BiggerPockets Real Estate Podcast - 881: How to Use Home Equity, 401(k)s, or IRAs to Invest in Real Estate w/Kyle Mast

Episode Date: January 29, 2024

Got home equity? Great, because today we’re showing you how to use home equity to invest in real estate, even if you’re low on cash. But maybe you’re still saving up to buy your first property. Well, we’ve got you covered; we’re also sharing the TOP ways to use your retirement accounts—your Roth IRA or 401(k)—to invest faster than ever before and even lock down your first property in 2024! Joining the show is Kyle Mast, fellow real estate investor and CFP, to talk about all the ways you can invest in real estate that you didn’t even know about. And if you’re like many Americans, you’ve got home equity just sitting there, waiting to be used, so today, we’re walking through how to unlock it so you can build wealth faster, retire earlier, or renovate that rental you just bought! Kyle goes over the multiple ways to finance these investments using a home equity line of credit (HELOC) or retirement accounts like Roth IRAs and 401(k)s, the special program new homebuyers can use to get their first house faster, and why you DON’T want to cash-out refinance your property just yet. Ready to start? Let’s get into it!  In This Episode We Cover How to use home equity or retirement accounts to invest in real estate  Cash-out refinances vs. HELOCs and the EASY choice in today’s high-rate environment  How to qualify for a HELOC and whether you can get one on your rental property  The 401(k) loan where YOU act as the bank and what to watch for BEFORE you get one The first-time homebuyer cheat code that lets you access retirement funds with NO penalty  How to make COMPLETELY passive income by “lending” your home equity  And So Much More! Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-881 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets Podcast Show 881. What's going on, everyone? This is David Green, you're host of the Bigger Pockets Real Estate podcast, here with Rob Abas Solo. Hanging out today. Robbie, how are you? I'm good, man. I'm good. I think I just negotiated a really good real estate deal.

The seller was very flexible, and I'm excited. I love closing deals, man. I love it. Yeah, Rob practices the yoga method of real estate investing. He's always looking for flexible sellers. Well, we won't be talking about the yoga method today, but we are going to be talking about some really great concepts for leveraging the wealth that you've already built in today's episode. I know a lot of you at home have been wondering, can you use a 401k to buy a house, can you use a HELOC, or should you use a HELOC? Should you do a cash-out refi? Can you use a Roth IRA to buy more rental properties?

And are there tools out there that you can use to keep leveraging the wealth that you've already built? We're going to be talking about this in so much more in today's episode. That's right, Rob. We're going to be covering that and my. more in today's show with Kyle Mass, a certified financial planner who is also a frequent contributor on the Bigger Pockets Money podcast. And let's get to Kyle. Kyle Mass, welcome to the show. Thanks for coming on today. All right, let's kick this off. What is your definition of equity for our audience? That's a good question. Let's keep it real simple, real quick. The market value of your house minus any debt you've got on your house. So that'd be your mortgage. So if your house is $500,000

in value. Mortgage is $300,000. Your equity is $200. You can get a little more complicated in that. A lot of people want to say I have a whole lot of equity in my house, but it's hard to get to it sometimes. So like just a quick example, if you sell the house, you're going to lose $25,000 in commissions and some other sales costs. So now your $200,000 and equity goes down to really $175. So if you're thinking of like equity that you can access, that's maybe a better way to think of it. But to keep it simple, it's the difference between the value of the house minus the debt you've got on it. It's It's what you own. Very nice. Rob, anything you want to add to that? I think that's honestly, most people, it's kind of funny how they don't really know this particular concept, because a lot of

people actually have a higher net worth than they think, and it's all oftentimes in the equity of their house. They don't really understand that that is a contributing factor to how much money they can retire with when they sell those properties. But a lot of times, just like you said, Kyle, no one ever thinks about the closing costs, which really do sneak up on you, especially the higher your property ends up being valued at. All right. So the most popular way that Americans access their equity is through a cash out refinance. Can you explain what that is and how it works? This is an interesting concept. And I like how you said the most popular way is the cash out refinance. And that's kind of up for grabs now these days, but we'll get to that in just a bit here. The cash out refinance is essentially, if you have a house

