Epic Real Estate Investing - Financial Forecast for 2021 – Rental Properties Hidden Gem | 1104

Episode Date: December 8, 2020

Government spendings are INSANE due to the Coronavirus outbreak causing inflationary pressure! Therefore, in today’s show, Mercedes, The Turnkey Girl reveals how YOU can use inflation to CUT your real estate investing costs and turn the odds of these unprecedented times into your favor! Tune in and find out more! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. So you want to be a real estate investor, but you don't want to do the work. If there were only a way where someone else could do it for you, now there is. Tune in here each and every Tuesday on the Epic Real Estate Investing Show for Turnkey Tuesdays with your host, Mercedes Torres. Hello and welcome. Welcome to Turnkey Tuesdays brought to you by Epic Real Estate Investing. My name is Mercedes Torres, your turnkey girl, and I am lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate empire. I help busy professionals create passive income through real estate investing so they don't have to work so hard

and possibly even retire sooner. So I created this show to share tips and real life real estate experiences so that you two can create passive income in your world. That said, if this is your first time here, glad you made it, make yourself at home. If this is not your first time here, welcome back. So let's talk about the economy and what's going on out there. There's a lot of hype and talk about what the economy is doing, what the real estate market is doing, and the real prices of real estate. So real estate, believe it or not, has gotten cheaper. Now, generally, experts in the field and financial analysts thought that when the pandemic hit, they thought that the market, the housing market, the real estate market was going to take a dive. And they were so wrong. Now,

that's not to say they may eventually be right because as the old saying has it, even a broken clock is right twice a day. But the reality is, home prices have far exceeded inflation measured by the consumer price index. And there must be a bubble. And when is the bubble going to crash, right? Because home prices are way out of sync. Now, I recently spoke at an event, And when I do speak at events, I usually have visual graphs to show what the market is doing now and what it's done in the past. I like to show a point of comparison. So hopefully, I'm going to do justice explaining it so that you can understand what I'm talking about. If you look back at the last crash, back in 2006, 2007, and you look back at the home prices, they were way.

way higher back then. So everyone thinks, okay, there's going to be another crash, right? But when you adjust for prices and interest rates and inflation, prices of properties and real estate have actually come down. Prices of home today are cheaper than they were four years ago. They're cheaper than even what happened in 1984, they're even cheaper than what they were in 1976. The big fallacy in this whole discussion is that people don't measure things on the prices of the house. They measure them on the payment because most people buy houses on payments, as we all know. Now, none other than Lawrence You. Now, Lawrence Yun is the chief of economist of the National Realtors Association. He was recently interviewed on my friend's podcast,

my friend Jason Hartman, of a podcast called Creating Wealth. And you typically is that individual that is criticized as he's like a big cheerleader, a big rah-rah kind of a dude, because he's always saying about, you know, now is the time to buy, buy houses now. I mean, he's an economist, and he does work for NAR. So he has to be. to hype up the market. But amazingly, he even recently said that even he thinks that prices are rising much too fast. Now, is that a cause to be concerned, right? That the bubble's going to pop. I'm going to share some home prices just to give you a point of comparison so that you can kind of hone in on what's transpiring. Now, the medium house price.

across America in 2006 was approximately $235,000. Now, for those of you living in California or in New York, you think I'm crazy, but I'm talking about the medium house price across America. Now, that was in 2006. It was $235,000. And the interest rate in 2006 was $6.78. So that house payment was $1,532. per month. Now, prices are way up. We're looking at a medium home price today of $313,000, and interest rates have gone way down. As of July 2020, interest rates were $2.99, making that payment $1,318. Now, Do you see where I'm going? But if you add inflation into that, the house in the last 14 years, the medium house price, the mortgage payment that's gotten $657 cheaper than it was when everyone thinks prices are too high.

So this reality goes to say, is there a bubble? the average person that's not an economist or a financial analyst, they just don't get it. They don't understand how to factor returns on an investment property because income properties are multi-dimensional asset class. And the reality is there's so much benefits to it. It's something that seems too good to be true. I hear this constantly from our students, from our investors, from our clients. They always say, I can't believe it when I break it down. They say, I can't believe it.

