Real Estate as a Wealth-Building Tool for a Business Owner

Leo and Claudine talk real estate and highlight the opportunities and pitfalls of the industry. Real estate is an important factor to a well diversified portfolio, but you have to go about it with caution and wisdom.
Prefer to read? (Transcript)

Speaker 0 00:16 Good morning everyone. Today is Saturday, February 9th, and welcome to legal and business talk with Leah and Claudine. You’re listening to power talk 1360 K F I V we excited to be back with you. Um, I hope you tuned in to our very first show. Um, and that today we’re gonna just start developing another topic. We’re excited to have you back and discuss an important business and legal issues and, uh, and that affects business owners daily. And I wanna say, uh, a great, uh, good morning to my great cohost, um, Claudine from Sharon law firm. Good morning. Good morning. How are you? It’s been a heck of a week. It’s been a heck of a week. And here we are. And I am your host Leo land, the Verda agreement advisors. Uh, yes, it’s been quite a week. I mean, it’s Saturday. I’m excited to be here. Uh, but I’m just glad it’s the weekend, right?
Speaker 0 01:13 Absolutely, absolutely. There’s so much going on in the business world here locally that it’s, um, it’s sometimes it’s a little bit mind boggling. You know, what funny thing is, speaking of that, as we’re going to be talking about that today, we’re going to be talking about real estate as a wealth building tool for a business owner. And, um, I don’t know if you knew this, but more millionaires actually that are more millionaires they haven’t made throughout the decades and in history, uh, more millionaires in real estate than in any other type of wealth building accumulation. Isn’t that crazy? It’s crazy, but it makes sense. It makes sense. We’re really not making any more real estate, right? And back in the feudalistic feudal days and, um, um, you know, I mean, let’s not go too far. You know, the house of Lords in England is for those who had the land, they were the Lords of the land, right?
Speaker 0 02:14 Right. Versus the house of commons. They wanted, it didn’t have the land. So real estate has always been, uh, it’s been a big thing. So, um, and it’s really been, uh, played a role in creating 90% of the world’s millionaire. And we’re going to get into this a little later, but we’re going to develop that topic today. And what does it mean to you as a business owner to diversify? Um, I, you know, I’ve, I’ve, I’ve shared this before that I’m a, I love to read, I love to get inspired and I love to talk about authors and Robert Kiyosaki and rich, that poor dad, that book that came out in 1997 changed my life. It’s classic. It’s a classic, right? Talk about the four quadrants. And um, so it is, it is a, an important vehicle to a well diversified portfolio, but you gotta careful.
Speaker 0 02:59 Absolutely. So there’s a business side of things in there is the legal side, and we’re going to really dive in today, uh, through our show about the great opportunity, but the great pitfall, you know, and the pitfalls that there are if you don’t do it right. That’s correct. So, um, let’s talk about, you know, Claudia, and I know that a lot of people are just, they’re just, they have a lot of questions about, well, yeah, I, I, I like real estate but I just don’t know enough and I don’t want to get sued. Correct. So you want to talk about a little bit about that?
Speaker 2 03:32 Absolutely. Absolutely. So when you’re owning real estate, and that’s just a homeowner, you’re owning, you know, simply owning your house, or are you trying to accumulate wealth through real estate? And that’s really where the liability changes and you start to look at different aspects. Um, if you are looking to buy real estate and to say, for example, accumulate 10 rental homes, um, you shift yourself into a completely different world by being a landlord and then amassing that much property. So when we look at it, uh, from a client’s perspective, we start to look at segregating the real estate. Um, so for example, we might utilize LLCs to ho hold real estate and own real estate so that we segregate the liability. So, for example, if you have a rental house and you have a tenant in there and something happens and a lawsuit arises, um, all of the property that you own then becomes exposed to um, that lawsuit.
Speaker 2 04:32 Whereas if you segregate it and you utilize vehicles such as LLCs to hold your real estate, then you can segregate your liability. And that’s um, segregating liability is something that we work on with business owners, um, in all areas, not just real estate. Um, is really if you own multiple businesses or multiple properties, we really want to look at that as well. When the economy chefs shifts, then we start to look at different aspects of real estate and we start to employ different strategies. So for example, you know, 10 years ago when the market was really low and we were seeing a lot of foreclosures, that was a different market than when we are approaching where we are. We are going to see more tax deed sales where properties are being sold at auction, not because the fork the mortgage is being foreclosed on, but because the taxes haven’t been paid.
Speaker 2 05:23 And that’s just a mindset of the homeowners. Um, we even had, I, I, I met an attorney, uh, about 2010 who had kind of focused his practice on, he was an estate planning attorney. And for those people who understand basics of tax space, when you purchase your property, the tax base is set based on the purchase price. So your, your property taxes are based on the value of the property, which is the, the, the price that you purchase it. Or if you do a major improvement and you have building permits pulled, um, or you build a house on it, then then your tax base gets reassessed. So what this attorney was doing was setting up living trusts, transferring the property into a living trust, which created a transfer of title, and then he would appeal to the tax collector to have the tax base reassessed based on the transfer of title. Well, when we had lost all of the values and property people were obviously struggling, um, large landowners, meaning people who owned large farming operations and whatnot, benefited tremendously from being able to reevaluate their tax base lower because of all of the, the, um, you know, the value had fallen out of it and it was, it was a method of triggering that reassessment. So, um, you know, there’s just different strategies that we employ based on, you know, the economy. Wow. That was a lot.
