The Way Real Estate Investors Make Money

There’s such an echo. So great, everyone. OK. Today, on today’s show,
I’m going to talk about– today’s show, we’re going
to talk about the ways that real estate
investors make money. That is today’s show. Welcome to the Investing
in Real Estate live stream. Thank you so much
for joining us. I hope you get a chance
to join us in the chat and have a conversation with us. We’ll open it up
to some question and answer a little bit later. But there’s a lot
of misinformation about the way in which real
estate investors– actually I’m going to call them from
now on real estaters. Real estate
investors make money. And I go back to the
great Gary Keller model of real estate investing. So can anybody–
I’m going to watch in the chat to see if anybody
can answer this question. There are three stages
of real estate investing. Can anyone answer me, what’s
the first stage of real estate investing? I’m going to give
you five seconds. What’s the first stage
of real estate investing? Anybody answer that? Anybody answer that? Anybody answer that? Anybody answer that? Looks like no one can
answer that today. OK. The first stage of real estate
investing is to buy– to buy– the second stage is to
own, and the third stage is to cash flow. Now, cash flow, of course,
is the number one way that real estate investors
make money, right? Most people think making
cash flow is the number one way to make money in
real estate investing, and that is a very
important component of it. So real estate investors–
yes, the beauty of being a real estate
investor is you’re purchasing a piece
of property, OK? You’re making some
improvements to the property that allow the property
to last a number of years. You update the roof if
it has less than 10 years of life on it. You’re going to put a new water
heater in it, if it needs it. You put a new furnace
in if it needs it. And those are a minimal cost. You know, a water
heater’s like $700, $800, depending on
where you buy it. A furnace can be like
$1,300 depending on where you buy it and the labor. But, you know, do you need
to put those in right away? Do you have a
working water heater? Well, then, wait two
years to put it in, right? Do those things on a
case by case basis. Upgrade your windows
if you need to. Put in new vinyl
windows if you need to. I put in Pello pro windows. You know, they can be
like $100 a window. But you don’t need
to do it all at once. You can upgrade your
property as you see fit. So cash flow, yes, is important
getting that property up to date and flowing. But the beauty of real estate
and the way that real estate investors make money
is not necessarily just from the cash flow. The cash flow is
really the byproduct at the end of the sequence–
buy, own, and cash flow. One of the number one ways
that real estate investors make money and they don’t
think about it is you’re buying a tax shelter. Taxes make you money as
a real estate investor, and you need to start thinking
about this the right way. So when I talk about
the three stages– buy, own, and cash
flow– what do I mean? I mean if you have
a goal of buying a million dollars worth
of real estate, that could be 20 single family homes. So I buy a lot of single family
homes in the $50,000, $60,000 range. That’s what I do. And those cash flow–
you know, $700, $800, $900 a month in cash flow. I’m buying those properties. The cash flow comes later. I’m not necessarily
concerned about the cash flow just yet, OK? So buying, those
properties, however you buy them– you
buy them with money from a 401(k) private
money, maybe you leverage money from a mortgage. However you’re doing
it, you’re buying it. But the beauty of purchasing
that million dollars worth of real estate
is that your net worth has increased by that much. And guess what? If you maybe bought a million
dollars worth of real estate but you paid $200,000
for it or $300,000 for it because you took out loans
or you used a home equity line of credit, which is a
killer way buying real estate, the beauty is that
you get to depreciate that full amount of real
estate that you purchased. The IRS doesn’t
care that you only used a fraction of your
money to purchase it. This is one of the
most powerful ways that real estate
investors make money. You now get the full tax
shelter of that real estate, even though you paid
this much for it. Now, a home equity
line of credit, right? I live in this house. We just actually expanded our
home equity line of credit because I want to buy more
real estate this year. I want to buy a lot
more properties. And so I expanded my home
equity line of credit because we have more
equity in this house now. And so we went back
to our local bank. We got a brand new home
equity line of credit. I think we got like a $200,000
or $300,000 home equity line of credit. And I’m going to buy like
six properties with that. You know why? Because now, I could
leverage this property to make me richer, and I’m
going to add six properties on top of what I currently own. Now, I’m increasing my net
worth by those six properties. And guess what? I used a loan to do it. I used a home equity
line of credit to do it. So yes, I’m paying back a bank
and I’m paying that interest rate back, but I was able
to buy these properties on the backs of a bank. I’m able to buy these properties
with someone else’s money, essentially, right? But now, I’ve increased my
tax shelter by six properties. Now, what is a tax
shelter, and why do I love a tax shelter more than
I even love the cash flow? I’ll get there in a second. But again, the
three stages, right? Buy, own, then cash flow. So I’m buying these properties
with this home equity line of credit, for
instance, right, or maybe you’re borrowing it
from a friend or your 401(k) or however you’re
buying properties. Once you have them paid off
or the tenants are paying down those loans, then
you own them, right? Then, you officially own them. Then, we worry about
the cash flow later. So when you’re in this first
stage of real estate investing, most people make the mistake
that, well, you know what? I just want to go
right to the cash flow. I just want to skip the
buying part or the net worth increasing part and go
right to the cash flow. And that’s the mistake that
real estate investors make. They get lured by
that cash flow. I love the cash flow. Don’t get me wrong. It enables me to
not have to work a day job because of the cash
flow from my rental properties. However, I am much happier
with the tax shelter that I’ve now created come
tax time, the money that I’m saving because of
real estate, the money that I’m putting into my
pocket because of real estate. Most of you have a W-2 job. Show of hands out there. How many of you have a W-2 job? How many of you have
a paycheck, right? How many of you actually
work 9:00 to 5:00 jobs? Just say yes. Say yes in the comment. I want to see how many of you
actually have a paycheck job. How many of you? Let’s see. Yeah. Yes, yes, yes, yes, yes. Let’s see how many of
you have a paycheck job. Let me know. Just say yes. I’m going to rattle your
names off right now. I’m going to rattle
