The Legacy Wealth Code Podcast

Building Lasting Wealth: A Simple Investing Strategy That Yields Huge Upside

• Michael Notbohm & Andrew Hoek • Episode 21

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Ever dreamt of building lasting wealth, but don't have heaps of cash to invest? The truth is, you don't need a fortune to start investing in real estate. In today's discussion, we, your hosts, Michael Notbohm and Andrew Hoek, decisively shatter this common myth and guide you on the path to financial freedom. We unfold the journey of a savvy investor who, with a small down payment in 2018, reaped incredible equity and tax savings by 2023. We're pulling back the curtain on strategic real estate leverage and smart tax planning to help you craft a thriving investment portfolio.

Prepare to be intrigued as we dissect a wealth-building strategy that revolves around real estate investment, showing how a modest duplex bought in 2018 for $250,000 could yield a staggering $692,000 profit by 2024. We'll illuminate the way to reinvest these profits and expand your financial horizons while securing tax benefits. Discover the art of resisting lifestyle creep, staying disciplined, and focusing on asset accumulation. We explore how to balance your tax savings for both future investment and present enjoyment. So, if you're pondering real estate as an investment vehicle, this episode is designed to guide you in making calculated moves towards a solid financial future.

Onward!

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Speaker 1:

This is the Legacy Wealth Code podcast helping you build long-term wealth and a lasting legacy through real estate investing, tax strategies and motivational stories from some of the most successful and influential people out there. Here are your hosts real estate investor and entrepreneur Michael no b, and real estate investor and attorney, andrew Hoek.

Michael Notbohm:

Hey guys, welcome back to another episode of the legacy wealth code podcast. My name is Michael, not bomb, here with my partner in crime, Andrew Hoek.

Andrew Hoek:

What's going on, guys?

Michael Notbohm:

So we are gonna talk about wealth today. I know that's a surprise, given it's the legacy wealth code podcast something new and different.

Michael Notbohm:

Yeah, right, so, but I think I make a post every year and the post is something you know I send out on my normal Facebook and then on any of the business related stuff, and it's just basically, like you know, we get to December, what are you gonna do this year or next year? As you start to game plan, like you know, for me you know a lot of times it was, you know do you need to up, size or downsize your house, blah, blah, blah, and then you start moving into the investment space, and that's really obviously my focus now and it's like what are your investment plans for for 2024? I do this every year. I've done it since 2018, and so this year I did a little different, as you know.

Michael Notbohm:

Yeah and just kind of went back to the first year I did it, which was 2018, and Just put into like real terms what it would look like if they listen to me the first time.

Andrew Hoek:

That's interesting is total segue. That's interesting. You said that, though, because I was thinking back, as you mentioned that that Back when I used to sell real estate, you know, in the early 2010s timeline, I used to send a letter every end of the year out, but it was snail mail and, you know, just shows you how quickly, like, the world has changed, where, like we fast forward a decade, and it's like who would even think to put something in snail mail now? Just blast it out to social media and you've already automatically contacted probably 10x what you would have in snail mail. But anyways, total, total secondary thought. But so I'm interested in this because, you know, I think there's a there's this, this misconception out there as to, like you know, especially for people who are just getting started, and I remember when I was young, it was like man, if I don't have a couple hundred thousand dollars in cash laying around, how am I we're gonna buy a property to invest in?

Andrew Hoek:

You know and that's such a wrong way to approach it, because you can get into a lot of these properties with a small amount down and that is what really kind of starts to help Accelerate, especially when you're talking about a market's like in Tampa Bay, where we've had great appreciation. It accelerates your ability to buy more and start building your, your wealth and your portfolio. But tell us a little bit about what you found when you went back to 2018 to say you know, if you'd bought one property in 2018, what's that looking like now as we, as we fast forward five, five, six years from?

Michael Notbohm:

yeah, so you think I mean I make the post as a pretty broad statement, right? So I'm not saying in 2018 if you buy a duplex, but I wanted to do this in terms of, like, you know, anyone can do this, you don't have to be the. The biggest misconception I would say in real estate investing is people think you have to have all of this money set aside In order to be a real estate investor, and it's really not true. So the example I gave is if you bought a duplex in 2018 for 250,000, you can live in half of it and use an FHA loan, right? So you're only paying 8,750 down and you rent the other side out. Looking at rent averages back then it was about 1250 for that, right. So you know you look at that annualized. It basically ends up being where the person living in that half of the duplex is paying 540 a month for To live right because somebody else was paying the mortgage, which is what I think a lot of people.

