Welcome to The Get Real Podcast, your high-octane boost and in the trenches tell-it-like-it-is reality therapy for personal, business and real estate investing success with your hosts, power-preneurs Angela and Ron. It’s time to get real!

Angela: Hey everybody, welcome to The Get real Podcast. This is Angela Thomas and I am here with Ron Phillips. Hey Ron.

Ron: Beautiful day out here.

Angela: Yeah, it’s always a beautiful day in South Carolina, so.

Ron: Not always, but yeah, most of the time.

Angela: Most of the time, yeah. We that out here in Utah, it’s either burning hot or freezing cold, there’s no in-between. So right now we’re in the burning, not don’t go outside. It’s awesome. Yes. So cool, cool. All right, so today we want to talk about the biggest reason really to invest in real estate. And the best way to be successful in that, so.

Ron: Because all the cool kids are doing it.

Angela: All the cool kids. Yeah.

Ron: And you know, you want to be a part of the cool kid club.

Angela: So, yeah…

Ron: You had enough of being an outcast in high school. You really don’t want to do that anymore. It’s time to join the cool kids club.

Angela: Yeah. I don’t relate to that reference, so. I didn’t go to high school.

Ron: I know, we’ve talked about this.

Angela: I’m sure I would have been really cool though. Yeah, for sure. What we’re talking about here, today is leverage, leverage. So a lever, you know, I don’t know much about levers, but there are simple and powerful tool an actual lever that multiplies the force when you apply it, right? So leverage is a powerful principle in mechanics and in finances and probably other areas I’m not thinking of, so. So we’re going to talk about different ways to leverage all aspects of your life to be successful. And of course the biggest one of those is leveraging your capital. And we can probably spend a long time on that one, so.

Ron: I love it. I love it all. I mean, if you talk about this is something that most people understand and yet it’s something that people have a hard time understanding as well, right? So, I mean, in general real estate, most people don’t pay cash. I mean there are some people who do, but most people don’t. Like if you buy your house, usually you buy your house by putting some money down and you get a loan for the rest. I mean, almost everybody buys their house that way, especially with interest rates as low as they are because it’s just almost free to do it that way. So anyway.

Angela: Exactly, exactly.

Ron: Okay. So we here we have I mean that’s leverage. What we’re going to talk about today is, is the same principle just real estate. But for some reason when people buy investment real estate and not their own real estate, they don’t realize where their money goes, Angela. We get this question all.

Angela: Yeah, yeah. Ron. So I was telling you, I actually heard someone say recently, you know if I invest in this property if I put down, you know, the down payment and invest in this property, when do I get my money back? And that seemed like a weird question to me because I’ve been doing this a long time and my mom invests in real estate back when I was little. So I’m like, what do you mean when you get it back like your money is in there working for you. It didn’t go anywhere, right?

Ron: Well, I mean technically I guess it went into the property.

Angela: You sent it off to work.

Ron: It didn’t vanish.

Angela: Right.

Ron: It’s not on vacation.

Angela: No, it’s out there doing what it’s supposed to be doing and making you more money.

Ron: I mean, if anything, you sold it into a labor camp, I mean if anything.

Angela: And that, you know, and that’s legal, so it’s okay.

Ron: It’s your money so it’s okay.

Angela: So you should take advantage of it.

Ron: And the crazy thing is, is that your money doesn’t really care whether it’s on vacation or if it’s in a labor camp. It’ll act, it’ll be just fine either place. It doesn’t make any difference.

Angela: Yeah. But it’s a safe, there as it is, you know, under your bed or in the bank in my opinion. So we want to talk about that for a second. You know, when you do buy real estate and you put that money down, what is happening? Where does it go? And I also want to talk about like, you know, when people say, get my money back, unless you sell the property, getting your money back is actually doubling your money. So let’s talk about that for a second. Do you mind giving us an example, Ron?

