Jay and I had a chance to visit and discuss some ideas about real estate investing. I hope you enjoy the video. I’ve also included a rough transcript below.
Michael Baker 07:50 Get this thing rolling. We’ll see if people start popping in. If it’s just if it’s just you and me, we’ll still roll it. We’ll knock it out. So, but as I suspect, you know, we’ll have some folk pop, you know, popping in here, because we’re just now turning on 1230. So, we’ll see who’s coming out here. I see Mr. Platts in there. Mr. Solomon’s here. Stephens here. Yeah, they everybody’s there. They’re coming in. I see Deb. All right.
Well, guys, we’re going to, because I archive and record these. You know, I imagine people will trickle in. But, we do want to be respectful of Jay’s time because you know, he is running a couple businesses. And we want to just honor that. So, it’s right here right at 12:30. We’re going to get started.
Thank you all for joining us. My name is Michael Baker. I’m a manager, a founding member of Vertex Capital Advisors in Fort Mill, South Carolina. And today, we are very blessed to have a good friend of mine. I’ve known Jay for years. He’s just a tremendous guy all the way around. He’s also a business mentor of mine, and he is my person that I go to on just about anything real estate or real estate tax related, estate related. He is my guy that I call upon to ask questions or to send people to that have those kinds of needs. And I asked him if he would be willing to hop on here and share some of his wisdom and insight with us.
Jay is the CEO of Rinehart Realty Corporation and also the President of Rinehart Property Management. And he’s just got a wealth of knowledge. We could spend, you know, many, many different sessions with him and take a deep dive into the weeds but that’s not what this is about.
Constantly, in my business, I get asked questions all the time from people that want to learn about how to invest in real estate the different ways you can invest in real estate. What you should do and what you should not do. And Jay has agreed to come on here today and just basically share some insights and wisdom with us. So, we’re gonna let him have the floor.
I think he’s gonna he’s got a few things that he wants to share with us. If you have questions, feel free to throw those up in the Q&A. And we’ll make sure we try to get to those as well. And I’ll also have some questions from him as we go. But with that, I don’t want to talk anymore. I want Jay to take over and hit us with the business. Let’s go.
Jay Rinehart 10:31
Thank you, Michael. I appreciate it. Thank you, everyone for joining us, we appreciate the opportunity to share with you. Michael approached me a while back–Matter of fact, Michael and I’ve been doing seminars for Michael six, seven years. It’s been a while Yeah, where we’ve we’ve talked with people about different things.
And Michael and I bring two different perspectives to what you really can do with your money. Michael is also one of my financial advisors. So, he handles the equity investing because I do not do that. I know my lane, and I stay in it very well. And just some background, my family started our real estate company 45 years ago. And so I’ve pretty much grown up in all of this. So, in a lot of ways, what I talked about as being very easy and being second nature does come from 45 years of hearing the language.
Watching the ups and downs and in 45 years, I have been through a number of recessions. And also we’ve been through a number of times that that are similar to what we’re in today, which is you have phenomenal increases in value that we haven’t seen.
It’s once in a generation increases in our local area. And all of a sudden, that attracts people to do all kinds of stuff. And we’ll talk about in just a minute but attracts people to do flipping, it attracts people to say, well, Jay, I just want to buy land and hold it. And then also attracts people to do investing in income producing real estate. So, we’ll go through three or four different categories that that I want to talk about.
And hopefully that will spark some questions and give you some good educational information that you can then take and make some decisions and have some further conversations. So, I’m gonna share my screen. Just got some slides that not a ton of them. But some slides that we’ll work off of. So, when you look at real estate investing, and you say, okay, Jay, where do I start, you really have to look at it is:
what is your goal in real estate investing?
There are a number of different goals. One can be wealth creation. One can be cashflow creation, the other can be something as simple as a place to live. I mean, we do forget about the fact that our house is an investment, it’s a terrible investment, by the way, because essentially, you’re paying to live there. Although a lot of times with the interest rates so low, it’s better than paying rent.
So you look at that, and remember real investments you expect to earn a return. That’s why your house is such a terrible investment. Because really, you’re not expecting in return and the only return you get is depreciation, you never get cash flow off of it. So, we start with, okay, what’s my goal? What category do I fit within, and a lot of times people when they come talk to us, they fit in more than one category.
And just like somebody like Michael was gonna build an investment portfolio for you with stocks, bonds, efts, whatever they may be, you can do that with real estate too. And you have to find that those things that you are willing to invest in. So you’ll see, you’ll hear this, and I’ve got on another slide…
You never buy one piece of income producing real estate.
And the reason I always say that is you’re either 100% vacant, or 100% occupied. That’s it, you’re 100% or 100%. That’s terrible when you start looking at cash flow when you start looking at true appreciation, because a vacant piece of property a lot of times is viewed out by other buyers as something that has a lesser value than if I have a tenant in place. And I can continue growing their cash flow and now establishing value not only off of comp analysis, but off of possibly a cap rate discussion based on the income.
So you really have to know again, starting with What’s your goal, let’s talk about their four options. So we’ll talk first about flipping, because that seems to be the thing of the day. You can watch it on three different channels on cable TV, and if you have satellite, there’s another three. We’re gonna talk about investing for appreciation only, then we’re going to talk about cash flow. And then we’re going to talk about investing for with the idea of cash flow and appreciation in the mix.
