Epic Real Estate Investing - How to Calculate Property Value Based on Rental Income | 1186

Episode Date: March 17, 2022

Calculating property value based on rental income is a very important skill for a real estate investor to have. Therefore, in today’s podcast, Matt shows you how to calculate property value based on rental income. BUT BEFORE THAT, Mr. Theriault shares an extra pearl of wisdom for newbie investors! Particularly, he reveals practical and doable options so you can start your real estate venture with little or no money, at all! Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. How to get started in real estate with no money. And you've likely heard that it could be done, but how? The good news is there's not just one way. There's plenty of ways. You've got options. Some, easier than others, but all practical and doable. And I'll let you in on seven of them right now.

Let's go. Welcome to the all-new, epic real estate investing show. The longest running real estate investing podcast on the interwebs. Your source for housing market updates, creative investing strategies, and everything else you need to retire early. Some audio may be pulled from our weekly videos and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, Epic rei.tv. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend.

If you want to go fast, go to reiase.com. Here's Matt. I'm going to go over the basic idea of how to invest in real estate with no money. I'm going to give you seven different ideas of how you can pull it off yourself. And then if you like some additional help with this, at the end, I'll show you how to get it. We've all heard that you need money to make money, right? And when it comes to real estate investing, you need a lot of money, don't you? I mean, don't you need 20% down to get that first property?

In some markets, 20%, that can be a whole lot of money. So don't you need that? No. not necessarily. Although there's a lot of truth to the wisdom that you do need money to make money, it's not an absolute truth. And when it comes to real estate investing, it's actually not true at all. There are plenty of gray areas to play in and many more that completely debunk that wisdom entirely. The truth is that in every business and real estate is no exception that people get started in business every single day with little and almost zero money. Many of them just, they get off the ground

with a really strong dream and a whole lot of hustle. How do I know this? Because that's exactly how I got started. And I've been fortunate enough to teach thousands of people to do that over the last decade. So here, I'll walk you through seven of the most common ways of how I've been able to do this for people. And then I'm going to close it out with my most favorite one that has produced my financial freedom.

So the first one is referred to as house hacking. And this is actually rather pretty simple. You take your living conditions, wherever it is, whether you will own a house already or you are renting and you hack that property by renting a room out. That's the most common way of doing it. And if you got multiple rooms, you can rent out multiple rooms. Another way where it's commonly done is people buying a duplex or a fourplex and they live in one and rent out the other units.

That works very well too. You can also get really creative with your residence, whether you rent out extra space and turn it into maybe storage facility or maybe you got some extra land and you turn that into the parking or maybe you have a basement and you can turn that into living quarters and rent that out. That would be perfectly acceptable. And kind of as I alluded to, you don't even need to own your own home to really pull this off. I mean, if you got an extra room in your apartment, go ahead and rent it out. You don't necessarily own the real estate and you're making an investment in that real estate, but you are producing passive income from real estate and that is a form of real estate investing.

So when you've saved enough money from this passive income that you're generating, it could be time to actually buy your own house now. This is a really great stepping stone on how a lot of people go about it. And it doesn't take as much money as most people think. I mean, you could go out qualify for an FHA loan, which can take as little as three, three and a half percent as a down payment. That could be really easily attainable for a lot of people in most markets. Another way is a VA loan. If you've got previous military experience, you can qualify for a property with zero percent down. And then once you've done that, you do the same thing. You rent out our room, you rent out the extra space, and you keep creating that passive income until you're ready to do it all over again.

So house hacking is a way to invest in real estate without making it a part-time business or even a full-time business. It doesn't have to be that much effort either. I mean, if you pick really good roommates to rent out the rooms in your house, it could be actually rather easy. And who knows, if you got just the right ones, it could actually be pretty fun too. Then there's master leases and lease options. I mean, if you're not ready to own a property or don't want to,

you could rent one out instead. master leasing, it's somewhat lighthouse hacking, but kind of on steroids. It's where you're not only renting the property and renting out a room, no, you're renting out a property and re-renting it entirely. So you're renting it out for, say, $1,000 a month and you re-rent it out to someone else for $11, $1, $1,200 a month, and then you get to keep the difference. And like most rentals, master leasing can be accomplished without a whole lot of upfront money. I mean, maybe last month's, first month's rent, a security deposit, that's it, and you're in.

