Epic Real Estate Investing - The Buy and Hold Property Strategy | 322

Episode Date: December 18, 2017

Epic Real Estate Investing presents the buy and hold property strategy that offers investors passive income and long-term financial freedom. Get the ins-and-outs of a real estate investing approach that will give you streams of income and bring your closer to the reality of never having to work again. It’s time to finally escape the rat race with a stronger approach to real estate investing! ______   The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? • E.ducation • P.roperties • I.ncome • C.oaching Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. What's up? Hello, and welcome to the Epic Real Estate Investing Show. So glad that you found us because, you know, if you're feeling like you've got limited options with regard to what there is for you to do next with your current. if you don't seem to have any like-minded friends or people to talk to, or if you feel misunderstood by your family, all because you wanting to be a real estate entrepreneur. I want you to know that you're in the right place.

If the career that you signed up for isn't panning out in the way that you had hoped, if you're tired of working for someone else's dream to the detriment of your own, if you're starting to doubt if you'll ever be able to take your foot off the gas, I want you to know you're in the right place. Because, you know, when you invest in real estate the right way, you get your family's approval. You get to tell all your friends, I told you so. And you start making better connections and relationships around your aspirations. Because when you invest in real estate the right way, you have more control of your life and more control of your finances.

I mean, certainly, you are working hard. I'm not saying it's easy. You are working hard, but you're working hard on your dreams. And you can really catch up and make up for lost time. And that light at the end of the tunnel gets closer, much, much quicker. This is the place that shows you how to get all of that and then some. All righty. So I got a great show for you today as we move in and get closer to closing the loop of the badass investor plan and focus in on the eighth profit accelerator.

But first, a couple quick announcements. I mean, these were going to be really quick. From our contest last week for two free tickets to January's Epic Intensive, we're going to give away three sets of tickets. of tickets. So two tickets to three different people. Right. Each person is going to get two tickets of their own. So I've got the winners. Dwayne Miller, congrats. Gilbert Ross, congrats. Stephen Mendiola, congrats to you. And Gary Abe Abe, I think I said that right. And I know I said three winners, but we had a tie. And that's how we break ties around here. So all four of you win. All right. So please send an email to Melissa at epic real estate.com.

com, Melissa at epic realestate.com, and let her know that you were the winners of the contest, and then she'll get you all hooked up, all right? Second announcement. If you're anywhere near Phoenix this week, this week, that would be the 20th, Wednesday the 20th, Wednesday specifically, I'll be taking over the Wednesday night club, the Wednesday night real estate investment club at the Orange Tree Golf Resort. Doors open up at 5.30, and I'll be covering cash flow investing specifically with an emphasis us on long distance cash flow investing how to make that work so if you're in town stop by and to

rsvp it's on meetup.com under wednesday night club it's wednesday night club and uh you're have to do a little bit of searching for that one uh i think stewart and i had that discussion last time i was out there he was supposed to have this fixed but you got to do some searching either way it's going to be worth it all right so hope to see you there oh and big ups to the people that caught me on instagram this week i followed all of you back just like i said i would for all of you back that mentioned of the podcast. So nice to be connected with you over there as well. So if you're on Instagram yourself, I'm at Epic Real Estate, at Epic Real Estate, posting a few times a day and just motivation and tips and stuff to help you escape the rat race.

All right. So let's get to the eighth profit accelerator of the badass investor plan, the REI Ace model. And that would be the exit strategy of holding property, right? Because we can flip, we can hold, and we can finance. We're going to talk about holding today. I mean, because, you know, you can get. rich flipping properties, but you get wealthy holding them. So if you want to be wealthy or wealthier, you can't afford to ignore this extra strategy. All right? Because if you get this part wrong, you're always going to be flipping and you're always going to be chasing the next deal. And no matter how much money you make, you spend it, right? We're human beings. That's how we operate.

If we make a lot of money that we tend to spend it and you end up just being broke at a higher level. and you're always, if you do this part wrong, you're always working. You know, you can't take time off because if you do, the money takes its time off too. The money stops, right? And if you get it wrong, you're constantly worried and you're concerned because there's no safety net there, no end in sight because you're just always chasing the next deal. But if you get this part right, you'll have an air of confidence knowing that you have money coming in, whether you flip that next property or not, your expenses,

They can be managed because your income, it's consistent. And it's entirely within the realm of reality of having the luxury of taking a break when you need it, spending time off with the family or just getting more view time. And ultimately, what's happening underneath is you're getting closer to having the option to never work again. And you're getting there faster than how 99% of the population is going about it. I always used to be so focused on retirement. I want to get to the point where I don't have to work anymore. because I don't want to work anymore because I was just doing something I didn't like.

