Episode 26: The Single Investment That Makes You Money 5 Different Ways


Real estate can offer an investor five avenues to make money. Tom speaks with Keith Weinhold about maximizing the return on your real estate investments.


05:44 – What Are The Benefits & Risks Of Appreciation?

06:16 – How Do You Cash Flow Real Estate?

09:32 – How Does Amortization Provide Benefits?

11:59 – How Does Inflation Benefit The Investor?

16:24 – What Are The Tax Benefits Of Real Estate Investing?

Learn more about Keith Weinhold visit https://www.getricheducation.com/

Announcer: This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright: Welcome to The WealthAbility™ Show, where we're always learning how to make way more money and pay way less taxes. Hi. This is Tom Wheelwright, your host, founder, and CEO of WealthAbility™. What if you could absolutely maximize your chance of successful investing? In fact, what if you could have a single investment make you money five different ways? I'm very excited with my guest today because this is a guy who's actually made investing very simple and very practical. His name is Keith Weinhold. I'm gonna let him introduce himself in just a minute, but really, a lot of this that we're gonna talk about today is .. it's really minimizing your risk for investing 'cause people tend to be very afraid of investing. If you could get benefits all these … in a lot of different ways, then it really minimizes your risk from relying on any one of them. That's really what we're gonna focus on. Keith, give us just a one minute background on how you got into investing, what … kinda your story.

Keith Weinhold: I didn't come from a real estate or entrepreneurial family at all, but one thing my parents instilled in me is live an extraordinary life. Don't live to get paid. Get paid to live. We vacationed well as I was growing up in Pennsylvania. One place I vacationed was Alaska. I soon learned Alaska really fits my interests for skiing and mountaineering, so I moved from Pennsylvania to Alaska more than 15 years ago. I fell in with a group of friends I would call aspirational. You wanna change yourself? You wanna change your future? Change the people you hang around with. My two friends would buy four-plex building, where they lived in one unit and rented out the other three. In 2002, I bought a four-plex building in midtown Anchorage, Alaska for 295 thousand dollars and I had the confidence to do it because I had two friends that had done it. I just bought that building with an FHA loan and a three and a half percent down payment, something that's still very actionable for the … for your audience today.

Tom Wheelwright: Thank you for that. You bring up a really important point right off the bat here, Keith, which is you were afraid of investing. Had you not had friends-

Keith Weinhold: Right.

Tom Wheelwright: Who had actually shown you the way, you might not have ever started. I was actually talking to a buddy of mine the other day and he said, “You know, the toughest … really, the only difficult deal is the first one.” Is that what you found? Did it get easier, the … after you did that first deal?

Keith Weinhold: It got easier. I lived in that first four-plex for three years. I made all the dumb mistakes self-managing my own property, including renting the unit out right next to mine to girls just because they were attractive, but yeah. The first one was the most difficult one. I think here's another lesson. Sometimes it's best to start before you're ready. When I bought that four-plex building, which was the first home I ever owned of any kind, I did not even know what the terms cash flow and equity meant, basic terms like that, I didn't know what they meant. I just kinda knew I was living for free. I knew real estate had made more ordinary people wealthy than anything else. I knew I was getting outside of my comfort zone, which is really what you need to do to live an extraordinary life.

Tom Wheelwright: Thank you for that. I’ve gotta ask you, a lot of people who've got into real estate have gotten into real estate since 2008.

Keith Weinhold: Yeah.

Tom Wheelwright: If you got in since 2008, I'm sorry, it was not that hard. Okay. The market took care of it for you. It's a little bit like-

Keith Weinhold: Yeah.

Tom Wheelwright: When I first got into real estate in 2003 and you're watching these and I got into real estate in Phoenix, which was of course boom boom boom boom boom, and we had 50% appreciation one year and 30% the next year, and a bad year was 20% appreciation. Then, of course, the bottom fell out. If you wouldn't mind, would you share just briefly what did you do when the bottom fell out?

Keith Weinhold: When the bottom fell out, in most of what Alaskans call the lower 48, or lower 49 states, that didn't happen here. We didn't feel that pain. I didn't buy property beyond my own home state of Anchorage until 2012. Actually, as you know, mortgage qualification is more of a national thing than a local thing. What really happened is people in Anchorage couldn't get loans for homes just because of what happened to the mortgage market nationally and this was actually good for me-

Tom Wheelwright: So it actually helped you.

Keith Weinhold: [crosstalk] demand. It actually helped me-

Tom Wheelwright: Oh, that's interesting.

Keith Weinhold: I was lucky.

