Epic Real Estate Investing - Tips for Analyzing and Selecting New Markets | Episode 224

Episode Date: October 3, 2016

Epic Real Estate Investing podcast is back! Discover the tools to find opportunity and leverage in every deal. Learn to create cash flow through passive income real estate investing. If escaping the rat race is your goal, you're in the right place. Today Matt Theriault shares strategies for analyzing and selecting a new market, giving investors ways to maintain a strong cash flow portfolio. This episode of Epic Real Estate Investing is a must listen for real estate investors.   ______   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

You know how some people want to invest in real estate but they don't know how? Oh, yeah. And you know how some people want to invest in real estate but they don't have the time? Oh, yeah. And you know how some people want to invest in real estate and they simply don't want to do all that work? Oh, yeah. Do you know someone like this? Mm-hmm.

Perhaps that someone is you? Uh, yeah. If so, subscribe to the Turnkey Real Estate Investing Podcast, the show for Business. people who want to invest in real estate, but don't have the time or the desire to take on the heavy lifting. Turnkey real estate investing. Subscribe today. It's free.

Yeah. Turnkey real estate investing. This is Terrio Media. Casting from Terrio Studios in Glendale, California, it's time for epic real estate investing with Matt Terrio. Hello, and welcome. Welcome to Epic Real Estate Investing. We are back, and this is the place where I show people how to escape the rat race using real estate. And if you're just getting started and

or you're looking for new and creative ways of making money in real estate, I've put together a free course just for you, including a checklist on how to find motivated sellers, you know, property owners that are willing and able to sell you their property at a discount. As investors, that's what we want. We can't make money unless we buy property to discount. So to access that free course, go to free real estateinvestingcourse.com. Free real estate investing course.com. All righty. So if you attended the Epic Intensive, what was that two weeks ago now, my gosh, time is flying,

there are two ways currently where you can recapture the magic. And if you missed it, you have the same two ways in which you can get on the same page with those that attended the greatest real estate investing event of the year. I really believe it's the most impactful event of the year. I've done some research. I've looked at all the different events that have happened and that are going on. And, you know, what made this one so special, in my opinion, the reason I decided to put it on and create the theme around this shifting market is that the market is shifting.

And what's gotten it done to the last few years for you is not going to get it done the next few years. That's why I think it was the most impactful real estate investing event of the year. And so you can go to epicintensive.com and pre-order the video recording. of the two-day event. That's one way you can recapture the magic videos that are going to be ready in less than two weeks before October 15th is what we're shooting for. I think we're going to hit before October 9th by the next weekend, but I'm just saying the 15th to give us some leeway. And at that point, they're going to double in price. And they're not going to be available forever because we're getting ready to promote the next event that's coming up in January.

So if you like to pre-order and take advantage of a 50% discount, go to Epicintensive.com And grab them while you can. I guess it was just last week. I guess this was just a really long week. It wasn't two weeks ago. It was just last week. That just popped into my head as I'm sitting here talking to you. So, yeah, it was just a week ago. Time flies, doesn't it? It was a very busy week when we came back as we're getting back on to our regular schedule and our regular routines here in the office. And so that's one way. Grab the videos at Epicintensive.com. And if you missed it, that's how you can do it. If you want to relive it, that's how you can do that. And then the second way to do to get or re-get the Epic Intensive experience is this week, Thursday, October 6th. I'm going to be holding a free. wrap-up online training session. I'm going to cover the highlights of all the new strategies for the shifting market. Everything, just the really key points that we went over. And I mean, it's two days.

It was a two-day event. I'm going to try and capture the essence of it and go through some of the more important parts all in less than an hour. And if you want to attend that event, go to Epic Onlinecoaching.com. Epic Onlinecoaching.com. There's a lot of visuals there. Also, I would cover it here just on the podcast, so you wouldn't have to do that. But there's some some visuals that you're going to need to see, and that's going to be really helpful. So you're going to be able to, you know, view the best of the Epic Intensive, the strategies for a shifting market. It's going to be almost like you were there, epiconlinecoaching.com.

