The Passive Income Lie Keeping You Broke - And Angry

"Well, in the tax code, the United States tax code, what it says is when you go out and you buy a rental property that's a single family house, you get to take a depreciation deduction because your property has wear and tear because it's one year older, you get to take a write off because of that. And when it's a single family house, you find the value of the actual building. In this case, $200,000 because we said $50,000 is the land. And then you divide that number by 27 12. Why 27 12? Well, that's just what the tax code says. If it's a single family house, if it's a commercial building, like an apartment complex, then you take that value of the building and divide it by 39. Again, that's just what the tax code said. I didn't make these numbers up. That's just what it tells you. So, in this case, I take $200,000 divided by 27 and a half. And what it tells me is I'm going to get a $7,200 deduction. Why? Because of depreciation."

"So, if you go out and buy this house for $250,000, and I know what some of you are thinking, Jos Breit, where can you find a house for $250,000? Well, I'm based in Michigan. My office is in downtown Detroit. If you look around the metro Detroit area, you can [snorts] find some great houses just like this listed for sale for $250,000, which you will be able to rent out for right around $2,500 [clears throat] a month, which is pretty nice."

"But what the IRS also says is if you can accelerate the depreciation, you can take a bigger deduction in year 1 and year two and year three. So what some investors will do is they'll work with their accountant to say, hm, value of the building is $200,000. In year one, instead of taking a $7,200 deduction, we should take 10% of the property value, which in this case is $20,000, which means now you don't have $8,600 of taxable income. You have a negative taxable income of $4,200."

"Now, $2,500 a month in rental income sounds great, but you have to remember that's not all profit. When you purchase a house, you have expenses. You have to pay for the property taxes. You have to pay for the insurance. You have to pay for the maintenance. You have to pay for the management fees cuz I don't want you to actively manage the properties because remember I want this to be as passive as possible for you."

"So, when it comes to your property taxes, let's assume $250 a month in property taxes. Then you have to pay for your insurance. Again, another $225 a month for your property insurance. Then you have to pay for your maintenance. And hopefully your maintenance costs are going to be less, but let's just assume about $250 a month factored in for your maintenance cost. Some months are going to have no maintenance cost. Some months are going to have more. Then you have to pay for your management fees because I don't want you managing this property yourself. A property manager might cost 8 9 maybe 10% of the gross rent. So I'm going to go with the 10% number if you're making $2,500 a month in rent. Your property manager might take up to $250 a month in management fees. And then you have to pay for vacancy costs. If your property is vacant for one month out of the year, well, that's going to be an additional $28 a month in lost rent."

"Well, according to the definition of a primary residence, when you go to get a mortgage, you're getting a primary residence mortgage. That primary residence can be a townhouse, a single family house, a condo. It can be a duplex, a triplex, or a 4-unit property, which means you could go out and buy this $1 million 4-unit property for you to live in yourself. Now, maybe you can't afford the costs on a $1 million property, but for this example, let's just assume that you're able to find a way to purchase this property. Maybe you can get a low down payment mortgage. Maybe you have the money for a bigger down payment. Let's just say you have the money for a $200,000 down payment here. You're still concerned about how you're going to keep up with the cost, but you had the $200,000 saved up. So now you go out and finance this property with an $800,000 loan. Sure, you could use a smaller down payment, but let's just stick with this example here. Now you purchase this property. There's four units. You are going to live right here for yourself. And now what you do is you're going to rent out the other three units to your neighbors who are going to be your tenants. and they're all going to pay you $2,500 a month. So, this unit is paying you $2,500 a month. This unit is paying you $2,500 a month. And this unit is paying you $2,500 a month, which means now you're making $7,500 a month in rental income, and you're living in this unit right here."