So let’s start with flipping. I call “flipping” 2020’s Word of the Day. Okay? Because every time you turn around, every time I looked on Facebook, I had a new Facebook friend, going into the flipping business. I start very seriously with this comment. This is not investing in real estate.
And one of the reasons for that, because people look at me all the time and go, what are you talking about? It’s buying a piece of dirt and termite food. This is investing in real estate, it’s not investing in real estate, I’m looking for passive income, I’m not looking for ordinary income. I’m looking for long-term capital gains taxed income, I’m looking for something that is not ordinary income. And that’s what flipping is, you have to hold for a longer period of time to get long-term capital gains tax when you are selling an asset. And for real estate, one of the things that we look at is owning longer term, because I’m then using the government’s money, they’re the tax that I would pay on that appreciation.
As a long-term benefit to me, when I go into flipping, I don’t do that. It’s a job. I got about his house, I got to work on it, I got to flip it over and look what I make. And really the TV programs, And if you go and listen to any of the webinars or the infomercials, if you want to call them that, and that talk about this, romanticize it, they romanticize that oh, I can make 10% of the value or 20% of the value by doing a flip.
Every once in a while, they’ll throw in that they got left holding the bag. In other words, they found something in the flip that that either made them not make money, not make as much money or sometimes they’ll show a loss, really your day trading real estate. And that’s a dangerous thing to do. Because if you are flipping and the music stops, there are very few chairs for you to sit down.
And if you’re playing the game, okay, we found that in the 2007-2008 recession, where a lot of contractors and flippers got caught. And right now, I’m starting to see people young couple and in our church, Michael, you may know them, but all of a sudden, they’re flipping a $250,000 house. And I’m looking at it and I’m going, whoa, yeah, the potential market now you might be able to get 300k on that house. But still, the risk is that they are stuck with a $250,000 house that they have put all of this work and this money into. That’s huge.
Michael Baker 17:57 Jay, I want to interject one thing is, and I think you’ve maybe you actually that have I’ve heard this, but you know, I’ve picked up things along the way. And one of the lessons I believe you shared with me one time is in real estate, you have to think about, you know, how are you going to make money. Like when you make money when you actually buy the property. And so, in this type of environment, especially here locally, where there’s so much growth and there’s such a lack of inventory and property values are being bid up, is it not getting even harder to do this where you’re you know, where you’re having to compete with maybe multiple offers to get properties, cash offers, and maybe even having to over bid just so you have the opportunity to possibly flip?
Jay Rinehart 18:46 That’s right, it is very difficult, but I will tell you that some people do use like, I have one agent that that has two of these guys that do flips. I will tell you that one of his guys mails out 7500 mailings per month to try and find houses. Wow. 7500 mailings. Now, is he making money? Yes, he’s making money. But he’s also stayed below that $200,000 number. So he’s really looking for the situation where, you know, Mike, Michael loses both parents, he and his siblings come in and they just, they want out. And otherwise Michael wants his 20-30,000 and go back to California. The sister wants to go to Colorado, they don’t really care. They have no ties to the area.
Michael Baker 19:32 He got a very specific criteria that he’s looking for. And he’s disciplined enough to say, if it doesn’t fit my parameters, I’m not interested.
Jay Rinehart 19:42 I am amazed at his discipline. Okay, I mean, because really, what we see in this is people start going okay, I want to chase the market very similar to the young couple that you and that was just mentioning to you, is they are chasing that market and that’s when you can get stuck. You can get caught and the problem with that $250,000 flip is not going to ramp for what it’s going to take to hold that as a long-term investment.
Right. So that’s where you start losing. And that’s why I’m not a big fan of flipping. I know what happens it matter of fact, we still okay. The other thing to me on flipping is, I believe people underestimate the risk involved in flipping you and I off camera, we’re talking about a situation. We’ve got a client where we sold a house that we were the buyer’s agent, we sold the house to somebody, and it had been flipped. And in the flip, the, the person that was doing the layout was also a contractor that they had covered up an issue on the stairs, thinking, no problem, it won’t ever come up. Well, our client actually fell through the stairs. And then when they pulled everything back, they found all the damage that had been covered up by the flipper.
And so it’s now going to lawsuit, because it’s number one, they got a fraud issue. Okay, they knew about it, they didn’t put it on the seller property disclosure, they got a fraud issue. But secondly, now they have a personal injury issue. And a lot of people say, well, Jay, you know, that’s not a not a problem. We have laws to take care of this. We’re how they do it. Well, they did it through an LLC. Um, great. Well, they’re out. So it’s only the assets in the LLC. I mentioned to him No, the problem is the person that owned the LLC was the one doing the work. So now they have potentially put their home at risk in this flipping. So if you do want to do flipping, you got to do it, right. You got to talk with an attorney, you got to get set up properly, you may want to do some asset protection, planning, and just look for those opportunities. And then lastly, don’t cover up something that’s messed up, you know, a simple thing if the person had just ripped out the stairwell and put it in properly, then they wouldn’t even be facing this lawsuit. So, livings Fleming’s out any questions on flipping that, Michael?
Michael Baker 22:01 No, I’m good. I don’t see any in the chat, man. Let’s keep going.
Jay Rinehart 22:04 Okay, let’s talk about appreciation only because that’s another way of investing. And I do have a lot of people that are looking at this today, because they’re seeing the benefits of individuals that may have invested 10 2030 years ago. And this is mostly land holdings. These are not things that you’re going to lease out, you may lease to 100 Club, things like that. But larger land holdings can allow you to have a smaller carrying cost.
