Real estate expert Alan Corey debunks the myth that mortgages are risky and that having a paid off property is the goal of a good real estate investor. It's actually the exact opposite. Think of real estate investing as a stock. It's not wise to...
Real estate expert Alan Corey debunks the myth that mortgages are risky and that having a paid off property is the goal of a good real estate investor.
It's actually the exact opposite. Think of real estate investing as a stock. It's not wise to let your future ride on one company, so why is it wise to let your future ride on one (paid off) house?
Creating a portfolio of homes creates a mutual fund-like strategy where you'll have some winners and some losers, but they support each other and you have the added upside of one property having lottery-ticket like appreciation.
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Read the transcript here:
Hey, Real Estate Maxi's. In today's episode, we're gonna talk about how more houses is better because it reduces risk, believe it, or not. Let's get started.
Hey guys. Welcome to Real Estate Maximalist. I'm your host, Alan Corey. I published three books in the personal finance, career, real estate investing space. At one point, at a peak, I had 50 single family homes, which actually I sold as a bundle. I run a real estate brokerage team in Atlanta, operate a property management company.
Have over 50 million dollars assets under management. I coach, consult and teach real estate investing using the House FIRE Method, but I find it easiest to just say, I'm a Real Estate Maximalist. The last episode we talked about House FIRE Method, A house for every single bill. Buy a house that spits off cash flow that pays for your debts.
That's the House FIRE method, a house for every bill Now this requires buying multiple houses in most cases. Sure, you can have that one giant cash flowing property that's gonna pay all your bills off, but that is not the way to think. Paying off one property is gonna hold you back. It's gonna hold you back in retirement.
It's gonna hold you back in living a more glamorous life. Actually, it puts more risk on your plate, having a paid off property, which I'll get it into in a minute. But here's the thing. Once you buy one house and you see the power of that cash flow, it's gonna get addicting because once you see that one property pays for one bill, and then you save up money, you buy another property that pays for another bill, and then you're like, Wait a minute, it's faster to save up for that third house or that fourth house because my bills are already getting paid.
So you can accumulate wealth so much faster because each house that you buy your bills, evaporate. Your bills get burned out by the House FIRE Method. So all of a sudden you don't have to worry about your internet bill. You don't have to worry about your phone bill. You don't have to worry about your utilities.
You don't have to worry about your car payment, you don't have to worry about your debt. Imagine you're snowballing, your real estate investment fund faster and faster and faster each year. Makes it much easier to buy real estate and accumulate real estate and you're gonna get addicted to that cash flow, which is a good thing.
You want to be addicted to it. And a lot of people pause and they're like, I don't wanna be huge real estate mogul. You don't have to. Five, five properties, I promise you. Just make a commitment. I'm gonna buy one a year for the next five years. I'll get you started in 10 weeks with my course. You'll have the tools to buy one every 10 weeks if you want to, but I understand that's not everyone's speed, but just make a commitment to yourself
you're gonna buy one a year and in five years you can retire. It's that simple. It's that easy.
Now Real Estate Maxi's, promise me one thing, if I convince you by the end of this podcast why, buying multiple properties is better, then please leave me a review on Apple Podcast, Spotify or your podcast of choice. This is something I want to get this message out. I need your reviews. All I hear about is the algorithms love the reviews, so keep that in mind.
If you learn something today, please leave me a review. I would greatly appreciate it. Now, here's a follow up question. I get quite often Alan, I've got a hundred thousand dollars, I'm just gonna buy a house in cash for a hundred thousand dollars. Yes, they exist. They're out there. They might not be in your hometown.
I bought 30 homes in one day at an average price of $29,000 each one hour from Atlanta, and they got an average $600 a month in rental income. I sold those two years later, an average price of $60,000 each. A hundred thousand dollars homes exist. Okay? Here's why you don't wanna buy in cash. This is also crucial in the House FIRE Method.
You put a hundred thousand dollars in one house, it kicks off a thousand dollars of rental income. You could put $20,000 down on five different $100,000 houses, 20% down payments everywhere, and that cash flows the same amount of rental income as one house for you. And you're gonna say that's risky. Why have leverage?
Why have a mortgage if I can have one house fully paid off, or five houses that have $20,000 down payment each and $80,000 mortgages each? Here's why. With one house, if you raise the lease every year, 50 bucks. You made an extra $600 a year. You have five houses. You raise the lease 50 bucks, you have 3000 extra dollars each year.
Additionally, if you have a single house that's paid off and there's a vacancy, you have zero cash flow, You actually have negative cash flow cause you're still paying property taxes and home insurance until that's filled. If you have five houses, one of them is vacant, which they probably one will always be vacant at one time.
Depending on when you purchase them and tenant turnover, you still have four other homes that are gonna pay for the mortgages of all five houses. The cash flow will be enough to cover it, so you'll never have a down month. It's like buying a mutual fund. Instead of putting all your eggs in one basket, you've got a collective that buoys your entire portfolio.
So if you have one that's vacant, Or has a lot of repairs. The other ones who aren't getting as many repairs that month or that year are gonna carry the other one. And the houses may FlipFlop on what is the good one, what's the bad one month to month or year to year. So you're actually reducing your risk by buying more homes.
