Rental properties can be a great source of passive income, yet not a lot of people seem educated about it. Well, in this episode, it’s time to learn about rental properties and their profit centers. Join our host, Jeff Rutkowski, as he talks to Gregg Cohen, the Co-Founder of JWB Real Estate Capital, on the subject of passive income and rental properties. Gregg discusses the strategies for taking advantage of profit centers in real estate and how vertically integrated companies can produce great results for investors. A great episode to learn from if you’re looking to get into investing in rental properties.
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Rental Properties And Profit Centers: Educating Yourself On Passive Income With Gregg Cohen
We have an incredible episode lined up for you with our guest, Mr. Gregg Cohen. He is the Cofounder of JWB Real Estate companies, which is a vertically integrated real estate company based out of Jacksonville, Florida. He’s going to be teaching us some stuff that is going to blow your mind. Before we welcome Gregg, let’s get into our Word of the Week segment. We have passive income versus active income. What do they mean? What is the difference? What are we after as real estate investors?
[bctt tweet=”If you want rental properties, you have to be in the game for the long haul to take advantage of its profit centers.” username=”fortunebuilders”]
Active income is simply defined as anything you are doing on a day-to-day basis where you’re trading your time for money. You have to get up, go to work, find the properties or whatever you’re doing to generate money in your life where you physically have to be there or else, you’re not getting paid. That would fall under the active income category. Active income is great to make money. What we want to generate as quickly as possible in our lives and our business is passive income, where instead of us getting up early, punching the clock and putting on our workloads, we’re sending out our money. We’re putting them to work on income-producing assets that are paying us on a monthly basis.
Think about it like Monopoly. It’s great to roll the dice and work your way around the board and spend your time moving around the board. Isn’t it nice when somebody lands on one of those little green properties? Wherever you are and whatever you’re doing, they’re paying you some rent. It is mailbox money. We used to call it mailbox money. Now it just appears in your bank account through direct deposit. What a great feeling. That never gets old. We want to keep building and growing that through the course of our lives. Our guest, Mr. Gregg Cohen, has done this. He’s probably one of the highest levels of individuals in this country. He’s going to break down how to generate passive income to get that flowing in your business. We’re going to use one property as an example and talk about five profit centers that come along with any income-producing assets that we own. Let’s welcome to the show, Mr. Gregg Cohen.
Mr. Gregg Cohen, welcome to the show.
Thank you so much, Jeff. What a pleasure to be here with you, brother.
It’s an honor. Gregg is coming to us straight out of Jacksonville, Florida. Some good things happened in Jacksonville, Gregg, not just in the real estate markets. For the first time in years, the Jacksonville Jaguars are in the news. Number one draft pick, Tim Tebow is coming on board. Any buzz around there about that?
It’s like a marketing blitz. If you could sprinkle a little bit of Tim Tebow on anything to the marketing and sales, the ticket sales would jump up. The foundation of Urban Meyer and Trevor Lawrence number one draft pick, we have some good friends that are high up in the Jags organization and they feel like they have suffered a long time to sell out the stadium. It’s not a problem now. They’re living the dream.
That’s something to be excited about. It is exciting to have you on the show. I know you’re a humble guy and you don’t like to brag, so I’m going to brag on you a little bit here. Mr. Cohen has purchased over 3,000 investment properties in his career, renovated over 2,000, over 500 new construction bills all in the Jacksonville market specifically. He manages close to 4,000 investment properties for investors all over the country from 43 different states and 13 different countries. I am one of those investors. Sometimes Gregg, I even forget that I own properties with you guys. It’s managed so well. I never hear about it but that rental check appears in my bank account every month. I appreciate the work there.
Our pleasure. That’s the way it’s built.
Gregg, your company is a vertically integrated real estate investment company. Let’s start there. What does that mean? Why is that important for real estate investors?
Many people don’t understand the way to win in rental property investing. They spent a lot of time thinking about that individual property that they are going to purchase. I’m a big proponent of spending your time ahead of time and knowing the numbers. The reality is that there’s a lot more than just the here and now on that property that’s going to take for you to win and have the best risk-adjusted returns for that individual purchase of that rental property or what’s more common is a portfolio of rental properties. You have to be in the game for a full market cycle to take advantage of all five profit centers in rental property investing. To do that, you need to work with a company that controls all or most of the process and is thinking about not just the problems and solutions for now for how to collect rent for you, but also the problems of what’s coming next, what’s a five-year problem, a ten-year problem. That’s where a vertically integrated company like we are here in Jacksonville can shine and produce the best returns for you.
There’s a misconception where a lot of people out there throw turnkey rental property companies into that same bucket as a vertically integrated company like yourselves. I live out here in San Diego and San Diego is not one of the great markets to invest in long-term real estate. There are many other states across the country, Florida being one of them, that offer so many more benefits. I get questions all the time, “Where do I invest? What turnkey companies do I invest in?”
