Building Wealth - Real Estate Investing: Building Long-Term Wealth with Real Estate

See how appreciation, principal paydown, tax advantages, and 1031 exchanges work together to create long-term wealth. Garrett and Shelby also discuss why fourplexes have become highly competitive in today's market, how out-of-state investment dollars are affecting prices, and what disciplined investors should watch for before making an offer. 

Transcript

SPEAKER_01 0:00

And welcome back to the Idaho Life Show, real estate and community, Garrett Thill and Shelby Matson here, and we've covered why investors are looking at the Treasure Valley. We've covered what to look for if you want to be an investor and how to finance it. And now we're going to look at what's the actual return on a rental and what's happening in the forplex market, which is really interesting that I think every fourplex investor needs to be looking at right now.

SPEAKER_00 0:25

I agree. And we promised the 1031 money flooding this valley and what it's doing to prices. But first, let's add up the actual returns, Garrett. Cash flow is one piece, not the biggest piece, though.

SPEAKER_01 0:38

Exactly. So let's go ahead and take that $500,000 home and meridian from segment three that we used. We're going to do the 20% down, the $400,000 loan. So breaking even or maybe even a slightly negative monthly cash flow. You know, most people call that a bad deal, but let's keep going on this, Shelby.

SPEAKER_00 0:57

Let's do it. So return one, principal pay down. Each month, part of that payment pays down the loan. Year one on a 7% loan, that's roughly $400 a month, close to $5,000 for the year. Your tenant pays that down for you and it grows. By year 10, you're paying down seven to eight thousand dollars a year in principal. By year 30, the loans actually paid off, and you own what's probably a million dollar asset somebody else paid for.

SPEAKER_01 1:27

I love that. And return number two is the appreciation part. Again, this is something that doesn't get looked at. They look at cash flow only. But number two, so the Treasure Valley isn't appreciating like it did, of course, in 2020 to 2021 during the pandemic. But here's the consensus is that the forecasts for 2026 are about three to four percent annually in the core markets across the United States. And I think we're definitely considered one of the core markets. So example here on let's say $500,000 home, 4%. Let's go a little bit on the aggressive side here. That's $20,000 a year compounding. And it accrues even though you only put down $100,000. So great investment on the $100,000.

SPEAKER_00 2:09

That's some serious leverage, don't you think?

SPEAKER_01 2:11

Absolutely.

SPEAKER_00 2:11

20% down captures 100% of the appreciation. $20,000 on a $100,000 down payment is a 20% cash on cash return on appreciation alone. It's huge. And that's before principal pay down or tax.

SPEAKER_01 2:26

You can't get that in the stock market, can you? At all. Not not in your not sit in the bank. And then number three, the tax treatment. And we're not CPA, so talk to your CPA before you do anything with real estate investing.

SPEAKER_00 2:38

Absolutely. And with that disclaimer, depreciation is the big one. The IRS lets you depreciate the building, not land, over 27 and a half years on a $500,000 property, roughly $15,000 a year. That's pretty big. It's a paper expense. You don't spend it, but it can offset rental income, turning a break-even property into a paper loss.

SPEAKER_01 3:03

Which is great from the tax advantage standpoint. So you take also your standard deductions that you've got, you know, on owning a house, you've got mortgage interest, taxes, insurance, repairs. If you're not doing self-managing, you're hiring a property manager, you've got the management fees on there. And on a sale, the long-term capital gains rates, or if you don't sell at all, you've got your 1031 exchange into the next property and defer that tax really indefinitely if you keep doing it.

SPEAKER_00 3:30

That's true. And a lot of investors do that, which actually brings us to the Treasure Valley forplex market. And the warning every investor needs out of state 1031 money has been pouring in, especially into fourplexes.

SPEAKER_01 3:44

And it makes sense basically three reasons. So it's the largest property that you can buy with residential financing. So you're not getting into that commercial financing we briefly talked about, which makes it a lot more difficult. So these out of state buyers, I mean, they go, okay, what's the biggest thing that I can buy that's going to get me the most amount of return? So prices are a fraction, right, of California or Washington, right? We all know that. And a 1031 buyer that's on the clock, they got 45 days once they close, let's say out of state, 45 days to say, here's where we want to buy. And we basically have to move very quickly on something. We've got to say it's a million dollars or 1.2 million. We need something to find quickly. And typically it's not going to be a single family home for 1.2 million that they're going to rent out. That doesn't make much sense. It doesn't make the most sense immediately is hey, let's go with the fourplex.