Now, they still have a lot of rent, but also don’t have a lot of expense, the lower taxes come in agriculture or farm use either one of those, you can put it in with the county, and then it drops your taxes from 1000s of dollars to hundreds of dollars every year, you can get a insurance policy and then allow somebody to hunt and really you come up with about clearing as much as you would need to pay your expenses on a yearly basis, what you’re doing in this situation is you’re holding for the market to catch up with you.
Okay, I’m holding today, I may be able to buy a piece of property for 1500 2000 $3,000 an acre. And what I’m waiting for is the development like is happening in Rock Hill and the surrounding area to catch up with me where the price per acre may be 2030, we just put 100 contract at $60,000 an acre for a 20 acre site. So that’s what they’re looking for is that going from a small amount to a larger amount. And in the meantime, you can also hold and actually do plantings on their land, if it’s a bigger track, you can grow trees, you can have a plan. And we’ve got a lot of advisors around here.
A lot of timber guys that can help you in that process with timber management, and also producing an amount of cash flow every so many years form that investment. But really what you’re doing this is patient, patient money. This is not stuff that I this is not money that I’m gonna need. And if I have a family problem, and I need to get cash, this is my long term, put it under the mattress, let it be out there, and really is a hedge type money, you still have to have that plan. Like I said, I’ve got to have a plan either to rent it out, I’ve got to have a plan to either, maybe farm it for timber use, I’ve got to have something there that is more than just let me buy it and let it just sit over there.
The reason is, it does have some risk. Remember, it’s a piece of land is probably not right beside your house where you’re keeping an eye on it. So there could be people that go on to the land. So you want to make sure you have your personal assets covered by insurance policies, having somebody go and look at the land take care of the land. My cousin Jeff, for many years has done some similar things where people have asked him on a monthly basis to go and he drives on a piece of property. And he’s looking for things like deer stands that are that aren’t authorized, he’s looking for people cutting access, or even at the access, putting up a chain, to keep other people out there looking for different things. Because this is also a long-term hold, it’s not something you just want to set and forget, because we also have some rules and or some laws in South Carolina, that somebody could squat on the property, they could do different things, and you just want to stop that you don’t want to have that happen. So while this is a category, and for a lot of people is part of their portfolio, I would not build an entire portfolio just on appreciation only property.
Michael Baker 25:46 So I want to hop in here, because and this is this is something that that I see all the time. And I don’t know, you know, how I got on the mailing list, but I know people other people get these things all the time, especially in, in areas that I know people are wanting to develop.
So, the example that I think of a lot is, you know, we live pretty close to the Blue Ridge Mountains and in the mountains are beautiful and, and my family, we love to go up there and travel and there are lots of people that they aspire to have a mountain property or a mountain home or second home in the mountains. And they’re saying, Hey, you know, there’s a lot plots of land here that you can, you can purchase. And I know some people will think about purchasing with the intent to maybe build in the future, or they are looking at purchasing a plot of land, you know, at these auctions that they hold for this reason to, you know, hopefully have that land appreciate that they may be able to, to sell in the future.
What are your What are your thoughts on that? Is that does that make sense? Or is that kind of fall into the category of like, okay, what’s the real plan here is the plan for you know this to appreciate it because I would imagine anything that you’re purchasing with the intention of having appreciation needs to be looked at through a different lens, when like a purchase that you’re going to actually use or builds for something in the future.
Jay Rinehart 27:13 Right, let’s talk about two different kinds of purchases, which I get the same mailers. And what amazes me is that, unfortunately, people do fall for this, because one of the most difficult transactions that I’ve done over the last really five years was to sell a foreclosed development, there was a bow, it had sold out almost 50%. But the developer ended up not completing some of the roads.
You know, the second, the second layer for the asphalt was not put in, they had not completed the amenity center, all these things. And these individuals were waiting for that to be done before they started construction, or maybe some of them, you know, bulk with that same idea you had which was let me just hold for five years pay off the lot. And then I’ll build the house, right? Well, what ended up happening is none of the houses had been built.
So basically, on a failed subdivision, and we’re going to add to an already been foreclosed, we’re selling it for the bank at a very decreased value. Okay, in something that in all honesty, I have no earthly idea whether or not it’s going to actually be finished or the development will be finished. Or whether or not that buyer that bought it stops the subdivision, in other words, combines all of his lots of act together and creates one location for him to put a piece of or a house on. So it’s really a risk. And yet it may sound like oh, we can get in here for $35,000 or $55,000. And of course they do put on those flyers the prettiest view of the entire property for people to look at. So the lake or the pond or the stream, that’s a one out of 100 lots, right? The brochure, the brochure looks a little bit different than real life. That’s right.
Jay Rinehart 29:08 And so you really have to you have to consider. So, you know, sometimes those work, especially if you’re in a subdivision that’s already 60% built out, or 70% built out, and they’re just trying to clean out the rest of the inventory that can work on guide where you can go in, but most of the time I’m looking for restrictive covenants that say you have to start construction within so many months of purchasing.
Michael Baker 29:33 Gotcha.
