When Homeownership is a Scam: Why the Rich get Richer

homeownership in America is broken and even though the New York Times tells us that the average net worth of a homeowner is 36 times that of a tenant I'm going to share with you four ways American homeownership keeps most homeowners broke and seven ways wealthy people get rich through real estate and keep in mind the real estate investing courses 20% off using coupon code short red fin and today yes I extended it one day because I was out of town so yes go down below use that coupon code it expires today making money through homeownership and real estate investing is not for everyone there are some massive pitfalls and I'm gonna go through the most popular of four reasons why most people say broke with homeownership and they might surprise you first things first the agency real estate model is highly incentivized to encourage you to sell your real estate or your house when you move I personally think this is a massive financial mistake as a real estate broker and having helped people buy and sell houses for over ten years I found that even when people have equity built up in their home when it comes time for them to move from the home there and now and move into the next home they want to move into usually what happens is they do a contingent sale which means in order for them to buy their new home they have to sell their old one and usually what ends up happening is they have to underprice their old home they have to overpay for their new home and then they pay massive selling costs and acquisition costs to make the transition this in my opinion erodes a lot of net worth that people gain by owning real estate selling to just move into a different property in my opinion is a terrible idea and any time a client comes to me with this scenario I always encourage them to consider renting out their first property keeping it as an investment and then moving because that helps eliminate a lot of the loss that happens when you move as a homeowner now even if you're not a homeowner yet this is important for you to consider because if you're looking for a real estate agent it's really important for you to find a real estate agent that not only invests in real estate themselves but can help you learn about real estate investing if they don't invest themselves it's difficult for them to say well here's what I would consider doing if I were in your shoes and that's very very valuable so even if you don't own real estate yet try to do whatever you can to find a real estate agent who also invests in the deals that you're looking to buy but always keep this example in the back of your mind about 12 months ago a client came to me and said hey Kevin should I sell this $550,000 house I would have made about thirteen thousand seven hundred fifty dollars selling that property and said I went through the scenario and said hey if you sell and you go through the sell and buy process it's going to cost you a lot why don't you consider renting out your first property they ended up renting out their first property and they let me manage it for them I ended up collecting a thousand dollar management fee and I worked my butt off to make a hundred dollars a month after that managing the property and the tenants for them that is I for went on thirteen thousand seven hundred fifty dollars in a matter of two months to make a thousand dollars and then a hundred dollars residually thereafter so you can see the incentives in the real estate agency model are such that you should keep selling your real estate well let me be the one agent to tell you you're often times better off not selling your real estate unless of course you're taking advantage of investment strategies like 1031 tax deferred exchanges where you're just moving on to a better deal the second reason most homeowners stay broke is because of the construction industry I hate to say it but a lot of the construction industry is based around the idea that if you spend one dollar you might get 20 cents back in value on your house and that's a terrible investment I would never want to put $1.00 in to get less than a quarter back that's terrible unfortunately that's what's done day-in day-out and that's because most construction does what's known as appealing to your pride you appeal to the keeping up with the Joneses mentality of look how nice my backyard is look how beautiful my stamped concrete driveway is look at my beautiful new paint my plantation shutters or my Brazilian hardwood floor anytime you have the motivation or urge to show off an upgrade that is going to come as the result of you doing construction the odds are you're getting 20 cents on the dollar there's a reason expensive ten million dollar home walkthroughs are basically a viral topic on YouTube because everybody wants to see this and everybody wants it unfortunately the best way to never get into these beautiful high-end homes is to spend money remodeling your home now look this isn't to say that you should never a remodel but it is to say that you should be careful with the choices you make in remodeling unfortunately a lot of people that don't understand real estate or don't own real estate think that value add products and not having the absolute highest quality possible-- stuff in their properties is somehow being a slumlord and unfortunately those people will stay broke these are oftentimes the similar audiences of people who are fanatical about green building and look I'm all for protecting the environment but let's make some basic math here if you're interested in replacing a furnace that you have right now that's operating at let's say 80% efficiency and you replace it for $7,500 with a furnace that gets you to 97 percent efficiency and you have utility bills of let's say $200 per month for gas for heating right it would take you 18 years to make up the money you spent on this furnace and meanwhile you're throwing away a perfectly good furnace which is probably gonna have some environmental impact itself but what I prefer to do is I would much rather say well if I have a working furnace it doesn't need to be replaced I'd rather take the $7,500 invest it into even an index fund and make let's say 8 percent over the next 18 years 8 percent over the next 18 years turns at $7,500 into almost $30,000 in reality if we all did a little bit of compound interest math like this here we'd spend a whole lot less money on