Settling the Rent Vs Buy Debate and 3 Rules of Investing in Real Estate with Paul Mark Morris

0:01I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. And it's time for some money rehab.

0:15Is renting really throwing away money? That is just one of the real estate topics that I get into today with Paul Mark Morris, real estate investor and host of the podcast Radical Wealth Plan. And I know that everyone these days with an Instagram account thinks that they are a real estate investor. But Paul is the real deal. His real estate firm oversees 2 ,000 realtors who have closed more than$7 billion in deals annually. So as a real estate guy through and through, he is the perfect person to have the rent versus buy debate with. As you know, I have a little bit more love for renting than most financial experts.

0:49Paul also gives a full-on masterclass in the art and science of closing a sale. Paul does what every finance bro has threatened to do since the Wolf of Wall Street. He sells me a pen, but actually he crushes it. And as a side note, after the interview, Paul kindly mailed both me and our producer pens, which I just think is the greatest relationship building move. Ten out of ten, highly recommend the interview after this. I once interviewed the CEO of a credit bureau and he confessed that his assistant has a better credit score than he does. Why? Because she's more organized. Yep, even the head of the credit bureau can use a little help in the credit score department.

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2:31Results may vary. See chime.com for details and applicable terms. I recently went on a quick beach trip with my husband for a little couple's time, and it was perfect. We sat in the sun, swam in the ocean, and generally just tried to get to that place of deep relaxation where your shoulders actually drop a few inches. Do you know what else can give you that feeling? Co-hosting with Airbnb. Trust me on this one. Hosting your home on Airbnb while you're away from home is a great way to make some extra cash and make sure your home is working as hard as you do. But knowing where to start can feel overwhelming.

3:03That's where co-hosts come in. These are local experts who can help make hosting even easier by taking care of all the little details back home while you're off enjoying yourself. Co-hosts can handle everything from staging your space to communicating with guests to offering on-site support so nothing interferes with your time away from home. Whether you're living the digital nomad life or just taking a well-deserved reset, I love this for you. Looking to get started? Find a co-host at airbnb.com slash host. Paul Morris, welcome to Money Rehab. Thank you for having me. I'm really looking forward to it.

3:40It made me feel like I'm a disc drug. Yes, let's go. So everyone asks you, I'm sure, is now a good time to buy? Is that the number one question that everybody asks? It is, to be honest. And I've answered it so many times that I'm happy to answer it again. Real estate is so deal dependent that there are great buys made in every market. And there are terrible buys made in every market. So, how good the deal is, is almost wholly independent of the market. Now, I might change the way I look at a deal knowing that, you know, like we really like the market's been so hot for so long, you know, we're really closer to the top than the bottom.

4:30I might adjust the things that I look at and be a bit more conservative. And I'm going to give you one anecdote. and that is I go to hot yoga and I'm in the locker room and men are nice to each other in the locker room at hot yoga because yes I'm sure it's because like we've just been through hell you know and now we're where it's much nicer and and the guy said to me hey you know I know you're in real estate and I was looking at this deal I thought it was really great deal and my CPA told me not to buy it. I was like, oh, that's interesting. And he's like, well, what do you think is now a good time to buy?

5:08And I asked him where the deal was. And interestingly, his realtor happened to work for me, which is not as crazy coincidental as it might seem because there are 2000 realtors in LA working for me. And I knew the person and I know that she's a great realtor. And she was suggesting a buy. And then his CPA said, don't buy. Now it's not a good time to buy. And I asked him, did your CPA go out and look at the property or did he at least see the deal? And he said, no, he was just saying it's not a good time to buy. And I told him, I absolutely promise you that that is terrible advice. And the reason why I know it's terrible advice, I'm not saying buy it or don't buy it.

5:55But the reason why I know it's terrible advice is because if you don't look at the deal, how in the world would you know whether you should buy it or not? And there certainly is a price at which any real estate deal makes sense in any market. For you, I think the better question, and we can't get into it now, is, is it a good time to buy for me and my family? If you have a need to buy real estate, meaning like you're renting, let's just say you're renting and you come to me and say, is now a good time to buy real estate? I would say now's a great time to look for deals. And every single market is slightly different.

6:39Like the Fed just dropped their rates and they're anticipating that the Fed's going to drop their rates again, maybe once this year, as many as two or three times next year, there are people waiting till those rates drop. And I'll tell you why that doesn't make sense. Because when rates are low and the market's hot, then I have clients. Yeah, I have clients and people, they've now missed their seventh home. They got outbid and they're waiting for a time when their offer would be looked at. So if you can afford to buy your own home, then every market is a great market. That doesn't mean that every deal is a great deal.