Michael Notbohm:

The initial thought with real estate investing is like well, let somebody else pay off my mortgage, which is totally correct.

Michael Notbohm:

Sure but the big part of this that we talk about a lot on here is the tax stuff. So you could actually cost segregate half of that, the half that you don't live in. So in this you know, once you subtract out land I just did a rough estimate it would put about thirty eight thousand dollars in year, one tax deductions Equating to eleven thousand four hundred in their pocket, and then the next year, as you move into 2019, you're gonna see my post again. But now you've bought the one property that, based on the the increase in Tampa, would have 37,000 roughly in Equity mm-hmm so now you take that equity and the 12 grand that you just saved and you buy another property, right?

Michael Notbohm:

And so you rinse and repeat this process 2018, 2019, so on and so forth, right? So I mean, this is crazy to me. So when you do the cost seg, the tax savings, the actual dollars in your pocket $138,228.

Andrew Hoek:

This is, if you fast forward to now 2023,. Yeah, okay.

Michael Notbohm:

So you started with $8750 as a down payment.

Andrew Hoek:

Yeah.

Michael Notbohm:

And now, after the six years, you've got six properties that you own, that you have approximately $692,000 of equity and that's just based on what the normal trend has been in the Tampa Bay market for real estate and I think for the most part it follows suit, I think pretty much across the country, within a few percentage points, but I mean, whether it's $600,000 or maybe it's $800,000 in other markets, it's a lot of money. It's $700,000 in equity and $138,000 in tax savings and roughly $3,500 a month in positive cash flow after you pay your mortgages, taxes and insurance. And this is an example that I can't imagine. I mean, obviously you have to have a job, you have to be doing something, but this is something that anyone could do. You start with $8750.

Andrew Hoek:

I mean, that's a pretty powerful visual and you think about what if you had not bought that property and you would have taken that $8700, and what would you have done with that? Probably that would have been squandered on some form of either entertainment or something that you bought. That maybe it's a depreciating asset as opposed to an appreciating asset.

Michael Notbohm:

Well, and you make a good point. So this Thanksgiving weekend, family and one of the things I wanted to talk about today is just what does wealth really mean? Because there's a lot of people that have money in the bank. Maybe they've got a great income, but they blow it all. Not that I could point any fingers no one I can think of in the Tampa Bay area that makes a lot of money and doesn't have any at the end of the day but it's one of those things where it's Wealth to me is the accumulation of assets that are creating positive cash flow for yourself, that are creating tax strategy events, that you can maximize the growth of your wealth and then ultimately having an asset that appreciates.

Andrew Hoek:

Well, I'm curious and I think this is a good segue into that but from your model there if you're doing that, at least in 2019, you said you buy a second property that is a total rental. At that point, it's not something you're residing in. Where, in that scenario, is the buyer residing in year 2024? Is it in theory? I?

Michael Notbohm:

mean. So in theory, you could still be in the other half of the duplex and maybe you don't have 700,000 in equity because you took 100,000 of it out and you bought your own primary residence. But I'm looking at, I factored in the increase in average median house property value, except, etc. So in 2023, you're buying a 350,000-hour property, not a 250,000-hour property there's still plenty of those out there and factoring in interest rates. All of that Because what you said people that have a lot of money that's been parked on the sideline. Now you're starting to see some high-yield savings accounts and things like that. But I mean, during the years when interest rates were in the threes, you were getting nothing out of your parked money?

Andrew Hoek:

No, exactly, but so in theory you could still be in that duplex or you could have taken some money off the table and bought something else, or you're living in one of the other properties that you've acquired in that scenario. But what I think is interesting about that and the reason I was asking is I go back to a number of the people we've had Ryan Butler on the podcast talking about kind of a similar structure of how you go from one property to 10 properties, dave DiNofrio talking about how he built his real estate empire. But if you harken back to what those guys talk about and as a pertain to wealth, a big piece of that is the discipline factor. The easy thing here is to say, okay, I got $36,000 in appreciation in year one, so I'm going to sell it and up-size myself. And then I got it down this one, so I'm going to up-size it again.