Speaker 0 06:51 That was a lot. And um, but very helpful. And you know, we are going to be diving deeper into throughout show, uh, later in the show today. But I think we’re onto a great opportunity. You know, the, the thing about real estate is cyclical, you know, it goes up and down. I think we’re going into an interest in time, uh, particularly in the central Valley. Definitely. If you are in a central Valley, you know, I think one of the things that over time the central Valley has been insulated. You know, you see the bigger markets, like you know, this the sea, the Bay area, and I’m in LA and a lot of what happens in the bigger cities and the top 10, you know, it has a ripple effect in the rest of the country, but so, but the swings are higher, the highs are higher and the lows are lower. And, and cities like LA and, uh, you know, it, I can’t imagine anybody trying to buy a house. You know, you, you get $800,000 for this, you know, dirt. Basically, you have to do a Rick, you know, basically have to, it’s, you have to redo the house. And, uh, the great thing though is that in the central Valley there is great opportunity and I think, uh, I think you would agree with me that this is a great opportunity for anybody, but if you’ve got to do it right,
Speaker 2 08:03 we still see a lot of conversion of land here, whereas they don’t see that in the, in the metropolitan areas. We have farm land, bare land that is still converting into residential land and we will be for some time. Um, but we have such a diversification of types of property, um, everything from large farmlands to smart small farm lands to, you know, um, two acre parcels, little ranchettes and then all the way down to condominiums. So here we still have such a much larger diversification. Um, and I know the market is changing. Um, I think we’re, we’re looking at, um, a really great opportunity to buy.
Speaker 0 08:40 So, Hey look, we’ve got about 30 seconds left until we go into a commercial break. But, uh, stay tuned. I mean, we’re just getting started. We’re going to have some fun. You’re listening to legal and business talk with Leah and Claudine here in power talk 1360 K FIV
Speaker 1 09:18
Speaker 0 09:24 you’re listening to legal and business talk with Leo and Claudine, um, on power talk 1360 K FIV welcome back to this show. We are going to, we’re continuing our conversation in buying versus rental real estate as a business owner. So let’s get into a little more detail. So should business owners consider owning property? So, you know, that’s one of the questions that I hear a lot, uh, in my realm, uh, as a, as a CFO and advisor. And when you start to consider all the ways that, um, you know, the, the top, the biggest two expenses that any business owner has is payroll number one and rent a close second. Um, and I see a lot of businesses that are profitable and, but they’re, you know, paying all this money every month and he’s going nowhere. Right? Right. And, um, and so if, when you start to look at all different ways, I mean, so I found this article that talks about all the top 25 things that you can do as a business owner, you know, and how real estate, but we’re going to talk about some of those things right now. And for instance, you have, you know, I don’t know about you, but don’t you get, don’t you love to getting a letter from the lender saying, well, we’re going to raise your rent. It’s a wonderful letter, right? It’s a wonderful letter. You like the place. And then they say, you know what? Um, you need to, uh, we need more money from you. Right. And that’s typically coming. Does that ever happen to you?
Speaker 2 10:58 Um, typically in the commercial scenarios we’re working with clients to get themselves locked into a good lease, um, and preferably a lease with, uh, options at the end of the term so that we know, we know what we have available. When the, say three year term ends, we know that we either have an option or to extend it or we don’t. And we know what the price is going to be at that point. Um, not too many commercial properties are on month to month, but when you do not have the option already, um, determined, that’s when you get the letter.
Speaker 0 11:31 Mm, right, right, right, right. So remember we started talking about the, you know, one of my favorite books of all time reached that poor dad by Robert Kiyosaki. It really changed my paradigm. It was a game changer for me. And you know, you can say a lot of things about Robert Kiyosaki and you know, some people saying, Hey, you know, um, you know, he didn’t have a ride. He didn’t, he didn’t do a ride or he is phony, but then you start to really see what he did and the way he laid it out. And there’s no arguing that this strategy worked for millions of people. And um, I don’t know about you, but I, I love board games and he came up with this game called cashflow the game. I don’t know if you’ve ever played it. Nope. Nope. So it takes you for the different, you know, the four quadrants where you are the employee then, then you are self employed and you’re the business owner and then you’re the investor.
Speaker 0 12:21 Well they invest a portion of it. The I quadrant is what it talks about investing in real estate is, and how he made it is through apartment buildings. That that’s, that, you know, that was, that was a strategy for him that worked. Um, but it’s great. Now the question is, so if you are a business owner, when is the time to buy? Right. And first of all, and I think, and the first thing that I asked or what we do with a client is to find out if they are actually profitable and able to sustain their rent. That’s correct. You know, because if you’re losing money, it doesn’t matter what good of a deal is, you have to be able to extract business, you know, money. It’s a different diversification strategy. And my number one goal with working with clients is get them to be profitable. Correct. Right. If a business, if you don’t have a business that is making you money, you’re basically having a very expensive hobby. Can you relate, you know?