that you bought and it's gone up in value and your loan has slowly gone down in value as you pay it down over time, you end up having more of that equity in your house. So a lot of times people want to access that equity. And if you can think of a bad example, but back in the recession, maybe prior when people were running up some stuff on credit cards, but their houses were growing like crazy. You just do a cash out refinance, put a bigger loan on your property, pull out some of the cash that was equity. You pull it out as cash, pay off your credit cards, rinse and repeat, do it again. That's a bad example of what to do with the cash out refinance equity. But essentially, you do it, you put a new loan on your property. You get rid of the old loan and usually the new

loan is bigger so that you have cash that you can access and you have to have a property that's going to qualify for that. So essentially, you've got enough equity there that the bank is okay lending you more for that cash out refinance above the current mortgage that you have on the property. Although you can actually do it without a mortgage on your property, you can just stick one on there if it's a completely owned property. But usually the cash out refinance means that you have the loan there. Yeah, so this is like obviously a big option for Americans, and I've heard that the amount of equity collectively in America is a pretty staggering number. Do you happen to have that stat handy or do you know it off the top of your head? Off the top of my head, but in the show notes

that we have for this show. So I'm not going to say that I am on this all the time, but it's like around $30 trillion of equity that people are sitting on. And there's a lot of reasons for that. there's really low mortgage rates that have been for quite a while. People have been sitting on homes for a lot longer than they have in the past. And the refinance boom has really tapered off in the last couple of years because of the interest rates going up. So people are not now restretching loans bigger onto their properties. That equity is continuing to grow and people don't want to lose the low interest rate that they have locked in on their original mortgage on their property. So those are some of the reasons that it is really huge historically that we have this amount of equity that

people are just sitting on. Another reason for it, too, is just the government printed a lot of money in the last few years and everything inflates and including the equity in your house. One of the reasons to own real estate. Now, people don't like the cash out refi option when they're going from a lower rate to a higher rate. And that means that people won't use that, even though it is the most popular way like we mentioned. So a lot of people have to Helox instead. Can you explain what a helicic is? Like you just said that cash out refinance has gotten a lot less appealing when someone has a 3.1% and they say, well, I'd like to pull $100,000 out and use it for something. But I got to get rid of my just stellar 3% loan and go to a six and a half,

6.757 plus percent loan doubling my interest rate. It just doesn't make a whole lot of sense. And honestly, in the past, when I had a financial planning firm, I would tell clients, you know, if your loan that you have is less than the historic rate of inflation, if the interest rate on your loan is less than the historic rate of inflation, you should really think of that loan as an asset because over the long run, the lending institution is actually paying you to borrow money from them. It's kind of a weird concept to think about, but as money inflates, they're losing they're losing money on that loan every year. So these loans that people have that are, you know, we don't have the percentage in the show notes, which is a bummer, because

I don't have it off the top of my head, but the percentage of people that have an interest rate between 3 and 4% is huge right now. So they don't want to get rid of those. They want to leave those on their property. The home equity line of credit is essentially a line of credit, like a credit card, but it's secured by the property. So you can get a home equity line of credit in addition to your first mortgage that is on your property. And it can be all kinds of different amounts. It's usually a variable rate. But for an example, if you have a $500,000 property that you owe $300,000 on as a first primary mortgage. So you got like a 3% awesome mortgage on that, but you want to borrow some more or cash out refinance, but you don't want to get rid of that.

You could do a he lock, a home equity line of credit, where a second lender will come in in second position and put a he lock on that property, maybe for $100,000. so now you've got access to another $100,000. And just something to keep in mind that people a lot of times don't know. But you don't pay interest or payments on a HELOC unless you use it. A lot of people will be like, oh, I don't want to get one because I don't want to have to pay another payment on $100,000 of lending. And I'll often tell people, if you've got the equity, go get one in place. It costs $100 a year administrative fee at your local credit union to have a he lock on a property that you've got equity. and you don't have to use it.