A lot of people don’t realize that these rental property turnkey companies are a lot of times like brokers in a sense where they’re not managing the properties themselves. They’re not even finding or renovating the properties themselves. They’re just connecting people together. Oftentimes, they will operate in multiple markets to keep providing inventory. An integrated company like yourself, what do you do? What steps do you handle? Make that clear for the readers.
[bctt tweet=”Not all turnkey companies are created equal.” username=”fortunebuilders”]
Let’s talk about a number of different ways to invest in rental properties then I’ll define what a turnkey company is and what’s the threshold of becoming a vertically integrated company. Let’s talk about neither of those to start off with. If you want to go and buy a rental property now, it’s hard. Jeff, is there a lot of inventory out there for people who want to go and buy rental properties on the open market here now?
There is not. I’ve never seen it so low, in fact.
If you’re an individual and let’s say that you are now getting this concept of how rental properties can be a great asset class for you, you’re wondering how to make that first rental property purchase. If you have to go out on your own, you might hire a realtor to help you. You got to put in a ton of offers. You’re going to get rejected over and over again. It’s going to be tough. Even if you get your offer accepted, many times you have to do work on the property. You have to go and hire a contractor. Jeff, who loves managing contractors?
That’s not the most fun job in the world, especially if you don’t know what you’re doing.
If you’re trying to get into this for passive income, managing contractors is not the best way to get passive income. Let’s say you do that, then you may either decide to manage the property yourself or you may decide to hire a property manager, that is a whole another important decision. Another teammate who’s important might not have the same goals that you have when you set out to go and buy your first rental property or maybe that your realtor had who was advising you on the purchase. If you’re going at this alone, it’s a tough thing to do. That’s one of the reasons why many people say they’d like to be in rental property investing but it’s too hard for most people because the normal way of going out it alone is hard.
I consider myself as more of an intrapreneur. I invest in real estate. I also hold the title here at FortuneBuilders. I have a passion for teaching and training. I don’t want to be out there visiting other states. I don’t want to be out there walking properties and making multiple offers. I like to have a company like yours that can do the heavy lifting and provide them to me on a silver platter. I’m sure there are some things that you can add to this list and I want to get a little formula that you have where people from home can jump on their computer and identify some good markets.
I’m looking for places like Jacksonville, Dallas and Memphis, Tennessee, places like this where price points are low enough to get some decent cashflow on a month-to-month basis, where state laws are structured to favor the landlord over the tenant. I remember one of my first ever properties in Connecticut took me about six months to do my first eviction. That’s not the case in Florida or Dallas or a place like that. The third is having a reliable property management company like yourself. What else would you add to the list? What formula would you give to people reading on how to identify good markets to invest in?
You hit the nail on the head for what is attractive to an investor who wants to be passive, who might not live in a market where you can get positive cashflow like San Diego. You can’t rent it out for high enough in relation to the purchase price to produce positive cashflow, but you want to be in this asset class. You want to be in long-term rental properties. That’s where these turnkey rental companies have sprung up. I’ve been doing this for over fifteen years. Back in 2006 when I started, the term turnkey rental property was never a thing. Now, because of market forces that have created low prices and high rents, a lot of companies have come up to serve that individual like you, Jeff, who wants to be in rental property investing and more or less to serve it on a silver platter.
The interesting thing is that not all turnkey companies are created equal. Many will claim this moniker, turnkey, but there are key elements that are missing. I’d start with what my definition of turnkey is. You mentioned, Jeff, that many of these turnkey companies don’t own the assets. In essence, what they’re doing is connecting and brokering between somebody else, the seller who owns the assets, and then the buyer. My first definition of a true turnkey company is, do they own the asset?
It’s important for a number of reasons. Number one, if you don’t own this asset, you don’t know what it’s like to own rental properties. You’re not going to be a good steward of somebody else’s money who is putting their money in rental property. You want to make sure that they practice what they preach and own this. The other thing is they need to be able to control the supply chain. If they don’t own the asset, all they are is just brokering the two. What happens when something gets disrupted in the supply chain? If you’re a real estate agent out there, have you ever known that when a real estate agent who is a broker between a buyer and a seller has something shoot up out of the left-field that they never thought it was going to happen and it killed the deal? Have you ever seen that happen?
[bctt tweet=”There are so many tax advantages for rental property investors that you just don’t get in other asset classes.” username=”fortunebuilders”]
It’s not a good situation for either the buyer or the seller there. If the company that you’re doing business with who’s claiming to be a turnkey company doesn’t own the assets, think that you’re facing that same risk. Especially in a market where inventory is scarce, the number of curveballs that can happen at the closing table multiply. You got to start with owning the assets.
