Epic Real Estate Investing - 3 Strategies for Increasing Your Real Estate's R.O.I. | Episode 83

Episode Date: January 6, 2014

When you go to work for your money, does it return the favor? How do you know? And if your money is working for you, how can you make it work harder? How can you make your money work harder for you without any extraordinary effort on your part? These are all questions that Matt answers on today's episode as he'll share with you something that he's never shared publicly before... the 3 strategies he consistently uses for maintaining and increasing the returns on his own real estate investments. -------------- If you have a question you'd like Matt to answer live on the show, call the Epic Real Estate Hotline at 1-888-891-7203 Download Matt's free course How to Do Deals : No Money Required at FreeRealEstateInvestingCourse.com Don't have a buyers list yet? Borrow Matt's until you do at EpicWholesalers.com Get "done for me" income properties with "guarnateed cash flow" at CashFlowSavvy.com Hit the streets and join Matt in the field in one of his cash flow markets at EpicRealEstateTour.com Subscribe to this podcast and access all episodes at EpicRealEstateInvesting.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Yeah. Hello. Welcome. Welcome to another episode of Epic Real Estate Investing. If this is your first time listening to the show, welcome. Very glad that you're here. This is the place where I show people how to get out of the rat race using real estate.

And it all begins with a simple shift in mindset. shift and focus. Simply stop focusing on creating piles of cash and start focusing on creating streams of cash. And that's what we like to call right here in the real estate world. We call that cash flow. Cash flow is king. By doing just that, making that shift in mindset, I escaped the rat race in less than four years. What literally 99%?

Pretty much everybody, 99% of our population is unable to do in 40 years. And I don't share that with you to brag. not by any means. I don't consider myself special in any way, meaning anyone can do this if someone would only show them how. Well, someone was gracious enough. I was blessed enough to learn this particular life secret from them. And now I'm letting you in on it, paying it forward, so to speak.

And if you think that's good news, it gets even better because it took me just under four years to escape the rat race. And that was with making a ton of dumb mistakes. But the great news about that is that you don't have to. to make all of those mistakes, meaning if you hang out here for a while, you should be able to travel that road much quicker than I, just like Fernando Ornales did, did it in a year. And to help you get started, I created a free step-by-step course to show you exactly how to do it, to show you exactly how I'd do it if I had to do it all over again.

And you can download that free course at free real estate investing course.com. All right. And if you happen to have a question or a comment or concern that you'd like me to answer or address here live on the show, please share them with me on the Epic Real Estate Investing Hotline at 1-88-891-7203. 888-891-7203. Okay, so before we get started today, I've got just a few quick announcements, just a couple. The next epic real estate tour has just been finalized. The dates are February 20th and 21st.

The first tour will be in Memphis. I'm going to be doing something a little different this time. On Thursday evening, the 20th, I'll be hosting a cash flow workshop followed by an open bar reception where appetizers will be served and we'll get to hang out. You, me, my team, and we'll get to know each other. as well, you'll be able to get to know fellow epic community members. And then Friday, we'll go ahead and we'll tour Memphis. We'll see important city sites, important city developments.

We'll tour properties where you'll be able to see what the properties look like before we purchase, what they look like after we purchase. You'll get to meet my Memphis team. You'll get an inside look at my entire process. And then we'll end the tour with lunch. And you get to ask questions of myself and my team. and we'll just have a good time. We'll then break for a few hours.

And then we'll meet up again a little later for dinner. And we'll talk shop and just hang out. Or we'll talk shop. We'll talk about whatever you want to talk about. So if that sounds like something you'd like to attend, go to Epic Realestate Tour. com, Epic Realestate Tour. com where you can register. It's $597 per person.

We've actually started to charge now. I know it was free last year in the year before. But we're going to do something a little bit bigger. We're going to hold a nicer accommodations. It's going to be much nice. and that is just to cover the expenses. And that covers all your food. It covers your drinks and it covers the tour.

And should you purchase a property from Cashflow Savvy, that $597 will be applied to your purchase. Okay? And you'll be responsible for your travel and hotel accommodations. That hasn't changed. So it's just pretty simple. If you'd like to go, I'd like to have you. I'd love to meet you.

