Real Estate is a broad word. Most people look at all the different ways to invest in real estate and are scared away from investing because there are too many options. What are the best types of real estate to own? Where are the best locations? Should I buy something myself and learn by experience? What are the risks in partnering on deals? These questions need to be answered before anyone can grow confident enough to make a serious investment in real estate. This episode attempts to answer these very questions and more. Listen to the full episode to learn from Aaron’s mistakes and how it invests wisely in real estate.
00:00 How To Use Real Estate To Build Wealth
02:02 How not to buy real estate
05:26 Best way to build true wealth in real estate
09:07 Final way to build wealth with real estate
Aaron Fragnito: By just owning the real estate, leveraging with a mortgage, working with our investor group to buy and renovate the property, using our in-house management company to make sure that project goes according to plan and the reposition goes according to plan, that’s, in my opinion, the most tried and true way to own real estate and operate real estate. I think that owning apartment buildings, especially by mismanaged apartment buildings and turning them into a well-managed apartment building which is what we specialize in, is in my opinion, the best way and the easiest way to build true wealth in real estate.
Hello, ladies and gentlemen. It’s Aaron Fragnito, your host of the Passive Cash Flow Podcast. I’m back with another episode. Thanks for joining us. We’re going to talk about how to use real estate to build wealth today. We’re going to really break into it, we’re going to talk about the hardest way to use real estate to build wealth. We’re going to talk about the easiest way to use real estate to build wealth.
I’ll tell you some fun stories there. I learned from my mistakes and how to use your IRA or solo 401(k) to build real estate wealth. I’ll touch on the checkbook IRA as well, although that’s really a whole other presentation in itself, and then we’ll compare the cash-out refinance versus the fix and flip, and my opinion on that. Real estate is a huge, huge asset class, and there’s many, many people out there that are going to sell you overpriced books and CDs about how to do it the best way.
Now, here at Peoples Capital Group, we don’t sell books and CDs. We just help people passively invest in real estate. If you want to learn how to get qualified to do that, go to peoplescapitalgroup.com and fill out a qualification form, and get connected with us. Schedule a discovery call and find out if you’re qualified to invest passively in real estate with us, but that’s one way to invest.
In my opinion, the right way to invest is passively with the right operators and we’re going to break into that a little bit more as well. I want to first touch on how to not buy real estate. How to not use real estate to build wealth, the wrong way to do it because sometimes we don’t know the right way to do something until we go through the wrong ways to do it. I personally needed to do it the wrong way a few times to figure out how to do it the right way.
There’s many ways to make profits and returns in real estate. It’s a huge asset class. We have location. We have real estate type. We have the way you lease the real estate. You can make profits in apartment buildings, warehouses, office space, land. There’s lots of ways, things to invest in real estate, but I do think the best types of real estate to invest in are the types of real estate that people need through thick and thin that they always are going to need and that’s, in my opinion, apartment buildings. People always need a roof over their head, it’s a commodity. Also, people tend to rent during recession instead of own, so rent tends to stay strong through recession, especially in high-demand markets.
Now, warehouses can be good as there is a lack of warehouse space with all the online shipping that can be a strong investment in the right locations, but I do find that it’s not as tried and true as apartment buildings. How to use real estate to build wealth. First of all, I would say start with the most desirable, highest demand, most recession resilient type of real estate. In my opinion, that’s apartment buildings and apartment buildings have had a very good run and shown that they are one of the best types of real estate to invest in over the last decade and continue to be.
Office space is quite soft with a pandemic going on and work from home and other types of real estate as well are not as desirable and consistently desirable as apartment buildings. You also have different types of way to own real estate. You can lease to own, you can put a property under contract and a purchase price in the contract, a lease to own, you can pay and then purchase it down the road. We’ve done that. It’s a little confusing, but that can be a way to own real estate. I don’t think that’s necessarily the right way to own real estate, it’s kind of complicated. You can do the fix and flip and this is all glorified on HGTV and DYI TV, it’s easy. Be a hero, buy the fixer-upper down the street, fix it up and sell for a huge profit.