"And finally, last but not least is number four, cash investments for cash flow. Now, I kept these last because this really isn't an investment. It's a way to generate some interest on this cash, then your cash really just isn't sitting idle. Right now, at the time of recording this video, the average interest rate on a bank account in the United States is about 0.4%. Which is essentially nothing, especially when you compare that to inflation. So, if you put this money into a normal savings account, you're going to be losing value. But then some people like to take this cash and put it into a CD, a certificate of deposit, which is going to pay you more than a savings account. At the time of me recording this video, the average 5-year CD in the United States is paying around 1.3%. Which means, yes, if you put your money into a CD, you're still going to be losing value to inflation. And then you can consider putting some of this cash into a high yield savings account. A high yield savings account is a savings account. They should be FDIC insured. If it's not, don't save your money there. But a lot of these high yield savings accounts are reputable banks that don't have the same overhead of a physical bank. So instead of driving into the bank branch, it's all digital, but it's still FDIC insured and it's still a normal bank. You just have to do it all digitally. And at the time of me recording this video, high yield savings accounts are paying roughly around 4% a year in interest where now we have some decent interest because the average inflation rate is right around 3%. And if you're generating 4% a year in interest from this high yield savings account, well, now at least you're not losing as much value as if you were just keeping that money in a savings account. Now, still in a high yield savings account, you're not really making much money because inflation is eating away at the value of your savings. And a lot of times, the real inflation that you're feeling is higher than the reported inflation numbers. But it's better to get something instead of nothing. in a high yield savings account definitely beats having a traditional savings account assuming that it's a actual reputable bank instead of a bank that well is not FDIsured and now you're essentially putting your money into a scam Ponzi scheme. So definitely do not do that but if you have some extra cash and you don't want to invest your money at least generating some interest whether it's a savings account or maybe even a treasury that way you can get some interest is better than not getting any interest."

"Now, when you add up all these monthly expenses, what you'll see is that you are making about $15,800 a year in profit. And right now, I'm assuming that you don't have a mortgage, that you purchase this property all cash."

"This could be a creative way for you to get started. And if you don't want to do a four-yun property, again, you can start with a single family house, live there for a year and a day, move out, and let somebody else live there and keep that mortgage in place, and now that tenant can pay for the expenses, and if you do the math right, put some money in your pocket year after year after year."

"If you take this profit, $15,800, and you divide it by the amount of money you had to put in, a4 million, that's about a 6.3% cash flow."

"Example number one is N OL Noble. This is an ETF that gives you exposure to the S&P 500 dividend paying aristocrats. What that means is number one, to qualify to be in this fund, you have to be a part of the S&P 500. That's a group of the 500 largest companies in the stock market. Then layer two is you have to be a dividend paying company. So you have the 500 largest companies in the stock market, but not all of them are paying out a dividend. And then number three is you have to be a dividend aristocrat. Meaning not only do you have to be in the S&P 500, not only do you have to pay out a dividend, but you must have also increased your dividend every year for at least the last 25 years. So this is a very exclusive club focusing on the very large companies that have a strong track record of not just paying out a dividend but also increasing their dividend for decades. At the time I'm recording this video, NOBL is paying out a dividend of around 2% a year."

"For me personally, not good enough. I like to invest in properties that are paying me a minimum of 7% cash on cash returns. So, it's almost there, but not exactly there. I like to look for for every dollar that I invest, I get 7 cents of cash flow back."

"Example number two is SCHD. This is an ETF created by Schwab. Schwab is a fund manager and this is focused on investing in high dividend paying companies inside of the United States. So, at the time of recording this video, SCHD is paying out around 3.75% a year."

"In real estate, you have turnkey properties and then you have value add properties. A turnkey property is a beautiful house. Those cute little houses that come with cute little profits. But a cute little house is one of those houses that looks very nice. It has brand new flooring, brand new carpets, new paint on the walls, new landscaping, new everything, and it looks so beautiful. It's ready to go. It's where you want to live. And because it's already ready to go, you have to pay a premium for that. So, your returns are generally going to be a little bit less."