And once I got my cash flow up to this point, I realized I do want to work. I just want to do something different, but I have the option not to. And that's when you get this part right, that's what's available for you, all right? And, you know, it makes me think of Epic Pro Academy member Ryan, Ryan Bagley, with the sole focus on buying and holding. He's doing it on the side while he served our country, Air Force, I believe. And in just a few years, though, he's retired. He retired from the Air Force. And relaxing on the beach, I think he just moved to Florida,

all because he chose to hold more than he sold. All with creative financing structures as well. I tell you, it's not the most exciting road to freedom, but it is the fastest. And I've got to say, at Ryan's young age, retired on the sunny beaches of Florida, that's pretty damn exciting. The road to get there might not have been exciting,

but he sure got to the exciting part quickly and that exciting part's going to last indefinitely as long as he manages his assets as well. That's pretty damn badass to me. In fact, just last week, I think. Actually, I was writing this episode and putting this together like moments after I did. I got a little notification from Facebook and he had posted up on Facebook that he put a little post underneath our, what do you call it, our follow through Friday inside of our private Facebook group and says picked up our 26th rental today and crazy as it seems.

my first subject to deal. Thank you, Matt and Mercedes, for showing me the light. A much-needed thank you to my new best bud, Johnny Miller. Fantastic Johnny. You got a new best friend. And of course, I can't leave out the lady whose referral made it possible River Huang, River fellow Epic Pro Academy member. Contracted this beauty with zero down and zero out of pocket. It's not a myth, but reality. No payments until February 1st, and the house is rent-ready. Loan balance is 165. Fair market value is 180 to 185. So, uh, nice one, Ryan. Sounds like a great one.

That's, uh, that's Ryan, badass bagley. So I've got five hot principles to share with you around holding properties today. So you can walk in Ryan's footsteps, okay? Number one are the numbers. You got to know the numbers. Number two are the tenants. You got to know how to get the tenants or pick the tenants. Number three, management and number four, the for profit centers.

And five, growth. All right. So of those numbers, tenants, management, four profit centers and growth, which one do you need most. Think about that. And I'll go over them and then you can tell me afterwards. All right. So point one, numbers. When it comes to holding property, you've got to know your numbers. Specifically, what is it going to cost you to hold the property? Will the property, the income from the property cover those expenses? And ideally, will it leave something left over for you? You know, the basic expenses on a property over an average year, you're looking at taxes, you're looking at insurance,

maintenance, management, and the debt service, if there's any, if the property is leveraged. So once you've got the cost down, how much does the property actually generate? Right? Is it more than what it costs you? Or can you make up the difference from income somewhere else in your life? I mean, maybe you've got intentions for a property other than cash flow. So if your goal is to hold a property, say, for the long run, maybe it's a little bit more of a speculation play for appreciation if you're going to hold it for there.

just make sure either the property can support that or you can support it, right? You don't want to over leverage yourself to where, you know, it makes it life really difficult for you to support that property that you're holding. So you've got to know the numbers. You got to make sure that it's going to either the property supports itself or in some significant, not significant, what the words I'm not, that's not what I'm looking for. In some specific situations, you might want to hold a property for a while just based on what you see coming down the road.

and you want to make sure that you can support it in that sense as well or structured terms of which allows you to do that. All right, so you've got to know your numbers. You've got to make sure that's not going to cost you. You've got to make sure that's going to pay you. Next is the tenants, right? Tenants. We can't have properties without tenants.

Now, not every property that you hold, though, will have tenants. I mean, maybe you're holding vacant land or maybe you're holding a lot. and a new housing development. But for the most part, you're going to have tenants. So take your time selecting them. This is, it's going to pay huge in the long run by taking your time and being a little bit patient up front. Make sure that they have the ability to pay.

