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#179: Money is an abundant resource. I tell you why. When you're looking to move accumulated equity, should you do a: 1) Straight sale. 2) 1031 Tax-Deferred Exchange. 3) Cash-out refinance. Avoid lazy money. My personal internet bill is $145, cable $126, phone around $100. Who cares? You learn how much I like to spend on a hotel. Uber and Lyft are killing the parking business. Learn how to estimate rental property operating expenses. Want more wealth? 1) Grab my free E-book and Newsletter at: GetRichEducation.com/Book 2) Actionable turnkey real estate investing opportunity: GREturnkey.com 3) Read my new, best-selling paperback: getbook.at/7moneymyths Listen to this week's show and learn: 00:52 Wealthy people's money either starts in RE or ends up in RE. 02:03 Listener question about 1031 Exchange vs. Cash-Out Refinance. 13:20 Lazy money. 15:04 Other podcasts. 16:09 Free book. 19:11 More on Dave Ramsey. 20:26 Why money is an abundant resource. 24:36 "Uber Really Is Killing The Parking Business". 29:18 Residential real estate is here to stay. 30:07 "Return On Life" and passivity. 32:47 Don't underestimate rental property expenses. Resources Mentioned: Article: Uber Is Killing The Parking Business GRE Video: Operating Expenses GRE Book: 7 Money Myths Podcast: The Real Estate Guys Podcast: Cashflow Ninja Podcast: The Real Estate Way Mortgage Loans: RidgeLendingGroup.com Cash Flow Banking: ValhallaWealth.com Find Properties: GREturnkey.com Education: GetRichEducation.com Welcome to GRE, Episode 179. I'm your host, Keith Weinhold. From Saratoga, Australia to Saratoga Springs, New York and across 188 nations world wide. This is Get Rich Education and we are cultivating a Real Estate Of Mind here. That is because wealthy people either start out in RE, or wealthy people's money ends up in real estate. It's either one or the other. ...and you know, the most important piece of real estate may very well be - that real estate right between your two ears - your mind We come from an abundantly-minded place here at GRE. If you want to learn about combining vinegar and water in a bottle because it's cheaper than Windex. Well, you're not going to learn about that here. If you've been wearing the same pair of monthly contact lenses for the last two years...then, well, you didn't learn to do that here either here. In fact, money itself is an abundant resource, not a scarce one. We're going to talk more about that today. We're going to talk about passive income and define what exactly that means. We're also going to talk about how to best increase your velocity of money. Is it by doing a 1031 Tax-Deferred Exchange or a Cash-Out Refinance - with your income property. Let's go to the listener question about this. Listener Jacob Ayers asks: To move equity, should I do a 1031 Tax-Deferred Exchange or a Cash-Out Refinance? Thank you for that rather eloquently-stated question there, Jacob - and it is a germane time to discuss this. There's a lot of equity out there that is ripe for harvest because most markets have appreciated a good 7-8 years in a row here. Really, this is a question about moving equity to keep it working for you. What is the best vehicle for increasing your velocity of money? Since the return from property equity is always zero, ideally you want to take a big chunk of it and splinter it off into a bunch of little pieces and that way you can leverage more property. Let's back up. There are actually three ways for you to move equity should you so choose that it's right for you. The first way is to... Sell Your Property - That way, you can get all of your equity out. Now, Jacob, you're a savvy investor so that's why you probably didn't even bring that up as one of the ways that you can move equity. Because, of course, the big problem with this is that when you sell an income property. You could sell your current equity-heavy property and buy another. But the problem with selling is that you'd probably have to pay capital gains tax, which would reduce the equity you have available to re-invest. You're also going to have to pay depreciation recapture. Yep, that is all of the depreciation that you wrote off against your taxes every year that you owned the income property will be recaptured off that first income tax return you file after the building sale. So you might have a nice gain but the tax hit is harsh. That is, of course, unless you move your equity in the second of three ways and you perform a 1031 Tax-Deferred Exchange. If you meet the rules of the 1031 Exchange, you can avoid all of the nasty bite of the capital gains tax and all of the depreciation capture. Yes, it can be 100% avoided. In fact, the Exchange is the best way to move your equity. If you follow the rules and do the exchange properly, you can move 100% of your net equity, tax-free. Sometimes people point out that exchanging is really tax-deferred, not tax-free. But, c'mon, the exchange itself, if done correctly, is tax-free. The capital gain is carried to the next property without being taxed. Therefore, in real estate, capital gains is a voluntary tax. What I mean by that