So go to Epic Real Estate Tour.com for more information to register. And last announcement. But many congratulations are due to our epic wholesalers. I've been able to match up a lot of your deals to buyers on my buyer's list. And I don't want to jinx anyone's deals as we've got about seven or eight in escrow. And it looks like a few more coming. So I'm going to go ahead and wait until your deals are closed before I congratulate you by name. And if this is your first time hearing of the epic wholesaler program, basically what it is

is if you find a deal that you're unable to find a buyer for, as long as it meets my list's criteria, I'll go ahead and I'll send it out to my buyer's list. Basically, you can borrow my buyer's list until you get yours built up and established. And, you know, some of you have actually been using it as your primary exit strategy, and that's okay, too. I have no problem with that. So if you like some more information on that, go to epic wholesalers.com. Epic wholesalers.com. Wow, lots of domain names today.

I typically like to keep it limited to one per episode, but a lot has happened in the last few weeks. Over the holidays, happy new year, by the way. I just had a little bit more than the normal to share. So I had to violate my own rule. And admittedly, it's not the first time. But I had to cover everything. So if you missed any of that, you can go to epic realestate.com forward slash episode 83. Wow.

There's another domain name. Epic real estate.com forward slash episode 83 where my partner, Courtney, works really hard to organize all this shows, notes and content. So it's really easy for you to access. and consume. Cool. Oh, and finally, sorry, one more. Thanks for all the nice reviews lately, and thank you for all the nice emails and text messages, especially about episode 80. Been getting a lot of correspondence on episode 80. Apparently that was some information that many of you have had a difficult time attaining until that episode. So thanks for acknowledging how important

episode 80 has been for your business, how it's helped you, how it's cleared up a bunch of your questions and how the tools and resources that I shared there are changing your business. I mean, podcasting, it can be such a lonely business, so it's nice to get feedback. So thanks for that. All right, so let's get into the subject of today's show. Thanks for your patience. On today's show, we're going to discuss return on investment, R-O-I. R-O-I is one of those things that's commonly misunderstood or not recognized as the powerful

tool that it can be when it comes to responsible indefinitely. disciplined investing when it comes to building your wealth and doing that quickly. So real quickly, I'll go over what it actually is and then I'll go over how to calculate it and then I'll go over why it's important for you to understand it. And then I'm actually going to go over three strategies on how to increase your ROI. So what is it? Well, ROI, as I mentioned, is return on investment. That's what the letters stand for.

but in more detail it is an expression of how much you get back over time in proportion to how much you put in how much you get back over time in proportion to how much you put in and most people that they're overly focused on the cash on cash return on investment of their real estate and i think it's because it's just it's easier to compare it's easier to understand when they're thinking of their savings account interest rate or the stock portfolio return that they've got. And all those comparisons are valid comparisons, but they're not complete comparisons. For example, you know, when you're looking at your CD, your certificate of deposit that the

banks offer or your money market account or your mutual fund or your IRA or your 401K or even your stock portfolio as a whole and you're excited, say that it performed as well as your real estate did this year. but you've got to look deeper because it might not have, even though the numbers might have matched, might not have performed as well as your real estate. You've got to look deeper before you start celebrating. And here's why. If your stock portfolio produced an 8% return this year and the cash on cash return of your rental property produced an 8% return this year,

they indeed are equal. 8% equals 8%. But at the end of the day, when the IRS comes to get their share of your stock portfolio returns, the actual return might be closer to say four or five percent, maybe even lower, depending on your situation after it's all said and done. However, with your real estate return, the cash on cash return of 8%.

Sure, the tax man is going to come and get some of that as well. He's going to collect his share. But he'll probably have to give a good portion of it back to you, if not all of it, because he owes you tax credits in the form of depreciation on your real estate. In fact, he might have to give you back more than what you gave him of which you could carry forward to next year's tax return as a credit. And then you have to factor in the appreciation that you might have experienced on the property

that year. And then if you're carrying a loan on the property, don't forget to factor in the principal pay down, the amortization. You got to factor that in too. And when your real estate calculation, the complete calculation is all said and done, that cash return of investment of 8% is probably closer to an overall return on your investment of say 20, 30 or 40% or even much higher than that. It just all depends on the property or properties in your situation. But whatever it is, it will be higher than 8%. And in most cases, significantly higher.

So real estate's ROI is not really comparing apples to apples with other investments. So with your stocks, you know, after you've calculated the basic factors, other factors cause your return to go down. With real estate, after you've calculated those same basic factors, other factors cause your return to go up. You see, real estate, it rocks. And it's for reasons like this, that I don't really consider this show a real estate show.

