Short Term vs. Long Term Investments
Carl Moore:
Hey, this is Meaningful Capitalism, and I'm Carl Moore. I'm with Brant Greathouse today, and one of the questions we've been asking, is it better to make money short term or long term? That's the question we're going to answer for you today.
Brant Greathouse:
When is it better to hold something long term and when is it better to sell it and make a big chunk of money?
Carl Moore:
That's right. Let's start with talking about the short term side and then move into the long term side. I think one of the things that we have seen, and it was really kind of even started before we started flipping houses, but is all of these TV shows about go in, renovate the whole thing.
Brant Greathouse:
It's really glamorized the whole [inaudible 00:00:45].
Carl Moore:
You've got the guy with the giant sledgehammer, but he's in the slack pants, so he is not actually the one finishing up all the work, and the Brothers one and there's the husband/wife, which that's fun.
Brant Greathouse:
Yeah.
Carl Moore:
But all of these shows have driven so many people to think about this idea of short-term flips.
Brant Greathouse:
Yeah.
Carl Moore:
What do you think about a short-term flip?
Brant Greathouse:
Well, so there's some pros and cons and I tend to actually think that there's really generally more cons than the benefits. With that said, I've done a whole bunch of house flips, so I've made money in this space.
Carl Moore:
Okay, so how many houses have you flipped or been a part of, so that as people listen to this, they can know where we're coming from?
Brant Greathouse:
Goodness guys, I've done over 200 house flips and when I talk about this, I'm not talking about it from a sense where you can't make money and it's a terrible idea, but here's some of the downsides. I want to start with the downsides and then we'll talk about the benefits.
Carl Moore:
Go for it.
Brant Greathouse:
The downside to flipping a house, to holding it short term, is that if I had have kept all those houses I've flipped a decade ago, they'd be worth three or four times in some cases what they were worth back then. I've totally shot myself in the foot, because I wouldn't have had, if I was able to hold those properties, and I've often kicked myself for not holding them longer, if I were just able to hold them doing nothing, they would've quadrupled in value in some instances.
Carl Moore:
What are the risks that are involved or entailed in this, outside of the fact that you didn't hold it longer and it grew?
Brant Greathouse:
Great question. When you purchase a property, say a single family house, you're going to sometimes have a lender involved and you're going to invest that money. The lender is going to make sure that their investment is backed by that house. You are going to get in there, do all the work, and with the plan, with an intention to make money. You hope that your assumptions are correct, that it's actually going to become worth more than what you are going to have in it, so that you have a profit. Sometimes you're right, but say you get into the renovations and all of a sudden you found out there's a lot more work than what you originally anticipated.
Carl Moore:
Which is what usually happens. Rarely do we get into the construction jobs and go, "Hey, you know what, it's going to finish up 30 days early."
Brant Greathouse:
Exactly.
Carl Moore:
In fact, I've never had that story.
Brant Greathouse:
No, no. It always takes longer and there's always something that you didn't know was going to need to be repaired, renovated or improved. Staying in your budget is really important. You can always spend more money, but staying in that budget, so that you're not killing your profit is a risky thing. There's some things that are outside of your control that could end up eating up all your profit, because in order to get it to sell, sometimes it's going to happen.
Then you're going to list it for sale, and then you're going to have people beat you up on your price. You're going to have people complain about the color of the paint and all sorts of nitpicky things, and hopefully it goes ahead and sells pretty quickly. If it sits on the market long time, you're paying the expenses of ownership until it sells.
Then, once it sells, you have now made a profit that fits into the IRS's maximum tax bracket of short-term capital gains. The bank gets theirs, the guy who bought your house from you gets his, and you have all this risk that you have taken on during the interim. Then you get taxed maximum tax value on that asset.
Carl Moore:
Unless you just happen to not sell it and it sits on the market for a year, then you fall out of that tax bracket. Which is still lost.
Brant Greathouse:
That's still a loss. Guys, the short term hold, it bears a lot of risk. With that, there's good ways to do it and I've made a ton of money doing it. I've never lost money, thankfully doing flips. But there's tons of people out there who have, and it's because of all these different factors that if you don't know what you're doing, you're going to get caught.
Carl Moore:
Oh, absolutely. Like you said, there's so much risk because I remember we got into the middle of this one renovation and we found a bunch of termites.
Brant Greathouse:
Yeah.
Carl Moore:
It's like all of a sudden we're taking what was going to be, "Hey, we're going to paint the whole thing. We're going to tile all the main areas, we're going to carpet the bedrooms. We got the granite guy coming to put a new granite countertop on and paint the counters and we're out. The outside of the house looks great." Now all of a sudden, you're taking down a wall and you're having to re-plumb around the bathroom where these termites are living and it actually made it all the way back down to the hallway. It's like all of a sudden what looked like 30 grand worth of profit, 40 grand worth of profit. I mean, it dwindles quick.
Brant Greathouse:
Yeah.