Andrew Hoek:

And next thing, you know you've gone from a duplex into a million-plus-dollar property in five or six years, but you haven't done anything else to keep any other properties. What I think is so important about the wealth-building piece of this is the discipline to not do that and to fight the temptation of the lifestyle creep every time you start to get a win. And that's where I think the difference between being rich and being wealthy comes into play, because the people that are wealthy are going to look at that and say I may not have the million, $2 million house as a result of this, but I have a portfolio worth that, that's spinning off income and generating income and it's actually an asset, not something that I'm living in that's costing me money that I have to then figure out how to pay for every month.

Michael Notbohm:

Yeah, that, and I mean obviously the tax stuff that we talk about all the time I mean out of that in this example, 138,228 of this would have just normally been sent to the IRS. You know, and I think that that's the part that is so important to not overlook is what did that enable? In this example, what did that enable you to do? Well, in 2018, you used $8750 of your money to buy a duplex. 2019, you used most of the appreciation doing some type of cash out refi, but you also had $12,000 that you know. So, say, in 2019, you did a traditional conventional loan. You would have needed that 12,000 to fill the gap of like a 20% down conventional product, right? So, really, this tax savings was what you know propelled them forward to be able to do this in ongoing years, which is what we teach all the time. It's that you know. What would you rather do? Would you rather do something that government will incentivize you to do? Real estate?

Andrew Hoek:

Yeah.

Michael Notbohm:

Or would you just rather write a check and let them do whatever they want to with it? And obviously, most common sense answers would be well, I'd rather own real estate because one, it's going to go up in value. Two, it's going to create this tax event. Three, hopefully creates positive cash flow.

Andrew Hoek:

Well, and I think that's an important point too, that what you just said. I mean, one of the things we always talk about is, you know, don't sleep on the tax side of this stuff, because it really is a huge benefit, and you know, to what I was just saying. Like, there's probably a route that you could take where you could say I'm going to hoard every penny and I'm going to live, you know, well below my means and not ever have any fun, and there's a lot of problems with that too, right? I mean, we've talked about that in the sense of, like, you got to do things that you enjoy, you got to still have fun and you still have to take advantage of things while being reasonable about it.

Andrew Hoek:

But to me, the tax piece of that is almost the ticket to find the middle ground, right? Like, if I'm going to hoard every single penny I have and never have any fun and do everything, yeah, I could build that, but I'm going to pay all that money to the IRS at the same time, whereas if I am taking advantage of both sides of it, you know, okay, let's go splurge a little bit, you know, maybe I take a nice vacation with my family or I, you know, whatever you want to do with it, you know, but at least there's that additional amount of funds there, too, to help you. You know, you don't have to be so crazy about it. You can still build the wealth and the portfolio while you know living your own life and making sure that you're enjoying things as you go.

Michael Notbohm:

Yeah, going back to what I said over the holidays, you know chatting with family and everyone has different perspectives on the way that they live their lives and etc.

Michael Notbohm:

But you know, the couple of family members are very frugal people and but they still enjoy life.

Michael Notbohm:

I mean, they do the things that they want to do, but they're just very frugal.

Michael Notbohm:

And we were having a conversation and there was one of these high yield savings account options that was out there and you know, their question was like well, if I put my money in it and I need it for something, can I get it out?

Michael Notbohm:

Which, of course, you know the answer is yes, but so, you know, and it was like four and a half percent, I think, is what it what it boiled down to, and I'm I'm thinking this was like a huge risk for them in their mind, because the way that they had done it in the past is just leave it in a savings account that they have. That's like next to nothing, and they've, you know, because of their lifestyle, they've saved a ton of money, but the money is not ever doing anything for them. And those people, you know, they're very like, you know to your point, very disciplined with the way that they operate their lives, and I'm always like, if you only had just like a little bit of risk factor, you know, with the discipline you have with money, and I think part of it's just education, right?

Michael Notbohm:

I mean so many people were never really brought up learning about investments. You know, schools certainly we touch on this a lot. Schools certainly doesn't teach financial literacy to to at a very high level, which I think you know. There's a million reasons for that. A lot of it boils down to they don't you know the government really would rather people rely on them for certain things Well and that's why, I think, you know, an exercise like this is so powerful, right?

