment? And the second question might be, for who?
00:36:09.680 | It might be a good investment for your children, if they inherited. But the whole time you own
00:36:14.320 | that house, if you think about what's going on, you're putting money into it. That house
00:36:18.960 | is never giving you any money back. There's never going to be any cash flow coming to you from that
00:36:23.440 | house, and it can consume a lot of your money. Well, if you own the house, free and clear,
00:36:29.200 | it would consume a lot less of your money. And of course, in our society, it's not unusual at all
00:36:34.480 | that people would refinance the house that they live in and take some extra cash out to go buy a
00:36:39.840 | car, go on vacation, or put a home equity loan on the house they live in and use that money to go
00:36:44.960 | out and buy something else. So they pretty much, you can find people who are 65 years old who are
00:36:51.040 | still in debt on their house, they refinance it two or three times. So they may never own that
00:36:55.840 | house free and clear, and that house may be really a burden to them at some point in their life.
00:37:01.760 | My advice is to kind of take a contrary approach to that. And what I did, and what I recommend
00:37:07.760 | others to do, and a lot of people have followed this advice, is rather than going out and buying
00:37:12.240 | a house when you're first getting married and first getting started, consider renting a house.
00:37:16.880 | You can rent a nice house in a nice subdivision for less than what it costs you to buy it.
00:37:22.880 | And I've always rented nice houses that are on my living, a waterfront community here in Sarasota.
00:37:29.200 | So every place I've rented has always been on the water. And I have found that when I go and
00:37:34.320 | buy, rent a house in a very nice part of town, in a nice community, I can rent it for a fraction
00:37:39.840 | of what it costs me to buy it. So I don't give up lifestyle, I get to live in a nice house,
00:37:45.440 | but I get to live in a nice house for a lot less money than it would cost me if I bought that house.
00:37:50.160 | Now, because I don't have the burden of a big house payment, and I don't have the burden of
00:37:56.320 | having to remodel that house, or even buy really nice furniture. If you live in a rental house,
00:38:01.840 | you can get by with even secondhand furniture if you like. You don't have to go to the store and
00:38:06.240 | buy all new stuff. Well, you can live pretty cheaply. If I was a single guy, I would probably
00:38:11.040 | have roommates. I would be living really cheaply. I'd be having other people pay most of the rent.
00:38:14.800 | But I've been married for 34 years, so a roommate and I share expenses. But we rented a house,
00:38:22.000 | and for 10 years before I bought the house, and I paid cash when I bought it, for 10 years before
00:38:26.400 | I rented, before I bought a house, we rented at really good rates. And I would use my money then
00:38:33.920 | to focus on buying investment properties. Well, the investment properties I bought and held for
00:38:38.880 | 10 years went up in value enough, the loans paid down enough, that I could take two or three of
00:38:45.040 | those investment properties after 10 years, sell them, and take the cash and buy the house we
00:38:50.640 | wanted to live in for cash. So I didn't have to finance it. And by doing that, and because I was
00:38:55.760 | a cash buyer, I was able to negotiate a good price on a house that we finally bought. And now we've
00:39:01.920 | lived in that house for more than 30 years. We have remodeled it three times. So I don't even
00:39:08.560 | want to think about how much money I've invested in that house since that time, since we bought it.
00:39:12.960 | But I can tell you this, if I'd bought that house the first day, instead of waiting 10 years,
00:39:17.920 | and if I'd financed that house with a 30-year loan on it, I probably, it would be paid for now,
00:39:24.640 | but it would have kept me from buying a lot of investments. If you think about what an
00:39:29.520 | investment house does for you, it's instead of buying a house to live in, you go out and buy a
00:39:33.200 | house as an investment, you rent it, you're paying down the loan, it's going up in value,
00:39:38.640 | you actually get some tax shelter if you need it. And then if you need some money,
00:39:42.960 | it's not an emotional thing to sell an investment house and take the cash and go out and use it to
00:39:48.160 | do something. It is an emotional thing if you have to sell the house you live in. If you're
00:39:53.760 | forced to sell that house, or if you go borrow more, you have to have that house do something,
00:39:57.360 | that's an emotional event. So I want to emphasize that it's just a better strategy not to get into
00:40:07.520 | a lot of debt and tied into a lot of debt, and especially by buying too much house to start with.