The interest rate could be 30%. It's not. They're usually around the 10% range these days. But if you're not using it, you're not paying any interest, but you have it there as a fallback, as an emergency. Why not have it? It's a pretty low cost to have it for a $50 to $100 administrative fee a year that you're paying to the second institution to have it in place

in case something comes up, whether it's an opportunity for investing or an emergency with your family, whatever it is. It's just a really nice, big credit. card to have in the back of your pocket. I love it. Yeah, I love helox for that exact reason. It's very different from, I don't know, some other types of loans where, yeah, you may have, like a refi, for example, whatever amount of equity that you choose to draw in a cash out refi, you're paying interest on it. They don't, they don't extend it to you like a, like a line

of credit. Whereas a helock, I've had a, I have a helock on one of my first properties that I ever bought. I want to say it's like $120,000, which is great, obviously. I've never reapplied to get it higher, but it's really nice to know that I have equity in my house that I can use to buy more real estate or to do any kind of renovation projects. I actually used my HELOC one time to go out and do like a new construction and built most of that cash and refied and then paid back to HELOC. So there are a lot of really, really great strategies that you can implement when using a helic. But how do you get one? More on that, plus some HELOC pitfalls to look out for, and how you can leverage your 401k to invest in real estate after the break.

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My question to you, Kyle, is how hard is it to get a helock? Because I'd imagine there's still a bit of an underwriting process there, much like there is with the cash out refi. Yeah, it is. And just before we go too far from what you were saying, Rob, those are some really good examples of good uses of a heloc. They can be used really well in short-term opportunities. That's really the best place to do it because of the variable rate that's on them and because of the piece that you touched on it, which is so good, is you can use as much as you want. You can use the $100,000 that you have, or you can use $10,000, pay it off. You can use another $10 next year. You can use $30 here. You don't have to pull it all out and

pay interest on all of it all at once. But yeah, I mean, as far as qualifying for one or underwriting for one, it's very similar to a home primary residence mortgage. You're going to have to look and see what the bank requires for your income. They're going to look at the ratio of the debt that you have on your cars, on your house, everything in a personal qualification standpoint. There are some products out there. There's not a lot of them that you can get from different non-traditional lenders that will lend a line of credit on rental properties. I actually, maybe five or six years ago, we got just a straight rental property line of credit from a local credit union. It was a great product. It was pretty cheap. That one was based on personal income

underwriting, but I know there are some lenders out there. And David, you could speak to this, too, that will lend on even a portfolio of real estate. So if you have maybe five properties that have a decent amount of equity within them, sometimes they'll do a line of credit that is based on a portfolio of real estate or a piece of real estate. But when you're more of an enterprise as a real estate investor, and you can show that and prove that, have you run into those products, David? We offer them on investment properties now. It used to be super hard to get those. Like I would, man, this was like probably six, eight years ago. I would go Google every single credit union in a city and just call them all and say, can you do it a helot on an investment property? I mean,

make my way down this list. Now, we have lenders that we know that one of our guys can just shoot an emailed all of them and say, who's doing investment property, helox, and they'll come back and they'll give you the terms like X amount above prime and what the loan to values are. So they're much easier to get, but they're also more expensive, like significantly more expensive than on primary, and that will shock people a lot of the time. Yeah, definitely. And I should say, too, on the primary and also on the rental properties, too, as you go up in percentage of LTV that you're getting your helock for, it's going to cost more. So to say that a different way, if you have, have a mortgage that is 60% of the value of your property and you get a he lock that just brings up

your total loan to value ratio from 60 to 70%. The interest rate's going to be higher than your primary mortgage, but it's not going to be terrible. But there are products out there. You can go to 80% or 90% LTV sometimes, but you will get hit with a really high interest rate when you draw those funds. And it's just to cover the lender for the amount of risk that they're taking on. But I, you know, it just depends on what your goals are, but it's not a bad idea to go get as much of a he lock as you possibly can to have that war chest if you need it. You're going to pay a little bit more in interest, but if you're a savvy investor and you're being wise with your money and you have lots of reserves, it's nice to have that in case, you know, what if you needed just $30,000 more to take down a really awesome property across the street where someone, there was a weird situation. you happen to be able to come in and get this property, but you didn't quite get enough HELOC to be able to do that

because you were trying to save a quarter point on the interest rate when you were signing up for it. Just a couple of things to keep in mind as you're taking them out. Man, I think I have a dream Heloc. I got this HELOC maybe five years ago. What is it, 2023? Yeah, probably about five years ago, six years ago. It's like a, I think a 3% interest rate, 90% LTV helock.