Andrew Hoek:

Because it's it's one thing to talk about it and say, you know, hey, you can do these things, but to try to conceptualize it and put it into real terms, I mean, that's when it becomes real to people and they're like whoa, I could actually do that. You know, because I think human nature is kind of like there's a possibility to do something, but but the I think the immediate thought is well, those people are doing that because of some other circumstances that enabled them to do it. Well, in reality, it's not necessarily some different circumstances that enable them to do it. They did, they went and did it. You know, yeah, and I think until you put it in real terms, a lot of people can't see that.

Michael Notbohm:

Well, and I you know, going back to your snail mail comment, you know when you first become a real estate agent, right? So when all I was doing is sell it, you know helping people buy and sell homes had no investments, I would post everything I was doing, you know pending under contract.

Michael Notbohm:

You know it didn't matter if it was a trailer park or the Taj Mahal, I mean, I was. You know you would know when it went pending, you would know when it closed, and I think that's kind of the nature of a lot of real estate agents. And so sometimes I've almost feel like because I don't really post that much anymore Like if I help a friend out by a house, it's typically like a pretty nice house at this point. So it's like, you know, I help Brian buy this beautiful waterfront home. That's awesome. But I don't want the message to get mixed to where, like, the average person can't see that I can invest in real estate as well. And I think you know the powerful piece to this part is that you could start being an investor using a primary residence.

Michael Notbohm:

FHA government-backed loan, so you only have to have 3.5% down. That to me is you know, I think anyone can conceptualize that that could be me. I could do that, and that's really what my whole point of the post was, because usually it's one of your 2024 goals. A few people will reach out. Oh, you know, I love what you've been posting, blah, blah, blah. We have some conversations most fizzle out just like everything. A few do some things and there's not any of them that ever regret doing them. You know.

Michael Notbohm:

I think you and I talk about this a lot. Our biggest regrets were the ones that we thought was like an instant home run, so we cashed in real quick and now we're like. I mean, I met like that one on on Sly. That was a three bedroom, two and a half bath condo on the lake, beautiful view, 1900 square feet that we paid 100 and like 99,000.

Andrew Hoek:

Yeah, yeah, I think 106,000 or something.

Speaker 1:

And that was about 2008.

Michael Notbohm:

I mean this literally, you know. Aside from that, we have taken action, you know, with regard to investing. But I think the part that is cool to me is that it's not this huge elaborate plan. It's buy one property a year. The natural appreciation that's happened in real estate and, yes, that will probably simmer down some in, at least in the next couple years, but it shouldn't deter you from buying because, as long as you're still having something cash flowing.

Michael Notbohm:

You know, I don't want everyone to say well, you know, I remember 2023,. Mike, I listened to your podcast and I bought six properties and now I only have 400,000 in equity and you know, and you said 692. And we've been on a really good run, but I don't think that it's. I don't think we're at the end of it.

Andrew Hoek:

And I don't think you can be. Even if you didn't hit those numbers and you appreciate, at a level, a fraction of that, it's still better than what you're going to do in most other things you know. So what you said before about is anybody can do this. One of the things we always talk about is that it may not be easy, but it's simple if you keep it simple, and I think that's such an important message to always go back to, because it's very easy to over complicate what you think you're doing. But if you stick to your fundamentals and you stick to the tried and true, it's there to be taken.

Michael Notbohm:

No, I can't agree with you more on that, and I think part of it too is, like you know, as we discuss a lot of times, what does the legacy mean to each person? If you start thinking about this as like a five or six years from now, you have a portfolio of products, portfolio of properties. You have a large amount of equity, not only for your current wealth, but what does that do for your legacy?

Michael Notbohm:

Like, what are those, what are those the things that mean the most to you? And I think when you start, really you know the dream board or you know whatever you want to do. There's power to that. I mean I think about how powerful the mind is. A lot. You know, the things that I've wanted the most, that I've thought about, that I've, you know, dreamed about manifest that a lot of them, you know, have either come true or are well on their way.

Andrew Hoek:

I think there's a lot to that. You know the manifestation of things, so. But what I love about this and where you're going with it is like I think back to when we had Chris McLaughlin on the show and he's talking about how he has either entrusted or gifted I can't remember how he did it exactly a couple of rental properties for his children, with the plan being that you know they hit 18 and these are yours and you can either, you know, refi them, sell them, do whatever you want with them If you want to go to college and pay for your college with it, or if you don't want to go to college and you want to become a landlord, these are yours to start peeling off income from. I mean, talk about opening an incredible gateway for your children. And you know we were hanging out with a friend over the weekend and she recently got her CFP designation and, you know, wonderful achievement for her, nothing against that.