00:40:14.720 | If you're going to buy a house, buy something simple. Back when I was a kid, my parents lived
00:40:19.840 | in a very small house, my grandparents lived in a smaller house. What we've seen today,
00:40:25.520 | and I've been involved with a group called First Habitat for Humanity for about 25 years,
00:40:29.680 | and now I chair the Fuller Center for Housing, both the non-profit housing providers, and we
00:40:34.880 | build very simple, decent houses for people who don't have much income but who need a place to
00:40:40.400 | live. And even those houses are bigger. The Habitat houses have become bigger over the years,
00:40:46.960 | and we started the Fuller Center to build smaller and smaller houses. So we focus on building
00:40:51.520 | houses we can sell to families for about $50,000 with no interest and no profit,
00:40:56.960 | and that allows a family who doesn't make much money to afford a house. Well, my suggestion,
00:41:02.080 | you move into a Fuller Center house or a Habitat house, but you can find some pretty simple houses
00:41:06.800 | out there to buy for a lot less money. And if you start off with smaller and then work your way up,
00:41:12.800 | that's a more fun path in life than having to step down. There was a lot of people during this
00:41:20.080 | last recession that owned a really nice house, and they lost it, and now they're in a much smaller
00:41:25.040 | house. So start off in a smaller house. Think about a strategy of renting for a while and investing
00:41:30.880 | in it. It's not something you have to do forever, but when you accumulate some capital and you're
00:41:37.520 | able to buy a house for cash, you'll get a lot of satisfaction out of owning your own home free and
00:41:42.000 | clear. Economic cycles change over time, and you wrote an entire book on this called Building Real
00:41:49.600 | Estate Wealth and a Changing Market, and it was published in 2007. What impact do economic
00:41:58.640 | conditions, recessions, growth periods, inflation of real estate prices, decreasing of real estate
00:42:05.760 | prices, what impact do those conditions have on a real estate investor, and how does a wise real
00:42:12.320 | estate investor negotiate and navigate successfully through whatever the economic cycle we're in?
00:42:18.400 | Well, we could go on for a few hours here. Well, you did write a whole book on it, so
00:42:26.480 | I assume you've got a few things to say on it. First of all, accept a couple things. Number one,
00:42:31.600 | there will be cycles. There'll be cycles in the business world, in the credit market, in taxes,
00:42:38.080 | in your personal life. You have good days and bad days. You have good years and bad years,
00:42:43.200 | and there's opportunities during all those different times, different opportunities.
00:42:48.240 | Number two, you can anticipate. It's very hard to predict what's going to happen.
00:42:55.840 | I had a guy call me the other day and said he's predicted the last five recessions to the day.
00:42:59.520 | I said, "When did you predict them?" "Well, I think you predicted them last week." You know,
00:43:02.800 | it's easy to predict them five years ago. It's hard to predict them in the next five years.
00:43:06.720 | Nobody that I knew anticipated the last downturn. Now, there's people now that claim they did,
00:43:13.520 | but they didn't do it in advance. So, you can't foretell the future. So, what you have to do
00:43:22.400 | is you have to have a strategy that protects you and the continent that you profit from
00:43:28.880 | if we're going to have the Great Depression or big runaway inflation, big runaway economy. You
00:43:37.520 | have to play both sides of it. So, you have to have some assets that are safe in case we have
00:43:41.680 | the big downturn. Then, on the other hand, you want to have some assets that are in a position
00:43:46.240 | to make you a big profit if we have a great market. So, it's an interesting discussion.
