Epic Real Estate Investing - There’s More Than Just “Cash Flow” in Rentals… | 1102

Episode Date: December 1, 2020

There is more than just “Cash Flow” in rentals! Quite frankly, it makes you rich! So, how do you get wealthy with creating cash flow? Stay tuned as Mercedes, the Turnkey Girl, shares the basic principles of economics that will help you better understand passive income so YOU can reach your financial freedom and EVEN more than that! 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'm lucky enough to be partners in crime with Mr. Matt Terrio, the guy who created the epic real estate empire. I help busy professionals

acquire passive income through real estate investing so they don't have to work so hard and maybe even retire sooner. So I created this show to share tips, advice, 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, you're listening to this podcast because you are interested in real estate investing, right? And you may have considered real estate as being something that's too risky. But I can tell you from personal experience that it's not as risky as other investment vehicles out there like stocks and bonds and bitcoins. That's right. I happen to think

that real estate is the least riskiest of all investment strategies out there. Well, when I started investing, I've shared before, I used to be a fix and flipper. I was fixing and flipping properties in Southern California. I did that for about five years, got really, really good at it, and even did a show called Flip That House. And at that time, my then-boyfriend, who is now my husband, was wholesaling. And his rule of thumb was, for every three properties he'd wholesale, he would buy one to hold. yes, of course, I'm talking about Matt Terrio himself. He would buy one property to hold, and these properties were cash flowing somewhere between $150 to $200 a month. Now, mind you,

these properties are located in the Midwest and in the south of our country. But I would say to him, I mean, really, what are you going to do with $200 a month in passive income? But before I knew it, he was holding 15 properties and growing. And every time I turn around, Matt would acquire another property that he'd throw into his investment portfolio as a rental. So it took me a minute to get it. But the one thing that really hit me about Matt's strategy is that Matt only did the work once to make the money and then the money would continue to roll in. While I, when I was fixing and flipping, I would close a flip and then I'd have to start the process of finding another property to do a flip all over again. Now, as you know in real estate, you make money when you find the deal and when you buy the property.

So I was always on the hunt and on the search for the next deal. Until one day, it just clicked. Before I knew it, Matt had about 37 properties in his portfolio, and I did the math. Ah, it's $200 a month times the 37 properties that he owned. Because I realized that piles of money was good. I mean, it totally, it paid the bills, I got to travel, I had a ton of fun, but the money didn't last. I had to do it all over again for me to create another pile of cash.

on the next flip. So I was always looking for the next deal, for the next job, if you will, where cash flow in turn continues to come in and you only have to do the work once. So I started to dig a little deeper. And it wasn't long before I discovered that cash flow and the creation of it creates wealth. I mean, Sure, flipping can make you rich. There is no doubt about that. But cash flow can make you wealthy. Now, how do you get wealthy with creating cash flow? Well, we're going to start with the basic principles of economics. And that is, first, supply and demand. Now, it's very easy to talk about supply and demand when it comes to thinking about Walmart and Costco. Specifically now during the pandemic, the crisis that we're experiencing

with toilet paper and paper towels, that still exists. Well, there's supply and demand in that realm of paper towels and toilet paper. Well, when it comes to real estate, the supply is land. We are not making any more land. God is not planning to create any more land in the near future. Supply in this realm is fixed. Where demand, demand in this case, it's people. And people are starting to grow in masses. They continue to grow. I mean, did you know that more people were born in 2007 than in any other year in history? So what does that mean? That means that the kids that were born, in 2007, that makes them about 13 years old today. So in 10 years, they will be moving out and going to college. They're going to spend four years in college, and then after that, they're likely to be

moving out on their own. Now, there is no such thing as a crystal ball. But this is the closest thing that you are going to find to a crystal ball. Safe bet that real estate is an essential of life. It's not going out of style anytime soon. So speaking of supply and demand and people being the demand in real estate, people and our communities are still growing. Okay. So now let's talk about the second basic principle of economics. And that is. is leverage. I often talk about leverage because I happen to think that leverage is a key component to creating massive wealth. Now, money is readily available today to the average person, believe it or not. So I'm going to dive into leverage just a little bit, and I'm going to

