ADPI_005: Buy n Hold vs Buy n Sell

Jul 05, 2018


Episode Transcription:

Buy-and-hold versus buy and sell. Which one is better or even more importantly which one's better for us as military? I'm going to go over each. But I'll let you decide. But I'll give a strong argument as to why buying hold is the right strategy for you.

Hey hey freedom fighters welcome to the active duty passive income podcast. The only place where military members, veterans and their families learn how to build wealth through real estate investing. I'm your host Mike Foster and I'm here to show you how to stop wasting your benefits. Now get off your ass, step up to the firing line and make ready for today's lesson. Shooter stand by.

You are in the place where we focus on teaching military members, veterans and their families. Hey what's going on guys Mike foster in the house here again? We are going to be talking about buy-and-hold versus buying and selling. Now this is a constant debate amongst all real estate investors. But really for us as military what is the better course of action right?

Now we understand that we PCs all over the place and we understand that there's no location that's set in stone for us ever. But people generally do tend to live in the same area and it's not like you can just keep using your VA loan over and over again if you're stationed in the same place. So what is the better move? I'm going to explain that to you here today. But first guys I'd like to introduce our little podcast if this is your first time tuning in, welcome. Thank you so much for listening. how to invest in real estate and build financial freedom, that way they can build their own residual or passive income coming in month after month without having to worry about the government cheese or the disability cheese or any of that right. Alright good to go.

So let's get into today's lesson. We in a deep dive this debate on buying and hold versus buying sell. Now I'm going to go ahead and start with buying and hold. Because this right here is the critical mass of our entire program right. We teach you guys to leverage your benefits and leverage your ability to buy properties and hold them long-term. Why? Because you want to build passive income and you want to build wealth okay and when you're buying a property and you're holding it over time, there are certain things that you need to take into account right. Like tenants okay. If you're going to leave let's say you buy that property initially. You live in it and then you PCS somewhere else right. You leave, you need to put a tenant in there to make sure that you're able to recoup all their expenses right and expenses that you'll pay in maintenance or taxes or insurance right and then also your monthly payments if you still have a loan right.

So you want to make sure that the rent you're receiving is over that. Now if it is, then it's a good investment and that is great for you. Because now you have income that comes in over all your expenses. You have a tenant that is paying off your mortgage and building your net worth over time right. Building the equity in your home.  That’s great. They’re giving you a residual income and your expenses are getting handled. That’s a huge reason why buying and hold is great. Because month after month right you'll have money coming in your pocket. When you transfer to your next station you have an extra income as well as the BAH that you're going to receive when you get to your new location. Which is really also great right. But you also have that asset that is back in your previous location and that asset will continue to follow you as long as you hold it right.

Now I touched about net worth. I want to go into that a little bit more right. So what is net worth? Net worth is a statement of your financial ability or rather your financial performance right. Now when you have your net worth calculation, you'll have your assets and your liabilities next to each other and you'll see when you break down all the numbers which assets are performing for you. Which assets are not performing for you right and the more assets you have right, the more things that are bringing you income, the better. Because you don't want too many liabilities right. Things that are taking your income from impeding your ability to do things. Like qualify for loans or really like live life.

Honestly I mean the wealthiest people in this world understand that net worth is the most important thing. Because you’re net worth really precedes you sometimes if you are, you know if you have that much of it right. I mean just think Bill Gates or think you know Warren Buffett right, their net worth is through the roof. So anywhere they go anybody knows that they've got a lot of money coming with them right. But you know you're just average Joe Schema right. When you have a high enough net worth, your ability to you know get loans from the bank or get financing for this or that or whatever right, it becomes a whole lot easier. Because they know that you are financially savvy right and so it's huge. Honestly doesn't sound like its big of a deal.

But it really is and it's good for you too. Because that's the amount of wealth that you'll be able to pass on to your family should anything happen to you or you know when you eventually pass right. So that's good okay. Taxes, taxes are another huge deal when it comes to buying and hold. Now yes you do have to pay what's called property tax. If you have a mortgage your property tax is covered with your mortgage company nine times out of ten. But if you are not, let's say you own your property free and clear. You do have to pay those taxes each month right or each quarter rather. But understand that you get a lot of tax benefits as well when you buy and hold real-estate.