Speaker 2 13:17 Yeah. And I actually think what I would add, one more piece to that is, is the business likely to be sustainable for, you know, at least a major portion of the term of the loan that you’re going to get to purchase the property. So for example, are you a new startup and is it a property that’s going to be difficult to lease? Commercial properties oftentimes sit on the market waiting for a lesser, you know, anywhere six, eight months, a year. and then some, uh, so they’re not, they’re not quick to lease as residential properties are. So if you’re just a brand new startup, um, can you take that? What if, what if something happens in business and then now you’re sitting here with a mortgage payment on a building that you may or may not be able to lease. So I think there’s a lot of strategy that needs to come into play. Um, and you need to look at a number of levels of your business and making that decision.
Speaker 0 14:07 Yeah. So you know, I have clients and in all segments and multiple industries and with different types of revenue, anywhere from, you know, the low one to 15, $20 million in the kind of rent that you pay as a startup is different than the rent that you paid as a season business. Correct. Right. And your goals change over time. You know, the goal is, I mean, the ideal is that you are growing a business that becomes either you have an opportunity to sell it, right? Or it becomes a cash producing asset, not if that business is producing cash. You can take that cash and easily to actually feed a second investment that you control. So you have two sources of wealth, right? And wealth accumulation. So some of the things is that people sometimes don’t understand is well, it’s just, okay, so I get the appreciation, okay, I get the fact that, okay, so if I’m paying $5,000 a month in rent and then I get alone and, and, and then I get the property and I’m paying, well, I’m only, I mean I’m paying 5,000, I’m not, it’s not like I’m saving any money, right?
Speaker 0 15:09 Well, that’s not true, right? So here are some of the things that you need to really think about and the things that, that you need to as, as a strategy for wealth building,
Speaker 0 15:20 the property that you’re buying is a long term investment that you can sell eventually or pass onto your children, right? You can take advantage of what is called costs, uh, segregation, depreciation. Um, you can, you know, you’ve done 10 31 exchanges, right? A 10 31 exchange when you can take one property and take the equity and the parking somewhere else without having to have all this tax consequences. Right? Um, how about this? You can lease out a pro portion of the property to somebody else, uh, so, so long. You know, and there are, there’s bank regulation when it comes to that, but you know, Salona is, some banks are like, well, you have to own at least 51% of the, you know, rental Brent, you know, the, the, the, the square or the, the, the square footage that you own. So if you have a 10,000 square foot property, you have to have 5,100 square feet and you can, but you can re you can have income from the rest, right? I have a client that has built a very successful business and they are profitable and they are thinking about doing that. And I told him, look, what is your longterm strategy? Write it. What happens if you sell the business? You know, uh, and uh, that’s something to consider. Um, here’s, here’s another one.
Speaker 0 16:41 You can design the property as you wish. You can make tenant improvements, right? You own the property right now if you’re leasing a property or if you live in a building, there’s only so much you can do before the landlord saying no. You know, you’re, I don’t want you to put up a wall here and a wall there. Um, and I’m sure that there are legal stuff around there in the, you have to finagle, we know where you’re doing tenant improvements,
Speaker 2 17:08 what are, what do you see there? We, we use the tenant improvements as a negotiating negotiation tool. Uh, when particularly with leases, um, when we’re buying a building, it’s all you. So if a client is looking to purchase the building and say it’s some sort of a light industrial type building and we want to convert it to warehouse plus office space and maybe we want to do some really nice improvements and so forth, the improvements, there comes a cap, there comes a point in time where the cash that you’re going to put into the improvement is just for cosmetic decoration purposes only. It’s really not going to add to the value of the property. Um, it may make, make it somewhat more desirable, but as is the old adage, location, location, location. So if we’re going to be in the light industrial district, um, you know, the, the CPA might not be looking to rent that.
Speaker 2 17:54 So you’ve kind of narrowed your market market, um, ability, so to speak. When you see, when it comes to a purchase, it’s from our perspective, from the legal side, it’s the same thing. Um, it’s just about location. Uh, you make your money on the buy. Um, so if you buy right, then you can sell right and you can make that money and it’s all about the location. Um, and I don’t know, you know, there’s certain liabilities that come along with, um, owning property and being a business. And one of those is if you’re a business that invites the public into your location. So for example, you’re a retail store. If you invite the public and you have a heightened level of responsibility to ensure that the building is safe and free from pitfalls and obstacles and things that might hurt, um, an invitee. Um, and then of course there’s always the, the dreaded ADA.
