Full Video Transcript

Pat (00:00:01):

All right, we are recording. Hey good morning everybody. It’s Wednesday here. We are gonna do a little agent training and we’re recording this. We’ll put it up on YouTube. Anybody will be able to watch it. My name is Pat Wilver. I’m a co-owner at Trophy Point Realty Group. Been an agent for a couple years, investor for a couple years more, um in real estate. We’re gonna go over today investing real estate investing metrics kind of with a focus on single family rentals. So that’s the topic of discussion I’m gonna share my screen, because we’re gonna be pretty pretty Excel-heavy on this. So here we go. Actually, Google sheets. Same thing as Excel though. So this sheet I made specifically for this class and you’re gonna see me looking off this way. That’s because that’s where my screen is.

Pat (00:00:50):

So we’re going off this screen. All right. So everybody, if you’re here in person you should be able to pull up this sheet in the email I sent you. So this is, and you can use this to evaluate any rentals if you want really, but I I’ve kind of tried to strip out all the, all the detail, like here’s the sheet, this is my detail sheet for like, you know, big projects and stuff. So we will, you know, eventually maybe get there, but we’re starting off simple. Everything you see in blue here is inputs. So these are the things that we know about the property or, or we need to find out about the property. Everything blue is something that’s an input, you know, we can edit it. Everything in black is all calculation cells and various things going on. Right?

Pat (00:01:33):

So there are some key metrics that we’re gonna try to arrive at at the end of the day to show our investor. And these are basically them right here, right? We’re interested in what’s our cashflow, right? What is our return? And this is just for one year what’s our cash return on investment and what is our total return on investment? These are like the, the big things that somebody wants to look for, but it it’s, it’s a, it takes steps to get to these values. So how do we get there? Right? Let’s go through it. So here’s our property. In this case, we’re just gonna keep it simple, just simple numbers with saying, Hey, here’s, here’s a great, you know, right. So we found hundred thousand dollars can buy it. Right. and I’m gonna, I’m gonna click through here repair estimate $10,000, right?

Pat (00:02:22):

This is what we do. You know, we go look at a place, what’s it gonna cost to do this? That I’m not gonna get into how to estimate repairs. You know, just now if we have some time later on in the class, we’ll get there. But we need to know what a purchase price is. How much is it gonna cost to repair it? We need to know what else about a property. If it’s a rental, what what’s a, well, yeah, what’s, what’s it gonna rent for? Right. And again, I’m not gonna in this particular class get into, how do we estimate a rent? We’re just, we’re just saying, Hey look, this is, this is a rent estimate. ARV, do we all know, Elizabeth, you know what ARV stands for? After Repair Value. Yep. ARV. So that’s after you do your little $10,000 in repairs, what’s it gonna be worth?

Pat (00:03:02):

I’m saying $120,000, right. You know, whatever we hope that the money we put in is gonna get us a little bit more. And typically it does appreciation, right? How much what’s the appreciation? I’m using 3% in this particular model this last 12 months, it’s definitely been higher than that. Like in places like Richmond Hill, it’s probably been closer to 10%. Which I think is a little unsustainable. We never wanna use 10% as our appreciation estimate. That’s just unrealistic unsustainable. I like 3%. If I’m trying to be more conservative, like maybe two, you know, that’s kind of standard, you know, inflation I think Savannah might end up being higher than 3% going forward, but it’s a good number. All right. So that’s our property inputs. Those are some things that we need to know, um when we are, when we are looking at a deal. Financing, right?

Pat (00:03:53):

Most of the time people are taking on a loan, right? So there’s certain things about the loan that we need to know whenever we’re running these numbers. So loan to value, right. LTV, right. You’re familiar with that term. Our interest rate, right? Our term, is it a 30-year, 15-year? You know, what’s the term of the loan points. Right? You know what a point is Elizabeth? You, you run across that yet? So a point lender point yeah. Lender point. Right? So it’s it’s a charge it’s basically paying interest upfront. A point means 1%. So an $80,000 loan, if you’re paying one point, you’re paying $800 in points. It’s just, it’s just something to know. And then of course closing costs and whenever we’re running these numbers for the purposes of this shoot, we are not gonna be doing the portion of closing costs that are held in escrow for like property taxes and insurance.

Pat (00:04:50):

Alright. So you probably haven’t run into that yet, but you’ve probably seen it on a settlement statement. Yes. Where they’re the prepaid. So that is stuff that, yes, you’re paying it at the closing table, but you it’s gonna end up going toward expenses that we already model. Right. We’ve already, we’re already modeling property tax. We’re already modeling insurance. If we count it here, we’re gonna be double counting. So closing costs is just your attorney fees, your appraisals, you know lender costs, but not points because points are separate. Right. That’s what I’m saying. The closing costs, I typically do $2,500, maybe $3,000 is what your what’s your what’s your closing costs are gonna be, alright. So those that’s our financing inputs, right. If you’re modeling a cash deal, we just do LTV and we just change it to zero. Right. Boom. All right. And that’s it. So this one we’re, we’re doing this, like it’s a rental property. Alright. So expenses, we have some expenses in a rental property, right. Property tax is one of them. So do you know what a millage rate is? This is something

Agent (00:06:00):

Actually, I’m not very familiar with.

Pat (00:06:01):

Okay. So, and this is, this is something when you’re looking, you know, it’s very important to know what your property taxes are gonna be if you’re looking at a rental property purchase. Mills is how we, we pay property taxes. So in Chatham county, city of Savannah Chatham County, it’s 44 mills, right? 44 mills is the tax rate. The mill is stands for like a thousand. So this is like 44 divided by a thousand, you know is what that means. So if you look at this, this little formula here, right, you can see the formula tab and the sheet, right. Basically that shows you the equation that we use in, in Chatham county. So we have B2 purchase price, right? Times 0.4. All right. So Chatham county, they only take 40% of the property value as the assessed value. And they typically will reassess it. If you purchase a property, typically the next year, they’re gonna change the assess what you paid for it a lot of the time, right? So purchase price times 0.4, and that will give you the tax assessment value. So it’ll be, in this case, a purchase price of a hundred thousand will give you 40, 40,000. And then they will take 40,000 times the millage rate. And you see how I have F2, that’s the proper rate, 44 divided by a thousand mil. What is mill like Latin or something? Mill

Wynn (00:07:26):

It’s like a mill it’s

Pat (00:07:27):

Yeah. One mill is 1044 mills is 44,000. So I think it’s, I think it’s a or something. Right. I think that’s the yeah. So that’s that math equation. You don’t have to remember it necessarily. If you have a sheet that just does it for you and that’s what

Agent (00:07:42):

I normally do. I just plug it in there. I’ve never

Pat (00:07:45):

Analyze it. So Chatham county, city of Savannah, 44 mills, Richmond hill, I think is like 36. So you can see, you know, how does that change without we’re out in Richmond hill? You know, save a little bit, it’s not, you’re not saving a ton of money on a hundred thousand dollars house, you know, that’s up.

Kelly (00:08:01):

Are these sheets accessible to us?

Pat (00:08:02):

Yes. Okay. You should be able to follow the link in your inbox. I think you’re already in there.

Kelly (00:08:07):

I see now, I’m in there. I’m saying there’s like a shared document that we can get in.

Pat (00:08:11):

Well, I I’ll, I’ll make sure everybody has everything at the end of the yep. So property tax, right. Everybody understand. Perfect. All right. Property tax. Insurance, you know, this is something like I got an insurance guy. He gives me a quote. I don’t ask him for a quote on every house I look at because I know a $100,000 house is gonna be $750 roughly, you know what I mean? $200,000 house, probably $1,000. $300,000, I don’t know, $1300. Right. You know this doesn’t factor in flood insurance, you know, I’m, we’re talking to standard standard house, standard insurance, nothing crazy about it. Right. That’s what we’re looking at. Maintenance and CapEx. Right? normally these are separated into two different buckets for the purpose of simplicity and like an introductory course, we’re just gonna talk about, ’em like, they’re the same. So maintenance and CapEx. Maintenance is just routine stuff. Hey leaky faucet, you know, Hey some paint, you know, whatever CapEx is like a serious investment like a roof or you know, new floors or HVAC system. The difference,

Agent (00:09:22):

What’s CapEx?

Pat (00:09:22):

You know it?

Agent (00:09:22):

No, actually I don’t know.

Pat (00:09:23):

So it’s a capital expense. Oh, okay. Yeah. Capital expense. The big difference, the first is how it’s treated from a tax standpoint. So maintenance, you write off your taxes on an investment property in the year it happens. Capex has to be depreciated like you depreciate, like you depreciate your house every year. If you have a rental property, you can depreciate it every year, you know, and, and basically not have to pay taxes on depreciation. Same thing. If you put in a brand new HVAC, that’s supposed to be depreciated over a period of like seven years, I think on your taxes. So if you install a $4,000 HVAC, you can write off, you know, probably $500 this year, $500 next year, et cetera. Right. That’s the difference. So they are different, but for this course, we’re just, we’re just trying to keep it simple.