What could go wrong? Well, the hardest dollar I’ve ever made in real estate was through fix and flips. Seth Martinez, my business partner and I have fixed and flipped over 50 houses and we’ve wholesale over a hundred properties, we’ve bought and sold dozens of apartment buildings and we’ve recognized that really when you sell your real estate, you, yes, can make a nice per profit. The great thing about real estate is if it’s not cash flowing all that well, or it’s not really exactly what you thought it was in the investment, you can generally sell it for a nice profit and move on. That is a good option sometimes if you’re investing in a property that’s not really performing as planned or there’s an issue with it.
For the most part, Seth and I look at real estate as a long-term investment strategy with our investors, and our investors often share the same mindset. Our real estate as it’s well managed over time and repositioned over time, once we really get it up and running properly, it’s a strong asset. It produces cash flow quarterly. It produces tax depreciation at the end of the year. It’s growing in value. It’s a hedge against inflation, which is through the roof right now.
By owning real estate long term and not doing the fix and flip or getting out to the property quickly or doing wacky lease structures, by just owning the real estate and leveraging it with a mortgage, working with our investor group to buy and renovate the property, using our in-house management company to make sure that project according to plan and the reposition goes according to plan, that’s, in my opinion, the most tried and true way to own real estate and operate real estate.
I think that owning apartment buildings, especially by mismanaged apartment buildings and turning them into a well-managed apartment building, which is what we specialize in, is in my opinion, the best way and the easiest way to build true wealth in real estate. Let’s get into the nitty-gritty of this. It’s not easy to find a mismanaged department building for a discounted price, buy it, renovate it, work with the tenants, do cash for keys with some tenants, renegotiate leases of other tenants, navigate the red tape, navigate rent control and permits and bureaucrats. It’s a lot. You can’t just expect to do it on the side, or maybe you’ll do it on Saturdays, or after baseball practice. It’s not something like that.
It’s a full-time job that Seth and I work full-time and we have a full-time staff behind us as well because we couldn’t manage our $17 million portfolio ourselves. Obviously, we have talented staff behind us that have more patience than I. I’ll tell you that much. Really that’s the trick of the trade. You want to have good people under you, a good operators you’re working with to buy these mismanaged buildings and turn them into producing cash flow machines.
There is a lot of work behind the scenes, but if you work with the right group that know what they’re doing, that in my opinion is the fastest and the easiest way to build wealth in real estate is to buy a mismanaged department building and make it a more profitable building and then refinance over time and cash flow on the real estate. That’s what we focus on here at Peoples Capital Group, and that’s what we do with our passive investors.
The other thing about this is when you refinance real estate it’s tax-advantaged. When you sell real estate, not only do you lose your cash flow machine, you lose your tax depreciation machine. You also now have lost your wealth-creating machine and your hedge against inflation. By not selling the property, by refinancing and taking that money off the table and harvesting that debt, harvesting that equity growth by using debt, that’s a tool that allows us to take some cash off the table, put that in our pocket, put that in our investor’s pockets, but we’re not going to pay tax on that. We’re not exiting the investment. We’re not selling the property. It’s not cash flow. It’s debt.
Now, it’s good debt that our tenants are going to pay down for years to come. It’s a debt that’s going to be at a low-interest rate that Seth and I may personally guarantee so our investors don’t have to make sure we get great terms on that. A lot of our investors will use their IRA or solo 401(k) to self-direct in real estate and that gives you even more tax advantages as well. You can use your real estate, your IRA, or solo 401(k) to invest in real estate.