I consider a money show. It's an investment show. It's a smart investing show. It's a financial education show. You know, real estate just happens to be the vehicle that provides the educated and disciplined investment. the most control. And when you control the investment, you can control the return. Okay. So that's a little bit what ROI is, a little bit deeper look into it. So you actually understand the difference between,

you know, your real estate ROI and your return on investment on other investments. So how do you calculate it? So there's two calculations for ROI that you must know when it comes to your real estate. And I defined ROI as an expression of how much you get back over time in proportion to how much you put in. Now, the reason I repeated that is because the operative words I want to direct your attention to there is over time. Over time is a really key part of this definition, meaning ROI is measured over a 12-month period. And specifically, the first 12-month period only. after that first 12-month period, after that's passed, there's a new calculation. And I'm going to get to that right after I explained the first.

So the formula for ROI, your cash-on-cash-r-I, is taking your first 12 months of income from your investment and dividing it by how much you put into the investment. So if a property produced $5,000 of net income in the first 12 months and it required, say, me, to put in $50,000 to acquire that investment, that would be $5,000, or $5,000, the income divided by $50,000, the amount of money I put in, so $5,000 divided by $50,000, which would give me a 10% return on my investment, a 10% cash on cash return on my investment. That's what cash on cash means. I know a lot of people have questions when they hear that.

They don't understand quite what that means. So that's just the basic calculation of the cash, the income. divided by the cash that you put into the investment. Okay, so that would be 10% cash on cash. So what happens after the first 12 months? What's the calculation then? Well, this is very commonly misunderstood. Most real estate investors, they don't get it.

They'll continue to refer to their return on investment as ROI. But it's not. It's not ROI. The calculation after month 12 is referred to as ROE. return on equity. You might also hear it referred to as IRR, internal rate of return. They're the same thing. So let's say this was a $250,000 property, the same one we're talking about.

And when you put down that $50,000 to acquire it, let's say that represented a 20% down payment. And let's say this property appreciated 3% in that 12 months. Okay? So it appreciated 3%, it's $250,000 is the value. So 3% of $250,000 is $7,500. So that's how much it appreciated, $7,500 worth. And let's say on that loan, you paid down $1,000 on your loan, meaning $1,000 of your loan payments went to the principal.

So now we have to divide our $5,000 of net income. That didn't change. Same example. Still got $5,000 of income that year. By not just the $50,000 you put into the deal, but you have to include the appreciation of $7,500 and the $1,000 of principal buy-down also. In other words, your equity.

You've got to divide it by your total equity. And your equity, that's the difference between what you owe on the property and the property's value. That's what equity is. So you add those together. That gives you $58,500. That's the $50,000 you put down.

It's $7,500 of your appreciation, and it's $1,000 of your debt paydown. how much you paid down to principal. That's $58,500. That's the number you divide into the net income of $5,000. So that calculation is $5,000 divided by $58,500, of which gives you 8.5% return on equity, ROE. So, 8.5%.

What happened here? Well, what happened here is your return on your investment. actually shrank, didn't it? See, that first year you received a 10% ROI. Return on your investment. But the second year, that return shrank to 8.5%. And as long as the property continues to appreciate, even if it's only slightly, as long as it appreciates,

and as long as the principle continues to be paid down, which due to the way an amortized loan works, more and more of that principle will be paid down, each year. And as long as all that continues to happen, your return for this investment is going to shrink. And we don't want that. We want our return to maintain at the very least. And it's going to continue to shrink if you don't do anything and you just sit there and watch it. And we don't want that. So that brings me to why that's important to monitor, why you don't want it to shrink. You see, ROI, it's important for several reasons.

one, it's going to help you make decisions on which investments to acquire. It's going to help you compare one investment to another. And so you'll know which one is the better one for you. It helps you make decisions. The second thing is it's going to help you monitor how hard your money is working for you. I mean, this is the very important, it's very important to track as the effort your money exerts is in direct proportion of how fast your wealth is going to grow. So when you went from 10% to 8.5%, your money started working a little less for you.

It started exerting a little less effort. So your wealth started to grow a little bit slower. Those two are in direct proportion. And third, it's going to help you track your progress. It's kind of related to the second reason. It's going to help you track your progress in your wealth creation. It's going to allow you to fairly accurately predict where you're going to end up financially and when you're going to get there.