stuff that we didn't need now on the topic of construction you also have to be careful of do-it-yourself projects look I'm a massive do it yourself or I will rewire your house I will replumb your house I will do it all but what you have to be careful of with do-it-yourself is if you're doing a house rewire that's fine you'll probably save a lot of money instead of spending nine thousand dollars with an electrician to rewire house you might spend fifteen hundred bucks and materials put your labor and you do it you save the money now I'd encourage you to pay an electrician to come safety check your entire job to make sure you don't burn the house down but that's good do-it-yourself work in my opinion where do-it-yourself work goes wrong is when you start doing work yourself on things like crown molding wainscoting bathroom remodels that don't need to be done or you start spending more on materials because you're doing it yourself and you're justifying well you know I'll get this really expensive Brazilian oak flooring because well I'm doing the work myself after all this is where the value of do-it-yourself work quickly goes down the drain and that's another reason a lot of homeowners stay broke now another reason homeowners stay broke is license Contracting is very expensive and this isn't to blame the contractors it's actually because of the regulations that contractors have to follow that makes their prices so expensive this is why oftentimes you can get a great handy person that works for 30 or 40 dollars an hour that does incredible work in fact that could be the same handy person that other days of the week works for the general contractor you might be considering employing except then rather than paying 30 to 40 dollars you're paying 70 to 90 dollars and look no shade on the construction industry I realize there are extra insurances that have to be provided and rules that have to be followed but it's frustrating to pay anybody 70 or 90 dollars an hour well here's the third industry that keeps you broke the furniture industry keeps you very poor because the bottom line is we don't need that many chairs we don't need that many couches and our butts don't know the difference between an $800 couch and a $7,000 couch but really is a more practical tip I really in courage you all to check out a website link wayfair.com where you can get really inexpensive furniture or decoration like even this dinosaur skull head that you could get on wayfair.com another really good resource is IKEA and I pause saying that because a lot of people immediately think oh my gosh IKEA cheap dorm room furniture look I have IKEA closets I've had akia kitchens I will agree there are things not to buy at IKEA but some of the stuff at IKEA is really good and guess what it serves the purpose if it's holding your books or it's holding your shampoo bottles how expensive does it really have to be now the fourth business that keeps a lot of people broke and this might surprise you but it's the refinance industry everybody's always talking about oh I'm gonna refinance to a lower rate but guess what usually happens when people start refinancing they do what are known as cash out refinances that is your house is now worth a little bit more or you've paid your loan off a bit hey if you're gonna do a refinance if you're gonna go through all the effort why don't you take some cash out at today's historically low interest rates well guess what people usually end up doing with that money they spend it on furniture they spend it on construction or eventually they spend it on selling moving and then construction and furniture from the new house in fact I hear a lot of people who consider cash out refinances say things like well we need a new kitchen but we need a new bathroom where we need a new roof people constantly I gotta have it like it's almost like like they're they're just like getting sucked into the concept of I must spend money on a new kitchen or new bathroom a new roof and then you look at it it's like your roofs got five years left on him your kitchens fine if you wanted a new look why don't you just paint the cabinets and why are you going to retile your bathroom if you could just glaze it or do something cheaper to it you know what hang a new curtain ride make yourself feel better but look realistically I've been told I needed a new roof and then I waited three years and it never leaked and then when it finally did leak after three years what did I do I took a bucket of Henry's found where the hole was which was convenient maybe I got lucky that I found where the hole was but is pretty obvious slap some Henry's mastic on it and there you go hole was sealed up it's been five years since I've done that and it hasn't leaked again since I'm not saying you can always fix a roof like that but what I am saying is I prevented spending ten thousand dollars for the last eight years and instead I've had that money invested which the last eight years have done pretty well for pretty much anyone's investments so how then do the rich get richer and who are these people they're your agents and contractors okay no I'm just kidding I'm kidding no there are seven reasons why of the rich again a richer when it comes to real estate let's get right into those reasons number one savvy investors understand the power of principle pay down most people look at principle pay down the money you're paying off on your loan and they don't even consider it they think of it as an expense but wealthy people when they owned real estate realize whether they're living in a property or tenants are living in multiple of their other properties every single month that payment gets made the net worth of the owner that landlord goes up rent check comes in ding-ding-ding-ding-ding wealth goes up up up up up it's great principle pay down is arguably one of the most consistent types of investments you could possibly have because you're forced to do it you're forced to make your payments but your tenants are also giving you the money to make your payments so you really have no excuse to invest and constantly be forced to invest overtime principal pay down becomes something so extremely valuable especially when other people are cutting the check for you and unlike cash flow which don't get me wrong cash flows great as well but unlike cash flow you're forced to keep the money invested at least until you refinancing you do something else