In this episode, David Dodge and Mike Slane talks about why are you in the Real Estate business. You can learn a lot in this episode.
avid: Alright, welcome back to the Discount Property Investor podcast. David Dodge and Mike Slane.
Mike: Hey guys! Morning, Dave, how are ya, man?
David: I'm good, buddy. Doing good.
Mike: Good. You-- you know why you're in this business, Dave?
David: I do know why I'm in this business.
Mike: That's what we're going to talk about today. Why. Why are we in this business?
David: I love this, this is going to be a good episode.
Mike: Sweet, let's dive right in.
David: Cool, so why am I in this business? I'm in this business because I like the fact that I can flip properties and make large sums of cash quickly. I like even more than that, that when you have a rental property, you make income on it. It is considered passive income, which really just means that it is taxed in a different way than your earned income. So you are paying less tax on the income you're creating. I love the fact that somebody else is paying off my assets for me. I would say to put the little icing on the cake, I just love working for myself, and having the freedom of both finance, but also to include time freedom in my lifestyle.
Mike: That's awesome.
David: I have quite a bit of things that I am not only grateful for, but those are my 'whys'.
Mike: Awesome man. I am very might in line with that. I think the first reason-- I used to always consider myself lazy. I always thought, oh man I can't wait to just do nothing. That's not really true. I've learned that about myself, I am not really lazy.
David: Nobody wants to do nothing.
Mike: I like doing stuff I like being busy, I like having a purpose. Anyways, so I always used to think that my 'why' was, man I can't wait to have a whole bunch of passive income so I can do nothing. Well that's not the real 'why'. The real 'why' for me is, time freedom. I want to be able to do what I want to do, when I want to do it. I think that time freedom is really the new wealthy. I don't say rich, it's the new wealthy. Having the ability go to go do what you want when you want is true wealth in my mind. Why am I talking about all this? Because real estate provides you the ability to do that. I quit my job, jumped in full time when I had a few rentals. I had a few rentals that were cash flowing well enough, I reduced my expenses to the point where I didn't actually have to make an income. Again, I was living in a two bed one bath little house, had my car payed off, no family dependent on me, nothing like that. So it was easy $500-1000 a month, payed my bills, that's easy. So now why am I in real estate? To keep upping that number to the point where I don't necessarily have to report to a boss. I don't have to come in and find that next deal. I like doing it, I enjoy it, but I don't have to. That's my real why is-- so that I can create time freedom for myself, and potentially for future generations. For my daughter, for my wife at some point, will retire her, maybe. She needs-- it's fun to have mental stimulation too.
David: Nothing wrong with being scheduled and having a routine. Routines are healthy.
Mike: A lot of our work does that for us. It provides you that mental stimulation that you wouldn't have if you were "retired". It's one of those things where we will probably keep doing it for a while.
David: Yeah we will never retire retire, well maybe when I'm really old, right? That's the cool thing about real estate. If you position yourself as an investor, and you're not getting dirty everyday, and you're not breaking your back to get out there and do the activities; talking to people and walking through properties is fun, I enjoy doing it. There is no reason I wouldn't do it.
Mike: So with rental real estate, one great example, it was a saying I heard a while ago, it was like, if you're over 30 you shouldn't be swinging a hammer. I love that analogy, and I love saying it to people. I'm sorry, I'm over 30, I am not swinging a hammer. It's pretty ridiculous, 30 is not old in life.
David: Not at all, yeah.
Mike: A lot of guys are working construction into their 50's or 60's. Again, it is back breaking labor, it's hard work.
David: It's hard work.
Mike: My thing is, I don't want to do the hard work. I enjoy doing the other work, I enjoy lining up stuff. It's fun like Dave said, it is fun. So how do you find out what your real motivation is? I always like the 'Start with why' book, so this was written by Simon Sinek I believe.
David: Uh huh.
Mike: It's a short exercise, I believe it came from that book, but don't quote me.
David: I think you're on track.
Mike: You can quote me on it as, I don't remember things and I misquote things. Quote me on that.
David: We will quote you on that.