Pat (00:10:10):

We’re talking about these as if they’re the same. I would typically do, um if it’s an older house like these old cement of housing stock, typically $1500 a year and per unit, if it’s like a 4-unit, you know, big 4-unit, I’d say $1500 per unit per year. If you got like a newer build in Richmond Hill on a slab, it’s typically gonna be less, you know, in this case I’m doing $1,000 or saying maybe it’s a newer house or something like that. Right. So some years you spend a lot more, some years you don’t spend any, this is an average right. Vacancy, right? We always want to factor in vacancy. The place is not always gonna be full. Tenants, move out. It’s gonna take some time to find a new one. I typically use 5%. If you’re running your properties well, your vacancy showed on average, be lower than that. But especially as busy as I get, sometimes I just don’t have time to get around the show, the place. So, you know, shame on me I guess. But so I typically do 5% vacancy. All right. Property management, typically 10%, right? I have these little, these are just some math cells. All right. So these are all of our inputs. This is everything we need to know. Do we have any questions about what these mean or how we figure them out before I start moving on?

Agent (00:11:25):

I think the property tax rate, how do you just know that?

Pat (00:11:28):

Yeah. so you just, if you wanna just Google, like yeah, like, yeah.

Agent (00:11:33):

That’s what I,

Pat (00:11:34):

City of Savannah.

Agent (00:11:35):

That’s why, I don’t know,

Pat (00:11:38):

Say Savannah city of Savannah property tax, like at this point, I just know it’s, you know, so right. So the city, so this, it gets little confusing because the city rate is 12.86, but there’s a Chatham county rate as well. It’s somewhere on here. Just if it’s in the city of Savannah, it’s 44. Except for some parts of southside Savannah, like Georgetown is less, but you have to pay a fire thing as well. You know, whatever, that’s where you find that. So any, any place and any, if anybody’s watching this, you know, on YouTube or whatever you know, any city you’re looking to invest in, it should be a pretty quick Google search go to the city website county website. You should be able to find that stuff. All right. Any other questions? Gonna start moving along. All right, cool. So the first thing we’re gonna look at you see, I’ve kind of broken this down into four different buckets, income metrics, property evaluation metrics, debt metrics, and return metrics. Right. And, and I’ve structured this because we’re gonna kind of go in order down the line. So gross rental income. It’s easy, right? Let’s gross. Gross rental income is our rent estimate times 12. That’s our yearly gross rent. All right. So $12,000 that’s gross coming in. Vacancy loss, right? 5%. So that’s just 5% of our gross, yearly rents, give 600 bucks other expenses. All right. So that’s, that’s our maintenance, CapEx, property management, taxes, insurance, all that stuff. That’s our other expenses every year.

Pat (00:13:19):

And then we arrive at net operating income or NOI, right? This is a very important, you know, kind of, kind of thing to remember. I’m gonna just like highlight it. You know, NOI is important, right? NOI is, is how much money you’re making. Like if you bought this thing straight cash, no loan. That’s how much money you’re gonna make in a year. That’s gonna be your cash flow. Right. is that gonna be your total return on that investment? No. Why not?

Agent (00:13:47):

Because you get equity in the home.

Pat (00:13:49):

Because you got equity in the home. Right? So what do we have building our equity every year?

Agent (00:13:56):

I mean the, the payments going to

Pat (00:14:00):

Say, say there’s no loan, own in cash. What do you got running value your home every year?

Agent (00:14:05):

Our appreciation

Pat (00:14:06):

Appreciation. So that appreciation that’s like, if you, if you buy stocks, right? Say you go buy Amazon, you know, stocks are on sale there, might go buy some, you know? So you buy some Amazon. Amazon does not pay a dividend. I don’t think maybe they do now. Say you buy a stock, doesn’t pay a dividend, you know? But the value goes up, right? Did you make money? If you still hold that stock, did you really make money?

Agent (00:14:32):

Not unless you sell it.

Pat (00:14:33):

If you don’t, if you don’t sell the stock, you didn’t really make money. It’s just, it’s on paper. It’s fake. It doesn’t exist until you sell it. Same thing with the house, you might buy a house for a $100,000, 10 years later, it’s worth $200,000. Did you make a $100,000 in profit if you still have the house? You didn’t make it. You have it. It’s equity. Right. But it’s not, it’s not really yours. You know? Because the house is not a, you know, it’s not cash like cash in the bank, you know, that’s that’s cash. Now, if you’re getting rental income, you’re making that money. If you, if you made $3,000 in rental income, yeah. You made that money. That’s in your pocket. That’s cash. You go buy stuff with it. You know what I mean? So we’ll, we’ll get there. That’s why I, that’s why there’s a cash return on investment and a total return on investment. But this net operating income is how much money you make if you don’t have a loan against a property and it doesn’t factor in appreciation. And if you do have a loan, it doesn’t include your loan payments. All right. So net operating income. Why is that important? If you’re gonna get a loan? Why, why do we need to even know? Why is net operating income matter for getting loan?

Agent (00:15:33):

Got to get it paid off? So you wanna pay it off at the end.

Pat (00:15:37):

Right. But you know, you’re gonna, so here’s our, here’s our, if we go down, here’s our principle and interest, right? $5,200 a year. So you know, $6750, $5200. Okay. We got enough to cover it. But this, this NOI doesn’t really matter a whole, whole lot necessarily if you’re getting a loan except for cap rate really. So who knows what a cap rate is? Who knows what a rent multiple is? This, this is where this is the new stuff, right? So this is property valuation metrics, right? So, um, a cap rate is a term that an investor will use to value a property. Right? So cap rate, let’s just, let’s just jump right into cap rate. All right. I have it 3rd, but let’s jump into it. Cap rate equals NOI divided by purchase price or sometimes we’ll do.

Pat (00:16:31):

Sometimes people do NOI divided by the all-in cost, right? In this case I did the all-in cost. So we are factoring in the purchase price plus our repair cost, your all in cost is $110,000, right? That’s in the denominator of that equation and the numerator is our NOI, right? So that cap rate is 6.14%. Right? What that means is that kind of means two things. First, that’s your return. That’s your cash return on investment. If you buy it straight cash, if you buy this house straight cash, you’re gonna put in a hundred, $10,000, you’re gonna make $6750 of NOI, $6750 divided by 110, gives 6.14%. So that investment yields you 6.14% every, or at least your 1st year, typically rents go up. So we expect that to increase every year. But 6.14% cash you put in 110, here’s $110,000.

Pat (00:17:25):

I know a year from now, I’m gonna have 6.1, 4% of that $100,000 in the bank account cash. Also, hopefully I’ll have some appreciation as well, but that’s not in my bank account. That’s just fake. You know, it doesn’t exist until I sell. So that’s cap rate. So that one it’s important. And the second reason that’s important is it allows you to compare investments in an apples to apples kind of way, right? Because you can change up a lot of stuff depending on your financing. So like, let, let me compare a cap rate. Like I said, that’s your cash yield. If you buy it straight cash, here’s our cash yield here with a, with a, with debt against it. It’s actually lower. 4.64%. Typically we expect to be high. Right? There’s some reasons I’ll explain why this, you know, I wouldn’t buy this deal, looking at these numbers.

Pat (00:18:14):

I wouldn’t, you know, I wouldn’t buy it, but that’s our, that’s our cash yield with the loan, but check this out. So it’s 4.64, right? But what if I come up here and I drop the interest rate to 3, 3.5 look how much I jumped up 7.21, all right. Now our cash ROI with debt is better than our cap rate. But what, but what I’m saying is you, if you play with your financing, you can change these numbers so much. You know, that’s why you always wanna shop around for different debt. And, you know but the cap rate ignores financing. It’s just let me look at this property. You know, and if you got a property, that’s a that’s, if it’s the same, say you got two houses that are exactly the same, same neighborhood, same, same everything. You know, and if, if you can get one at a higher cap rate, buy that one, right.

Pat (00:19:09):

It doesn’t matter, you know, you might, you might, for example, there’s a bank I like to use in Savannah, they only lend in Chatham county. They don’t do Hinesville. Right. So, you know, say I had a deal in Hinesville and a deal in Chatham county. I’m like, which one of these do I wanna buy? You know, I, I look at the cap rate, you know, now I have this as a property valuation metric. All right. So we’re, we’re all talking like, how does this, you know, relate to the value of the property? So the way it does is investors and this cap rate applies more to like bigger multifamily investments. You can still look at it on a single family. It’s not as applicable, but on a big, like a 50 unit building, they’re not doing a comparable sales analysis. They’re not looking at, you know, like, like when you do, when you’re looking at a house, right.