Seeing it through from start to finish like yourself. If you’re reading this and you’re thinking about investing with a “turnkey provider”, you want to be looking for a company that is owning the asset and doing the work from start to finish. I want to back up. You mentioned when you’re looking to invest in real estate, it’s important that you’re looking to invest through a full market cycle and knowing and understanding at least five different profit centers. Why do you believe in real estate as an asset class? Why do you believe in holding it long-term? What are the benefits outside of just cashflow alone?
I love this asset class so much. I’m a conservative investor and person. To think that I would change my career path and go 100% into owning rental properties and building a business that is built on owning rental properties as an entrepreneur, if you had known me twenty years ago or so, that would have been the craziest thought. I don’t come from an entrepreneurial family. My family doesn’t have a rental property or real estate investing in their blood or in their experience.
What happened with me is that I fell in love with this asset class for a couple of reasons. Number one, I became convinced that this was the best risk-adjusted returns on investment that I could produce. The reason that I say that is because those five profit centers matter. I’ll go into what those are. The first one to pay attention to is positive cashflow. To me, positive cashflow reduces risk. It helps me sleep better at night. I think about another asset that I could go and invest in and many times, you’re putting a whole bunch of money into something and you’re hoping it goes up in value. The longer it takes to go up in value, the more it’s costing you every single month. Either in terms of real expenses and/or opportunity cost of what you could be doing with that money.
Another way of saying this is if it goes up in value eventually, that’s great, but what did it cost you to get to that ten-year point where it went up in value and met your expectations? To me, that’s a risk. Being a conservative guy, I love this asset class first and foremost because it was like an epiphany for me. I realized that I could buy this asset and there was already a market out there of people that wanted to rent it. Not only did they want to rent it and pay me the rental income but if you choose the right market, they will rent for more than the payments that you would have on the property and it would produce positive cashflow.
I was like, “Let me compare this to investing in the stock market or investing in another asset and bonds or annuities or oil or Bitcoin. Let me compare it to those.” I couldn’t find another asset class that would make me feel like it wasn’t risky because I had money coming in every single month and I also had other profit centers that allowed this thing to grow at a substantial rate. That combination there is what made me jump 2 feet in, quit my job, and make sure my family was on edge a little bit about me doing that back in the day. It was because it was quite a leap. At the core of it, that’s what I fell in love with.
I can’t live without positive cashflow. It’s a beautiful thing, that mailbox money hitting your bank account every month while a company like yours does all the work. That would be profit center, number one. Let’s define these for the readers. Number one, positive cashflow. Number two, talk a little bit to me about depreciation. I was always taught growing up that Uncle Sam was a bad guy. We have to pay all these taxes and things like that. When I started my journey on financial education and started studying things like asset protection, I remember going to the asset protection and tax planning academy here at FortuneBuilders and my mind was blown. I began to see how tailor-made the US tax code and the IRS is. It structured things to benefit people like you and me that hold the real estate long-term. There are so many benefits. One of them is depreciation. Tell the readers what that is and why you consider that a profit center.
I knew you and I were going to be best buds a long time ago when we met many years ago. Every time we talk about tax savings, you and I get this special twinkle in our eyes because you know how fired up we are with tax savings. It’s not normal out there but it’s normal in our bubble here. The reality is that there are so many tax advantages for rental property investors that you don’t get in other asset classes. Depreciation is one of them. When we say depreciation, we’re not talking about home value depreciation like the value of your homecoming down. We’re talking about just depreciating in the tax sense.
Here’s the thing. All of us love tax write-offs. It allows us to pay less money in taxes because it offsets our income. We’re constantly in search of tax write-offs. The thing about tax write-offs is you typically have to spend the money and then you get to write that off, which is cool. There are a lot of things that I spent money on that I then don’t get to write-off on my taxes. The fact that you have to spend the money on it and then you get to write it off is what everybody’s in search of. You’re going to want to talk to your CPA. Jeff and I are going to make this simplistic for the show that we’re doing right here. You’ll want to investigate this further. You’ll be even more excited when you do.
The thing about depreciation is the IRS allows you to get a write-off because they know that things break over time in your property. You’re able to get the write-off called depreciation expense. The thing about it is you didn’t have to spend the money. Even if things don’t break, you still get this write-off. You get this write-off that you didn’t have to spend money on, which there are not many of those around. At the core of it, depreciation allows you to do that. That’s why so many wealthy rental property investors, real estate investors, and individuals in general, want to hold hard assets like rental properties because of this depreciation write-off and many others.
Typically, at a residential home, the IRS will allow you to depreciate the value of the building over the 27.5-year term and a little bit longer on some commercial assets. There are even some exciting segregation studies that you could do and depreciate things like appliances and fences even at a faster rate. It gets exciting but that’ll be for another show. I want to get into the third profit center here. Before we do Gregg, I want to make the readers aware of a class that they will be happy to know about that will benefit them. One thing I didn’t mention at the beginning of this show is that you are one of the original FortuneBuilders students and started in a similar class to what I’m about to talk about.