"Example number three is VIG. This is an ETF created by Vanguard, another fund manager that focuses on appreciating dividend companies. So, VIG is looking for the companies that are the larger, more established companies that are focused in on increasing how much money they're paying out in dividends year after year. VIG at the time of recording this video is paying out around 1.6% a year."

"And then last but not least is VMI, another fund that I'm personally invested in. As a disclaimer, this is also created by Vanguard, but this is investing in international companies that are not in the United States that have a track record of paying out strong dividends. So, this gives you some diversification outside of the United States, but there's also more risk because not only do you have the company risk, but now you also have the country risk because some of these countries are not as established. They don't have as strong of a military. They don't have as strong as common me, but the company and the country is looking to grow. At the time of recording this video, VYMI is paying out around 4% a year in dividends, but the also potential for higher growth and higher returns on the dividend side as well."

"A value ad deal is the opposite. You walk into this house and it smells like crap. There's holes in the walls. You walk into the kitchen and there's a rat running around. Those are the types of deals where you're going to get a big discount. And because you get a big discount, if you're willing to put in the work, you can get a better deal."

"For me personally, not good enough. I like to invest in properties that are paying me a minimum of 7% cash on cash returns. So, it's almost there, but not exactly there. I like to look for for every dollar that I invest, I get 7 cents of cash flow back."

"And so, let me show you why this can be so powerful. Because when you go to invest in real estate and you make this $15,800 a year in income, you would think that you have to pay taxes on all $15,800 a year in income, which is not exactly true. For the purposes of this example, let's assume that in this quarter million dollar house, $50,000 was attributed to the value of the land and $200,000 was attributed to the value of the actual house, the actual building. Well, in the tax code, the United States tax code, what it says is when you go out and you buy a rental property that's a single family house, you get to take a depreciation deduction because your property has wear and tear because it's one year older, you get to take a write off because of that. And when it's a single family house, you find the value of the actual building. In this case, $200,000 because we said $50,000 is the land. And then you divide that number by 27 12. Why 27 12? Well, that's just what the tax code says."

"For example, a number of years ago, the McDonald's stock was trading for around $100 a share. And at that time, around 10 years ago, the McDonald's stock was paying out around $2.80 80 cents per share, which means over the last decade, not only did the stock price grow by around 200%. But they've also increased the amount of dividends that they're paying by 150%. Which means for every share that you bought years ago, not only is a share more valuable, but you're making more money out of every share that you bought years ago as well."

"So, in this case, I take $200,000 divided by 27 and a2. And what it tells me is I'm going to get a $7,200 deduction. Why? Because of depreciation. Why do I get it? Because that's what the IRS tax code says. When you go out and you buy a single family house, take the value of the building, divide it by 27 12, and that's how much of a write-off you get every year for the next 27 years."

"So, I made $15,800. This is how much money is in the bank. I get to take a $7,200 write-off, which means I have a taxable income of $8,600. this is how much money I'm going to actually pay taxes on even though this is how much money I have in the bank. This is one of the hacks that real estate investors have to pay less money in taxes legally because the IRS tax code says that you get this depreciation deduction."

"Because my propertyy's one year older and we did this accelerated depreciation, which means you have $15,800 in the bank, you're going to pay $0 in taxes because in the IRS's eyes, you lost money. And then next year, when you go to file your taxes, you're going to take this loss and you're going to carry it forward to the next year. This is how many real estate investors get to make large sums of money and pay little to no money in taxes because of this depreciation deduction right here."

"So, I made $15,800. This is how much money is in the bank. I get to take a $7,200 write-off, which means I have a taxable income of $8,600. this is how much money I'm going to actually pay taxes on even though this is how much money I have in the bank. This is one of the hacks that real estate investors have to pay less money in taxes legally because the IRS tax code says that you get this depreciation deduction."

"So what some investors will do is they'll work with their accountant to say, hm, value of the building is $200,000. In year one, instead of taking a $7,200 deduction, we should take 10% of the property value, which in this case is $20,000, which means now you don't have $8,600 of taxable income. You have a negative taxable income of $4,200."