Speaker 2 18:52 And I don’t know if we have time to go into that. It’s worth talking about. Um, but maybe we do that in another SEG segment. We have a few minutes if you want to talk a little bit about, and I’ll tell you when, you know, okay. If we can take it over to the next segment. So the thing with ADA, a lot of times people, particularly business owners who are leasing or even business owners who own the building and they’re leasing the building to somebody else, um, we try to contract around the ADA responsibilities. And that’s Americans with disability act is our requirement as business owners and land owners and building owners to provide accessible spaces for those with disabilities. And so accessibility is what it’s all about, but it’s turned into quite, um, quite the industry, um, ensuring that properties are, um, accessible to all people.
Speaker 2 19:39 And so oftentimes the, the, the tenant and the landlord tried to contract about, around the responsibility of whose responsibility is it to ensure that these buildings are ADA compliant. What we find in virtually every case is even though the tenant may have the responsibility to ensure the ADA accessibility, the landlord is the one with the asset. So the landlord gets sued as well. And if the building owner can’t afford to bring the building up to ADA compliance, then it falls on the landlord because the landlord has no other choice. It has to be brought up because they’re being sued as well. So everybody should go into it recognizing that we’re kind of all in the bucket together. Um, and we need to ensure, um, uh, ADA accessibility. And I recommend to all of my clients call, um, a certified CASP and that’s an acronym for certified access specialist. And they can come out and they will do a complete inspection on your property, ensure that you are ADA compliant. I would say virtually I just, the number of buildings that are not compliant that you think are, is enormous and it’s
Speaker 0 20:48 the pressure, the, the amount of pressure that it takes to open the door. I mean, if it’s anything more than five pounds of pressure, well guess what, those doors, they change. Sometimes as they get older, they get harder and harder to push open. And at the point that you’re beyond five pounds of pressure to push the door open, you’re not in compliance, you know? Yes. I mean, we don’t want our listener to get freaked out like, Oh my gosh, there’s just so much. There is, it is true that there is a lot of responsibility and liability that you have. But if you set up legally, properly with the right, um, vehicle where the property is in the right legal entity to protect yourself, and that’s something that you’re really an expert at and you help clients every day for me is it’s how can I help my clients be more profitable and effective and be able to have more cash this, you know, and have every increase in wealth.
Speaker 0 21:37 I have a great story of a, of a client that had in rented for years and they had a very steady business that was producing great income, 10 to 15% net earnings every year. And then they went on a fence and then they just decided to take the plunge about 15 years ago and then went ahead and bought a building. And when they bought a button on the bottom of the market and for, for $1 million, had a seven year loan, they, you know, they, they actually, from what they were paying in rent versus why they were paying as, um, you know, the, the principal interest taxes and the insurance and everything else that comes with it and they paid it off. So they bailed in when they purchase. It was a million. By the time they were finished paying it off, it was worth 3 million. Oh, no question.
Speaker 0 22:22 And we’ve watched clients also do this with building, um, bought a piece of land on the outskirt of town and when it had an ne they needed office slash warehouse and invested, you know, the cost of the property and invested another million in building and ended up with a property that’s worth an excess of 5 million. And it’s their property. So when they pay off the note, now they’re just paying their property taxes. They have effectually eliminated one of the highest costs that they have in their business. Okay. So great. So we have a minute left. So we’re going to continue to talk about the great opportunity that lies ahead for central Valley to, for business owners who are savvy enough to understand the difference between renting and buying and, and we want you to get, you know, the good, the bad and the ugly. But I think this is a great opportunity that I want to take advantage. I’m sure you want to take up that we, in fact, we’ve been talking about taking advantage of this great opportunity. So stay tuned. Are you listening to Lee legal and business talk with Lear? And Claudine here on power talk 1360 K FIV stay tuned. We’ll be right back.
Speaker 1 23:33
Speaker 2 23:47 we’ll come back.
Speaker 0 23:49 You are listening to legal and business talk with Leah and Claudia and I’m your host Leal on the Virta with green land advisors. And I got my cohost here, Claudine Sharon from the Sharon law firm. How are you doing? Are you loving it, Sam? Fantastic. You are like fish in the water right now with your topic on real estate.
Speaker 2 24:06 We do quite a bit of real estate work and then business owners are occupying real estate, whether they’re leasing or whether they’re, um, purchasing. Um, and so we probably a third of our practice is a real estate work and real estate problem resolution, whereas two thirds of our businesses representing business owners. So we, it’s a subject I love. I started selling real estate in the early nineties. I know it’s just a little tiny kid when I started that. But um, my, I know my, my sister is a top agent in the Bay area. My aunt is a agent in LA. My cousin’s an agent LA. Um, it’s just kinda something that runs in the family.
Speaker 0 24:46 So let’s get into it. All right, so we’re going into the fun stuff now. So what the, what the considered financially if buying versus renting. So if you’re on offense, I hoping that this segment will help you out. So here’s, I’m going to give you a list of things to consider, right? If you want to consider re if you want to have real estate as a, as a play for you and your business and your family and your legacy, uh, as a, as a wealth diversification and income building opportunity. So I would say whenever a business owner comes to me, the first thing that I look is look at it. Looking at the current lease, you know, aid, what percentage of, you know, what is your lease payment as a percentage of your sales? Okay. The reason I look at that is because I can tell, you know, different vertical industries, different businesses.