Okay, so it's really important to track this number. As a, you know, as rental real estate is a reliable source of passive income that's going to eventually grant you your escape from the rat race. Understand that passive doesn't mean unmanaged or uninvolved. The ROE calculation, the return on equity calculation I just gave you, it must be managed. You've got to keep your eyeballs on it, and you've got to be active in its participation.

You know, if you expect your money to grow and at the fastest rate possible, you must stay involved. You see, if you acquire a property and just let it sit there as you collect the passive income, you're actually prolonging your journey to financial freedom. I mean, this is another aspect of real estate that's a little bit counterintuitive. I mean, if you don't understand it and take action on what you understand, it's going to prolong your journey to financial freedom. very much like the conversation we had last episode with the relationship between cash and cash flow. Right?

It's a counterintuitive concept of which you must go against your intuition to move yourself in the right direction, to expedite your travels to financial independence. And here's what I mean. You know, if this property you purchased, we'll just stay with the same example, okay, it's steadily appreciating. Right. We'll just assume it's steadily appreciating. That's good, right? Right. Right. And the principal continues to get paid down and it proportionally gets paid down a little bit more each year because of the way the amortization works. So the principle

continues to get paid down. That's good. Right. Indeed. And you continue to benefit from the property's depreciation. Well, that's good, right? Absolutely. But as all these good things are happening, as it feels like you're prospering and you're progressing, just like when you get that $30,000 cash payout that we discussed last episode, it feels like you're doing the right thing. I just got paid. My property's appreciating the debts being paid down. Everything is good. But as good as that feels, all those good things are happening.

What's happening to your return on equity? It's dropping. And that's a bad thing. Right? You know, in reality, it won't take. long before your money is essentially earning minimum wage, meaning in the example that I gave you, in four or five or six years, less than 10 years for sure, your money might as well just be in a bank account and a savings account, earning a nice 0.75% return.

And we know we'll never get out of the rat race at that rate, right? So hopefully this is making sense to you. And listen to this again, write down the numbers and work it out on paper if you have to and project out those calculations five or ten years from now and see where that's leading you, how the effort that your money is working for you, how that's diminishing. It's important for you to understand this dynamic. You know, your financial freedom, your independence, getting out of the rat race, it depends on understanding this.

So to keep the machine moving, we've got to manage the ROE, the return on equity, at the very least. We've got to manage it at the very least, or even better, another one of the amazing aspects of real estate without any real extraordinary effort, we can not only manage the ROE, we can increase it. We can make it work harder. We can increase that number. And that's what we're going to move on to next. That's what today's episode is about.

But I want to lay the foundation for you first. So how to increase it? All right, there are three ways that you can do this. There's three ways to increase your return. Three ways you can specifically get your money to work harder for you and keep it working hard. You see, we want maximum effort of your money without losing control of your money. And that's what I'm going to share with you right now. Several strategies, actually three strategies on how to do this.

You can, one, increase the net income of your property, or two, you can increase the leverage on your property, or three, you can move the equity of your property. So let's go over the first one. Those are the three. So let's go over the first one. increase the net income of your property. And the net income is the gross income minus all expenses. And for this ROI calculation, we would want to include debt service.

We want the toll, like we want your cash after debt service. So to increase the net income, you can either increase the income of the property or you can decrease the expenses of the property. Or you can do both. One, two, or both of those things will increase your net income. For example, if we take our previous example, we have this $250,000 house in its second year, it's producing now an 8.5% return on equity, right? But let's say that second year we raised the rent on the property, $80 a month.

Let's say the second year, we raise the rent $80 per month. That would give us approximately an additional $1,000 per year. So now our income from the property is not $5,000 a year. It's $6,000 a year. We added $1,000 a year by increasing the rent by $80. So if we take that $6,000 and divide it by our equity, which was $58,500, remember, our return just went from 8.5% back up to 10%. 10 and a quarter, actually, to be exact.

We've actually increased our return from the first year to the second by a quarter percent. So that's one way to do it. That's a very basic, simple way to do it. simply raising the rent. And that's how raising the rent affects the return, how increasing your income rate affects the return. But in reality, raising the rent $80 every single year, that might not be doable. That might not be realistic.

So you need to look at other methods as well. And other ways to increase the gross income on a property are. And some of these will apply to single-family residences and some will apply to multifamilies and some to both. You definitely have more options with multifamilies, but sometimes you can do these with both. Other examples in addition to raising rents are, except a higher rent up front in exchange for a security deposit. Except a higher rent up front in exchange for a security deposit. Now, why would you want to do that?