Whoa. Yeah, I know. Yeah, so I need to go find that. that that that and use it but i mean i have several times but it's just kind of interesting how the terms often change depending on the actual climate that we're in and it's kind of clear now with everything going on the he lock terms have changed quite a bit one thing i wanted to ask you though was when you're comparing like a helock to a cash-out refi i feel like there's several reasons why one is more appealing than the other uh me being more pro helock but when you're doing a helock

is there as many, like, are there as many closing costs or fees associated than with a cash out refi? Because getting a cash out refi, even if you are going into like a lower interest rate, it can be kind of expensive to process, right? For sure. They are definitely cheaper than getting a primary residence loan a lot of times, especially if you, you know, I keep saying local credit union, but for some reason, local credit unions just love these heli locks. And that seems to be where you get the best interest rates, the best terms. That's where I got mine, by the way.

Yeah, yeah. I mean, they really are in that market. The big, huge institutions, there's a lot more hoops to jump through. They kind of shy away from them. For some reason, it's a local thing that they like to do. But yeah, you definitely, the qualification is maybe a little bit easier from the paperwork standpoint, but the closing costs and stuff are definitely not as cumbersome as if you do a complete cash out refinance.

So you mentioned I had a couple of strategies that are perfect for the HELOC method, but do you have any ideas or any other ideas or strategies that someone could use a he lock for? The first one that comes to mind is something where you can get a quick return on the money. So what I mean by that is say you have a property. I'll use an example, what we did with one of our short term rentals this last year. The short term rentals is a six bedroom three bath and it also has two great rooms and it has a hot tub room. Highly not recommended. So we basically, we moved the hot tub outside. We spent about $35,000 on a helock. Move the hot tub outside, turned that into a bedroom, added a bathroom, which was kind of already there with a vanity, a pretty cheap renovation to be able to add a bathroom

in a bedroom in this resort town on a house like this. So we went from a 6-3 to a 7-4, and we paid it off within a year. So that's that with a he-lock, with the amount that we were able to increase in rents on that property for the short-term rental, we were able to pay that off just in one year of using the property. So a helock, I give that illustration to kind of emphasize a helock is a really good short-term, get-it-done-now type of thing. It's cash that you can buy a property for cash if one comes up. You know, this is a really good way to you. If you have a very big hel-lock and a house comes on the market and say it's listed for 300, but you can offer 225 cash and you know there's some value there. It really allows you to take something down that you don't have to wait

for financing in that whole process with the seller and down the road when you do some renovations, if you read David's book and do some burying or whatever you have planned for it, you can put some new permanent financing on it and pay your HELOC back down, that higher interest rate back down, get that out of there, put that nice 30-year fixed mortgage on a single-family rental if you have that. But those are, I generally try to paint it in short term, short term pictures, because if you get long term with a he lock, you start running into cash flow issues, you run into interest rate uncertainty. So for example, if you, if you use a he lock as a down payment on a new property and you also put a mortgage on that property, the downside of that is now you have a 100% finance

property, which sounds awesome and is amazing from an ROI standpoint. but it gets really hard to cash flow and you can get really tight really fast if you don't have a good exit plan for putting that all on permanent financing and getting rid of that he lock, that down payment portion of it. So I generally try to think of it as just like your quick hit something that you can get, you know, your high return on the money, like doing a quick renovation that adds $100,000 in value to the house and also increases rent so much that you're able to pay that heat lock off really quick within the next year. or two. Yeah. But you, I mean, you hit him really good with your examples earlier. No, man. I like that.

Actually, just hearing you say that, because I've got a flip right now that I wasn't intending to do a full flip. It was supposed to be like a quick hole tail, but it looks like the move or the more profitable strategy is doing a full flip, which is going to require another 65,000. And, you know, I could go the hard money route and all that good stuff. But, you know, I've got this HELOC and I'm like, oh, duh. I don't I just use that. I honestly forgot about it until this. this conversation because I haven't used it in a while. That's funny. That's awesome.