It's too good to be true. Now, I'm going to give you a few examples of a property that I own. And if you just look at the cash on cash return of this example, you know, it's a 7% cash on cash return. And you might say, what's the big deal, Mercedes? It's 7%. it's not huge. It's nothing to scream home about. But it's everything else that you're not looking at. So here's the example. I have a three-bedroom, two-bath, single-family residence in Birmingham, Alabama that I purchased for $190,000. The property rents for $1,465. And if you take the total normal things considered, like the taxes,

the insurance, all of that, except for one factor that I'm going to talk about in just a bit. With all of the extras, that total return is 38% annually. That is an annualized return on your investment. And this 38% I'm assuming 6% appreciation. And now in this conversation, 6%, I am being super conservative because lately, and this is not always the case, lately appreciation has skyrocketed, but I'm still using 6% for this evaluation. I'm using an 8% vacancy. That means that one month per year, this property, I'm assuming, is going to be vacant,

regardless of the fact that I have a two-year lease in place. I'm factoring a 10% management fee, and I'm factoring 3% of the income going to maintenance, despite the fact that I have a maintenance plan on this and the fact that the property is relatively new. It's only a few years old, so we're certainly not going to be using this 3%, but regardless, I factor it in into my,

pro forma to be super conservative that comes up with that 38% annual return that I was just talking about. So most people think, oh, gee, what's the big deal, Mercedes? I'm going to invest $54,600 in this property to cash flow $304 per month, right? No big deal, not so great. Some people think 7% is not so great. They think they can do better at the stock market. They think Bitcoin's going to pay them better. That 7% not a big whoop.

But it's a multi-dimensional asset class. It's like an iceberg. The bulk of the return is below water. You don't see it on the surface. And it drives me absolutely insane that people don't really get it. And the average person doesn't get it because it's not real common knowledge. It's a bit more advance, if you will. But if you really strip down everything that I just shared with you, it's really not that

difficult to understand. I mean, the concept is not difficult to understand. The math may be a little challenging because you have to factor in, you know, what the government says that you get for depreciation. You have to factor in what the market is doing as far as appreciation. And you may have to factor in if a tenant pays rent late or, you know, or, you may have to factor in if a tenant pays rent late or if maintenance got a little out of hand because your water heater broke. But the reality is that's what you have a CPA for. The CPA should be able to break it down for you

so that you understand that below the iceberg are all these hidden gems that nobody talks about. Now, the one matrix I did not discuss is something that my friend Jason Harmon, coined, and he calls it that inflation-induced debt destruction. What that means is, it's a very fancy term for the concept of we think we make money on the long term on the rental, and the reality is we do, but we do make it on the cash flow, but we can make more money on other aspects of it. Now, the cash flow for sure. You think this because the tenant pays down the mortgage, you know, the property appreciates, and we get all those depreciation tax benefit in addition to the cash flow. Very few people understand this is inflation-induced debt destruction,

because mortgage monthly payments on this property and the mortgage balance, both of those things get completely debased by inflation. So what does that mean? Inflation pays them off for us. If you go back in history to understand this concept and so many people got rich just owning their own properties back in the day. So if you go back to 1972, this is the year right after President Nixon took us off the gold standard. And when people bought their own home, the home that they lived in, their primary residence, when we got off the gold standard, the government was allowed to spend money irresponsibly at that. Politicians loved it, by the way, because this is the time that politicians got to give out goodies and buy all this luxury stuff with none of their own money

and then give it away. I mean, that's another conversation. But back to the point, when the home buyer bought their home to live in 30 years ago and they paid off the mortgage over 30 years, that house, that medium-priced house that they bought for $18,000 back in 1972, they actually got paid to live there. They got paid to borrow that money. So just because of inflation, they not only got paid to live there, they got to live there for free. And over the time span, they got paid 1.16 percent and they got a free house on top of that. Now, imagine if this was a rental property that produced this income, how good that equation is. It would have been awesome. And this is why I love real estate and why I love teaching it.

Because these hidden gems, the ones that I just shared with you, no one talks about them. Now, inflation is largely driven by government spending. So when you look at government spending now, I mean specifically this last year because of the pandemic where money was being printed like crazy. and you compare it to the 70s, the 80s, the 90s, and 2000. I mean, government spending is astronomically insane. Surely the pandemic didn't help, and the Great Recession only accelerated that. So what that means, even if we haven't seen most of it yet,

I think there is a lot of... inflationary pressure just waiting to come out. If we lock a whole bunch of these properties down and we buy rental properties and we teach each other how this actually happens, we can help each other. We can help you to understand how we can get into great financial shape and more importantly, how you, how you, you can get into great financial shape. I mean, if you look at the aging of our population, as the population ages, this widespread effect on the economy and all the entitlement programs that have been created and promised by the government over the last 20 years, programs like Social Security and Medicare and Medicaid, et cetera.

And, you know, all the tons of programs that were just recently created this last year for the pandemic, think about it. There is no way to pay the nation's deficit back. No way. It's a mathematical equation. I mean, even if we were to raise taxes by 150%, still, the problem cannot be solved that way. The only way out for us, the only way out for the good old US of A and other countries that are experiencing like situations is to inflate their way out of it. We want to align our interest with that inflation and invest for it.

