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The Four Benefits of Investing in Real Estate

When thinking about investing in real estate, many people only look at whether the rent they expect to receive is greater than the monthly payments they’ll be making. Forrest Odend'hal joins us today for a look at the four benefits of real estate investment that investors should take into account when determining whether an investment makes sense: Income, Principal Reduction, Depreciation, and Appreciation. Check it out to learn more.

 

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Adam (00:08):

Welcome to episode three of Keepin' it Real. I'm your host, Adam Tabaka. Today we're examining the four benefits of investing in real estate with Forrest Odendhal. Forrest is the managing broker at Long and Foster in Old Town, Alexandria. He's an expert in fields of residential real estate and investment real estate, with 31 years of experience serving clients in Northern Virginia. From 1990 to 2010, Forrest consistently sold more than 100 units per year. And in 2003, he was recognized by Realtor Magazine as the number 41 agent in the entire nation with 133 civil units. Forrest was the president of Prince William Board of Realtors in 2011, served on the board of directors and was the RPAC chair for the Virginia Association of Realtors from 2012 to 2016. And next year he'll be inducted into the National Association of Realtors Hall of Fame. A father of two, a grandfather of three, a personal mentor of mine. He fought in three amateur boxing matches, enjoys fitness and loves real estate investing and teaching. It's an honor to present the one and the only Forrest Odendhal. Forrest, thanks for joining us today.

Forrest (01:18):

Thank you, Adam. It was very nice. Thank you so much. I appreciate it and I'm thrilled to here.

Adam (01:25):

All right. Well, now Forrest you've been in the real estate industry for 31 years, which is impressive for someone who appears to be 40. Give us a little background about yourself and how you got to be where you are today.

Forrest (01:37):

Well, I was a criminal justice major at Salem College, played football there at Salem. And when I graduated, my professor said, "Hey, if you really want to know place work, you need to go to one of the big cities." So I applied at my hometown police department, came out number one in that process and was hired and served from '85 to '89 with the Manassas City Police Department at 14 years. And while I was doing that, I always had a drive to do something else. So my rookie year, I talked to a corporal Don McKinnon and I said, "Hey, we should start a fitness center." And so we start the Powerhouse Fitness Center and we own that from '85 into '89, and what I learned was when you have a fitness center, you got to cover a lot of hours.

            So we sold the fitness center and I thought, let me do something that I only have to count on myself. And so I decided to go ahead and take the real estate class. Now, at that point in time, the class was offered at the community college. But once I passed that in March, I did both real estate and place work full-time for nine years. So from 1990 March until March of 1999, I did both and was able to really have a real decent career by putting forth the effort, both of those.

Adam (03:08):

That's a lot of work. It's quite a work ethic you've got. So tell us what are some of the ways that maybe your previous law enforcement experience may have made you a better salesperson and manager in the real estate industry?

Forrest (03:23):

Well, as police officers are in situations. The job of a police officer, you're the last call somebody's going to make. And when you get to the situation, the situation has to be resolved. So you're actually trying to communicate with human beings, probably at the worst time of their life to communicate with them and get anything positive that you're going to be able to utilize out of them to try to resolve this situation. And so by having those communication skills and going to actual trainings about interview techniques and that sort of thing, being at the police department, I really focused heavily on that and it really improved understanding people. So then when I got into real estate and I'm dealing with a buyer and a seller, it seemed pretty simple.

            Nobody was going to go to jail. Nobody had been victimized and your communication skills, you understood people, and you could communicate with people. You're just trying to help people. Seller just simply wants to sell their home and a buyer wants to buy a home so it was a whole different dynamic. I really think that a good place officer, a good detective would be an exceptional sales person, especially in real estate because they understand people. And isn't that really what we're doing all day is whether it be with our agents or with the consumer, we're just having good communication and we're listening and trying to solve problems.

Adam (04:57):

Makes sense, makes a lot of sense. So before we delve in today's topic, real quickly, just curious, what do you see as maybe the biggest misconception that the general public might have about working as a real estate professional?

Forrest (05:14):

So it's a very highly taxed job. You only get paid if you succeed and no other benefits come with it. There's no retirement, there's no pension, there's no health benefits, nothing. So to make $100,000 in real estate is probably equivalent in another profession to make $65,000.