that's creative number two wealthy people realize that when they're getting paid in rent ordinarily they'd have to pay taxes when you get paid at your job you have to pay taxes when you go sell smoothies you have to pay taxes on your income when you make a profit selling stuff online you pay taxes well interestingly when you get paid rent on your rental properties there's so many tax write-offs that you oftentimes don't have to pay taxes now everybody situation is going to be different but thanks to the tax benefits and the tax tricks that there are which we talked about a lot of them in the real estate investing course link below we teach you at and ever pay taxes on real estate but because of all these tax benefits and something known as depreciation which is just a paper loss a lot of people just don't pay taxes on their rental income and it's completely legal the third reason the rich get richer with real estate is real estate is a really good hedge against inflation when inflation happens values of real estate happen to go up so you don't lose your money if you had cash sitting around in a bank account you'd lose your money against inflation because the money becomes worth less but that's different in real estate real estate values just happen to go up above the rate of inflation in addition to that the amount of debt you have outstanding on your real estate becomes less valuable thanks to inflation so that means it's easier to pay off your debt when inflation happens and the value of your real estate goes up when inflation happens so you're burning the candle at both ends of the stick here inflation is great and rich people realize that when it comes to owning real estate and having debt on your real estate number four I could not make this list without mentioning that cash flow in real estate is very realistic and it's very possible now somebody starting out might not be able to have cash flow day one of their ownership but as rents are increased over time as values increase in the long run averages over time as you get better and better deals as you become a better and more educated investor which is exactly when I teach you how to do in the course linked below then you will almost always end up with great cash flow amazing passive income and finally have money coming in the mailbox while you sleep the wealthiest of the wealthy though take this cash flow and reinvest it right back into real estate and that's because reason number five the wealthy people know about the power of something known as leveraged appreciation in fact let's just make an example here and we won't mention any names let's just say somebody was going to buy a hundred million dollar apartment building and let's say the listing price for it was 90 million dollars that means they overpaid by 10 million dollars to get it and then they put 50% down so they get a loan for 50 million dollars well if property values just by fluke chance happen to go up in value over a certain period of time 30 percent that property is probably now worth somewhere around a hundred thirty million dollars now let's say there's some selling costs and you know some repair costs and let's say they can sell the building for a hundred thirty million dollars and walk away with not just the original hundred million they paid but an extra twenty five million now they made twenty five million dollars but they only put up 50 million remember they got a 50 million dollar loan that means they got a 50 percent rate of return over whatever timeframe that was because of leverage depreciation their return was double because they used the loan to control that real estate in other words if you made 25 million on a hundred million you made twenty five percent if you made twenty five million on 50 million you made fifty percent it's easy because part of it was alone but the value of the building still went up the same amount the sixth reason people get wealthy off real estate is they realize not to overspend now I kind of beat this one to death with the construction segment earlier so I won't go crazy on this but watch some of my new burst pro videos watch the choices that I make in my remodels when I show you before and after videos watch what I show you in the course how I walk you through the choices I make and materials I use and all of a sudden you'll realize ah okay that's how to make money and real estate because remember the goal is if you spend a dollar you better be making two dollars in sales volume if you spend a dollar you better be making positive returns on your projected rental income otherwise why spend the money if you're spending money to make you feel good or because you want a nice bathroom you're not an investor you're a broke homeowner the seven threes and wealthy people make a lots of money people buy under market you real-estate this can be done by getting cosmetically challenged properties usually in the realm of single families or condos or townhouses those are great opportunities to get what are known as wedge deals below market value deals something like buying a house for $450,000 that's worth $600,000 after you spend 50k on it there is an opportunity in multifamily to do this as well it's called the wedge rent opportunity where you find a property with below market value rents and you buy it at a below market value because of that however I will say for every about 20 wedge cosmetic deals that come up in the single-family sector there's maybe one wedge multi-family deal that comes up so yes you can get great deals in multifamily as well the odds are just significantly lower if you're going to roll the dice and say you wanted a good deal oftentimes starting with that one - for real estate the smaller deal is going to be where you're going to build some massive wealth usually the only people that argue no no no no you can't fake wealth and small deals you don't have scale usually the only people who say that are people who don't own real estate ask anybody who owns more than three properties if they're upset that they own those three properties and find out what the unit mixes of those properties and so folks there you have it thanks so much follow me on instagram and until next time [Music]

Channel: Meet Kevin

Views: 74,123

Rating: 4.9105186 out of 5

Keywords: homeownership, real estate, investing, money, rich vs poor

Id: 1xMl7wpxaEg

Length: 19min 7sec (1147 seconds)

Published: Wed Aug 21 2019