Well, when the tenant moves out, what do you have to do with the security deposit? You've got to give it back to them, don't you? So one way you can, or just an alternative way of looking at this, and one example of how I use this strategy is what I could call pet rent. I call it pet rent. You know, most places that accept pets, the landlord is going to ask you for an additional $500 security deposit, maybe $750, $1,000 or less, whatever it may be. We'll just say $500.

But what if instead of that $500 security deposit, you didn't ask for the $500 security deposit, what you did was you raised the rent $100 a month and called it pet rent. That's kind of what I call it. The extra $100 a month can increase most properties return anywhere from 2 to 4%. That's huge. Raising that monthly rent in little increments really has a significant impact on the return. And what makes it even better is you don't have to give it back when they move out. Okay?

It's an alternative way to look at that. Another way to increase the property's gross income is, is to add a coin-operated laundry facility. Now, this would probably be more applicable to multifamilies. A coin-operated laundry facility, that will increase the property's income. Or a vending machine. That will increase the property's income. Or a cell tower on the roof of the property.

Again, probably more applicable to a multifamily. I know in the building that I rent my office space, the landlord has a cell tower on the building. So I know he's actually implemented this strategy. I'm also looking into this in a couple of my Memphis buildings right now. Or a billboard on the roof. You could rent out the space of the billboard if you can get the city ordinance to comply, or if you can comply with the city ordinance. Or another longer-term approach might be to add additional square footage to the property,

or build a storage facility on the property, or add extra parking and rent those out at additional costs. You could add a business onto the premises, such as a date, care, obviously more with an apartment building. You can add a daycare of business. That would increase the income of the property. Or you can go down to the city or the county and see what they're in need of by way of housing for the government subsidized programs.

You know, in most cases, those programs pay more than market rent. And in some cases, those programs will allow you to rent a property, say, by the room instead of by the unit. So you've got a three-bedroom place that you're going to rent for $1,000 or you rent it buy the room for $500 each room. So that just increased that one unit's income by $500, just the one unit. Or you can strike a deal with the VA and rent your property, say, to disabled veterans. And that comes to mind because I just did this with one of my buildings in Memphis.

We get slightly above market rents and three months in advance. I think that's a pretty good program. And now there are other ways, but those are some examples. And you can get as creative as you want with this. And just keep in mind raising the income of your program. property will increase your ROI. And not only are you increasing the, I should say your ROE to stay consistent, and not only are you increasing that ROE, that return on equity of your properties, by implementing these

strategies, and this applies really to more to multifamily properties, you are also adding to the value of the property. You are essentially forcing appreciation on your property. Almost sounds illegal, doesn't it? Forcing appreciation? But that's exactly what you're doing, and that's totally illegal. you are forcing appreciation on your property when you implement strategies to increase the net operating income of that property. Got it?

Okay. So the second way to increase the net income, as I mentioned, is to decrease expenses. You can increase the gross income or you can decrease expenses or you can do both. So, for example, to decrease expenses, maybe you pass on the utilities to the tenant. Make them responsible. Make them pay the electricity. Make them pay the water. Make them pay their cable.

Something like that. Or you could actually, this will be kind of going to increasing income, is you could pay those for them and then pass that on to them and mark it up a little bit. You could do that. That could increase your income as well. To decrease expenses, you can also negotiate with your property manager for a lower management rate, especially if you start acquiring a few properties, then, okay, so he's got multiple properties of yours. So maybe you can take it from 10% to 9%.

That 1% is going to make a difference in your ROI. I promise you. It doesn't seem like that much, but it will make a difference. in your ROI. It'll be a noticeable difference in your ROI or ROE. Or maybe you shop around for other property managers or you shop around for your maintenance services such as long care. Always looking for the expenses of how you can push those down a little bit. One thing that I'll be implementing in 2014, it's going to be standard operating procedure as soon as we close escrow, is to renegotiate the property taxes. That's a biggie. And that right there can save you hundreds, if not

thousands of dollars a year. I know we just negotiated our down our insurance premiums. That saved us $1,000 a year between two buildings. That's a significant impact on our ROE on those buildings. And depending on how many properties you have in your portfolio as far as

negotiating the property taxes, I mean, if you're regularly successful with a strategy, I mean, that could be tens, if not hundreds of thousands of dollars per year. That's going to make a significant impact on your net income. And, you know, if you'd like to look into that for your own properties, Sounds like a good idea, but how do I do this?