Pat (00:19:56):

They’re looking at cap rates and they say, Hey, look, a class, a multifamily building and a tertiary market like Savannah, Georgia should be selling at a x cap, you know, probably 5 cap. Right. And that’s how they value. And if it’s a class C multifamily in Savannah probably want it at a 7 cap. Right. So as the property gets shadier, investors expect a higher cap rate because it’s a shadier place. They wanna make more money on it. Does that make sense? You’re yes. If you’re investing in like a great office building in a great city and it’s just great tenants or like an Amazon warehouse, like Amazon warehouses right now, investors are paying a load of money for them. Because it’s like, it’s Amazon. You know what I mean? So you look at that equation, it’s NOI divided by, you know, your purchase price, right? So as as purchase price gets bigger, what happens to the cap rate? It’s gonna get lower, right. For the same NOI. So you see how this is a property valuation you know, an Amazon warehouse that somebody will pay a 3 cap for say it generates, you know, $10,000 in NOI. Right. Let’s let’s just, lemme just set up a new, I’m gonna set up a new cell, right. Just to kind of illustrate this. So,

Wynn (00:21:25):

While he’s doing that, is everybody tracking with all this getting broken down? Any questions?

Pat (00:21:30):

No questions.

Pat (00:21:33):

So I’m gonna, I’m gonna illustrate this is important, right? I, I might be diving a little bit too much into cap rate for like a introductory course, but it’s an important, and it’s, it’s something that a lot of people don’t understand. And when you’re dealing with an investor, you know, especially somebody who kind of know they’re doing, and you don’t know what a cab rate is, like, you’re gonna automatically lose legitimacy with them. Right. So, so let’s say there’s a, there’s an Amazon warehouse you can buy for a million bucks. Did I put enough zeros in there? Let see for a million bucks and let’s say the NOI is you know, 50,000, I don’t know. So that would be a 5 cap. Right? You see that. So you know, maybe, maybe three years ago, people were buying Amazon warehouses at a 5 cap, but you know, things have changed now.

Pat (00:22:28):

People are really into that kind of asset, but say, you know, say some, say somebody bought it for a million bucks three years ago, 5 cap, right? Well say investors, and this, this has happened. Investors all around the world are more interested in that kind of asset than they were three years ago. That makes it more valuable even with the same amount of NOI. So maybe say that you can sell that for a million, five now, but it’s the same NOI that cap rate went to 3.33. Do do, do we see how? Yes. All right. So say you got a rental, say you got a rental out in the hood, say this, thing’s getting you what $6750? $6750. And all-in for $110k or 6.14 cap. Right. so say, you know, if, if you’re getting this much NOI let’s say the place is like, like in a rough spot, you know, and it’s a rough place and like you’re gonna have transient tenants, whatever.

Pat (00:23:27):

You probably wanna pay a little bit less for that. Right? Yes. You know, maybe you wanna get it for 90. Cap rate goes up. That makes sense. Right. Say it say it’s in a great, super, you know, like gated, fricking suburbia, whatever, you know, the kind of tenants are gonna be there for 5 years, you know, easy investment, newer house, worry free. Right? Yeah. People, people pay more for that stuff. So, you know, say it’s that same NOI, but say they pay $200,000 for it. They probably wouldn’t but say they would, all right. That’s a 3.38 cap super low. Right. but you see how, how it changed things. Right. So that’s why it’s a property valuation metric. All right. Does that make sense? It does. Yep. So you can typically expect in better neighborhoods to have a lower cap rate, because people are more willing to pay for the same amount of rent as they would buy somewhere else.

Pat (00:24:20):

Right? Now, single family homes. It’s not super applicable. Right. It’s just kind of something. When I’m looking at a single family home, I’m not looking at the cap rate as a valuation because people value single family homes based off the one next door that sold, they don’t, most, you know, that market, you’re not just competing with investors. You’re also competing with just Joe Schmo who wants to buy a house. So it’s not really a super, you don’t really use it to value a single family home, but I just, you just look at it like, Hey, that’s if I bought this in cash, this is what I would make on it. It’s cap rate. Cool. So that’s why it’s a property evaluation metric. Now we also have the gross rent multiple. So that is your purchase price, the bottom by your gross annual rents. Right. So that’s something that a lot of people use. I prefer to use it based on like a monthly so I just call that the, you know, my rent multiple, right. So this one would be a hundred. Right. so that’s, and I actually, I typically do that for all-in cost. So let me just change that.

Wynn (00:25:24):

Um say, say that multiple part again, what are we looking at with rent multiples?

Pat (00:25:29):

Yeah. The, the rent when you say, I always say like, oh, that should sell for a hundred times rent, right. Is something I say a lot. That’s typically what I use and what a lot of other investors looking into single family home, or like something, it it’s more like a, you know, shoot off the hip kind of thing versus cap rate. You got to like do math and stuff. You know what I mean? To figure out

Agent (00:25:51):

The 1%.

Pat (00:25:52):

Yeah. So this, so the 1% rule 1% rule will correspond to a rent multiple of a hundred, 1% rule means that your monthly rent, you know, if your, if your monthly rent’s $1,000, your purchase price should be $100,000. It’s the one per people like to use this 1%, 10 years ago was a 2% rule. Because you could buy them that cheap. You can’t buy them anymore. You can’t even buy one – people call me, I’m looking for oh I want a 1% rule house in the suburbs. Okay. Good luck. You know, like that doesn’t exist. So rent multiple is a way that, that I really value a lot of my deals. It’s it’s off the, off the cuff kind of thing. It’s something you don’t have. You don’t have to calculate NOI you don’t have to calculate property tax. It’s just, it’s just a much quicker way to come up with a value and

Agent (00:26:48):

Because this is the way I’ve always done. Just real quick. Yeah. Off the hip. And that’s where like I fail at this side of it. Because I haven’t really dug into it.

Pat (00:26:55):

Both, both are important. Now you don’t wanna spend all your time plugging stuff into a spreadsheet. If you can look at a deal and be like, that’s a deal. Yeah. I’m not gonna spend any more time on it. Yeah. Once you find a deal that you’re like, that might be a deal, then, then you do all this. Right. So rent multiple. And I’ll just tell you, city of Savannah, if I’m buying in Kyler Brownsville, west Savannah, some parts of east side, places that like, there are a lot of condemned houses, it’s run down, you know, I’m looking like 80 times rent. This is where I wanna buy. Right. And that’s where a lot of people wanna buy. So 80 times rent. So if say, say this right now, this is 110 times rent. Right. Which isn’t bad for some neighborhoods, just depends on the neighborhood. But if we were over there in you know, say I found a place that I knew would rent for $1,000, typically a 3/2 anywhere in Savannah is gonna rent for at least $1,000. Right. If it’s in decent shape. So say it’s $1,000. Well. And I gotta put $10,000 into it to get that $1,000. I need to buy it for how much, if I’m, if I’m looking for an 80 times rent kind of neighborhood,

Agent (00:28:07):

90?

Pat (00:28:07):

70. When buy it for 70, Buy it for 70, I’m putting $10,000 into it. It’s gonna rent for $1,000. Here we go. Rent multiple 80. Right. so the lower, the rent multiple, it’s kind of the opposite of, of cap rate, right? The lower, the rent multiple, like the, the more like NOI you’re getting, because you or the more

Agent (00:28:37):

Ah I added 10 instead of subtracting them.

Pat (00:28:38):

Um yeah. So, so anyway, you’re, if you’re, if you’re buying in a, you know, if it’s a sketchier asset, you know you need, you want to have a lower rent multiple, right. If it’s a safer asset, you can have a higher basically 80 times rent right now in this market is like super hard to find. So, but I, I still try to stick to that. Like, and if I’m buying something a little rougher what I’m seeing right now is 90 to a hundred times rent, even in like some of the worst places we’ve seen a lot of people buy a hundred times around right now. Okay. I’m seeing like a nice Starland duplex, you know, and like a nice part of Starland fixed up. It’s nice. 150 times rent they’ll sell for. Anywhere from one to already to one 50 kind of, depending on, you know, some, some specific details. I mean, you’re kind of seeing that too, right? Yeah.

Wynn (00:29:41):

I wasn’t involved with, I kind of came a little late, I apologize. So one of the things for,

Pat (00:29:48):

Hey Wynn speak up, because I’m recording this too. Yeah.

Wynn (00:29:51):

Yeah. So pat and I, we do this all the time. So it, it becomes second nature. We throw out these numbers, we throw all these terms to throw everything for, for you guys. If I were to ask you, what would a, what would a monthly payment be on a house that’s worth 50. You, if you contract on hundred 50,000 house today and somebody ask you, what’s your mortgage one, would you know that answer? And two, do you know where to go to find that answer?

Agent (00:30:23):

I just always Google it.

Wynn (00:30:25):

You can Google. It’s a great way to do okay. Same thing. Right? So all of this is predicated on payments, right? For an investor. They wanna know how much can I make every month? Well, in order to know how much you’re gonna make every month, you need to know a couple baseline things. How much am I paying and how much can I get, right? Those are the two biggest ins and outs, right? Regardless of the underwriting, which is this best underwriting is fantastic. But all, all the you know, NOIs and cap rates and all these various things really don’t, that’s digging way deep for, for your entry level thing. If I’m buying a house for $150,000, your 1% rule is gonna say, I want to try and get $1,500 rental. And pat had said, it’s very difficult to do, right? So at what point is it not a deal for somebody?