And maybe master leasing just isn't good enough. You can increase your opportunities by putting an option to purchase on the property while you lease it out. And what this is is you negotiate a predetermined price somewhere in the future of where you are going to make an offer to purchase the property. Now, it is not an obligation to purchase. It's just giving you the first right of refusal. For example, you might negotiate a purchase price of, say, $200,000 for that property that you are master leasing. and you've got a two-year window to execute that transaction to make that purchase. Now, over those two years, if that property were to appreciate to $230,000,

you've got your purchase price of $200 locked in. So at that moment, when it comes time to execute that option, you've got a $30,000 spread there. You can choose to buy the property with $30,000 of equity in place, or you could do something like sell your option. You could sell your option to somebody else who will step in, buy it for $200,000, and they'll have the equity in place. And then you can make an arrangement with that buyer to split that equity. Maybe you get $5,000, $10,000 for them to get that option to purchase.

So if that house were to appreciate for $230,000, you could sell that option contract, say for $220. That would give your buyer a $10,000 equity position and you $20,000 in your pocket, creating a win-win scenario for both of you. And all of that can happen with no out-of-pocket money. Number three, short-term rentals. And you've probably heard of them referred to as Airbnbs or VRBOs. Those are the mega marketplaces that do the marketing for landlords to find these short-term tenants, people that come in and rent the property, say, by the night rather than by the month.

And you can use this as a really low-cost entry point to get started in real estate. This could also be categorized as another form of house hacking, where you could get your master lease in place and then take the property, place it on a short-term rental website like that Airbnb or a VRBO to where you can find short-term tenants. My good friends, Dave and Jill, they've done this very thing. They've gone out and negotiated with different property owners, master leases, a half a dozen of them or so, I believe, right now. And they've taken these properties, they've put them on these short-term rental sites. They have generated a nice passive income for themselves where they don't have to work.

That's all that they do. And the income from these short-term rentals has grown and grown and grown as this type of living situation or vacationing situation for people has grown in popularity. I went to dinner with them actually just last week and they had told me that they just hit an all-time high last month. They generated $30,000 from their short-term rentals and they don't see any signs of it stopping. And that was just six properties. And I've been so blown away by these numbers and their stories and having them share with me their experiences. I'm actually taking on my very first short-term rental next month. Number four, partnerships. If you don't happen to have all the money yourself to

get started in real estate investing. Maybe you bring on a partner and use their money to get started. While there are many ways to partner, one of the more common ways is to form a credit partnership. That's where the partner comes in, say, with the down payment and the credit score to acquire the property and then you manage the property on their behalf and you can share in the profits, you can share in the appreciation. Another really great way to get started. A modification that you could make to this partnership, so you have a little bit more upside for yourself, is your credit partner could come in, they could use their credit score, they come in with a down payment, they close on the property, they own it, and then you lease it back from them with an option to

purchase in the future. You then sub-lease it to a tenant, you manage the day-to-day activities of property management, and you get to keep the difference between what you've leased it from your partner for and what you are renting it to this new tenant for. Now, before your option expires, you have the opportunity to go out and get some traditional financing to purchase the property back. If this is done correctly, you can control the appreciation and the income of this property and you got all in for really no money out of your pocket. And all that really took was a little bit of creativity and a little bit of hustle. Number five, bird dogging. Now, this is essentially where you go out and you look for deals for other real estate investors. And this really takes no

money at all. Essentially, you connect with the real estate investor or two or three or more and you interview them, finding out what each one of them wants. And then you just kind of keep your eyes and ears open for what they want. And when you find it, you share with them that property. And should they close, they'll give you a nice little referral fee. Now, you can be as passive or as active as you want with this, but it takes absolutely no money to get involved. And this is pretty easy to do.