First one being your interest rate. So you are allowed to take account of the interest you're paying on the loan that you're receiving and you can deduct that from your taxes each year. You also can deduct what's called depreciation right. Where think of your building as an asset or it is an asset right. But think of your building just like any other business. When you have a piece of equipment that you're using to make you money, that asset depreciates over time right. It eventually you know wears and tears and it breaks down.

So just like that piece of equipment, the government treats your building as that piece of equipment right. Because it is bringing you money as an asset right month after month, year after year and the government knows that that building is going to eventually wear down. so it will pay you right a portion of your money, of the money that you spent to acquire that asset divided by, I believe it's 20 years, don't quote me on that all right. Consult your tax accountant, your tax adviser for that information. But there is a certain amount that they will give you each year right, divided by the 20 years or 22 years I believe that it will take your house to depreciate. All right so that's money coming in each year in taxes just off of you buying that home, it's great.

Another awesome tax benefit that you can take advantage of are just the deductions that you have over holding that property. Right now you can deduct everything from property management to the insurance that you pay to any of the maintenance and repairs you pay. You can deduct all the expenses that go into it. Even expenses like you know planning to buy that property. Let’s say you and your Realtor you know go out for lunch and you talk about the property and what you want to do with it or you know you're potentially buying it, whatever the case may be right. You can get your lunch expenses deducted too. 

I mean you and your wife you want to have a night and you want to discuss the awesome you know things about what you're planning to do with your real-estate Empire, you know when you build it or as its building. That’s another you know business expense right. Because it's a meeting .so anyway I don't want to go too much into the tax things. Because you can literally spend all day talking about it. But there are so many awesome things you can do with taxes in regards to buy and hold real estate. But the most important thing that you need to do if you want to take advantage of all these tax advantages is you have to incorporate. Okay you have to put the properties that you are using as rentals in an LLC or in some kind of corporation right.

So you can be able to take advantage of these business expenses. Because that's essentially what they become and that's why these tax benefits are so great for real estate investor’s right. Okay so keep that in mind let's move on. Buy-and-hold is less risky than buying to sell okay. Two reasons. Let’s talk about the costs and expenses that you might not see right. When you're buying to sell, let's say you're flipping right. You don't know what is in that home. You might have an idea based off of your inspection that you received. If you were smart right when you first bought the property. But you never really know what you're going to find until you start fixing stuff and you start taking stuff apart and you start to see the good the bad and all the ugly you know what I mean.

Now one of the same thing can be said for buy-and-hold. But when you're buying to sell especially again if you're trying to sell within a short period of time, these expenses can become very costly to fix quickly. Because that's the whole goal. Alright if you're flipping you want to be able to sell quickly. So it'll cost you a little more to fix these things. Whereas if you're buying to hold these problems you can take time to fix them. Because there's no rush, all right there's no rush at all. I mean even if it's a major problem and you've got a tenants inside, then yeah that becomes a little bit of a rush. Because you don't want your tenant to be you know out of the property for so long.

Especially if you have to cover you know expenses while they're trying to find someplace to stay. However you know it's still not nearly as bad. Because you're not worrying about that final price that you have to you know come up with when you're trying to sell. Alright second thing, right the market now the market drops and goes up. I mean just like any other market right it fluctuates. However the real estate market does not fluctuate nearly nearly as bad as the stock market does right. so it's generally easier to tell when the real estate market is you know hitting a downturn right or hitting it up turn right up in your area depending. So really you have a bit of a cushion.

Now again a lot of people lost in 2007-2008. So keep that in mind right if the market does tank then you know you need to be able to keep your mind focused night in that area. But it also behooves you to buy right in the first place and I think a lot of people also face that issue where they didn't buy right and that's why they lost right. Now there are many reasons I'm not going to go into all them. But based off of what I've seen that generally tends to be the one of the bigger cases, the property was not bought right.

Well either the terms were not in favor of a cushion or didn't give the investor a cushion in case the market dropped and also the purchase price was way too high. So you definitely want to make sure that you're not buying over market value for any property that you, whether you're going to live in it or whether you plan to sell it in however long right. Definitely want to make sure you buy right and that covers you in case that market does fall. Because you want your rent that you're going to charge to be able to keep up with your business.

Your biggest expense which will be your mortgage payment if you haven't paid that mortgage off completely by then right. so in order to account for market falls, in case rent fluctuates you know a certain amount you definitely want to make sure that you charge enough rent and you buy low enough where your mortgage payment will give you a good cushion within the case okay.

