Investment Counselor Sara has returned to this Flashback Friday episode of the Creating Wealth podcast to discuss how she obtained her three new properties in Memphis, as well as her observations on how competitive the market is. She and Hartman also spoke about the customer experience and how she plans to experiment with the property managers she’s going to use.
Her client, Dr. D’Ambrosio, shared his experiences with the 1031 exchange he performed on his childhood home in order to obtain properties in Orlando and Indianapolis. He and Hartman discussed possible next moves for D’Ambrosio, including community banks that offer portfolio loans for investors who have reached their traditional loan limit.
Sara Closed on Three Properties in Memphis
Welcoming listeners to this Flashback Friday episode, Jason Hartman explains that a client case study will be featured. He adds that he loves when his clients come onto the show and tell their stories, and today Dr. David D’Ambrosio is on to talk about his investment journey, equity stripping, 1031 exchanges, and the investing mentality with medical professionals.
Before getting to that interview, Sara, the investment counselor who worked with Dr. D’Ambrosio, joins the podcast to discuss several real estate topics. She closed on three properties of her own in Memphis and is excited to get them leased before the holiday season. She explains that she bought two properties with one provider and one with the other to compare property managers.
Hartman adds that his team likes to have the customer experience. He purchased a couple of properties in Memphis both this year and last, practicing what he preaches. He states that it’s interesting that he and his team do not get any preferential treatment the way one would believe. They’re regular customers and the interaction seems normal. Hartman mentions that the local market specialists don’t bend over backwards for him.
Sara explains that she feels the same way and adds that they might actually receive less attention from local market specialists because they think Hartman’s team knows what they’re doing.
She states that when she was ready to pull the trigger and was looking in different markets, her decision came down to what was available. She lost out on two different properties to her own clients because she wasn’t quick enough. In that way, she didn’t get any special treatment and learned how to be quicker.
She recalls seeing a hit on the website one morning after checking her email as soon as she got out of bed. She saw an awesome house and thought about calling on it after taking her kids to school but figured it would go quick. Instead, she called right away, and someone else was interested in it right after her call.
Sara states that she wants to share an opinion about rate locks and when someone should lock in their mortgage rate. She had an issue come up involving rate locking when she put some properties under contract before the rehab. The rate lock was good for thirty days, and based on the predicted closing date, it seemed fine.
She explains that the rehab took a little longer than anticipated and scheduling a follow-up inspection was needed. All of this added time to the closing process and she was pushing up against the rate lock expiration. She adds that she was rushing a little and found the experience to be a little uncomfortable. She had to get the local market specialist to put in writing that she was going to get a clean inspection report after closing. She states that this should be done before closing, generally.
She clarifies that if she didn’t lock the rate in, her home would have closed just a bit later, and the rate would have been almost the same at that point.
Hartman explains that the danger with that is, if rates are climbing and you fail to lock in your rate, you might end up paying a higher rate.
Sara agrees that this could happen but adds that you could be paying extension fees for the rate lock as well. If you’ve got the lower rate, you might be paying a fee because closing is taking longer than usual. The real risk is that the rate might go up a little.
Commodities Are Independent of Currency
Hartman states that it’s interesting to see how in essence, when you pay for a rate lock, you’re renting the money. You pay a certain amount and daily rate for extending afterward. The concept of money, or currency, just like anything else is a commodity like coffee, soy, copper, or lumber. He advises listeners to look at the world that way. All of those commodities have a price and a demand. The commodities that are ingredients to a house are independent of any currency. These commodities have intrinsic value.
The Fox News of Real Estate?
In light of recent issues with Obamacare, Sara mentions that she took her son to urgent care recently and couldn’t believe how crowded and understaffed Kaiser was.
Hartman adds that insurance rates are going up, and this is only going to get worse. Regulation is a form of tax, and if you burden something more, you’re going to end up with less of it. Less healthcare in all of its forms is coming. Hartman states that Obamacare is not going to work, as even Bill Clinton said that it wasn’t going to be a success.