Where do I go? Go to Google and search for property tax consultant. Property tax consultant. You don't have to do this tax negotiating yourself. There are people that will do that for you. Another way to reduce expenses would be to refinance your debt to a lower interest rate, to reduce your debt service. And you might be able to do that with a bank or you might be able to do it privately.

Okay, you can do that with privately. That's almost, I think, yeah, 100. percent of the loans and the debt on my properties are all private loans, whether that came from the seller or an outside investor. Also putting strategies in place to increase your occupancy rates. You know, turnover can be expensive. So if you reduce your turnover, you are also decreasing your expenses. And, you know, that turnover can cut deeply into your ROE.

So put strategies in place to encourage tenant retention. For example, do good rehab up front. spend a little extra up front. Make your properties nice places to live. If it gets hot in your area, invest in good AC units. AC goes a long way to keep people in place, especially in hot regions. Respond to maintenance calls quickly. Keep the properties clean.

Just make it a nice place for your tenants to live. Offer a referral program to your tenants. Should they find you another tenant, give them a half months rent-free or something like that. give extra incentives to your property managers to find good tenants and make them part of your team. Have them share in the success, but also have them share in the liabilities too. Make sure that they're incentivized in the right way. For example, if a tenant they place doesn't fulfill a certain percentage of the lease, they have to surrender their placement fee or they don't get a replacement fee for the next tenant.

Okay. So those are some of the strategies that I use to decrease expenses. Ask your property manager for some suggestions too. You know, local knowledge can go a long way in tenant retention. The next way to increase your investment's return is to increase the leverage on your property. For example, staying consistent with our previous example, we now have $58,500 of equity in that one property, right? That's 23% equity. Now, if we could refy $50,000 out of the property and go buy another one just like it,

let's see what that action would do. We take $50,000 out. we're going to leave $8,500 of the equity in. We're going to take $50,000 out. We're going to go buy another property. Let's see what that does. So on the first property where we took the money out, we'd have left just $8,500 of equity in the property.

Now, what's going to happen is we're going to experience, we took money out, so we borrowed more on that property. We're going to experience an increase in the debt service of the new loan, right? So that would reduce our income a little bit because we've got a higher loan payment. So let's say we went from $5,000 of annual net income to $3,000. $3,000 of annual income. But when you take that $3,000, that reduced income, actually, and you divide it by just the equity that you have left in the property, $8,500, your ROE jumped from 8.5% to 35%.

I mean, tripled, almost quadrupled, right? That's huge. So, you know, that might not be a real-world possibility in the current lending environment, but it's not impossible either. Regardless, that's not the point that I'm trying to make here. What I'm trying to show you is by refinancing money out your equity, you increase the ROE of the property. That ROE goes up.

Your money's working harder for you. And if you did it right and you didn't go take that money to Vegas and you actually went out and purchased another property, just like the one you did initially, you've got another, say, 10% ROI property growing there. So now you've got two properties. one's earning 35% one's earning 10%

and your portfolio just went up from producing an 8.5% with that one property all by itself to 22% when you average those two properties returns together and remember that's just the cash on cash return on your equity that's just the cash on cash went to 22%.

That doesn't count the other stuff so that's how cash out refies increase your ROE until you hit your cash flow goal anytime that you can take money out of a property to purchase another, you'll keep your money working hard for you with that strategy by taking the cash out refis, taking that cash and buying another property. The more you do it, the faster you progress.

Therefore, I recommend it. I mean, if you want to progress faster, I would recommend it. And I know there's, I know I can hear you right now. I can hear you right now. I know there's a lot of naysayers on over-leveraging property. Matt, you're being very responsible in recommending this. but if you're managing the property properly, there's very little risk here.

And I'm going to go into that and just a little bit more before this episode is over. So for you anti-leverage people, you that went to the Dave Ramsey School of Real Estate Investing, hold your horses. Stand by.

I'm going to get to that in just a minute. Now, the third way you can manage or increase your investment's return is to move your equity. And what I really mean by that is sell one investment to acquire a better produce. producing one. And you can do this without tax implications using a tax vehicle called a 1031 exchange.