Mike: It's a little exercise where you ask yourself why. I know it sounds stupid, but you ask yourself why. Hey, Dave, why do you like rental properties?
David: Because they create passive income.
Mike: That's cool, Dave. Why do you like passive income?
David: I like passive income because it is taxed less, and I don't have to work as hard for it.
Mike: Okay, Dave, why do you like being taxed less and working less?
David: I get to keep more of my money, and have more time freedom.
Mike: Perfect. If you do this exercise--.
David: Why do you like more time freedom? So I can enjoy the things that I want to do. Why do you want to enjoy the things that you want to do? Because that's what makes me happy. You just keep asking the 'why'.
David: Until you get down to where you can answered any more. Well making myself happy is the number one intention in my day, in my life. Keeping myself happy as well as my spouse and everything else is good.
Mike: I think that is just a super powerful exercise in almost anything. Well why do I want to do that? Well why do I want to do that? Pretty often you are going to come back down to the same couple of things for you. So it is really an important exercise. Figure that out first is that 'why'.
David: Start with the 'why'. Absolutely. Start with your 'why' so you know the reason in which you are doing everything else. So why rentals? That's a simple question, kind of answered it in the beginning, but passive income, taxed at a lower tax bracket. If you are not aware--.
Mike: There are so many cool tax things with real estate too.
David: Let's list a couple of them.
Mike: One of them is absolutely amazing, and I am going to go into two things off thing. One is depreciation. The IRS set up a depreciation time table of 27 and a half years, why? I don't know.
David: I know why, because there were two senators that were arguing over 25 and 30 years.
Mike: Is that really true?
David: And they just met in the middle, what you would call a compromise. It ended up being 27.5.
Mike: Is that true? That's interesting. That's really cool.
David: I read that in a book somewhere. Assuming the book wasn't lying to me. Don't quote me on that either. It makes sense. This is just people making laws anyway, right? That's where I'm thinking the 27.5 came from. That's on residential, and again, don't quote me on that. I think commercial may be 40 even, it's different definitely.
Mike: It depends, residential-- I was just looking at this the other day.
David: Either way it's different. What we're working with is the single families, right? 27 and a half depreciation.
Mike: Depreciation, really cool. So depreciation allows you every year, again you have to talk to a CPA, but I am pretty sure you just divide the asset, a hundred thousand dollar property, divide it by 27.5, that's not true, there is a depreciation schedule. But you get to depreciate so much of it every year until--.
David: Over 27.5 years.
Mike: Until you have depreciated the building worth down to zero, then you can no longer write off that depreciation. 27.5 years was considered the useful life of a building, of a residential rental property. You are depreciating that, you get a tax benefit for doing that. Here's where it gets really interesting. Say you want to keep playing that depreciation game, and keep writing that off. Well guess what? You get to sell that property via a 10-31 exchange, and buy another property and restart the depreciation all over, which is awesome.
David: That's awesome.
Mike: The second thing about depreciation which is really cool, if you were to pass away, you can pass that property on through your will, through an inheritance. Somebody else inherits the property. That property resets. The depreciation schedule resets. It goes back to the current value. The cost basis.
David: The cost basis is when you depreciate gets depreciated down to zero. What happens is, when you go to sell a property, you then have to claim the cost basis to the sale price, that difference becomes profit. If you depreciate a property down to zero and you sell the property for a hundred grand, let's say you bought that property for 90 grand 27 and a half years ago, you have to pay the taxes on the full hundred, right? Which is steep.
Mike: That's a lot.
David: But when you pass away, the cost basis resets for the current market value. If you inherit a property, or you pass a property to somebody that you know, family member or whatnot. When they get that property, they are not paying any tax, it is reset to the current market value. It's a very cool IRS loophole essentially, or tax break.
Mike: Again, it is very exciting.
David: It's how most wealth is transferred to be honest.
David: Via real estate holdings.
Mike: So why is it cool? Tax advantages. Tax advantages are not that cool unless you geek out about it. I geek out about it, I think it's awesome. It's like what Dave said; it's how most wealth is transferred, why? Because there are tax advantages too.