Ron: Yeah, so I mean if you, let’s say you buy $100,000 property, you put $20,000 down, right? So you have a loan for $80,000 the property’s worth $100,000. So when you had the $80,000 and the $20,000 together, that’s the full price of the property. Therefore your money is in the house.

Angela: In the house. Got it.

Ron: It’s in the house, right? So it didn’t vanish. It didn’t go anywhere. It’s actually in the house. So if this property then produces cashflow of say $5,000 a year, that means in four years you will have gotten quote, gotten all of your money back, but you didn’t really get all of your money back. It’s still sitting in the property. What you got was a return on the money sitting in the property.

Angela: Great.

Ron: So let’s like, let’s hit a timeout real quick and let’s just say we bought a stock because for some reason people can understand this about stocks. So let’s just talk about it really quick, right? So you go and you buy stock would be really cool if you could a stock that’s $100,000 get a bunch of shares, but you only put $20,000 down. Since you can’t do that, let’s just say…

Angela: That’s a really important point though. You know that you can’t buy…

Ron: That’s where the leverage, that’s where we’re headed, Angela is the whole leverage piece, right? But for just a second, when you buy stock, because you can log into your Smith Barney account or whatever it is and you can see it in a little report there. And it says that you own 60 shares of whatever you understand where your $100,000 is, it’s right there and Smith Barney, they’ve got it for you. It’s sitting there, right? And if any day you want to go in there and sell it, whether it’s up or whether it’s down doesn’t make any difference, you can sell it.

Ron: So the difference between real estate and a stock is that real estate is not liquid like a stock. You can’t just go sell it whenever you want to. Someone has to want to buy it, right? So it’s not as liquid as a stock, but that doesn’t change the fact that you can log onto your property management account. You can very clearly see there that you’re getting money from your property, you know? And if you want to, you could even design a cool little spreadsheet for yourself. Or we’ve already, we’re how many, we’re like a month away from launching ours where you’re going to be able to log in just like Smith Barney. You can see your house is going to be sitting there. It’s going to say you got $20,000 sitting in this house, it’s worth $100,000 you’ll able to see it just like Smith Barney.

Ron: And maybe that’ll make it so that everybody can understand this piece, but your money didn’t vanish in other words, right? So it’s still sitting there. In addition to that, you’ve only put $20,000 in there. But to Angela’s point earlier about leverage, you’re getting your return on the full amount of the property. $100,000 not $20,000 $100,000 so if the appreciation rate next year is 5% then you make your property value goes up $5,000 but you only put $20,000 in there, right? That’s a 20% 25% return, okay?

Angela: Heck yeah.

Ron: That’s a 25% return, but you only got 5% appreciation. So what does the lever do? What does the leverage do? If you’re using this big lever, it allows you to multiply your invested investment because you’re getting the benefit of the full value of the real estate when you didn’t really put all of the money in. And in addition to that, you’re getting a whole bunch of other returns. We’ve talked about the four returns of real estate, but the reality is you get the four returns on the $20,000, on the full, $100,000 purchase price of the house, but you’ve only invested 20,000. That makes your returns way, way bigger. Does that make sense, Angela? Or did just completely bungled that up.

Angela: I mean it makes sense to me, but I’ve been doing this a while so. Hopefully, it made sense to everybody out there. I think it’s also important real quick, you know, cause that person that asked that question, when do I get my money back? He was thinking, you know, it’s, you pay it and it’s gone and you have to wait to actually get that investment back. Like you loan the money to somebody. So I think it’s important, like there are some investments, investments where you don’t have the money anymore and maybe you’ll never get it back. You know, and you know, examples of that is like loaning to a small business loaning to a friend, Ron said…

Ron: Bad idea. Bad idea.

Angela: Bad idea, yeah, you really don’t know if you’ll get your money back.

Ron: When I heard that when you loan money to friends or family, that is officially not an investment.

Angela: No, no it’s not. And you can hope that someday you’ll see some of that, but you should think of it as a gift. So.