Now, basically what that says is the tax code will allow you to sell property A, our first property. Let's say that's our sample property. That's producing an 8.5% return. And let's say you stumble across property B, this cool little duplex that's in a really cool neighborhood that with the profit you make from property A, you could use that as a down payment. And if you did that, this little duplex would produce a 15% return. So you're exchanging an 8.5% return property for a 15% return property. And the 1031 tax provision will allow you to sell property A without tax implications as long as you purchase property B within a certain period of time.

and I think they give you six months. Don't quote me on that. Check with your CPA, but I think they give you six months. I think you get 45 days from the close of the sale of property A to identify property B. They give you 45 days just to find property B. And then once you have identified property B, you get six months to actually close on that transaction, to actually buy and solidify that whole transaction. So that's how you move your equity.

Very simplified version, but that's how you do it. So any of those strategies that I just, just mentioned, or a combination of them, will at the very least maintain your ROE, but almost always increase it. That's the goal. But keep in mind, you have to keep your eye on investments returns at all times. You got to keep your eye on your investments and how hard they're working and how they're performing.

You have to reevaluate, I would say, at least once a year. And sometimes there's nothing you can do. Sometimes you evaluate it. There's nothing you can do. None of those options are going to fit. None of those strategies are going to be applicable, meaning they don't all work all the time. They're not always an option. And that's okay too. But you have to check in every once in a while to see if anything's changed to where now one of them might work. Or if you've been blessed with a new

idea or a new opportunity that will actually increase your investments return. You've got to keep your eye on it. And this is what I mean when I say that my strategy at the moment, and I've been questioned on this several times, and I've said this over several episodes, I mean, when I say my strategy at the moment is to acquire as much real estate as possible while this window of opportunity that we're in right now, while this window is open, while I can still buy so significantly below replacement costs. I'm not going to go into detail what that means I've talked about that many times before. But because, you see, when I can no longer buy this much below replacement costs, when that window of opportunity closes, and we've had the window's been open for a little while, a few years, and it'll probably be a few more years. I'm not sure though.

But when that closes, it's going to be much easier for me to manage the ROE of all of these properties that I've acquired through all these strategies that I just shared you. It's going to be much easier to manage all of those properties. It's going to be much easier to manage the debt. It's going to be much easier to manage the overall investments through these strategies than it will be to find new deals. Does that make sense? It's going to be much easier for me to manage my portfolio,

then it's going to be to find new deals once that window does close. So that's my recommendation. That's why I'm doing what I'm doing to get in control of as much properties as I possibly can because it's going to be easier, much easier to manage your return on equity, to manage my return on equity. When I have control of all these properties, then it will be to find new deals to control. Make sense?

Okay. So now, just a few words on leverage. to get back to this because I know there are some people questioning the practice of using so much leverage. They probably haven't heard a word I said since I mentioned leverage your properties and keep doing cash out refis. First, you need leverage to get control of a bunch of properties. You just do. You're going to run out of money. You need the leverage to get control. If you don't use it, your wealth will grow at a fraction of the speed it will grow without it. Second, don't ignore all the other tenants of responsible, disciplined investing.

Just because I'm saying leverage, leverage, I'm not saying being reckless and irresponsible. No, you still got to buy your properties with equity already in them. You still got to buy properties that positively cash flow. Don't use leverage just for the sake of leverage and forget all the other aspects of real estate investing, like buying right and buying for cash flow. Using leverage, it's a tool to accelerate your educated investing. It's not the solution in and of itself. Okay.

It's just a tool to accelerate that and accelerate your educated, disciplined investing. We're not going to throw everything else out and ignore everything else out and just take advantage of how much leverage as we can irresponsibly. No, that's how you're going to get in trouble. But as long as you're buying right, you're buying for equity and you're buying for cash flow, leverage as much as you possibly can. And third, there is an end to this strategy. The strategy is not to use leverage indefinitely.

That's not what I'm recommending. What I'm saying is, well, I shouldn't even be recommending. I'm going to tell you what I am doing. Okay. And then you can make a call. You can judge for yourself. You can decide what's best for you. I'm leveraging as much as I possibly can until my cash flow hits my monthly cash flow goal.

Okay? I'm going to leverage as much as I possibly can, control as much as I possibly can, acquire as much as I possibly can, until my cash flow, monthly cash flow hits my actual monthly cash flow goal. And see, my goal is I want to cash flow $1 million a year from my real estate assets. That's my goal. That's my personal goal. Your goal, whatever you want it to be. You might not need that much.

You might want twice as much as that. It's whatever you want for you. But once I hit my goal with leverage by using leverage, once I've hit that million dollars of cash flow with the leverage, I'm then going to use the cash flow to eliminate the leverage to start paying off my property loans. I'm going to use the cash flow to. to eliminate my debt to the point where my properties will buy my properties, where I will own them all free and clear.