I think that’s the right way to do it as well because quite frankly, that’s a great hedge against inflation. It’s a great way to diversify out of the stock market, not your entire IRA, your entire solo 401(k), but at least part of it, maybe 30% to 50% into well-managed high-demand real estate, professionally real estate. Real estate syndicates is what we are Peoples Capital Group here. You want to look at those opportunities, decide what’s the best opportunity for your IRA or solo 401(k), but take a look at utilizing your IRA or solo 401(k). Working with an IRA custodian to self-direct your IRA into real estate that’s another great way to use real estate to build wealth.
Of course, the final way to create a good real estate to build wealth, how to use real estate to build wealth is to understand that time and money are so closely correlated that if you just hold on to an asset that follows inflation and grows at or greater than the rate of inflation, then you are in the right place. Especially right now, inflation’s skyrocketing. That’s why our real estate wealth is skyrocketing as well. That’s why rents are going up.
Inflation can be a good thing, but too much inflation is a bad thing. We may see that in the near future, even though our trustworthy politicians ensures that it won’t be, but a lot of people are saying right now that inflation is here to stay at least for a little while. Owning real estate means you go up with that inflation, you hedge against inflation, you work with inflation.
As inflation makes our bread and our eggs, and our gasoline more expensive, what also makes our homes more expensive, our real estate more expensive, our rent more expensive? That’s good for me and it’s good for our property values. It’s good to allow our wealth to grow as inflation grows, and keep up with, if not beat inflation. If you’re invested in an asset class, that a third or more of your investment is not correlated with inflation, well, you’re in a tough boat right now, because inflation is eating up a lot of your gains.
I’ve read that inflation took place around 4% to 5% last year. That means if you were invested in an asset class that didn’t correlate with inflation, and didn’t grow by that minimum 5% amount, and didn’t have the return, the ROI of 5%, then you actually lost 5% on your investment, right? If your money is just sitting there earning 0.2% in a savings account, you’re losing money at a very accelerated rate right now. In fact, you’re losing money at twice the rate you were just a few years ago because inflation is growing so quickly.
The best way to use real estate to build wealth is just not to sell it, hold on to it, have it managed professionally, or work with a real estate syndicate that is managing it professionally. Make sure the building is cash flowing and the tenants are paying down the mortgage over time, you’re taking advantage of all the tax depreciation, and it’s a well-managed asset in a high-demand market. Well, quite simply, hold on to it and it’ll be worth more over time, it’ll produce tax benefits and cash flow for the foreseeable future, and that will allow you to build your wealth for you and your family, and one day, perhaps sell the building or 1031 tax differences trade into a bigger building, or heck, just hold on to it, let your tenants pay off the mortgage.
Hand it down to your kids. That’s called legacy wealth. That’s the most amazing thing about real estate. That’s pretty much my plan here at Peoples Capital Group is to always be invested in real estate and use it as a long-term legacy wealth strategy to one day hand down to my baby who was just born about two months ago, so we’ve got a little time here. That’s the plan here with me.
I use real estate to build wealth by using these strategies, and I’ve used these strategies over the last 10 years with my business partner Seth Martinez at Peoples Capital Group. We really focus on helping people invest in real estate, we focus on finding off-market opportunities, helping people work against inflation, hedge against inflation, by investing in high-demand real estate that’s professionally managed with our management company in North Jersey. We focus specifically on North Jersey.
You can go to peoplescapitalgroup.com and check out other podcast episodes that talk about why we focus on investing in North Jersey, why we use this type of real estate strategy to create wealth for our investors. You can also check out other webinars we have there as well. Everybody, that’s about it for the episode here. I hope you learned something. I hope we can help you invest or improve your investment portfolio. I want to ask you one last question before we go here, is your investment portfolio where it needs to be? I ask myself that as well often.
If it’s not, then contact us at Peoples Capital Group we might be able to help you. If you’re a qualified investor, you can go to our website and get qualified, and we might be able to help you get your real estate or your investment portfolio just in general where it needs to be, help improve that portfolio and make real estate a reasonable part of that portfolio. Thanks for watching. I’m Aaron Fragnito, and this is the Passive Cash Flow Podcast. We’ll see you next time.