Epic Real Estate Investing - How to Become Wealthy In Real Estate | 421

Episode Date: July 6, 2018

Today on Financial Freedom Friday, Matt dives into the math behind real estate investing and wealth creation. Learn the exact equations that explain why real estate brings epic wealth, what makes real estate more powerful than any other industry, and how to become wealthy in real estate. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Hey, this is Matt over at Epic Real Estate and welcome to another episode of Financial Freedom Friday. It's time for Financial Freedom Friday with Matt Terrio. All right, so the question that came in this week was how do you get wealthy with real estate? How does real estate create wealth? And good question. Very general, maybe basic, but I don't think the answer is basics. I don't think a lot of people understand or realize how well.

real estate actually works how does it create so much wealth how is it so much more powerful than any other industry or any other investment vehicle out there why is it created it created more wealth for more people than anything else well that i want to answer for you all right so let's let's be really simple about how this is going to work because a lot of people think you know you just come in you buy a house low and you sell it high and you put 40 50 grand in your pocket you just got to do that a bunch of times and that's how you get wealthy um you can make a lot of money doing that i know a lot of people who have There's a lot of people that I don't know that I've made a lot of money doing that. But it can make you rich, certainly.

The pay is really good. It's really good paying work. But what we're talking about today is wealth. How do you create this wealth that can last your lifetime and beyond your lifetime and support generations to come and really create a legacy for yourself? All righty. So let's just look at this. We'll start with the basic principle of economics.

And that is, you've probably heard it as before, nothing groundbreaking. supply and demand. This is the basic economic principle that runs the economy. It doesn't matter what industry, doesn't matter what product, what service it is, service it is, supply and demand. So inside of real estate, what represents our supply? Well, in real estate, what represents the supply is land. Land, that represents the supply. And what represents the demand? Well, who wants the land? Who's going to live on that land, right? It's people. So inside of real estate, that's basically what it looks like. So land, as far as our supply, we've got what we got. Right? The earth isn't making any more land. I guess unless you count

the lava flow off of Hawaii or the little island, man-made islands are making in Dubai. But other than that, I mean, we got what we got. So the supply is fixed. Certainly, there's a lot of it, But it's fixed. The demand, the people, how are we going with that? Is that growing or shrinking? It's growing, right? There's more people walking this planet than have ever walked it before. And in fact, in 2007, there were more babies born that year than any other year in history.

So they're all, what would that be? When we're making this video right now, they'd be 11 years old. So that means in 10 years, guess what they're going to start doing? What they're going to start thinking about? They're going to start thinking about buying real estate, right? So the population is growing. Each generation is a little bit bigger than the previous, and that just continues to happen.

And so we've got more people walking. They're going to need a place to live. So this is a pretty good safe bet. The supply and demand equation very much in your favor, and it's going to be long after or for at least as long as that we're walking this planet, right? So the demand is growing. Supply is fixed. So we're good to go there.

is about as close to a crystal ball as you could have. And I think that's pretty good when it comes to investments. We all want a crystal ball when it comes to investments. So I think we're pretty safe there unless a shelter or a roof over our head somehow goes out of fashion. I don't see any technology coming up and disrupting our need for housing. So it's a good safe bet. Real estate, right from this point forward, as long as we're alive and walking the earth, we're going to be fine. Okay? So there's supply and demand. Now let's look at the second part. All right. Second is I want to draw your concept to something called leverage okay leverage and specifically I'm talking about the leveraging of other people's money and I'll show you how this works because this type of leverage

is available in real estate for the average person anybody can go out and do this but it's not available this type of leverage is not really available in any other type of investment strategy or investment vehicle for the average person so if we look at leverage we got this house Okay. Let's say the house or the sales price of this house is $100,000. Okay. Now, if we want to buy this house, we're not going to go and give the seller $100,000. No, we're going to take advantage of this leverage aspect. So what we're going to do is we're going to leverage or borrow $80,000. And we're only going to put down $20,000. Okay, so we have put this down as our down payment and we've leveraged this $80,000 other people's money

in most traditional instances. That would be from a bank. Got it? Now, let's say that this house, it's going to appreciate, we'll say it appreciates 1% per year, okay? 1% per year. We're going to keep this ultra-conservative to show you how this works. So we're just going to say 1%.

If it repreciates 1%, what is we going to look at in five years? What will this look like in five years? Well, in five years, this will have repreciated about $5,100, okay? About $5,100. I'm going to keep this really, really simple and just round it down to make the math simple.

