Afford Anything - Ask Paula - Travel vs. Passive Income, Proximity in Real Estate Investing and Selling Off Properties

Episode Date: February 6, 2017

#63: It's the first Monday of the month, and you know what that means - another Ask Paula episode. Our first question comes from Richard, who wants to know if he should focus on creating a travel fund or building passive income through real estate. What did I do, and how did I manage to come back from my world travels and start building a real estate portfolio only a few years later? The next question comes from Andrew. He's contemplating purchasing two houses on the cul-de-sac he lives on and then renting them out. He only plans on living in his current house for another five years, at which time he also wants to rent it out. Is he crazy? Would proximity give him an advantage? Jennifer asks the next question. She and her husband owe $150,000 on a rental property in Portland, OR that's worth $350,000. Should they sell the house and buy more properties? What would I do with the equity in the property?   Find more resources and Ask Paula episodes at http://podcast.affordanything.com/tag/ask-paula   Learn more about your ad choices. Visit podcastchoices.com/adchoices

So here's the deal. You can afford absolutely anything you want at any time without limit. Nah, psych, just kidding. The truth is you can afford anything, but not everything. Every decision that you make is a trade-off against something else. There's always an opportunity cost. And this is true, not just of your money, but also your time, your energy, your focus, your attention, anything in your life that is a scarce or limited resource. And it's not that I'm trying to promote a scarcity mindset. It's just that these are the facts we're dealing with. So the question becomes, how do you make better choices? How do you make better decisions about those limited resources? And how do you create more abundance in the areas where you're capable of creating that? My name is Paula Pant, and this is the Afford Anything podcast, the show dedicated to answering these types of questions. Typically, on the first Monday of the month, I answer questions that come from you, the listeners, the Afford Anything community. We had so many questions that last week we did a special.

episode of Ask Paula, featuring my buddy, Joe Sal C-Hi. And this week, we are back with round two. Our first question comes from Richard. Hello, Paula. My name is Richard Kennedy. I live in California, and I love your podcast and your website. I have a question for you about what you did when you returned from traveling. I'm in a position now where I can either build a large travel fund or fund to invest in real estate. for the first time. I really love to travel while I'm young and everything, but I also know that if I can set up a real estate income or passive income, I might be able to travel anyway. So I'm wondering, what did you do when you came back from traveling for the first time? How did you take those

steps from not having any money to investing in real estate? And what would you suggest to someone who has the opportunity to start one or the other. Thank you, Paula. Have a great day. Thanks for the question, Richard. You know, it's funny. Your specific question is, what did I do? But what I hear you really asking is what should you do?

So let me pause here. Let me back up and add some context for the listeners who might be wondering, wait a second, travel, passive income, what's he talking about? Here's the background to that question. About a dozen years ago, in 2005, I graduated from college. I really wanted to go travel, but I didn't have the money. I was a fresh college graduate. So I went into the workforce. I worked for three years. I had a starting salary of $21,000 a year. At the time that I finished my three-year career, I had gotten a promotion. I was making $31,000 a year. So that was the most that I've ever earned at salary W-2 income. I saved. I saved. I saved a lot while I was working. Most of those savings came from freelancing that I did to. during the evenings and weekends. So whenever I had some time off from work, I would write freelance articles for magazines and websites. I would save every penny of that after taxes. And after three

years of doing that, I'd save $25,000. And so in 2008, I quit my crappy job with my $30,000, $31,000, excuse me, $31,000 salary. And just flew to Egypt. I got a one-wave plane ticket to Egypt and kind of went from there and putzed around, did a whole lot of nothing and learned an incredible amount. It was one of the most life-changing experiences of my life that's redundant. But it was. It was fantastic. A lot of people think that traveling is nothing more than sightseeing, but sightseeing gets really old. I mean, there's nothing meaningful about just standing in front of an object taking a selfie. Of course, back in 2008, that was before the selfies. That was before selfies were invented. Dude, it was even before Kindles were invented. That's a different story for another

day. My point is, the years that I spent traveling changed me in ways that I never could have imagined and afford anything. The website, the podcast, none of this would be here today if it weren't for the fact that I had done that. So on the surface, it might have seemed stupid to leave a career. I used to be a newspaper reporter and quitting a newspaper job in 2008 was just like the dumbest thing in the world that you could. I mean, it was career suicide, right? Because there's no way, virtually no way I was ever going to get a job in newspapers or possibly even journalism again. Everybody told me not to quit. You know, they told me that your 20s are a great time to be saving money and investing, putting that money into index funds and just really building a solid

