Here’s how to basically earn tax free money in real estate. Since it’s a subject so many people get confused on, I’ll do my best to break it down as simply as I can from beginning to end. Enjoy! Feel free to add me on Snapchat / Instagram: GPStephan
Here’s the situation using some simple numbers. You buy a property for $100,000. You spend $20,000 fixing it up. The home is now worth $170,000. This means that you’ve just gained $50,000 of EQUITY in the home…your $120,000 price + $50,000 gained = $170,000 value. What is equity? Just think of it like an unrealized gain, like if you hold a stock and it goes from $100 to $150…that extra $50 is an unrealized profit until you sell it…what is unrealized? That means you haven’t sold yet and are still holding on to the asset.
Since you now have an UNREALIZED gain in real estate and the home is worth MORE than you bought it for, you’re able to borrow against that gain. So in this case of $50,000…you’re able to get a LOAN against your $50,000 profit, using that equity as collateral. Now the way taxes work is that you’re only taxed when you SELL the property…just the same as stocks or cryptocurrency, you’re taxed at the time of selling and then those are REALIZED profits. So if you had a $50,000 GAIN when you sold the property, you’d then have to pay taxes on that income…but if you get a LOAN, even if you wind up with money back in your pocket, the IRS treats that as just a shift in assets. Because you just received a loan, you never “realized” your profits by selling.
Because there was only a shift in assets and debts and not a change in the REALIZED net worth when you sell, the IRS does not consider the pulled-out cash income. When you receive cash out in a refinance, the IRS recognizes that you have to pay it back, and so you really haven't “made” any income.
The thing is, since this is a loan, you still have to pay it back over the term of your loan. And this frees up the money you would have tied up in a property, and opens it up to be reinvested at a higher rate or into something else. The purpose of doing this should be to buy more investments that produce a HIGHER return than what you’re paying out in interest..and the refinanced property should generate the income to support the new mortgage. If this doesn’t happen, it begins getting risky…you shouldn’t over leverage yourself to a point where you owe more than you can handle, BUT, if used correctly, you can leverage yourself a lot of extra money to invest with.
This is what’s known as a cash-out refinance and how you can use your equity in a property for tax free money. This method of real estate investing is also known as the BRRRR method of real estate investing. Buy. Rehab. Rent. Refinance. Repeat.
It’s a way of “cashing out” without actually cashing out…then using those proceeds to continue investing in more properties. Each property generates equity, each time you use that equity to buy another, which continues the process. I like this method because it’s a long term approach that grows a lot over time. But like I said, I’ll get into this in another video in more detail. Thanks for watching!
For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness @gmail.com
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
Favorite Credit Cards:
Chase Sapphire Reserve - https://goo.gl/sT68EC
American Express Platinum - https://goo.gl/C9n4e3
Here’s the situation using some simple numbers. You buy a property for $100,000. You spend $20,000 fixing it up. The home is now worth $170,000. This means that you’ve just gained $50,000 of EQUITY in the home…your $120,000 price + $50,000 gained = $170,000 value. What is equity? Just think of it like an unrealized gain, like if you hold a stock and it goes from $100 to $150…that extra $50 is an unrealized profit until you sell it…what is unrealized? That means you haven’t sold yet and are still holding on to the asset.
Since you now have an UNREALIZED gain in real estate and the home is worth MORE than you bought it for, you’re able to borrow against that gain. So in this case of $50,000…you’re able to get a LOAN against your $50,000 profit, using that equity as collateral. Now the way taxes work is that you’re only taxed when you SELL the property…just the same as stocks or cryptocurrency, you’re taxed at the time of selling and then those are REALIZED profits. So if you had a $50,000 GAIN when you sold the property, you’d then have to pay taxes on that income…but if you get a LOAN, even if you wind up with money back in your pocket, the IRS treats that as just a shift in assets. Because you just received a loan, you never “realized” your profits by selling.
Because there was only a shift in assets and debts and not a change in the REALIZED net worth when you sell, the IRS does not consider the pulled-out cash income. When you receive cash out in a refinance, the IRS recognizes that you have to pay it back, and so you really haven't “made” any income.
The thing is, since this is a loan, you still have to pay it back over the term of your loan. And this frees up the money you would have tied up in a property, and opens it up to be reinvested at a higher rate or into something else. The purpose of doing this should be to buy more investments that produce a HIGHER return than what you’re paying out in interest..and the refinanced property should generate the income to support the new mortgage. If this doesn’t happen, it begins getting risky…you shouldn’t over leverage yourself to a point where you owe more than you can handle, BUT, if used correctly, you can leverage yourself a lot of extra money to invest with.