David: So Mike, this is-- I kind of nerd out on this but-- let's talk about, why? I know why, it's simple; laws are written by rich people. I am just going to pause right there in my sentence, just think about that for a minute, guys. Laws are not written-- people do not write laws that are working at Taco Bell or Jack in the Box. I am not trying to be rude, this is just a fact, right? Senators, Congress men, representatives, these people are typically, not always-- but they are typically wealthy people, alright? They are hanging out in other wealthy circles. I am not saying this is good or bad. I am just stating the facts. They are the ones that are writing the laws. So of course they are going to write laws that are going to impact and or benefit them. So why am I even talking about this? Here's why. When you go and you try to earn money and you trade time, it's called labor, right? You trade your time for a salary, or a for a pay check, that is earned income. You earned it, you worked for it, you traded time for. You get taxed the highest in that bucket. The bucket of the passive investments, the stock dividends, or the cash flow from real estate is taxes as passive income. This is just an IRS category that it is put in. But it is taxed at a lower tax bracket. It's not something I agree with, but I am going to understand how this works, and I am going to play the game the way they want me to play it. Which means, I focus on my income more as-- sorry, focus on my wealth creation, more than I do my income. The income is taxed and the wealth creation isn't. I also focus on my income to be generated in the bucket of the passive as much as I possibly can for this exact same reason. Again, it is not something I agree with, but I understand it, and I know that, okay if this is the game of money and how money works, then let's play the game of money the way it is supposed to be played.
Mike: Play it at a higher level, play it the way the rich are playing it, and you're going to be rich.
David: There you go, or the wealthy rather. They are written by rich people to protect rich people. Not saying it's a good thing.
Mike: Again, don't make moral judgments, you're right. It's just a fact.
Mike: It is. So you are either going to complain about it, or you can play--.
David: Play the game the way everyone else is playing it, right. That's basically 'Rich dad poor dad'. Maybe not that book but one of his books for sure. That's the message. So learn how the rich or the new rich, the digital age, the age of the microchip are making their money. Yeah, I love real estate. That is one of my main 'whys'. The taxation aspect of it. The depreciation is the hidden-- or basically-- you are reducing your cost basis yes, but you are coming up with a phantom, an expense you get to write off, that you didn't actually have to spend.
Mike: Yeah very cool.
David: That is very cool. On top of that, all the expenses that are payed, the interest expense, maintenance--.
Mike: Property managed.
David: All those costs are also depreciated. The main thing is someone else is paying it off. That's the long term game.
Mike: What I love about that too, Dave. We always forget-- I feel like we forget to mention that too. With rental property, somebody else is buying you a house. When does that happen?
David: Again it's a long term game.
Mike: -- good looking sugar baby to have someone buy you a house. I ain't that guy. I aint the sugar baby and I ain't the sugar daddy. But I got people buying houses for me.
David: Yes you do.
Mike: So you do you, Dave. It's awesome. That is so cool. That is one of my 'whys' too. I want to have expensive things that I can then pass onto family, or that I can refinance and take advantage of-- the current tax laws. Again, I want somebody else to pay for them. So that is why real estate.
David: Let's talk why wholesaling?
Mike: Why wholesaling? Wholesaling also-- again, and I think it is just one of those things that-- it's just a part of real estate investing. So even if you are going to be a rental investor, you are going to get your best deals by going direct to a seller. So if you do that, if you are a rental investor, and you are going to go direct to seller, well guess what? You are going to be trying to market for leads. You are going to be find those. What's going to happen? You are going to find properties that don't interest you. What are you going to do with them? Throw them away? No. I am going to try and capitalize on them. I am going to try and sell that off to-- hey maybe my buddy Dave is looking for a house in this area event though I'm not. Dave would you like to buy this contract that I have on this house?
David: Sure. Is it a good deal?
Mike: It's a great deal.
David: I want it.
Mike: I am going to charge you a thousand dollars though.
David: I love that idea.
Mike: Great. Thousand dollars is a gift.
David: If it's a great deal you can charge me ten.
Mike: Doesn't really matter.
Mike: So yeah it's very exciting. Why start in wholesaling if you are not trying to buy rentals right now?