Anyway and then of course right buying and hold allows you to use a good team to help you reciprocate in certain areas. let's say right if you are living in an area and you've been constantly you know transition from one place to the next, I'm sorry for one place the next in that specific region right. So you have built up a good team. If you're moving out of your property, you're refinancing and you're finding a new property with your VA loan that's great and you can have a steady property manager, you can have a steady insurance agent, a steady lender. Right those three things right they're super important and you know and even if that property manager is a realtor that's even better.

So now you have those four things and you can continue to you know build your portfolio very quickly. Because you have a lot of help right. If you're transitioning from place to place, then it becomes a little bit more hairy. But you still have the ability to build a good team by reaching out to other real estate investment. You know groups in the area right or even being connected through ADPI right, we are all over the place. So definitely make sure that you find a group to connect with and ask those questions. Find some good people that would be willing to help you out and you know and you're buying and hold strategy can go seamlessly. But you know buying to sell right this is the other side of the coin.

What appeals people to the whole buying sale thing? Well I'll tell you right off the bat I think and this is my personal opinion right. But I think that people are a little short-sighted when they comes to real estate. They see that it's a good wealth building tool. But they don't see the full picture. They see that you know if they live in a home for two to three years, they don't anticipate live in that area. Right everyone says I'm not going to live in Norfolk, I want to go to San Diego.

Okay got it. well while you've spent six to ten years in Norfolk, dreaming that you're going to live in San Diego and renting because you don't want to buy a house; think about the fact that that's six to ten years that you have lost out on building equity in your home and taking and building money, cash that you can take the San Diego and put a down payment on a really nice home in a really nice area. Okay I want you to think about that okay.

So everyone will think you know and then the other people right those are those people who rent. the other people right who get into this mindset which is the buy to sell will say I'm going to buy a home, I'm going to live in it for two to three years and I'm going to sell it as soon as I PCS, I can take that cash and I can do whatever with right. So all right that's fine. But you have to take into account a few things. Let’s talk about taxes since we're talking about taxes and buy-and-hold right, what's the difference? If you are going to sell a property and you don't do what's called a 1031 exchange, you will face capital gains tax on anything that you have received in growth from the time you bought it to the time you sell and that capital gains tax is roughly about thirty percent.

Right so you can definitely see a significant chunk of money coming out and I hope that you're like also accounting for the ten percent you're probably going to lose in the sale.  Due to closing costs and realtor fees and all that jazz right. so that's an extra ten percent on top of the thirty percent which makes 40, that's almost half the amount of money that you have received in growth taken out. Okay taken out completely. oh and by the way at 10 percent that you're getting charged on for closing costs and realty fees, that's off the selling price of the entire property. So it may even be a little more than 40 when we really add it all up right. But you're going to lose a quite a bit off of that growth.

So again unless you do it in a 1031 exchange, which I'm not going to deep dive into now. But it's a way that you can transfer the gain you have from your property into another investment tax-free. Unless you do that you're going to get hit with that capital gains tax and you're not going to make quite as much money as you thought you were going to. Something else that's more appealing you don't have to deal with tenants. Once you sell your property you're good to go and you no longer have to worry about you know dealing with property managers and what happens with my property and all that. Which again you know is not necessarily all that bad when you think about it. because it's just like taking care of a division or taking care of a department.

There are ten million things that can go wrong within your ship or within your unit. Right well regardless wherever you're at right. But there are systems in place to handle it if things go wrong. So why can't you have that same. Trust with property management and let's say your property management company isn't good okay. Then why don't you just fire them and find another property management company. Alright maybe this is a hassle for you and if that is a hassle for you, then that's fine and that's your perspective. But I'm just saying from one leader to the next right, if something is wrong I'm going to fix it, bottom line.

So regardless of what that is in my life, whether it's my job or whether it's my money I have that same outlook on it. So I don't see why I can't just translate one to the other and use it to benefit me over the long run right, bottom line. Anyway so another thing that you're going to want to take into account and I kind of mentioned this in the last one. But your unexpected challenges. right now things come up all the time and this can happen for both you know you're buying whole strategy or for your buying and sell strategy .But you know let's say you're going to sell your property and all of a sudden the water breaks in your HVAC and you have a whole bunch of water dumped in one of your rooms and you're trying to close in like 10 days, that's not good. That’s not good at all and now you really need to fix it. Because you want to get rid of this property and I promise you, your buyers not going to want to pay for it. Because they're trying to buy a home that the inspection said it was good, that you said it was good right.