[bctt tweet=”The idea that real estate values always go up is not correct.” username=”fortunebuilders”]
Let me tell them the class and I’m interested to know your feedback in your memory from that. This is where I got started and a similar class is where Gregg got started. If you’re reading or have been reading for a while or listening to other real estate podcasts and you’re thinking, “Where do I get started?” All these different things, depreciation, long-term real estate, flipping properties, wholesaling, and all these great ways to supplement income or facilitate a career change is where you get started. This is where the formula is provided. The 1st, 2nd and 3rd steps are laid out on what you need to do to make real estate a reality in your life. Gregg, you started in 2006 at one of the first-ever real estate classes at FortuneBuilders office. I don’t know if I ever talked to you about this. What was that experience like?
There are only a few moments in your life that you remember everything about it. For me, I remember everything about going to my first event and meeting Than, Paul, Konrad, the leadership at FortuneBuilders. I remember seeing those guys teaching this and falling in love with a model of business that I wanted to recreate. I remember everything about it. I was sitting in the back left of the room. It was this big seminar that was going on. These three individuals were in the front of the stage talking about a new way of building a real estate business.
I fell in love with the idea that you can run this business. You can have multiple streams of income coming in. You could be active or passive. You could do wholesaling and figure out how to do rental property investing like I chose, and build a business with your friends or family. I remember walking up to Than at that point in time and saying, “How do I become a part of this?” That was back in 2006 before we had ever done our first deal. I’m not typically that guy who goes up to individuals in a networking event and starts a conversation. I’m more reserved so this was way outside of the norm. Thank God that I’m able to do that.
Since then, it’s been an incredible relationship that I’ve had with you, Jeff and the entire team at FortuneBuilders. It’s formed into more of a partnership that we have many years later. I still remember the fear that I had to spend some money on my education in the beginning. In fact, my business partner was the one who convinced me to put that money into play even though I hadn’t done a deal yet. I’m so thankful that I took that leap and that I had the access to that training. Now folks have that same access, so I hope everybody takes advantage of that as well.
One of the things that FortuneBuilders offers is called the Passive Income Club where we facilitate and connect students with high-level vertically integrated real estate companies like Gregg where they could get their money working for them at higher rates of return. Check that out if you’re interested. I remember when I got started, I had never done a deal. When I heard numbers like 3,000 investment properties purchased and managing over 4,000, it intimidated me. I don’t have much in common with that person. They got to be especially talented or gifted or maybe inherited a lot of money. That was not your story. When you walked into that room in 2006 into that first class, what were you doing? What were your career path and your current situation?
As far as a career path, I wasn’t in a great spot. I had worked through college with this dream and this idea that Corporate America was the place that was right for me. I had gone to high school and college and thought that I needed to get a great job. The best job for me was working for a Fortune 500 company. I was blessed to get that opportunity. I went to go and work for Johnson & Johnson. That’s what originally brought me to Jacksonville. What I quickly learned there was that it wasn’t the right fit for me. For me, that was depressing because I wasn’t an entrepreneur at that time. It was the farthest thing from my mind. I just knew that this vision of my career path that I had worked hard to get was not going to work. I was in a tough spot.
A friend of mine introduced me to this wonderful book called Rich Dad Poor Dad. I remember reading that book and it changed my life. I remember reading it one night and I read it all the way through. I remember putting the book down at 2:00 AM or 3:00 AM and looking in the mirror and saying, “I’m going to quit my job and start my own real estate investment company.” I’m not that guy. That’s how powerful that book is. When that happened, that was a great thought but there was a lot of fear, trepidation and risk going into that.
I was lucky to have my best friend who is now one of my business partners. We started the company back in 2006. We were those guys in the room that didn’t come from money and real estate experience but had a passion for creating a business that we wanted to love and enjoy. It’s one of the reasons why we love learning from FortuneBuilders so much because we saw the business they created. We also did not even have this fear of failure. We were young and we didn’t care about failing. It was this amazing time. We still are that way now. Now that I’m older, my fear of failure is different.
I remember back then, I didn’t care if I struck out. I learned this idea on how to invest in real estate. I went to go put it into place. I went and I called 100 people on the phone to try to dial for dollars and cold call people. It didn’t work and it didn’t matter to me. I went and I did door-knocking to go and try and find undervalued real estate. I learned the right way and the wrong way to do that. I dealt with rejection a lot. For me, it was this amazing time. I felt like I had the mentors to teach me how to do this so it gave me confidence. I also feel like I’ve been blessed with this real lack of fear of failure. I don’t look at failure as an ultimate endpoint.
Funny story, I have a daughter. My daughter comes home from school and she had written this on her sticky patch. She said, “Dad, I want you to see this. I came up with this.” I don’t know if she came up with this or not, but I’m going to give it to her because it’s that cool. She wrote out FAIL and she goes, “Daddy, that’s not fail. That’s your First Attempt In Learning.” I’m like, “That’s how I felt early on.” She probably didn’t come up with that. She heard that, I would assume.