your names off. Prudence says yes. Prudence says yes. John. John says yes. Jason says yes. Jason Quinlan says yes. Vanessa says yes. Stir Crazy says nope. John Pareta says yes. Sean Davis says yes. Yes, yes, yes, yes, yes
all the way down the line. Peter cook says yes. Jimmy Roger says yes. Rachel Flower says yes. So think about
this for a second. When you invest in real
estate, the cash flow is great. It enables you to
quit that day job. But guess what? Many of you might even like
the job you have, right, so you have money coming in. That’s great. That’s great that you
have money coming in. So John Houser
reached out to us. We’ll take care
of you, my friend. We’ve got some good
solutions in place. So when you’re cash flowing from
these properties, when you’re cash flowing, that’s great. You’re able to bring
that extra cash flow in. Maybe $1,000, $2,000,
$3,000 a month, then you’re not as scared
about your day job. But now, that W-2
job that you have, that paycheck, under the
new tax law, guess what? Guess who’s hurt the most
under this new tax law? You. You, the paycheck employee
without real estate or the paycheck employee who
does not have a business. Now, you might be saying, how
am I going to start a business? How am I going to
get into real estate? Guess what? I’ve done it. Many of our watchers
right now who are doing it are doing it the same way. Starting an LLC, very simple
to do for $100, right? Start an LLC. You purchase real estate
in that business, OK? Now, you are in business. Now, the government is going
to treat you differently come tax time. Now, your business– you
know, John’s Holdings, LLC– buys a property, buys
three properties. Your net worth is increasing,
but what you’ve just created is a tax shelter. I had a great conversation with
a multi-millionaire real estate investor not too
long ago, and we were talking about
Hurricane Irma and I asked him how
his properties fared. He said, oh, they got slammed. They got slammed. I said, oh, I’m
sorry to hear that. He said, why? Why? He said, I love repairs. And when he told me that,
it affirmed something that I already knew
inherently, which is I love repairs on
rental properties. People get all
panicked about, oh, I’ve got to have this repair
and this is going to be fixed, and that’s going to have
to come out of my pocket. Most of the time, the
property management company will handle it and it will just
come out of your rent, right? But guess what? Repairs are great for your
taxes because it mitigates your overall W-2
income and you’re creating this tax shelter. It’s lowering your financial
burden from your paycheck job. So you’re making a boatload of
money from your paycheck job, but you’re being taxed
ridiculously, right? And that’s why under
the new tax law, you’re getting hammered
as a paycheck employee. You’ve made off the worst
under this new tax law. Like Warren Buffett
likes to say, his secretary is
taxed at a higher rate than he is as the owner
of Berkshire Hathaway. Why? Because she’s a
paycheck employee being taxed a certain way. And so when you’ve
got that paycheck, you need to find ways
to mitigate that income with real estate or other
performing assets that are providing cash
flow, but enabling you to create a tax shelter. So purchasing real
estate with an LLC and then being able
to take that LLC and depreciate those
assets so the cash flow you’re getting
from those tenants is almost nothing, right? I’m sorry. You’re not being taxed on it. That’s why real estate
investors don’t pay taxes. So think about real estate
not in terms of the cash flow, but of the tax shelter. So when I had that conversation
with that multimillionaire real estate investor, he said,
I love that I have repairs. Are you kidding me? Because I created an
amazing tax shelter. He’s like, I don’t
sell real estate. I don’t buy real estate. He goes, I don’t care
about real estate. He goes, I care about
buying tax shelters. I was like, wait a second. Yes. That’s the answer, right? It’s not about buying four
walls and a roof, right? I don’t really care about what
my properties even look like, my rental properties. Four walls and a roof. I don’t care that they’ve got
green shutters or red shutters. I really don’t care. I care that they
are tax shelters. And if I have to put in a new
water heater in three years, great. You know why? Those repairs enable
the tax shelter. They enable my overall
financial well-being. I had a conversation with
our tax accountant last week, and we were texting and I said,
how do you feel about repairs? And he said, for real estate
investors, I love them. I love repairs. So think about falling in love
with repairs as a real estate investor and think about
creating a tax shelter that enables you to make money. If you’re a real
estate investor, you should pay nothing in taxes. Remember, you’re
purchasing six properties. We just had an investor who
bought eight properties. And I said, congratulations. You know why? Because they were kind of going
back and forth on what strategy they wanted to use,
and I said, you know, the strategy that
you chose, I wasn’t going to push you
in any one way, but you made a great
decision because now, you’ve created an enormous tax
shelter for yourself. You’ve now increased
your family’s net worth by like $600,000. And that’s how true rich
people measure their wealth, by their net worth,
not their paycheck. Their net worth is what matters
for wealthy individuals, and your balance sheet. That’s what wealthy
individuals look at. So remember, buy,
own the property, then cash flow comes later. But the reason that real estate
investors buy until they die and the reason you, if you
get started in real estate investing, should– because
people ask me all the time like, well, when’s enough? You know, should I stop
after 10 properties? You could, but here’s
what happens when you stop after 10 properties. Guess what? Now, you’re not offsetting
that cash flow anymore. The cash flow is coming in. You’re not at an 11th property,
which mitigates that cash flow, right? So as you add properties and
you add those tax shelters, that’s why smart real estate
investors pay zero in taxes. Zero. Because the cash flow
is mitigated by repairs, by the tax shelter
that you’re creating. You understand? Are you starting to hopefully
understand the method to this madness? There are so many great ways to
mitigate that paycheck, as well as that cash flow. I love cash flow, but I
actually don’t like cash. I don’t want cash. I don’t want it because then,
you’re paying taxes on it. The cash flow, you need to have
mitigated by the tax shelter that you’re creating with
real estate investing. So that’s my message for today. I’d love to help you answer any
questions you have about this. So let’s try to stay on topic
today about this and the idea that real estate
investors make money. So you guys are talking about– I see some of the chat
questions about having LLC. So there’s a lot of questions
right now about series LLCs, which you just would
get one series LLC. Now, according to our
lawyers an accountant team, they don’t recommend that
for us yet because it’s not battle tested in court, and
regular LLCs, absolutely. So we purchased our
rental properties in limited liability
companies, LLCs. We’ll put like– we
have one LLC that has like 10 properties in it. So having an LLC