7:26You can make a bad buy in every market and you can make a phenomenal buy in every market. Okay. I want to debate with you. Please. Renting versus buying. Should we do it now or should we get to your three rules? Whatever you want to do. Let's go through your three rules. Okay. And then let's get into it. So rule number one, if you're investing in real estate, which is different, investing in real estate is different than buying your primary house. It is and it isn't. I use an investor mindset when I buy my own house. I had a podcast on how I made a million dollars the day I closed on my own house.

8:04So how did you make a million dollars the day you closed? Well, so one of the myths is that in order to get a steal or a great deal, it's got to be off market. You've got to steal it from somebody. You've got to whatever. I feel like those deals are always more expensive, though. People are always looking for them. They're like, oh, if it's on the market. So I'll just give you the example of my house. my house is at it is at a luxury price point and it was a poorly done flip okay what it meant in in real terms for this house and i'll just go ahead and tell you the numbers the house was listed at 4.75 million it was at the top of the market this is when anything that was like halfway decent was in multiple offers 4.75 million is all was already low for this.

8:56That's why they priced it that way. And it just sat there. I looked at it and there were enduring qualities. The enduring qualities are magical views, 5 ,000 square feet all on one level. It had a beautiful infinity pool that was like carved into the edge of the mountainside. I'm painting a very nice picture, right? Wow. Wow. Wow. Wow. Right. And you go in And there are, I think it's not an exaggeration, 100 overhead LED lights of the cheapest brand possible. And there's not a dimmer in the whole house. So you go in and you turn on the lights and it's like, you're like in a surgical theater. Interrogation.

9:44It's interrogation rooms. It's like, that's bad. And then there was just so much wrong with the house. visible flaws and things that chase people away that if you do a little bit of work or a little bit of due diligence that you can you can work around and the bottom line is i ended up paying 4.65 million for it and just do the math it's 5 000 square feet and i brought a whole team in to inspect everything and then had a contractor who i trusted and said you know how much is it going to cost to fix all this stuff and the answer came back you know well under two hundred thousand dollars so let's redo that math 4.65 million in with everything screwed up and two hundred thousand dollars to fix it now we're at 4.8 it's never what they suggest you know it was over time you know what i did it in a way that i was like like tell me if you think it costs 20 grand to fix it, like tell me 40.

10:50I don't want to undershoot it, just overshoot it. And the number came at 200 grand. And the easy math is 4.65 plus 200. Now you're at 4.85 with all the stuff fixed. And then I went to a great realtor, even though I'm in that business. I went to a great realtor who specializes in the area. He knew the house, he knew the view. And he just said, there's nothing, You cannot touch anything with that kind of a view for under$1 ,200 a square foot. So that math is$6 million. So for 4.85, I'm getting$6 million worth of house. And that, by the way, was in one of the hottest markets. That's when it was buy, buy, buy.

11:36And I was still able to get essentially that steal. It wasn't a steal because guess what? it was already, it had been on the market, which means every end user, every investor had already seen this place and passed on it. And being able to see through that with the help of experts to, cause I'm not an HVAC guy. You don't need to, you don't need to be any of this stuff, you know, just get the right people, get the right information, make an informed decision. And that's how I gained a million dollars equity at, you know, at the close of escrow. Well, we're definitely having a party at your house.

12:12But for somebody who isn't looking for a$5 million steal, let's come back to earth and say, you know, we're out there. We're looking for a place. The number one rule you have is buy where you know and what you know. So explain that. Let's say you are, though, in a really expensive market like LA or New York, and you know that, but you can't afford that. Right. Right. Buy where you know, make sure it's value add and make sure it cash flows. So, and the other thing, just like you said, come back to earth on the$5 million house. I just want to say that that math works exactly for a$500 ,000 house.

12:51So you buy the$465 ,000 house that has$30 ,000 worth of bad stuff. You can do a lot for 30 grand. And now you're at, now you're at 500 grand and it's worth$600 ,000. So the math works at$500 ,000. I'm originally from Pittsburgh, and that's where I found that math. So one of the things that people find interesting or surprising is that I've been investing in real estate for 30 years, and I've never lost money in a single deal. And I've done that by following the three rules that you're referring to. and the first one is buy where you know and to answer your other great question of okay well you know geez i live in la which is where i know so like shouldn't i be buying in detroit where i heard it's cheap or where you know whatever and my answer is first of all if you don't own a home and this is where we're getting back to investing versus your personal residence the best place to start building wealth by far is in your own home.

14:01And the reason why is there are loans and products, loan products available to you for your own home that do not exist for investors. So you have to check the box that says, yes, I'm owner occupy. And then there are programs that like kick the door wide open. You mean lower interest rates for first time homebuyers and much, much, much lower down payment for starters. I'm not sure if that's the best move for everybody, but we can debate it in a moment. Let's put a pin in it. Let's go back to number two. So make sure it's value add. So buy the worst house in the best neighborhood is a great North star.