Adam (05:45):

Okay. So let's talk about today's topic now. The four benefits of investing in real estate. If you would kindly, give us a brief overview of each of those, and then let's delve a little deeper into each one individually.

Forrest (06:02):

Thank you, Adam. I'll be glad to do that. Let me just say that Tom Longstead... I was in the business. My friends and I thought we were investing in real estate by buying real estate and selling. So we'd buy maybe a townhouse or I would guarantee somebody a sale I'd say, "Look, if I can't sell your townhouse, I'll buy it." And then you have the money to move on into your next home. I don't want that to be the reason. In the last 31 years, it wasn't always this market, Adam. I can tell you. Interest rates weren't below three. As a matter of fact, from 1971 to current, the average interest rate, 8.08% is what it would be.

            I remember a lender once told me if we could just keep interest rates right at 10%, that would be awesome. I paid points one time to get 93 quarters percent and I thought I got the best deal ever as far as interest. So we've been through different markets. You have a buyer's market where the buyer's in the driver's seat and then you have the seller's market. So a lot of the time when you're in these markets you have to be creative.

            One of the things that I did was I put myself in a position that I was able to buy a property if I wasn't able to sell it. Now, I was successful in selling a lot of properties, but occasionally I would have to make that guarantee and buy one. And then once I bought it, we may rent it, but generally what we would do is just go ahead the folks would move out and then we'd sell it. When I say we it was either myself, sometimes I would partner with a lender, I would partner with a contractor, I would partner with somebody else that was in the deal that had an interest in the deal. So if we needed work done and I partnered with a contractor, we could get work done at cost and we wouldn't be paying retail.

            So went ahead and in flipped this, and I thought, because of that, I was a real estate investor, but I really wasn't a real estate investor. I was just a speculator. I'd buy a property. Hopefully I can make a profit after I help the folks out, get into another property, whatever amount of money that we made, we would be taxed on and it would just be taxed as regular income. It wasn't until 2009, I had been in the business licensed in 1990. And here I am Adam, 19 years later, I'm in leadership with Prince William Association of Realtors. And I go into this class, VAR function, Virginia Association of Realtors function.

            And this guy, Tom Longstead, sitting there and he's saying, "Hey guys, let me tell you..." Let me tell you this guy was a former professional baseball player. If you have, can never hear Tom, if you ever have a opportunity to hear Tom speak, you want to do it. He's just an, an awesome guy. And he said, "Look, there's four benefits to investing in real estate. You have income, you have principal reduction, you have income tax savings and you have appreciation. And all four of these working together is why real estate is a great investment." And at that point, really what all we're considering is, is the income piece.

            We're saying, how much money is going to come in every month? How much is it going to cost me? And just considering that factor may be the deciding factor on not buying a property, that may be a really good real estate investment. So if we were just to take the income of the property, which would be the first one we'll take, you're saying, you know something, what is the income of this property? Or what could the income be compared to what it's going to cost? And of course the higher the interest rate and the leverage and that sort of thing may make that a negative number. So that's the income piece.

            We then say, what is principle reduction? Well, every time I make a payment, there's going to be a portion of that payment that goes towards interest and a portion that goes towards principle. And every time I make a payment, so the tenants make a payment to me. I then make a payment to the lending institution and the lending institution collects interest and they collect principle. And every time the payment is made and the principle reduces. The next payment, I'm paying a little less interest, because they can only charge you the percentage of interest on the amount of money that you still have, and the principle reduces even more. So the principle reduction, every time the principle reduces, my net worth going up, I'm getting richer. So I thought, even if it cost me a few hundred dollars negative on the income side, maybe I wouldn't have bought this property, but just considering principle reduction, maybe it's not so bad because I'm reducing the principle at a greater rate potentially than I'm actually losing money on the income side.

            Also, every year I'm going to raise the payment 3%, because I'm going to consider the fact that inflation is going to take effect and I want my dollar to still seem like a dollar, and over the last 100 years inflation's been about 3% per year, so every year I'm going to raise it 3%. As I raise it 3% and my payment stays the same, I'm actually now narrowing down that negative amount and I'm still getting the principal reduction.

            Then we have income tax savings, and this is really the one that you really want to get at your head about. The government says, "Look, the home ownership rate is, let's say 67%", which means we have 33% of the folks that have to rent. And if those folks have to rent, we better have a place for them to rent. The government certainly doesn't want to provide housing, so they want independence, independent people to invest in real estate. So by investing in rental property, the government says, "Look, we know you are taking a risk. We would like there to be some advantage."