purchasing real estate, now, you are a business, right? And can you find a way also
to become a real estate professional? Could you spend 15 hours a
week on your real estate? That changes your
tax classification to an active investor
versus a passive investor, and the tax benefits even
become more beneficial to you. We’ve got a great episode
coming up very, very soon with Tom Wheelwright,
the smartest tax accountant in the country
for real estate investing. We did a great episode
with him on passive loss and passive
investing, and that’s going to be coming
out very, very soon. And he just blew our minds
with some fantastic strategies. If you haven’t had a chance
to go listen to our podcast, it’s the Investing in Real
Estate podcast on iTunes. Download it. Check on some episodes on the
tax code with Tom Wheelwright. It’s the Investing
in Real Estate podcast with Clayton Morris. And Natali Morris joins me on
Wednesdays on those episodes, as well, so check those out. Ken says, “Hey, Clayton, is
there a video in your archive regarding purchasing single
family properties in an LLC? The finance company
we were dealing with would not allow us to
borrow via an LLC.” Yes, we do have videos on that. I believe our team just
linked you to that, Ken, so thank you for that. We work with a few
different lending companies for our
clients that will allow them to buy it in an LLC. So that’s one of
the tricky things right now with the federal
government and purchasing properties, whether
or not they’ll let you like get funding in an LLC. And, you know, you have
to buy it in your own name and you’re only
allowed to buy up to 10 properties in
your own name, which is a ridiculous law. It happened after the crash. So it looks like Congress
is going to be rolling back some of the regulations
around the Dodd-Frank law, and I hope we don’t roll
back to pre-2007 levels. But allowing people
to buy up to 20 properties in their own
name, investment properties, why not, right? With a mortgage. Let’s see. What other questions do we have? Deepak wants to know,
“Is there any insurance product which provides
blanket coverage for a number of properties?” Absolutely. Hey, reach out to
our team, Deepak. I think you’re already
a client with us. Reach out to our team
because we have now gotten a whole new insurance
team, which we’re super excited about,
which will allow you to do sort of a blanket coverage
for your properties, which is pretty killer. I think that’s how
we’ve set it up. Sort of a blanket
policy, and you can add properties individually. You could add them into
your umbrella, so to speak, instead of having to do
just like individual stuff. OK. Juan wants to know,
“Hey, Clayton. I’ve talked with someone
from Morris and Vest”– our company– “and wanted to
see if you had just 10 minutes to talk about strategy on which
properties from your company to choose from
from my situation.” Well, Juan, why don’t
we do it right here in front of everyone? What is your situation? Let’s talk about the
situation right here and we can talk about
strategy for you. Because we do C and B
class properties, mostly in the $45,000 to
$50,000 is going to be a C class, up to $55,000. And then we do
also some B class, where we do a few extra
bells and whistles because the neighborhood
sort of demands it. We might even put in
granite countertops. We might do hardwood floors. Those types of things will push
them into the $60,000, $70,000, even $80,000 range. We just did a
house for $100,000. It was a gorgeous, huge house. And so just
depending on that, we kind of play in that range
right there between $50,000 and $100,000, depending on it. Joe Briggs wants to know,
“How do I become a client?” Oh, super simple. Just go to our website, Joe. Book a call with our team. We’ll jump on the phone
for 30 minutes with you. We’ll help you out. Steven wants to
know, “In what state do you establish your LLCs?” There is no rule on this,
and our accounting team says, you know,
there is no rule, but just to make
it easier on you, why not establish your
LLCs in the state where you purchased your properties? So there are so many
websites for each state. So we do our rental properties,
we renovate properties, and we sell them to our clients
in Indiana, Michigan, and Ohio right now, and each of those
states has their own website–,, and And you just log on. You pay like a $100 or $200
fee to set up your LLC. You pick your name. And then, you also get– they become your
registered agent. Because you need like a
local registered agent, and so they act on your
behalf and it’s super simple. And then, you’re set up. Usually, it takes
like five minutes. So again, It depends on where you are. If you’re buying properties
in Oklahoma or something, I’m sure also exists. Someone at Morris Invest sent
me some info on Fund & Grow, and I want to hear about it. So Cole, Fund & Grow is amazing. I think they’ve raised
over $22 million for our clients to buy
real estate at 0% interest. And you get $500 off,
I think, if you sign up through our website. They only charge you if they
get you money, which is great. So we were able to get
a $176,000 from them, 0% interest, in order to
purchase rental properties. So just go to And you just jump on
the phone with them and see if it’s a fit for you. Again, you’ll save $500 if
you go through our website to do it because we’ve
partnered with them. Again, I think they’ve
raised now $21 million for our clients who
bought properties with us. So I want to see if
Juan responded yet. I asked him that question. Juan, have you had
a chance to respond? Diego wants to
know, “Do you have a video explaining how
to transfer property from your name to an LLC?” No, we don’t, but
that’s a good idea. It’s a fairly simple process. Basically, you’re
just deeding it over. I think you’re doing
a quitclaim deed. And your title company
can do that or a lawyer can do that for like
a few hundred dollars. It’s very simple to do. You’re not selling the
property to your LLC. You’re simply deeding it over. Therefore, it doesn’t
trigger a due on sale clause. I would recommend,
Diego, listening to the podcast episode that
I did with Garrett Sutton, an incredibly smart attorney. He is Robert
Kiyosaki’s attorney. Garrett Sutton. Go to the Investing in Real
Estate podcast on iTunes and look for Garrett
Sutton, or maybe our team can link it up right
here in the chat thread. Garrett Sutton, he talks
about how to do that transfer and why you should not have
any fear about it at all, and he’s an attorney. He’s a real estate attorney. So check that out, Diego. CEO Place. “Clayton, how do I get more
e-mails on listings available? Can’t wait to get started.” Well, you can–
hey, come on over. Come on over and say hi. Come into the pub. Natali’s here with the baby, so
we’re answering some questions. Say hi. Hello. She’s so tiny, you
can’t even see her. You want to see baby? Hello. Hello, hello. All right, so we’re
answering– this is Eve. Can you say hi? Can you say hi? Can you say, hi, everybody? Say, hi. Can you say, bye bye? Can you say, bye bye? OK. Juan wants to know,
“I kind of want C+, B- property for many factors,
one being the area where the property is because