Tom Wheelwright: That's interesting. We know that we wanna talk about these five ways to make money in real estate, and that's actually one … I think of real estate as kind of like a whole food. It's got a lot of different nutrients to it-

Keith Weinhold: Yeah.

Tom Wheelwright: And because of that, it's more complete than a typical invest in the stock market, where you're limited to appreciation in most stock market investing. Sometimes you get dividends, but for the most part, you're limited to appreciation and that's really the benefit and that's the singular benefit. You're putting all your marbles in one place there because of being so dependent on appreciation. Obviously, appreciation is a major factor in real estate. We shouldn't ignore it. However, those of us in the lower 48, people who got hammered in 2008 got hammered because they were relying on appreciation. Outside of appreciation, which I think is what everybody understands, so what would be … if that's number one, what would be number two on your list of where you make money from real estate?

Keith Weinhold: Cash flow. Yeah. Of course, we cannot count on appreciation. We just know it happens in general over time. The second place is really cash flow. Just to give an example, if we buy a 100 thousand dollar rental single family home, and yes you can find these in the U.S. Midwest and South, if that appreciates from 100K up to 106 … well six percent return, that's really not very thrilling, but realize you might've only put a 20% down payment and you start to realize your six percent gain is based on just your 20K of skin in the game. That's 30% of appreciation because you get the six percent return on both your 20K down payment and the 80K that you borrowed from the bank. Cash flow, that's just your rent income minus all the monthly expenses. Say in this one 100 thousand dollar property you just have $150 of monthly cash flow. That's 1800 dollars a year. That's another nine percent return. That portion is known as the cash on cash return. It's your annualized cash flow divided by your skin in the game.

Tom Wheelwright: Right. To me, the big lesson of 2008 was cash flow. I think that was the big lesson because appreciation is … like you say, leveraged appreciation goes up exponentially when the market's going up, but it also goes down exponentially when the market goes down. You leverage your gains but you also leverage your losses. Whereas with cash flow, what I love about cash flow is it … as long as you have a fixed interest rate, which is another place where people got hammered in 2008 'cause they didn't-

Keith Weinhold: Right.

Tom Wheelwright: Have fixed interest rates, but nowadays it's not that hard to get fixed interest rates, I mean even if they're 10 year fix. Knowing that we are … that real estate typically runs on a 16 year cycle, so 10 years out 'cause we're already 10, 11 years into the cycle, so knowing that you had a 10 or a 15 year fixed rate, then what happens is, is that as you go … you know that cash flow, while you may lose some, because we actually saw rents go down, as long as there's sufficient cash flow, you don't really have to worry so much about the ups and downs 'cause you can still pay the mortgage, right?

Keith Weinhold: Leverage cuts both ways, for sure, just like it amplified our appreciation gain from six percent to 30%. It certainly cuts the other way. What's gonna save you is cash flow. That's what happened to a lot of people 10 years ago. If they didn't buy for cash flow, they were in trouble.

Tom Wheelwright: Yeah. I think there's no question. I just wanna emphasize that to people because I've just seen too many people, including myself … I lost money in that 2008 from relying too much on appreciation-

Keith Weinhold: Yeah.

Tom Wheelwright: And I look at cash flow and I'm going, “Look, if we have enough cash flow,” now, our cash flow can go down, it just really is a good buffer. We're gonna help minimize our risk. This is one of the challenge I have. Frankly, this is one of the challenges of investing in the stock market. Most stock market investing does not include cash flow. Okay. To me, that's a real … a really big way to minimize the risk. Okay. We've talked about appreciation and cash flow. What's your number three?

Keith Weinhold: Loan pay down made by your tenant. Some might call this amortization. In a rental property, the cash flow, meaning income exceeding expenses, one of those expenses is the principal portion of the mortgage and your tenant pays that. To keep with this example, with an 80 thousand dollar loan on a property at a six percent interest rate on a 30 year loan, that's $898 annually that the tenant pays down for you. That's another four percent return to you. To some people, that's a phantom return. They're not even thinking about amortization.

Tom Wheelwright: Yeah. I think that's one of the things, the unsung if I could, the unsung benefits-

Keith Weinhold: Yeah.

Tom Wheelwright: Of real estate is that you really do have … you have somebody else paying down your debt. Not only that, but you're actually forced to pay down your debt as long as you have this … as long as you don't have an interest-only mortgage. I'm not a real fan of the interest-only mortgages for that reason, because you don't get the amortization. You know, you could say, “Well, yeah, but if I amortize it, I'm actually making a lower return from the standpoint that some of money could have been going to another investment.” The challenge is is that, at the same time we wanna maximize our reward, we do wanna minimize our risk. Amortization is really a good way to do that. This has been made public, so I'm not telling any confidences.