So this house, after five years, is now worth $105,000. Basically, a 5% return. Okay? to write home about. But is it really a 5% return for you, for you that put down the $20,000? No, because this $5,000, although it appreciated the sales price appreciated 1%, you got this full $5,000 on only the money you put in. So that's 25% return. Do you see that? It's 5% on the full price, but 25% on your investment. Okay, so that gives us a, uh,

Let's see. It gives us 25%. So far so good, right? That's really good. So that's a 25% return on this 1% appreciation. Okay, over five year term. Now, we've got our supply and demand that we know about. We've got our leverage. Now let's look at what most people won't tell you about. And I don't know if they want to keep it a secret. I don't know if they don't know, but you're not going to learn this in too many other places. But stick with me. Some of this might be reviewed. for you, some of us might not. Okay? So this is what we call the ROI matrix. When I say we, means us here at Epic Real Estate. That's what I call it. Okay. And it's just four quadrants. Now this is my second time shooting this video because I got the math wrong and I had to stop and do it all over again. But I started thinking about it was, is this, the math isn't really what's important that I'm going over here. I got it right now. It's going to be right. But if it happens, to be wrong, don't get distracted with this whole concept I'm showing you focusing on the

math. Make sense? All right, I just don't. I'm putting that disclaimer there because if I get this wrong again, I don't want to shoot it all over again. But we're talking about the appreciation. Here's our appreciation quadrant. There are four profit centers inside of real estate, the four biggest ones that you should be paying attention to. And based off of our appreciation, that 1%, and then when we talk about the leverage, we'll just keep the same properties. an example, that turned out to be 25% right? So 25% in that profit center. Now let's look at the next profit center. That profit center being the cash flow center. Okay. So if this is an investment property, you're going to rent this property out to somebody for the right for them to use it.

It is their living space. They're going to occupy that dwelling and they're going to pay you on a monthly basis for the right to use that property. Call that rent. Okay. So, So let's see. Let's say this house, so that $100,000 say it rents for, keep the math again nice and simple, rents for $1,000 a month. Now, do we get all that $1,000? No, we don't. It all comes to us, but now we've got to pay some expenses for the property.

So I want to deduct 40%. Okay? We want to deduct 40%. And that 40%, just a rule of thumb that you can use for a quick and dirty math. It's going to count for your taxes, your insurance, your vacancy, your maintenance, and your property management. Let's just say that. So that's going to leave us with $600 a month.

So that's our net income. Right? But what do we have left? We have another expense because we leverage the money, right? We borrowed that $80,000. So the payment on that, we have to pay that now. We have to pay that out of the $600 we have. So that payment will be about, keep it simple again, be about $500.

Okay. So $600 minus $500. That leaves us. Let's see. I'm running out of space here. Let's keep it in this quadrant. That gives us $100 a month of cash flow. Got it?

We got $100,000, or excuse me, $100 a month of cash flow. If we take that $100 and we, this is over five years because this was a five-year appreciation, so that cash flow over five years, so that's 60. So that's going to be $6,000. It'll be $6,000. All right. Now we're going to divide that by our investment again, right? This 25% was based off the $20,000 that we put into the property.

This cash flow was based off the $20,000 we put into the property. So we're going to take this $6,000, divide that by the $20K. And what does that give us? This is, I think I did the math beforehand just to make sure. And so that's going to give us a 30% return. Okay? Let's circle it so you can see it. So we got 25% for our appreciation quadrant.

We have 30% for our cash flow quadrant. All right. So when you're looking at these two things, this is how most people make their buying decisions for an investment piece of real estate or for a real estate. Is they're looking, okay, what's the appreciation or how much equity that I have? How much do I project or am I predicting or am I guessing that the property is going to appreciate? And then how much money is it going to pay me? Most people just look at the appreciation. But the smarter investors, they'll look at the cash flow and the super smart investor is going to look at both. But the ultra-intelligent real estate investors that you're going to be after you watch this video, They're calculating the other two quadrants as well, the other two profit centers for real estate.

So let's look at the next one, amortization. Amortization. I think amortization has one, I'm not sure, maybe it's two, but amortization. All right, we'll just assume that I spelled that correctly. So what amortization is, that's the buying down, the paying down of that $80,000 that you borrowed from the bank, the $80,000 that you leveraged.

But if this is an investment property that's paying you the cash flow, are you paying this down? No, your tenants paying it down. See, if this was your primary residence, that's you paying this down every month. There's no ROI for that for the amortization quadrant. But if it's an investment property and the tenants paying it down, good ROI here. You can't underestimate and you can't ignore this. So the way an amortization schedule works when you're paying back the bank, they try to get, they don't try. They do.

They get most of their interest up front. and then the principal is paid on the back end. So it's kind of a sliding scale. So in the very beginning of year, you're paying this much of the principal and you're paying almost all of your payments going to the interest. And then that gets smaller and smaller

and smaller as you go on year after year after year. So the last 29 and 30th year of your mortgage, most of that payment is now going to the principal. But in the beginning of the first five years, it's really insignificant. But not totally. So let's look at it. I did the math again.

What that would be is, in your first five years of this $80,000 loan, only, it's kind of sad, most people don't realize this, it's really kind of sad, but only $1,800 was actually paid to principal. The rest of it went to interest, all right? But you still got $1,800 of your loan paid down. So if we go ahead and we take that and what are we going to do? How much money do we put in the deal? We put it in the 20 grand, right? We leverage the 20 grand, we got the return on that, and then we put in the 20 grand, we got the return on that. So we're going to take this $1,800.