of the tenant quality. Also, I want a solid ROI with
as least as possible headaches.” Well, if you want as least
as possible headaches, I mean, I would
go right in there. C+, B- in that $55,000, $60,000
range is probably going to push your quality of tenant
up just a little bit. That allows us to
do a little bit more on the bells and whistles. We might be able to do
some hardwood floors. And it just kind of
depends on the market. It’s a real narrow thing. But again, go back
to what I said at the very beginning of
this podcast, which is don’t get so hung up on real estate. Remember, you’re
buying a tax shelter. And also, don’t get so
caught up in repairs, right? You might think of a
headache as a repair. I don’t. Didn’t we just have a roof we
had to put on the property? You can talk. Yeah, we did. Yes. We had a $3,000 roof on one
of our New Jersey properties. Yeah, a smacker. It was like going to
be a $1,500 repair to kind of get it fixed or
$3,000 for us to replace it, and we just said (SNAP). Right. I’m like, absolutely,
because we love repairs. Also, the new tax laws allow us
to accelerate the depreciation on roofs, HVACs, so I
was like, absolutely. I’ll take a depreciation
on a $4,000 roof rather than pay for a repair. If I paid for the repair, it
would be 1/3 of that cost, and I can’t depreciate
the repair cost, right? I mean, I can deduct it. Anyway, this girl’s
going to nap. OK. Bye bye. Night night. Say, night night. Can you say, night night? Bedtime. Night night. Love you. Night night. OK. Bye bye. Bye bye. That little interlude
brought to you by Natali Morris and Eve Morris. All right, Jose Santos. So if they do get
you the money, what is the interest on that money? We’re talking about
Fund & Grow again. You added 0%. And then, after about
a year or 18 months, it jumps up to credit card rate. But by then, you’ve
now refinanced it or pulled that money back out
using like a refinance loan. So that’s why I would definitely
suggest getting like a B- property if you use them,
because it’s very easy to pull out cash from that
to do like a refinance, pay off those cards, and
then Fund & Grow actually helps you get extend that again. They do it like every year,
sort of rinse and repeat, which is a great strategy. Ken wants to know, “Am I
standing on a crate, [LAUGHS] or am I that much
taller than Natali?” No, I’m 6’2″. Natali is like 5’4″, I think,
so I’m a lot taller than she is. And when I worked
in television, a lot of the women I worked
with at Fox News Channel would stand on
like an apple crate when they stood next to me. OK. Stir Crazy want to
know why depreciation is better than a deduction. That’s a great
frickin’ question. That’s a very
intelligent question. And I’ve got a
whole video I just shot on that exact question,
so please check that out very, very soon. But bottom line is
under the new tax law, the IRS is very specific
about the difference between maintenance
and repairs, OK? Think of maintenance like
putting oil in your car or just continuing to do
what the car should be doing. That’s maintenance. Maybe changing the air
filter on a furnace. That’s maintenance, OK? So if your maintenance guy has
to go out from your property management company
to take care of it, that’s simple
maintenance that you have to deduct in the very
same year that it took place. So you’ll get your statement
from your property management company. Might say, had to
snake a drain, might have had to replace air filter. You know, whatever. Basic maintenance, OK? You can deduct that
in the same year. Now, when you make a repair,
think of the mnemonic bra– B-R-A– the bra method, OK? Think about that. So the B-R-A method. B-R-A is to better the
property, restore the property, or alter the property, OK. What does that mean
for a repair that you can depreciate over many years? The beauty of repairs is
that you can depreciate them over many years on your
taxes and you create that tax shelter, like a roof. So are you bettering
the property? Are you restoring it? A lot of the houses I buy
are like 100 years old, so it’s not working. Guess what? That’s a tax shelter. I can depreciate that, right? So if I put a new roof
on it 10 years from now, I am now restoring that
property and giving it another 30 years of life. If I am bettering the
property by putting in a brand new bathroom, if I’m increasing
the value of that property and pushing it forward so that
it lasts another 30 years, I’m bettering the property. If I’m restoring it, I’m
bringing it back to life and making it workable again. That is depreciable, OK? And then, if I’m
altering the property– so let’s say I bought
a six bedroom property and I kind of didn’t
know what to do with it, and it was on 10 acres. It was a real oddball property. Well, instead of
just like trying to sell it as a normal
six bedroom house, what if I altered that property into
a long term care facility, OK, that had six bedrooms, create
like a main sort of area where there’s a
kitchen and a TV, and hired like a 24 hour
nurse on the property, and I’ve added additional
generators and things like that? I’m altering the
property from what it used to be to a new
function, a new functionality, and those are depreciable, and
man, you want depreciation. Maintenance is fine. You can deduct it this year. But actual repairs go
way into the future, and that’s the beauty
of depreciation. So great question. Let’s see. Video Teachy wants to
know, “Hey, Colleen here. I’m in West Orange, New Jersey
going through a short sale on my primary residence here. I have also a rental
condo in Weehawken, New Jersey with positive
cash flow of $100, but thinking about
1031 exchanging that. I also have a
rental in Pittsburgh with cash flow of $475. I don’t know if I can
refi the PA house, add that to a 1031 exchange,
and invest with you.” Well, you know,
here’s the rule that I have on 1031
exchanges, which is, I think, one of the most
important ways to build wealth. A 1031 exchange is
an incredible way that rich people make money, OK? So if you can use it, wonderful. If you’ve got a property
in Weehawken, New Jersey that you saw massive
appreciation on, but your cash flow
is really low, I would definitely
take that property and sell it and
take the proceeds from that appreciation. Remember, appreciation isn’t
doing anything for you, right? Cash flow is. Great that your
house appreciated. Who cares? Who gives a rat’s behind? People are like, the house I
live in is a great investment. It appreciated. It I had it for 10 years,
and it went up $60,000. Good. Who cares? What’s it doing for you? Nothing. Is that putting
cash in your pocket? No. So that house in
Weehawken, New Jersey– I mean, it’s right across
the bridge from Manhattan, right next to the
Lincoln Tunnel, right? Hey, it’s where Alexander
Hamilton was killed, right? So you take that property,
roll it into a 1031 exchange, use that sale of the proceeds,
and buy a bunch of C and B class properties that have a
high ROI and are cash flowing. I would be doing
that all day long. So the rule is, let’s say
you’ve got a portfolio of 30 properties, and you’ve got a
couple of B class properties in there. Let’s say you own five
B class properties. Well, guess what? You want to analyze that