Jay Rinehart 29:36 So bigger tracks land it. I’ve had some people ask about well, what about subdivision lots? locally, I wouldn’t do that. Mainly because right now you’ve got everybody in their brother competing for subdivision lots to build on. So, I wouldn’t be a buyer. I’m here with the intent of holding long term. Right now, we’re in a position to where there’s just not a lot of Inventory out there. So even if you bought it to hold on to it, what ends up happening is, in all honesty, your phone’s gonna be blown up, you’re gonna have people mailing stuff to your house wanting to buy that lot. Could be a quick turnover, make a couple of $1,000. But again, you’re not holding it for that long term appreciation, you end up getting taxed at a higher rate.
Michael Baker 30:22 Right.
Jay Rinehart 30:24 Okay, maybe they’ll some appreciation.
Michael Baker 30:27 I think we’re still all clear. So let’s, let’s keep rolling.
Jay Rinehart 30:30 Okay, so let’s talk about the first part, which is cashflow. I put the word the why up at the top, this is very similar to your goal. In other words, what is the intent of cash flow? Cash Flow, we’re looking for check of the Month Club when you start looking at real estate investing. And that is the intent for most of the investors that we represent in Ron Howard property manager that we manage about 1100 units for 440 investors.
And the vast majority of them that I hear from is so that they have that passive income. That’s why a lot of them, again, got the property, they either inherited the property or bought one unit. And their idea was to have a supplement to their retirement income, whether or not for some of them, it’s social security. For others, it’s pension plans, things like that. The one thing that is tough when they only own one property is, you’re still cyclical.
Okay, you’re still gonna have people talking about? Well, it’s 12 months of them making your payment. That is correct. But when a tenant moves out, I have a time where we have to turn over the property. And sometimes that’s a wonderful time, it’s two or three days because the tenant left it wonderfully. But the vast majority of time we have to go in and do something to the property. And then the rare circumstance but not rare enough circumstance, we have to do major renovations to the property. So in a major renovation timeframe, I’m losing a month, maybe six weeks, and I in a smaller renovation, I’m losing a couple of weeks’ worth of rent.
Michael Baker 32:13 Jay, when you say when you say major renovation give us an example of what a major renovation would look like.
Jay Rinehart 32:20 Probably one of the worst ones my wife and I ever had was we had a couple that lived in one of our rental properties. We had approved a dog and they lived there for a long period of time. They lived there about six years. And we had approved a smaller dog. That dog passed away and they did not get approval for the dog that they bought. They bought a great dane.
Oh wow. The couple had a terrible falling out and split up. And during that process, they would lock the Great Dane in one of the bedrooms. And so when we got possession of the property, the dog had pretty much chewed up around the doors, all of the door molding and about the height of a Great Dane so a little above chair rail had banged his head into the wall such that we had to go ahead and and basically take out all of the sheetrock and put in brand new sheetrock.
Well, he had taken the doorknob and crushed it in his mouth guy, so the dog was in stress because the couple was in stress. That type of damage is is not fun, right? And so we could think in that case, we had about $7500 worth of damage on $1,000 a month rental that means for that year, I made no money. Okay, um, I make the payments. But you know, we estimate two and a half months just to pay the taxes in South Carolina.
So two and a half months, $1,000 a month plus 7500 after paying my fees. Yeah, I made nothing. Now, to that end, we’ve had that house now for 20 plus years. And I can you know, I’ve had two maybe three bad experiences, which means for 17 of those years, that I’ve had somebody that has been paying my mortgage and putting monthly a monthly amount in my pocket every single month. So again, it’s cyclical, it does happen. The worst thing that somebody can do is mentally think I’m never going to have a problem on a on a rental house. And therefore, they don’t set aside money. They don’t put aside you know, the creative capital account. That’s why I say here, you must have a plan for investing. It has to include dealing with those times when somebody doesn’t take care of a property.
Michael Baker 34:43 Exactly I mean, so me I was just gonna say that sounds to me like that’s a as you were talking, I was thinking Well, it seems like best practice would be is that you can’t consume all your cash flow because I know when we start talking when we start thinking about cash flow and The sexy side of it where it’s like you have all this revenue coming in.
But you know, you also want to operate it from a standpoint of, you know, hey, I’m going to have expenses, I’m going to have taxes I’m going to have maintenance and repairs, I may have a bad scenario come up, I may have a period of time where it’s vacant and I can’t get it rented right away. You need to have some contingency money set aside to help you with that, you know, a can’t have it where the minute you have a Great Dane experience like you shared shortly now you’re dipping into your own pocket or, or worse, like, what do you do to come up with liquidity to deal with that, so you can get the house back on the market?
Jay Rinehart 35:41 Our best investors and our most, I guess profitable investors treat real estate investing like a business where they sit back and they say, okay, until I have a base amount built up in this business, not to go and invest in another property. That’s a whole nother bucket. But my bucket of what else. So let’s say you invest in decide you want to buy five rental houses, again, most people aren’t buying five at a time, but I want to buy up to that five amount, then I’m going to make sure that I have enough for a new roof and hv AC unit at all times.
So in any one year, I could own one of those five Have either of those things go out? Now people say well, what about water heaters? Yeah, water heaters $1,000 expense, that there’s not going to break you. Right, here’s the $12,000 roof. That’s a whole nother thing. And then our HVAC system, it’s a whole nother thing. So then if you are doing that, and let’s say out of that five, you use your bucket one year, then you just know that from the five rails, you have to refill your bucket. And you have to be ready for that. The bigger the portfolio, the bigger the bucket has to be.