is the gain is not taxed unless the you, the owner, volunteers … by selling the property outright. Instead of selling, savvy investors continue to exchange until they die and then your cumulative gains over your entire lifetime - they are forgiven upon your death - and that's because of the stepped-up basis rules. Be sure to ask your good tax manager about the details of the stepped-up basis rules. I'm not going to get into that here. But that's why it's effectively tax-free But whether you call it tax-deferred or tax-free, exchanging is one of the most powerful things in the entire tax code, but it's very much misunderstood by many accountants, attorneys and real estate agents. Actually, during my first-ever 1031 Exchange I soon learned that my income property agent had never gone through this before. Now I devoted an entire episode to the 1031 Exchange here for you a few months ago, so I'm not going to get into all the details and rules again here. The most important thing that I can tell you, to pull off a 1031 Exchange, is to enlist a 1031 Exchange Qualified intermediary early on - before you even sell the property that you want to sell. From the time that you sell the equity-heavy property that you want to get rid of, you have 45 days to identify a qualified replacement property, and 180 days to close on that identified replacement property. ...and there are all kinds of rules and limits around how to identify property. But it must be specific. You can't say that your replacement property is going to be a green duplex in Kansas City. You've got to give a specific legal address. The episode that I completely devoted to he 1031 Exchange topic a few months ago where I discuss the rules and the critical mistakes to avoid, and the deadlines and everything else for you, that is Get Rich Education podcast Episode #143. So the first way to access equity in a property is to sell it outright, the second way is through the exchange, and the third way that you mentioned, Jacob, is with the cash out refinance. The problem with the cash-out refinance is that you typically cannot access all of the equity in a property because you are not selling it like you are with the other two methods. So if you've got 50% equity in a property that you want to get rid of, you can get all 50% out with the straight sale or the exchange. But you might only be able to access 30% of the property value with a cash-out refinance because you might only be able to get an 80% loan-to-value loan. A bank is going to make you keep 20% equity in there as your skin in the game. The advantage of the cash-out refinance is that you shouldn't have to pay tax on the equity that you extract because the IRS classifies this as debt. There's no tax on debt that you've originated. One advantage of the cash-out refi over the 1031 is that the cash-out refi is faster & less stressful. You can move at your own pace. With a 1031, you're selling at least one property and buying at least one property, so now you have all these steps - inspection, appraisal, you'll incur make-ready expenses, and you'll often be paying an agent commission too. With a cash-out refi., you typically just have an appraisal - no inspection, no make-ready, and no agent commission. But a 1031 is typically the best vehicle for moving equity from a "dollars" perspective. A 1031 is also a better move if you want to sell a "dog" of a property that you can't seem to keep rented to decent tenants or something, but yet you've built equity in the property. If you own a property that's been good to you but it's become too equity heavy, you might be tempted to do a cash-out refi instead of a 1031, but yet if you can replace your nice cash-flowing property with one that cash flows even better, look at the 1031. When it comes to the cash-out refi, if you think that's a better choice, remember - and this is especially true if you're looking to do a cash-out refi of your own home - your primary residence, you can often take out a second mortgage and keep the first mortgage in-place, untouched. That might be a good option if you still like your first mortgage's low interest rate or it's advanced amortization schedule. A cash-out refi doesn't mean that you have to restructure every part of the debt on one property. You can keep a first mortgage in-place and see if you qualify for a second. Just a word of caution on the second mortgage cash-out refi - if your second is a HELOC - home equity line of credit, those HELOC interest rates are not fixed. They float in lockstep with the Federal Funds rate which is expected to increase. To be safe, you want the CCR from your new purchase to equal or exceed that of the mortgage interest rate on the property that you just took cash out of. Although I like the 1031 more than the cash-out refi overall, I can think of a couple other disadvantages of the 1031. With the 1031 Tax-Deferred Exchange, you might experience a degree of stress, much of it having to do with the timing of meeting those 45 and 180 day milestones that I mentioned earlier. You don't really want to be on a 3-week vacation to Peru and Ecuador during a 1031. On the properties