Sara explains that healthcare is one of her biggest fears and recalls that if she had to take her daughter to the ER for shortness of breath, she was seen right away in the past. Most recently, she had to wait for thirty minutes for the initial triage. It’s frightening to her and many other people.
Speaking politics, Hartman mentions that had a recent review on iTunes that called the Creating Wealth podcast “the Fox News for real estate investing.” Hartman states that he thought it was funny, but that he isn’t a Fox News guy and does not generally watch TV. He will catch CNN in hotels but does not generally watch TV. He adds that political news is a big part of real estate, and he mentions it on the show because it is not irrelevant. It means something.
He states that his website has been updated and has a couple of bugs due to the newness. There is a lot of new options to click, as well as educational products.
Dr. David D’Ambrosio’s Investing Journey
Hartman welcomes guest Dr. David D’Ambrosio to the podcast. He is a Radiation Oncologist tuning in out of New Jersey.
Dr. D’Ambrosio explains that he has been listening to the podcast for over a year and has gone back and listened to some of the older episodes. He adds that he is the son of an immigrant living the American dream and has always been interested in investing in general. He always comes back to real estate, with the help of some of the things that were discussed when he read Robert Kiyosaki’s Rich Dad Poor Dad book. He became especially interested in the 1031 exchange.
Dr. D’Ambrosio’s 1031 Exchange
Dr. D’Ambrosio clarifies that his medical partner was a client of Hartman’s previously, and he encouraged Dr. D’Ambrosio to check out the podcast. He introduced himself to it, educated himself about investing, and then dove in.
He explains that his parents retired, and they were looking to sell the house that he grew up in. He planned to buy the house and initially planned to rent it out for a bit of cashflow. Once his eyes opened, he realized that instead of renting the house long-term, he could perform a 1031 exchange, and it would improve his investment.
He sold the property at the end of last year and transferred it to four properties in Orlando, Florida. He explains that the cash he got out of the exchange and put into the new houses was enough to where he could put more than 25% down. Not having to pay the tax on it was a big deal for him.
Ways to Diversify
When asked if he wanted to diversify into two markets, Dr. D’Ambrosio explains that he also has four properties in Indianapolis but felt that Orlando was a unique situation. The upside is the potential for appreciation, and he thought it was a good idea to split himself up and put more of his portfolio in the Orlando area. He adds that he would like to get into one more market in the future.
Hartman mentions that getting into one more market to total three would make his portfolio quite diversified.
Dr. D’Ambrosio notes that when you perform a 1031 exchange in general, things can get a bit complicated. This is especially true when you move from one property to having multiples. He explains that he did not want to get hung up with the deadlines.
Hartman asks how smoothly the exchange went and whether Dr. D’Ambrosio was worried along the way or ran into any problems. He adds that he did a few himself and it has been a little difficult. He made it through decently, but he was worried about the deadlines at times.
Dr. D’Ambrosio explains that the exchange went well and adds that you’re allowed to name 250% more value of additional properties, so he picked about ten, which is six more than what he wanted just in case one of the ones he aimed for fell through for some reason or another.
Hartman mentions that the IRS won’t let people identify the whole world. They’re too smart for that, and he explains that of the value of an exchange is at $500,000, an investor can identify $1 million in properties. They’ve only got to close on $500,000 to meet the requirement.
Dr. D’Ambrosio adds that he only had 45 days to identify and six months to close. There were things he didn’t realize. For example, he thought the cash he had to reinvest was capital gains, but it was all of it. He put some money into renovating the house but explains that he had to spend all of the cash, as he was not allowed to take any out. The investor has to use the same amount of debt.
The Views of Other Professionals
Hartman asks Dr. D’Ambrosio what he sees when it comes to other doctors and if they’re into real estate at all. He adds that it’s a great investment for high-paid professionals, as they tend to have giant tax problems. A lot of professionals are not involving themselves in real estate, and they’re missing out on tax breaks.
Dr. D’Ambrosio explains that it’s frustrating to try educating people. His peers devote themselves to educating themselves in medicine but seem to have no real financial IQ. He hears them talk about their stockbrokers, and he feels that he’s on a soapbox telling people to invest in real estate. It’s a no-brainer with the tax advantages, he says. The returns are better than anything else out there.