Michael Baker 36:57 Yeah, absolutely. And we got a question here. And this may this is probably going to tie in, in its own way. You know, David’s asking, you know, when you when you’re looking at cash flow, you know, how do you decide between, you know, maybe pursuing commercial real estate versus residential real estate? Because those are two very different types of investments. And, you know, can you share a little bit about, you know, how you kind of evaluate those, those different types of, you know, those different types of investments and what you look for?
Jay Rinehart 37:32 Sure, well, number one, I believe in truly building a portfolio. So I think you ought to own both of them. And when you talk about commercial real estate, boy, there’s many commercial buckets as there are different types of stocks almost, because a strip center is not the same as a industrial building. Nor is it the same as an apartment complex. So those are all commercial things. When you start looking at investing, I will tell you that residential is all more of a churn.
So most leases have historically been one year long, I will tell you, we’re starting to get requests for longer term leases right now in our area, it happened right before the pandemic started, we were getting requests for two and three year leases, and where the tenant sets what their increase could be, right versus the market. But so that’s one one year now lower entry level on most residential. Even today, you I can get you into a residential somewhere between about a good one, not a slum property, but a good property somewhere between about 150 and $225,000.
Michael Baker 38:41 So that’s been that’s purchase price, right? Just price.
Jay Rinehart 38:43 That’s correct. And that’s pretty much ready to ramp. That’s not a I got to go in and put $50,000 into it. So but if you go into the commercial marketplace, it’s going to be a lot more expensive. Just take I’m on Ebenezer road here in Rocky Hill, there’s a property that I’m working with a potential client on as a potential purchase and the purchase price $325,000. It’s an office building. Now it’s converted old house, but it’s an office building and he will be able to charge on his his rents an amount sufficient enough to cover right the cause of the churn in residential, a lot of time cap rates, my return on investment is higher.
So for some of y’all may have never heard of cap rates cap rate is basically a calculation that shows me what my risk is. It’s very similar to interest rates in a lot of ways. So if a property can lease for 15 $100 a month, and it costs me $150,000 a year, well, that 15 $100 a month $18,000 a year tolerable, less my expenses, so let’s call it I get $15,000 a year. That’s Natalie My experience is 15,000 or 150 to 10% cap rate. Right gives you an idea as to how you figure those residential you’re always looking for double digit cap rates.
Gotcha. Always. Now talking about commercial, right before we got on today, I was looking at an email I just got I’m like, oh, chick fil a in Louisiana. from home. That sounds like a great place. Chick-Fil-A and a brand new 20-year lease. It’s in one of the bigger cities on a corner lot. I’m going Come on, let me see. Four and a half million-dollar purchase price but the cap rate was three and a half percent. Wow. Well, Michael, that’s, that’s basically bond money. Yeah, they’re gonna have the same bond line. Now it is chick fil a. Right, then, I mean, it’s pretty, pretty stable, I would say place to be looking. But at the same time, you know, that’s definitely a lower calculation than what you were just talking about residential. And you’re in that for a lot higher amount of money too.
Jay Rinehart 41:06 now I can tell you that if if you’re talking about a commercial and you say, Jay, I’m not talking about a $4 million chick fil a, I’m like a little strip Shopping Center in York County, I would tell you, you’re in line, but behind about 200 people looking for the same investment right now.
Because those little strip shopping centers are very valuable. As a matter of fact, some of their cap rates are in the same area as residential, which would be that eight to 10 or 12. range. So that’s, that’s a tough asset to find. I will tell you today to buying office property in your county, I’d really want to know where by, okay, because office world office world is changing. But I would tell you that our industrial and warehouse in your county has gone nuts, the values are through the roof. Because I’m leasing one right now. And we’re getting almost $10 a square foot on a 20,000 square foot building on a 10-year lease.
Michael Baker 42:07 Yeah, it’s it’s wild in this in this area, you know, and our county, you know, and that’s but that’s a that’s a testament to different areas of the country that are going through the similar growth that we’re going through.
Jay Rinehart 42:20 Right, you got it. So again, cash flow is one of those things, so making the decision between commercial and residential. Now the other part of that is a is a decision you have to make as an individual to. So as an individual, I do have investors that contact me. We sit down, we go through everything. I’m like, you do not have the emotional fortitude to be a residential owner. Okay?
Because the reality is I have had to evict people and I have to set people out that I really don’t want to. Okay, one of the hardest things in residential is when you walk up, when we walk up to move somebody out there, constables knocking on the door, and he opens the door. And they’re all of mine notice letters just in the floor, never having been a. And we set everything out on the on the lawn while somebody’s screaming at us or calling us names that we won’t repeat. And then the kids get off the school bus.
And they burst into tears because mom and dad hadn’t let the kids know anything. Yeah, I mean, that’s it. Those are emotional things. And so if you can’t handle that, and you can’t handle, check my Google reviews for on her property management, we get on a lot of things. But the reality is you got to be able to handle it. If you can’t then commercial, it’s it’s very non emotional. If the business didn’t pay the rent, they’re out.
Michael Baker 43:46 Right. And they there’s that understanding going in, you know, the business knows, I mean, we’re here, this isn’t our building. We’re leasing this property. And it’s a business truly business relationship, you know, for the most part from the outset.
Jay Rinehart 44:02 That’s right. That’s right.