Ron: Yeah, I was going to say, should I just tell them how I feel about this?

Angela: Yeah go ahead.

Ron: I mean, you brought it up. I didn’t know if you wanted to go down this road or not, Angela.

Angela: Sure, why not? Yeah.

Ron: Family and friends do not get loans from Ron, they only get gifts. Because when you become a lender, it changes your relationship. There is a debtor relationship now and that just skews a family and friendship. It should, in my opinion, humble opinion should never happen. You should not loan money to family and you should not loan money to friends. If they want to pay you back, they should pay it forward to someone else. You should never take their money back.

Angela: Okay, I agree. But what are other examples of that? I mean the point is there are some investments you make where you know, the money isn’t just sitting there, it’s being used and you know, you do have to wait to actually get your money back, right. You said a trip to Europe. I mean that’s investing in your, you know, family time. And…

Ron: I mean, it’s really not an investment. You’re going to spend your money and then it will be gone and we’ll have all of the memories and I think everybody should do it. Especially Europe. I love Europe. Going to Europe in September, it’s going to be awesome. But the money that I spend on the trip to Europe is officially gone. I will not get it back, right. There’s no return coming to me. And that’s the difference. So when you put your money in, I think the other thing, I think that person said that at least that you told me was that they had quoted the rule of 72 when they ask when they’re going to get their money back.

Angela: Yeah. They said it’s going to take this many years to get my money back. And they were calculating that with their financial advisor. Their financial advisor is actually the one that said, you know, if you make this investment, you need to figure out when you’re going, how many years it’s going to take to get your money back.

Ron: Right. Which is completely different than doubling your money, which is the rule of 72 actually says. The rule of 72 doesn’t say when you get your money back, the rule of 72, if you guys aren’t familiar with it, Einstein, right, Angela?

Angela: Yeah.

Ron: Einstein.

Angela: We should, we got to get a fact checker on here, but…

Ron: Oh, just Google it real quick, Angela while I’m blabbering. So I’m pretty sure it was Einstein. Angela’s going to fact check us. But the rule of 72 basically states that you take the interest rates. So let’s say you’re getting 7% on your money. If you divide seven into 72 you get 10%, or excuse me, 10 years, right? So in 10 years your money will have doubled at 7% compound. And you know, the more you get, the lower the amount of years it is to return to double your money. It’s to double your money, not get your money back.

Ron: So this guy had a fundamental misunderstanding of what was happening, right? So you don’t put your money in and then after seven years you get it back. That’s horrible. That’s a 0% return. I mean, you get 100% of your capital back, but you made nothing on it, right? So if you took 10 years and you really didn’t make any money, that’s actually how the stock market usually works, right? I’m sorry to all the stock people out there, that’s usually how the stock market works because it goes up and then it crashes and it comes back up. And ultimately you made nothing but you had this really cool fun rollercoaster ride, which was exhilarating and ultimately you really didn’t make what they told you made.

Angela: It’s a little addictive though. That roller coaster ride is kind of like gambling, you know?

Ron: So where leverage comes in is where you actually take the $20,000 and it’s supposed to make another $20,000. It’s supposed to birth another $20,000. How quickly we can make that happen is what the rule of 72 helps us determine. Because if we get 10% on our money, then it’s going to take us seven years, right. Because you divide 10 into 72 and you get seven, right? And that just keeps on going down and down and down. The more money they know, the higher the percent is, the lower the years, the quicker your money doubles, right.

Ron: But it’s not like your invested capital went somewhere magically. We spent a lot of time on this, Angela. But we get this question a lot. And so I just wanted to, you know, maybe we flogged the horse a little bit too much, but I want to make sure everybody understands the money’s in the house is still there. It’s sitting there working and you get four returns on it. All four of those returns get to use leverage and some people would say, well your rental income doesn’t get to use leverage. To that, I would say, yes it does because the difference in rent between a $20,000 house and $100,000 house is substantial.