But here's the real wealth creator. We all know real estate markets go up and down. You're gonna hold this as a long term plan. 10 years, right? Any 10 year span in history, actually any eight year span in history, as long as you've had real estate. And you bought it the worst time possible, like at the peak of the crash of 2008, 2009.
It took about eight years for it to recover its value, and that was the worst housing crash we've ever had. There's now safeguards in place to not replicate that event again, and you're gonna buy these properties for long term. This is your retirement plan, so you're gonna hold 'em for eight years.
You're not looking to flip these. You're not looking to sell these. So let's assume over a 10 year period, just to make the math easy homes appreciated 10% if you had one paid off house. That Hundred thousand dollar house with 10% appreciation, straight line, not compounded. You now have $110,000 house. You put a hundred thousand dollars in a property and now you have $110,000 if you go to sell that property.
Now, let's assume you bought five houses that are each a hundred thousand dollars. Fast forward until we have a 10% appreciation. Well now you've got five homes that are $110,000 each. If you sold them all and paid off your mortgages, you would've $150,000. You've made five times the amount of money than you would've on just one.
That is only in a home appreciation. We've already know that you're gonna make more money in cash flow cuz the rental income goes up. So all your wealth compounds, the more properties you buy. This is the beauty of the House FIRE Method, and this is why you can retire the fastest with this method and live the largest in retirement with this method.
And it's incremental. You're keeping the money for yourself. Don't give it to the government to pay off your student loans. Don't give it to Elon Musk. Don't give it to Uncle Jeff Bezos. If you've got a $500 a month Amazon spending habit, stop giving it to Bezos. Go buy a house that cash flows $500 a month.
That goes to Bezos because if you have a house paying your Amazon bill or your Tesla car note, at least, you're keeping the money for yourself. It's earning cash flow for you. It's appreciating along with the housing market, it stays attached to you because it's your asset that you own. And over time there is a mortgage.
And that tenant is paying down that mortgage for you. So let the tenants pay down five mortgages for you rather than no mortgages for you. Imagine a situation where you have tenants that are paying 10 mortgages, 20 mortgages, 30 mortgages for you, your cash flowing on each one. Your risk is reduced with addition of each property because it's the buoyancy method, your mutual fund of houses, and you're raising the rents
50 bucks each year. How fast can you pay off your bills in that scenario? So that's why I challenge you. Why are you waiting? Are you waiting to time the market? You can buy a property now that cash flows, and I'm not saying now, as in when I'm recording this, I'm saying in any moment in history you can go find a property that cash flows.
You don't have a crystal ball that's gonna take you 10 weeks to go buy a house. Using my House FIRE Method and the courses that I teach. So who knows what the market's gonna be in 10 weeks? That's the thing. I don't care. I don't care if the interest rates are 20%, 30%, 3%. I don't care if the prices are up higher than they normally are, or lower than they normally are.
Cause all I look at is, is this gonna cash flow? I can lock in my mortgage, I can lock in a 12 month lease. I know my cash flows fixed for a year, but at the end of that year, maybe I can refinance to a lower rate. Puts more cash flow in my pocket. But if the housing market crashes, that doesn't mean rental crashes. If you've ever had a landlord reach out to you that says, Hey, the value of my home went from $500,000 to $400,000, so I'm gonna reduce the rent, I charge you from $4,000 to $3,500,
call me. I wanna talk to that landlord. That has never happened. No one reduces the rent that they charge you because the housing market fluctuates. Your rent's gonna stay the same or it's gonna go up 50 bucks, a hundred bucks, which is gonna pay off more bills, House FIRE's gonna burn your bills for you.
This is a longevity get rich slow method. I shouldn't even say that. It's get extremely wealthy, slow guaranteed with very low risk. That's the House FIRE method. Once all your bills are paid off, then you start making up expenses and you're gonna say, I want a fancy new Tesla. Let me have a house that pays off that Tesla.
I don't care if I have a $500 Amazon spending habit each month that I'm giving all my money to the richest guy in the world. Jeff Bezos, let my house give money to Jeff Bezos. I'm gonna keep my money in that house and equity of that house. You're keeping your money that way and you're growing your money that way, and you're not compromising your lifestyle, you're increasing your lifestyle.
All right. Now I've saved the boring part towards the end here. I want to be talking about taxes. Let your eyes roll back in your head, but it's worth talking about, and I'll make this quick cause I know taxes is not always the sexiest conversation, but if you hate wealthy people for not paying taxes or if you want to be a wealthy person, not paying taxes and have people hate you,
you're gonna wanna pay attention. Now, here's the situation. You bought a cash flowing rental property. It's making you $500 a month. That's $6,000 a year. If you made an extra $6,000 year at work, you got raise, you worked overtime, you worked a side hustle, somehow you made an extra $6,000 a year that's gonna be taxed.
Federal state. They're gonna probably take somewhere between 35 to 50% of that. You really just made about $3,000 not in real estate because of the tax benefits of real estate investing. There's something called mortgage interest deduction, which means, hey, I had to get a mortgage to buy this property and that mortgage had interest.
