Epic Real Estate Investing - What Does Cash Flow Mean in Real Estate | 1192

Episode Date: April 7, 2022

Cash flow is used inside and outside real estate. With this fact, people get confused with its description since it does not mean the same in the 2 different contexts. Therefore, in today’s show, Matt explains what does cash flow mean in real estate. But before that, Matt covers another important topic when it comes to your financial freedom. Particularly, he reveals how much passive income you need to retire and how real estate investing can efficiently help you achieve the desired retirement amount!  Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. How much passive income do I need to retire is a thought that might have run through your mind once or twice. Or maybe all the time. I get it. The daily grind has got you down and you're looking for an escape. And the idea of waiting until you're 65 years old, that's got zero appeal. So let's take a look at how much passive income you need to retire right now. You ready?

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, EpicR-E-I.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 rei-aise.com. Here's Matt. All right, let's cut to the chase. You're wondering how much money you'll need in passive income to retire and likely, comfortably, without being dependent on a job, family, church, or state. If that's you, you're my type of peeps. Work smarter, not harder, and ultimately not work at all. If you don't want to, of course.

So let's look at why a traditional approach ain't going to cut it, why passive income is your only option of real retirement. And then we'll wrap it up with how you can actually pull it off for yourself. Oh, and by the way, if you're still looking to get that first deal under your belt, I put together a free training just for you to help you get that first deal done, and then how to earn $5,000 a month, flipping contracts and properties working as little as one hour a day. And you can access it at matsfreetraining.com. All right, first thing, that traditional advice that you get from retirement experts and financial planners,

you know, that 10% rule, saving 10% of what you earn over a lifetime, how that's going to enable you to live comfortably in retirement. You've heard that before, right? Well, the truth is that unless you plan to retire abroad, you're going to need a substantial nest egg to generate enough passive income to enable you to retire with that plan. And saving 10% in most cases is just not enough. Because the truth is, we're all living much longer than we were

when they came up with that 10% rule. And realistically, most people just don't make. enough to save enough for that plan to pan out. Per the Department of Health and Human Services, that plan has failed 95% of today's 65-year-olds. But what about Social Security? Well, while the government assures us that Social Security benefits will be around when it's time to retire, it's best not to rely too heavily on others when planning how to live out some of the most vulnerable years of our lives. You know, the average retirement benefit for a retired worker at the time of this recording is just over $1,600 a month. That's it. Even with inflation-based increases

each year, you're not retiring with that, not unless you pull three roommates together, and that's not likely how you want to spend your golden years. $1,600 per month is not even a significant supplemental income. Social Security, forget it. It's play money. But saving 10% of a lifetime's worth of your salary certainly has to amount to something, right? Well, intuitively, it feels like it should work out. That's why most people follow this advice. But very few people actually do the math to know for sure whether or not it will work out for them. And you don't need a degree in higher math to figure this out either. I mean, basic high school math is enough to show us that saving only 10% of your income isn't enough to retire. I mean, let's take the median salary of

about $48,000 a year. By saving 10%, your money would need to grow at a rate of 6.7% a year for you to retire 40 years from when you start just to reach $1 million. But what if you don't have 40 years? What if you got a late start? In order to retire after 30 years of contributing, you would need an unrealistically high rate of return of 10.3%. In these situations, not only do you need to contribute more than 10%, but you also need to double it and then some to have that $1 million nest egg in 30 years.

And if you did make it happen, how long? would that $1 million last? Well, if you left your million dollars in a low-risk conservative investment returning 5% per year and you wanted to live on, say, $7,500 a month, you'd be out of money in 14 years. So you better not live one day past your 74th birthday, or it's welcome to Walmart for you. It's no wonder 95% of retirees are struggling. They never had a chance. And for those that pulled it off, They live their final years terrified of running out of money before they run out of life. So if you don't have the ability to save a pile of money high enough to produce a passive income that will carry you through your final years, what do you do? So rather than focusing on the mountain of cash that we need to create the stream of cash to retire, let's flip that equation around and focus on the stream of cash first that we need to retire and let the excess then build the mountain.

Let's start with some math. A little math can go a long way. So a simple way to get an estimate of how much money you're going to need for retirement is by calculating how much you spend monthly. Or ask yourself, what am I making now each month? If I maintained that, would it be enough for the rest of my life? If not, where does it need to be? I mean, you know what that number is.