Make sure that they haven't any evictions. And then, you know, credit score and criminal records are important considerations as well. But I do believe there are good people out there that have had some bad luck in the past. So I look really for the ability to pay and pay without really. an extraordinary effort on their part, and I really turn my nose up on evictions. If you've got an eviction, you're probably not going to get in my house. Now, I don't ignore credit scores, or I don't ignore criminal records, certainly not, but I do exercise some discretion at times, and I do kind of evaluate those on a case-by-case basis.

There's a big fat depends for those two for me. All right, so tenants. That's number two. Number three, management, the most underrated aspect of escaping the rat race. and in many regards, probably the most important piece of the puzzle if you want your income to be more passive than active. I'd say property management is as important, if not even more important than the property itself. And in there you should exercise as much due diligence on your property manager as you do the properties that they'll be managing. I mean, you can manage your own properties.

It's fine. You can do that. But it's work. and it's not fun work. And it doesn't pay that much either to manage your properties. Now, on the flip side, you may enjoy this type of work. You know, it might be better than the work than the work that you're doing currently at your job. That's what people always, I always think that's funny.

When they say, you know, I don't want to manage property. I can't deal with tenants. I don't want that headache. I'm just like, but you got a job for the next 30 years. That's not a. a headache thinking about that? You know, which work would you rather do? The time that gives you, you have to work a few days a month to manage your tenants or report to your job, you know, nine to five at best, five days a week, right? But it's still work and it's thankless work

as far as managing property. So if you really want to escape the rat race and you want your income to be more passive than active, you don't want to manage your properties, most in most cases. I know there's some cuckoo people out there that like that type of work. God bless you, and I'm not going to try and dissuade you from doing it. It's just not for me. So you don't want to manage your properties. I don't want to manage my properties, but you do want to manage the property manager or managers. You don't want to manage the properties, but you want to manage the property managers.

Now, at this point, the number one question I'll get is, how do you find a good one, right? Boy, isn't that the million dollar question? So the quick answer is you work with a lot of bad ones until you get lucky. Now, that's a little facetious, but it's not too far off from reality. I mean, after all the dirty water that's flowed under this bridge, here's how I do it now. First, I ask for referrals from other satisfied cash flowing investors in the area. Okay, just go to your Rhea, interact with some other investors that are holding properties and find out who they're using. That's a starting point.

It's not foolproof by any means, but it's a starting point. point. Second, I start them off small, right? I start them off with one property and I go through that process and I wait till that one property is up and performing before I give them the next one. I used to go big. I say, great, I like you. You got a great operation here. It looks like you got a good team. You got all the experience. You got all these properties. Boom. Here's all my properties. Take them. I've been burned on that more than once. So shame on me on the second, third time. right so start them off small that's how we do it now third i look for a backup property manager immediately as soon as i got one i look for a backup immediately and then when uh i'm interacting

with them i always casually mention the other property manager i let them know about each other because what that does is it causes performance to increase and it causes to those expenses to magically decrease. Okay? So there's just this inherent air of, I guess, competition. I don't pit them against each other, but I do casually let them know. I make sure that they do know about each other. Now, I don't know if you'll hear that anywhere else, but that's the safest way that I've

found to do it. I've got a lot of properties. I've managed a lot of properties, not just for myself, but for my clients through cash flow savvy. And it hasn't been smooth sailing all the time. And so we've made a lot of mistakes. So those three steps that we operate now, it's eliminated a lot of the hassle that we experienced in the early years. All right.

So that's number three, property management. Point number four. The for-profit centers, this is a biggie. You know, most people in analyzing deals and deciding on whether or not to purchase that property, they're going to look at really just one or two things. I mean, they're going to look at either the cash flow. How much money is this going to make me? How much money is going to put in my pocket? And that's how they make their decision.

or they look at the potential appreciation, right? I'm going to buy in a nice area. I know, you know, I know Nike is moving into town. I know that the two Fortune 500 companies are also coming. This is going to really appreciate. There's going to be a giant demand for housing here. So I'm going to buy this one that way. So that's how people look at it, either the cash flow, depreciation, or a combination of both.

They'll look for stability in the area and stuff like that. So those are only two profit centers from real estate. state, right? There are two others that people overlook, almost completely overlook, and they are depreciation and amortization. And I think most people overlook them because they don't understand how they work. Yeah, I mean, they, they kind of, they, and they, they kind of work really under the radar, so it's easy to miss them. The profits generated from depreciation and amortization, there aren't as tangible or as noticeable as, you know, cash flow and appreciation are. But don't get it twisted.