Speaker 0 25:32 You know, if your retail space, you know, your rent may be three, four, 5% of your sales. If you’re a professional services division, like, like you and me, we probably have one and a half to 3%. Um, it, depending on if you’re an a, B, C building, depending on what the needs of your business are. But the first thing you look at is what is your rent as a percentage of sales? Now it in what type of business? You know, what, what is the strategy, right? There’s many types of real estate. And, you know, some people need to be in an industrial, right? Um, so need to be in a professional office space. You know, some do fine in downtown, some have to be in, you know, what is your brand and how does your identity, you know, I have a business in the Fresno area who just loves the downtown Fresno vibe, right?
Speaker 0 26:19 You know, this is resurging, you know, the Resurgens, uh, around the, the, the, the California wanting to be in the downtown areas and eh, and it’s just, it can be fun. You know, the, the, the Polish floors, the they industrial type and, you know, a lot of the creatives are, tend to go there. So, um, down payment. So there’s multiple types of leases, you know, the full service, gross modified gross, uh, single net, double net, triple net. Um, so you want to look at that because how similar is, so what you don’t want to do is you don’t want to do for, you don’t want to go from pain, you know, $1,000 a month in rent and you are mildly profitable and then wanting to pay go $6,000 a month and buying a building if you’re not profitable. That doesn’t make sense. Does that make sense at all?
Speaker 0 27:13 But do you see that happening? We do because there is, um, uh, I think there’s an underlying current of, um, people always believing that being a land owner is better than being a tenant. And I’ll tell you there, there’s, that’s not always the case. Sometimes you are better off being a tenant. Um, and I think that that’s really where you kinda have to go about the analyzation of your business. Where is your business? Where are you going? Um, what, what’s your outlook for the next five, 10, 15 years? Um, and you kind of need to kind of take a holistic approach. But I love what you’re saying because when I look at leases, when I work with clients, I look at trying to negotiate, um, a square footage price that’s better than the norm. So if I can drive the price down below, say a dollar a square foot is the going rate and I can get them down to, you know, 85 cents, then you know, for us that’s success.
Speaker 0 28:07 And you’re, I’m suggesting to look at it from a completely different standpoint, which is, you know, a percentage of your, of your earnings and your income. Yes. And then I think that that’s so important. Well, my job is to help them be profitable and effective, right? So your job is to help them keep it. I want him to make it right. So you gotta have a solid base. You have to have a business that is making money. If you have a business that is losing money, you’ve got your business to pay that rent right now, your personal guarantee and against the bank. Now the things that we need to start looking at or that you have to be just be mindful of, there is going to be a down payment. Correct? Right. So there is the, you know, there’s the type of lending you’re venturing now into commercial space, the commercial lending and completely different than residential, right?
Speaker 0 28:49 No commercial lender will let you have a building if you’re not putting at least, you know, 20 to 25% down, probably 25% down. So if you, if you want to purchase a $4 million building, you need to be able to raise $1 million worth of capital right now, how many businesses have that kind of capital? There are some that do and , but some of them don’t. Right now, there are things that you can do to help your case. Now, it doesn’t necessarily apply to an empty, we know box, a industrial building, but the, I know clients that they say, you know what, I’m fine with the rent that I pay, but I want to get into real estate and I want to get into multi-units. I want to get into the residential unit space and I don’t know if, well I’m thinking you knew that, right? So if you’re getting into 10 units, um, and then you know, we’re talking about 50,000 a unit and you know, have a base price of, you know, a half a million dollars, you can get credit back for all those deposits.
Speaker 0 29:43 A lot of, um, potential buyers neglect to look at the deposits actually belong to you now, correct? Correct. No, they transfer when, when the property transfers over, those deposits transferred to the new owner. So if you’re a little short, right on your down payment, it’s just a matter of praying yourself. You’re making yourself, um, have every available cash at your disposal. Right? So, so there is that in, and also you have to look at beyond the down payment. There are other costs associated, you know, to, to the upkeep of the property. Right? And this is something that you have to keep in mind, but there’s great benefits. And I started telling you in the last segment about some of the great things that you can do to help yourself, but you can also design the property, whoever, however you want it, um, which is great. Uh, and the equity portion of it, it’s great. Um, there is a it, you know, and this is one thing I, you know, I told you earlier that, um, I had a client that actually, um, surprisingly we were into a, trying to negotiate from our five year to another five year and the difference in the rent increase was like 15% more that they had been praying the prior year. Right? They basically wanted us out.
Speaker 5 30:59 So
Speaker 0 31:01 and they were already paying like five grand a month. Can you imagine that kind of Rennie crease? You know, and if you’ve been there for 15 years, right? And if you’re getting food traffic, what do you think you can do?