            So if I invest in residential real estate, I get to depreciate that real estate over a 27 and a half year period. If I invest in non-residential, it's 39 years. But if I invest in, let's say a restaurant building, then it's 15 years. The shorter amount of time, the better it is because the more you can write off with the depreciation. So depreciation is simply a number attached to property by the government, allows you to depreciate the property and save tax dollars. Well, that's huge. So now in addition to principal reduction and income, now I actually get to save tax dollars, that I get to keep in my account rather than paying the government. And they're doing that because I'm taking on the risk of providing something that is needed for our economy.

            And then the next one and the last one is simple appreciation. Larry Kendall from Ninja Selling, Adam says, "You know, there's a thing called the equilibrium theory. Real estate over a long period of time in the United States will appreciate 5% per year. And so if it's appreciating 5% per year, and the average as far as insulation is 3% per year, then owning real estate is a huge advantage. So just consider if I have a hundred thousand dollars property and it appreciates 5%, it's appreciated $5,000. Well now next year it's 5% of the 105. And this is why I think the net worth homeowner exceeds $280,000 because it's a difference between what that property is worth in the United States compared to what they owe, and that gap represents both of their net worth. And that's why the difference between a homeowner and a renter is so substantially different. And it's just simply because of that property appreciation and the principle reduction as they're making the payment.

Adam (14:03):

Excellent. Thank you. That's a fantastic rundown on everything. Now, out of curiosity, what do you think is behind, what do you think propels the long-term trend where home appreciation has outpaced inflation over the long run and is that sustainable indefinitely?

Forrest (14:23):

Well, I went back, the chart that I found that I could put my hands on actually was in 1963.

Adam (14:34):

Okay.

Forrest (14:34):

I did the new homes sales and it gave a chart from that point forward. And in 1963, the new home sale was the... The average was 18,000 and I applied the 5% rule to that. And if you apply it to the new home sales chart, it actually appreciates even greater than the 5%. But I think it really comes down to any appreciation in real estate. There's a couple things that really have a big impact on it, and the first is supply and demand. When there's an abundance of supply and there's not a huge amount of demand, you're not going to have great appreciation in those years. And then today we have such a small amount of supply and such a huge demand that we're seeing double digit appreciation. So I think if you take the totality of all those and know that the equilibrium is going to be somewhere in the middle.

            Also, it's something that you can't just make more of overnight. So if a company says, "Hey, we need to increase our production of a product." They pretty well can determine how much product comes out. Whereas if you're trying to increase housing, it is a much longer process. And because of that, because it takes the builders, it takes the builders building the product and all that, you have the actual growth of your population, you have job growth, you have such a desire to be in an area, Northern Virginia area. Now supply and demand switches very much in favor to the seller. We can't quickly correct that. It takes time for the builders to build where that pendulum comes back the other way.

Adam (16:30):

Oh, these are excellent points. You mentioned early on that there are a lot of maybe novice investors, kind of just look at the income piece when they're looking at the benefits of investment real estate. In your experience in talking to new investors or prospective investors, I mean, how many do you think only really look at the income piece of it without really recognizing the other benefits that are associated with investing in real estate?

Forrest (17:05):

Yeah. I think, I've done the real estate seminar we've done from the Jersey down [inaudible 00:17:14] footprint down to Raleigh, North Carolina and what I found is over 1500 agents have taken the seminar and they just don't know. And so the income part of it is the simplest part. People get that I have to pay money to own something and if it's going to generate money, I need that to balance. So people understand that, they understand money in money out. They deal with that daily with their jobs, "I have so much money coming in, I can only have so many bills." And they conditioned themselves to understand that, and I don't think that generations in the past have known these things, just like, I didn't know. My parents didn't pass on any of this to me, this was something I had to take an interest in and learn.

            So I think that just the common sense of it is, this is going to generate money, this is going to cost me money, where is that balance? It isn't until you really start looking a little bit deeper or somebody educates you on it to understand, so when I make that payment, what are the components of that? Okay, well now you have a benefit principal induction.