Andrew Hoek:

But like one of the first things she's talking about is, you know, wanting to network with people who are interested in like 529 programs for their kids and you know I have a 529 program for my children but like that's nothing compared to being able to say I've bought a rental property that's going to cash flow me now as it appreciates, and at some point I'll turn it over to my children. That is a way more powerful tool than thinking about a 529 or Florida prepaid or one of those, just from a you know thinking about college preparation strategy, and so again, it's kind of reshaping how you're thinking and getting creative about it. But, like I mean, I think that's an awesome substitute for something that's like a more traditional, you know plan.

Michael Notbohm:

Yeah, so think about this. I mean, so your kids are five years old, right?

Andrew Hoek:

Seven and two.

Michael Notbohm:

Okay, so cost average three and a half yeah. So you've got to roughly 15 years till you got to start thinking about college.

Speaker 1:

Sure.

Michael Notbohm:

So if you bought a property today, for each of them you did a 15 year loan by the time that they're graduating high school. It's free and clear, it's cash flowing. You turn it over to them Now, to your point. You don't even have to sell it in Pay for College, you can do a cash out refi, since it's paid off, pay for college with that and still have the property. That's cash flowing.

Michael Notbohm:

I mean, when you start, really, the thing that I'm always amazed with real estate is how many different angles that there are. You know even Brett, one of our mentors. I was always blown away with him because it's like my head would explode sometimes just by thinking about all the different. It's like an onion, it's like, okay, well, that's. It's not just that level, it's then this level and this level and this level. Before you know it, you're like this one thing, this one asset, is literally giving me benefit from, you know, a wealth standpoint, from a tax standpoint, from a cash flow standpoint. You know it's like all just from one property. And then you start thinking about all the different types of properties that there are. It's like there are so many different angles.

Andrew Hoek:

I think about that a lot. You know, when we talk with Romano, who's been on the show with us too, but I remember talking to him one time and he was, he was evaluating some property he was looking at and they were coaching with Mani at the time and his comment was Mani was like you have to figure out how to extrapolate everything out of these properties and, like you know, we look at something and you might say, okay, well, I can, I can rent it for X number and we do our underwriting and move on. Well, you haven't really thought about the other three to four things that you could do with that property, the other ways that you could use it in addition to just the rental activity on it. So I mean really really thinking about how can you get creative and how can you maximize each of these things. I mean, you're right, there's just, it's almost an endless opportunity as to what you can find when you are willing to get or able to get creative with some of this stuff.

Michael Notbohm:

Yeah, and I think to kind of summarize, everything is that it doesn't have to be super complex like that.

Michael Notbohm:

You know, it just needs to be. You can't listen to the, just listen to the show and say all that that was a great show and then never do anything with it. Which is kind of the whole purpose of my post I made is it's like, you know, I don't want. I love having the conversations with people. I'll talk to people as much as you want to talk to me about real estate, because I'm not passionate about it, but it's like I also want to see that what I'm telling you, I want you to see how fruitful it can be for your own legacy and for your own wealth building journey, because there's nothing like it in the world. There's no other asset that has so many benefits and so little. I mean risk really. I mean even you buy something bad, you know, as long as it's cash flowing and you can, you know weather, the storm, you'll probably still be all right.

Speaker 1:

Sure.

Michael Notbohm:

And I think, but if you, you know, using sound fundamentals and foundation, et cetera, but it's just, it really boils down to you just have to do something, even if it's a duplex that you live in half of it, to start.

Speaker 1:

Right.

Michael Notbohm:

So I think going into 2024, hopefully that's the message that was received on my Facebook and hopefully to the listeners of the show.

Andrew Hoek:

Just do it.

Michael Notbohm:

Just do it. We didn't take that from anyone, just for disclaimer.

Andrew Hoek:

I'd like no cease and desist letters. We don't own it. Yeah, we don't own it.

Michael Notbohm:

Credit Nike All right, guys well until next time, this has been the Legacy Wealth Code Onward.

Speaker 1:

Thank you for joining us for another episode of the Legacy Wealth Code podcast. If you enjoyed this episode, click subscribe now and never miss an episode Until next time Onward.