TRANSCRIPT:
Welcome back to Financial Foundations, brought to you by Base Wealth Management, where we are the foundation to your financial plan. I’m your host, Dustin Taylor. And I’m your co-host, Kyle Howell, from Base Wealth Management and Loots Office. Today, we are joined by Sarah DeMonaco, the broker and owner of Remarkable Real Estate and Rentals. And today, we’re going to be discussing wealth building through real estate. Sarah, for the first question, how do homeowners build wealth with their homes? Well, Dustin, there are a lot of ways. One of the most basic ways, and a lot of our parents did this way, you buy your home, you live in it for 30 years, you pay it off, and then you’re living for the price of taxes and insurance, and you can use, as your income grows, you can use your growing wealth to invest in the stock market, in funds, in 401k plans, whatever it is that you have the money left to do. That’s like the simple old school way of doing things. You can do what I did and Kyle over here did with both of our first homes.
was, you know, I bought a house. It was a nice little house with a good floor plan and a great neighborhood, but it had ugly wallpaper and, you know, a lot of things. Did some cosmetic work to it over the years, and then when I sold it, I made a big profit. If you do this to your own home and you are a single person, you can make up to $250,000 on that transaction without paying taxes on that. If you’re a married couple, it can be $500,000. I took this profit from that first home, put a whole bunch of money into my second home, which was a nicer, bigger home, you know, got the pool, got the extra bedroom in there. And then we took a bunch of that money that we profited on and also invested it. So those are kind of the two big, basic ways. So it sounds like it depends on your goals. Could you talk about that a bit? Yeah, so one of my goals, just like Sarah mentioned, was creating wealth through home ownership. So my first very similar story to Sarah, my first home, we bought for $139,000
And five years later, I was able to sell it for $290,000. And we, just like Sarah said, took that profit, put it into the next home, which I bought for $250,000. Seven years later, we sold that house for $650,000. We put in a pool. We did a lot of upgrades to that home. But we were able to take that larger profit, not paying tax on it because we were a married couple and we made a little less than $500,000 on that property. And we are now in what I consider our dream home. And we owe roughly half of what the house is worth because of these real estate moves that we’ve made over the years. A third way is for people, so when you purchase an investment property, you have to put 25, 30% down depending on your situation. But if you buy a starter home, especially if you get it at a low interest rate, sometimes you could take that starter home, turn it into a
Cash flowing rental and buy your next step up home in that way, just keeping that original home is another way to do it. How can paying down your mortgage help you build equity faster without using up all your cash? Well, you have to have a little bit of money left over at the end of paying your minimal bills to do that. But if you pay your mortgage, if you pay the equivalent of two payments extra a year, you pay your loan off in 17 years versus 30. And if you do the math on that, the amount of interest you save over the next 13 years is a lot. I am not a fan of refinancing to take cash out for unnecessary things. Back a few years ago, we had super low interest rates. And even then, in my opinion, the smart play is to refinance at a lower interest rate, keep your payment the same or slightly lower and pay it off in a shorter period of time. There are times if you have a great investment opportunity that may be taking out in super low interest rate environment, taking out.
A home equity line or refinancing in order to do some kind of investment, whether it be in a business or rental property, can make sense. I don’t ever recommend that anybody do that without talking to their financial advisor first. So Sarah, we’re in the northern Tampa market, but obviously you go from Tampa to St. Pete up into Pasco down to Sarasota. You’re kind of all over the place. What neighborhoods are you seeing that are offering, I guess, the most consistent appreciation at this point? I don’t want to say specific neighborhoods, but to quote the great philosopher Shrek from the movie Shrek, appreciation and depreciation happens in layers like an onion. So let’s say downtown Tampa, downtown St. Pete, they’re your hot spots. As they become hot spots, they become unaffordable. So the next layer out is where buyers go. And when that becomes unaffordable, the next layer and the next layer. So if you’re looking.
to build equity and do like you and I both did with our first purchases of homes, you want to buy something really close to what’s going to be the next layer. And that’s where you need an experienced agent guiding you. And you need to be in something if it’s going to be a house you’re going to live in, you know, your plan might be two to four years. And then if the market slows down, or interest rates become unfriendly, you know, you want to be in something you can live in a neighborhood you feel comfortable in, and something you can be comfortable in for a little bit longer if you need to, I will tell you that it’s always willing to pay a little extra to be in a good school district, because in the event that you need to move, that house is just going to sell faster. If you’re buying a home mainly to grow equity over time, what key factors do you check? For me personally, I like to find something that I can put some sweat equity into in an appreciating neighborhood like we just talked about something that maybe potentially I could turn into a rental in the future. And you know, I look for a good solid construction, good bone
And how can I improve this without spending a ton of money over time? So, you know, the big hot buttons, is the roof good? Is the construction solid? If it’s a bungalow, and I’m a huge fan of 100-year-old bungalows, which are an act of love because they take a lot of maintenance, but you know, you got to walk the floors and make sure they’re not all wobbly. And so good construction that maybe needs a little bit of love. And those homes will appreciate over time if they’re in good areas. So Sarah, those that are considering a secondary property, maybe a rental property, how do you assess a purchase price versus expected cash flow and maybe the health of the neighborhood? Like how does that align with like income replacement goals down the line? So there will always be a market for the starter home as a rental property, the small family home as a rental property. There are a lot of people in the housing market that are not prepared to purchase yet, but they want house living, not apartment living. So those make great rental property.