Angela: Pretty substantial. Yeah.

Ron: Yeah. $20,000 house you probably can’t rent because it’s probably not fit for anyone to live in and you probably don’t want to rent it because it’s in a war zone.

Angela: Blow it up and start over.

Ron: Yeah, but a $100,000 dollar house, you could get $950.00 a $1,000 month, right.

Angela: Exactly.

Ron: You get a really solid return on that. And the reason that you do is because well leverage, right? So you are getting the rent from $100,000 property even though you only put $20,000 down on the property. Same thing with the principal reduction, right? So the principal reduction, someone is paying off an $80,000 loan for you, not a $20,000 loan, an $80,000 loan.

Angela: Exactly.

Ron: Same thing with tax benefits. You get to depreciate a $100,000 property. You get to depreciate that instead of a $20,000 property. And yet you’ve only invested $20,000. When you get appreciation, like we talked about earlier, the return can be staggering even though you get a really tiny amount in a percentage base of appreciation, right?

Angela: Exactly.

Ron: That’s what leverage does for you, for your investments, right.

Angela: Well said. Thanks Ron. Okay. I fact checked us and it’s a good thing because we were wrong.

Ron: Who is it, who is it?

Angela: It’s a popular belief that I’m Einstein invented it because he supposedly quoted something about the rule of 72, but in fact, it was first cited nearly 400 years before his birth by an Italian friar named, Luca Peceli in his 1494 book that he wrote, which I can’t pronounce. And it was a guide to arithmetic, algebra, geometry, accounting and weights and measures. So he actually came up with it.

Ron: Man, those Italians. I’m headed to Italy in September. I’m going to look this guy up. Maybe I’ll go visit his birthplace because that’s how much I think he’s cool.

Angela: Thank you Google.

Ron: Love Google.

Angela: So I’m pretty sure we used to say Albert Einstein invented it back in your presentation. So we got to go fix that. Yeah.

Ron: I don’t know how to do that, Angela.

Angela: I know, I know. That’s okay. Video editing.

Ron: Oh, here we go. It is now out there on the internet.

Angela: Yeah. Everyone that we told the wrong thing, we apologize. Sorry about that. Okay, so on leveraging, so we talked, we kind of flogged the horse on leveraging your capital, but you know, I also want to touch on, and we’ve talked about this before, but leveraging your time, the time value of money. We’ve, you know, we’ve talked about that many times, but hitting on this, staying on the topic of real estate, you leverage your capital, right? And then how do you leverage your time in real estate, Ron?

Ron: Good question. Do we have an audience?

Angela: Yes.

Ron: Audience is a mandatory section.

Angela: Okay. So yeah, leveraging your time in real estate. We’ve talked about this so many times, but if you’re out there fixing broken toilets and replacing carpet and mowing lawns or whatever it is, you know, replacing tenants, you’re not really leveraging your time and you’re not getting passive income. So.

Ron: Nope.

Angela: Just flogging that horse again.

Ron: In addition to that, you’re not allowing other people to leverage their time, which is very selfish.

Angela: Yeah. And no matter how good you are at property management, you can’t possibly do it on the amount of properties that you need to replace your income or retire comfortably. And you’re probably not as good at it as a property management company that has the people that are good at doing those kinds of things and that are paid to do it. And that’s their career. So just, you know, give them a shot.

Ron: You don’t want to be, look, hmm, here’s another way to look at it. If you’re hell-bent on managing your own properties, fine. Then create a management company so that you can at least work yourself out of a job and have a company that’s functioning underneath you so that you can actually leave, go on vacation, retire, do some other things other than fix toilets.

Angela: Yeah, and you know, if you’re that good at it, everyone out there who’s not good at it like me and Ron, we need you. So please start a property management company and offer your services, you know.

Ron: If you’re one of the lunatics out there that loves management. Like I said before, God bless you. We love you, you know.