That happens to me all the time. In the middle of recording, I'm like, I could do that too. Damn it. I didn't think about that at all. It's like finding $65,000 in your gene pocket, you know? One of the things Rob's been hitting really hard is investing money into properties you already have, specifically short-term rentals to improve their performance, right? So in this case, you take 40 grand, you use it to build a tree house on your property.

It makes you another 30 grand that you. year, about 1.25 years, you've now paid off that HELOC. It paid for itself and you have the treehouse and the property that would rent for more. That's a great example of what we're describing here, as opposed to what everyone's mind goes to, which is pull out the money, buy a whole new property. Well, now that property doesn't cash flow, or if it cash flows a little bit, it doesn't cash flow with the additional debt of the HELOC. It's incredibly difficult to find something new to buy that's going to cash flow. But improving what you've already got, using the money to finish out of basement, using the money to improve an ADU that now could be rented out and have the HELOC payback makes a lot of

sense. Although I'm going to say I'm a little brokenhearted, you got rid of the hot tub room. That sounds awesome. There's anything but awesome. It looks awesome in the pictures for getting it rented, but then when 16 people move out of it and there's like a pool of water across the tile floor and you don't know where to put it. Duly noted. It's not all that awesome.

Was it heart shaped? It was not heart shaped. No. I have a cabin I bought with a heart shaped hot tub. It really does have one. And I didn't notice it in the pictures and I was buying it. And when I walked it, I was like, this is like that dumb and dumber scene when they're sitting in the tub and they both got their side of the heart. Like some Philly Break Your Heart.

It was just like that. That is so good. I found like old Zillow listing pictures from the owner before we bought it. And it used to be an elevated hot tub up on a platform with red lights in the room. It looked. Yeah, I don't even know what you would use to describe. What movie reference you would describe with that one. But it's, yeah, it's good to have it outside for sure.

So one other interesting method that I, I've seen people use helocks for is, like, PML, like private money lending. They'll do like helicage where they basically will take the interest rate that they have and then they'll charge a higher interest rate to someone coming in, borrowing it from them, and they make a delta on that. Have you ever gone down that road with using your helock for something in that space? I have not personally done that. I've done that with an investor through, I've borrowed from someone and I know it was their

helock. So I would, and paid them back. you know, so that's, that's something that definitely is something that goes on. I would say a caution that I have, unless you want to lend to me, you know, but the caution I would have is you just really got to make sure who you're lending to. And of course, that goes in any lending environment. But when you go on a he lock, it just ups the ante a little bit because you have a variable rate on that he lock most likely. And if you run into an issue or interest rates or you lend it out in the spring of 2020, to and interest rates start ratcheting up on your helock and they're paying you back at a lower interest rate that you thought was a good hard money rate, but it no longer is. You can just run into some stuff there. Nothing wrong with doing it, especially if it's someone that you've lent to and they have a season track record to go that route. But yeah, that's definitely something that's out there. You got to be careful, especially if your house is a collateral. I mean, if you loan out

money from a bank account, like your savings or something, you're on the hook for that amount of money, but when you use a helock, your house is on the hook. So be very, very weary and know who you're lending to in all situations. Okay, so I know I just learned some things about how to use helocks, and I imagine our listeners are too. And after the break, Kyle teaches us about how investors can leverage a 401k or Roth IRA and what most people get wrong about this strategy, including me. So if you want to learn from my mistakes, you're going to want to stick around until after the break. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect

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That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. Welcome back. And if you've been sitting on pins and needles waiting to hear what type of mistakes Rob Abasolo makes, you're in luck. Because we're getting into that now with Kyle Mast talking about the best strategies that investors can use to tap into their equity. Now, Kyle, I understand there is another popular way to access funds to buy in real estate. And that is a 401k loan. Can you explain what that is? Because I think a lot of people don't realize that this is a super powerful tool and the interest on it can actually be relatively beneficial, I think. Yeah, this is kind of a cool way to go. And I should say before we get into talking about some retirement account stuff here, in general, as a principle, I like having real estate and retirement accounts pretty separate. You know, you can have real estate inside a self-directed IRA or even a self-directed solo 401K. And if that's the only way that you can get into real estate, then that might be a good route to go. But in my

experience, the tax code is written really well for real estate. We have in the U.S. like some of the best the best thing. The government has known for decades that real estate drives jobs, drives economies. So they incentivize it incredibly with the tax code. And the tax code is built well for real estate by itself. When you start doing it with a retirement account or putting it inside a retirement account, some of those can get missed, lost, or even messed up, those benefits from a tax standpoint. So just a caution there. In general, I like people having diversification, having some retirement accounts and having your property is separate. But you can kind of have best of both worlds sometimes and sometimes in a shorter time frame.