00:43:52.400 | I've gone through four major recessions in this town in the last 40 years, and the first one was
00:44:00.160 | a real learning experience. I've been fortunate. I've never gone broke because I've never had a
00:44:04.560 | bank loan. I've always had owner financing. So, when we have these recessions, I can go back to
00:44:09.200 | the people I bought the houses from and say, "You can either have the houses back, or we can talk
00:44:14.160 | about what will work during this economy." An interesting thing we've learned is this last
00:44:20.400 | downturn, even though prices dropped by about 50 percent in our town, the rents didn't drop that
00:44:26.080 | much. They came down 10 or 15 percent. People needed, you know, they still wanted to live inside,
00:44:31.840 | and then folks who lost their houses, of course, became tenants. It created an interesting
00:44:37.840 | situation where we had a shortage of houses that were available for rent because a lot of the
00:44:42.400 | houses in foreclosure were not available for rent. A lot of the houses that were being rehabbed were
00:44:47.440 | only half fixed up, so they weren't available for rent. So, we ended up with a shortage of
00:44:51.680 | rental houses, and we ended up with a lot of folks who wanted to be tenants because they
00:44:55.280 | were moving out of the houses they lost. So, the rents didn't come down as much,
00:44:59.440 | but every cycle is different. And the next major cycle we have is bound to be different than the
00:45:06.000 | one we just went through. This last one was caused by a credit crisis. The next one will
00:45:09.680 | probably be caused by something else. The '86 one was caused by a big tax law change. So,
00:45:13.760 | you just can't, you know, anticipate exactly what's going to happen next. But you can have
00:45:19.200 | a safe portfolio. You can have a portfolio that if prices do drop 20 or 30 percent, you survive.
00:45:25.200 | If they go up 20 or 30 percent, you're in a position to take a nice profit. And some of
00:45:31.120 | this just comes through experience. And as I say, you know, I teach people. I tell stories about
00:45:35.360 | what I've done and what has worked for me and the mistakes we've made. But you're really going to
00:45:40.240 | learn this by doing it. So, you know, if you'll learn to be safe, as safe as you can be, then
00:45:46.000 | hopefully you'll never go broke. And when you have a downturn, you'll be in a position to
00:45:49.760 | survive. And then when everybody else is getting out of the business, if you've got your head on
00:45:57.280 | straight and you have the ability to buy, you make some of the best deals of your life, of course,
00:46:02.320 | when everybody else is selling and everybody says real estate will never come back. It's a terrible
00:46:07.440 | idea to buy real estate. That's the time to buy. A lot is made when you go to a real estate
00:46:14.640 | investment seminar about the tax efficiency of real estate. And for many people who've never
00:46:19.040 | owned investment property, it's kind of a new concept. Could you explain just briefly some
00:46:25.920 | of the general principles that do make independent real estate investment useful and efficient for
00:46:32.240 | a tax perspective as to why it is so advantageous in many ways? Well, probably two simple things.
00:46:41.200 | One, when you buy a property at a below market price, of course, that profit that you're making
00:46:49.600 | is tax free to you today. I like to tell the story about Donald Trump who came down to West Palm. He
00:46:55.120 | bought a six million dollar house for three million dollars. Well, you buy a six million
00:46:59.520 | dollar house for three million dollars and those are real numbers. You actually made three million
00:47:04.720 | dollars, but that three million dollars isn't taxable to you. And what Donald did shortly
00:47:09.200 | thereafter, I think, is I think he borrowed against it. So he may have put a million dollars
00:47:12.640 | in his pocket. He may have borrowed four million dollars against the house he paid three million
00:47:15.920 | dollars for. And of course, that borrowed money is not taxable to you. So in his situation, he
00:47:21.920 | bought a six million dollar house for three million dollars, borrowed four million against
00:47:25.040 | it. I'm just making these numbers up, but that's probably somewhat true. And all in, he hasn't paid
00:47:31.840 | a dime of taxes yet and he still owns his house with two million dollars in equity in it. Well,
00:47:36.320 | you're not going to buy a six million dollar house, but the same tax laws apply to you when
00:47:42.400 | you buy a hundred thousand dollar house for ninety thousand or eighty thousand. You're making that
00:47:47.680 | profit and you're making it without paying taxes. I have a student who's a medical doctor and makes
00:47:54.320 | good money practicing medicine, but he pays a lot of taxes because the income that he makes
00:48:00.480 | practicing medicine is all personal income, it's taxed at the highest rate. So he decided years
00:48:05.520 | ago to start taking a couple of months a year off. And when he took a couple of months a year off,
00:48:10.560 | his goal during that couple of months a year was to go out and buy two or three houses.