Keith Weinhold: Yeah.

Tom Wheelwright: Robert Kiyosaki, Robert and Kim, talk about a property that they bought. When they bought the property, it had a … it was a commercial property. It had a 17 year lease on it. They set up a 17 year loan to amortize it down so that-

Keith Weinhold: Interesting.

Tom Wheelwright: If the tenant left and did not renew at the end of 17 years, they were okay. I'm going, “Well, you know, people think of Robert as not risk-adverse.” I mean, he's an-

Keith Weinhold: Yeah.

Tom Wheelwright: Entrepreneur. Yet, here, they're doing something that really is very much a risk minimization tactic in order to reduce the risk you have on real estate. Having that loan amortize is … while it technically can reduce your returns, actually, it's such a good risk management tool that I just think that every … I just think that it's an amazing way to minimize your risk while still getting those great returns.

Keith Weinhold: Yeah. It's just a third of five ways that one profits when they're a real estate investor. This fourth way is called inflation profiting. It's even more stealth than amortization. You know, even some advanced investors fail to consider the inflation profiting benefit. You wouldn't keep a million dollars in the bank or any associated [inaudible] for the long term. The opposite way, if you borrow a million dollars, we know your tenant's already diminishing that for you with amortization as we just described. Inflation is actually eating away at that as well. With three percent inflation, if you have the one million dollar loan, even if there weren't any principal pay down made by the tenant, you'd effectively only owe the bank 970K after year one, 940K or so after year two. You tie up long term fixed interest rate, that's tied to a cash flowing asset: inflation profiting.

Tom Wheelwright: Here's what fascinating to me 'cause you and I are in this … you and I were in New Orleans at the-

Keith Weinhold: Yeah.

Tom Wheelwright: New Orleans Investment Conference, which is really the headquarters of the gold movement was my experience down there. I had not been down there before. It's a great conference-

Keith Weinhold: It is.

Tom Wheelwright: It's fascinating. It's done very, very well. It's like the oldest investment conference, I think, on the planet. A lot of what you think of as gold bugs, a lot of people who love gold. I remember having discussion with a buddy of mine years and years ago about gold. I said, “So how is it? Why would you think that gold is better than debt?” He just looked at me like, “What?” I'm walking him through and I'm going, “What is the federal government doing it? How is it that they expect to pay down 22 trillion dollars in debt?” Inflation. That is the only way. You cannot pay it back. The debt's now as big as the economy. There's-

Keith Weinhold: Absolutely.

Tom Wheelwright: No way to pay down that debt with current dollars. The only way to pay down that debt is inflation. The government is actually … has actually built this in, the Federal Reserves actually built this in to this … to the U.S. system of government that, “Look, we can have this debt because we're gonna pay it down with cheaper dollars down the road.” The government knows it. I mean, if you believe that inflation's gonna continue, then debt and particularly … again, we're talking about cash flowing debt. We're not talking about any debt. Okay. I wanna be really clear. It's not consumer debt. It's not debt that's not performing. It's performing debt. As Kiyosaki's always saying, he goes, “There's good debt and there's bad debt.” Okay. Good debt produces cash flow. If you have real estate and you're relying solely on the appreciation, I think you have bad debt because it's not producing cash flow. You may still be getting inflation benefits, but the reality is, is that there is potential for deflation as well. Now, granted, the Federal Reserve will do anything to keep away from deflation. I mean, we-

Keith Weinhold: For sure.

Tom Wheelwright: Saw that with HARP and all of the bailout in 2008. They would do anything in their power to avoid deflation. They think that is the death of the economy. That's the good news, actually. It's a good news for having debt. We just need to make sure that it's debt … A, it's wise debt, so it's debt that actually has that fixed rate of interest and B, it's wise debt in that it gets amortized and C, that it has … that it creates positive cash flow. I don't care if it's real estate debt, business debt, if it's debt on your farm, as long as it's debt that creates positive cash flow.

Tom Wheelwright: I don't know if you know this, Keith. I grew up Mormon. In the Mormon church, they really are very prudent with money. They really do not like consumer debt at all. I grew up consumer debt is bad, bad, bad, bad, bad. On the other hand, they're actually very positive about business debt and debt that produces cash flow. They're actually very wise that way. Of course, they're … they make millions and millions of dollars on their investments. It's really interesting to just think of it this way. Of course, the last of the five and then we'll wrap up, the last of the five of course is my favorite. What's the fifth benefit from real estate?

