Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
How Your Landlord Gets Rich Off You (I’m One… and I Rent Too)
Your monthly rent check is powering a sophisticated wealth-building engine for your landlord that goes far beyond simple cash flow. Speaking from the unique perspective of both a rental property owner and someone paying $2,000 monthly rent, this breakdown reveals the complete financial picture that most tenants never see.
While cash flow (profit after expenses) is what most people think of when considering rental property income, it's merely the beginning. Each time you pay rent, you're helping your landlord build wealth through multiple channels simultaneously. Your payment reduces their mortgage principal, steadily increasing their equity stake. Meanwhile, inflation gradually increases the property's value while their debt remains fixed or decreases - creating a widening equity gap that represents significant wealth creation without additional effort.
The tax advantages available to property owners further accelerate wealth accumulation. From maintenance deductions to depreciation benefits and the powerful 1031 exchange provision that allows tax-deferred property upgrades, the system provides landlords with remarkable financial leverage. Perhaps most compelling is the cash-out refinance strategy, where increased property values (driven by rising rents) allow owners to extract tax-free cash while tenants continue paying down the newly increased mortgage.
Despite understanding these wealth mechanisms as an investor myself, I currently rent by choice. High property prices and interest rates make renting strategically sensible for my situation, providing flexibility while I wait for better opportunities. If you're renting, don't feel like you've "lost" at real estate - it's about making informed decisions that align with your current circumstances while understanding the complete financial picture.
Hey everybody, my name's Cole. I'm a part-time real estate investor, full-time legacy airline pilot and a part-time military instructor pilot. Today, I'm gonna be talking about how your landlord is getting rich off of you, spoken by somebody who not only owns a bunch of rental properties but also rents this place behind me, paying $2,000 a month for it. I don't own it, I am renting it. I've been renting it and I I'm sure all of you have heard the first one you pay your rent every month. They pay off all their expenses principal interest, taxes, insurance, water bills, property manager, whatever the case may be and what's left over is the cashflow right.
Speaker 1:I'm sure you've heard people talk about cashflow, probably from people selling courses online and whatever. Cashflow is something that people think that is like the main source that a landlord makes money, but it's not really even the half of it. The cashflow is great. If you have a property that cashflows, that's what you want to hope to have as an investor, but you might not always have that right. Every month, things change. People don't pay, people move out early or just otherwise stop paying their rent. When they move out, you're gonna have to remake the units so that we can rent it to somebody else. So there's ancillary expenses, but at the end of the day, any money that's left over will be your cash flow. But the next one is something that people forget about and that's that every time you pay your landlord and they pay down their debt, they're paying principal and interest right, just like you would if you owned your own home, and the principal is the big one that you're helping them pay down their debt every single month. And on the other side, the property is slowly but surely increasing value every single month and year, with some major caveats, but generally increasing because of this big thing that you guys have probably heard of called inflation. Right, inflation has been crazy the last couple of years and landlords are benefiting from that because their debt doesn't go up with inflation. It stays the same or decreases every single month because you're helping them pay down their debt. So the delta between the two, the gap between the two what they owe and what it's worth continuously rises as time goes on. And that's one of the big benefits, long-term, with owning these properties, because at the beginning of a loan, whether it's your own personal residence or an investment property you're paying down debt, but it's going very slowly because the majority of your payment is going towards interest. But as time goes on that starts to flip itself and you're actually paying more down on principal than you are interest. So landlords are not only making cash flow potentially, but they're also paying down the debt with your money and they're getting the benefit of inflation long-term on their property's value.
Speaker 1:Now the next thing that a lot of people don't think about is all the tax benefits Every time they come in and fix your furnace or your water heater and put new flooring in and change out the cabinets and fix the garage. Not all that stuff is able to be used as tax benefits, but a lot of it is, and there's people I know that are making a hell of a lot more money than me and paying less taxes than me by 50%, just because of that simple fact. It's not that the landlords are necessarily sneaking their way through the tax code. It's just that's the way that it's built and people are taking advantage of it and you can't necessarily blame them for that. Maybe call your congressman or senator or whoever controls that stuff and try to get the tax code changed. But people are going to go where the tax advantages are, and real estate is one of the places that has a massive tax advantage, and one of those being a 1031 tax deferred exchange.