00:48:14.400 | And he would do that. And he'd go out and buy a house and he'd buy it below market,
00:48:19.600 | because he knew if he could go out and buy a house that was worth one hundred and fifty thousand for
00:48:23.920 | one hundred and twenty five, that's twenty five thousand dollars in profit that he can push off
00:48:28.960 | and not pay taxes on today. And it would grow over time. And of course, that growth is also tax free.
00:48:34.640 | So if he buys a hundred fifty thousand dollar house for one twenty five and he holds it until
00:48:38.720 | it doubles in value, and now it's worth three hundred thousand dollars, all that profit is
00:48:42.800 | accumulated is still tax free to him. And the rents that come in, they're going to be taxable.
00:48:49.280 | But if he wanted to borrow against that house or if he wanted to sell that house,
00:48:53.360 | he could pay taxes at a lower rate on his profits than he would on money he earned
00:48:58.640 | practicing medicine. The highest tax rates are charged to people who work and are subject to
00:49:06.720 | payroll taxes, Social Security taxes, Medicare taxes and ordinary income taxes. Those folks
00:49:13.120 | often live in a state, this fellow from California, who lives in a state that has a state income tax,
00:49:19.120 | he would spend about 50 percent of his income in taxes, round figures.
00:49:23.280 | Well, if he can stop and if he has enough money to live on and he can stop,
00:49:28.400 | you know, live, stop earning income and then use some of his time to buy property,
00:49:35.360 | buy investment property to provide him tax free income and long term capital gain profits down
00:49:40.560 | the road, he can accumulate a large net worth and at the same time live a more tax efficient life.
00:49:48.320 | Now, if you think about it, if I buy a house, the house I bought in 1973, which I still own,
00:49:53.360 | and it's doubled in value several times, I don't have to pay taxes on that profit until I sell it.
00:49:58.800 | And I don't ever have to sell it. There's a good chance that I'll leave that house to my children
00:50:04.480 | in their estate. And when they inherit that property, there's a part of the law that talks
00:50:10.240 | about what happens to the taxable basis when you inherit property. But the current law is that
00:50:16.480 | the people that inherit the property get a stepped up basis. And what that means is if I bought that
00:50:23.280 | property for thirty thousand, it's worth more than three hundred today. Let's say when they
00:50:27.040 | inherited it, it's worth four hundred thousand dollars. They would receive a basis, a new basis
00:50:33.680 | of the fair market value of my debt, which might be four hundred thousand dollars. They could then
00:50:38.640 | sell that house for four hundred thousand dollars the next day and pay no taxes on it. So that whole
00:50:43.600 | transaction, that thirty thousand dollar original investment that grew to four hundred thousand
00:50:47.360 | dollars, they inherited and now they sold. That whole transaction is tax free. There's no income
00:50:52.960 | tax paid on it. So there are some strategies that benefit rich people, just to say it out loud,
00:50:59.280 | and that rich people understand, and it has to do with asset accrual and asset appreciation
00:51:08.320 | that benefit folks who do this. And wealthy people have been using these for years, of course.