All righty, let's see. You know, at the intensive, one of my favorite parts of the event was our live podcast episode, of which I aired for you last week. And I apologize for the terrible audio quality, by the way. It's a huge pet peeve of mine. I hate poor audio. But the, but the answers from the, the panel of the experts were just so good that I still had to share it with you in spite of that

awful audio quality. Anyway, we had so many questions from the audience that we only had time to answer half of them during that session. I mean, went a little, I think right at an hour and we're just like, ooh, we're only halfway done. So I just pulled the plug on that. And then this morning, I pulled out the remaining questions and started browsing through and pulled out a handful that, you know, just kind of represented the majority interest of the event. I thought I just answered those for you here on the show. All right? So here it goes. First question comes from Ken 39, Warrington, Pennsylvania. And Ken asks, we've heard the importance of focus on select areas within real estate investing, especially with so many ways to create value. How did you

select the areas to place your focus? Good question, Ken. You know, my first criteria is I've shared several times before and I'm never going to change this, is that I have to have or I have to know someone that has a solid property management relationship in that area. You've got to have that. I've got to get a yes to that answer for me to even consider that market. You know, from my experience as a cash flow investor, I find the property manager to be more important, really, than the market or the property themselves? Really? I mean, what good is a market, a great market with a great property if you can't get it to perform?

It's your property manager that gets the property to perform. And if the property manager can't get the property to consistently perform, why invest there? I don't care how many people are there. I don't care how much success is going on there. if that property manager, the property manager that works for me can't get that property to perform, I'm not going, you know, unless you're going to go do it yourself, of which that's not an option for me either. So first, I need a trustworthy property management relationship in the area. Second is the purchase price to rent ratio has to be as such to create a positive cash flow.

There has to be the potential for positive cash flow without any, you know, extraordinary effort on my part. I mean, I don't have to grind every single seller down to the bare minimum all the way to the bottom just to get the property to cash flow. I don't want to do that. Right. So that purchase price to rent ratio has to present, you know, very viable and doable cash flow returns. You know, are the area's numbers conducive to an above average cash on cash return, which I prefer? Third, there must be ample and diversified employment in the area. You know, at the end of the day, that's what really drives a market. Can people make a stay? living and pay their rent in that market.

And if I can mark all three of those things off my checklist, there's a pretty good chance. I'm going to start investing there. So with all things being equal between two markets, though, if I had to choose one, it would probably come down to which place I'd prefer to visit, right? Which place can I have a little bit of fun while I'm visiting there? My properties are visiting my team while I'm there. So that's how I do that. All right.

So thanks for the question, Ken. Good one. Next question comes from Juan, 48 out of Hawaii. and Juan asks, are you adjusting your market's cash flow versus appreciation to mitigate risk as your portfolio grows? My quick answer to that question, Juan, would be no. Not for cash flow versus appreciation, not adjusting based on those criteria. But I will tell you what I am doing to mitigate risks as my portfolio continues to grow. Few things.

One, I'm investing a little deeper in the markets where history has revealed my best property managers. This is kind of off of Ken's question. You know, I look at, I'm looking across the markets and like which property managers and which markets are, am I getting the best returns? And now I've got a good track record in each market. I can see and analyze that where I've got a good history in each market. I can see which ones are performing the best. And I'm going a little bit deeper in those. So that's one thing I'm doing. Second is I'm looking at my portfolio as a whole. And I'm selling off many of my more pain in the neck properties. This was a big question that came up at the intensive.

Because last year's intensive, I had over 200 units. This year I have only 100. And here's what's happened. Why I'm in half is that I'm selling off more of these pain in the neck properties. And I'm either paying down or paying off some of the higher interest loans that I have. Or I'm purchasing nicer properties in nicer areas. I'm upgrading the quality of my portfolio, just less headaches, less maintenance. just nicer areas.

And for me, that presents future, you know, what is it? I guess less risk. That's what we're talking about. Less risk mitigation or more risk mitigation. You know what I mean. That's the bait. That was the question. But no, it represents a little bit more security, a little bit more stability, and a little bit

less headaches by upgrading my portfolio. So that's the second thing I'm doing. The third thing is I've been doing this a lot lately, is turning some of my properties into notes, meaning selling them by a way of providing seller financing to the end buyer, of which allows me to pull out most or all of my cash. So that's a big risk mitigation. I'm getting a lot of my cash back, if not all of it, but I'm still maintaining cash flow, so I'm not interfering with my residual income.

And at the same time, I'm significantly increasing my returns. And I'm loving this third thing that I'm doing so much that I would love to convert my entire portfolio to notes in this manner. That would be super. I mean, the returns would just literally go through the roof. Risk would go, we'd be almost completely, you know, evaporated. And management would be reduced to almost nothing. But that would be the perfect world if all things were equal.

But by doing something like that, three things would actually become an issue. If I took all of my properties and returned everything to notes. There's a couple podcasts out. There's a couple real estate experts out there that just swear this is the only way to do it because you don't have a whole lot of risk. They don't think. And you don't have to deal with tenants or property management. So it really is quite minimally intrusive into your personal life. But by doing so, three things actually become an issue that I don't know if they understand or not.