that you identified as replacements for moving your equity into them tax-free, something might get slowed down in your ability to buy them that's out of control, or if you're looking to 1031 your equity into new construction property and the new construction is going too slowly, that can create some stress. With the cash-out refi., you're on your own deadlines, not the 1031 deadlines that the IRS sets for you. You know another thing - another small disadvantage with the 1031 Exchange that people never think about - and everyone overlooks this. I didn't really see it coming until I had the ball rolling with my first-ever 1031. It's that during that time - those three months or so after you've sold your relinquished property and before you've closed on your replacement property, you've lost cash flow… ...because there's that gap there - that delayed exchange gap where you don't own some property for a period of a few months. I've done a 1031 with a substantial chunk of my portfolio, and I had about three months where a major piece of my cash flow was cut off until I closed on the replacements. 1031s & cash-out refis have definitely been good for me. I've made some mistakes in real estate investing for sure, but having an early awareness of the fact that dead equity isn't serving me and then actually doing something about it really helped me get me to where I am today. If you've got a lot of equity in a property or a property paid off, you've got to realize that your money just got lazy. Not only is it not working for you, you're paying the opportunity cost of not using it to also leverage other people's money work for you. Don't let your money get lazy. So when I've built up around 35% equity in an income property, that's when I'm looking forward to moving it. It's that 35% mark. With a primary residence, it would be less than 35% because I can pull more out - I can pull out equity up to a higher loan-to-value ratio. Just think about property that you have 50% equity in. Your leverage ratio is been slashed to 2:1. If you reposition it with 20% down payments on multiple properties, now your leverage ratio is 5:1. That is just huge, and it's great as long as you've safeguarded controlling your cash flow… ...and we love cash flow - but what has created more wealth for real estate investors is really leveraged appreciation so consider keeping your leverage ratio up there by maintaining small equity positions in a bunch of properties. You know what else? The more that you learn about the economy, pulling $ out of property and transferring it into another property actually expands credit, that very act expands the money supply, and it stokes inflation… ...and as you know from listening to this show, inflation is actually our friend. Great question from Jacob - asking about the pros and cons of a 1031 Exchange vs. a cash-out refinance. By the way, that "Jacob" was "Jacob Ayers" - he is the host of "The Real Estate Way To Wealth And Freedom" podcast. That's another show that you can listen to. You know what's funny - some podcasters don't want to talk about other podcasts similar to theirs or they're afraid that they're going to lose listeners to that other show that they talk about. Well, I just don't feel that way - and well, maybe that's part of my abundance mentality. Of course, I value my listeners and anyone wants more listeners just like an artist would want more people to see what they've spend weeks working on - on canvas. You can check out The Real Estate Guys Radio Show with Robert Helms and Russell Gray. That's a really good one. Sheesh, I've even got a commercial on my show that tells you about someone else's podcast - the Cashflow Ninja hosted by my friend M.C. Laubscher. That's another good show that you can check out. He's had some great guests on that show like Ron Paul, Robert Kiyosaki, and Jim Rogers. Once again, Jacob Ayers' show is called "The Real Estate Way To Wealth And Freedom". Uber and autonomous cars are killing the parking lot and that's going to change real estate. I'm going to discuss that in a bit. I've also got some Dave Ramsey fallout from our episode from two weeks ago. You know, if you want to learn more about the misconceptions around debt and equity - which have been woven into this discussion so far - and how to use debt and equity to your advantage - and in the way that affluent people use them… ...and why getting your money to work for you won't create wealth and how to get other people's ethically working for you to create wealth for yourself and a lot more... I wrote a book less than 9 months ago about how you can do that. You can get the e-version of my book completely free. Not just a free chapter or something but the complete e-book free... ...Robert Syslo is going to tell you how easy it is to do that now. Go. ________________ Welcome back to Get Rich Education. I'm your host, Keith Weinhold. We got more great feedback on our episode from two weeks ago when we were talking about the largely - really - antiquated Dave Ramsey 'debt-free' School Of Thought. We're talking about a School Of Though…
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