portfolio every couple of years because if those B class
properties start to become A, that’s the goal, right? They’re going to move up,
and they’re appreciated. Well, now, that $50,000,
$60,000 property is worth $100,000, $110,000,
but the cash flow is the same. I would sell that bad boy. I’d roll that into a 1031
exchange, and guess what? I’d buy two
properties with that. If I had five of those,
now, I’d trade up for 10. So that’s why you want to look
at those appreciating assets that you have in your portfolio. It sounds like a
Pittsburgh house– I don’t know where
that one plays. But that Weehawken,
New Jersey house, I would definitely
think about rolling that into a 1031 exchange. Maybe our team can
link it up right here. One of our team
members that we work with who does 1031
exchanges does a great job. He helps a lot of our
clients with that. His name is Lance Growth. He’s been a guest on our show
and we have his contact info. We’ll drop it right here
in the chat thread for you if you want to talk to
him about it because there are very specific laws about the
way that 1031 exchanges work. But we work with
a lot of clients. We had a client recently
who sold two or three homes in Arizona that
were like $400,000 homes that he bought
for like $200,000. Cash flow was awful and the ROI
was awful, but he sold those, and then, he bought like
20 properties with us. And now, the cash flow
is through the roof and his ROI is through the roof. So he traded up
for like and kind, and now, he’s built even
more wealth and his net worth has gone up significantly
as a result of that. So that’s why the
1031 exchange is one of the most powerful
tools for building wealth in this country. Anil Ali says, “Are
you at all concerned about the lead based paint
in properties you purchase? Also, you have commercial
property insurance if you purchase the
property in an LLC.” No, you don’t do commercial
property insurance. No, you don’t have to do that. But no, I’m not concerned
about lead based paint. If we see it on a
house, we get rid of it. We scrape it and get rid of it. That’s bottom line what we do. And you also sign, in your
property management agreements with tenants– like you have a lead based
paint disclosure in there so that if they’re scraping
a wall and they discover it, you’re not held liable for it. State to state, but you’ve
got to– if we see it on windowsills and things
like that, we get rid of it. It’s not a big deal. Kim Davis says, “We purchased
a house requiring a total rehab last year. That house was built in 1966. We were worried
about lead paint, but since it was all redone,
that was taken care of.” Here’s my thing. Here’s the thing. You can worry about as
much stuff as you want. It’s your choice, right? You can lose sleep over lead
based paint, a bad tenant, what do I do in an eviction? I don’t care. I have a property management
company that handles that. We have two evictions on our
property we bought New Jersey. We have 10 properties
in New Jersey. We have two evictions right now. They’re in collections. Great. They’ll handle it. You know, oh, the
tenant didn’t pay one of my Michigan properties
because it was the holidays. OK. The property
management company is going to try to work
with them, get them back on the right track. If they’re not, they’re going to
go through an eviction process. You know, oh, we got a leaky
roof on 123 Main Street. OK. Am I going to lose
sleep over it? So as an investor,
as a human being, when you walk through your
day, you have a choice to be as worried about things
as you want to or realizing, guess what? At the end of the day,
everything’s going to be OK. And that’s the way
that I try to operate. In real estate, there’s
nothing you can’t fix. There’s nothing you can’t fix. Everything is fixable. Everything. So that’s how I want you
to kind of think about it. I hope that makes sense
on the lead based paint. Don’t get too in the weeds
with this crap please. It’s not worth it. Do you think like
Robert Kiyosaki that has 6,000
properties worries about that kind of stuff ever? No. He doesn’t. Quest Trinity says,
“Hey, if a client invests through Morris Invest”– by the way, it’s not
investment, Morris Investment. It’s just Morris Invest. We have people ask
us sometimes like, there’s a company
out in Cincinnati called Morris investment. Is that you guys? No. I don’t even know
what those guys do. Who knows what those people are? It’s just Morris
Invest, is our company. Where do we make money? Why does the company
sell off houses remodeled that could get a high ROI? Because that’s what we do. We make money on the
sale of the house, so our labor in the property. My contractors are in
there ripping out walls, and so we have a little bit
of margin on each property. I could charge a lot
more per property and sell it on like the
retail market if I wanted to, but that’s not what I do. I want people to hit
financial freedom. So I want them to get 10
properties and 12 properties. See, my thought is, if I play
the long game with people that don’t rake people
over the coals, get them a great
property with a high ROI, then they’re going to
work with us for years and we’re going to help them
achieve financial freedom. That’s the goal. So I could charge literally
$20,000 or more per property if I wanted to. $30,000 or more if I wanted to. Let’s see. Kim Davis wants to
know, “Hey, Clayton, does hard money come into your
model at all for investors, or since it seems you are doing
turnkey, does this not apply? We’ve done hard money on
one of our properties.” I mean, we have a lot of
investors that use hard money. It just depends on the property
because certain hard money– you know, hard money is just
basically a hedge fund, right? It’s not an FHA loan. It’s not Fannie and Freddie. It’s, you know, a
group of doctors that got together and started
their own private fund of money, right? And they dictate what
value of a property they’re going to lend
on, so most of them won’t lend below $60,000 or so. And so a lot of our properties
kind of like right there. You know, it takes a long time
to close with these people. So a lot of our investors
either pay with cash or they buy with cash and
then do a refinance later, that sort of thing. So happy to do it. Matt Flores say, “Hey, Clayton,
how does an investor obtain financing for over 10 properties
at an attractive long term rate?” Yeah. We’re going to
put up a resources page on our website,, to help people with
that very question because we do get
that question a lot, and we have some
preferred partners that we’ve been talking
with and working with and that we believe in. So we’re going to hopefully
add that very soon. Devin McCrae says, “Love
your channel, guys. I’m thinking about
buying my first property under my own name. Do I need to tell the
mortgage company my intentions about renting it out?” No. We’ve done hard
money on one of our– no, not at all. You’re buying a property
in your own name. You can then quitclaim
deed it over later. Again, listen to the
episode with Garrett Sutton. Our team just, I
think, put it up here. It’s episode 197 of my podcast,
the Investing in Real Estate podcast. Go listen to that episode
with Garrett Sutton because he talks about how easy