Carl Moore:
I had all of this risk involved and yeah, what I hear you saying is the bank is, while they are a partner, they're not going to lose. The IRS, they're not going to lose, the person buying it, they're not going to pay extra. I mean, unless you are doing... Now, I think there's a space for it, but like you said, once you start selling houses that are at that primo level, now the people buying them are expecting brand new, even though it's a 60 year-old home. They're complaining because the light switches don't match in one room to another.
Brant Greathouse:
Yeah.
Carl Moore:
It's like, goodness, people, let's move past this.
Brant Greathouse:
You might be thinking, "Brant, why did you do all this? I mean, you said you never lost money, so why aren't you still doing it?" Well, here's the deal. Where when I came from, I didn't start off with boatloads of money to be able to invest and my parents gave me a bunch of money or anything like that.
Carl Moore:
You didn't get the million dollar Trump investment to going?
Brant Greathouse:
I did not. No. Some people are fortunate enough to have, that wasn't me. But what I did have was a set of skills that allowed me to make good, manage those risks that we've talked about well, because life is not about avoiding risk, life is about managing the risk that you have. I learned what I needed to know to manage those risks well and make money every time.
But then I got to the point where, "Look, I don't want to have to keep going out and flipping another house to make more money. I want to make money in an area where it's going to keep paying me. I do the work one time and it's going to keep paying me over the long haul."
Carl Moore:
Right.
Brant Greathouse:
The only way I was able to do that is by building up the original cash, so that I could invest in the long term.
Carl Moore:
Absolutely. Well, and you've kind of done the same thing. That's how we've switched short-term flips into long-term investments.
Brant Greathouse:
Yes.
Carl Moore:
Hey, I'm going to go out and I'm going to buy this and take this huge risk, but by making this cash and then doing it again and making this cash, now I'm going to get to a point where I buy a house and I sell off one of them and then I keep one of them. Now I'm flipping one house while I start with the regulated income.
Brant Greathouse:
Yep.
Carl Moore:
Now I'm flipping two and I keep one and now I have two kept houses and I'm flipping a third.
Brant Greathouse:
Mm-hmm.
Carl Moore:
We've grown in that way to the point where now we're partnering with investors to go in and buy actual communities with thousands of rental spaces, which is super exciting. In the real estate niche, let me ask you this, what are the top ways for making money in real estate?
Brant Greathouse:
Yeah, so cash flow investments is my number one favorite and it took me building up the cash to where I could get into some cash flow investments and hold these properties long term, but there are five ways when you purchase a cash flowing property, it doesn't matter what it is, it could be a commercial property, it could be a single family rental, or it could be a mobile home, or it could be a storage units, or it could be retail shops. Doesn't matter what it is. All those things generate revenues. There's five ways that you're making money when you buy these kind of properties. First of all, when you buy a property, nobody ever pays the asking price.
Carl Moore:
They do in Austin.
Brant Greathouse:
The asking price might be what the market... Well, now, in some markets, sure.
Carl Moore:
Go ahead, go ahead.
Brant Greathouse:
But that's why I'm not investing in Austin, because I would say that's really inflated. You're going to find a deal. Even in Austin, you can find deals that are below market value. When you purchase something below the market value, you've instantly, the day that you buy it, you've made money or you've created wealth, because what you paid and what it's worth are two different things and there's a margin.
Carl Moore:
You've got some equity.
Brant Greathouse:
You've got equity. The second way that you build wealth and get paid, is now you've rented this property out and it's paying you every month. You got that mailbox money coming in and when that money comes in, you're actually probably paying a mortgage. In most cases people don't own it outright and they're paying a mortgage. Well, every time you pay that mortgage, you're paying down the principle balance due. That's the third way that you're making money, is even though you're not able to spend that principle balance that you're paying off, it's money that's tied up in this property that eventually if you ever did sell it, you would get to capture that.
You're paying off debt, you are getting the monthly mailbox money, hopefully you're making a profit. If you're not making a profit, you didn't buy it right. You paid too much. Then, one of the cool things about real estate is that you get the option for tax benefits, you get depreciation and other types of write-offs that decrease your tax burden.
If you're saving money that you would've had to pay to Uncle Sam, but you're getting to keep that in your pocket.
Carl Moore:
Yeah. Because you should be reinvesting that.
Brant Greathouse:
You ever heard a penny saved as a penny earned? That's exactly what we're doing. The concept of the fourth way you're making money is you're get the tax benefits of real estate. Then the fifth way is that over time, real estate, land and the structures built on it are going to increase in value. It's called appreciation. That property is going to appreciate over time and who's getting the benefit of that? The owner.
Carl Moore:
Right.
Brant Greathouse:
Wait 10 years, wait 20 years, it's going to be worth more and did you do anything for that work, or for that money? No.
Carl Moore:
No. You didn't really have to do it for that at all.
Brant Greathouse:
You didn't have to work at all for that. It just happened.
Carl Moore:
Yeah. One of the things I love about the appreciation of assets and the ability to take loans on them, and this is why I would say, "Hey, don't own an asset outright with all of your cash." If you own that asset outright with all of your cash, you're actually missing some of the tax benefits to having a loan.
Brant Greathouse:
That's right. Yeah. You can't claim depreciation on something that you own outright.