I'm going to divide that by our 20 grand as well. And what that's going to give us is 9%. Okay? So we got 25% in the appreciation quadrant, 30% in the cash flow quadrant, 9% in the amortization quadrant. It's looking pretty good, right? So let's look at the next quadrant. Have any guesses?

What that might be? The next profit center real estate? Depreciation. Yeah, tax deductions. It's another big profit center. A lot of people fail to calculate when they're making this buying decision. But this one, it's significant. It's significant. You don't want to.

You don't want to ignore this. So what's depreciation? Well, Uncle Sam, inside the tax code, they give you an allowance for the wear and tear on a property. What they're going to do is they're going to allow you to take deduction for the tax code. depreciation over the next 27 and a half years. But they'll only allow you to take it on the actual physical structure of on the property itself. You can't depreciate the land. The land isn't going to deteriorate, but the property or the structure will. So the basically the formula is they're going to give you 80 percent. Okay. So we have that $100,000 property that we paid

for. So we're going to take away 20 percent of the land. So 20,000 moves of the land. So we're allowed to depreciate $80,000. Okay. We're going to divide you that by 27 and a half years. Okay, and that's going to give us again, see, 27.5. That's going to give us a $2,909 deduction. Okay? Each year, that's pretty good. But if you're, so you can't take it all because it depends on what tax bracket you're in.

So let's say you're in the 40% tax bracket. Going to multiply it by it to 40%. and that takes it down to that was 1163 okay and this is why a lot of people don't recognize or don't feel this or they don't they don't see it

it's because that's not $1,163 that your real estate paid you like you that wasn't money that you actually got to put in your pocket it was money that you got to keep in your pocket you know in that tax bill and you're not so fast I have this property and I get to deduct this from how much I owe you or yeah how much I owe you so it'll be like 8900 bucks I'm gonna send you 8,900 bucks instead of a $10,000 bill or $10,000 so that's

where most people it's not incoming it's just money that you get to keep that doesn't go out but it's still a return because you didn't know this property that would actually go to Uncle Sam so let's multiply this by five years and that gives us 58 008 oh 5818 Sorry. 5818. And what we're going to do? We're going to divide that by what? Yeah, the $20,000 that we put in, right?

So divide that by 20. And that gives us, you click it with the math of me, let's see, 29%. So look at all of this. After five years, you got 25% here, you got 30% there, you got 29% there, and you got 9% there. That's how real estate makes people so wealthy. And you add all that up, and what you got there is, Let's find a really good number here, or good color, is 93% return on your investment in five years with just a very basic, modest, ultra-conservative 1%.

93%. Now, if we divide that by five, we're going to annualize that. That's going to give us an 18.6% return. That's pretty cool, right? Now, I know the stock market's been really good lately, and maybe you got lucky and you bought some Netflix and this 18.6% looks ridiculous because you did so much better than that.

But is it going to do that next year or the next year or the next year? Maybe we don't know. If it's Amazon or Facebook or maybe you took a chance on a tech stock or something like that, but you know the real estate, this is off a very 1% appreciation. I did this really, really low just to kind of prove this point. Because if you go back over the last 60 years,

Real estate is averaged almost 12%, a hair over 12% in appreciation. I did this just off of 1%. All right. So let's say we just went to 3% with this. We just went to 3%. And what that does to this, that changes this to 28%. But just by going 1% to 3%. But we know over the last 60 years, we've averaged over 12%.

All right. So hopefully that gives you a little bit of an insight as to why real estate. creates wealth and how it's created so much. Because you've got all these profit centers working. And see, most people look at the appreciation, they'll look at the cash flow, and they just kind of stop with their analysis is right there at that point.

And we hear this all the time at cash flow savvy, our turnkey operation, where people will buy a property and say, I don't know, say the water heater goes out. Okay, it happens, right? So the water heater goes out and have to totally replace it.

And they'll look at this like, well, I only make $100 a month, and the water heater costs me $1,200 bucks. I wiped out a whole year of cash flow this. was a waste. I shouldn't even have bought it at all. No. You've got this profit center working. You've got this profit center working. You've got this profit center working. So yeah, maybe you lost this 30% for that year, but actually you didn't because all you do is just adjust the cost basis. This is a capital improvement. And boom, you get it all back. It's not a loss.

So don't judge the performance of your real estate just off the cash flow alone. It's important. It's fun. We want this. But you've got these other three profit centers that are happening underneath whether you cash flow or not. All righty. So, that is how real estate makes you wealthy. And that is why real estate is the final frontier for the average person to creating epic wealth for themselves. There's lots of other ways to do it. But if you look at the statistics, this is how it's most likely going to happen for most people.

All right. So hope you enjoyed that. I will see you next week for another episode of Financial Freedom Friday. Take care. This podcast is a part of the C-suite radio network. For more top business podcasts, visit C-Dash. Sweetradio.com