You got to give her the credit. I don’t think I’ve heard that before. That’s such a powerful point. We talked a lot about overcoming fear. Speaking of daughters, I mentioned this to JD, my daughter in her little workspace at home wrote out, “Five seconds of fear or a lifetime of regret. I choose five seconds.” That’s right in front of her. That’s so important. Many of us have been raised to think, “When you fail, something’s wrong with you,” and not seeing it as a learning experience like your daughter. That’s eloquently stated. I love that, Gregg. Thanks for sharing a little bit of that background. Where do you want to go next? Do you want to get into some appreciation or principal paydown? What are you thinking?
Let’s go with principal paydown. The principal paydown is incredible. It is this amazing feeling that you’re going to have some time in the not-too-distant future where you’re going to look at your loan balance on the loan that you have on your rental property and going to think that it might be $80,000 or $100,000 or whatever that loan balance is. You’re going to look one day and it’s going to be $50,000. You’re going to look one day and it’s going to be $20,000. None of that money had your pocket to pay it down. The beautiful thing about investing in cashflowing rental properties is that your resident is paying your loan down for you. Many people don’t think about this because it doesn’t hit your bank account. I can tell you from experience you’ll be thinking about it when you look at your equity in your property 5, 10, 15 or 20 years down the road. This profit center is substantial.
It’s funny, we talk a lot about how our culture has taught us a flawed model, work hard at school, get good grades, get a good job, save your money and hold on to it tightly. One of the things you always hear is, “Stay out of debt.” I’ve learned that investing in real estate, one of the greatest tools we have to accelerate to create wealth is in fact debt. There’s a difference between good and bad debt. The debt that Gregg and I are talking about is the type of debt where you want to get into as much debt as you possibly can because the more debt you have, the more assets that you’re going to own. I know that was probably a mindset shift for you as well just like myself when I got started because I was always learned to stay out of debt. Talk to us about debt.
It was a complete mindset shift that I learned through FortuneBuilders, through those training early on and through Rich Dad Poor Dad. Once I learned this, I started to actively search out smart debt opportunities because I realized that it is a tool for generational wealth. If I could understand how to use this tool to my advantage, it is one of the most powerful tools you have out there to do it. For me, smart debt comes down to three things. Smart debt is if it is inexpensive. Inexpensive would be a low-interest rate. The fact that you can borrow debt for less than maybe 4.25% and have that debt in place for 30 years is incredibly low. I’ve been telling people in rental property investing, “The deal is not the property. The deal is the debt.” This is the best deal I have ever seen and probably we’ll ever see as far as the debt goes. Your first element of smart debt is if it is inexpensive. If it’s 12% debt or 16% debt or something like that, I’m not going to have the same gung-ho attitude as far as going and acquiring as if it is inexpensive debt. That’s rule number one.
Number two, the asset that is backing the debt, the house let’s say, should be able to bring in more income than the debt expense. What I’m saying is the debt should be able to pay for itself. If your debt can pay for itself every single month, then this isn’t costing you money every single month. In fact, in rental properties, it pays you. You take the debt out of something. You put it on a property and you rent that property out. Not only is that debt payment covered, but then you might get $100,000 extra or a little bit more than that. That’s the second smart debt. Does it pay for itself? Number three, is the asset that is backing the debt going up in value over the long haul? Invest in assets that appreciate over time. If you have smart debt on an appreciating value over time, that’s like wealth creation on steroids. All three of those things are rental property investing to a tee. That’s why I love it.
I remember having this a-ha moment working with a coach of mine where he said a simple statement casually but it clicked in my mind, “You don’t save your way to wealth. You borrow your way to wealth.” That was the a-ha moment for me. If you can visualize a financial statement of assets and liabilities, two ways to increase that wealth is to place as many assets in the asset column that over time are going to go up in value. Get as many liabilities into that liability column, also known as good debt that overtime is going to go down in value by the asset and somebody else paying that off for you.
[bctt tweet=”When we hear that real estate is cyclical, what that should mean to all of us is that it’s a cycle. History repeats itself. ” username=”fortunebuilders”]
Cashflow, number one. Depreciation, number two. We have two more to cover here. Let’s start with appreciation. For many years, I was taught, “You don’t buy banking on appreciation.” Over the years, learning from people like yourself and many others, I began to realize that appreciation can’t 100% guarantee it. If you understand certain things happening in the market and the government with all the money being printed, you understand that appreciation over time is very likely. When should you and shouldn’t you invest in banking on appreciation? Talk about that overall as a profit center.