Wynn (00:31:17):

And the answer is you’re gonna take a mortgage payment, wherever that is. Whether it’s through financing, say you get a 30 year, you can go on to bank rate, you can go on to all the various websites and do a mortgage calculator, right? You factor in there’s hundred, $50,000, a down payment. And you get a ballpark, right? For like a 30 year loan. A lot of investors don’t do 30 year loans. They’ll do shorter term loans. They’ll do balloons, they’ll do arms, they’ll do private money. They’ll do hard money. They have a whole bunch of different financing, which if you’re talking to investors, we need to be aware of all of that. But I mean, they deal with a lot of that stuff themselves. So you really don’t get too much into the weeds there, but you need to know. So let’s do real quick exercise. Let’s find out what a $150,000 house kind of mortgage real quick. I don’t wanna take time away. Yeah.

Pat (00:32:06):

Let’s but so I’ve got, I’ve got, we’re gonna talk debt here the next little. Yeah. It’s good time to move on that, I guess. So let me let sit back down and get

Wynn (00:32:16):

I’ll just let’s check. So if we’re looking at

Pat (00:32:22):

So let’s we jump into the mortgage payment. Do we have any more questions on the rent multiple on, on cap rate? Or are we, are we making sense here? Yeah,

Agent (00:32:34):

It makes sense. Because I’ve always just done like general percentages and I think I’ve always done like 5% for like closing costs to calculate all that, but I’ve never dug this deep.

Pat (00:32:43):

Yeah. So yeah. So, you know, there’s our property evaluation, right? The biggest ones I use, I’m just gonna like, honestly, I think rent multiple and for what we’re doing, single family home, that’s more important than cap rate, honestly. So I would say that’s your more important from a valuation standpoint, if you’re just, what’s the value here, rent multiple right. Nicer neighborhood gets higher, you know, you’re in Richmond Hill. I mean, if you’re buying a single family house to rent in Richmond hill to open market, I think you’re probably a little crazy you know, unless you’re just sitting on buckets of cash, like some folks you’re sitting on buckets of cash, Hey, you know, if you can make 4% on that cash and, and get appreciation sweet, you know, because otherwise the Fed’s just printing all that money and it’s, you know, inflation, right.

Pat (00:33:28):

Everybody’s got different things they’re looking for, you know? So rent multiple, right. I also put in here free equity, right. That’s not like an official term. That just means, Hey, we bought it for $100,000. We were putting $10,000 into it and we think it’s gonna be worth $120,000 when we’re done. So we got $10,000 of free equity. Right. I just like to see that, you know, it’s not an official, like you’re not gonna see it on bigger pockets. You know, there’s probably a more, you know, fancy word for it. You know, whatever. Appreciation to year 1, 36, hun $3,600, 3%. And that’s, that’s going off our ARV of $120,000. Right. Because we already got our free equity and then we’re getting some appreciation to it. Right. Sweet. So so I just got it in there. I don’t know if that’s really should be in property valuation, but that’s where I put it.

Pat (00:34:11):

So debt, right. We were talking about debt. How we looking at debt? You know, you got your mortgage payment right now, your mortgage payment typically a traditional person includes your taxes and insurance as part of the payment. But we already accounted for that as an expense. So we’re not going to double count it here in our debt metrics. Because we’ve already accounted for that expense. Right. And we have to account for that expense before we calculate NOI. Why? Why do we look at proper taxes and insurance? Even though we’re paying it in the mortgage, why do we, why do we look at it before we get to the mortgage in this analysis?

Agent (00:34:52):

We’re trying to calculate our debt that’s going out.

Pat (00:34:55):

What do we do with NOI? What’s NOI used for

Agent (00:34:59):

Valuation? What,

Pat (00:35:02):

What do we use that? What formula do we use NOI in. Cap rate? Yeah. So let’s let’s refresh cap rate is what, what is cap rate before I wanna make sure we really drill this, you know, before we keep going, what is the cap rate?

Agent (00:35:23):

I mean, I, I think I’m getting confused now because we’re kind of going through it.

Pat (00:35:28):

Yeah.

Wynn (00:35:29):

It’s a lot, this is kind some heavy lifting that we’re going over with. They all important concept. So is

Agent (00:35:37):

Is it the percentage of money that we make?

Pat (00:35:40):

It can be,

Agent (00:35:41):

I don’t know how to articulate.

Pat (00:35:43):

So it can be the percent of money we make. If we do, if we buy the property, how? All cash, all right. If we buy the property and all cash, that is our in official work for that money, make we call it yield. Right? We can call it the cash ROI, cash return on investment. Some people call it cash on cash return. Right? Couple different words for, it means the same. You know, cash on cash, return cash on cash ROI. If you buy the same straight cash equals cap rate equals 6.1, 4% in this right. In this equation. Right. That’s why we have to look at taxes and insurance, even though it’s part of the mortgage payment. That’s why we have to look at that first as part of NOI, because that’s something you’re paying, whether you have a mortgage on it or not, you’re paying that. So that’s why we talk about it here, even though, you know, for, you know, and I, I do have a mortgage that does not have an escrow. I got to cut the check for insurance and taxes. Right. That’s investor stuff. You know, you’re not gonna deal with that with your regular buyers. Anyway, we refresh cap rate. All right. Remember that? So here’s our debt mentions, right? So we, we inputted all this stuff, you know, up at the top, everything about our loan. LTV stands for

Agent (00:36:58):

Loan to value?

Pat (00:36:59):

Loan to value, all right. Typically on an investment property, conventional investment property, it’s gonna be 75 to 80%. We’re doing 80% for this, our interest rate. Right. I think right now there as good as like 4% is probably as good as it gets right now

Wynn (00:37:17):

For investor. Yeah.

Pat (00:37:20):

Yeah. so 4% the, the term, typically 30 years, right. If I have any client, I always recommend don’t do a 15-year loan. Why’d you do a 15-year loan. This kills your cashflow. Right? 30-year, you know, I would always push people towards a 30-year, especially an investor. Everybody’s got different things, but yeah. 30-Year, alright points. Do you remember what the point was?

Agent (00:37:44):

Yes. That is like interest you pay upfront.

Pat (00:37:47):

Yeah. And if I’m paying one point on an 80% loan to value loan for a purchase price of a $100,000, what’s that? $800. Yep. All right. So cool. So we have all that stuff and all this is just being calculated automatically. So we have our finance amount, right? 80,000, 80% of a hundred thousand. We have our principal payment. Do you see that formula here? PPMT all right. Excel has a principal payment formula. And it amortizes for you. So yeah. It’s pretty cool. So, and they also of course have one for IP Mt. All right. Interest payment. All right. There is a formula. Right. You do not need to look up the formula because this will do it for you. Right. you know, and so here’s, here’s, here’s something that, that I have to explain here. Right. when, when you, when you buy a loan or when you buy a house and you loan typically have you guys you’re in a house, right?

Pat (00:38:53):

Yes. You’re in a house you, you have before. So you, did you notice how your principal payment part of your payment goes up every, every month? Yes. All right. That’s that’s because of the way it amortizes. Right. So, you know, typically most regular home buyers and most regular investors will have a 30 year fixed, fully amortizing loan. Right. So starting out you know, the bank, the, the banks know that you sell your house on average, every, you know, seven years, right. Every seven years on average, somebody will sell their house. Like you buy a house on average, seven years later, you’re gonna sell it. The banks want to get their interest front. So they take more interest when you first buy a house. If you got a $1,000 payment every month, $700 of that is gonna be interest, 30% is gonna be principal. And, and on your very last payment, it’s gonna all be principal.

Pat (00:39:44):

Right. And that’s how it rolls. Right. This formula in Excel automatically does that. Right. Automatically does that calculation. Make sense? Yes. All right. So that’s why you’ll see. And this is for the whole year, right. I have this set up for the whole year. I’m not gonna really get into how I do this formula. But you, you can see, you know, there’s the good thing, the cool thing I like about this you know, you can fricking click on the question mark. Oh, and it’s tells you exactly. What’s in this, what’s in this formula and how it works. Right. So you can read that if you’d like if you wanted to set this up to be a monthly payment all you’d have to do is take take the number of periods. And take these two, basically these two here and just multiply it D4 times 12, B24 times 12.

Pat (00:40:45):

And that would give you your monthly payment. We’re doing this yearly, we’re doing a whole yearly thing. So this is yearly. Hey, that year I’m paying, you know, this much principle, this month’s interest. This is my total year, one principle and interest on this note makes sense. So more, more is interest less is principle year one. All right. If we freaking go in here and we do, what’s your 30 look like we just changed that number. Oh, that’s really cool. Yeah. Look how much more, you know, look how much more principle it is versus, you know, interest is barely any that last year. Right. So that’s pretty cool. So that’s how we change that. Right.