it is to just transfer it over to an LLC later after closing. So it’s not hard at all. James wants to know,
“Where in Michigan do I invest currently?” I’m in Inkster. I’m in Detroit. I’m in Warren. Redford. So up in those areas. I love Detroit. I love it. Love it. Some of my best
properties there. I love those like little
tree lined brick homes. They’re bulletproof. They’re going to
be there 100 years after I am, after I’m alive. That’s for sure. A financial investor,
do you still use Oceanpointe for rehab, repair?” On some properties. And no, it was a rumor that was
started by a competitor about– you have these turf wars from
these property management companies that like to kind
of trash talk other people and hurt other
people’s businesses. So no. But we actually have started
our own crew, as well, so we’ve got our own teams
right now under Morris Invest. So sometimes, smaller jobs
will contract out with them for putting in furnaces
and things like that because they’ve got
great teams that do that. “Would you invest in the area
with a declining population, about 1% a year?” It depends. I mean, I look at a
whole number of factors. Hey, Zach is here. Zach [INAUDIBLE]. Am I saying that right? I hope so. So here’s what I look for, and
I’ve got a whole video series on this on our
channel, on what I look for in my rental markets. I want areas with
American based jobs. That’s why I like Indiana,
that’s why I like Michigan, I like Ohio, because they’re
the crossroads of the country. You know, when I
lived in Dayton, Ohio, where I do investments– I lived in Dayton, and one of
the reasons I love it is it was called America’s
most average city. Why? Because they would try
out all of the new chain restaurants right there where
the major highways intersected. I think Olive Garden started
there, Joe’s Crab Shack right there because
all of the truckers would stop and sleep overnight. Vacationers would stop there. And so they prided themselves
on being called America’s most average city. Well, guess what? A lot of the distribution
centers are based there. In Indiana, FedEx
distribution hub. These are all American based
jobs with a growing population. So I don’t like to
invest in areas where– there’s no reason to invest
in areas with a declining population or to invest
in areas like Memphis that have an enormously high crime
rate and things like that. So I’m not a big
fan of those things. “Are the rehab
costs for properties I buy from you able to be used
as he deduction, write off, et cetera?” Yes. It depends. So if you’ve got like
a scope of work– so a lot of properties
we sell, we’ve already done the rehab on, so you’re
buying it after that’s been done. But if you bought it
during the rehab phase and you have the
scope of work, that’s something you can submit
to your tax accountant and get the write off for that. Absolutely. Watson says, “You’re
great, Clayton. Your hard work and dedication
to teaching is so appreciated.” I love you. Thank you so much. I want you to build
financial intelligence, and that’s what I am doing. That’s what my goal is, anyway. Michelle says,
“Hey, Clayton, I’m looking to pitch
for private money to buy properties from you. Should I show my properties
or your turnkey operation?” Either one. It totally up to you. We’ve had a lot of
people who do that. Devin says, “I am looking”– hold on a second. Francisco says, “I’m 22. I just bought a house. Set it up as a
threeplex in Iowa. How would I get a
legal to rent it out?” I don’t know. I don’t understand
that question. Can you rephrase that question? Devin says, “I’m looking to
buy a rental under my own name. Do I need to tell the
mortgage company that I’m planning on renting it
out, or does it matter?” No, it doesn’t
matter, like I said. Maybe I already
answered that for you. It shouldn’t matter. I mean, if they’re asking you,
what is the purpose of it, you’re allowed to buy an
investment property, up to 10 properties,
under your own name, so it doesn’t matter if they
ask you what the purpose of it is– second home or investment. It’ll just depend
on what percentage they’re able to give
you, like whether it’s 25% down or 20% down. Typically, if it’s an
investment property, they’ll want you
to put 25% down. So you don’t want
to lie to them. You always want to do
everything above board. Renae says, “What do you think
of properties with a home pool? Is it a liability for me? Never knew.” Well, a lot of
people in Florida who buy investment
properties– you know, you’ve got to have that
additional insurance coverage. Just talk to your
insurance provider and make sure that the
property management agreement is very clear and
concise so you protect yourself legally. And please do not buy that
property in your own name. Absolutely not. Make sure that a property with
a pool is purchased in an LLC, OK? You don’t want them coming
after your other holdings. How do you find
properties in Michigan? Well, I’ve got a
whole team, Gerald, so if you’re interested in
grabbing a property, just book a call with our team. That’s what I do. I find them. We renovate them. We place a tenant in them. And that’s what we do. So just reach out. Go to my website and
book a call with my team. Video Teachy says, what are
your thoughts on Section 8? I like Section 8. You know, the only
downside of Section 8 really is that they tend
to take longer to pay, meaning when you first get
a Section 8 tenant in there, the city holds the money
for about three months, and then they finally release
it to the property management team. So the tenants living
there are happy, but the city holds the money
back in like an escrow account, and then, they release
it three months later. Now the great thing
about Section 8 is, a lot of times, a tenant
will stay for many, many years because they don’t
like to have to move. And so you can also get a
higher rent amount, too, in a lot of Section
8 properties. So I like Section 8. Juan says– all right. Finally, Juan. Juan says, “I prefer a
10% ROI with normal things to deal with than a 15%
with many headaches.” Yeah. I mean, 15% ROI– I mean, come on. If you’re going to find– that’s
very difficult. Net ROI 15%, you’re probably buying
a piece of garbage that looks good on paper, but
is probably in a very high crime area like Memphis or something
like that or Little Rock, Arkansas. So it might be
attractive on paper. You know, that’s what
a lot of people do. They’ll go to Zillow and they’ll
try to buy a property that way, which is just the
worst because you’re going to buy a piece of
garbage that probably has mold and foundation problems. You’re going to have
all kinds of issues, so I would stay away from that. Chris. “First live session with you,
we bought five properties with Morris Invest in
December and January. Is rehab faster in
summer versus winter?” Well, Chris, this year,
it seems like it is. You know, I go to
our properties, so I’m in our
Indianapolis market a lot. And, you know, our
contractor crew will be in there with what
they call salamanders, which are like long heaters,
because they’re inside doing drywall and doing other things. Outside work can be hampered
by the weather, right? So siding can’t be cut. You can’t be painting in
five degree temperatures, and it’s hard to maybe put