Also, you know, when you look at real estate and what the nation is doing as far as building, building homes, just itself and builder confidence, it's the highest that it's ever been. I mean, if you read an article and talk about the builder confidence, it's the highest it's ever been ever. And then you read an other article three months later attesting the same thing. And articles are saying, you know, builder confidence is rising. Even more builders are looking into the future about how much building is happening. I mean, the confidence is just gone out of this world. In fact, I recently heard a podcast that interviewed a Stansbury research guy. He had a whole bunch of empirical data. And he shared that he had a friend that has an excavation company. And he shared that this friend started off with like

a small shop, a mama and papa shop, if you build, working with one builder at a time. And over the years, over 25 years, this company grew, and he's now working with these huge excavation or these huge builders as an excavation company. And he says that he's never seen the land grab and the optimism among builders that hire him to excavate and move dirt around in their track of homes. He's never seen anything like it in 25 years in the business. That said, I think this market has a lot of steam left in it. So go out and reap it. I mean, granted, there are a whole bunch of other factors. The whole economy right now is built on a house of cards.

I will be the first to acknowledge that. But for that matter, so is every other economy. And as you know, people are moving out of big cities, left and right on a daily basis dramatically. They're leaving cities like Los Angeles and San Francisco, Boston, New York, Philly, and these people that are leaving, they're leaving with cash in hand. So they're moving into these suburbia markets where they're finding these bigger homes or they're finding older homes with plenty of land that they're able to build out.

and they're finding them for a fraction of the cost that they're used to living with. I mean, their point of comparison, dollar-wise, is vastly different because they just came from a city that's crazy like Los Angeles. So they're buying, buying and buying because it's so cheap to them. Just that movement of wealth transfer, if you will, is starting to put upward pressure on suburban real estate prices. So the markets that I invest in, like Indianapolis and St. Louis and Birmingham, are starting to look more and more attractive for all these reasons and because people are from larger cities are coming in and they're just buying as much as they can. I mean, I have a right to talk about California. I'm a native Californian and that's why Matt and I left.

and so many people are doing the same. In fact, Matt just did a YouTube video on exactly that, why we left California and why people like Elon Musk. And I mean, the list goes on of the people that are leaving California and the companies that are leaving California because they're insanely expensive markets all over the place. And not just California. I'm talking about New York and, you know, all the markets that I'm. I mentioned. Anyway, fun fact, I often look at trends of, you know, Starbucks and Walmarts, and I like to see where they're opening the next location, the next Walmart, because you know that a corporation is big as Walmart and Starbucks does their extensive research on where population is

moving to. So I'm a big fan of that. I follow just those trends all the time. But something interesting and a fun fact. Another place I usually dive into is U-Haul. That's another good place because if you go on to their website to see the cost of a U-Haul rental to different locations, it's really interesting what you learn. Because if you go on and price a U-Haul from, for example, Boise Idaho to California, northern, California, the cost of that U-Haul rental is $99. But if you reverse engineer that and you rent a U-Haul from Northern California to Boise, Idaho, that same U-Haul is $850. Now, U-Haul has to charge something, but what you don't see behind the scenes is that U-Haul has to hire drivers, independent drivers, to drive the U-Haul back to the cities where people are fleeing.

Now, that's an interesting fact, because if you take that information and you go to the cities where there's suburbia and people are moving to them, that's where you want to start to collect your marbles, to collect your little properties. That, my friend, is a really cool nugget that I wanted to share with you because I think there's hope for 2021, and I truly think it's the time to dive into rental properties not only for cash flow, but for all the hidden gems that I just shared. That's it for today. Should you find this podcast super helpful? And you thought about it. somebody when you were listening to me speak, please share it with someone. And if you want to connect with me, feel free to reach out. Go to my website, cashflowsavvy.com. That's savvy with two Vs.

Click on the contact us or email me directly at Mercedes at Epic Real Estate.com. I always welcome your comments, your questions. I welcome anything that comes from your thought process and your cash flowing brain to my inbox. My name is Mercedes Torres with Cashflow Savvy. I'm your turnkey girl where cash flow is king. Have an epic day. Your portfolio has seen better days. But this two shall pass. And the best for you is yet to come. Together, we'll get you there faster. We're Cashflow Savvy. And we'd like to share some information with you that will show you how you can take control of your financial future and accelerate its arrival. Go to cashflowsavvy.com.

More building, less waiting. Cashflow savvy.com. This podcast is a part of the C-suite radio network. For more top business podcasts, visit c-sweetradio.com.