Speaker 1:Now, I'm no tax expert, can't give tax advice. I have no idea what I'm doing. I hire accountants because I don't want to spend time thinking about taxes. But the idea behind a 1031 exchange is that I can sell a rental property, take all the money that I would have made off of it and, instead of putting it in my own bank account, put it into an escrow account where it stays dormant until I find a place to buy a new property with it. So people generally call that trading up. They're going to trade out an old property, maybe a couple duplexes, for an eight unit, for a 10 unit, for a 50 unit, whatever the case may be, and the capital gains tax that they would have paid on the money that they made off of the sale of the original property is deferred tax, deferred exchange. It's deferred down the road and people kick that can until they die, and I'm sure there's ways to kick that can even after you die, and I don't know all that stuff. That's why I have an accountant. But the idea is that you're deferring the capital gains and rolling into a new property which is now worth more money, which has all the same benefits that we just talked about cash flow and you're paying down the debt and the equity is slowly increasing because of inflation. You're getting all that, but at a larger scale and, as you can see, that snowball just keeps rolling downhill and getting bigger and bigger, all off of your measly. So that's not where it ends, though that's still just the beginning.
Speaker 1:Now, when you started paying rent, let's say 10 years ago, the rent for an average one bedroom, or two bedroom maybe was five, six, seven hundred dollars a month, at least in the Midwest, and now that same payment I'm paying two thousand dollars a month for a thousand square foot one bedroom. So you can see that this stuff has slowly increased over time. And what does that mean? The rents of the property have slowly increased over time, and if you look at the property as a business, the revenue has gone up there, for the underlying value of the business has also gone up, and so what people do is they're going to take your rent payments and all of your friends that you live amongst in your building, just like mine, and they're going to go to a bank and say, hey, five years ago we were getting $20,000 a month in gross rents, but now we're getting $50,000 a month in gross rents, mostly because of inflation. They didn't do anything special, maybe they renovated some units and were able to command higher prices, but it's really just the idea that the rising sea, the rising tide, raises all ships right, so everybody's just riding the inflation wave. But they can go back to the bank and say, hey, I'm getting $50,000 a month in gross rents, my property is now worth more. And the bank is going to look at that on a statement, on a basically just like a normal income and expense statement for any other business. And they're gonna say, yeah, you know what it is worth more. And what they're going to do is, let's say in the example I used, originally $100,000 house. Let's say it's not worth $200,000.
Speaker 1:The bank's going to generally let you take out maybe 75, 80% loan to value, so in this case about $160,000,. They're going to let you take out the difference between what you owe which has slowly been getting paid down by your tenants and what it's worth currently. And when you take out the difference on a bigger loan so I'll say your new loan instead of $100,000, $160,000,. The difference on that loan is not taxable, right? It's a cash out refinance. You're getting cash back. This person in this case is getting $60,000 check written to them and there's not a taxable event because you don't owe taxes on money that you owe back to the bank, right? So on just your rent payment, they're paying down the debt. The cash flow is getting spun off every month. They're getting the benefit of inflation over time and they have tax benefits like a 1031 exchanges. Let's say they own the property for 10, 15 years and they want to trade up into a new property. They can defer their capital gains tax and they can get the benefit of a cash out refinance all on the back of your rental payment and everybody else's rental payment.
Speaker 1:So as much as I'm benefiting from these things in my real estate investing, I'm also helping somebody else do it by renting this place, right, and I'm very aware of that. But that's just the circle of real estate life, if you ask me. So when you're thinking about your rental payment and where it goes every single month, that's where it's going. That's how they're attacking this problem from multiple sides. Real estate is not just a one facet approach. It's not just cash flow. It's a combination of maybe four or five, six different things that all combine into a pretty impressive investment vehicle, and for you it might just mean that you're funding somebody else's cocaine habit or their boats or who knows what.
Speaker 1:I thought it was interesting to attack this problem not only from somebody who's benefiting from this, but also his paying somebody else to benefit from this. The reason I rent, in case you're wondering, I did make a video about this, but the idea is that prices are so high right now and interest rates are so high that I just feel like the affordability for what I want to live in is just not there at all. And I understand that I could live in a house right now and I could just not be paying somebody else to get rich off of me. But to me right now it's worth the flexibility of living in a rental and deciding what I want to do into the future and waiting for the right deal to find me. I understand that it's not always going to work out that way. It may take some time to find that, but I'm just laying low until I find something that kind of fits what I'm looking for, and so I don't mind renting right now.
Speaker 1:Is it a forever solution? No, but is it a good temporary solution? For some people? I think it is. I still have a normal job, like I said, flying for the airlines full time, flying for the military part time and doing the real estate investing on the side. So for me it fits the niche and what I'm looking for, but I understand that's not the solution for everybody. But if you are renting, don't feel like that you're just a loser and that you haven't figured it out. Some people like me are doing it too. Maybe I am a loser, maybe I shouldn't be talking about this, but anyways, I just want to make a fun video about what people are doing to get rich off of you and hopefully, if somebody finds it interesting, if you do, leave me a comment and tell me I'm a loser, or tell me whatever you think. I'm happy to read them all.