financial future and building your career. I mean, that was the advice that I got from everyone. And I said, no, I turned my back on all of it because I, like you, Richard, I wanted to travel while I was young. And in hindsight, the urgency to travel while young was actually incredibly misguided because you can travel at any age. 20s, 30s, 70s, 70s, 70s. 70s, 80s. My parents are in India right now. I mean, my parents are 75 years old. They're still traveling. They went to Panama last year. They went to Russia a couple years ago. They've done all of this in their 70s. So there isn't actually any urgency to traveling while you're young. But that being said, I would encourage you to travel at all decades of life because you yourself

are going to be different and the world is going to be different. Remember that earlier kind of casual comment that I made about the fact that when I traveled, selfies weren't a thing, the Kindle wasn't a thing. So if I wanted to read, which I did, of course, because I'm a nerd, I carried around books in the English language. I would carry these into remote places in a backpack, and I would rip the covers off of the books in order to reduce the weight of those books in my backpack. And as I was reading the books, I'd like rip pages out in order to reduce weight and leave more space in the pack. And I have that story. I have that experience. I know what it was like because I traveled before smartphones were ubiquitous. And traveling now is very different.

And that's just the difference between 2008 to 2017. It's just a difference of less than 10 years. Imagine how different the world will be when we're all traveling with glasses that have AI that translate foreign languages so that when we look at a sign, we can read it even if it's written in Korean or Japanese. You know, we have that technology already, but imagine what will happen soon when it becomes more ubiquitous. Imagine what will happen when augmented reality and AI just change the way that we travel. It's almost unthinkable. So our world is going to change and you yourself are going to change. You're going to have different priorities and interests, I would encourage not just you, Richard, but everybody listening, to travel at all

stages of life, no matter how old you are, and no matter what decade we're in, because the experience will be fresh and new and different every time. And sometimes it doesn't seem like it makes financial sense to do so. But if you have the savings, so do not go into debt for it, if you have the savings to be able to travel, and you can, you can, you can build that at almost any income if you're willing to have a side hustle and spend your evenings and weekends making extra cash and putting it all into a savings account. Like almost anybody is able to do this if you live in the United States or a similarly free First World country. And particularly if you get paid in U.S. dollars or a similarly strong international

currency, almost anybody has the ability to have these experiences. And even though they might not seem to make financial sense on the surface, inspiration may or may not strike. I mean, for me, inspiration struck. And I remember the moment that I thought of the name Afford Anything. I was in Bali at the time. I remember that exact moment. Here we are. Six years after I've started afford anything, this is now what I do full time. It's much, much more lucrative than the dead end newspaper job that I had beforehand, the people who said that I was committing career suicide were wrong. When they said that I would never get another job at newspapers again, they were totally right. I never did get another job. But my career has improved in ways that I could not have

imagined, just as the world will change in ways that we cannot imagine. And that is the benefit of traveling. And it's not something that you can quantify. It's not something that there's no ROI on it. But there's no, geez, the risk. of sounding like a Hallmark card. There's no ROI on life. Okay. Excuse me while I vomit. Blah. Now this is all a long tangent to your original question, which is what did I do when I came back? So to answer that question directly, when I came back to the United States, it was 2010. I knew that I did not want to get a job. I didn't want to work a W-2 salary, sit and bumper-to-bumper traffic in a crappy commute, like the kind that many of you who are listening to this podcast

are probably in right now. I didn't want to do that. And I didn't want to do that. And I did. didn't know how I was going to not. I just knew that I wouldn't. So I had the skills and more importantly, the confidence from that side hustle of freelancing. I had the confidence to believe that I could strike out on my own and become a full-time freelance writer. And so that's what I did. Starting in 2010, I became a full-time freelance writer. And in the beginning, it was very slow. I remember when I landed my first client and they paid $800 a month. And for how excited I was, you would have thought it was $8 million a month. And it snowballed from there, but the first few months were incredibly lean and hungry and stressful. But eventually, you know, one client

leads to the next, leads to the next, word of mouth spreads. And I built up a solid six-figure income as a freelance writer. Then I saved that money because I was just used to living cheaply. And frankly, once you've traveled the world and you see people with leprosy, yet leprosy still exists, a number of people, a significant number of people are affected by it. Once you see things like that, living in a tiny apartment with low ceilings doesn't seem like such a big deal. Cooking dinner at home rather than going to a restaurant, hashtag not a big deal.