Speaker 2 31:12 It’s devastating. Devastating. I know that when we, one of the strategy strategies that we use when we’re working with clients and they’re looking to purchase, um, one of the things we do is say, let’s look at the building you’re in. Uh, and let’s talk to the landlord. Oftentimes you can negotiate in your lease. Um, let’s just say you negotiate a five year lease and after the five years you have a two year option or a three year option to extend the lease. Um, we oftentimes are able to negotiate an option to purchase at the end of the lease or at some point during the period, the lease period. Um, and that is a really effective tool. Oftentimes the landlords, um, own the property outright or if they don’t own the property outright, say they have 15 years left on the lease, you give them, you know, a longterm lease for the property and then an option to purchase at the end where they finance it.
Speaker 2 32:03 Those are, you know, we’re all about getting creative and, and you know, never say no, we don’t like the word no and we don’t like to be told we can’t achieve. What we’re trying to achieve. So one of the things, um, you know, we do is to really get creative with the lease and the landlord at the end of the day, what they want is they want to have that income coming and they want that payment and they want to know it’s secure. And if you’ve been in that building for any length of time and have proven yourself as a solid tenant, um, there’s oftentimes that they’re willing to go ahead and, uh, negotiate the longterm lease with the option to extend and with an option to buy at the end. Really, it’s very, it’s a very good tool because we also negotiate the price at the time we’re negotiating the option.
Speaker 2 32:47 So, so far we’ve been talking about, yes. So if you’re, if you’re renting and if you want to buy the property that you’re in, so you basically, your landlord becomes your other business, right? I know that other business that you control, then you’re having two potential income streams. Okay. But what if that is not an option that at all the options for you to get involved in real estate? Correct. Absolutely. So what are some of these other things that we have? We have tax deed sales, correct. Right. We have, uh, getting into foreclosures. Right. Um, what have you seen since you’ve got a lot of your practices in real estate, um, what, what other strategies or what have you seen people do when they’re not able to buy where for their business? Well, um, what we see people who are really savvy and have some gumption, um, they’ll do what we call pre purchases, um, where properties are scheduled to go on auction and say, for example, the property is going to tax auction and there’s a $30,000 tax bill that is, um, you know, needs to be satisfied.
Speaker 2 33:46 And, um, some savvy buyers will literally go knock on the door prior to the auction and negotiate a deal with the person who’s in the property to, um, pay the tax bill, take it off the auction block and lease the property back to them for a certain period of time or purchase it at a certain price. Um, but it gets that property, um, off of the auction block, uh, pre-purchasing is very creative. Um, it takes some gumption. You need to be pretty good at negotiating and you need to understand, um, you know, title issues. Those are always something when you’re looking at alternative purchasing. Um, title issues can be, you know, the death of us. Um, but foreclosures, you know, um, for closures you have to be very careful. Um, there are regulations set up by the state of California on helping people who are in foreclosure.
Speaker 2 34:37 And if you’re not a licensed attorney, um, I would suggest that you be extremely careful and research the regulations on that just because there’s been so much fraud and if you’re not a licensed attorney, um, pre-foreclosure, um, assistance is highly regulated. Okay. Let me ask you this. I always wonder about this. So is the foreclosure market, um, a way to hedge your bets against other markets? Um, meaning that when you, when do you see foreclosures rise as property? When is it time to get into the foreclosure market? Is it when property prices are coming down? Well, uh, the foreclosure market is more driven by, uh, people’s ability to work and pay their bills. And, and we had so many foreclosures, um, in, you know, and the quote unquote the mortgage meltdown period of time. A lot of that was because people were able to get mortgages that that didn’t actually qualify. We’re not seeing that anymore. So we don’t have those numbers of people who are in properties that they cannot
Speaker 0 35:38 actually make the payment. Okay. When the market goes down and people’s, let’s say the employment is down and people are not able to work at not able to make their payment, that’s when we start to see the closures. All right. I’m not sure if you’re finishing that thought, but um, we got less than a minute left and I want to wet your appetite for what’s coming in the last segment. Stay tuned. So we’re going to start talking. We’re going to talk about, um, flipping properties. Hey, there we go. Have a bunch of clients that are in the flipping business, right? And it’s actually a lot of money being made right now. Stay tuned. We’re going to talk about that. You’re listening to Leona legal and mrs. talk with Leo and Claudine a power talk. Hey, if I be 30, 60, we’ll be right back.
Speaker 1 36:16 welcome
Speaker 0 36:47 back. You are listening to legal and business talk with Leo and Claudine. I am your host Leo Llandovery and my cohost is Claudine from the Sharon law firm. Yes. And a good law firm. That is love. Love you guys. All right. So, um, let’s bring it home. So one of the things that we didn’t talk about, so we’ve talked about multiple strategies, you know, where the, so you’re, you’re buying, um, where you rent. So basically you stop renting and you buy it. That’s one strategy you can get into. Um, buying single families, you know, one to four units or you can get into, you know, anything over five units. Then it’s commercial real estate and there’s multiple plays in that. You can go five plus and you know, apartment buildings, you know, 30 plus units and some people have, um, made a bundle in apartment buildings and commercial property.