So now you're going to fix your HVAC. You got to fix the room. Make sure all the water is out of it. Because you don't want any moisture to sit in there. Otherwise you'll you know give a chance for mold to grow and you're going to be set back in the hole little bit. So now again here comes some more money out of pocket right, that you'll eventually end up losing in and again that kind of refers back to the old tax thing and the closing costs and realtor fees and all that jazz. So you know I mean anything can happen and I'm not saying that that's something that should scare you from selling your home. But that's something you want to take into account too. Right what happens if that comes up okay?

Also you know you need a good team. You need a good team to help you out. Right so you be in the military I don't assume you're going to have enough time to market your home and to... I mean if you do that's great. you know if you have the time to market your home, to put on the MLS or to do like for Fib right first sale by owner, that's great and if that works for you, awesome. But you know a lot of us don't really do. So I'm just saying like it this might not be the best strategy for you and then you can think and entertain holding your property right and seeing some of the long-term benefits you can have from just holding it.

Now alright so let's go over some people's concerns when it comes to doing one versus the other. All right so being able to qualify for a refinance loan. So with the VA right you can you can automatically refinance your loan into a lower rate. Let’s say if you use the VA loan like 10 years ago when interest rates were like around 10 percent or something right and interest rates now are like 4-3 maybe even 5 percent, you can refinance that with your VA again too.

But you can refinance that and get an automatic lower rate, which is great. But if you're going to buy and hold that property then you're going to put a tenant in there, you can't have your VA loan on it. Right I mean if you're in the same area you can't. But if you're in the, but if you're in a different area right, if you're going to PCS to let's say San Diego from the East Coast, yeah then you can. You can keep that VA loan and you might want to refinance so you can get a lower rate just before you move out and then you can put a tenant in right as you're going out to make sure that you have enough income to cushion you know market falls and any other random expenses that may come up right.

So that's good to go. You know and again if you have enough equity built into your home over the time that you've been in let's say you purchased your home with a VA loan four years prior or two years prior right and you have enough equity in there you can refinance with a conventional loan and then you can put a tenant in there and you're also good to go. Right so there are so many ways that you can make it work.  Don’t limit yourself in thinking that you know one is impossible and I I'm forced to go with this option. Right but definitely consider buying and hold. Because again buying and hold, you're keeping your eyes set on the long term gain, not the short term. I mean let's face it, if you were to receive $30,000 in cash right now, what would you do with it? Answer yourself that question.

What would you do with that money right now? I'm ready I have a plan to use it and it’s good to go. but I also guarantee to you that there is some listening to this podcast who are now faced with this question and they're asking themselves what would I do at thirty thousand dollars if I got it in my hand right now. Because you haven't thought about it and when you don't think about it when you don't have a plan for money that comes into you like that, you leave yourself susceptible to drop that money into anything. Right a car right which you know maybe another liability for you right. I mean maybe you have an expense that you need to take care of, maybe you have debt that you want to pay off and that's fine right. I mean we're going to go into another discussion.

There’ll be another podcast verse on you know paying off debt versus investing.  I've got some pretty good insight that I have read from certain books and listen to some podcasts I'd like to share and maybe get your opinion on it. But you know for now try and think about you know what if you have a home right and you know you're getting ready to PCS, think about what you want to do. Do you want to hold it for the long term? Do you want to build your net worth? Do you want to allow the chance to grow passive income right at once you do the legwork to set up correctly the first time, you'll never have to worry about it again?

Right do you want to have that income coming in each month to add to what you're receiving on BH for your next station or retirement right, of your pension cheese to add to your pension that you're receiving soon? Just think about it and answer yourself that question and if you do choose to sell your home, make sure that you have the right things in place to cover the losses that you are going to or make potentially you know see. All right well okay guys that'll do it.

Thank you so much for listening. We appreciate you guys tuning in. make sure you go ahead and hit that subscribe button. Also go reach out to us on Facebook. If you like and subscribe to that as well so you can see some live updates as well as our Instagram page. I just launched that, so it's really exciting and thank you so much for the time with us all right. Catch you guys in the next episode. This is Mike I'm out.

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