It doesn't have to be exact, and you don't have to commit it in stone either. You can change your mind as you go, but you already kind of know what you need to support the lifestyle that you want in retirement, right? And that's the first step, defining your monthly income number. The second step is to look at different options for generating passive income that can get you there. I mean, I recently put a video together outlining the different options

for the average person. And I put a link to that video for you down below in the description so you can watch it later, just in case you don't like what I'm going to share with you now. It's no secret that real estate has created more wealth for more people than anything else on the planet. And when it comes to creating passive income for more people, enough passive income that fully supports a lifestyle, real estate, it's the clear winner in that category, too.

And there are three popular ways that anyone can pull it off. The first way, the real estate investment trust or the REIT. One of the easiest ways to earn passive income in real estate is to invest in REITs. Real estate investment trusts, these REITs are very similar to mutual funds. Investors buy shares, they contribute money, and then they gain monetary benefit in return. In most cases, REITs are publicly traded investment opportunities and can be found on major stock exchanges, allowing you to quickly buy and sell online. With these real estate investment trusts, your investment is spread out over a portfolio

of real estate properties. Now, REITs are required to return at least 90% of their income to investors in the form of dividends, and just like mutual funds, they are generally very easy to get involved in, making it a great passive income option for many investors. A downside to this investment opportunity is the lack of transparency and control on your investment because REITs do not allow passive investors the opportunity to choose which real estate assets their investment goes into. Additionally, REITs will generate lower returns on average than other passive income real estate opportunities. And the other part of this, you're going to need a significant amount of money for that passive income to amount to something.

The second way is through real estate syndications. So unlike REITs, with real estate syndications, you are not in. investing in a fund, instead, you buy a specific real estate property and become an owner of the asset. As the owner of the real estate asset, you have more opportunities to increase your tax benefits as a passive investor. In short, a real estate syndication involves multiple investors pooling their capital to purchase a real estate asset. The general partner or syndicator of the real estate syndication finds a deal, coordinates the transaction and financing, and then manages the investment once it has been finalized. Passive investors pitch in most of the capital

required in exchange for equity in the real estate. In real estate syndications, passive investors don't have to be actively involved in property management, accounting, or tenant-related issues, making it very appealing to many. You know, a great aspect of real estate syndications is the transparency in your level of risk.

When you are a passive investor in a real estate syndication, you know exactly where you are investing, the asset you are investing in, and most importantly, who you are investing with. This allows you to correctly underwrite the opportunity and communicate with your sponsorship team directly through the course of your investment. One of the benefits to real estate syndications is the potentially high returns. A typical multifamily syndication firm proposes an investment model that looks something like this.

The whole time is going to be five years of owning the asset. The passive income is going to be 8 to 10% cash on cash return on your investment per each year. And the profit on the sale could be 40 to 60% or more return on your investment at the sale of the property. Now, a downside to real estate syndications is, the barriers to entry. You know, for most offerings, expect a minimum investment of $25,000. Additionally, unlike REITs, real estate syndications are, in most cases, held under SEC regulation. This puts limits on the marketing of these offerings to the public. Finally, if you do not have a relationship with a real estate syndication company, it will be more challenging to find these

particular investment opportunities. But ask around at your next RIA meeting. They might not be in plain sight, but they're not terribly difficult to find either. especially when associating with fellow real estate investors. Now, the third way, the single-family landlord option. This option is going to take more hands-on work up front, but the payoff on the back end is almost always worth it. By taking on the role of property owner and landlord, you're able to receive all of the benefits of owning real estate,

like, of course, passive income, but also appreciation, depreciation, and amortization. And then there are the intangibles. You've got pride of ownership and you've got total control. Throughout the Midwest and the South, it doesn't take any real extraordinary effort to locate a modestly priced single-family home that would produce a positive cash flow, meaning a tenant's going to pay you more than what the mortgage costs you, leaving you each month with a monthly income. By setting a very conservative goal of purchasing, say, just one income property every other year, enough monthly passive income can be produced to pay the owner the nation's median household income in just 20 years. I mean, that's something the average is failing to do right now following the traditional strategy of saving money for 40 years. That slow buy-and-hold real estate plan cuts that time in half and also makes up much more certain. If you wanted to go even faster, you most certainly could.