forewarn you that I'm going to be sharing figures and numbers. And these figures and numbers are probably going to make more sense if you write them down. Good thing that you can rewind this podcast and listen to it over again because understanding these figures is going to help you create massive wealth for yourself. Now, let's talk about just a basic property. And I'm going to use round numbers on actual properties that we sell and that I personally own, but it's easier to understand when I present numbers. So let's just assume that you are going to utilize a bank to help you leverage as much as possible so that you don't have to use all of your money to buy a property. So I'm going to choose a property in Middletown, Alabama, let's say,

where the sales price of the property and the fair market value is $100,000. Now, in today's world of a conventional loan, the bank will allow you to borrow 80% of the loan amount. If indeed you can prove you're a law-abiding citizen, have a decent credit score, have a job, and you can prove that you have some kind of stability, all you have to do is, is come down with 20%. So, with a $100,000 property, you get a bank loan for $80,000. Your down payment is $20,000, 20% of the property.

Now, let's just assume that in our world, and this is a pretty fair assumption, your property is going to appreciate 1% per year. Now, the average appreciation across our country ranges between 2 and 6% a year, depending on your location. But for the sake of argument, I'm going to use an extremely conservative figure of 1% per year appreciation. Okay. So in five years, this $100,000 property that we just purchased using 20% down, a $20,000, dollar down payment will be worth $105,000 in five years, right?

If you do the math, that cash on cash return is 5%. That's your ROI. Your return on your investment is 5%. Really, nothing to write home about no biggie, not exciting, whatever, right? The reality is that ROI is calculated based off of the 20% down payment that you put down, the $20,000. So now, if we take what we invested, the $20,000, and we divided it by the appreciation of 1% per year, that gives us a cash on cash return of 25%. Your ROI is 25%, and that is called leverage.

Now, here is where it gets juicy because there's more than just cash flow in rentals. I'd have to say that we coined the term ROI matrix. And what I'm about to share with you is something that goes, so way under the radar. It is truly underestimated the four areas where you make so much more money with your rental. The first one is appreciation. We just talked about the appreciation with the example that I just gave about putting 20% down with a $100,000 property at appreciation of 5% in five years, that gave us a 25% appreciation. Simple math.

Let's talk about the next more important component of our ROI matrix. And that's cash flow. Let's assume that the property that you just purchase is already rented. And we know that the tenant is paying $1,000 a month. Now, I said, let's assume. assume that is actually what is transpiring with this $100,000 property that you purchased. You collect $1,000 a month in rent for this property. Now, I'm going to use quick and dirty math, and we're going to deduct 40% of expenses.

And those expenses consist of taxes, insurance, property management, your vacancy, and your maintenance. I'm factoring 40% of those expenses. So we subtract the mortgage payment of $600 a month because that's roughly what your mortgage payment will be. So that leaves us about $100 a month. Now, we take that cash flow, $100 a month, and we multiply that times the five years. Now, you'll notice that I said five years because when you buy a property, the least amount of time you should hold it as a buy-and-hold rental should be five years. This is why I continue to use five years in my example. So we take that cash flow that we are getting every month after we've paid our taxes and insurance and our mortgage and everything.

We take that cash flow of $100 a month and we multiply it by five years. that gives us $6,000 in five years that we've collected in cash flow. We then divide that by the $20,000 down payment that we use to buy this property, and that gives us a 30% return. Crazy, right? 30% return on cash flow by just holding this property for $5,000. years. Here's my next favorite, amortization. On an investment property, amortization is being paid by your tenant because your tenant is paying you rent and that rent is going towards your mortgage payment. Now, the way the

amortization schedule works is, at the beginning of the loan, most of your payment pays off the interest up front. So at the beginning of your loan, a very small amount goes towards the principle of your balance, the principle of your loan. That's about roughly speaking, about $800 of your loan is being paid off the first year. However, if you take that interest payment of $1,800 that we just paid and we divided that by the $20,000,000,000, that you used as a down payment, that equals a 9%. So amortization over five years pays you a 9% return. Crazy.