Agent (00:41:22):

I didn’t know you had a formula in there, I’ve always done everything online on this little calculator.

Pat (00:41:26):

Yep. I, I used to as well. I actually had I, like, I had a sheet I didn’t about this and I like did my own math to get it. Yeah. It was a freaking nightmare. It was the nightmare. That’s what I still struggling with. Yeah. So yeah. So here’s our principal and interest, right? Boom, debt metrics. There we go. That’s our debt. Right? So principal, what happens to that principal payment? Over time, yeah. Goes up. It goes up and that principal payment does that money go away? Are you losing that money? Are you losing that? The value of that money? No. No. Why not? Because you’re gaining equity. Because that’s going towards paying off your loan. Right. That’s kind of like that appreciation, right? The appreciation happens for free. This principal payment is you paying down your loan.

Pat (00:42:20):

So that $1400. Yeah. You don’t have it in cash anymore, but it’s in that house. You know what I mean? The interest payment, of course, that’s just money you spend, which you can write off on your taxes and investment property. Right. So that’s our principle and interest. So now we get to our return metrics. All right, here we go. This is our cash flow. All right. Our year one cash flow, all this equation is, is NOI minus principle and interest. Right? That’s our cash flow. All right. After all expenses are paid, that’s how much money the investor puts in their pocket because they own this asset. Right. It’s not bad, right. Face value, you know, something close to $200 a month. Right. And, and remember too, you know, we’ve got this $1,000 of, of maintenance. Maybe they didn’t spend any money that year, you know?

Pat (00:43:12):

So they might have, you know, $3000, maybe they spent $5,000, you know what I mean? That’s it. So, and then this year one total return is the cashflow plus the appreciation plus the mortgage principle pay down, right. So $7,100 of total return. But it just so happens that most of that is, is in equity in that house. Right. And that’s why you have it broken up so you can explain, that’s why I have it broken up. Right. So here we go, cashflow, total return. There we go. Right. And you can see how playing with the debt, you know, changes. Well, let’s go through all the metrics and then we’ll, we’ll get in a little bit about how you can play with debt, right? So here’s our cash invested $33,000, right? That’s our down payment. Plus our loan costs plus our rehab budget, right?

Pat (00:44:09):

So, you know, our down payment was $20,000. We had $13,000 of other costs, $10,000 of that was in rehab. And then we had closing costs and points as well, involved in that. Right? So that’s our cash invested. That’s how much money we had to, we had to wire to close on that deal. There it is. And then this is our total equity. Not at the end of the first year at, you know, once that rehab’s done, that’s how much equity is in it. Right. $40,000. All right. That’s the that’s the, this, and then the total equity is the down payment plus the plus the rehab on budget plus the pre equity, right? $40,000, $20,000 is our down payment. $10,000 is our rehab budget. And we all have that 10,000 of free equity. You remember, you remember how we came over with that 10,000? So we were, we bought it for what, $100,000, we put $10,000 into it.

Agent (00:45:08):

We expect,

Pat (00:45:09):

And it’ll be worth $120k. So it, that’s how we got that $10,000. And just, you know, that’s our free equity, right? That’s equity. We didn’t pay for. It just exists because typically a house that needs to be fixed up, you know, if it’s worth $120k as is, and it takes $10,000 of work, typically people aren’t gonna pay $110k for it. Because most people don’t wanna do that work. They just wanna buy a shiny new house. Right. That’s how investors can sometimes find some value if they know how to do that work. And they’re not afraid of it. Right. So that’s, that is our equity makes sense. You got it. Perfect. So knowing all of these numbers, we can now calculate these numbers, right? Cash return on investment, right. 6.38%, Right. That is our cashflow here divided by our cash invested. Right. So buying this property, we had to put up $33,000, right on that $33,ooo, we make a cashflow of $2100, 2100 divided by 33 equals 6.38%. Right. So that’s a pretty decent number, right. That’s not, that’s not crazy. You know what I mean? A lot of times, you know, if I’m buying something, I like to get double digit cash ROI if I can. Right. It’s, it’s hard to find those deals, you know, like, and a lot of times you’re gonna have to like, do you know, work for ’em and you having and stuff. But that’s not bad. I mean. What are you getting in your savings account in the bank? Probably 0.15%. Right?

Agent (00:46:43):

You lose money.

Pat (00:46:45):

Yeah. I mean yeah, so that’s not too bad, you know, that’s, that’s your cash ROI. Now your total ROI is down here. That’s 21.47%. Right. So that is our total return. $7,100 divided by that same $33,000. Right. So a 21%. Do you see where that’s coming from?

Agenda (00:47:15):

Is that at the end, as it’s all said and done, like if we were to sell the home

Pat (00:47:20):

That, so this sheet does not take into account selling costs. Right. So would you, if you sold the home, I mean, if you didn’t pay any commissions, if you didn’t pay any closing costs, then yeah. That’s what, that’s what you would get if you sold the house at the end of the first year that would be, you know, your, your return. I see. And so and what, what that, what I did not include on that is the free equity, I’m only including this year one total return. Oh, okay. Right. I, I have other sheets that we’re trying to keep this simple. Okay. Right. so in this case, you know, that’s actually, you know, really pretty good. Yeah. That’s pretty good. That’s a pretty good return on your cash invested. Right? So I see that 21.47%. Now check this out. This is why, this is why leverage is. So is so you know, big you

Agenda (00:48:15):

Cash down.

Pat (00:48:16):

So if you’re doing this straight cash, look at that number. It’s it, it, it, it’s cut in half, right? It’s cut in half. It goes from 21 down to 9. Do you understand why that’s so different? What changed? Right.

Agenda (00:48:32):

Get more money outta pocket. It’s you’re not using other people’s money.

Pat (00:48:36):

You’re not using people’s money. Right? You see this Elizabeth, you see total, total cash invested. You see cash invested. If we do it straight cash is $112,500. Right? And you see year one, total return, if we do it straight cash is, you know, $10,350. Right? You see those two numbers now stay looking at those. I’m gonna change that back up to 80% loan of value. Watch how those numbers change. You see that change? So your total return dipped about $3000, not too big, but your total cash invested changed massive, right? That total cash invested is in the denominator of the return on investment equation. That’s why that number changed so drastically, right? That’s called leverage. All right. You, you take out debt to buy an asset. It will juice your returns typically. Right? typically it should, if it doesn’t use your returns, you shouldn’t take it out.

Pat (00:49:39):

Because it’s not doing anything for you. Right. But in this case, it more than doubled our return on investment. Right. Did not change the cap rate, did not change anything about the property itself, did not change the rent. Nothing. All it changed is how much money we, we had to bring to the deal. Right. And when the interest rates are as low as they are, it, you, you don’t have to pay a lot of money. Right. Let’s look at it. Let’s look at it. You know, traditionally interest rates have been like, you know, like my, my parents bought their first house and they’re paying like 13%. What does that look like? 13%. Oh my God. I mean, you’re losing tons of money. Right? That’s leverage. That’s what leverage does. And that’s why, you know. Yeah. That’s why I like, in a nutshell, people like, why do you like real estate? Leverage is why I like real estate.

Pat (00:50:27):

Right? If I could take out a 30-year loan to buy Amazon, I probably would. And if it was at 3.5%. Problem is, and you can take out loans to buy stocks. But if your, if your stock starts going down, they liquidate it. They sell all your stock and they take your money. They don’t do that with real estate. If you buy a house, the guy, you can go down 40%, as long as you still make your payment on time, doesn’t matter. Right. And it’s 30 years, it’s a low rate. That’s why real estate is so powerful is because of leverage

Wynn (00:50:59):

Run that by. Like if you wanna buy a car. Like people aren’t paying cash for a car.

Pat (00:51:04):

Yeah

Wynn (00:51:06):

People, people don’t credit cards, everything you buy, like how many people pay cash when they have a credit card. Yeah. Leveraging credit cards, money to buy what you want today. And you’re paying them back at some point, whether you want pay back that full amount, you don’t have interest whether you want paying back a little bit and then they make money. But like the world revolves around leverage.

Pat (00:51:27):

So leverage. Right. That’s that’s and, and, and, and we went through all of that basically to get down to, you know, kind of showing the power of leverage. Right. Makes a huge difference. So this cash and, and, and, you know, you evaluate enough deals for whatever reason, you know, this one, the total return on investment looks pretty pretty juicy the cash isn’t sometimes it’s the other way around. Right. But that’s, that’s what you make that year right? Now, of course, this is simplified. Right. You know, if we look at, you know, my big sheet here, I’m looking every single year, year 2, 3, 4, 5, 7, right. And I’m looking, you know, you don’t ever have to get this, this complicated. Right. If it’s something you’re interested in, great. If not, don’t worry about it. Because you know, this is a part of real estate that I like, you don’t have to like it, you know, but I think you should understand the, the basics. Right. So, you know, that changes, you know, I’ll just show you internal rate of return, you know, is a metric that we look at. That’s basically this that, that’s what you’re making every year. So in this case, you know, a pretty good approximation. I can’t come on, go away, go away. Come on, here we go. Right.