Michael Baker 44:05 So I have another I never another question that came through here. And I can see your, you know, moving to cash flow with appreciation. But this is actually a two part question. And it’s a great question from my friend, Sandy Solomon, he but he’s asking, you know, all people in the sit in my chair, from time to time, we will run across somebody that is very, very excited about the idea of doing self-directed IRAs and using residential or real estate inside of a self-directed IRA. And for those who are watching, basically, there is a there is a wrinkle in the tax code that enables this to happen where you can own real estate inside of what they call a self-directed IRA. But you have to follow the rules very, very specifically. And you know, can you share a little bit about that? And then I have another question to ask as well.
Jay Rinehart 44:59 Yes. Self-Directed IRAs can be incredibly, it can be an incredibly successful way of investing. And it can be a disastrous way of investing too, if you do not follow the rules very, very specifically, okay. I have seen some people be successful at flipping in a self-directed IRA, but there are certain expenses that cannot be paid out of the IRA. And you individually cannot pay those expenses, because it would be an invalid contribution to the IRA, which just disqualifies the whole thing. Right, which then blows the entire thing up, okay. So you have to be very careful in how you structure your transactions. That being said, there are very professional companies that do this, somebody like me, I’m not going to advise you on how to do it in an IRA, I’m going to turn it over to a professional that all they do, because they keep up with all of the different changes, and all of the different revenue rulings, the profit letter rulings, everything that comes out, they go ahead, and they don’t find the asset. That’s where we come in, as a real estate broker, we help you find the asset to be able to invest in in the self-directed IRA.
Michael Baker 46:23 I’ve always looked at those. And when I’ve seen those, what I always am astonished by (this is my personal take) that someone is willing to take the risk, because the rules are so stringent that if you, even by your own ignorance, ignorance is not an excuse if you bungle something, which is why you have to typically involve that third party administrator to basically run it for you.
It blows the whole thing up, but at the same time, you’re taking an asset where you have, you know, long term cap gains, and you’re putting it into an IRA, where, you know, you don’t get that same tax favor, you know, tax favored treatment, it’s almost like you’re, you’re trying to beat the system by just constantly and forever deferring, you know, paying tax on gains. But then if you ever pull money out of it, or use it in any way, you’ve foregone the long-term capital gains treatment on it, which is to me is, you know, to me is what, that’s where some of the magic is, right?
Jay Rinehart 47:27 Yeah. So, one of the best. Again, it’s it depends on how you’re going to use it. I’ve seen somebody that was incredibly successful at this out about almost $2 million in their IRA. And literally, because they have done other real estate investments have been successful at that over time, we actually did just did a tax move to where we were giving away their IRA to charity.
Yeah, they’re taking all of that and just getting rid of it. Because they have realized, okay, now I’ve created this huge IRA, that is going to be nothing but ordinary income, taxable, by the time I pass, and instead, I’m once at the tax benefit today, by giving away the asset and we’ve just done all the calculations are going to give it away over a four-year period. Yeah, basically wipe out the income tax, because of some of the CARES Act.
Michael Baker 48:25 Yeah. Yeah. Awesome. The other the other question that came through, and I see this, too, is, you know, one of the one of the cardinal things that we say in investing is don’t invest in anything you don’t understand. And, and I could, I can think of no other profession that probably holds true to that more than the real estate professionals, because, you know, I constantly meet real estate professionals, brokers, agents, realtors, and, you know, they are all very, very excited about what’s possible with real estate, but there seems to also be this reluctance to invest in anything else.
So like, you know, it’s I often will meet people that are involved in real estate professionally, and they don’t have a lot of investments outside of real estate. That was the second question is like, Can you speak to just you know, why that is why it seems to be so few. You know, real estate agents, real estate professionals don’t want to venture outside of real estate when it comes to their investing is it just, you know, that familiarity bias, they’re so in it every day and they see what’s possible that they don’t want to diversify out?
Jay Rinehart 49:47 Yeah, there’s a there’s a, I believe there’s a couple of reasons for this. One is real estate’s The only hedge against inflation you’ve got. It’s it, is it, okay. Because if I buy a house Today, and it’s a rental house. And I use this example all the time, my parents bought their first two rental houses before they bought our house. This was back in the 70s, when they first opened the company, well, what they paid for the rental house, we have sort of passed now in their yearly rental income, net of expenses. Wow. per year, every single year. Okay.
But yeah, how much did they pay for that house? Yeah, you know, and so their hedge, their return on investment is massive, when you start looking at it. Whereas if I had bought another asset, I’m gonna have ups and downs, I’m gonna have to deal with different things. So that thing, that’s one of the reasons that real estate is so attractive. I think the second reason is, as a real estate broker, the high we get from dealing with real estate is beyond anything that that I’ve seen out there. Okay. It is just we love doing the deal. We’re deal junkies.
And so it it actually satisfies two different things that satisfies that desire to do the deal, and is a long term investment for us. Now, I will tell you for this group that’s own and anybody else that that ends up watching this, or you talk to one of my first questions for a real estate agent, if they’re trying to sell me an investment is talk to me about your portfolio. I think I shared with you a long time ago, I get unsolicited, all the time, telephone calls, where the guy says, I’m in Toronto, and I’ve got this great investment for you. He usually has a new jersey accent, I got this great investment for you and this and that you’re only going to have to put up $100,000.
And I tell him all the time, write down this number 803-329-2953. He said, Okay, what is that I said, that’s my fax number, fax me your holdings of this investment in your own name. That is at least exceeding what you’re asking me to invest. And I will call you back. And we’ll talk about, you know, how many faxes I’ve gotten Michael? Zero. Never, never got mattifying they usually hang up on me.