He clarifies that before investing he was always open to the idea but didn’t know how to go about it. Through his medical partner, he was introduced to the concept of not investing locally, which makes sense because he couldn’t cashflow in New York or New Jersey as the taxes in those two areas are crazy. New Jersey has the highest property taxes in the nation.
He mentions that a lot of physicians are not educated in finances, and he had the interest but didn’t know how to pursue it initially. His partner encouraged him to check out Hartman’s podcast, and he hasn’t stopped since he started listening. He started buying in cities where it made sense, and he adds that if the houses he bought in Florida happened to be in New Jersey or New York, they’d be four times more expensive.
What’s Next After Reaching Traditional Limit?: Portfolio Loans for Investors
Dr. D’Ambrosio asks Hartman where his next best move should be, as he is almost at his limit with traditional mortgages. He has heard that there are portfolio loans for investors with more than ten properties, but wonders if he should stop at ten, or keep exchanging.
Hartman explains that if he is at his ten-property limit and his spouse is able to qualify, another ten properties can be obtained. There are still options for good portfolio loans for investors, he adds. Some community banks will allow portfolio lending and the rates aren’t too bad. He mentions that the ones he looked into were only fixed for seven years in the high 4% range. It’s not great but not bad. By the time seven years passes, an investor can pay the balance off if needed or exchange it.
He states that this probably requires going into a bank in the area you’re buying. It makes sense because these small community banks aren’t dictated by the big government entities. They will perform some good loans with 25% down. It isn’t a 30-year fixed, but it’s reasonable.
When asked if amortization is still thirty years, Hartman clarifies that it is. It will become adjustable in seven years because these banks aren’t selling off to secondary markets. They are either keeping the loan on their books or selling it to another investor, rather than a big market with specific guidelines.
Dr. D’Ambrosio asks if after this step is taken, and the investor wants to refinance into a more traditional loan, would they still be constrained?
Hartman answers that we don’t know what the rule will be in the future. Lending could either become more liberal or more conservative, but with seven years to evaluate, you can get good returns.
In the post-financial crisis world, you could get four traditional loans, and it moved up to ten. It might change again. There is also the risk of interest rates going up. Hartman explains that if they do go up, there is always lag time behind them. If rates spike tomorrow, it will still take a couple of years for rents to adjust and inventory to decline.
Cash Out Refinance?
Dr. D’Ambrosio asks if it’s sensible to cash out a refinance if you can get a significant amount of money out of it.
Hartman explains that it depends on the rate you have compared to the rates with a new loan. You might get a better rate, and if so, definitely do it. He also states that it isn’t really about the cashflow. It’s about the rent-to-value ratio. For example, if you could control $100 million in real estate tomorrow and rent it for 1% a month, but it was fully-encumbered, would you want to do it?
Hartman answers yes because the investor would have other things that would create wealth with that portfolio. You need a good rent-to-value ratio, and in the pre-recession days, people would say that Hartman was imprudent for recommending the deferred down payment. The reason for this is that the market was appreciating quickly, and rents were taking a while to keep up.
One could buy properties with no money down, but if you put 25% down, the property could yield $300 a month in positive cashflow. If you put nothing down (at that time, you could have zero cashflow. The RTV ratio is what has to make sense, as the time horizon on it is basically about nine years. If you can get $300 with 25% down, or $0 per month if you kept the money in the bank and drew on it, there would be a nine-year period in which to break even.
Hartman states that he would rather have his 25% in the bank than the $300 cashflow a month. He would rather have more leverage and more money under his control for the ability to buy and control even more real estate.
He advises listeners to lean in favor of equity stripping and having control. Acquire an asset and then get all of it back out and own or control the asset. There is no tax on the borrowed money as well. It’s a great asset class.
In closing with Dr. D’Ambrosio’s plans for the future, he explains that he is thinking about investing in that third market. He is probably going to wait and start up again next year because he did a lot of investing this year. Because the interest rates are going up, he knows that he can’t wait too long.