Angela: Share your talents.

Ron: I’ll send you something for Christmas and all kinds of things and I would love to pay you for your services.

Angela: Yeah.

Ron: Just for the love of all that is holy, please start a business and then leverage your time again by leveraging the talents of other people so that everyone gets to benefit. That’s the whole deal behind leverage is that everybody can win when you get outside of yourself and you start leveraging your time.

Angela: Exactly.

Ron: You employ other people who need the work, you allow them to take their talents and grow them through your company, right. There’s a lot of good that comes from getting out of your own way and from leveraging other people’s passions and talents, all of that stuff, right?

Angela: Yup. Awesome. Okay. Last one we want to touch on. You know, we always talk about giving and this is a selfish way, but the third one is leveraging other people’s needs. So we are leveraging our capital, our time. And the third one with rental properties is we’re actually kind of helping other people because we’re providing, you know, nice housing to people who for whatever reason don’t want to or can’t buy a home at the moment. And need a good, safe, well-maintained place to live with, you know, the nice landlord. So that’s actually, it’s kind of, I mean, all the other investments that you make, they don’t really affect people the same way as this. I don’t think so. It’s kind of cool that you’re, you know, providing good housing for people out there that need it at the same time, right?

Ron: Yeah, absolutely. And if you do it right, well hear you’re leveraging, not only are you leveraging their need, right, or you’re giving them, you’re providing something that they really, really need. But in addition to that, you’re leveraging their money to do all the things that we talked about earlier.

Angela: That’s one of the returns.

Ron: They call and they ask, you know, hey, can we use other people’s money? Yeah, absolutely. You can use a little bit of yours and you can use a whole lot of everybody else’s mind, including the tenant for whom you are providing this awesome rental

property, right? So again, we talk about this all the time, but it’s a win-win all over the place. These should be, it should be a win-win for everybody involved, okay? And to the extent that you can create more winning scenarios, you will make more and more and more money. Going back to my example of the property management company, if you’re really good at that, how many people can you get to win? How many people can you get to win? If you can get more and more, more people and you can help them win, you’re going to make more, more and more and more money. Everybody wins in that scenario.

Angela: Can’t help it. Yup. Yeah. And the better you treat your tenants and the more they like living there, the longer they’ll stay, the less turnover you have and the more money you’ll make. Again. So leverage.

Ron: And I’m just going to throw a little plug in there for the property managers out there, those lunatic people who love this business, be nice to them, be kind to them. They’re the people who manage and protect your asset. Okay. It’s really important that you’re kind to them. No one is infallible. So they will make mistakes when they do. You should expect them to own their mistakes, but you should do that in a way that does not put you in the jerk category.

Angela: Yeah. Having a good relationship with your property management is a huge investment that pays off over the years. Like Ron said, they protect your investment and you don’t want them at mad at you. So.

Ron: And you want them to be happy when you pick up the phone and call them.

Angela: Yeah. Exactly.

Ron: Right. When you call them and it’s you on the phone, you want their voice to sound happy, right? So if they’re screwing things up, help them try to fix it, give them a little bit of grace, but not too much grace, right? I mean, they still need to, it’s still a business, you know, they still need to own what they’ve done if they’ve screwed something up. But, but yeah, just be kind. Good Lord.

Angela: Be kind. I love it.

Ron: How hard is it?

Angela: Okay. All right. So, so leverage your capital. The whole point of this is leverage, right? Leverage your capital, leverage your time, leverage other people’s needs. I hope, I mean, we’d beat it to death like Ron said, but if you have any questions about how that works or want to point out anything we missed or any other comments, please visit us on GetRealEstateSuccess.com. Let us know how we’re doing. Subscribe if you like to. And you can also see us on a Get Real Podcast on Facebook and on YouTube and we look forward to seeing you next time. Thank you.

Ron: Thanks guys.

Angela: Thanks Ron.

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