Michael Baker 52:15 Yeah, onto their onto the next they’re on to the next person.
Jay Rinehart 52:19 If your real estate adviser is not investing in real estate, then they don’t know how to advise you to I ever play a sale?
Michael Baker 52:26 Absolutely. And, you know, and I think that’s a that’s a great point. Because one of the things that you mentioned earlier, you know, in your talk was the importance of being patient. And, you know, I think that I know for a fact that that that that happens with people that when we deal with equity markets, especially when you’re in the type of environment that we’re in right now, where you’ve seen some really just some outlier type performance in certain asset classes, even with some individual companies.
And the tendency is, is to look at, you know, what you might be doing, you’re like, well, well, where I’m not going to the moon, like, what, why am I not going to the moon, and then we get that urge to be impatient. And unlike, and this is, this is coming from my seat, unlike equity markets, where we kind of know that we can’t control what the market does with real estate, especially when you have a specialized knowledge or your boots on the ground, and you can go walk in these properties there, I think there can sometimes be a sense, a sense of control that you feel that you have, like, oh, if I just deal with this, like, I can control, you know, different parts of the transaction, I can market the property this way I can do this. Well, we know we don’t necessarily have that. And, and I think that that may play a role as well. I mean, what are your thoughts on that type of assessment?
Jay Rinehart 53:50 Yeah, I don’t disagree with that. I mean, I think it’s, you’re talking about back to why real estate agents don’t invest in other classes. That way, what you’re tying into,
Michael Baker 54:01 yeah, yeah. We’re just in general, and I’m laughing because my buddy Derek on here, and I need to connect you guys. You guys are kindred spirits. He’s a real estate guy. He and his family, they develop hotels, and he was joking. He said, what was that fax number again?
Jay Rinehart 54:18 You know, so So I mean, when you look at it, I mean, you know, you you do have building a portfolio. So you know, my background one thing we didn’t share with him as I’m also an attorney, I’m a tax attorney. Right. And so as I’ve advised clients when they’re looking at you know, a net worth of 10 million 15 million $20 million is real estate should be part of your portfolio should equities. So should bonds because in all reality, they all move in different waves. Correct. You don’t want to look at just the return on real estate, because you’re better Yeah, I would tell you that 2020 was probably hard for him and the hotel industry. You know, I mean, it couldn’t have been easy last year. But again, we’re coming out of this and guess what’s gonna happen, people go and go stay places
Michael Baker 55:09 people are going to move and do things and they’re going to a lot of people are going to have money in their pocket to do it. They’re going to be given money to go and do things.
Jay Rinehart 55:18 Michael, we have sent more referrals to Myrtle Beach this year, we sent we closed approximately, I think 58 referrals, outgoing referrals this year, more than half of them were to Myrtle Beach Wow, guy, that’s the most we’ve ever sent there. And the reason is, people are looking and they had that extra 10 2050 $80,000 in their pocket and said, I’m buying a house where I can go because I can work from just about anywhere.
Michael Baker 55:45 That’s gonna be interesting. Yeah,
Jay Rinehart 55:47 yeah, let’s let’s, let’s hit just a couple of things on cash flow with. This is kind of the holy grail of investing. Okay. And we talked about cash flow, yes, I won’t cash flow. And there are assets that people do buy for cash flow. One investor here in Rock Hill that I dealt with on and off for many years has 52 properties. And those 52 properties are worth the same thing today. That is what he bought him bought them for over the last 15 years.
Because all he was buying was cashflow, no appreciation with most real estate investments, where you’re looking for appreciation to, then what that allows you to do is have a good return on cash flow. But then with appreciation just at a reasonable level, which is two to two and a half percent per year, that gives you a bump in your total return on investment. Now, when a year like the last two that we’ve had in your appreciation goes nuts. Matter of fact, 2021, we’re estimating in the price ranges, that would be our rental houses, you could see anywhere from eight to about 16% increases, depending on the location that you’re in embraces.
And that’s just, it’s just crazy. Other thing here, like I said, never buy just one unit, I mean, obviously buy one unit at a time, because you want to get in, you want to get it up and going, you don’t want to have the drain on everything else. But creating that portfolio of units in different places, different types of units, come up with what is your bread and butter, and then be close to that. But certainly invest in different areas.
And those last two things, run it like a business, please run it like a business until you can walk away. And it will provide you with passive income, like a return on investment where you hire people to handle all the aspects of it. And you just received that, then you have to work it like a business and you are the chief person there. You’re the investor, which means you’re providing the capital, but you need to have advisors just like I have with my stock portfolio you would have with your real estate portfolio. And that would be someone in the real estate business day to day.
Michael Baker 58:07 Yeah, I agree with that completely. And that was one of the things that I wanted to you know, I’m glad that you mentioned that, because we talked about this, you know, I think before is is how important it is to get the right people on the bus. Because there’s so many things out there and you just can’t, it’s not possible to know everything, we all have blind spots. And you know, when you start dealing with, you know, money and one of the things that I think is funny is as, as the numbers on the page get larger, you know, even the most confident people start to have a little bit of nervousness and anxiety. And, you know, Tiger Woods has, you know, has a golf coach.
I mean, Steph Curry has a shooting coach, I mean, you know, the best in the business still have trusted advisors and people around that that can give them insights. And you know, and that was one of the things that I really liked it what you said earlier is when you talked about, you know, show me your portfolio, because I know that when someone’s going to work, you know, working with you as far as doing real estate investing is not want to be Hey, transactional. I just want you know, here you just buy this property and and we wish you well it’s like what’s the what’s the purpose? What’s the strategy behind what we’re doing?