They are there working for you whether you pay attention to it or not. And it's a good thing. So it's safe to say that you all know what cash flow and appreciation is. So I'm just going to skip over that. You all know what that is. Now, depreciation is a deduction that the IRS allows you to take each year for the wear and tear on your property. Very nice of them, right?

You can't depreciate the land, but you can depreciate the structure on the land, of which typically that translates to about 80% of what you paid for of the property. And you can take this deduction for 27 and a half years. I'm sure there's a reason for that specific number, but I don't know what it is. And I'm sure there's some of you listening right now saying, it's because blah, blah, blah, blah. Well, it doesn't really matter. You just need to know it's 27 and a half years. but it's a very specific number, so I'm wondering how they came out with that.

I guess I could go to Google and figure it out, but it's not important to me. But it's 27 and a half years. Now, you may never get to put a $1,000, well, like $1,000 of depreciation in your pocket. You may never get to put that in your pocket. But indeed, you will be able to keep $1,000 of depreciation in your pocket in the form of you not having to send it to Uncle Sam.

Because you don't actually receive the money from your real estate with, um, uh, from depreciation. You don't actually receive money. So most people, they don't even notice it. But if you didn't have depreciation, you'd certainly notice it by way of your larger tax bill. You'd notice your larger tax bill for sure, right? So that that $1,000 that's in your pocket, you get to keep it there.

Okay. And not send it to Uncle Sam. You get to use it for you. So depreciation, that's a biggie. It's really big. amortization. This is another profit center that's misunderstood and or ignored. And that's the paying down of the debt on your property.

That's the paying down of the debt on your property. And it's not you paying it down, right? No, it's your tenant paying it down for you. You see, each month we collect our $1,000 of rent, let's say. You pay the property bills, right? And then you pay your debt on the property. And then you're left with this cash flow. say it's $250 of cash flow.

And everyone just sort of chocks up the $750 that went to maintain the property of loss. Like that's gone. It's disappeared. But it's not. It hasn't disappeared. Okay. So there's a portion of, like you got $250 of the cash flow, right? But some of that $750 is yours as well.

A portion of that payment you make to your debt. It goes to principle. It's not a complete loss. Not by any means. It's a significant gain over time. See, through amortization, your tenant is building your equity. That's how your equity gets built.

Through amortization, your tenant through amortization builds your equity. So as well as appreciation. But right there, like if nothing else changed, we just lived in a vacuum, that's how the equity is built is through amortization. So here's an example. If you have a property with a cash on cash return of, say, 8%, right? Actually, I was going to say that's not that great of return these days, but actually it's becoming more and more of a decent return just because of the way the market is going.

Prices are rising and rents are kind of staying where they are. So those cash on cash returns are not double digit, large double digit like they used to be, you know, a few years ago. But anyway, my point is 8%. So-so property, okay? Probably not too difficult to find an 8% property for the cash flow. But, and let's say it's in a Midwest Southern community, annual appreciation is maybe 2-3%. Okay, we'll give it 3%. annual appreciation.

And then depreciation might be around 9%. 7, 9%, somewhere in there. And amortization might be around 5%. So that's a total ROI of 24%. Where in the world are you going to get a 24% return on your money? And when I talk about those numbers like the depreciation, the depreciation, the amortization, the amortization. I mean, if you held that property for three or four years, like you,

probably going to, and you took all that return and then you annualized it, that's probably going to come around right around a 24%, between 20 and 30%, on just a basic property that produces an 8% cash on cash return, total ballpark figures. But that's reality. I mean, so if that paid you 24%, where in the world are you going to get 24% return on your money? I mean, I always think it's funny when people say they had to buy a new water heater for their property and it ate up an entire year's worth of cash flow

and what a waste of time owning that property was. As they forget the other 16% that was still working for them, the other 16% that grew underneath it. So you lost out on one of the profit centers, right? But you had the other three working for you. Now, that's all pretty simple math, but that's the gist. That's just an example. Okay, I just want to give you an idea of how that works.

So that's how the for-profit centers work. And it's why real estate has created more wealth than anything else on the planet. Because it's not just based on cash flow. It's not just based on appreciation. You've got depreciation and amortization going in there. Got it? Boy, and you put the leverage part in there, and it's five times the growth of anything else out there.