Okay. So so far, we have appreciation, cash flow, and amortization all paying you while you sleep. Here's the next profit center that. just is so underestimated. And it's called depreciation or tax deduction. It's so underrated. Now, inside the tax code, Uncle Sam allows you an allowance on the wear and tear of the property over 27 and a half years on the structure of the property. You can't depreciate the land because the land won't deteriorate, but the structure will. So the formula. So the formula,

is basic. You take the $100,000 property minus the 20% off the land. So we get $80,000, right? You divide that by 27 and a half years. That gives us $2,909. By the way, that $2,9009, that's the tax deduction. So you don't get to take it all. I will tell you that because it depends on the tax bracket that you're in. So let's assume that you are in the 40% tax bracket. You then multiply what you get by the tax bracket. So in this case, we've come to the figure of $2,909 and we multiply that by 40%. That gives us $1,163. And then again, we multiply that by five years because remember, we're holding the property for five years. That gives us a grand total of $5,818. And again, we're dividing that by the 20% down payment, the $20,000 that you use to buy this $100,000 property, and that gives us a 29% return or depreciation.

Now, look at what you just created for holding a property for five years. We've got 25% appreciation, 30% cash flow, 9% amortization and 29% depreciation. Now remember, I said that we did this with a 1% appreciation. Now, if you divided that by five years to annualize it, that gives us an 18.6% return. Now, 18% that's not too shamed. Abby, if you had a stock on Amazon or Netflix, well, maybe you're thinking you can get a lot more than 18%. And if you did strike one of those, you're right. Maybe. I mean, we don't have a crystal

ball to determine what stock is going to crush it next year. But what I can't say is that history repeats itself. And chances are, real estate is going to appreciate. Now, I did say that we were doing it off of a 1% appreciation because I wanted to be extremely conservative during this analysis so that you can do the math at home. But the reality is, in America, most properties appreciate anywhere between 2% and 6%. Now, using a 3% appreciation matrix, which is still conservative, but a lot more realistic. You will take that 18% over five years on that 1% appreciation. It grows to 28% if your property is to appreciate the average 3%.

That is insane. Now, I hear the naysayers saying in my turnkey operation all the time is well, what happens if the water heater goes out in my rentals and it costs me $900 to replace it? Well, you're thinking, okay, well, my property is only cash flowing $100 a month and that wiped me out for the whole year. No, because you still have three other profit centers. It might have wiped out your cash flow for a year, but you still have appreciated. amortization, depreciation,

and the cash flow from one year, yeah, it might go away for the one year. But all you have to do is adjust the cost basis, add the capital improvement, and besides, it's just one year.

If you're holding the property for five years or more, the rest goes back to be positive cash flow. You still have the three other profit centers, and now you have the capital improvement. So this is how real buying and holding property creates wealth. And this is why real estate is the final frontier to where the average person has a legitimate chance of creating epic wealth. But wait, there's more. I just used

one example, one property, just one, in order to achieve epic wealth, you're going to want to buy more, and you're going to need to buy one more property. But we just scratch the surface. You're going to need to buy several properties. But now that you know what's possible, it's very doable to buy more properties. All you have to figure out is the how, because I've already showed you what's possible when you have the knowledge. I know it's a lot to take in. And as I shared at the top of this episode, thank goodness you could replay this episode over and over again. And surely you are going to have questions. So feel free to reach out to the epic or cash flow savvy team members. We'll be happy to break it down for you. Feel free to go to cashflow savvy.com. That's savvy with two V's

click on the contact us and we'll be happy to connect or just email us Mercedes at epicrealestate.com. It will absolutely be life-changing for you if you learn how these four components can create true wealth in your world. Now, if you found this episode helpful, do me a favor and share the link. And it goes a long way if you write a lot. us a review and tell us what this episode has done for you. If it's making a difference for you, it surely can make a difference for somebody else. That's it for today, my friend. It has truly been a pleasure to share with you all of the amazing things that derive from holding real estate. Have a great and epic week. Until next time, where cash flow is key.

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