First, the tax liability would increase significantly as the passive income from a note is taxed at a higher rate than the passive income from. property. There's a pretty big difference there, actually. So you've got to keep a good balance of both notes and properties in your portfolio to keep your tax bill at bay. You know, consult your CPA to determine the best note to property ratio for you. For me, I've got it figured out. It's right about one-third notes, two-third properties. And that can pretty much, you know, level out my tax liability there. Second, real estate, that's your hedge against inflation. You know, real estate preserves the purchasing power of your dollar. You know, if you have everything in notes and the dollar continues to lose its value, your notes lose their value. So you need some real estate in there to preserve

your purchasing power of your dollar. And third, when the market appreciates, you're not going to get any of that. And we all know the property or the market will appreciate at some point. I mean, it's appreciating right now. It's probably, you know, we're all expecting a correction just because it's been a while, but it's going to continue to go up. And we've talked about that so many times how there are more people walking this earth than there are properties. And 60% of the population is below the age of 30. They are all growing up. They're going to need a place to live. And there's not enough housing to house them all. So the demand is growing and growing and growing. So that and the supply is kind of fixed or there has to be more built. And there's not a whole lot of new

building permits being pulled right now still. So what that represents is appreciation. So it's coming. Okay, it's going to continue to come. At least through our lifetime, that might change after we're gone. It might be different for our kids, depending on what happens of the population or whatever. But for us right now, it's a pretty safe bet. That is our crystal ball. We've got the supply and demand. We know what's coming. We can see the wave coming. It's kind of like when the tsunami, when the water goes out really, really far, and you're just like, oh my gosh, look at that. But you know what's coming back. That wave is coming back. And that's exactly what represents our population.

So when that appreciation comes, if you're all in notes, you're not going to get any of that. So those are some of the things that I'm actively doing right now to mitigate my risk while simultaneously increasing my yields. Here's another idea that I'm kind of playing with. That's moving out of California and specifically because of the state income tax. It's a whopping 13%. I think it's 13.5%. It's 13 or 13.5%.

And that's 13% on your entire income. And I started to think about this, about how I evaluate the return on my investments. I'm always looking at the cash on cash return. And I'm always looking at how I'm looking at the yield. And I'm looking at how, you know, most people would jump right now on any property that would produce a 13% cash on cash return, right? Yeah, definitely. That would be a great addition to just about anybody's portfolio. But what if you get a 13% cash on cash return on every dime that you've,

made, whether at your day job or your real estate, that would be significant, right, to get a 13% return on every dime that you made. Very significant. And that's available to you if you're a California resident if you were to relocate to another state, to a, even if you went to a state that was half, like just five or six percent, which is pretty much the rest of the United States is an option for you. That would cut that in half. Or move to a zero income state, a state income tax. like Nevada or Florida, Texas, Washington, Wyoming, South Dakota. So those are the ones that, there might be another one or two, a little one up there in the northeast. But those are the main, Nevada, Florida, Texas, Washington, Wyoming, South Dakota.

And if any of those states you find appealing, that could be a very impactful action to your wealth building strategy, especially if you're starting from California. that means the 13% cash on cash return on every damage you make. And I'm seriously considering it. Mercedes, she knows I am. She thinks I'm a little cuckoo. She knows, but she knows I'm considering it. But don't, I don't know if she really understands how serious I am thinking about it. Because 13% that's a lot.

I mean, just think about how much did you make last year, right? How much did you make last year? Now, what's 13% of what you made last year? Would you like to add that amount to your bottom line? Of course, right? It's a good chunk of money, isn't it? It's, you know, that kind of represents almost a little bit more or a little bit less, right at least one months of extra income.

And that's not just once that you'd add it to your bottom line. No, you'd add it to your bottom line every single year. Anyway, think about it. I am. Think about it. Next question comes from Jason, 42 out of Fullerton, California. And Jason asks, when obtaining private money, how do you structure your agreements with the lender? Quick answer there, Jason.

You can guess. Ready? With me. One, two, three. It depends, right? It always depends. So when you ask me this question, how do you structure your agreements? I don't even know what they need to know what the next part is.

How does any agreement structure? I mean everything inside of an agreement is negotiable, right? And you can put anything you want into an agreement. Either the two parties can agree on whatever they want and they can put that inside of an agreement. But when it comes to structuring agreements with a private. lender, there are two basic ways. And both of these ways have pros and cons. Now, before I share this, let me emphasize these are basic ways, basic ways.