14:42And the only reason why I deviate from that is because of where we live. Okay. So you're going to buy the worst house in Beverly Hills. Sorry, I can't afford that. that's not going to work. It's still a great idea. It just doesn't work in a very high-priced area. So instead of buying the worst house in the best neighborhood, what I'm buying is close to the worst house in an area that I know is up and coming. And I know it's up and coming when about 25 % of the houses are done. There are other signals. I use as a signal, you know are there cool coffee shops coming in are there vintage shops or just like the cool stuff is coming in and then you you just know that it's starting you know that it's starting to turn because if you buy too early uh which i've done that too like i know this neighborhood is going to change and you want to catch it early and you buy too early you just never know like it could take forever so you have to like miss the best buys and wait till it's already starting to turn.

15:46And then everybody in the neighborhood is like, did you see that place? Like that is crazy what that sold for. But when it's only like 20 to 25 % redone, you're already paying more than the people that first got in, but you know that that train is moving, which is important. You're following the cool kids. You are following the cool kids. Couldn't have said it better. So the third one is look for cash flows. That still applies for your primary house? Yeah. So when you're doing it for your own home, it's buy where you know, buy the value add, and then know that you can afford the payment. And so if you can afford the payment, that's the same exact thing as it cash flowing.

16:30So if I'm paying$1 ,600 in rent and I look at the mortgage payment, I'm like, yeah, but the mortgage payment is going to be two grand. That's more, but I can't afford it. And a 1031 exchange, very sexy on TikTok right now. Yeah. I do hear a lot of people talk about it with their primary house, but it's intended for investment properties. Sure. Can you explain? So, you know, 1031 is really about pay taxes now or pay taxes later. And, and if you can delay taxes, that's always a good thing because, you know, again, I'd use very, very simple math. And let's say we got into an investment property and it was$700 ,000 and we put$300 ,000 in to make it great.

17:20And the rents went up and we waited a while and now it's worth $2 million. So if we sold it, we would have to pay taxes on that$1 million gain. And that would come out right now. And then we would have, let's say, you know, whatever, it depends on what state you're in and that sort of thing. But as you say, now we have one and a half million to invest instead of 2 million to invest. If you 1031 exchange it, you can delay the taxes and then you invest the whole$2 million into a new property. So you have more to invest. And if you do that over time, your money will just grow much faster.

18:07Hold on to your wallets. Money Rehab will be right back. And now for some more Money Rehab.

18:20Okay, let's get into it. Yes. You say - Argue with me. That buying is almost always better than renting. A big pro for that is that people say renting is throwing away money. Sure. And buying is not. I'm sure that's one of your arguments. Of course. And you're making the landlord wealthy. You're not making yourself wealthy. Also, there are tax benefits. I didn't create the tax laws, but there are massive tax benefits to owning property. I think the idea that renting is throwing away money is just incorrect. It buys you flexibility. It buys you safety. It buys you optionality. It buys you shelter.

19:04I mean, nobody says I'm throwing away money because I'm buying groceries or health care. I think there is a cost of living. Period. There's a lot that you don't get back from homeownership either. You don't get back closing costs. You don't get property taxes. You don't get back the insurance premiums that you paid. And yes, you might get a tax write-off, but that's making the biggest financial decision of your life based on a write-off. It's like the tax tail wagging the dog. Somebody's paying insurance. And so if the landlord's paying insurance, they cannot pay their insurance unless they're charging you for their insurance.

19:41Somebody is paying that property tax. Or homeowners association fees, if that makes sense, or repairs. These are things that you never, ever get back. It goes into the value of the property. The reason why apartment building owners are the secret millionaires or multi-millionaires is because it's worked for them and has always worked for them. I see people lose money in real estate. And the people that lose money in real estate are people that get over leveraged. Like you said, I agree with you. accept that if you can afford to pay, if you can afford to pay the mortgage, just like you have, if you can't pay your rent, you're eventually going to get thrown out.

20:24And so if you can afford to pay your mortgage, then you're good to go. And over time, the payment that you're making is almost all interest in the beginning. And then it starts to change. You're paying down principle over time. You're building your own war chest. But we can agree that in the short term, it doesn't make sense because there's a five to seven year break even period, right? So if you're not sure you're staying there as your primary home, it doesn't make sense because you're spending so much in interest, especially in the beginning. We can do some easy math if you would like. Sure.

20:59Let's say you buy a$500 ,000 starter home and you think you're going to get a bigger, better place in five to seven years. You put 20 % down. Okay. So you put a hundred K down and after five years you've spent 133 ,000 just on interest and only 26k on principle. Okay. If you took that 100 grand and you put it in the market instead you'd have 160 grand. So the real cost is an opportunity cost especially in the short term. I would want to ask you where is the value of the house during that during that period of time and that you might say is market dependent. And I would say to you that if you bought it the way I talked about buying it, it's more dependent on the value you add than the market.