00:51:13.760 | Do you have many people in today's world of uncertainty, especially with some of the
00:51:20.000 | fluctuations in the publicly traded stock market, look to real estate and their money's in their
00:51:25.360 | IRAs? So I've seen a real growth in the interest of using self-directed IRAs, self-directed ESAs,
00:51:31.920 | HSAs, and investing in real estate through those accounts. Do you have any perspective,
00:51:36.560 | opinions, observations, or experience on people doing that and the advantages and disadvantages
00:51:41.840 | of that type of approach with real estate? Well, when you say IRA, you may be talking about more
00:51:47.920 | than one type of vehicle here. You could have a traditional IRA that distributes its profits,
00:51:55.680 | its taxable income to the beneficiaries because when they make contributions to that IRA,
00:52:01.680 | they deducted the contributions. That's certainly a different type of investment vehicle than the
00:52:08.880 | Roth IRA, which started about 14 years ago. And a Roth IRA allows people to make contributions to a
00:52:16.320 | retirement plan that are non-deductible. You don't get a deduction today. But then when the
00:52:20.960 | withdrawals are made and profits are taken out, they are tax-free. So first of all,
00:52:28.560 | you have to separate these two ideas because there's different strategies for these two
00:52:33.040 | different types of investment plans. If you have a Roth IRA that allows you to take profits out
00:52:40.960 | tax-free, you can always take your contributions out tax-free, but you can take your profits out
00:52:45.920 | tax-free too. Then investing in something that's going to have a lot of appreciation over time
00:52:52.080 | makes a lot of sense. If you have a traditional IRA or a qualified pension plan, investing in an
00:53:00.160 | asset that's going to produce capital gains does not make any sense because if you have a large
00:53:06.560 | capital gain personally and you pay the tax on that, your rate's going to be relatively low,
00:53:13.520 | it's taxed capital gains rates. If you have a large capital gain inside a retirement plan,
00:53:19.360 | a qualified plan or a regular IRA, when that profit comes out, it's going to be taxed to you
00:53:25.360 | at ordinary income rates. So you might be paying twice as much in taxes. So hopefully everybody's
00:53:30.880 | clear on that. The Roth IRA is an excellent tool to use for real estate investors who understand
00:53:38.240 | how to use it. Unfortunately, and we're seeing a lot of this now, but there's a lot of
00:53:45.840 | people investing in business properties in the Roth IRA, which is not allowed. There are people
00:53:52.160 | that are self-dealing, they try to sell things to themselves, or they try to borrow money from
00:53:57.040 | the Roth IRA. They make prohibited transactions and they don't understand they're doing this.
00:54:02.000 | They're getting bad advice sometimes. And if you do this, then when you get caught, if you get
00:54:07.680 | caught, the penalties are stiff. You're going to have to pay taxes on all the money, probably,
00:54:12.080 | plus penalties. So investing in real estate in an IRA is possible. And I would encourage it,
00:54:19.680 | but I'd encourage it only with really good information. If you don't know how to do it,
00:54:26.320 | you need to get some good advice and not from one of your high-priced seminars,
00:54:32.000 | you know, not from a $30,000 seminar. Those guys will just make up some good stories for you.
00:54:36.320 | But, you know, from a real CPA, from a real tax attorney, from somebody who's in the business,
00:54:41.600 | and there's some good folks in the business who will give you the straight scoop. It's the law.
00:54:46.160 | You can read the law, but too many people try to get around the law somehow, and that's not a good
00:54:52.880 | strategy. So the important thing to understand, though, at the beginning is there's two types of
00:54:57.520 | plans. You don't want to invest in a traditional plan in assets that produce long-term capital
00:55:03.680 | gains because you're paying twice as much in taxes. - I think he's a friend of yours. Is it
00:55:09.280 | Peter Fortunato? Is his seminar a good resource for people? I think he does a whole seminar on
00:55:13.040 | that. Am I right? - There are a number of people who do. Yeah, Pete Fortunato and Dykes Botterford
00:55:17.680 | teach a class in Atlanta once a year on IRA investing, and I would recommend that. They're
00:55:23.360 | both very bright people. - Yeah, I've got that one on my list of classes to take because I'm
00:55:28.800 | familiar with the tax law side of it, but not from the specific real estate perspective. So
00:55:32.800 | it's on my list of classes to take. Do you have any sense, one of the things that I encourage
00:55:38.640 | people to look at when they're building out their wealth plan is to try to figure out where their
00:55:44.000 | highest rate of return is going to come from as far as where their investment highest rate of return
00:55:49.040 | potential is, and that's going to be different for each person. But I'm just curious, with your
00:55:55.200 | decades of experience, do you have any either sense, gut sense, or do you have any metrics that
00:56:02.000 | you've actually tracked to have an idea of how much, what your average rate of return has been
00:56:08.640 | over the years with your good deals and bad deals just over the course of your career? - Sure. It's
00:56:14.720 | our business. That's what we do. We pay a lot of attention to which investments make us the most
00:56:19.440 | money and on an after-tax basis because that's the only part that really counts. And a lot of
00:56:28.080 | the things I've talked about today come into play there. This untaxed part of the capital gain that
00:56:34.320 | you're able to defer until you sell or leave it to your kids is a big part of that. Long before I was
00:56:42.080 | in the real estate business, I was involved in charting stocks and playing commodity options,
00:56:48.640 | did some other things where I was trying to make some money in a hurry. And I learned by studying
00:56:55.920 | the securities business a little bit and commodity options, stock options, different things that
00:57:00.800 | there's a lot of different ways to make money. There's thousands of different ways to make
00:57:05.440 | money. You can start a restaurant and make money. But what it comes down to for me is safety,
00:57:11.440 | being able to sleep well at night, lifestyle, being able to get away from something. I have
00:57:16.400 | good friends who play the stock market every day and they won't take a day off because they're
00:57:22.080 | afraid something bad will happen to them. And in the real estate business, you can take a day off.