All it takes is a quick computer search for a RIA meeting in your area. RIA stands for Real Estate Investor Association. And this is where once a month, a group of real estate investors will come together and basically talk shop. There will be buyers there. There'll be sellers there. There'll be lenders there. And you go there, you network.

And that's how you can get started. It's one of the ways I got started by finding other real estate investors, their deals. Number six, wholesaling. Now, this is the practice of buying property low and selling it low and doing it really, really fast. But you're doing it so fast that you never actually take ownership of the property that you stepped in to buy. So you go out and you find a good deal.

You put it under contract. And under that contract, you were typically given 30, 45, 60, days of inspection period, sometimes referred to as due diligence or often referred to as due diligence. And during that period, now it's your duty to go and find a new buyer to step in your place. And for a fee, they will step in your place and they will close the deal and they'll buy the property themselves. Now, many wholesalers will start as bird dogs. And they are essentially the same thing.

The big distinction here is, is the wholesaler is actually putting the property under contract. And because they have the property under contract, because they've taken that extra step, They control the deal, which means they also control their profit. So they're not necessarily working so much for a small little bird dog fee. Now they're getting real estate profits. And that essentially is adding an extra zero to your paycheck. And many people just don't get their start wholesaling. They will turn it into an actual business and make a whole lot of money.

But keep in mind, it's a job. It's a high paying job, but it's a job nonetheless. You're constantly in pursuit of the deal. The last way I'll share with you is my favorite. and it too is also a job in the beginning, but ultimately done right can turn into your financial freedom, where it is no longer a job. And that's number seven, seller financing.

So what this is, instead of you going to a bank to get a loan to purchase a property, you're going to negotiate the price in terms directly with the seller, and the seller's going to step in and become your bank. So essentially, you're buying the property over time. You've agreed on a price, but you've agreed with the seller that you're going to make them pay, over time until it adds up to that price.

This is my favorite way to buy real estate. It's the way I primarily do it still today. And it's my favorite because I'm not bound by bank requirements. I'm not bound by lending guidelines. It's just a conversation and agreement between the seller and myself. As long as you and the seller agree, anything goes. You're limited only by your own creativity. And to give you an example, if you met a seller that was willing to sell you

their house for a bucket of hot wings, that would be, a viable transaction. Now, I've never purchased a property for a bucket of hot wings, but I want you to know you are only limited by your own creativity. As long as you and the seller agree, anything goes. You could purchase a property that way. And if you'd like to get started, purchasing property via creative financing, I've got the best free course for you, the best place for you to start. Take a look at what I put together for you at epic breakthrough.com. Thanks for sitting tight while we pay our light bill. We'll be back right after this. Ever hear someone say, I have too much money.

Me neither. Let's get you some more. Back to the show. How to evaluate property value based on rental income. And this is a really important skill for a real estate investor to have because sometimes when you're looking at a property, there might not be a sales comparable. And all we have is the income to go by. So what do you do then? Because if you get it wrong, it can be very, very expensive.

but if you get it right, everything else can fall into place very easily. And I'll let you in on how to do that when you only know the property's income. All right, so I'm going to walk you through the four steps to determining a property's value based on its income so that you'll always be able to make the best decisions for yourself when you're buying income property. So there are three primary methods. There's more methods to the determining value, but there's three real primary ones that real estate investors use specifically to determine a property's value.

Separately, each method gives you a little snapshot of that value, but not a total picture. But being able to use each one of them individually can give you a lot of different perspectives on what it's going to take to create a profitable real estate investment, whether that's going to be a fix and flip or it's going to be a rental property. Today, we're talking about income property and what do you do and how do you determine the value of a property when all you have is the income to go by because that can be very common. But before we go there, let's go over the three approaches to determine. value. The first one is the sales comparables approach. And you might refer to this as

cups. Compar. That's short for comparables. And what you're looking for are like properties, like the one that you're looking at, similar properties that have sold recently. Because the market is really what determines the value of a property. Ultimately, whatever someone is willing to pay for it, that's what the property is worth. So to determine what the subject property you may be looking at is most people will go and see what if properties like it sold for recently? What has a property that attracted a buyer? The buyer went ahead and wrote a contract. They went through the entire due diligence process.