With a 401k loan, usually it's up to $50,000 that you can borrow from your 401K. And it can be with an employer and it can actually be your own solo 401K. If you are your own employer, this is what I've done in the past before I sold the business. I did this with my own solo 401k to buy a property and paid it back. But you can borrow the money and then you make payments to yourself as the bank. back into your 401k account with interest, which sounds kind of silly because, you know, I'm lending it to myself, why do I have to pay interest? But that's how it's stipulated in the IRS code and how you're able to do it without it being an early withdrawal where you would pay a

penalty on it or income tax on it. So you can pull that $50,000 out and you don't pay tax on it like a withdrawal. But when you pay it back, that interest that you're paying back goes right into your account, adds to your account. The downside is you're paying it back with after tax dollars. which your whole account is pre-tax dollars for this type of loan usually, and now you're mixing in some money that you pay tax on, and then you'll actually double tax. You'll pay tax on it again when you pull it out because you're paying that interest, but it's kind of negligible in the long run.

It's just something that's not super efficient from a tax standpoint. Yeah, that makes sense. So if I'm hearing this correctly, yeah, because this is how one of mine was set up. Like if you borrow, let's say, $50,000, you'll, depending on who your brokerage is and the stipulation, you might have to pay a 4% interest rate to borrow that $50,000, but that 4% interest you are paying to yourself. Right.

And now you're saying while that's cool that you're getting that extra interest, you're paying that extra interest with post-tax dollars and you're kind of mixing post-tax and pre-tax. Is that what you're getting at? Yeah, you're losing some of the benefit because you're paying tax on that money that you have to pay back in interest. And then with a traditional 401k account,

when you withdraw it out in retirement, you pay tax on everything you draw out and you pay tax on that amount as if it had gone in pre-tax, which it didn't. So you get double taxed on it. But I mean, like I said, it's really negligible in the long run if it helps you buy a good property and helps you get into something. A couple other things I should mention with the 401K loan to you need to really pay attention to the plan documents at your employer. So in general, you have about five years to pay it back. That's a pretty standard rule unless you're buying a primary residence. So if you're buying a primary residence with that loan, using it for down payment, using it for helping with closing costs.

Then you usually have 15, even sometimes 25 years, depending on your plan document, you can really stretch it out. And that's where it starts to really make some sense, because that becomes a fairly low payment in the grand scheme of things, helps you leverage into a primary residence that can then give you some leveraged growth over time, as long as you're not stretching yourself too far. but, you know, as long as you're using it for a good asset, you're not losing out on the compounding interest that you would otherwise get in the 401k. When you take that 50,000 out, it's no longer working for you in the 401k. You got to put it to work in whatever you're going to invest it in. That's what I was going to ask. Okay, so the moment you tap into that, $50,000, it's no longer

making you, let's say, a 7 to 12% return in the stock market or wherever it's invested. Yep. Okay, that's good to know. That's super. big. So you just want to make sure it's, you put it into something that is going to do that well or better. You know, I mean, that's a pretty easy arbitrage way to look at it. I mean, that's a great point to make for investing in general, though, like opportunity costs is referred to in economics, okay? Like, if I use the money for X, I can't use it for Y. A lot of people are obsessed with cash flow investing. Just where can I get cash flow? Meanwhile, they're paying $3,500 a month in rent. well, if you house hacked and you only had to pay $1,500 to cover your housing and you're saving $2,000 a month, that is even better than if you made $2,000 a month in cash flow because it's not being taxed.