It’s great to have perspective because this idea of when you should factor in-home price appreciation into your decisions of when to invest is one of the most misunderstood things when it comes to rental property investing. If you go back to 2001 to 2006, we had this great run-up of prices. If you asked anybody during that time, if real estate always went up in value, they would say yes, 100%. Everybody thought real estate went up in value all the time. It never went down in value. As we learned, that’s not exactly true because then what happened is the Great Recession. During that time, real estate values fell nationally over 30% from 2008 to 2010. All those people who invested purely based on speculation of home values going up in the short run worked out a difficult lesson. Home values were down and they went down sharply.
That’s not normal. What it shows you is that real estate values in the short run can go up. I guarantee you, nobody thought that they were coming down as sharply as they did in the Great Recession. Over the short run, real estate is speculative. What most people fail to understand is that the idea that real estate values always go up is not correct and the fact that real estate values go down over time and you can’t count on appreciation is also not correct. There’s a middle answer which is supported by data. What happens is real estate is cyclical. When we hear that real estate is cyclical, what that should mean to all of us is that it’s a cycle. History repeats itself. When it comes to home price appreciation, if you hold on for a full market cycle and you look back at what the historical average appreciation rate is for your area, what you’re going to find over a full market cycle is that it’s largely going to be that same figure. There’s a lot of data to support this as well.
If you’re in rental property investing and you want to count on home price appreciation in your market, you need to be committed to a buy-and-hold mentality of between 10 to 20 years because a real estate cycle is generally going to last between 10 to 20 years. If that’s the case, you can look back over what historically your average appreciation rate is and it’s almost like you know the answers to the test. History most likely will repeat itself, and then you can use this home price appreciation to your advantage to choose the right real estate market that has both positive cashflow and home price appreciation. You just got to be in the game for the long haul.
That comment right there demonstrates the power of financial education. Knowing the answers to the test. That’s what a lot of people don’t understand. There are ways to predict the future essentially with a high level of certainty, understanding that history does repeat itself and the market is cyclical. There are things that our government is doing and not doing that is forcing appreciation, forcing the values of homes and even rental rates to rise over time. Let’s knock out number five. We talked about cashflow, depreciation, principal paydown and appreciation. Let’s end off here on tax savings. There are so many to talk about. I’ll let you choose.
We talked about the crown jewel of tax savings, which is depreciation. Talking about that amazing tax write-off there. We shouldn’t discount the fact that there are a number of other tax write-offs when it comes to tax and rental property investing. You’re able to write-off your interest expense on the loan. You’re able to write-off your property taxes, insurance costs, management fees and real maintenance costs. You even can write-off and you need to consult your CPA to do this the right way. If you’re going to your market to be able to check on your rental properties that are serving your business, you might even be able to write-off your expenses to travel to that market and go and check on your rental property. By the way, you might also be able to do some fun things while you’re there. There are these incredible tax savings beyond just depreciation of the asset that you get access to by rental property investing.
In the asset protection tax planning academy, Than and Paul brought in some of their financial advisors and they went through a list. They didn’t have time to go through each one line by line, but a list of over 400 potential tax savings for business owners and for real estate investors. One of the biggest ones you mentioned is write-off the interest on the debt. That’s something a lot of people don’t realize. IRS allows individual homeowners to do that capped at a certain amount but for real estate investors, it is unlimited across the board on all your investment properties. That’s why I said if you don’t love Uncle Sam yet, you just got to give him some time and get to know him a little better.
Uncle Sam takes care of rental property investors.
He’s looking out for us. I could picture some people driving in their car, “What the heck are these guys talking about loving Uncle Sam?” It’s so contrary to things that we have been taught. You too can learn to love Uncle Sam if you learn about real estate and financial education. There are some five profit centers. We built a great case for investing long-term in real estate. One thing I heard you share before and one thing we always like to do for our readers, Gregg, is to give them some action items. Many people in the world say, “Knowledge is power.”
I disagree with that. Knowledge applied and knowledge implemented is power. You can know everything there is to know but if you don’t sign up for a class, take action and started looking at rental properties, your life doesn’t change. Let’s help the readers answer that question, how do they find a good rental market that they can invest in? In the beginning, I promise that we will give them a simple formula that they can get on their own computer and do right now. Mr. Gregg Cohen, how can someone reading this identify a good market to invest long term in?
Everybody’s going to be surprised at how easy and accessible it will be. It doesn’t cost any money to get this information. If you do these three steps, you’re going to be so far ahead of the game when it comes to choosing the right rental property market. The first profit center we talked about was positive cashflow. When you hear positive cashflow, what you should think about is, “I need to be in a market that has low prices and high rents.” When you have low housing prices and high rents, you create this cashflow opportunity. That’s what you need to identify.
This has been a theme, having the answers to the test before time. In real estate, you have access to all of this information. Many of it is provided either by the government or over your multiple listing service, so you can get access to this information. The first place in order to find the right rental property to establish positive cashflow is you look for low prices. Low prices are important. The way that you do this is you go and you find out what the median home sales price in your market is and you can compare that to what the median home sales prices across the US are.