It’s math. You know, you take a look at this is what it’s going to cost you to purchase, this is what it’s going to cost you in insurance, you need to be reserving money for repairs, and you need to take a look, you know, an inspection process of am I going to be replacing a roof soon or air conditioning soon, because you have to factor that into your cost of ownership. You have to factor periods of vacancy into cost of ownership. If you don’t have a little bit of money in your pocket, it’s very, rental properties can be very risky. That’s where sometimes that plan of using your first home as a rental and then moving into your second home plays in a little bit better. You already kind of know the house, you know what’s wrong with it, your expenses have become a little more fixed over time. It’s math. And sometimes people look at a house that they’d love to live in, and it’s really fancy and expensive, and then this will make a great rental. You got to see what the rents are going for. And if you have vacancies, it’s going to, you know, be a longer period of time. Small multi-families are great. If you’re young and can afford to buy a duplex and rent out one side of it,
Live in that for a while, and then as that’s starting to cashflow for you, move out of that and keep that. That’s a great strategy. But at the end of the day, once you try to get rid of those properties, once you get tired of being a landlord or when you try to liquidate them, you have tax implications. If you’re not doing a 1031 exchange or what a lot of people do when they approach retirement, they’re starting to think about leaving these to other people, is they invest in a real estate investment trust. And Kyle has a great one of those that he is able to get people into. You avoid the capital gains tax of selling a real estate. They still produce dividends, but at the end of the day, you’re not making decisions about tenants in and out. You’re not having to send a plumber in the middle of the night. You’re not having to send your kids over there to paint because you’re paying for their college education. All of these things I know my friends with rental properties do. I have a lot of friends with rental properties. Yeah, and I’ve helped clients out with those specific situations.
You know, tired of quote-unquote carrying around the little red toolbox, tired of being landlords. So, you know, they decided to sell and we did a 1031 exchange where we took the rental property, sold that, took the proceeds from that, and put it into something similar to a real estate investment trust. By moving the money into the 1031 exchange property, it created a very similar cash flow without the headaches of, like Sarah mentioned, you know, sending a plumber out in the middle of the night or an electrician to fix, you know, whatever is going on at whatever point in time is happening. So 1031s can be a great tool for somebody that is looking to get out of real estate when they’ve been in it for so long and they’re just tired of it. Well, and the other thing, if you’re talking about leaving your wealth to your kids, you know, as people get older, they start to talk about, all right, we’ve got these, let’s pretend you have one rental property and you’re talking about leaving all your assets to your kids at some point.
Kids to fight, leave them a house, right? One of them wants to move into it but can’t afford it. One of them has some money and everybody expects them to do the repairs. The other one wants to rent it out and manage it as the three of you together or whatever. But if you leave them something like this fund, when the fund retires, and I guess there are sunset dates or something on those where they have to be sold, they just split the money three ways and move on their merry way. And there are some tax breaks there that are different than if the property had been sold by the original, by the parents. I didn’t describe that very well, but you described it very well when you told me about it. Yeah, there’s what’s called the step up in basis. So the beneficiary inherits the property at the time of death and whatever the value is of the fund at that point is what the beneficiaries receive. And because it was through a 1031 exchange and now the step up in the cost basis, the beneficiaries receive it tax free. Can you share an example where?
Timing or simple home improvements created more equity that was then reinvested somewhere? Well, shoot. The first house I ever bought, I was in my 20s, and it was in a great neighborhood. It looked like people had thrown up wallpaper all over the wall. And what I mean by that is every room was colored in wallpaper. And we used to joke that the family each drew a room out of a hat, and they got to wallpaper it however they wanted. But you could see the dining room from the living room, but they didn’t match. It was terrible. We called it the confetti house. And so over time, we were 29, so we didn’t have a lot of money. We had time and ambition and not common sense. So we stripped that wallpaper. We retextured the walls. I don’t know how great that job was. We sanded and refinished the floors. But we put probably $3,000 into this house total. And our return on investment was we made 30% on that house.