There's an opportunity cost there, right? And I think sometimes we get these goggles where we're just like have to find cash flow and you miss all these opportunities that you would have to make money in other ways. And that's a great example of it. Like, yeah, you take it out. You were making 7% on it. if you invest in real estate that cash flow is 6%, you might actually be losing a percent unless you're getting something like appreciation or a loan paydown or you have some kind of strategy there. So I'm always a proponent of teaching people how to look at their finances holistically. How do all these pieces fit together as opposed to just trying to line up a whole bunch of rental properties and think that that's the only way to buy wealth? Is that something, Kyle, in your experience that you've noticed that investors can sort of get

those blinders on and sometimes chase after pennies and miss dollars? Oh my goodness. If I could scream that from the rooftops, I would. You just nailed something that people miss all the time, especially if you're good at what you do. You know, whether you're a business owner, an employee, or a good real estate investor, your problem, the problem is that you get really good and you get really fast and you grow really fast and you start missing some of the things along the way. Taxes is one of the huge things that people will miss with just a little bit of tax planning. I mean, once you start really rolling, you can save yourself hundreds of thousands of dollars a year if you pay attention to it. So I definitely, and that's one of the wonderful things about real estate. There are so many little avenues to the opportunity cost your way into something a little bit better and optimize something a little bit more. And depending on what your goals are, whether it's to get really big with a whole bunch of rental properties, whether it's to retire early, have time with a family, travel a lot. You know, you can do any of those things. and it helps so much if you're not just looking at accumulating $300 to $400

cash flowing properties up to a certain point. That's not the whole picture. The whole picture is what are your expenses? How can you reduce them? What is your income? How can you increase it? And what pieces go into that? Taxes, you know, all these different things.

Credit card hacking is something that people just blow by when they have huge revenues in a business and you could be having your family travel everywhere for free for the rest of your life just by doing a little. to a little credit card hacking. I mean, we're off topic, but I, you're, you're getting me going. This is exactly, people need to look at their whole financial picture, not just accumulating rental properties for sure. Yeah, I want to move us a little bit along because we're, you know, we've kind of nailed the 401k side of this too, but there's sort of the 401k counterpart, if you will, and that is the Roth IRA. Are there similar strategies or things you can do with the Roth

IRA to buy real estate? The Roth IRA is like my favorite count of all time. You know, it just really is this wonderful account that does so many things. So one of the first things that people think of, or if you Google, you know, what can I use a, how can I buy a house with a Roth IRA? The first thing you're probably going to see is the first time home buyer exemption where you can use $10,000 from a Roth IRA, tax free, penalty free, pull it out and use it towards the purchase of a home. And that's awesome. You know, anytime you pull out of a retirement account before age 59 and a half, you get hit with a 10% penalty in a normal situation. This is a situation where you can pull 10,000 out, you don't pay tax on it, you don't pay a penalty on it, you can use it. That's awesome.

Bigger picture stuff with the Roth IRA, all of the money that you put into a Roth IRA, all of the contributions over the year, you can draw out at any time before 59.5. The growth you cannot, you can draw it out with a penalty, but you can't draw it out penalty free. And I should step back. A Roth IRA is where you put in after tax money, it grows tax free, comes out tax free in retirement as opposed to a traditional 401k or a traditional IRA where you go in pre-tax, don't pay tax now, grows tax deferred, you pull it out and pay tax. So the Roth IRA, you've already paid tax, that's it. All the contributions over time, go into that account, grow tax-free, come out tax-free in the future. And one of the main reasons I like a Roth IRA is that say from age 20 to

30, you're working a good job, you're putting, you're maxing out your Roth IRA each year, doing some 401K, buying a few rental products. properties and you get to 30 and you're like, well, at 35, I could probably leave my job and just go like rental properties and kind of do this whole thing full time. I've got some Roth IRA money here. Oh, I've got, you know, maybe $100,000 in here in contributions that I've, that's maybe high. Let's say $50,000 in contributions that I put in here. The account's worth $100,000. You can take that $50,000 out, tax free, penalty free. Those were contributions. You already paid tax on them. You can buy a rental property with them, leave the $50,000 in growth in

there to grow to help you in retirement age as cash flow in the future. You can do that. And then there's a few other things that we can get into too on the Roth IRA. But that's one of the most powerful things. And I just always tell people if you can especially early on really rock that Roth IRA, because that will just give you so much flexibility down the road for purchasing things that come up straight out of a retirement account. Oftentimes I hear about a self-directed IRA. Is that, Is that what you're talking about or is that another subset of the Roth IRA? Yeah, that's another subset. So the self-directed can be any type of retirement account.