Speaker 0 37:39 Commercial, commercial property is fantastic. Yeah. You know, I, I’ve, it’s amazing to me, you know, if, if you go to the Bay area, if you go to the LA, you’re getting capitalization rates of like three or 4%. Now in this, in, in the central Valley, you can still find a find a 9% caps, you know, capitalization rates, which is, you know, net income on the value of the property. Um, but there’s one strategy we haven’t talked about and that is flipping properties, flipping houses. You know, there are shows right now on TV, you know, flip this house, what is it, uh, fix or flip, uh, what other ones, a property brothers flipping Las Vegas, Las Vegas, New York, flipping LA hour in one hour they flip a property and buy it, fix it and flip it and one hour. But there is something that, you know, I have clients and I have been very fortunate to work with, with several clients that are really big players.
Speaker 0 38:35 The in, in, in, uh, buying and flipping homes. And there’s one thing, one strategy that I’ve seen in that I helped them develop. And this is a two prong approach to, to getting into that business. There is a lot of money to be made, uh, but you have to know what you’re doing. Um, so it’s, it’s a two prong approach. Number one is you, you are certain that you’re making at least, you know, uh, good money, 30,000 more or more per property that you flip. And you can do that in the central Valley. And I know people who are doing that every day. Yes, right? But that’s not enough. Here’s the problem. If you stop flipping homes, what happens to your money? Your income is zero. Zero, right? So it doesn’t matter if you fit, you know, if you did 20, 30, 40 flips in one year, the next year you got to do all over again, right?
Speaker 0 39:24 Right. And you got to do it every year. So what you do is step two is you take some of that money that you make, flipping properties, and you put it on us. I invest in rentals. You invest in properties and buildings and apartment buildings and industrials. Um, you do all of that in depth because what you really want, it’s passive income, correct? Correct. Isn’t that the Holy grail of everything in investing, passive income, the minute you stop working, money steals rolls in. Right? The challenge that we see business owners having, and, and I represent a number of contractors here in the, in the Valley, um, whether they be a tradesman, single trade or or general contractors, um, the challenge that you have is to get into the market and to get in correctly, you need to be a cash player. You can get in slowly if you’re using financing.
Speaker 0 40:19 Um, but then you’re usually dealing with properties that are listed on the market with through the MLS and perhaps need repairs. So for example, we put a, an offer in on a property for my daughter, um, and it’s in a great neighborhood, um, but it’s the 1956 original, um, original sinks, original floors and, and so forth. And so there is some equity to be made. Um, it won’t be the equity that a, you know, a season house flipper makes who somebody who comes in with cash and is in and out of the property in three months. Um, you know, but that’s a way to start. Um, but that is the challenge from the financial side is if you’re going to be playing out what the tax deeds or the foreclosure houses, those are all, you know, you got to come in cash on that. Um, and so financing is, unless you have some hard money where you can get the cash immediately and then then turn it into a financing option.
Speaker 0 41:11 Yeah. And here’s the other thing is you got to come out as a, as a business owner, you know, people get into the, into the real estate flipping business and they don’t know how to talk to lenders. Correct. Then they, you know, the contractors or contractors or negotiate or have all this paperwork that is needed. And, uh, and there’s the key element of after repair value and the formula is that you got to get to the 70% of the ARV rule. Have you heard about that? And explain it. So when you’re purchasing a property that you want to flip, that property are already fixed up is um, so it’s 70% of where you can actually flip.
Speaker 2 41:56 So if the property is after, after repair is worth 100,000, then you have to be in at 75,
Speaker 0 42:02 correct? Well, yes, no, in 75. So what happens is if you don’t, I don’t know if I told you that, but I actually wrote a little book back in the day because there were a lot of people that I was helping with this. The secrets to unlocking unlimited profit is for house flipping because there was so much of our going on is
Speaker 5 42:20 so
Speaker 0 42:22 you, in real estate, you make money when you buy, not when you sell. Correct. Right. Always made on the buy. It’s always made on the buy.
Speaker 5 42:28 So
Speaker 0 42:31 is if you’re, if you’re looking at to buy a property that you expect to sell for 200,000 but the cost of repair are 40,000 how much do you pay for it?
Speaker 5 42:40 Right? Two 40. So
Speaker 0 42:45 if you go to 70% of the 200,000, minus the $40,000, that was going to cost you to fix it, you should not buy the property for more than a hundred thousand.
Speaker 2 42:54 Right. And this is, this is a key element to um, house flipping that I think so many people miss. And, um, I’ve recently had some clients come in, wonderful people, um, but they had attended a seminar in Modesto from one of the folks that has a show on TV and, and we’re kind of talking about some strategies that, uh, I’m not really sure they’re going to actually work. But one of the things that scares me is that, um, when you’ve been, say for example, you’re a general contractor and you’ve been a contractor for a lot of years, you become very familiar on what it takes to do the work, exactly what it takes. And you are also familiar typically with, um, at least, you know, basic business principles and the ones that you’re talking about that working backwards from, from the after repair value and working your way backwards and knowing that I can’t possibly buy this property for more than a hundred thousand because I have all these other factors and this is I think what really gets overlooked in that one hour show that we watch. And then the house is really cute and clean and it sells the first day at open house.