How are we going to build this because I’ve met people in over a decade of working and helping people financial planning. I’ve met people all the time that have a rental property, or maybe two, but I’ve never met anybody with one or two rental properties this that is absolutely crushing it. I have met people that have portfolios of rental properties that are absolutely killing it with their cash flow, because they have run it like a business, and they treat it in the way that you’re describing.
Jay Rinehart 59:53 Yeah, Michael, one of the one of the funniest things that we ever did, I bought the company from my parents said we’re 45 years, years old, I bought it almost 17 years ago now. And three years ago, we sold the portfolio for our first investor. He was with us for 42 years. Wow. And, and and we knew from day one, what his intent was, we weren’t the intent. And then when they had to go into a facility, we started selling the rental property to help pay for their care, which kept the liquid assets available for what the liquid assets needed to be available for. So, I mean, again, it’s just having a plan. What is that goal in your mind? And you just work at the end work the plan their long-term assets? You don’t they trade them? So?
Michael Baker 1:00:47 Absolutely. Well, I have one quick question to ask. And it may not have a quick answer. But this, hopefully, we’ll give anyone that’s got any questions lingering to throw something up in the chat for us? We got a few more minutes here. So, if you got a question, you know, type it in the chat? And we’ll try to answer it here before we before we jump off. But one of the things that was talked about heavily in the last presidential election, was this idea that we’re going to possibly go after and change long term capital, right, you know, capital taxes, sorry, capital gains taxes for long term capital gains, because these tend to have more favorable tax treatment than ordinary income or investment income.
What are you seeing, you know, on that front, you know, what, how could that possibly impact people that are either holding properties or looking to get involved in real estate? Because, you know, that could have an impact? I would imagine on people that are that are looking to or are planning to be in this game? Yeah.
Jay Rinehart 1:01:53 I mean, the most successful real estate investors I’ve ever dealt with have never paid long term capital gains tax. Okay. One of the things we do have the benefit of is we have step up in basis at death. So some of my my wealthiest clients literally hold him for the entire their entire life, they just never sell and never sell. And that’s what they’re looking for is I’m never gonna pay that tax. They know they’re gonna have to pay a state tax. Well, right now, if they’re over 11 million, if they’re below that, they don’t have to pay estate tax. Let me per person, right, right. Right. Right. Right. So so they look at it as just a long term cash flow play. If they have to sell an asset during its lifetime, then they just 1031 exchange into another asset. Again, don’t pay the taxes, look for that cash flow. And if by chance, they do have to pay the taxes, and the tax code is changed. And remember, if I am massively successful at generating passive income, and getting my retirement income, all of those different things, and I’m making a high bracket taxpayer, well, I have not only long term capital gains, I’ve also got the 3.8% add on, I’ve got just a lot of different things.
That’s still a better case scenario than paying ordinary income, you’re talking about basically 28 and a half 29% is still better than buying long term capital gains, I mean, long, ordinary income, burn. So if by chance, they bump that up and make long term capital gains the same as ordinary income, they would actually go back to, we haven’t always had capital gains tax, right? at different times, they’ve been coupled together with ordinary income.
So if we would go back to that, but what it would happen was, it would definitely impact your commercial real estate marketplace, and the turnover of those assets. I do believe that that you would stop it, especially if they get rid of 1031 exchanges. It would require a higher return on those assets. So I think you’re going to impact ramps. Now, ramps are not a fast thing to move, because of longer term leases in commercial world. But I do think you’re going to impact that. And if you impact commercial rents, guess what gets impacted residential rents, because you’re in a period of inflation.
Michael Baker 1:04:28 Yeah, no. Well, I had to ask you a tax question. You know, I did. But well, I don’t see anything else in the chat. So I think this is a great place, obviously a ton of information to to digest and, you know, multiple different ways as you talked about multiple different ways to get involved in real estate. But you know, some of the key themes that that I took away from this, you know, that I would be sharing with anybody is, like, number one is you want it like what’s the strategy? What’s the long term plan for it is, I mean, is this something than that, you know you’re just interested in or this is something you really the path you really want to go down.
And if we are going to pursue this then you know, who Who’s your team who’s on the bus who’s going to help advise you, and who’s going to help, you know, you know, you build a plan and a strategy and then you know, what, what’s the end goal or are we looking for cash flow? Or are we trying to you know, grow something in a you know, and appreciate it? So, those are those are like, you know, my my main things that that I’m taking away and I hope that you know, for those of you guys that are that are on here or watching that you have some good solid takeaways as well. Jay. If someone wants to reach out to you get in touch with you, what’s the best way for them to contact you guys, Ed Reinhardt? Sure.
Jay Rinehart 1:05:45 main number is 803-329-3333. Here on Ebenezer road. My direct number is 803-323-5605. And my emails the letter J. The letter D is in David Rinehart @ RinehartRealty.com.
Michael Baker 1:06:02 Awesome. Jay, thank you so much for being generous with your time and everybody– Thank you again for hopping on here. And I will work to get this thing edited up and have a replay out to you soon. So have a wonderful day. Have a wonderful week. And we’ll see you guys next time. Jay. Thank you.
Jay Rinehart 1:06:19 Thanks, Michael.