Pat (00:52:43):

You know, this would be like 21. Like you can expect to probably be making 21% every year and it should go up as rents go up. Yes. Right. So, I mean, that’s sweet. I mean, you don’t find 21% in the fricking stock market.

Agent (00:52:57):

Well, we did it with, uh, an FHA

Pat (00:52:58):

For, oh, and if you do FHA, we’ll check it out. So, so if you buy this thing, so say you do an FHA 3 you know, 96.5%, how’s that gonna change it? It’s gonna be massive. Right? Look at that, that one up to 38%, because you barely put any money down. You know, if you, if you, yeah, if you do a VA loan,

Pat (00:53:23):

You know, it’s 40. Now we have these. If we cut out the, if we cut out the repair costs as well, 181% total return on investment, even though our cash flow is only $960 a year. Right. Because as we take out more debt, what goes up our loan payment, right. But 181% total ROI, 27% cash ROI on a measly $967. But why is that? Because what’s our cash invest at $3,500. That’s why a VA loan is so sweet. Now, now this is, this is kind of a dangerous place to be because you don’t have, you know, if your rents go down, if you misjudge your rent by a $100, right, which isn’t impossible to do. What do we look like now? We’re losing $59 a year, right? So, you know, this that’s another effect of leverage, is it amplifies your gains,

Pat (00:54:17):

It amplifies your losses. Right? So, but the reason I like real estate and especially rental properties is it’s typically pretty easy to, to estimate what your rent should be, right? Especially you got enough time in the market. Like you should know about what it’s gonna rent for. You have your expenses, the biggest thing, when you’re, when I’m talking, you know, especially with your investors, I say, you know, you kind of go over this and you say, look, you’re gonna be a landlord. It’s a business. It’s not a passive investment. It’s a little more passive than some, but you still need to be involved. You know, and if the HVAC goes out, like you need to have, you got to tell these investors, you got to have money set aside for repairs because it’s gonna happen. And it could happen the first freaking week you own it. Yeah. And you know, when you have this kind of leverage, if you’re only cash flowing $1,000 a year, and you got to spend $5,000, you know, like that, you know, that’s gonna hurt you a lot. So that’s the leverage, but you, you see how that, how that changes things. And why that’s important. Now, let me, let me set everything back to where, where it was

Wynn (00:55:25):

Before, while you set that back. Quick, quick pause – we’re an hour in, right? This is pretty heavy lifting. Some of the, the words, concepts, everything that pat talks about, he talks at a different level than most people. I mean, are we, is this still somewhat? I know it’s gonna be new, over our head.

Agent (00:55:45):

Yeah. This is something I’m going to have to watch again, especially.

Pat (00:55:52):

I wanna make sure that you’re understanding, you know, from the basics, like the building blocks, right. Like Pat didn’t get to this level overnight. Like he joined us, I started walking him through some stuff and then like you, once you got good footing, you kind went off on your own. Yeah. You kind of built your own stuff. You wanna make sure and it’s recording, which is good. We wanna make sure we understand the, like I said, I mentioned earlier mortgage in or rents in mortgage out. If that doesn’t make sense, like none of it matters. Like you have to make sure that you get a, get a kind of investing 101. Yeah. You know, most people want 200. Right? So your cash flow. Back to the napkin stuff. So you have $150,000 house the mortgage payment on that is gonna be what what’s the mortgage payment on a $150,000 house?

Pat (00:56:44):

Probably, probably gonna be around $1,000 at 4%.

Wynn (00:56:49):

Right. That’s let’s do it real quick. Let’s find. Let’s go to

Pat (00:56:52):

To, well here I got, I got, I got everything in here right now, so let’s just so equals yearly principle and interest plus property taxes, plus insurance divided by 12. Oh. It’s I need to do minus, minus.

Wynn (00:57:20):

Yeah. It’s probably be about 1,050

Pat (00:57:24):

I’m coming up with $590. Oh, that’s $100,000. Which would be about right at this interest rate. So

Wynn (00:57:31):

$150, $860

Pat (00:57:34):

That’s at 4%,

Wynn (00:57:36):

4% that’s included? Principle and interest? Everything?

Pat (00:57:39):

Yep. Yeah. That’s also, that’s on a, you know,

Wynn (00:57:46):

30-Year,

Pat (00:57:47):

Your yeah, your, your insurance is probably gonna be a little bit more. That’s 30-year. Yeah. $860. That, that sounds about right. I think that’s about right.

Wynn (00:57:54):

Yeah. So, so if you buy a house, if someone wants to buy a house for $50,000, their mortgage payment, because they have to pay every month to the bank is gonna be

Pat (00:58:02):

$860.

Wynn (00:58:04):

Let’s round that up to $900. So your 1% rule is gonna say, I would love to get $1,500. I’m buying a house for $150,000. I would love to get $1,500 bucks in rent. It doesn’t happen. Right? Not, I mean that, those are kind fair rents, right? So at some point it’s a good investment. Some points it’s not. So say it’s $150,000 and you can get 80% rents. Right. 80% rents would 80% of hundred $50,000 is $120,000 or we’ll do it the same way there 80%. So you’re looking at $1200 a month at your 80% or your,

Pat (00:58:42):

Your not. 0.8%.

Wynn (00:58:45):

0.8% so 80x, 80x rent

Pat (00:58:47):

No, no. That’ll be like a 120x rent

Wynn (00:58:49):

Or yeah. Yeah. Right. So you say that’s, you’re, you’re looking in here. Okay. So The, so if, your mortgage payment is $900 a month, how much more than that does an investor need to say it’s good deal? Right? If you, if you pay out $900 a month,

Pat (00:59:13):

Probably $1300.

Wynn (00:59:13):

When you bring in $900, is that a good investment? If you’re paying out $900, bringing in $900, is that, are you gonna wanna do that? No. No. Right. If you’re bringing in, if you’re taking out $900, and bringing in $2,000, is that a deal? Of course. Now somewhere between not a deal and a deal, every investor has a different threshold of what they’re comfortable with

Pat (00:59:36):

Yeah.

Wynn (00:59:37):

Right. And that’s where we need to make sure we’re kind of working in the back mapping numbers to see, even if I wanna show it too, because you don’t wanna drive all the too. And you’re like, Hey, rents in this neighborhood are $700, your mortgage payment’s gonna be $900. [unintelligible]And they’re Gonna look at you like [unintelligible]. So when you do it enough, like Pat does it you just, you know, when you look at neighborhoods, you look at houses, you just kinda, it runs in your head and like deal, not deal, deal, not deal. But this is the, the, the basis of where he and I are getting more repetition. When we look at 10 deals a day, 20 deals a day. So you got you mortgage $900/mo. Most people wanna make minimum $300 or $200 a month on that. Right. So if you have $200 you wanna make, and then you have little backwards math on you have to set a little bit aside right, every month for your, your expenditures and your maintenance, which is, we already talked about, about $1,500 per for per year.

Pat (01:00:40):

Yeah. I mean,

Wynn (01:00:42):

So that’s about $125-$150. So pack that on top. So you got $900, you wanna make $200 that’s $1100 tack on another $150, $1250. And you had said $1300, right? So the scenario ran quick. Boom. If I can run it for 1300, is the deal. If I can run it for $1,000

Pat (01:01:04):

Not a deal

Wynn (01:01:04):

Not a deal. So anything over $1300 would be a juicier and juicier deal for your investor.

Pat (01:01:11):

Yeah. And, and I’m, I’m typically you know, people, you you’re talking, 1%, people throw around 1% and 100x rent. That means the same exact thing. 1%, it depends on whether you’re applying it to the purchase price or the rent. So if I’m saying, Hey, it’s $100,000 house. The 1% rule means I probably want to get at least $1,000 in rent, 1% of $100,000, or if you’re looking at the rent is $1,000 and you apply the 100x, you know, that it’s, it’s the same thing. So it just depends on whether you’re going from purchase price to rent or from rent to purchase price. But typically like if I’m looking in a nicer, maybe Georgetown, maybe Richmond Hill, you know, southside Savannah, some of the nicer places, like 120x rent might still be a good deal.

Pat (01:01:59):

You know, that, and that would be like, what about 0.8%? Right. You see how that it goes. So, you know if it’s renting for, you know, 1300, you know, and you’re, you’re 120x rent, you know, what’s the Wynn’s a better mental math guy. 1300X120, $156,000. Right. That makes sense. That’s in like a little bit of a nicer spot. But if you got the same 1300 and kind of a nastier place, so you want 80 times rent 1300 times, 80, $104,000, right? Same rent, different areas, different price you wanna pay for them.

Agent (01:02:39):

Makes sense. Yeah.