And if you'd like some help with that, along with dialing in the exact number that you need to retire and the exact number of income properties to achieve it, I've got some free information for you. Download an investors package at cashflow savvy.com. If you like what you see, you're going to have to have to get a number. have the opportunity to pick a time for us to hop on the phone and strategize your passive income retirement. And it all starts at cashflow savvy.com. Thanks for sitting tight while we pay our light bill. We'll be back right after this. Boarding for flight 246 to Toronto is delayed 50 minutes. What? Sounds like Ojo time. Play Ojo, great idea. Feel the fun with all the latest slots in

live casino games and with no wagering requirements. What you win is yours to keep groovy. I won! Beal the fun. Boarding will begin when passenger Fisher is done celebrating. 19 plus Ontario only. Please play responsibly. Concerned by your gambling or that if someone close to you, call 1-8665-3-1-2-600-0

or visit Connexonterio.ca. Ever hear someone say, I have too much money? Me neither. Let's get you some more. Back to the show. What does cash flow mean in real estate? I mean, you hear it all the time, right? And you hear it used outside of real estate too. And it's easy to get confused because it doesn't necessarily mean the same thing in every capacity.

Well, I'll let me tell you what cash flow means in real estate right now. When it comes to rental property investing, your cash flow is the net amount of money that piles up in or disappears from your bank account each month. And that's to say real estate cash flow can be positive or negative. For example, if you're pulling in $1,500 a month in a rent, and your mortgage, taxes, insurance, and property management fees are, you know, running $1,000 a month. Your net cash flow is $500 a month. That's what it is. That's how it works.

But let's go deeper. And I'm going to ask you a simple question. Would you rather have money in the bank today or entertain the promise of seeing money in the bank at some point in the future? If you chose the former, then welcome to the real estate cash flowing investing club. You know, today money is something that a certain kind of investor tends to prefer over other. uncertain, but potentially lucrative long-term appreciation. Cash flow can be very helpful to an investor because you can put cash flow to use and other projects and ventures right away, or it pays your personal bills each month.

Other types of investors are often more focused on whether their property has the potential to appreciate, and that will mean for their equity position. And these investors are generally willing to wait and get the bulk of their expected financial return upon sale. And while real estate markets have historically gone, at about double the rate of inflation, there are pronounced down cycles too, which are difficult to predict. Investing for future appreciation alone, that can be tricky unless you are a committed and strategic long-term buy-and-hold investor. This is where the cash flow approach to real

estate investing comes in, which prioritizes money in your bank account now, ready to be deployed for other investments or simply spent on things that you value in life. And then when done right, you're likely to get the long-term appreciation too. So let's dive. in and I'm going to show you how to produce and maximize your real estate cash flow. And then I'm going to finish up with some very real risks that you're going to want to watch out for. All right, exactly what is cash flow real estate investing? Well, one way to think about cash flow investing is to compare it to investing in dividend paying stocks. You know, at regular intervals, you receive cash distributions from the investment while doing very

little, if anything, with the asset that you've purchased. A quick example might look like this. So Mary owns three rental properties that each rent for $1,000 per month. Her expense ratio, and this is the percentage of gross rental income used for normal operating expenses like maintenance, property taxes, vacancy, insurance, and property management fees. That ratio typically lands right around 40% of the gross rental income. So Mary, she also set aside 5% each month in a capital reserve account for emergencies and incidentals. Very smart of her. So Mary's monthly cash flow is $3,000.

That's the $1,000 times those three homes, less $1,200. That's 40% times the 3,000. Less $150. That's 5% times those three properties equals $1,650 per month. Sounds pretty good, doesn't it? But there are ways that cash flow investors may be able to further increase their income every month. And I'm going to give you three winning examples of that. One, you could raise the current rents to market rents.

You know, every year, Mary pulls market rent comparables. to make sure the rents she's charging her tenants is at least on par with the market. She learns that rents for properties comparable to hers are going for about $1,050 per month. So when she renews the leases, she also raises the rent at all free properties to the market rate. The result, her income goes up, and assuming her expenses stay the same, the result is as follows. New cash flow is $1,350 plus the $150 equals $1,800 per month. Typically, expenses are more static than rent. So as you raise rents, your mortgage, taxes, and insurance costs often decline as a percentage of the gross rental income.