It could be Roth IRA, traditional IRA, solo 401K. Those are usually the ones that you can do self-directed. And all that means is that you can then generally invest in things that are more non-traditional. And by non-traditional, I mean not stocks and bonds. You could invest in a rental property in there. But no, the Roth IRA, this is just how it functions. I mean, it just, that's the contributions go in. They grow tax-free, come out tax-free, and your contributions you can always pull out.

The one thing that, you know, if you're serious about real estate investing, and I wish every real estate investor would know this, is that when you, if you, at some point, make the transition from a W-2 job to a full-time real estate investor, that first year or two that you make that transition, what happens to your income on paper in taxes? I mean, you know, you're making this, you're making $150,000 at a job. What happens in the first year or two when you become a, quote, real estate investor? Do you have any income? Well, yeah, most banks will say no.

Zero. Even if you do, yeah, for two years, usually. The whole point of saying it is that when you become full-time into real estate, there are so many deductions that on paper from a tax standpoint, your income is almost nothing. Oh, I see. And what that does is it gives you this incredible opportunity that if you have a 401K from that previous employer, you can start converting that money to Roth money. And you usually only have a year or two window because it's these first years in the real estate

investing that you've got a whole bunch of depreciation coming from your properties. And you're even kind of bootstrapping it a little bit, trying to make the transition and you're not making quite as much. So you're going to have low income. And you've maybe got a couple little tax deductions running around in your living room tax credits that you can use on your taxes. And those can offset income. You could convert, you know, 50 to 100.

thousand dollars of traditional IRA money to a Roth IRA, and that would be the same as converting 401k money to a Roth IRA completely tax-free because you have a standard deduction. You've got tax credits from your three kids at home. You've got all these deductions from your rental properties, but that opportunity goes away pretty quick once your cash flow starts coming in a little bit more from those rental properties. And then at that point down the road, you'll have to pay tax pulling those funds out of those retirement accounts. So if you can use that opportunity, to pay nothing in tax and get those monies from a traditional pay tax later account into a Roth account where you never pay tax later. It's a huge opportunity. If I could just,

everyone, when they make that transition, pay attention to that because it's an opportunity that comes and then it's gone. I did not pay attention to that when I quit my job a couple years ago. And now I wish that I would have had this podcast. So hopefully you've saved somebody this moment. No, that's fine. It's fine. It's fine. So is there like a, what is the first time home buyer exemption whenever you're using a Roth IRA? Is there something in this space too, yeah? Yeah, that's the $10,000. The first time home buyer exemption is when you can pull out $10,000 and you don't have to worry about whether it's contributions or whether it's growth.

You can just use that, pull it out, just like you were pulling it out of a bank account and use it towards closing costs, down payment. any expenses associated with buying a primary first-time residence. All right, when it comes to buying a house, any other creative ways or paths that people should think about when they want to buy a property? I don't, you know, there's really no silver bullets out there. I think we covered a lot of really good ones here. There's none that come to mind in addition to what we're talking about. I think one of the things that you guys hit home all the time is just the house hacking piece.

You know, a lot of these things that we're talking about work really well for a primary residents, a first time home by. And if you can just make sure you take advantage of that, especially the early years in the career when sometimes there's some income qualification stuff where you can get a better loan through a certain government program, because those years go by and you're not able to use it anymore. And the earlier you start, the better on those. So yeah, there's no silver bullet, but it's also not a real hard thing to do if you just start doing it. All right, Kyle, good stuff. Thank you for your contributions today. Had a good time learning about helox, cash out refinances, equity, and most importantly, equity options that people can use

to improve their portfolio or expand it in the right circumstances. And Rob, I just want to say, you're particularly good today, too. You've been stepping up your game. Thanks, Dad. Appreciate it. Kyle, I'm going to let you get out of here. If you guys liked, Kyle, you can catch him as a frequent contributor on the Bigger Pockets Money podcast. But we're all done for today. This is David Green for Rob. Buy nice, not thrice. Abas Solo. That's me. Signing off. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday.

I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calicoe content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.w.w.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing.

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