00:57:26.960 | I take months off sometimes. My view of retirement is a little different than some people. I wrote
00:57:31.280 | a course on retirement investing a couple years ago, a year and a half or so ago. And I like to
00:57:35.840 | be able to retire on a day-by-day basis. If I want to take a day off, I want to be able to take a day
00:57:40.480 | off and not have anything bad happen to my investments. And so I've set my life up that way.
00:57:45.440 | I invest in things that work with or without me. If I get run over by a bus or crash my airplane
00:57:53.120 | someplace, I want my investments to continue to produce income for my spouse and my heirs.
00:57:59.680 | I don't want to just disappear on me. So it's not just investments. I have a lot of personal
00:58:06.960 | input. Now I've had some, of course, to buy the right properties and to manage them well. But
00:58:11.200 | without me, it still works. So that's the important part. As far as the amount of money we made,
00:58:16.480 | our overall rates of return over time, if you want to use just a round number, it's about 20%
00:58:21.520 | compounded over the last 40 years. So numbers do go up. And if you do that math, you're not
00:58:27.760 | going to figure out my net worth because I spend a lot of money. We enjoy traveling. We live in a
00:58:33.680 | nice house. We have kids scattered all over the world. So we love taking our kids on good vacations,
00:58:40.560 | scuba diving and skiing and doing things all over the world. But 20% is not a return you get on an
00:58:48.640 | annualized basis over 40 years unless you're pretty darn conservative. It's not a speculative
00:58:53.760 | thing. And people who speculate try to play markets, try to tie markets, rarely get those
00:58:59.520 | kind of returns. I've served on several foundation boards that have a lot of money that are
00:59:04.240 | professionally managed, and they're pretty happy if they can make 5% or 6% or 7% over a 20- or
00:59:09.680 | 30-year basis. So to make those kind of yields, you have to have information and exercise it.
00:59:18.960 | Other folks don't have. You have to know how to do something that most people can't do.
00:59:23.600 | But it is learnable. This is not rocket science. I'm certainly not a rocket scientist. I'm one of
00:59:30.080 | these guys who's steady, who has a plan, who stays the course. And I continue to teach so
00:59:36.480 | other people can learn how to do that. Three final questions as we finish our
00:59:41.520 | interview here. The first one, how would somebody, if they're doing some self-evaluation
00:59:48.240 | and they're looking at what their skills are, what their abilities are, and they're trying to
00:59:52.560 | figure out if real estate is the right forum for them to dig into for their wealth plan,
00:59:58.560 | what does it take to be a good investor? And how would you know if you have that, whatever it is,
01:00:06.400 | versus knowing whether you're better off, better served pursuing wealth in another
01:00:10.720 | career or another area? Well, I think number one is probably delayed gratification.
01:00:18.240 | If you can invest in something, knowing that if you hold onto it for 5 or 10 or 15 years,
01:00:25.840 | it'll make you a lot of money or probably make you a lot of money. But it's not going to be a
01:00:32.080 | short-term profit. It's going to be a longer-term profit. I think that fits well for real estate
01:00:37.680 | investment and it's worked well for Warren Buffett. The people that buy with the idea of not
01:00:43.280 | selling an investment, that hold in it for a long time, are true investors. People that buy with
01:00:49.040 | the idea that they're going to sell it in a year or two and make a quick profit are speculators.
01:00:52.480 | And so to be an investor, you have to have this long-term outlook, I think.
01:00:58.000 | The second thing is understanding money. If you're not good at math, if you didn't do well
01:01:03.680 | in the fourth grade, that's about as far as you need to go. But you need to be able to add,
01:01:07.840 | subtract. Percentages are not a bad thing. Understanding the rule of 72 is a good thing.