Keith Weinhold: The fifth and final way is the tax benefit, things like depreciation and the 1031 exchange. I just wanna let you talk to the tax benefit on this property where we bought a 100 thousand dollar property with a 20 thousand dollar down payment.

Tom Wheelwright: Actually, the challenge with tax benefits, I was glad we put it last-

Keith Weinhold: Yeah.

Tom Wheelwright: Because a lot of people lead with tax benefits. I was in Australia last year and they had what … they do what they call negative gearing, which is actually losing money because the tax benefits from real estate are so good. Now, that would be a real temptation in today's market because on your example of 100 thousand dollar property, you put down 20 thousand. Your tax deduction the first year could easily be as high as 30 thousand dollars. You put a 20 thousand dollar investment and got a 30 thousand dollar deduction. That's because of bonus depreciation. It's literally remarkable when you think about it. Let's say you were in a 40% tax bracket and you got a 30 thousand dollar deduction. That means you got 12 thousand dollars. That means, out of that 20 thousand dollars, the government contributed 60%. You're going, “I'm only putting eight thousand dollars into this deal,” which is true.

Tom Wheelwright: Now, you're taking all of the risk going down the road. You're taking all the risk. If your cash flow goes down, you're taking that risk. The government's not. If you're taking … we have a deflationary period. If you get your loan called, all of those things, you still take all those risks. What I wanna emphasize here is taxes are such a big benefit right now that it's very tempting for people to buy real estate because of the tax rules. Now, I will say one thing. The purpose of the tax law is to incentivize people to do things the government wants them to do. Real estate is obviously, right now, the biggest incentive. Of all the incentives in the U.S., real estate has the biggest incentive. New or used property gets the same benefit, which is astounding when you think about it.

Tom Wheelwright: Just investing for the tax benefit, while it's not good, if it encourages you and you go, “Look, I'm … I can reduce my risk. The government literally is going to take 40, 50, 60% of the risk away from me,” and that encourages you to start studying, to start learning, to start listening to podcasts like this one and Get Rich Education where Keith does very simple, just like we do … it's just very simple, practical podcasts, so you start getting educated. If the tax law is encouraging you enough, you're going, “Wow. That is such a big benefit. I cannot afford anymore to ignore real estate as a potential investment,” it may not be the right investment for you. It's not for everybody. Personally, I'm a much bigger investor in business than I am in real estate. I only invest in real estate as a way to further my business.

Keith Weinhold: Yeah.

Tom Wheelwright: Real estate's not for everybody. What I wanna do is encourage everybody who's still relying on the buy, hold, and pray strategy of a 401(k) and the stock market and remember that the difference with real estate is you get a deduction going in, like you would with a 401(k), but, it's actually bigger than the amount of money you put in, not like a 401(k), and when you take the money out, it doesn't … it can be tax-free. That's a subject of a whole other show. We've talked about it. If you go back to our Buy, Borrow, and Die strategy in a previous podcast, you can get a little bit more on that.

Tom Wheelwright: What I found the last year, though, is that I have a number of clients that are real estate professionals. I mean, they are really, really … you would know who they are. Okay. That's how big they are in real estate. They've been hesitant in this market to buy real estate. There's been a couple of them, the only reason they even looked at a deal was because of the tax benefits. Once they looked at it, then they started examining it, pulling it apart, and looking at the other four ways and it turned out that that real estate investment was good. They thought they couldn't find anything good. The tax law incentivized them to look. This is really the key message here.

Tom Wheelwright: Let the tax advantages incentivize you to look and do your homework. Just don't let it wag the dog. Don't let that tax tail wag the dog. Make sure that you are getting the cash flow, that you're in an area that is hopefully likely to appreciate, that you're in a loan that will amortize and will … you can take advantage of that inflation hedge. Take advantage of all five. I would say, for me, number one is cash flow. If it's gotta significant positive cash flow, you're in pretty good stead, because the other things all give you a hedge against that. Keith, one more time, how can people find you?

Keith Weinhold: They can find me at The Get Rich Education Podcast and getricheducation.com, where right now, at getricheducation.com, we're giving away my free e-book called Seven Money Myths That Are Killing Your Wealth Potential.

Tom Wheelwright: Well, thank you, Keith. Thanks so much for taking time. I love other educators. I love people who specialize and Keith really specializes in real estate. Real estate's not the only way to invest, but it is a … like I say, it's a whole food. When we get educated on real estate like other investing, when we get educated in taxes, what we always end up doing is making way more money and paying way less tax.

Announcer: You've been listening to The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.