SPEAKER_00 4:36

Yeah, agreed. And one fourplex parks a lot of money in one offer. The convenience is worth real dollars to those buyers.

SPEAKER_01 4:43

You actually hit the nail in the head. Convenience. That's just that's I was trying to think of a word, and that's exactly what it is. So the fourplexes have gotten bid up to prices that honestly we kind of try to pencil out. They just don't pencil out as well sometimes as the single family or duplex or triplex. And sellers know too. They know that the buyers are on this clock with this 1031 and they price it aggressively. And I mean, the price is what the price is, and the buyers are willing to pay it.

SPEAKER_00 5:11

They are. Last year, Boise Area Fourplexes were running roughly $230,000 a door, which is $925,000 for the building. Cap rates on B class compressed under 5%. C class around 5.4%. Most local investors want at least a six cap. The math wasn't working for disciplined local buyers.

SPEAKER_01 5:32

It's just not working. It's getting, I mean, to get under that 6% cap, it's just, it's getting very compressed. So three little warnings. One, if you're a 1031 buyer from out of state, even if you're a local buyer, you know, get a local agent who isn't also the listing agent because it's it can be a bit of a conflict of interest. I mean, it can work, but you know, talk to a trusted realtor that's there for you.

SPEAKER_00 5:55

100%. And number two, if you're a local investor competing with 1031 money, be willing to walk away. I know that sounds crazy, but a deal that pencils at $850,000 doesn't pencil at $950,000.

SPEAKER_01 6:09

Exactly. And then three, consider the single family alternatives. We we spoke about this before. There's a lot of pros to this. And I again, a lot of investors think they have to go right for the duplex, the triplex. But again, they've got the broader exit, which means when you're going to go sell it, there's a lot more buyers there are than there would be for a fourplex. That's true. You've got steadier tenants because again, we spoke about that. That they want, you know, these are there are tenants that want to be there long term. Maybe they've got a family, they've got a dog, they're there for maybe more than six months or a year. And then believe it or not, sometimes it's got better cap rates, which means it's better returns, than sometimes the fourplex, just because the fourplex pricing right now has gone up quite a bit. So duplexes, um, you know, or say two duplexes, or let's say even three single family homes, they might outperform that fourplex.

SPEAKER_00 6:58

They possibly can. And I want to just preface that this is not a knock on 1031 buyers at all. I've worked with many, many buyers that are using a 1031 exchange. We love working with them. The warnings for whoever lets the clock dictate the price.

SPEAKER_01 7:13

Yeah. So let's land it. Same meridian house, $100,000 down, year one, negative $5,000 cash flow, positive $5,000 on the principal that you're paying down, positive $20,000 in appreciation, five, say $10,000 in the tax benefits, depending on your situation. Add that up. What is that?

SPEAKER_00 7:34

Yeah, it's roughly $25,000 to $30,000 return on $100,000 of capital. It's really great. A 25 to 30% total return in year one, not on cash flow alone. That's the math real investors run.

SPEAKER_01 7:47

That's the math that we've been talking about all segment about here's what you actually want to look at. So that's what we call real wealth building, Shelby. It's slow, it can be boring, but it's reliable and it's worked in this country for a hundred years.

SPEAKER_00 8:00

Absolutely a hundred years. If you're thinking about starting or even want a second rental, give us a call. We'll run the numbers, connect you with lenders who do the DCR weekly. And if the deal doesn't work, we'll tell you to walk away.

SPEAKER_01 8:17

That's right. So, anyways, to start this, let's start the conversation. Head over to IdahoLife.com. You'll find our information. And we have over 40 agents that are amazing. They're full-time agents ready to help you with your first rental, your second rental. Head over again, IdahoLife.com. Find more out about us. Give us a call, connect with us, and we'll help you out.

SPEAKER_00 8:38

Find us on Instagram at Idaho Life Real Estate for daily market content. See you next Saturday at noon.

SPEAKER_01 8:44

You've been listening to the Idaho Life Show on K at EO. I'm Garrett Thill and Shelby Matson. Make it a great day, Idaho.