            I've always turned myself into my account. I don't know how it turns out. Well, then you don't understand depreciation because you've never had to personally apply it, and you may not even know that it's a benefit because, maybe nobody in your family or nobody that you know has ever had investment real estate to even understand that they can get depreciation. Most people will just have the home that they're in and these benefits you're not applied to the home that you live in and you reside in. And so you have the depreciation, just that principal reduction, they don't understand. The part they do understand is, Hey, every time I bought a property and we've owned it for a while or my grandparents' property or my parents' property, it seems to be worth a whole lot more when they go to sell it in the future than what they paid for it. And the problem with appreciation in people with instant gratification is, once the property value goes up and they see that they can make a profit, a lot of them are pretty eager to cash out.

            So you have to set a long-term goal and say, I'm going to hold steady to that long-term goal and hold real estate. You know, there's a saying that says, "You don't wait to buy real estate. You buy real estate and wait." And a lot of folks will see $200,000 or $300,000 worth of equity in investment property and think, this is awesome, I could sell this and then put that money in my bank account, and I'll that money by bank account. It'll give me something to touch, I can actually hold onto the money, I'll see it in my account. And because they're in instant gratification, they don't hold onto it for a long time.

Adam (20:24):

Excellent points. Now for anybody who's contemplating getting into the investment arena, or just wants to learn more, what are a couple of good resources, whether they be books or online, or individuals that someone should look into when they're really kind of thinking about getting into this?

Forrest (20:45):

Well, Googling it. The best book I think and the simplest book to understand an income producing asset, which is simply what real estate investment is, is Robert Kiyosaki's Rich Dad Poor Dad.

Adam (21:03):

Great, great.

Forrest (21:05):

Really great book, but there's a lot of resources out there now with all this information available. So I think if you just focus on those. There's a company called in trust ENTRUST. This thing called self-directed IRA, you can take your retirement account and actually invest in real estate. And for instance, my wife Christie now owns three condos she paid cash for. These are income producing assets, generating tax-deferred income. She doesn't pay taxes on it, she's making the income and she's paid cash for them with her IRA and like I said, she owns three of those. If she was to sell them, she wouldn't pay tax on the gain she has, whereas generally you'd pay capital gains, and interest is a great resource for that.

            But there's, as far as investing in real estate, there's commercial real estate people understand this completely. I don't know of a lot of courses out there that specifically deal with this. I know Larry Kindle with Ninja Selling, he calls it Wake Up Money. He teaches a course on it.

Adam (22:28):

Any final parting thoughts for our audience?

Forrest (22:31):

Yeah, I think that investing in real estate takes planning, and there was a great study done by Harvard. So you got to figure this MBA study was done and it's from 1979, 1989, they do this study and they said, okay, they took a thousand Harvard MBA graduates. Now, not only these cats went to Harvard, but they're MBA graduates, right? So they understand this. And they went ahead and did a study and they said that when they did a study and they pulled them, 83% of them had no specific goals and 14% had specific goals but didn't write them down, and 3% had specific goals that they wrote down. And of the 14% with specific goals earned an average of 300% more than those without specific goals and the 3% with specific goals that they wrote down, earned 1,000% more.

            So the idea is if you want generational wealth, if you want to become a multi-millionaire, real estate is a surefire way to do it. You have to set a goal. You're going to have to be patient. You're going to have to buy real estate, resist the urge to sell it when the prices go up, because think of real estate as an income producing asset, and think of it as a money machine. When you sell your money machine, even if you get a good price for it, it stops making money. Somebody else has it. So all four of these benefits continue to work in harmony as long as you continue to own it.

            So resisting selling it is probably the biggest goal. And if you do sell it, there's a thing called a 1031 exchange, sell your investment real estate to get into a faster investment real estate wagon. Don't sell it just for the sake of selling it to take a profit, unless there's some other income producing asset that you're going to invest in, that's going to be better than what you had just got out of. So I'd have to say that's my parting thoughts.

Adam (24:53):

Great stuff. Great stuff Forrest. Thanks so much for joining us today. Really appreciate having you on. Love to have you back at some point here in the future. You've been a great guest.

Forrest (25:03):

Thank you so much, Adam. I appreciate it. And I think you're doing a wonderful job of these podcasts.

Adam (25:34):

Yeah.

Forrest (25:34):

Have a great day.

Adam (25:34):

Of course. Take care.

Forrest (25:34):

Okay, bye. Bye.

 

Adam Tabaka

Long & Foster Old Town Alexandria, VA - Realty
400 King Street
Alexandria, VA 22314
703-683-0400
703-589-6513
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