This is what’s known as a cash-out refinance and how you can use your equity in a property for tax free money. This method of real estate investing is also known as the BRRRR method of real estate investing. Buy. Rehab. Rent. Refinance. Repeat.
It’s a way of “cashing out” without actually cashing out…then using those proceeds to continue investing in more properties. Each property generates equity, each time you use that equity to buy another, which continues the process. I like this method because it’s a long term approach that grows a lot over time. But like I said, I’ll get into this in another video in more detail. Thanks for watching!
For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness @gmail.com
Suggested reading:
The Millionaire Real Estate Agent: http://goo.gl/TPTSVC
Your money or your life: https://goo.gl/fmlaJR
The Millionaire Real Estate Investor: https://goo.gl/sV9xtl
How to Win Friends and Influence People: https://goo.gl/1f3Meq
Think and grow rich: https://goo.gl/SSKlyu
Awaken the giant within: https://goo.gl/niIAEI
The Book on Rental Property Investing: https://goo.gl/qtJqFq
Favorite Credit Cards:
Chase Sapphire Reserve - https://goo.gl/sT68EC
American Express Platinum - https://goo.gl/C9n4e3
What if you own your home and want to buy a new home. Could I use the house I own (No mortgage) as “equity” for collateral for the new house? I want to rent out my house and buy a new house for myself.
Hey Graham,
I just have a quick question that I'm going to put into an example so it is easier to understand.
I bought a duplex for 100k with a down payment of 20k. I put in 30k of remodeling/updating and now it is worth 200k. I do a cash out refinance (I'm assuming it involves an appraiser saying my house is now worth 200k) and pay off my 80k loan and I get 70k cash.
The question is: because I now have a loan for 200k, would that mean my monthly mortgage would be higher for the property I own?
Stephen, for this scheme to work, the initial purchase of the property should be done by taking loan or just spending my money?
@graham What kind of renovations would actually increase the value of the home?
“SunCor Financial MPI review” """
J dilla "life" playing in the back.. oooh yeeeee
What about refinancing costs?
Thanks for this awesome video, Graham! Does this still apply to homes that saw an increase in value solely from time (ex: homes in that area have increased in value), rather than from renovation?
Came back to this video because I needed to explain something to my fiancée lol. Glad I watched cuz I didn’t realize u did a tour of the garage 🤯
brrrr nice
How do you protect your personal assets during this? are you set up as an LLC or something?
Digging your office space. Where did you get those blackout curtains? Not all blackout curtains are created equal. I work nights, I soo need some good blackout curtains.
this method works great in bubbles created by foreign money and record low interest rates and only 5% downpayments, but how long are these gonna last here in canada
Your info is cool but the black background is scary, spooky? You assume the construction company who does the remodel company is qualified, available and your loan wi dow is reasonable. Can we say risk?
I like to live in a property for 2 years and sale it for tax free cash! I give this video 👍👍
For some reason I thought grahams office was a giant 6 car luxury garage
Another great topic is please explain how much of a buffer you should have so when the economy slows down you are not playing with a house of cards and you loose everything. Always make sure to manage your risk.
THANK YOU!
I would like to know more of your real estate videos . thank you
Loved the office tour!!! Thanks for that.
That's what im searchimg for.🤙
when you reinvest that loan. do you have to pay taxes on the money that loan earns?
BiggerPockets man, i see.
Why not use HE Loans or HELOC to purchase the houses, IF you have lots of equity in your personal house?
Just did this on a property I purchased for 125k in 2015, reappraised at 200k and got a 50k cash-out while leaving 49k (25%) equity in the rental property, and starting to look for the next deal! Love your content Graham!
I know this is an older video, but I'm specifically interested in this topic.
If you do see this comment, I was wondering when this comes full circle.
Like will you always be in debt to be wealthy?
Can you ever cash out, or do you have to always keep pushing to keep the money tax free?
I feel like I don't even have the right questions to ask to get me the answers I want.
One more question, if I have bad credit, what are my chances of even breaking ground on a tactic like this while that's a thing?
Dope office
A tax free loan? It's not income until you sell it.
Where did you learn all this is there a book or website you would recommend?
Graham! Thanks for everything!
Can you do a video on tax lien investing?
Like: is it worth it? is it a better investment than T bills? What[s the risk level? What's your take on it? Is it a scam? Can you recommend anything about tax lien investing? Etc.
Seriously thanks so much for explaining everything and being so helpful!
I'll probably post this exact comment somewhere else so you see it.
Thanks again!
Be sure to smash and sub folks!
Watched til the end.
Liked.
Commented.
Can you do a video breakdown about the risk of continually leveraging with the BRRRR method vs just paying the property off and having 100% cash flow? If you haven't already that is…