Because at the risk of sounding callous, a lot of middle class to upper middle class people in first-world countries who complain that they don't have the same luxuries as the upper upper middle class. It's like you're in the global top 5% complaining that you're not in the global top 1%. You know, I realize that relatively it feels significant to you and I'm not trying to be dismissive of that. But sometimes it's hard to break out the victim violin when you see how much better off you are than the vast majority of the globe. It's one thing to sit at a computer and read about those lessons,

but it's another to actually be in Cambodia face-to-face with somebody who survived the Poulpot regime and really internalize that lesson. So anyway, wow, this is like tangent after tangent, like ping, ping, ping. I have the attention span of a cat. So, Richard, to answer your question, what did I do when I got back? I became a full-time freelance writer. I lived really frugally. As a result, I built a large gap between what I brought in and what I spent. And so that gap is what we refer to as savings. I took that gap and I bought my first rental property with it. And that first rental property was a triplex, moved into one unit with roommates, rented out the other two. And then lather rinse repeat. I just kept doing that. I bought a bunch of Family homes after not a bunch. I bought like a total of four other single family homes. So now I've got a total of seven rental units. And the cash flow that they kick off is totally sufficient to cover my cost of living at, you know, a reasonable middle class lifestyle in a location that has a reasonable cost of living. I live in downtown Las Vegas, Nevada. So that's what I did. I put my lifestyle first. And I didn't delay building passive income. So here's where we get to the question. what did I do and what I think you're really asking is what should you do. And I guess I can't tell you what you should do because that depends on your priorities. But I would encourage you not,

it's difficult to say this because on one hand I want to say, you know, don't delay a tomorrow that may never arrive. You know, you never know what's going to happen. You might get sick. You might get hit by a car, anything could happen, and you don't want to be living so much for the future that you forego the present moment. I realize that sounds funny coming from somebody who hosts a podcast that's more or less dedicated to saving and investing, which on the surface seems to be the art of delaying gratification. But have you heard of this thing? It's called the marshmallow test. And it's famous study in which a bunch of young children were given marshmallows. And they were told that they could either eat one. I may be misquoting the details, but it was something to the

effective. They were told that they could either eat one marshmallow now or if they waited 15 minutes, they could have two marshmallows later. And that's one of those tests in which you measure a person's ability to delay gratification. And they found that the kids who were willing to delay their marshmallow eating by 15 minutes later in life were also more successful because they had the ability to delay gratification. But the other part of that study, the part that nobody talks about, is that the kids still ate two marshmallows after 15 minutes. They didn't wait for six hours to have eight marshmallows or for 10 years to own a marshmallow. factory. And that's the part of the equation that I don't think we're talking about enough.

So, TLDR, which I know doesn't make any sense, but I'm going to say it anyway, TLDR, I encourage people to retire both early and often. And what I mean by that is bake mini retirements into your life while you're on the road to an early retirement or financial independence. That way you get a little bit both. You still have those mini-retirements, those sabbaticals that you're enjoying in the present moment so that, you know, you can travel while you're young and while you're middle-aged, and while you're old, and while you're every age. And also, you can build to financial independence concurrently. So I guess I'm telling you to have your cake and eat it too. And wow, I've just like weaved a whole bunch of metaphors and analogies and cliches together into one giant

confusion soup. So, Richard, I hope you got something out of that. But the takeaway here is enjoy mini-retirements while you're on the road to financial independence or while you're on the road to early retirement. I hope that helps. Enjoy your travels. And call back sometime. Let me know how it goes. Let me know what you decided to do. Thanks again, Richard, for asking that question. Hey, we'll be back with the Ask Paula episode in just a moment, but first I want to give a shout out to one of our show sponsors, FreshBooks. If you're an entrepreneur or if you have a side hustle, how much time do you spend sending invoices, tracking those invoices, making sure that you get paid on time? Probably more than you should. Inter FreshBooks. They automate

that process, making invoicing and bookkeeping and all of that super easy. So you fill out a form once, you can have a customized template, and FreshBooks will send that invoice to your clients. they'll automatically send follow-up reminders to make sure that you get paid, and they'll let you know whether or not your client has even bothered looking at the invoice. If you want to give them a try for free for 30 days, head to freshbooks.com slash Paula. That's freshbooks.com slash p-a-u-l-a. Our next question comes from Andrew. Hey Paula, this is Andrew from dollar after dollar.com and I have a quick question for you.