21:52But I love over time, looking at big data sets. I mean, that's the only way to make this comparison, right? So over time, real estate has yielded. On average, I know it's very market specific and your properties are special, but 4.5 % a year. Over time, the S &P 500 has yielded 10%. So if you're looking at an apples to apples comparison, you're going to make more if you take that money and you invest in the stock market. So if you invest that 100K and never put another dollar in your investment account over that 30-year mortgage, you'd have$1.7 million. dollars on a five hundred thousand dollar house with the interest you're spending close to a million dollars for that house so it has to grow a lot and oftentimes it doesn't and so you want me to answer that is that a statement or is that a question i'd love for you to answer it's like you know a national a national weather forecast let's say we're going to plan your we're going to plan your wedding.

23:00We're going to plan your, you know, big celebration. And you're going to like look at a national weather forecast. It doesn't, it doesn't make any sense. You got to look at the micro market. So let's talk about a specific area. We pulled the numbers for LA and a lot of Metro areas for comparable homes. Rent is 30 to 40 % lower than a mortgage payment. So in LA right now, the median rent,$3 ,000 versus a mortgage,$5 ,000. So we talked about the opportunity cost. If you invested just the down payment and never put in another dollar, you would still beat the return on an average home. But let's say you added that delta of what you're saving on your rent versus a mortgage and all of those costs that you never get back.

23:49So$2 ,000 a month with no down payment, you would have$4 million at the end of 30 years if you signed up for a 30-year mortgage. If you did both, you'd have$5.7 million. If you took the$100 ,000 down payment and the$2 ,000 that you're saving every month by renting and not buying, then you would make almost six times as much money as you would have spent buying. What do we say to that? Well, again, every single property is its own stock market. The market exists inside of that. I don't know what stock you could possibly, you would have to have a crystal ball to pick a stock where, by the way, and I did take a loan out on the$4.65 million house.

24:42And the amount of money that I put down was$400 ,000. And when I closed escrow, I was plus a million in a market that was difficult to buy into. And so you're at 250 % gain. If somebody will spend that, I mean, ultimately, a property is only as valuable as somebody's going to spend on it. Of course. Spend on it. I got a call while I was in escrow and someone said, I'll pay you a million dollars more for the house. And I had already sold the Santa Monica house. A million dollars sounds great. And then I had already sold the Santa Monica house. And then it's a short-term gain. I would have to pay like 52 % tax.

25:32So I'm going to walk with$480 ,000 cash. That still sounds great. And where am I going to go? you know, in, in one of the hottest markets, I would have to like move out of town in order to do that. So I hear what you're saying. And I, I respect people that have, you know, this phenomenal stock market knowledge. The thing that I love about real estate investing is it's when you invest in the S and P you're a passenger in somebody else's car. Okay. I wouldn't even say that you're riding, you know, in the backseat of the bus of somebody else's bus and there's drivers and there's, you've got no control of what's going on.

26:17And when you buy a piece of real estate, you can find out, I believe more about that piece of real estate, especially if you have local knowledge, like, Hey, I live here. I know what, you know, what the area is doing, what it's not doing. Now you throw in$600 for a home inspector that's going to go through every single thing. You're going to know more about that house, that one single purchase than I believe, than anyone could possibly know about a stock. How are you going to know? I definitely don't have a crystal ball for sure, but over time, the S &P 500, so the overall index has yielded 7 % to 10 % over time.

27:02I'm definitely not in the driver's seat there, but historically it allows me to diversify. So renting, I don't believe, is throwing away money. It's buying you the option to invest elsewhere where you can also have potentially higher returns and your risk is spread out. I thought I was in the driver's seat of my house until it burned down. Tragic, and hopefully you had insurance to help. Insurance premiums are through the roof too, and it's really hard to even get an insurance policy. That's correct. Every one of these things creates opportunity. Well, I think it's just important to remember that homeowners don't just pay a mortgage.

27:40They pay insurance if they can get it in some areas, property tax repairs, and renters. Sure. Somebody's paying that though. The landlord is paying that and that is going to be reflected in your rent. And make sure that it's worth whatever you're missing out on 10 % potentially compounding in the market. We're going to still be friends after this. We're totally cool. Are we going to be friends after this? Absolutely. I think it's just really important to not take anything for gospel. I don't think it's one size fits all for anybody when it comes to financial moves, whether in real estate, in the market, in anything.

28:15So this idea that buying a home is for everybody is not true because not everything is for everybody. and flexibility, especially if you're moving around is really, really important. Sometimes is not emphasized that five to seven years of break even period. You're not going to even make the money back in that if you sell before that time. And I have a client that was interested in a certain area. I saw this house that was great. And I'm like, let's take a look at this house. And he's like, oh, you know exactly what I like. This is amazing. And the guy has lots and lots of money. This would be a small buy for him, small risk.