01:01:13.120 | Knowing how long it's going to take to double your money at different rates,
01:01:17.280 | understanding compound interest, and being comfortable with the math side of it so you
01:01:21.680 | have some confidence in your ability to grow money. And then the third thing is people skills.
01:01:27.360 | We talked about earlier, if you are not willing to talk to people, manage people,
01:01:32.560 | probably you're better off hiring somebody else to do that. That doesn't mean you can't invest in
01:01:37.600 | real estate, but the management is a key piece of this. You've mentioned a few different names.
01:01:44.960 | Somebody for whom this is their first introduction to real estate and they're interested and they
01:01:49.680 | say, "I fit those criteria. I'm interested in pursuing it." What would be some suggested
01:01:54.880 | recommended resources, a reading list, courses, and make sure to mention your own course that you
01:02:00.400 | do as well. Well, it's a little self-serving, but I have been teaching people for a long time and
01:02:06.720 | have had some success. So I would suggest you get on my website, which is just Google John
01:02:12.960 | Schaub. That's C-H-A-U-B. It'll pop up. We've over the years written a lot. I've written a number of
01:02:19.840 | books. I've been writing newsletters since the 70s. I've recorded probably 15 different courses.
01:02:25.280 | Some of them are not available anymore, but about 10 recent courses that are one-day courses on
01:02:31.360 | specific topics and they're very helpful to folks. Other than that, I haven't read a contemporary
01:02:37.280 | book in a while that I thought was right on point, but the books I mentioned earlier,
01:02:42.560 | you've got no reason to repeat them, but the books I mentioned earlier were all good books.
01:02:46.800 | I continue to read and I continue to listen to other people speak and look for people who are
01:02:51.680 | ahead of me in the business so I can learn from them. Of course, if you're just starting,
01:02:55.280 | you need to be looking for folks who can get you started. I have a whole list of folks on my
01:03:02.960 | website, different links you can go to. So I would start there. I would go to the website and read
01:03:07.920 | what I've published and while I work for free and then look at the links and study those people.
01:03:13.600 | I know, final question. I know Habitat for Humanity is a cause that's near and dear to
01:03:19.200 | your heart and you've been involved over decades, as you mentioned earlier. Take just a moment and
01:03:23.200 | mention Habitat, the work that you do and what you've learned in helping and then how people
01:03:29.360 | can get involved with Habitat and what would be helpful and why they should consider it.
01:03:34.240 | Well, I was involved with Habitat for more than 20 years. I chair a board now called the Fuller
01:03:40.400 | Center for Housing, F-U-L-L-E-R, Fuller Center for Housing. And both of them do good work.
01:03:45.120 | The Fuller Center was started a couple years back to help people that are even
01:03:49.920 | poorer than the folks that Habitat's able to help. We take existing houses, we renovate them,
01:03:55.120 | and then we sell them at no interest and no profit. So that's the focus of my efforts right
01:04:00.160 | now is with the Fuller Center. But both Habitat and Fuller Center do well. They're both widely
01:04:04.480 | known. So if you can Google either one and if they're active in your area, volunteer,
01:04:09.360 | it's a great way to learn how to build a house. All my kids build houses and picked up those
01:04:13.360 | skills. And it's a great way to help build community in your town where you bring people
01:04:18.000 | together to work on a project and improve your town, improve somebody's life, improve your life.
01:04:24.640 | So it's all good work. It's all good news. Awesome. John, thank you so much for making
01:04:28.720 | the time to come on. This has been a wealth of information and I thank you for being willing
01:04:33.280 | to do it. Okay. My pleasure and best of luck with all you're doing. Did you learn something?