Carl Moore:
Right. Then, what you can do is as that appreciates, you can go back down to your bank and say, "Hey, I bought this for $100,000, it's now worth the $150,000 and you get a refinance, they give you $30,000. Because it's coming in loan form, it's not income. That's different than income.
Brant Greathouse:
That's right.
Carl Moore:
You take that money and now you go buy another house. Your house that somebody else is paying for-
Brant Greathouse:
Man, we can do this. Yes.
Carl Moore:
Became worth enough more that you took a loan and bought another house with it.
Brant Greathouse:
That's a [inaudible 00:13:07].
Carl Moore:
Now your assets are buying assets.
Brant Greathouse:
Yes.
Carl Moore:
You didn't even... You can still work your day job and do stuff like this.
Brant Greathouse:
What a powerful strategy. In fact, we should probably do a whole podcast just on that alone.
Carl Moore:
Oh man.
Brant Greathouse:
Equity harvesting is unbelievable.
Carl Moore:
Equity harvesting.
Brant Greathouse:
Yes.
Carl Moore:
Yeah. What about a person that does not have the time or maybe desires the time with their family and the evenings with their wife and date night and those social events, but their day jobs making them enough that they've got $500,000 or a million dollars in cash. How do they switch that to wealth?
Brant Greathouse:
Not everybody wants to be a landlord and you can be a landlord and lease your property to a company, or you can be a landlord and lease your property to a family. Whatever it is, not everybody wants to do that. What those people need to do is invest with, find other people to invest with. We do this all the time. Investors come to us and invest with us in what we are doing. They get to build wealth and get rich at the same time that we are, but we do all the work.
Carl Moore:
Right.
Brant Greathouse:
We've got the systems, the models, the people and the teams developed around property and asset management that put into practice all of the best practices, all the best methodologies for maximizing wealth and real estate. That's kind of what we do.
Carl Moore:
Which actually, it doesn't eliminate all of your risk, but it allows you to put in the hands of professionals, whether that's us or another firm that does this kind of same thing, you're putting your investment into the hands of professionals.
Now, I would say this, most people before they get to that $500,000, a million dollar mark to start investing with firms like us, what they end up doing is, and the same is true for you and me and for a lot of our friends, they go out, they get that first rental property, they put a down payment, they now take on the maximum amount of risk, but that house grows and develops and then they own two houses and three houses and four houses.
Then before long, what a lot of the complaints I've heard is, "Man, six, seven rent houses, this is really a pain in my neck." But if you sold all of those off now you'd have enough cash to invest. That's true. What you've got back is your greatest resource. The time, the thing that you can never get more of.
Brant Greathouse:
Time. Time.
Carl Moore:
That's time. Time with your family, time with your church, time with your relatives and friends and barbecuing and all the good things in life.
Brant Greathouse:
Yes. Yeah.
Carl Moore:
Drinking a nice cup of coffee.
Brant Greathouse:
Yeah, absolutely. Well, and so that goes back to something we talked about in a different podcast with the concept of making your money work for you.
Carl Moore:
Right.
Brant Greathouse:
Instead of working for money. See, too many investors, they take the mindset, "If I'm going to make money, I have to do all this work myself." Here's the bottom line guys, there's so many ways to make your money work for you and hopefully you've gotten something out of this podcast that'll help you kind of start thinking in that direction.
Carl Moore:
Yeah. I want to tell one more story, and I referenced this story in our Wealth and Money podcast. I did some short term investing, which is not our MO, that's not what we usually do, but this was something I did personally. Covid hit and I don't, if anybody was paying attention to the stock market and if you weren't, just go back and look. Over the last five years there was a massive plummet. I think it was March or April, I saw some opportunities of stocks that had never been that low. I thought, "Man, those are going to come back."
I took advantage of the opportunity. I grabbed a whole bunch of stocks. Those stocks went from $10 to $20 and I was like, "Woo, money made. Short term investment, let's do it," and I doubled my money and it was great. I got hit on the tax side of it too, but that's worth it. I went and looked at that stock the other day, just out of curiosity. It's now at $60.
Brant Greathouse:
Oh, come on.
Carl Moore:
I could have, I mean, how much money did I give up by going for the short term win?
Brant Greathouse:
Yeah.
Carl Moore:
That means I gave up on all the dividends, all of these other. So short term investing, while it has its place and it is fun to have a quick win, where you turn something around. Long-term wealth, the stuff that's going to leave a legacy, that's going to impact the world around you, that's going to give you the freedom to do things that are meaningful, to sit down with the good relationships in life, to... Like this morning, I got to go running. It was one of the most beautiful sunrises I've seen in a long time.
Brant Greathouse:
Mm-hmm. Yeah.
Carl Moore:
Enjoy life. Breathe in the goodness of what's going on around us. Yeah. But I gave up that long term growth for a short term win.
Brant Greathouse:
True. Freedom of time comes from thinking long term, not thinking short term.
Carl Moore:
Short term versus long term, we agree, it's long term that wins.
Brant Greathouse:
Absolutely.
Carl Moore:
I'm Carl Moore. This is Brent GreatHouse, this is Meaningful Capitalism.
Brant Greathouse:
It's been great.