So we live in a cul-de-sac with eight houses on it and two of the houses are actually going up for sale next month. We're considering buying the houses after doing our due diligence and turning them into rental real estate properties. Our plan would be to get a property manager so the tenants did not know that we were the owners. Do you think that we are crazy for considering living across the street from our rental properties? The house we live in now we only plan on being in for another five years and then also turning that into a rental property. Thanks for taking the question, Paula. I appreciate everything you do. Thanks, Andrew.

So, Andrew, your specific question was, do you think we are crazy? Yes. No, I'm just kidding. I really wanted to answer yes to that. Anytime somebody says, am I crazy? I'm like, you know, I think we all are. A couple of things here. I'm going to argue this case from both sides.

on one hand, proximity to an investment property does not make that property a good deal. By the way, I'm trying to think of a snappier way to phrase that. This is how much of a nerd I am. I was out hiking the other day and I had this long conversation about like, what's a snappy way to say that? What's a really like soundbite way to say living close to a house doesn't make it a good deal? I don't know. Maybe that's the soundbite that I'm going for. I'm not sure.

But just because you live close to something does not mean you should invest in it. Because after all, the point of owning an investment property is to generate strong returns. And those returns are going to come in the form of a healthy cap rate. So a cap rate, I'm going to get into this a little bit deeper with the next question because, you know, I have the powers to know what question comes next. I'll go into the formula a little bit deeper in the next question, but essentially cap rate is analogous to the dividend that you might get on a stock. And so if, I'm assuming, you want to own rental properties for the sake of building financial independence, then you would be looking for properties that have a cap rate, or i.e., a dividend, just think of. it is a dividend, properties that produce a dividend that are awesome relative to the value of the asset and that are appropriate for the risk-reward profile of that particular neighborhood

and property. Because like a stock, you know how like certain index funds are higher risk, higher reward, and other index funds or even other asset classes like bonds are lower-risk, lower-reward, same as true for investment properties, right? There are certain neighborhoods where you often may get a higher cap rate, but there's also a lot more neighborhood risk. And likewise, there are other neighborhoods where you'll often get a lower cap rate, typically. But, you know, in return, there's less neighborhood risk, higher quality tenants. So you've got the risk reward spectrum, just as you would between asset classes in, you know, bonds versus treasuries versus stocks. you also within inside of the asset class of rental real estate, you also have that risk reward spectrum. And so as an investor, what you want to look for is an asset that produces a solid dividend and also is appropriate to the risk reward spectrum that you're investing in or that you would like to invest in. That's the criteria that you, I'm going to use the S word here should. That's the criteria that I would encourage you to use when you are shopping for

investment properties. And notice that that criteria has nothing to do with its proximity to your current domicile. I am such a nerd that I refer to your own house as a domicile. Can you believe that? It's the place where you shower, Andrew. Don't buy an investment property just because it's close to the place where you shower. That being said, I told you that I was going to argue this point from both sides. So that's side A. That is the, yes, you're crazy for thinking this argument. But on the other hand, I do see the logic. I do see the wisdom in your approach. Because if I were to argue this from the other side, you mentioned that you live on a cul-de-sac. This cul-de-sac has eight houses. You already own one of them.

Two more of them are going to go up for sale. So if you bought those two, you would, oh, three out of eight houses in a confined space where no new houses could be built. And what that means is that you could have the ability to force appreciation in that specific area. So here's what I mean by that. Have you ever seen like one of those streets, like a neighborhood street where it was kind of a crappy street and then all of a sudden one house just kind of cleaned up its act. Like the owner started mowing the lawn. They replaced the chain link fence with a nicer, newer one. They painted the outside of their house. Like, you know, one house got really nice. And then maybe one other house on that street got nice. And it soon started this chain

reaction where all of the houses on that street all started getting nicer piece by piece until finally the last few stragglers got around to replacing the broken window and, and fixing up their act. And by virtue of the fact that all of the houses on the street improved, the property values for every house went up. You know, like that is how you force appreciation in a neighborhood. Now, I'm reluctant to talk about property values going up because there are multiple sources of property appreciation. One of those sources, the one that everybody likes to talk but nobody can actually do anything to affect is market appreciation. So market appreciation is like the weather. Everyone talks about it, but you can't do a damn thing to impact it. It's the market.