[bctt tweet=”Real estate investing can and should be a team sport.” username=”fortunebuilders”]
The last time I looked for the US, it’s about $360,000 median home price across the US. You can find this by searching for the Federal Reserve Bank of St. Louis. They usually prepare this information either right up to the date or quarterly. You can go there and do a search there. That’s free. That’s a government website. You’ll figure out what the median home sales prices across the US are. If it’s $360,000 and you’re looking at your market and you want to find cashflow, you need to be under $360,000. The lower you are, the better. There, you’re finding low prices.
For you to get a realistic expectation of what your median home sales price is, that’s easy to do. I’m sure everybody has access to the multiple listing service themselves or has a friend or a neighbor or a family member who is a realtor. Right now, everybody’s a realtor. When you work with a realtor, they can provide this information for you on your local market. The first thing is to see what’s your median home sales price in your market compared to the national median. If it’s low in your market compared to the national median, that’s a great first sign and that’s how you accomplish the first step.
If I’m not mistaken there in Jacksonville, your sweet spot is around $150,000 to $250,000 on the high-end.
You’re exactly right. If $360,000 is the median nationally and your market is somewhere around $250,000 to $275,000, which it is in Jacksonville, that’s a great sign that you’re in a market that has the potential to be a cashflow market.
You do that first step, identify the median price being lower than the average for the country. What’s step number two, Gregg?
The next component of finding positive cashflow is that you have to have high rents. This information is available as well to the US Census. You can do a search for the gross median rent across the country, and then you can do a search for gross median rents in your neck of the woods, in your metropolitan statistical area, which is another way of saying your city and the surrounding areas. You see if your rents are above the national median.
The interesting thing here is you need to take into account how far low your prices are, and then how close you are to being above national rents. You can’t make the decision independently. For example, if you were to take San Francisco and only look at the rents, you’re going to find that the rents there are above the median gross rents there. That doesn’t mean that San Francisco is a great place to invest because the prices are so high. To put it in perspective, Jacksonville is 27% below the national median in terms of home prices but our rents are 0.3% above the national median gross rents. When you see low prices in Jacksonville and high gross rents, even higher than the national gross rents median there, that’s your cashflow market. Now you have taken all of the potential markets in the country to invest in. You’ve probably narrowed it down to a shortlist of 4 to 6 markets.
We’re filtering down. We’re taking the US average median home price. We’re looking for markets that are below that. We’re taking the US average in rents and looking for a market that is doing better than that. What would be step number three that they need to search for?
A lot of investors get the first two steps, especially if they’re experienced in rental property investing, but almost no investors get the third step. It’s the most misunderstood part of the equation. Unfortunately, it’s the biggest miss because if you get this component right, it will have the biggest impact on your returns on investment over a full market cycle. We need to have some way of delineating between a growth market in terms of home price appreciation and a market that is low growth or no growth. We can go back to the same concept that real estate is cyclical. Go back to the same concept of having the answers to the test ahead of time. Jeff, did you know that the Federal Housing Finance Agency, which is a government website, produces information on what your home prices were all the way back to 1991 for almost every major market out there in the country?
It’s all right there at our fingertips. We just got to learn. That’s why we’re here.
You know that now, so you can go to this website, FHFA.gov. You can go and see what your house price was in 1991 which is several years ago. You can run it in the home price appreciation calculator. You can see what the median home sales price is for your market now. You can see what that historical average home price appreciation rate is year over year. If you follow the same methodology and you believe and you understand how real estate is cyclical, you now know what your expected home price appreciation will be over the next market cycle. In Jacksonville, 4.3% is our average appreciation rate year over year over the last several years. For investors that are buying properties with JWB, we want to make sure they’re investing for the long haul. If they are, we talk to them about how you can count on home price appreciation if you’re in the game long enough. If you’re holding for 10 to 20 years, you can look back and there’s a high chance that you’re going to see somewhere around 4% home price appreciation on average over the next real estate cycle.
It’s such wisdom. I appreciate your time. I have one last question. We’d like to end every show by asking our guests this. What are the top three tips that you would give to somebody reading to this thinking about investing in real estate as a career or just supplementing income around their current career? What would those pieces of advice be?
The first is to invest in your education. I don’t know where I would be right now if I hadn’t invested in my education. I know it’s not easy to spend money on investing in education when you haven’t done your first deal. You’ve got people in your own family, friends and work colleagues all saying, “You’re just running off and following a late-night infomercial. What do you think you’re doing? Being a real estate investor flipper?” I dealt with all that too. Once I got past all that noise, I sat back and I said to myself, “Has anybody out there not invested in education and become great in a short time period?” Usually, the answer is no. We all spend money on college out there to learn to get a better job.
It’s almost unfathomable to think that if you want to be successful in a highly competitive career field like real estate, to think that you can do it all on your own doesn’t even make sense. Once I got to that place and I understood that it was normal to invest in my education and quite inexpensive compared to other places that you have to spend money to learn your craft. That perspective helped me and gave me the confidence to go out there, invest that money, and build what has become lifelong relationships that have helped me achieve great success in rental property. That would be number one.