a really short period of time. So that’s, you know, if you can do the little things there, paint goes a long way. Sometimes just updating the hardware on cabinets can go a long way, lighting fixtures, you know, and those are things you can do one piece at a time, not like gutting a kitchen, which, you know, once you start, you got to commit and power through. Otherwise, you know, you’re grilling and keeping your things in a Yeti cooler in the backyard, and that’s probably not for anybody. So talking about these small, inexpensive upgrades, do you recommend as a realtor for somebody to do those things if they’re getting ready to sell? Yes. And, you know, sometimes you’re thinking, all right, we’re going to sell this house in the next year. I mean, let me come over, you know, and I’ll look around because if you, especially if you’ve lived in your house a long period of time, just have a lot of stuff. And when you live in your house a long period of time, you don’t even see your own clutter because you’re used to it, right? You become blind to it. So yeah, to look at it in advance, and sometimes I’ll say, give people, these are
things I’m really going to think are great for you. And there’s some really, like if somebody’s going to sell their house, there’s some very simple things that make a difference. When you go to look for a house, you stand there awkwardly for a few minutes while your realtor’s playing with the little super key. Go to Target and buy a new doormat. Make sure your front area is pressure washed and swept clean of cobwebs because people are just sitting there doing this, you know, while I’m going to the lockbox. Pull the weeds, put fresh mulch around the flower beds by the front door. Those little things cost you almost nothing. A fresh coat of paint on the door, sometimes a little poppy color, people like that. Something easy that can be fixed if they don’t like the color. Right, and if your house has a little bit of the sort of grandma look or whatever, and I say this as a grandmother, so, you know, to put some more modern poles on your cabinet, some slightly more modern lights, you know, I can give people some suggestions. If you’ve been in it a long time, a coat of paint goes a long way. Straightening, decluttering. I mean, I took a staging class, so sometimes I’ll say, listen, you’ve got six things on the surface, let’s remove it to three, or I actually have a stager that I send in to people,
People’s homes, if she’s staging everything and putting furniture in, it’s a different story, but she’ll come in and make some suggestions to people. And since I do a lot of business with family and friends, it’s better for them to hurt their feelings than me. When is a fresh coat of neutral paint worth it and how much value does it really add? So I do hear people say a lot, well, it’s just, you know, when you’re selling the house and it’s got strong colors, well, somebody’s just going to come in and paint anyway. Any house that’s freshly painted just feels more maintained. You know, if the baseboards are also, people don’t want to paint the baseboard sometimes because it’s more expensive, but you know, if the baseboards are clean and neat, re-caulking, sometimes spending a couple hundred dollars to have your shower regrouted, you don’t need to change the whole shower, but regrout it, makes it look like a new shower, especially if you’ve got, you know, tile that’s a current color. So I think paint is always a great idea, cleaning, updating light bulbs.
Just silly little things like that make a difference because even though, I mean, we’re sitting here talking about the investment of real estate, if people are going to purchase the home they live in, they walk in and they immediately have an emotional reaction. And if there are things that just are objectionable to them for the start, unless they’re people that are like gung-ho and I love a project, and those people are out there, to try to neutralize your home so that people can imagine themselves in there makes a big difference. As we wrap up, what is one practical tip for homeowners to enjoy their home now while still building equity? I would say if there’s something you have a burning desire to do to the home and you can afford to do it, go ahead and do it now because more than once I’ve done the projects that I wanted to do while I was living there right before I sold the house and then I’m like, I don’t want to sell this place. So, you know, there are a lot of things you can do yourself. Or you can have done economically. And then there are other things, you know, like a big kitchen remodel.
If you’ve got the money, do it because you’re going to like the house so much better. But if you don’t, you know, wait until you can. As a bonus question, is there anything that people would think would add a lot of value to their house when they do it, but then it doesn’t really? Is there anything they should maybe avoid that they’re thinking about doing? Not really. I’ll tell you one that really adds value to people’s houses if you’re doing a kitchen remodel is put in a wine fridge. Because I don’t care what the price range is, people walk in the house and go, ooh, a wine fridge. I mean, if you have no cabinet space, you can’t do it. But ooh, a wine fridge, it’s a thing. And they’re not that expensive. I think what you just want to be aware of is not over-improving yourself for the neighborhood. If your house is going to sell for $300,000 fixed up, you’re going to put in a $20,000 or $30,000 kitchen, not a $90,000 kitchen because you’re going to over-improve yourself for the neighborhood. So you have to be very aware of that. Pools don’t cash flow right out the gate.
If you want a pool in your backyard, put it in and live in it and enjoy it. Now your house will sell faster. It will sell for more money. You’ll enjoy your house more. There’s a big emotional value to the pool. But as far as dollar for dollar right now, pools aren’t going to get you your money back. Replacing an old uninsurable roof with a new roof, you’re going to get it back. Paint, you’ll get back. Small upgrades like lighting, you’ll get all of that back. A deck in some areas, like if you’re farther up north, putting a deck on your back is a pretty affordable thing. Any form of additional sort of outside living space like a gazebo or screening in a lanai, you definitely get your money back on that. And you don’t get bit by bugs while you live there. So that wraps up our topic about building equity in your home. If you’d like to hear more from Sarah, you can reach her at 813-417-0926. All right. Thank you for joining us. If you would like other resources or information, you can find those at Base Wealth Management.
We have podcasts, YouTube videos, and articles there for you to consume. And please make sure to subscribe if you like this episode. We have plenty more, so make sure you follow us on all of your social media platforms. If you have any questions, send them to question at basewealthmanagement.com. I’m Dustin Taylor. And I’m Kyle Howell. Happy listening.