It goes where it wants to. So if your house happens to go up in value, awesome, but you did absolutely jack squat to make that happen. And you have absolutely no control over your own future if that situation were to either stagnate or reverse. That's market appreciation and I don't want you to get hung up on it and that's why I try to avoid even saying the A word appreciation because I just don't want people's mindset to be there. But I would be remiss if I didn't talk about the variant of appreciation that you can control and that is called forced appreciation, which is just a fancy way of saying that

you actually got off your butt and hired a contractor to make stuff better to improve things. Typically when people at the individual level, when mom and pop people like you and me, mom and pop everyday Jane and Joe investors, when we talk about forced appreciation, we normally talk about it in the context of a specific property. So you can force appreciation on a specific property by improving that property itself. But you, Andrew, because you have the opportunity to own three out of eight houses on this cul-de-sac, you have the opportunity to force appreciation not just in those three houses, but for the cul-de-sac as a whole. Now, I'm assuming, at least, that you live in a neighborhood where there is some headroom for forced appreciation. So if you live in an area where jobs are scarce and the population is rapidly declining,

then everything I've just said about forced depreciation is moot. And also you need to get out of there and not be buying more. But assuming that you live in a stable area with steady job opportunities and a stable or growing population, then you may have some room to be able to be the guy who fixes up the whole neighborhood. So that would be the argument for buying those. properties on your cul-de-sac. You could literally turn the block around, single-handedly almost. So I guess my final answer, Andrew, is it depends. What are the cap rates on those properties? And would those properties be good investments even if you didn't force any appreciation on them?

If the answer to that is yes, then, you know, you might have something there. But if those properties, if they don't have good cap rates, if they wouldn't be attractive, imagine that you live like 2,000 miles away, right? Imagine that you move to Alaska. Would you still want to own those houses? If your answer is no, if you wouldn't own them from Alaska, why would you own them now? Because that's the thing about forced appreciation. I would happily, if I found the right houses on the right block, I would happily buy an entire cul-de-sac four time zones away from where I currently live. Proximity has nothing to do with the decision.

It's all about evaluating the investment itself, the asset itself, both in terms of the dividend that it can produce and in terms of the future value. valuation that you yourself can control. It's not not the market valuation, but the forced appreciation. The common thread behind both of those considerations is that you're thinking about how good of an investment the properties are. You're not considering where you happen to brush your teeth as part of your investment criteria. So I hope that helps. Thank you so much for asking the question and good luck with your decision. I mean, you've put yourself into a spot where it seems like you're choosing between some pretty awesome options. So, congratulations for doing that. And I'm sure you're going to do great no matter what you choose. But Andrew, I encourage you

call back at some point and let me know what you decide. Our next question comes from Jennifer. Hi, Paula. This is Jennifer in Portland, Oregon. I love your show. I'm learning tense from you. Keep up the good work. I have a question about, and Vince, rental property. My husband and I have a rental property and we have a loan of 150,000 and it's worth about 350 currently in today's market. And we are curious. I'm always kind of thinking if there's something else we should be doing with it, if we can maximize the equity that's in there. And I'm curious to know if you think we should sell it and maybe just take that equity and buy more rental properties. We live in Portland where the housing prices are going up and also the rental prices

are going up too, but it's not kind of me. I know you talk about the 1% how you look at the purchase price and the rental price and we're not quite there yet. I think we are making $1,600 a month from it and our mortgage is about $10.50. So I'm just curious if there's something better we should be doing with the equity in this property. If you were, would you keep this property or would you look or would you sell it and look for other multiple properties to buy? We're just kind of in a quandary about what to do. But we've got a lot of equity in it and so we could ride it out and I know we'd be happy to do that, but I don't want to miss an opportunity if there's something more that we could be doing. Thanks, Jennifer, for that question. All right, the short answer

and the long answer. Short answer is if you are interested in owning more rental properties or having more rental income, then you could either do a cash out refinance on the equity of that property and use the money from the cash out refi to buy more properties. Or, as you said, you could sell it and buy other ones. If it were me, personally, I would just do a cash out refi and use that money to buy more properties because mostly because I'm lazy and selling a property is a bunch of hassle and yours sounds like it's pretty stable, it's pretty solid. So it's, you know, it doesn't raise any red flags. So for me, just because I like to keep things simple and I like to take the path of least resistance, I would cash out refi it, but that doesn't mean that you should. So that's the short answer. The longer answer, however, and I'm just going to pull back, and I'm saying this not just for you, Jennifer, but also for the sake of anybody else who's listening who has a similar question, because I get a lot of variance. of this question. A lot of people contact me and say, hey, you know, I have this property. We paid X for it, and now it's worth Y, and our equity within it is Z. And if we refinance the mortgage,