There are nuances to this, but as a general rule, this is often the case. And on a side note, the net cash flow landlords are receiving, it's rising rapidly in the current market. And based on supply and demand, it's going to keep increasing at rates that we haven't seen in a really long while. So owning income property is a good place to be in right now and will be for the foreseeable future. So if you don't have any yet, might want to get some. The second way to maximize your cash flow is to reduce your operating expenses. So after Mary brought her rents to the market rate, she recognizes that she might be paying more than necessary for landscaping and lawn

care. And so she's able to trim some of those costs there. Mary reduces the monthly operating expenses on her rental property portfolio by $70 when she hires a new lower cost landscaper. Her new cash flow, $1,800 plus $70, equals $7,000. $1,870 per month. It keeps getting bigger, doesn't it? Now, the third thing that she can do to maximize her cash flow is to add value to the rental property. Now, so far, Mary has increased her cash flow by $220 per month, but she's not stopping there. You see, Mary decides to convert the spare room

above one of her rental properties' garages into a studio apartment that she quickly rents out for $300 per month. Her new cash flow now, $1,70 plus the $300 equals $2170 per month. By bringing her rents to market, cutting landscaping costs, and adding value to the rental home, she increased her monthly cash flow by 32%. Now, there are some risks of negative cash flow. And here are three cautionary examples. In the real estate investing business, when more cash flows out than in during a given month, that's what's known as negative cash flow. And I'm going to give you three costly cash flow mistakes that some real estate investors make. Number one, paying or borrowing too much for the purchase. This is a common mistake that real estate investors who focus on appreciation are susceptible to making.

You know, overpaying for an income property results in extra large mortgage payments that can go on for years. And if market rents don't increase steadily, investors can find themselves barely able to cover the property expenses. For example, if your monthly rental income is $1,000, less $400 in expenses, less $50 in reserves, and then less a $500 mortgage, you're left with a mere $50 of monthly cash flow. Now, what happens if a tenant leaves and it takes one month to find a new one? Zero rental income for a month, less $950 of expenses, and that gives you a $950 negative cash flow. Then once you find a new tenant, it's going to take you 19 months to recoup what was lost during only a single month of vacancy. The second mistake, choosing the wrong tenants.

Some investors are so anxious to get a vacancy filled that they neglect pulling a thorough tenant credit report and running a thorough background check. Let's assume for this example the following scenario. Monthly rental income is $1,000, minus $750, that's our 40% expense ratio plus 5% reserve plus 30% mortgage payment. That gives us $250 of cash flow. Now, let's say the tenancy goes bad. The tenant disappears in the middle of the night without paying the current month's rent, takes all of the appliances with them, and leaves behind $2,000 worth of damage. It takes one month to make repairs and re-wret the property.

That would equate to $0 of rental income, less the $750,000,000,000. of normal expenses, less $3,000 repairs and new appliances, and that will leave you for the month with $3,750 of negative cash flow. You know, while situations like these can happen, you can indeed minimize these and practically eliminate your exposure by doing your homework and checking references before signing a new tenant. So if cash flow is important to you and your goals, then minimizing downtime that results from non-paying tenants should be a priority. Now, the third mistake is overspending.

on expenses. You know, some real estate investors spend too much on items like landscaping and business operations and fancy renovations. You know, while this approach may produce the best-looking property on the block, very few tenants will pay an above-market rent in return. Most tenants just want a nice enough place to live in and call home. You know, a nicer looking place may cause a property to rent faster, but rarely for more. You know, it's just basic math. When landlords spend more on expenses then the rental income will cover. The result is negative cash flow. Now expenses you could be overpaying for, they include insurance. Be sure to shop around annually. Advertising of vacancies when you're looking for new tenants. Then landscaping, shop around and minimize the frequency. And then property

management. You want to self-manage or negotiate lower rates over time. Then there's the utilities. Use energy efficient appliances. Give tenants incentives to reduce their use. As with any real estate investment, due diligence can make or break a property and your business if you're not careful. Your answers will always lie in the math. So do the simple math to get a better idea of the cash flow that you can expect. 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 a material. Living the dream. Yeah, yeah, we got the cash flow. You didn't know home world, we got the cash flow. At Desjardin, we speak business. We speak startup funding and comprehensive game plans. We've mastered made-to-measure growth and expansion advice,

and we can talk your ear off about transferring your business when the time comes. Because at Desjardin business, we speak the same language you do. Business. So join the more than 400,000. thousand Canadian entrepreneurs who already count on us and contact Desjardin today. We'd love to talk, business. Okay, only 10 more presents to wrap.

You're almost at the finish line. But first, there, the last one. Enjoy a Coca-Cola for a pause that refreshes. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit C-Suite. www.sweetradio.com