David: So many reasons.
Mike: Dave, give me your top three.
David: Okay well for one, it's the best way to get the deals direct to the seller. You are not having to go through any other person, you're going direct, and direct is always the best, that's number one. Number two is, you need to learn all the things that wholesaling can teach you to be a great landlord, or to be a good fix and flipper. There are so many things in terms of negotiating and talking to sellers, running comps, doing repair estimates, that are going to be helpful later in the game. Number three, probably my favorite is that it is a means to an end to cherry pick the best deals. I mean that's the thing; Mike and I started out as a wholesaling company, and we still have a very healthy wholesaling business. We realized, and this isn't a bad thing, but it is also a fact; wholesaling is a job. We don't want to do it forever. However we probably will, we love doing it.
Mike: It's a great high paying job.
David: The thing about it is, it's a cycle; market, get a bunch of leads, work the leads, close the deal, market it, get a bunch of leads, work the leads, get a deal. It's a cycle. By having rental properties, it eliminates the need for us to have to keep that cycle going, or another way to look at it is we can automate the first cycle, put other people in place to keep the leads being worked, and the deals being wholesaled, but we have essentially switched to a keep the best sell the rest wholesale strategy. We go out and find killer deals-- now it depends on the deal of course, but we are more likely to keep it and hold the equity and build the wealth than we are to take the income today. It depends though. Sometimes we may need capital, and we will come across a home run deal and be like, this is an awesome wholesale, 30, 40, 50k, let's do it. Totally understand that. In the long run we are keeping the very best deals with the most equity. That way we can use the BRRRR strategy, which is an awesome strategy in itself.
Mike: Did you do three? I kind of want to interject real quick.
Mike: And this is what is really cool, it is kind of a tax loop hole again, a lot of the bigger names in the business do this on a high level. They refinance their properties. They will buy an apartment building, fix it up, refinance it, are able to pull out 100'000, 500'000, a million dollars.
David: If it's a big enough project they can pull that money out.
Mike: You pull it out. By that we mean refinance it. Hey, there is all this extra money so they pay you that. That check or that money can be deposited into your account, your LLC account. But it is not income, you are not paying taxes on it.
David: Even though it is to you--.
Mike: And it is spendable money.
David: -- on paper, and it is spendable money. You can go do whatever you want with that money, right?
Mike: But now you owe it.
David: On paper you owe it. It is a debt, not an income, which is so crazy. If you increase the value of a property big enough, so what if you increase the debt on it a little bit and pull money out. You may still be at the same ratio or in the lower ratio of debt to value. So yeah that money isn't taxable, how awesome is that? It is one of my favorite loop holes in this business which we haven't really capitalized on yet that much. We have a little here and there on some deals, but nothing with 100 or 300k.
Mike: Just one a one off basis. Dave was saying, a great deal, maybe we will wholesale it, maybe we will keep it. Well on some of the great deals we keep, what do you think happens? We buy it and we refinance it. Guess what? If we are able to pull money out, there you go. That's a win, that's not income.
David: Not an income.
Mike: Very cool. That's another why to wholesaling. Dave, I know you did--.
David: I think I did three. I think essentially learning the ins and outs of the business, being able to cherry pick the best deals for yourself, and it's just easy. I would say those are my three 'whys'.
Mike: It does, it gets easy.
David: It's simple, let's put it that way. Very simple.
Mike: And it gets easier too.
David: Wholesalers complicate things. Wholesaling is simple.
Mike: Even the business, it just gets easier. So again, if you are unfamiliar with wholesaling, we put a little course together, we love the course, check it out; FreeWholesaleCourse.com. Go there, it is going to give you a bunch of stuff.
David: Or if you are looking for other episodes that are similar to this, we have a new podcast site up. DPIPodcast.com. It is designed to search, so if you have a topic; rentals, BRRRR, wholesaling. Go to DPIPodcast.com, search what your topics are, and it will give you all the episodes that we talk about those topics in, it has been very helpful, and we have been getting good feedback on it too.
Mike: Alright guys, thank you so much for listening. Figure out your 'why'.
David: Figure out your 'why', signing off.