then the current debt that we would hold would be A, and the total interest rate that we would pay would be B, and the other thing is C, and something else is D, and the rental income is E, and the operating income is F. And so my question is, if a train leaves off, in at 7 p.m. heading west at 42 miles per hour and another train leave Chicago heading south at 8 p.m. at 62 miles per hour, then how much wood could a woodchuck chuck, if a woodchuck could chuck wood. So I get that question all the time. And the way that I like to answer it is first I encourage people to take a pause for a second and ask yourself, what is it that you actually want to do? Again, figure out the what before you figure out the how. And sometimes that

question can be very enlightening. Like, for example, the other day I was hiking with a buddy of mine, and he asked a similar question to what you did. He bought a property. It's now worth a lot more than what he paid for it. It's a rental. And he had gone to lunch. And okay, this is the thing you should watch out for. So he had gone to lunch with a buddy of his who was a real estate investor. And in the real estate investing community, there is a lot of group think, in my opinion, about the group think says that you should just buy, buy, buy, buy, buy, buy, buy, buy as much as you can. And within that, that means leverage. Like, just keep, I call it refi till you die. Just keep, like, buying as much as you can and going into as much debt as you can so that you can eventually, when you're like 212 years old, you'll have a bazillion units.

For some people, well, okay, I won't comment on that advice. right now, but what I will say is that that advice does not, if you just give somebody that piece of advice in a vacuum, then you're, as my friend experienced, you're failing to start with the question of what do you want, what's your goal? And so that was what I asked him. You know, I was like, is your goal to replace your income so that you can quit your job? Is your goal to supplement your income with some passive income on the side that can maybe pay for your kids' education or just be some extra beer money for, you know, vacations and furniture and things like that. What are you trying to do here? And within that conversation, and that took a while, he didn't have a

simple or quick answer. But we were hiking. And so within the course of that conversation, it came out that he psychologically would feel a lot more free if he just paid down the debt and got rid of it. And so, you know, there was his answer. I mean, if what he wants is to be rid of debt, then don't take on anymore. And so that's just really where I encourage people to start. And that step can't be overlooked. And if within that process, you decide that what you want is to own more rental properties, to have more passive income, then as you evaluate every new property that you're purchasing, evaluate each property based on the same way that you would evaluate your first one. Evaluate each property by looking at the cap rate that it generates.

So let me talk a little bit about cap rate because that's conceptually just something that I really want to explore and I hope that people understand. When you own an asset like an index fund or any other asset, there are two forms of valuation within that asset. There are There is the asset valuation itself, and then there is the cash flow that that asset kicks off. So if you own a share of Coca-Cola, you've got the price of Coca-Cola stock, that's the valuation of the stock, and then you also have the dividend that that Coca-Cola stock pays. Same thing with the house. You've got the valuation of the house, and you've also got the cash flow that it, the unleveraged cash flow that it generates. which is to say the money that you would get from it if there was no mortgage on it.

And the reason that when you look at cap rate, the reason that you compare those two numbers is because you're trying to evaluate the asset itself. You wouldn't judge a stock based on the margin deal that you get. So likewise, don't judge a house based on the financing deal that you get. In the show notes, which you can find at afford anything.com slash episode 63, I'll link to an article that explains exactly how to calculate cap rate, like what that formula is. But fundamentally, conceptually, what you're trying to calculate with cap rate is you've got a property. The rent that it produces is X.

The cost of holding on to that property, the taxes, the insurance, the maintenance, the management. All of those costs are Y. And X minus Y is Z. and that is your net operating income. And that net operating income proportional to the value of the asset, that's your cap rate. And so when you evaluate a property, I would encourage you to lead with that equation. But again, lead with that only if you were first on the work of deciding that you want another rental property because, you know, you may or may not. So thank you so much, Jennifer, for asking that question.

I still have like five more questions in the queue, but just for the sake of time, I'm going to stop here. Thank you. Thank you. Thank you so much to everybody who listens to this show, to all of you who are here, who've made it to the end. If you have a question, please head to Afford Anything.com slash voicemail to leave your question. I actually, I love doing these Ask Paul episodes. This is really, these are actually like some my favorite episodes to host. So I'm really happy that I'm doing more of these. So if you've got a question, I super encourage you to go there and leave your question because I welcome the opportunity to keep doing this. Thanks to everybody who has gone to iTunes and left a review. Those reviews are super helpful.

You can find the show notes once again at afford anything.com slash episode 63. My name is Paula Pant, host of the Afford Anything podcast. Signing off, I'll see you next week.