01:04:40.080 | Remember, you too can do this. This is not out of reach. Many people have done it. You too
01:04:48.960 | can do it. If you're interested, if this is something that appeals to you, start doing your
01:04:53.840 | homework. And we're coming up on a new year here. It's December 2014 as we come up on a new year
01:04:59.120 | here. Be thinking about what is your plan for the investment side of the equation? What's your plan
01:05:04.960 | for how to grow your wealth? Real estate can be a powerful way to do that. And so I encourage you to
01:05:13.280 | begin the journey. John's books would be a great place. I have four of them. I have his book
01:05:22.400 | Building Wealth One House at a Time, Building Wealth Buying Foreclosures, and Building Real
01:05:26.720 | Estate Wealth in a Changing Market. I also have a book called Buying Right. So I would just
01:05:32.960 | recommend start with Building Wealth One House at a Time. That's the best overview. Consider his
01:05:37.200 | seminar. I've heard great things about it. It's at the end of January in Sarasota, Florida. And so
01:05:41.840 | that would also be a great place to start. It might be a good place for you to go to
01:05:45.760 | enhance your education and your knowledge for this new year.
01:05:51.280 | That's it for today's show. I thank you all for being with me. A couple quick announcements as
01:05:56.640 | we go out the door here. Number one, the schedule for the rest of this week, tomorrow I have an
01:06:02.880 | interview for you with Scott Young. Scott is the man who did the MIT Challenge. And he was the one
01:06:10.480 | who essentially recreated his own MIT degree without ever going to the school, without paying
01:06:15.440 | for it. On Wednesday, I'm going to bring you another technical show. We're going to do some
01:06:19.280 | technical end of the year planning topics. And that'll be the last of the technical shows for
01:06:23.360 | the year. I'm getting ready to take off for the next two weeks, working on a lot of business
01:06:25.840 | stuff behind the scenes and really trying to make some progress on that. So I'm just going to be
01:06:29.920 | releasing some interviews next two weeks. But I will be releasing shows so that way you don't
01:06:35.120 | have to go without a show. Thursday, however, I'm bringing Jim Rawls, author of Survival Blog,
01:06:39.760 | back on the show. He was very...many of you really enjoyed the first interview that I did with him.
01:06:45.920 | And it's an interesting topic. So we're going to talk a little bit about moving as a way to
01:06:50.240 | improve your lifestyle and save money, both moving across the country and expatriation and different
01:06:55.680 | ideas for that. Friday, I'm going to be doing another Friday Q&A show. And the next week,
01:07:00.080 | I have an interview on Monday for you with Ben Falk from Whole Systems Design up in Vermont.
01:07:08.720 | Tuesday, I will be releasing an interview with Dr. Vern Poitras, who is a professor at a
01:07:16.480 | theological seminary, former mathematics, also a mathematics PhD. We're going to talk about
01:07:22.880 | children briefly. Friday is an interview with Jeff from the Sustainable Life blog. We're going to
01:07:29.200 | talk about investing in your house. Then the following Monday will be Eva from Teens Got
01:07:34.240 | Sense, a fascinating young lady who writes a blog on finance for kids. And then I got a couple more
01:07:42.640 | as well that'll be coming up that week also. So if you'd like to get in touch with me, Joshua@radical
01:07:47.040 | personalfinance.com. Twitter, we're @radicalpf. Facebook.com/radicalpersonalfinance. Thank you all
01:07:52.400 | so much for your support. Consider joining the membership program, The Irregulars. If you haven't,
01:07:56.560 | details are at radicalpersonalfinance.com/membership. And it may be in your best interest to join now
01:08:03.120 | because I am going to be substantially increasing the price of making some progress on kind of the
01:08:08.640 | business planning ideas here. I'm going to be substantially increasing the price in the future,
01:08:12.800 | but I'll keep it the same for those who join now. Thank you for listening to today's show.
01:08:17.040 | This show is intended to provide entertainment, education, and financial enlightenment.
01:08:23.840 | Your situation is unique and I cannot deliver any actionable advice without knowing anything
01:08:31.600 | about you. This show is not and is not intended to be any form of financial advice. Please,
01:08:41.680 | develop a team of professional advisors who you find to be caring, competent, and trustworthy,
01:08:49.680 | and consult them because they are the ones who can understand your specific needs,
01:08:55.440 | your specific goals, and provide specific answers to your questions.
01:09:00.800 | Hold them accountable for your results. I've done my absolute best to be clear and accurate in
01:09:07.360 | today's show, but I'm one person and I make mistakes. If you spot a mistake in something
01:09:12.560 | I've said, please come by the show page and comment so we can all learn together.
01:09:17.200 | Until tomorrow, thanks for being here.
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