Pat (01:02:40):

Different neighborhoods. Yeah. There, there are two different, there, there are 3 different ways that most people invest. I just had a conversation with an investor outside. Right. Who wants to get in – a lot of, a lot of people want to get into investing. They’re like, “Hey,” they’ll call Pat, they’ll call me, jump on the phone with these guys, “I wanna get into investing but I don’t know how to do it. Like can you help me out and explain more,” and I tell them the basics or the three ways to invest. You can do a cash flow investment strategy, which means you want cash the most amount possible, most amount of money possible every month. You don’t care about appreciation. You don’t care about other stuff. You just want cash.

Pat (01:03:14):

If you’re looking for that, probably Hinesville

Wynn (01:03:16):

I was going to say, there are certain markets and certain neighborhoods that if you want to make a ton of cash, that’s the way to do it. Right? So an example would be you buy house today for $100,000 and you can make $500 a month in cash flow. And in five years you sell that house for $100,000. Because it doesn’t appreciate certain neighborhoods won’t appreciate, right? Some investors would like that. They don’t care. They, they, they want as much money on a monthly basis as possible. I don’t care what I sell it for, that’s food. Right? Your option B is I don’t wanna make monthly money. I don’t want any cashflow on the equity game. I’m playing the long game. As long as my rent coming in covers my note, I don’t care because I don’t need it. I don’t want it. I’m looking for a equity long game. So that’s, if you buy a house for $100,000, your mortgage payment is $700, as long as I’m making $700 of rent in five years, that’s worth $200,000. And that’s what I’m looking for. I’m not looking for the monthly payments. So you got your cashflow option, boom, you got your equity play, boom. Now most investors wanna be right in the middle. Right. They want the equity and they want some cashflow. And that’s where

Pat (01:04:30):

You typically got to give one to get the other. Yeah. You know what I mean? Like you can get way more cashflow in west Savannah, but the appreciation, in my opinion, I know some people who think that that’s gonna be a hot place. I’m not really sold on it. But anyway, typically like Hinesville Hinesville, for example Hinesville appreciates, whenever the BAH goes up, you know what I mean? Like that’s what it depreciates. And it’s not much, you know, but you can get some cheap houses out there. You can make some cashflow, you know, whatever. But then the kind of in the middle is kind of why like eastside Savannah because you’re still getting decent cash flow better than Starland. And I still think there’s good appreciation potential over there. So, but I think like a straight appreciation buyer they’re buying, you know, Starland typically nicer places and they’re typically from out state, like, you know, people who live in Savannah have been investing in Savannah. Like they don’t want buy something on Bull and 33rd,

Wynn (01:05:25):

But they wanna buy in a neighborhood that’s seeing appreciation. So look at 33rd – your place on 33rd, right? That’s a, that’s a transitioning neighborhood. Right. And pat has a personal investment. That’s like, Hey, I’m gonna hold onto it because I think this neighborhood is gonna appreciate, and it’s gonna be a good, long term investment.

Pat (01:05:47):

I’m still making good cashflow on that. That was a total. That was a total like a total gut job rehab. And that’s something you talk about investors. Like if you really want value, you got to buy a stinkhole and you got to make get nice because, because the buyer pool for a crappy house is just so much less competition. But more risk involved, more things can go wrong. I went $15,000 over budget. You know, it happens. Right?

Wynn (01:06:12):

Question that you can ask if you’re talking to an investor, ask them up front – are you looking for a cashflow strategy, or are you looking for an equity play, or do you want kind a hybrid, right? One, that’s gonna give you credibility that, you know, show you know about you understand the three basic buckets of what it is, and just because you or me or somebody might be all about this strategy that the person you’re talking to that investor might be all about another strategy. So we can’t assume that what we want in our own personal investment is what the investor might want. Because you have to ask them that, are you looking for maximum amount of cashflow every month? Are you looking for a long play kind of equity play? And most of them come back say I’m looking for something in between. And that’s where getting into the spreadsheet and the underwriting can try and maximize in between because you are gonna sacrifice one or the other, right, there’s no, there’s no way to, you know, you’re gonna be, you gotta balance it. So, and the balancing, the, the threshold of every respective investor is gonna be different on what they wanna do. There are deals that I think are deals that other people don’t think are deals. And there are deals that other people don’t think are deals or that do think are deals. And I don’t. Yeah, because we all have our own,

Pat (01:07:26):

Everyone’s got their own thing and, and everybody sees, I, I always tell people, you know, like, like I always talk about eastside. I’m big on it. I tell my people, Hey, I’m big on it. I own stuff over here, but I might be wrong. You know, there’s other people who think this is the thing, the thing about real estate, you know, people think real estate’s gonna be, oh, this is safe investment. This is, you know, and I think in some respects it is safer than, I mean, it’s certainly safer to buying, you know, crypto. Yeah. Right. But nothing’s safe. I mean, nothing is safe. A freaking category five hurricane could come in and just totally, you know, frick Savannah. And if you look at what happened in New Orleans, I mean, there’s still neighborhoods in new Orleans that never recovered. Never. Yeah. So, yeah.

Pat (01:08:01):

And so like, nothing is safe. You never know what might happen. Managing expectations, this job’s managing expectations, but like to Wynn’s point, like, you know, Wynn’s got a buyer, that’s got $2 million in cash that she’s got to get in something. And she’s buying deals that, you know, I wouldn’t buy, you wouldn’t buy, you know, but like for her, for that investor, it makes sense. You know, I’ve got another client, you know, who has a lot of money that he’s got a place, um and for him he doesn’t need, you know, we did manage it, I actually found him a deal. I kinda wish I would’ve bought it myself. You know, last year we put them on a duplex on market, you know, something that I probably wouldn’t have bought myself, but like still a good deal. It’s in a good appreciation spot, you know, whatever. Everybody’s got their own thing. So we kind of went off on a tangent, but you know, this is, this will help you help give you kind of the tools for your toolkit.

Agent (01:08:52):

So I got A question for you. Yep. So for us I’ve done a few of these, but I’m still having issues going through understanding like the property valuation metrics, that section of it. What would you recommend for us to just get this and train and practice?

Pat (01:09:13):

I would just, I would, you could just use this for a different properties. I mean really you know, let’s, I mean, why don’t we

Agent (01:09:22):

Like, can we do a real one? Just like,

Pat (01:09:25):

Yeah. Yeah. Why don’t we, why don’t we do one? I’m gonna do, I’m gonna share my whole desktop here. So,

Wynn (01:09:36):

Because I understand it. It’s like, I’ve, I’ve done it a different way and it’s never been this accurate.

Pat (01:09:43):

So I’m gonna share the whole desktop here. So anybody watching this should be able to see both windows alright. Here’s my money out money here. Yeah. I made I made almost a almost a dollar today. Right. Let’s look let’s look at let’s just look at a regular, regular house.

Pat (01:10:19):

So let’s, let’s, let’s do one. Actually dude, let’s do one that… This is a house I sold. Yep. Alright. So this is a house I sold a guy about a little over a year ago. He paid and he didn’t even buy this as an investment. I mean he intended to rent it out later, but he needed to place to live. VA loan buyer, right. Sold for $289k. So let’s plug that guy in $289k. That same condo would sell for probably $330k right now. He got, he got, we actually bought that in like April, went under contract, like the worst of COVID times when like everybody thought the, yeah. So good, good timing on this part. Alright. So $289k, right. Repairs. I think he’s put, he’s put some money in there maybe $5,000 odds and ends, you know rent estimate.

Pat (01:11:18):

So I think back then I told him it would probably rent for $2000. I think he’s got a little more than that. He’s got it rented out. Let’s just say $2000 ARV, you know, we’re going back then. It’s worth about $300,000. All right. Loan to value. Like I said, he’s, he’s VA, so 100% technically the VA loan because of that funding fee, they tack on the funding fee. We’re just gonna keep it 100%. We’re just gonna keep it simple. His rate looks like cheap. I think it was, I think it was like, I think it was 2.5 30-year, 30-year loan. I don’t think he got any points on that. All right. For, yep. All right. Insurance. he’s probably paying $1200. Insurance is higher when you’re living in it than when it’s rental property, by the way.

Pat (01:12:14):

So maintenance, that’s $1500 in a house like that. Vacancy 5%, property management, 10%. Okay, cool. So let’s go through our numbers, right? We’ve got a net operating income, $12,000, right? We’ve got our rent multiple $147. That’s a high rent, multiple that’s, you know, pretty good that’s Ardsley park. Like that’s a nice single family home in Ardsley park. You’re you’re gonna have to pay, you know, you’re paying a premium, like the cap rate 4.3%. That sounds about right. I mean, that’s, you know, it’s, it’s a nicer property in a nicer neighborhood, you know, you, how that changed, you know, that, you know, if that same house was in west Savannah, somebody probably went like an eight, like, like double the cap rate, which would mean if we doubled a cap rate, what happens at the purchase price? By how much?