They followed all the way through and signed the final documents to consummate the sale. That is the primary method people use to determine a property's value. Now, the second way is what we call the cost approach. And what we're doing there is we're going to evaluate if we had to build a property's value. if we had to build that property from the ground up, how much would the materials and the labor cost to make that happen? Now, there's two common areas where this is going to come and play to a real estate investor. The first is when it comes to determining your property's insurance.

Because in some markets, it might cost more to build that property than it would to buy an existing one, one that's already been built. And in other markets, it's vice versa. So when it comes to insurance, I always choose the greater of those two. Is it worth more? is an existing structure or would it cost me more to build it brand new? Because if that property were to burn down, I want to get the most money I can for it. And if I'm in a market where I have to rebuild it, I want to make sure that I've got enough money to go ahead and rebuild the

property. Or if I'm in a market where I could actually build that property for cheaper than what it was worth, then I want to be insured for the higher number. I want the most money for my insurance. I pay a lot into it and very rarely do I get to use it. So when I do get to use it, I want to make sure I get the most money possible back. The second area that you'll use the cost approach is when you're analyzing repairs, like how much is it going to cost to fix this house up to get it, say, rent ready, or how much is it going to cost for me to fix this property up to get it on the cover of better homes and gardens?

I don't know. But you want to know what things cost to go ahead and rehab. And that's where you'd use the cost approach. Now, the third approach to analyze the property is coming up with its value is the income approach. And that's what we're going to talk about. You see, rental properties can all be a little bit different, particularly once you get outside of the single family market space and you're looking at duplexes or threeplexes or four plexes or even, you know, actual apartment buildings. It's difficult to find light properties that have sold to compare them to.

So you have to use other approaches. Now, you can use the cost approach, but it's not always the best indicators what the property will sell for, what it will actually be worth to you. So we have to use the income approach because most people are going to buy these. properties based on the income that they generate. That's why they're buying them. So if you come across a property that doesn't have any sales comparables and all you have is the income, you need to know how to determine the value of the property from just the income itself.

So if all you have is the income of a property, you can still determine its value. You can still come up with a pretty accurate idea of what that property is worth. And we use what we call the gross rent multiplier, or G. ETHR. The value of a property equals the gross rent multiplier times the annual gross income. Calculating the gross rent multiplier is very simple as it only requires two pieces of information, the property value and the annual gross rent. The general formula to calculate the gross rent multiplier is property value divided by the annual gross income of the property. But our issue right now is we don't have the property's value. All we have is the income. And we don't have the gross rent multiplier either.

So we have to find the gross rent multiplier elsewhere in order for us to complete our equation to determine the property's value. So that is step one to determine the gross rent multiplier. And you want the gross rent multiplier of properties that are similar to the one that you're looking at and have recently sold in the same area of where your property sits. Now, you can often find gross rent multipliers through brokerages and in their published reports and in their sales reports. That's one place to look. Or you can contact a local appraiser or a brokerage to find out what the gross rent multiplier is at the moment for that specific market for that type of property. That's another way that you can do this. So what we'll do is we'll use an arbitrary number.

We'll pretend that we called an appraiser. They gave us the number and they said the gross rent multiplier in your market is thanks. Now, step two, you need to determine the annual gross rent of the property. And fortunately, that is the number that we do have. And we'll say for this example, the gross annual rent is $15,000. So the last step is to multiply the gross rent multiplier by the annual gross income. Eight times $15,000 gives us a property value of $120,000. And that is how you determine your property's value based on the income alone by using the gross rent multiplier.

Now, if you'd like to get started investing in off market deals and finding discounted deals and finding income properties like these, I put together a free training for you. And you can take a look at that at mats free training.com. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them. And ask them to click the subscribe button when they get here and I'll take great care of them.

God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Tario. Living the dream. Yeah, yeah, we got the cash flow. You didn't know, home boy, we got the cash flow. 246 to Toronto is delayed 50 minutes. Ugh, what?

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