"It could be a duplex, a triplex, or a 4-unit property, which means you could go out and buy this $1 million 4-unit property for you to live in yourself. Now, maybe you can't afford the costs on a $1 million property, but for this example, let's just assume that you're able to find a way to purchase this property. Maybe you can get a low down payment mortgage. Maybe you have the money for a bigger down payment. Let's just say you have the money for a $200,000 down payment here. You're still concerned about how you're going to keep up with the cost, but you had the $200,000 saved up. So now you go out and finance this property with an $800,000 loan."

"You have $15,800 in the bank, you're going to pay $0 in taxes because in the IRS's eyes, you lost money. And then next year, when you go to file your taxes, you're going to take this loss and you're going to carry it forward to the next year. This is how many real estate investors get to make large sums of money and pay little to no money in taxes because of this depreciation deduction right here."

"Now you purchase this property. There's four units. You are going to live right here for yourself. And now what you do is you're going to rent out the other three units to your neighbors who are going to be your tenants. and they're all going to pay you $2,500 a month. So, this unit is paying you $2,500 a month. This unit is paying you $2,500 a month. And this unit is paying you $2,500 a month, which means now you're making $7,500 a month in rental income, and you're living in this unit right here."

"According to the definition of a primary residence, when you go to get a mortgage, you're getting a primary residence mortgage. That primary residence can be a townhouse, a single family house, a condo. It can be a duplex, a triplex, or a 4-unit property, which means you could go out and buy this $1 million 4-unit property for you to live in yourself. Now, maybe you can't afford the costs on a $1 million property, but for this example, let's just assume that you're able to find a way to purchase this property."

"Add up the expenses and you have $3,400 a month in monthly expenses to operate this property. You're making $7,500 a month, which leaves you with $4,100 in net income, which sounds great, but don't forget you got a mortgage you got to pay for as well. You finance this $800,000 property. So let's take a look at that. You don't have to get an investor's mortgage. you're getting a primary residence mortgage because you're living here yourself. So, let's say you're paying about 6.25% for a 30-year mortgage. It's going to cost you right around $5,000 a month, which means you are going to be losing $900 a month to purchase this property."

"So, now a year and a day go by, you go out and you purchase a different property and now you rent this out for $2,500 a month. Hopefully, it's in a good area and it can rent for a little bit more. But let's just assume you rent it out for $2,500 a month. Now, this $2,500 a month is going to cover this loss that you had plus puts some money into your pocket every single month. And now you are making a positive cash flow on this property that you purchased to live in yourself. And now you have another place to live because you can do this year after year after year assuming that you live in a property for at least a year and a day."

"Let's just say you have the money for a $200,000 down payment here. You're still concerned about how you're going to keep up with the cost, but you had the $200,000 saved up. So now you go out and finance this property with a $800,000 loan. Sure, you could use a smaller down payment, but let's just stick with this example here. Now you purchase this property. There's four units. You are going to live right here for yourself. And now what you do is you're going to rent out the other three units to your neighbors who are going to be your tenants. and they're all going to pay you $2,500 a month."

"the goal is the shares that you buy today are going to pay you more income next year. They're going to pay you more income the year after that and even more the year after that. So, you want to own these investments for the long term."

"Add up the expenses and you have $3,400 a month in monthly expenses to operate this property. You're making $7,500 a month, which leaves you with $4,100 in net income, which sounds great, but don't forget you got a mortgage you got to pay for as well."

"You finance this $800,000 property. So let's take a look at that. You don't have to get an investor's mortgage. you're getting a primary residence mortgage because you're living here yourself. So, let's say you're paying about 6.25% for a 30-year mortgage. It's going to cost you right around $5,000 a month, which means you are going to be losing $900 a month to purchase this property."