Because I want to acknowledge there is no limit to how you can structure deals with private lender. You can get as creative as you want and you can get as complicated as you want. But here are kind of the two basic ways. All right. So basic way number one is you create a promissory note and you record it against the property. This is exactly what a bank does when you get financing from them. Okay, so there's just a note.

There's, there's, there's, there's, there's, there's, there's, there's, there's, there's, there's, there, there's, there's, there's, there's, there's, and, uh, you have an agreement on how to pay that money back. So the pro here is, you have total control of the property. In our context here as real estate investors, you have total, um, you get to benefit a hundred percent from the upside, from the profit, from the return, from the appreciation. That's all yours. You don't have to share your profits with anybody. Now, the con with this is you're responsible if it doesn't work out. The loss is all.

yours too and most likely you're going to be held liable for it by your lender. Now the second con here is there's almost always going to be a fixed payment attached to an agreement like this, meaning whether you make money on the property or not on any given month, you still have to make a payment. You know, for example, if a property goes vacant for a couple months, you're not receiving any cash flow from the property, right? And you're still having to make payments on the note. That's that fixed payment. If you start collecting a bunch of those, it really increases your overhead. And all of a sudden, that can become a stressful situation if one or two or three of those things start not performing as a way you thought they were.

And you have to constantly put this cash out every single month. So now someone saying, yeah, but what if you negotiate a six-month moratorium on the payments? Or what if you negotiate no payments until the balances do? Yeah, yeah, yeah. I told you, there's no limit to the creativity and the performance. terms and everything you can put inside the agreement. No limit. I'm just talking about the basic structures. And most of those basic structures, if someone's going to lend you money, they're going to want a monthly payment back. Most cases, okay? Yes, you can negotiate it out. I'm just absolutely,

I'm just giving the basic ways. I think with all the possibilities and variations and variables available here, I could probably fill the rest of the year's podcast time with just this conversation on everything else you could do inside of a contract. But I'm just giving me the basic ways, right? Basic way number two, basic way number one was you have, you create a promissory note and record against the property. Basic way number two is you create a partnership. And the good thing about here, the partnership is you can typically eliminate the fixed payment, right? You only make, you don't have to pay somebody if you make money. You don't have to pay anybody if you lose money. So it removes a lot of pressure and stress from a deal. Now the con is, though,

you're going to have to share your profits. And often the sharing of the profit is going to result into more, maybe even far more than what the payments on a straight loan would have amounted to. You got that? So if you got a partnership, they're going to say, I need 20%, I need 50%, well, you're going to be 50-50 partners. I'll get the money. You do the sweat equity. Whatever it may be, you're going to have to share in the profits.

And a lot of times that profit payout is going to be more than what it would have been if you had just made payments most of the time. Okay. Yes, there's always exceptions. I can hear you. There's always exceptions, always. So those are the two basic ways. However, with so many variables, for so many moving parts,

considering everything is negotiable, the answer really is it depends. But hopefully, Jason, that's going to give you an idea of how to structure private money in your deals. Analyze each deal individually. That's what I do. Analyze each deal individually. Try both of those basic methods on for size.

And then just go for the one that you like best for that deal. and then repeat the process for the next deal. And just do that individually for each deal. And there's not a one-size-fits-all answer here. Okay? So look at each deal, analyze what's going to work out best for you, and then make that proposal to your private money partner, all right, or your lender. All right.

So I've got five more questions here, and they're all about creative deal structuring and seller finance. I kind of group these together. And I didn't think the answering to those three questions is going to take so long. So what I think I'm going to do is I'm going to make the most sense is to save these for next week. I'll group them all together. So we'll have just one episode about creative deal structuring and seller financing.

That was the hot topic. That's where all the questions came from at the Epic Intensive. So let's go ahead and just do a whole episode on that based off of these five questions. There's some really good ones in here. So before we shut it down today, quick reminder, you can get in pre-order the Epic Intensive videos right now and say 50% at Epicintensive. And or you can join me this Thursday for a free online coaching session, the best of the Epic Intensive strategies for a shifting market. and you go there at epiconlinetraining.com. Epic online training.com.

I think that was the right one, wasn't it? Wasn't it? Epicintensive.com for the videos. Epic, uh, do, do, do, do, do, do, do. Yes, no, Epic online coaching.com. Epic online coaching.com. I'm glad I double checked on that because a lot of you guys would have got lost. So it's epicintensive.com for the videos.

Epiconlinecoaching.com for the free training this Thursday. All righty. So until next week, God bless. And to your success, I'm, I'm Matt Terrio, living 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. For more top business podcasts, visit c-sweetradio.com