Okay? It's why real estate has created more wealth than anything else on the planet. So don't ignore all the profits. It's just if you're basing all of your decisions off of how much does it cash flow or how much you expect it to appreciate, you're not looking at the whole picture when you make your decision. Number five, growth. Growth. Now, you could hold one property.

You can buy a property and just hold on to it forever and it's going to grow on its own just fine. There won't be anything for you to do except collect the rent and pay the property's expenses and your wealth will grow. but you can considerably speed up that process by using the profits from your property to buy more property and when those properties when they appreciate you refinance them to pull out the money to buy more property it's a process it starts off a little slow you know like the first couple years it's going to feel like nothing's really happening but a few years down the road it starts to speed up and fourth and fifth year it starts to speed up really quickly and I'm

just talking like a very basic conservative, you know, that's just buy one property and as soon as we have enough, we'll buy a next, right? So, but it starts to speed up really quickly. And the idea is to leverage as much as you comfortably can to build your wealth and then eliminate the leverage to sustain your wealth. Got it? So you want to maximize, in my opinion, I think you want to maximize leverage as much as you possibly can to build your wealth, responsible. of course, don't bite off more than you can chew, more than you can pay. But you want to leverage as much as you can. Make sure it all cash flows.

And then once your cash flow hits that certain point, now you want to eliminate that leverage to sustain your wealth. So I recommend you just refi, refi, refi, refi until you get your cash flow to a point where it supports you without having to work and then start allocating extra portions of your cash flow to pay down the debt on your income properties. So your properties buy your properties. they help you acquire the properties and then they help you pay them off. And they just knock out, pick out a property.

This is the one I'm going to knock down. And I like to always look at the one that, which one has the highest rent? Because if once I eliminate that debt, that creates a significant spike into my cash flow, right? So if I had a property that paid me $2,000 in rent and my debt on that was say $1,000, so I'm making, you know, maybe $500 of cash flow on that. but once I pay off that $1,000 debt, that $500 of cash flow on that property probably just went to about $1,500.

So that's why I like to look at the highest ones first. Once you hit that point, okay? So just knock them down one at a time and you'll have paid, or you've had all of these free and clear properties of which essentially, not essentially, it literally does skyrocket your cash flow. I guess I can't say literally with a skyrocket.

So it's still a metaphor. But it boosts your cash flow significantly. and when there's really no, when there's no longer any debt on the properties to pay. How cool is that, right? I mean, it's so cool that you need to hold properties. You don't get to do any of this if all you're doing is flipping properties and contracts. All you're doing is you're worried about your marketing campaign and you're trying to get deals and then you're chasing deals and you're out there wheeling and dealing and you're flipping properties.

And, you know, it does, you can make a lot of money doing that. Okay. Flipping properties, that should be the cash that fuels the acquisition and management of your cash flow. Right? You need both parts for a while. But eventually you don't need to flip. You can flip as long as you want. I'm not saying don't because sometimes the cash is good and you want to keep doing it.

But you get to a point where you don't need to do it. You don't need to get up and chase that next deal and chase that next seller down. Okay. So do both if you want, but don't neglect holding properties. You know, you can create through. through your job or through another endeavor, you can create this type of cash that you would flipping properties, but you got to buy properties to hold.

Okay? So do both of those strategies if you want. If you got something else that's going to produce the cash to help you buy properties to hold, do that. But yeah, just essentially don't neglect holding the properties or all of the wealth and freedom that real estate promises will never be yours. You got to hold. All right.

So to recap the five hot principles, one is the numbers, two is the tenants, three is management, four of the profit centers, and five is growth, how you create that. Now, if you need any help with any of this or you flat out just want someone to do it for you, like it just sounded like a ton of work, it probably makes sense to have a conversation with Mercedes. Have a conversation with Mercedes at Cashflow Savvy. It's what she does all day. And so she would love to have that conversation with you. and you can book a call with her at call mercedes.net.

Got it? Call mercedes. And you can jump on her calendar and, you know, you can pick her brain and maybe there's something we can do for you or maybe we can point you in a direction where it might be a better fit for you, depending on where you are in your situation and what your preferences are, what your end goal is.

If you want to have that conversation with her, call mercedes.net. All righty, so that's it for today. God bless. And to your success, I'm Matt Terrio. in 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. podcast, visit c-sweetradio.com.