IRS says, Hey, that interest is a business expense cuz you couldn't run this business, this business of owning a rental property without getting a mortgage and paying that interest. So you get to write that off. So if I made $500 a month cash flow, but my interest on my mortgage payment was $500 a month, then guess what?
On the books, it looks like I made $0. Therefore, I'm not taxed. Even though I really made 500 bucks cash flow, I still had the tenants paying down my principal balance on my mortgage and they're already paying my interest on my mortgage that's been worked in, so someone else is paying that and I get credit for it as a business expense.
There's also a second tax benefit. It's called depreciation writeoffs. Now, depreciation is not the same thing or the opposite, or even in the same realm is D appreciation. Appreciation in real estate is the value of your home. Going up each year, historically, about 3% a year, that compounded really, really increases the property value over time.
Depreciation not the opposite of that. Nothing to do with that. Depreciation is saying, Hey, you started a business that had a bunch of equipment and that equipment was buying a house. That includes the equipment of the siding. The roof, the plumbing, the electrical panels, all that, right? If you were to start a business and you had to build it from scratch or buy a warehouse or a factory, all that is business expenses.
So IRS is saying, Wow, buying a house, this small business that you're creating is also a business expense. And you can use this, whether it's in your personal name or an LLC. So don't take this and run with it, that you have to have an LLC to get this. If it's in your personal name, you still get these benefits.
You can run a business under your personal name, and what they're saying is, Hey, let's say you bought a house for a hundred thousand dollars. If it's a residential property, four units or fewer, they're gonna say all that equipment will probably have to be replaced over a span of 27 and a half years. So we're gonna take that $100,000 house and we're gonna take off about 20%.
Let's just say $20,000 is the land value. So even if the house crumbles, you still have land. So you can't depreciate the land, but you can depreciate everything that goes above it to make it a business, to make it a place that you can rent out to someone else. So you've got $80,000 and they say that will all have to be replaced over a span of 27 and a half years.
You'll probably have to replace the roof at one point in 27 and a half years, maybe the siding, maybe fresh paint, maybe the electric. Maybe the plumbing, right? Your business cost $80,000 when you purchase it. 1/27th of that is $2,909 a year. They're just gonna give it to you. You have to take it. You can't not take it.
It's just automatically included. That means if I was making $500 a month cash flow, that's $6,000 a year. I get to take off $2,909 each year as a expense in my business that offsets that cash flow, which then says, Hey, I really made $3,100, and then I'm taxed on that smaller amount rather than that larger amount, But, This depreciation coupled with the interest deduction tax will most likely always cover the cash flow that property is making.
So on the tax returns, even though I really am pocketing money, it appears on my taxes as if I'm not making money, that either I'm breaking even or I'm losing money. And so the IRS can't tax you. They only tax you when you make money. So again, the more properties you have, the more depreciation you can claim on these properties.
And the more mortgages you have, the more interest deduction you can claim. So regardless of how much cash flow you have, you can kind of shuffle around your properties or continue with buying properties one a year to cover all your cash flow and take all this depreciation. Cause an advanced strategy is something called "cost segregation studies" and "bonus depreciation".
These are other advanced tax loopholes that you don't even need to understand. Don't worry about it. Let your accountant worry about it. Your CPA's paid to understand these things. What it's saying is, Hey, I bought a property and rather than taking $2,909 every single year, let me take $30,000 the first year in deductions and I'll just take fewer deductions later on because I'm gonna replace the roof now and the siding now, and I'm not gonna spread out these expenses over the next 27 and a half years.
I'm gonna do those renovations or those fixes now, and I'm gonna front load that depreciation in year one or year. I know investors who have income from their cash flowing assets, and they just buy one property a year for the sole reason that they can front load this depreciation to offset their cash flow.
So always in the books, it looks like they're breaking even or losing money. This is not illegal. This is not a loophole. This is just the IRS rules for real estate investors. That is why wealthy people avoid taxes. That is how you're gonna avoid taxes or greatly reduce your taxes. And you get more and more benefits, the more and more properties that you purchase.
So hope I didn't lose you. Hope I didn't bore you talking about taxes, but hopefully I widened your eyes, seeing the benefits of owning multiple properties and trying to acquire them every single year. It's just a windfall for your finances. So there's your quick rundown of why more houses is better, why not paying off your mortgage is better, and why you are gonna leave me a wonderful review on Spotify or Apple Podcast or wherever you listen, podcast, because I can't argue with what I just laid out there.
It's mathematically going to help you. And if you still feel like, Wow, this feels risky, having five mortgages, five houses, here's the thing. You could let two of those go in foreclosureand burn to the ground and you just ignore them and put your head in the sand for whatever reason, you're still gonna have more money with the three other ones that you're paying attention to that are working out well for you
then you would with just having one house that was paid off. All right, guys. If you learned anything, please tell a friend about this podcast. Please sign up for my newsletter at realestatemaxi.com or join the Real Estate Maximalist Facebook group. It's been a pleasure. Thanks for listening. I'm your host, Alan Corey, and this is Real Estate Maximalist.