Speaker 0 44:05 Right, right, right, right. I agree. And that are, um, so, so just to, just to recap you, so you gotta be at after repair value should be 70% of what your spec to sell it less. The fixing costs were just people forget, you know, you got to get a good contractor to tell you exactly how much that is going to be as as no more. So if somebody tells you it’s going to be $30,000 to fix a property, better cost 30,000, $40,000 to fix
Speaker 2 44:32 a property and from experience, don’t just don’t shop for the lowest price. Because a lot of folks who are not really good at business, they are just trying to tell the property owner what they want to hear so they can get the job more experienced. Contractors are typically gonna come in with a higher price because they also recognize that as soon as they open up that wall, you have no idea what’s going to be behind that wall. Correct? Correct. And you know, you’ve got a foundation issues, you’ve got all kinds of problems that, uh, rookie investors just fail to see. Now. Um, let’s talk, let’s get a little bit into what’s going on in our market. Okay. Um, so I, uh, do you want to tell us what’s going on in there’s, um, Turlock, Modesto and people we know, I, I’m, I’m curious. Well, right now it looks like the medium price in Modesto is about 299,000.
Speaker 2 45:21 Um, which is very understandable because considering that Modesto has a wide variety of, of areas and properties on the market, um, we have stuff from all the way from, you know, lower end to very, very high end properties. So two 99 is the, is the median price, which means that there’s an equal number of properties for sale, um, above the price or below the price. Okay. Okay. Um, currently there’s 200 822 active listings in Modesto and realtors. We kind of look at stuff, um, by square footage. And so, uh, the median price in, um, Modesto is, uh, per square foot is $193. Is that a good deal? That’s pretty fair. That’s honestly pretty fair. If you look at Turlock Turlock’s a little bit higher, two Oh three, um, if you go over to the Tracy area, the Tracy area is significantly higher, but Tracy area is what we refer to as, um, a bedroom community that is on the East Bay.
Speaker 2 46:18 And so a lot of commuters, um, you know, are working in the East Bay or in San Francisco, um, and they’re living and commuting to Tracy. So Tracy’s prices are a little higher. Stockton’s prices, um, are about commensurate with Modesto. Okay. Um, and if you look at, um, Oakdale, um, is commensurate with Turk Turlock. So you know, it’s understandable if you look at, they’re kind of similar type of towns. They’re kind of by theirselves where Turlock survives on its own. It’s not just a bedroom community or a suburb of Modesto. Um, Oakdale similar in that aspect as well. Um, and they both Oakdale interlock, have rural properties. They have quite a lot of farmland still. Um, and as well they have a nice, um, kind of spread of, you know, maybe lower end houses, first time buyer type houses and, and very high end houses. Wow. So it sounds like there’s an opportunity still there is. Um, if you look though right now the preform properties in pre-foreclosure in Santa SaaS County, um, or excuse me, in Modesto, um, came up at 30. Wow. That’s pre-foreclosure. That means that we’ve only recorded the notice of default.
Speaker 0 47:30 We haven’t assigned a auction date. Once they get a notice of trustee sale, which is where the foreclosure trustee notifies everybody that the property is now going to be sold at auction and they publish the date and they publish the amount that is due in order to correct all the debts. Can you be set? So can you believe where it, we’ve been talking about this for an hour timing. I’m ready to talk some more, but I’m listen other hour. I know that our hour. So let’s, let’s recap. So w what’s, what’s, um, what’s the decision? Do we buy or do we sell? I mean, do we get into it? Do we keep renting or do we buy and I think is absolutely a potential buyer opportunity for a business owner right now is the buyer’s market. So if you are considering at time to buy, it’s now if your business finances are in order and if you’re making money, if you’re looking for a way to diversify your income, probably this is the time to talk to your realtor.
Speaker 0 48:22 Um, feel free to reach out to us. We’ll connect with the right people. Um, any, I know. Final clause, closing thoughts, Claudine? No. Um, w yeah, actually I would, I would suggest if any of the listeners out there are considering buying property, um, really sit down with somebody like yourself, Greenland advisors, I, I highly recommend, uh, folks, I use your services myself. Um, and when I go to make a financial move, I absolutely will sit down with Leo and, and we’ll go through the numbers and we work backwards because that’s not what I do as an attorney. So that’s what you do. We start with profit first. That’s right. Figuring out from profit backwards. So yeah, I mean this has been a fascinating topic and thank you so much for tuning in and thank you for joining us. You can find us on the web, uh, Greenland advisors and it’s a green on HQ is G R E N L a N D H and a Sharon law, S H E R R O And, um, next week I need, we need you to come back because we’re going to be talking about, we’re building on the topic of, of buying versus renting. You’re going to talk about debt versus equity and raising capital for your business, and there will be a lot to talk about. So thank you for joining us here. They going to business talk with lyric. Claudine, have a great week. However we can, everybody
Speaker 3 49:37 .