a roof on there when you’ve got a foot of snow on the roof. So yes, this year was
particularly harsh. We had a lot of new
construction properties, so pouring concrete
in the winter. You can’t pour it unless
it’s above 18 degrees, so we had about three,
four weeks there in December and January where we
just had a horrible cold snap, and so you had like
maintenance teams running around the city, Indiana
power and light and Michigan Michigan power and light running
around fixing power poles that are down. And so we we’re like, hey. Hi, Indiana power and light. We need you to come put a brand
new power pole on our property we’re renovating. They’re like, the
house is vacant. Screw you. You know, we’ve got people
that need our help right now. We’re like, oh, come on. Really? And so instead of three days,
it might take them two weeks. So, yes, this year was
particularly harsh, but most years, not so bad. Last year it was not
difficult at all. David McDuffie wants to know,
“Are the properties purchased from your turnkey
company financeable?” Yeah. I mean, if you’re
going to do that and you’re thinking about
doing financing or refinancing, go into the B class
because that way, a bank can pull up
comparable properties that were sold to
a retail husband and wife who bought a property. Most of C class is off
market, sold to investors, and therefore, it’s not ever on
the multiple listing service. It’s not public. And so when an appraiser
goes to do an appraisal, they can’t find anything. All they can find is like a
foreclosure that a bank sold. That’s pre-rehab. So yes. If you’re thinking
about doing that, I would definitely consider
going to like more of a B minus property. It’s just going to make your
life a heck of a lot easier. Also, who cares, right? Because now, you’re doing
it on the backs of the bank, so the ROI might be a
little lower, but now, you’re getting a property
on the banks of a bank. So any day of the
week, I would do that. So I’m running out
of steam, guys. You guys have had so
many great questions. Julio want to know,
“Am I selling property in Springfield, Massachusetts?” No. Taxes are way too high. Joey want to know, “Is a
fourplex good for a first home purchase?” If you’re going to
live in it, sure. And then, you could rent
out the other three. If you’re going to buy
it to invest, sure. Again, you’re buying ROI. Make sure the
return on investment makes sense, the ROI
and the cash flow. That’s what I care about. How much are you adding
to your net worth? Zach wants to know, “I
know it’s off topic, but when do you expect the new
constructions to be ready?” Well we have new
constructions that are coming across the
finish line like every day. We have some that will
finish next week, next week, because our crews are
building a whole bunch of them simultaneously. If you’re talking
about when we have new ones available for sale, we
just got seven in this morning. I think they sold like that. And we have a waiting
list right now, I think, of like 25
people for those. So they’re coming in. As soon as they get out of
surveys with the city, then we’re releasing them. Because surveys will
let us know, oh crap. Is this lot buildable or not? And we had a hiccup with a few
lots that were non-buildable, so we wanted to avoid that. So once they come
out of surveys, we release them into
permitting phase, and that’s when
we’re able to sell them to start the construction. So once we start, it takes about
eight weeks from the ground up. Once we break ground,
they’re about– and now, with the spring,
it’s very, very fast. David McDuffie, yes, you can. Video Teachy, “How much are
property taxes on your homes?” You know, anywhere from $400
to $1,200 or so, basically. But hey, Financial
Investor says, “Morris does all cash buys.” Yes, but we might be doing some
interesting things coming here. Sanchez wants to know,
“Can Morris Invest help me in the California market?” No, I cannot. We do not do anything
in California. In fact, I would say 70% of our
investors live in California and buy properties
through us, honestly. If I looked at the number
of where they’re located, they live in California. Like my whole extended
family is from the Bay Area and they all buy
properties through us because there’s just no way. Cody says, “Thank you
for everything you do.” Hey, much love to you, Cody. Thank you so much. I really want to help you guys
build financial intelligence and change your family’s life. That’s the whole goal
of what I do here. [INAUDIBLE] wants
to know, “Do you recommend any specific
banks for doing a refi on a rental property?” Yeah, Northpointe. Northpointe Bank. It’s all one word with
an “E” at the end. They’re a national company and
they do refinances, as well. “How often are tenants
negotiating a rental price?” Rico, I don’t ever
deal with that. We set our price for what
the rent is going to be and they sign a contract, a
property management agreement, and a lease. And they pay it or they
don’t, or they get evicted. So, guys, you had some
amazing questions. Our goal is to try to do these
live shows every Wednesday at 11:00 AM, weather permitting. God knows we’ve had some crazy
weather, which prohibited us from doing it. We had flight delays,
all sorts of things. So weather permitting,
we’re trying to do these every Wednesday. So thanks, everyone. I really appreciate you
guys all joining us. I really, really appreciate it. And please, any comments,
questions, thoughts, prayers, let us know. And please, please,
please subscribe. Hit that subscribe button. How many of you have not even
subscribed to the channel? We just passed 40,000
subscribers here on our YouTube channel, specifically, so thank
you so much to all of you. And thanks for checking
out our podcast, as well. Please go over and check it
out on iTunes or your Android device. Just the Investing
in Real Estate show with Clayton Morris, and
Natali joins me on Wednesdays and we have experts on Thursdays
to talk about real estate investing. So thanks so much. Much love to all of you. We’ll be back here next
week for another episode. Until then– oh, Steven
wants to know, “Can Canadians invest with you?” Yes. We have investors
from New Zealand. We have a lot from Canada. So very, very simple to do. Just reach out to our
team and book a call. We’ll take care of you. Mahalo. Thanks, guys. Thanks, Michelle. Thanks, everyone. Thanks, Abdul. I love it. Hey, Abdul, you know what? I’m going to have our
team reach out to you. You said, “Is there
another way for us to reach out to you on Blind? It’s hard for me on the website
to interface with your site. It’s not accessible for me.” Abdul, I’m going to have
our team reach out to you privately here, and we’ll
try to get on the phone with you that way, if
that works for you, OK? I want to make it as
easy as possible for you, so thank you so much, Abdul. All right, guys. Thank you. Thank you guys. Love you all. Thanks, guys. Have a great rest of your week. Go out there. Build financial intelligence. Take action. Become a real estate investor. Again, I believe it’s the
number one way to build wealth in this country. Thanks, everyone. Thanks for all of your
kind questions today. Really appreciate it.