"And then number three, when I get paid with that cash flow, I'm reinvesting that cash flow as well. I'm reinvesting these dividends because I'm working to build a machine that's working to pay me with income. Then as the machine pays me with income, I'm going to use the income from the machine to buy more machines that are going to pay me with income. So you use money to buy the machine. Then as the machine pays you, you use the payment to buy more machines."

"So, now a year and a day go by, you go out and you purchase a different property and now you rent this out for $2,500 a month. Hopefully, it's in a good area and it can rent for a little bit more. But let's just assume you rent it out for $2,500 a month. Now, this $2,500 a month is going to cover this loss that you had plus puts some money into your pocket every single month."

"It is a very slow process in the first few years, but I call it a decade of sacrifice. If you stick with it, the first three years are going to give you essentially no returns. Year four, year five, you start to see a little bit of returns. Year six, year seven, you start to see some more returns. Year eight, oh, all of a sudden you have a new stream of income. Year nine, now you're starting to see how this machine starts to work. And by year 10, now you have a solid new stream of income if you're willing to put in the sacrifice to stick with it."

"Right now, at the time of recording this video, the average interest rate on a bank account in the United States is about 0.4%."

"And at the time of me recording this video, high yield savings accounts are paying roughly around 4% a year in interest where now we have some decent interest because the average inflation rate is right around 3%."

"At the time of me recording this video, the average 5-year CD in the United States is paying around 1.3%."

"If you look around the metro Detroit area, you can [snorts] find some great houses just like this listed for sale for $250,000, which you will be able to rent out for right around $2,500 [clears throat] a month, which is pretty nice. Now, $2,500 a month in rental income sounds great, but you have to remember that's not all profit. When you purchase a house, you have expenses. You have to pay for the property taxes. You have to pay for the insurance. You have to pay for the maintenance. You have to pay for the management fees cuz I don't want you to actively manage the properties because remember I want this to be as passive as possible for you. In the beginning it's going to be a lot of work. But once you understand it and you build a good team, then it can be very passive for you because I don't manage my rental portfolio. I have a team of managers that are doing all the work and they just give me a report every single month of how things are doing. And then you have to cover the vacancies because there's going to be times where tenants move out of the house and you don't have anybody paying you. So let's factor in some costs. I'm going to round up what I think the cost could be because I'm not going to be upset if I made more money than what I expected. But if I make less money than what I expected, I'm gonna be a little bit more stressed out. So, when it comes to your property taxes, let's assume $250 a month in property taxes. Then you have to pay for your insurance. Again, another $225 a month for your property insurance. Then you have to pay for your maintenance. And hopefully your maintenance costs are going to be less, but let's just assume about $250 a month factored in for your maintenance cost. Some months are going to have no maintenance cost. Some months are going to have more. Then you have to pay for your management fees because I don't want you managing this property yourself. A property manager might cost 8 9 maybe 10% of the gross rent. So I'm going to go with the 10% number if you're making $2,500 a month in rent. Your property manager might take up to $250 a month in management fees. And then you have to pay for vacancy costs. If your property is vacant for one month out of the year, well, that's going to be an additional $28 a month in lost rent. Again, it's not an actual fee that you're paying, but I want to factor in the cost because most people forget that sometimes your property is vacant and you still have to pay for the expenses. Now, when you add up all these monthly expenses, what you'll see is that you are making about $15,800 a year in profit. And right now, I'm assuming that you don't have a mortgage, that you purchase this property all cash. Now, the first question you have to ask is, is this a good return or not? And this answer is going to depend on who you are and what your goals are. If you take this profit, $15,800, and you divide it by the amount of money you had to put in, a4 million, that's about a 6.3% cash flow."

"And at the time of me recording this video, high yield savings accounts are paying roughly around 4% a year in interest where now we have some decent interest because the average inflation rate is right around 3%."

"Russia accused the United States of trying to devalue its $37 trillion of national debt without informing the American people. How? By using stable coins, crypto, and gold."