That's the end goal for me. Okay? So I'm going to use as much leverage as I possibly can to build my wealth, and then I will eliminate as much leverage as I possibly can when it's time to preserve my wealth. That's the strategy. Leverage, leverage, leverage to build, eliminate the leverage to preserve.

I just wanted to share this last part with you, so you understand there is a method to the madness. But I wouldn't even call it madness. It's not madness at all. I call it shrewd wealth management. A strategy, I believe, will not only have me completely retired in just a few years, before I hit 50, but a strategy that will create a legacy that I can pass on to my children

and my children's children. That's the goal. Now, I'll go ahead and I'm going to, close with this. Increasing your ROE, your ROI, it's not limited just to your real estate investments. You know, if building your wealth is important to you, you should be looking at all of your investments and all of their returns. How hard is all the money that you have right now? How hard is it working for you? Or is it working at all? No, is it just sitting there? Is it just sitting there with inflation chipping away at your money's buying power?

I mean, this is so important. And I go through the this exercise with all of my coaching clients. I think it's on the first phone call that we have that when we're getting established, getting to know each other, and I have them run down all of their assets. And once they reveal all, we make a list of all their assets, their homework for the next call is to report back the performance of those assets. For example, you know, what's the value of your mutual fund? That might be a question that I ask. And they'll give me a number, and then I'll ask them what the return is, and they'll typically say, I don't know.

So their homework is to go out and find the return. So what was the return you received over the last 12 months? Well, let's say it was 8%. Which by today's standards, hey, that's acceptable. There's nothing wrong with that. And perhaps you should leave it there and just let that trend continue. Or if you stumble across another investment, real estate or not,

and it's projected to produce a 12% return, then it might make sense to sell the mutual fund, and invest the proceeds into the new investment. And then you hold that one until you find something better. And this is the third strategy that I shared with you, moving equity. And this is one of the more important aspects of understanding your ROI, your ROE. Because as you're building your wealth, a fast track to building that wealth is to constantly monitor your investments and trade your low-producing assets for higher.

producing ones. So go through your own portfolio. Look at everything that you have a value and then calculate its return. I mean, do you have a CD that's producing 1.5%? Well, you can surely do much better than that. Is that really the best place for your money to be working for you? Or do you have a stock that's just sitting there? Or how much equity do you have locked up in your current income properties? Maybe you've got some equity there that you can access. Or perhaps you have equity in your personal residence. Okay? Maybe you can use that.

Or do you have an old 401K from a previous job? What is it earning right now? Is it earning anything? Perhaps you have some cash value life insurance. What's the return on that? Do you have any gold or silver just laying around? Could you put that to better use? Do you have any collectibles?

Do you have art or baseball cards or stamp collection? I mean, could you put those to better use? How about that boat or the jet ski is sitting in the the garage that you're making monthly payments on that that you only use two or three times a year. Calculate the payments and the amount of use that you get out of those. Perhaps it would make sense to sell the boat, to sell the jet skis and buy an investment property and then just rent the boat or jet skis each time that you use them. You know, it's all just a math equation.

You put all the pluses in one side, all the minuses in the other side, and you combine them all up and you see what the number is. And then you just measure that way. that's your return. I don't know. It's something to look at for you. Look at all of your assets as an investment and calculate the return. Most people, most people have more to work with in building their wealth than they are actually aware of.

So look at those assets and track your ROI or track your ROE. Now you know how. I showed you how to do that. And if you don't remember, go back and listen to this again. You know how. And then be on a constant lookout for higher producing assets. for look out look out look keep looking for higher producing properties that you can exchange or trade up for that's going to accelerate your wealth building easier than anything else easier than going out

and just finding new deals that exchange and that trading up for and then increasing the income and that decreasing the expenses and that increasing the leverage all of that is going to accelerate your wealth much easier than than going out and finding new deals so if you have those assets make sure you're not ignoring that make sure you're not doing all the hard work first when you have other resources that can accelerate that hard work and make that hard work easier. Okay? So to sum it up, three strategies for increasing your real estate's ROI are, one, increase the net income of your property, two, increase the leverage on your property, and three, move the equity

of your property. Now you know, but it only works if you do. That's it for today. I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing. the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening.

We'll see you next time here at Epic Real Estate Investing with Matt Terrio. This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.