72 thoughts on “The Way Real Estate Investors Make Money

  • Here's my completely irrelevant wish list, when it comes to your studio setup… 😉
    I like the pub-themed background, although I personally would like to have it a bit less blurry. It still won't distract from the foreground but might look a bit more authentic. The video is crisp. Whatever camera and "streaming box" hardware combo you use, keep using it – it seems to work great. LOL. Didn't notice any noise spill from the cooling fans but I listened on my computer speakers, not my headphones and the Apple Pro sitting on my desk seems to think it's a Dyson, anyway. The audio has a bit of an echo to it, maybe you could do some sound dampening wall treatment to your room. But that is all minor, rather irrelevant stuff. Love the content and work you guys do!

  • God bless! Me and my girlfriend are working on 2 jobs saving 100k soon, I'll contact you, lets make this money!

  • What do you think about investing in student rental houses in university towns? Rents seem high but lot of turnover and damage.

  • dnt get hung up on the real estate, its a tax shelter. who cares if its a c property and the tenants can t pay the rent.

  • Clayton I need help understanding something. I get the net worth part but what I don't understand is how a wealthy investor(s) is able to spend the money they make? Another words, how do you withdraw your profit without paying taxes, for let's say a month vacation to Europe or to purchase a car?

  • I understand now the benefit of having real state under a LLC.
    What is your opinion or advice for people that have 2 or more houses under our name with FHA mortgages. How can we benefit from taxes law? How can obtain Credit with FHA secure properties? How can we transform or become LLC? Thanks for your help and answers.
    My name is Joffre from JACKSONVILLE, FL

  • Let me tell you how it will be
    There's one for you, nineteen for me

    'Cause I'm the taxman
    Yeah, I'm the taxman

    Should five percent appear too small
    Be thankful I don't take it all

    😀 thanks for this video Morris. Best!

  • Clayton, I think i look at net worth diffrently. If you get $200k from heloc and buy $200k of property. Initially it's a wash. Is in it? If you buy and it has $100k of equity then your net worth is $100k more than what you had. Great video and advice. I think end result is to have tax shelters as you said.
    Keep up the great work.

  • How many B-C class properties would you suggest buying if you are starting out with 100k? Is it smart to buy a few properties out right or spread the money out more and finance?

  • I have 4 rentals and listen to you all the time to keep me going and to give me wisdom for the future. Keep up the great work!

  • Thanks to your videos I’ve been motivated to get my crap right! Been working on my credit and it’s going great. I’ve been thinking of using fund and grow to open enough credit lines so I can purchase my first property then get a loan to pay the cards off then just rinse and repeat! Hoping by June my credits where I need it!

  • Hi Clayton, love your channel. I am planning to do a cash out refinance and then put quit claim deed it to an LLC. Do you know if I can still depreciate the property on my personal tax to lower my taxable income after the deed transfer? What's Morris invest properties average cash on cash rate of return? Thank you.

  • Oh my God, I just had an Aha moment. You just helped my family out SO MUCH with this information. God bless you guys for sharing your experience and knowledge.

  • hi mr Morris, how many properties can an LLC or Cooperation owed before we have to open another LLC or Cooperation?

  • Love the video. I always define net worth as debt free “worth,” so I think your equity would be your actual net worth, but I get what you’re saying. 😉 I would maybe call my holdings “gross assets,” or something along those lines.

  • I don't understand why taking depreciation of a repair is better than taking a tax deduction. If the deduction reduces your taxable income by the cost of the repair, and depreciation deducts a percentage of that cost every year for X amount of years, at the end the amount deducted is the same. So why wouldn't you want it all upfront?

  • i seem to miss every one of your live cast, i need some guidance on how to join your live cast, i dont seem to know how to find that access

  • Hi Clayton. My name is Daniel and i’m a 17 year old guy from Denmark. Since I was 14 years old I’ve been studying financial education, taxes, phantom income, real estate, stocks that pay dividends, and i’ve read all of Robert’s books including your book too and most of you videoes. My only question to you Clayton is this: I know my strategy will be multifamily properties – at least 16 units or more so i can have a property management company run it. I wanna use the banks money and make the loan non-recourse. My question to you is: Is it too early for me to start when I turn 18 years old to buy an apartment complex? And how do I raise the down payment money?
    Best Regards

  • I get the tax shield allows you to virtually not pay any taxes on the income from cash flowing properties.. But im confused on why you like the tax shield more then you like cash flow… if the houses are not cashflowing what purpose does the tax shield. ("depreciation,repairs") serve.

  • Clayton, in this video, you mentioned that 70% of your clients who buy properties with you are from California. I’m from California as well and have a question, please.

    If I setup an LLC out of state (Ohio, Indiana, Michigan, etc) to buy the property…

    Do I still need to pay California their $800 LLC fee as well?

    Again, the LLC is not being setup in CA, it’s being setup out of state where the property is. I’ve read some mixed answers on this and that I still need to pay CA the $800 simply because I live here. I hope that isn’t true?


  • we think you and your wife are trusted worthy. I have no college degree no business back ground barely speak English, will this be possible for me to accomplish?

  • Clayton, would you recommend getting into several properties with smaller down payments and have mortgage payment or would you recommend spending more money to buy one or two properties free and clear?

  • How much money do I need to invest? I have about 4k in my bank. 150K in retirement savings. Possibly 150K in equity in one home as well as 10K in another. I'm tired of just saving money, I need it to work for me. My number is 12, that's what I need to stop working. I'm 33 and don't want a "W-2 Job" after 39.

  • Clayton please tell us more about buying 1st property with op$, then using job $ to pay down debt, refinance and repeat. We have no home now to draw against, nervous regarding challenges we might face going into a 30yr mtg from fund and grow. Our call booked with M.I. Jan 25.

  • Clayton , i have a mixed use property that prints good passive cash flo , and i have a good amount of equity , in the property , its dead money in the property you are slapping me in the face , i should max out on a equity line of credit , and buy 3 more single family homes , i want to put this equity to work . with 40k or 50k homes , i agree with the tax shelters

  • Thank you for valuable information. I know about fund&grow. I am work with them, but it been 6months passed they cannot get One collection account of my Experian and it costing me alot. What ur Advice?

  • Is there any reason for me not to tell my bank that I'm trying to get a Heloc with that I'm going to use the money to buy a rental house?

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