We have a saying around here, “The more you learn, the more you earn.” I found that to be so true in my life. I remember before starting this journey, I would look at people like yourself that have achieved a high level of success, not just in real estate but in any area. There must be this magic bullet or they have some advantage that I don’t. As I got to know people like yourself, high achievers, I realized that it’s simple. They were willing to learn, put in the time and invest in learning something that most other people weren’t willing to, and then go out and do it. It was that simple. I couldn’t agree more. What would your second piece of advice be Gregg?
Get comfortable with failing and rejection. You got to separate that from the activity that you failed on from who you are as a person. I almost start to look forward to failing. In my office here, we have our core values and one of them is, “Empower people to fail forward.” We believe that. When a teammate comes on board here, one of the first things we talk about is, “You’re not perfect. You’re going to fail a lot. What I ask of you is that you learn from it.” It takes a lot of egos and real humility to know that you don’t have it all figured out and to be eager for those learning opportunities. That’s what failures are to me.
[bctt tweet=”It takes a lack of ego and real humility to know that you don’t have it all figured out and to be eager for those learning opportunities. ” username=”fortunebuilders”]
Get over the fact that you’re going to fail. You’re going to fail hard in the beginning. Dust yourself off, get right back up and keep going. Don’t take it personally. In fact, keep that humble attitude. When you’re failing, bring others along with you on the ride. Share your story with your mentors and with other people in this business because everybody loves somebody who’s chasing a dream and is humble. How you react to failure is a testament to how you’re going to handle success when you get there as well.
You’re speaking my language. I love it. I remember years ago reading Think and Grow Rich. It’s an amazing book but there’s a quote in there that said, “Every failure, setback and disappointment carries within a seed of equal value for success.” You don’t wake up and say, “I’m going to mess up today. I’m going to fail today.” Nobody plans to do that. Inevitably, as we move forward and implement, we’re going to make mistakes. As long as we learn from that, that mistake is going to have an equal or greater benefit on the other side as long as you don’t quit. What is your final tip for that person thinking about starting off in real estate?
I’m thinking about what makes us successful here at JWB and a lot of people will say that we are strong at acquiring inventory or building inventory or renting houses. I don’t think it’s any of that. The reason why people trust us with their money is because of the team itself and the culture that we have. We have highly talented and skilled individuals who care about clients and they care about each other. I learned early on that real estate investing can and should be a team sport. It’s one of the first things I learned by emulating FortuneBuilders.
It’s 80-plus people now at JWB. In the beginning, it was just my business partner Alex and myself working out of our condo. Investing in your team, network and the people that you treat, whether they’re buying or selling, if that’s an appraiser or a home inspector. Treating those people as a teammate and empowering them because the reality is that the playbook on real estate investing is well-known. It’s not like it’s a secret out there, how to do this. It’s the team, culture and ability to produce an experience for your end buyer that is better than what they could do for themselves, and 99 times out of 100, that comes down to people. I would highly recommend even early on, focusing on how you’re building your team even if you don’t have employees. How are you empowering others around you and sharing your vision? At some point, you’ll probably have maybe a few employees or maybe more, and then it becomes even more important.
You manage a couple of properties for me. Every time I’ve interacted with your team, I always leave that phone call or that interaction feeling that they treated me like I was the most important person on Earth to them at that moment. They always followed up and exceeded expectations. I have to give you a shout-out because that doesn’t happen without a great leader. You and your partners are setting the tone and doing it right. I appreciate your time. That is it with the legend, Mr. Gregg Cohen from JWB Properties. If you want to learn more about Gregg, he does his own podcast called Not Your Average Investor Show, which is excellent. If you want to check that out or if you want to learn how to get connected with him and maybe learn more about buying properties in Jacksonville, go to FortuneBuilders.com/podcast, you’ll find all of this information there.
For those of you that read this, I encourage you to tag somebody on this show and share it. If you know somebody that can benefit from this education, somebody that’s not getting out of life what they know they should or not financially succeeding at the level that they want to. We are on a mission to empower people through this financial education. Please share it if you’re reading. Give us a like, a review or whatever it may be. Join us on the next episode of the show. See you soon.
- JWB Real Estate
- Gregg Cohen – LinkedIn
- Passive Income Club
- Rich Dad Poor Dad
- Federal Reserve Bank of St. Louis
- Think and Grow Rich
- Not Your Average Investor Show – podcast
About Gregg Cohen
JWB Real Estate Capital sells rental properties in Jacksonville, FL that generate passive income streams while providing our clients with peace of mind.
Our clients invest in specific, hand-selected, single-family investment properties located in Jacksonville, FL that produce consistent monthly cash flow and we make the process hassle-free for our clients.