Agent (01:13:09):

Oh I don’t know how much,

Pat (01:13:14):

I mean, we cut in half. It just cut in half if it’s the same rent, you know what I mean? If it’s the same rent coming in and a double cap rate, you know? So like, yeah. So that’s, that’s how we’re valuing that particular property. I see. Okay. So the rent multiple is higher. Now, and this is a deal that like a straight investor, you know, is not, you’re probably not gonna buy that house to rent it out. Right. This is a guy who was VA loan. He’s gonna live in it. He had to buy house anyway, you see how we’re looking at this? He had to buy house anyway, so all right. So what are we looking at? Principal and interest. All right. So here’s his here’s his payment every month, principal interest taxes and insurance $1674, right. Instead it’s renting for $2000.

Pat (01:14:02):

That’s what we estimated. So when I, when I ran the numbers for him you know, if we go through here’s our cash flow: -$1,000 bucks. Right. So I, you know, I told him, I was like, look, you know, like you’re probably lucky to break even on this. You know, if you move out. Now in, you know, two years timeframe as rents go up, you know, you’re, you’re looking better. He was gonna live in it for probably three years, but he ended up getting moved somewhere else, like pretty quickly. So he ended up having to rent it out. I think he’s getting $2200 now. So he’s making little money, not much. Right. but even with that negative cashflow, look at his total return. Sweet, because he’s paying down his mortgage, right. How much? $6,000 a year. Right. He’s paying down his mortgage $6,000 a year and he’s got the appreciation. So you know, his cash ROI, -14%. Right? Talk about, talk about leverage, right? -14%. And, and the less money say he didn’t spend anything on repairs, that cash ROI is now -42% on the same exact cashflow. Just because the denominator, that equation is so small. That’s how, when I talk about leverage, can amplify gains and losses in this case, it’s greatly amplified his loss, even though it’s the same dollar amount, but when compared to his initial investment. Right. Makes sense. Yes. But his total return on investment 580%. You can see how you can lose money in a cash basis, but make money in other ways.

Agent (01:15:38):

Right. Actually that’s a lot more, it’s probably over 600%.

Pat (01:15:41):

Yeah. so, but he did, I know he did spend about $5,000 fixes some stuff, so, you know, whatever. So I mean that’s, that’s leverage, right. But that’s, that’s that deal that’s Ardsley Park, you know, and, and for him, like I said, that’s something I wouldn’t buy that as a rental. He probably wouldn’t buy that as a straight rental either, but he had to have a place to live and he didn’t wanna pay rent. He wanted, you know what I mean? So like, and here’s something else that I didn’t even think of that I want to bring up, look at this principle and interest. Right. It’s pretty similar. They’re they’re both pretty close. As the interest rate gets closer to zero, right? Say, say your interest rate’s 1%. It’ll never happen. But alright, now, look at that. Now you’re actually paying more principle than interest. Even though I just talked about what did I, I just talk about? I said, usually they’re, you’re gonna charge more interest. Say that, say, say it goes up to 10%. Alright. You’re barely paying any principle. You’re paying so much interest. That’s just how it amortizes. That’s. So the lower, the lower the interest rate is obviously good because your payment’s lower, but it’s also good because the lower, the small, the, the, the closer that rate gets to zero, right? If it was all the way at zero, say you got a loan, no interest rate. Well you’re paying nothing but principal at that point. Because there’s no interest to pay.

Pat (01:17:04):

You see how so you get a lower rate. That’s also juicing, not just a lower payment, but it’s also increasing the portion of your payment that goes to principle. So that’s why low rates. This is a little bit of an aside, but like if rates go up to 10% tomorrow, there will be a massive real estate crash. I mean, prices would, would cut in half prices would cut in half overnight. Right. If, you know, the, if you’re one of the people that believes in like a global conspiracy of, you know, the elite and they all got together and they said, you know, we’re gonna crash the housing market today. Set rates of 10%. Yeah.

Agent (01:17:40):

It’d be great if you have cash on hand,

Pat (01:17:41):

It would be great. Yeah. If you were like a global elite and you had a much of cash on hand. Yeah. Yeah. So, so yeah, that’s, that’s rates, that’s a little bit of an aside on interest rates. You know, some, some movement in rates 1%, 2%, not really that big of a deal, you know, to most people. Anyway, so let’s put that. So yeah, that’s, that’s always a part of deal, so you can see those valuations and all those metrics and stuff. So we talked about valuations rent multiple 147, that deal. Let’s look at a different deal.

Agent (01:18:20):

Let’s let’s go to

Pat (01:18:21):

Where do you wanna go? Where do you wanna look at a

Agent (01:18:22):

Deal? Let’s look at a nice deal.

Pat (01:18:26):

Is that

Agent (01:18:26):

That’s the I’m looking at quite a few like New Mexico street. You

Pat (01:18:32):

Wanna look at someone in New Mexico? All right.

Agent (01:18:35):

Yeah, I wanna check out some of

Pat (01:18:38):

How about

Agent (01:18:40):

I was going through that area. It looks really, really appealing.

Pat (01:18:44):

Why don’t we look at actually,

Agent (01:18:47):

There’s a nice small

Pat (01:18:50):

You know what? Lee, oh, well, Lee, I got that deal really, really good.

Agent (01:18:56):

But there’s a couple of them over there. I’m I’m

Pat (01:19:00):

Let me call up. Let me just call Lee real quick. See if he’s got a second. Because he got a really, really good deal.

Agent (01:19:08):

I think that was the one I went over

Pat (01:19:10):

And check this one. Yeah. It’s the one you looked at? Well, the one that’s finished.

Agent (01:19:13):

Oh, okay.

Pat (01:19:14):

Let me call Lee,

Lee (01:19:22):

Hey, what’s up man Hey

Pat (01:19:23):

Lee, how you doing? Hey I’m gonna head out shoot pictures at your place here pretty soon, but we are, I’m finishing up an agent training. We’re going over investing math and I just wanted to, that rental. You just did. Yeah, I wanted to analyze that for them. Can you tell me like what, what you got into it and, and what it rents for, if you got a minute?

Lee (01:19:44):

Yeah. You talking about the — that we just renovated?

Pat (01:19:47):

Yeah, yeah, yeah, yeah,

Lee (01:19:49):

Yeah. So this is an odd — because it’s got a clouded title. It’s, it’s. The math is gonna be different on that. So I bought it for $20k. Yeah. With no title insurance. Yeah. Put $35k into it.

Pat (01:20:05):

Yep.

Lee (01:20:05):

And it’s currently listed for rent at $1300. I’ve probably had 10 people want to submit apps already.

Pat (01:20:11):

So you’re gonna get, you’re gonna get your $1300 sounds like,

Lee (01:20:14):

I think so.

Pat (01:20:15):

That’s awesome.

Lee (01:20:16):

At least 1250.

Pat (01:20:17):

That’s a what is that? Is that a little 2-bed bungalow or is that a 3?

Lee (01:20:22):

2-Bed 1-bath

Pat (01:20:26):

Sheeeesh! That’s incredible right. I’m gonna, I’m gonna run through I don’t wanna take up too much of your time, but I’m just gonna I’m I’m just, you know, teaching them. Yeah.

Agent (01:20:34):

So do you have insurance and all that on that one?

Pat (01:20:37):

Okay. Yeah. I’m sure he’s got insurance. Yeah, yeah, yeah.

Agent (01:20:39):

Um because I didn’t know what the clouded title.

Pat (01:20:40):

I’ll talk about clouded title. Yeah. Lee, I think that’s, I think that’s all we needed. Appreciate you taking a quick minute. Right on. Yep. Awesome. Thanks man.

Lee (01:20:48):

Well then I don’t know if you wanna share this or not. You can talk about it a little bit. But with the clouded title also, so, and I got two options. I can either run a quiet title to be equitable, be simple. So it’s marketable. Yeah. Or even if we don’t do that in Georgia, since I do have a quick limited warranty deed, I don’t have title insurance, but I do have a limited warranty deed. In seven years I can use adverse possession to also get marketable title on it. So the equity can be realized, it’s just gonna take longer.

Pat (01:21:22):

Yeah. Yeah. I’ll explain that to them after we hang up what that all means, but yeah. Man, that’s a sweet deal. That’s a sweet deal.

Lee (01:21:31):

It’s a freakin money maker, man

Pat (01:21:32):

Yeah. Yeah. Good job Lee. Awesome man. All right. Appreciate it. Alright see ya.

Pat (01:21:38):

All right. So Lee, this is Lee’s deal. So I’m not gonna it’s it’s it’s over here. It’s one of these streets. I forget exactly which one already. So Lee bought this place and he’s holding this in cash. Lee, you know, you would think Lee would be like levered up on everything. That’s when, when I say levered up, that means leverage, get a loan. Lee talked about different investing strategies. Lee wants to maximize the cash in his pocket. He doesn’t care about the percentage cash return. He just cares about how much money’s coming into my pocket, because he’s trying to put together a smaller portfolio. That’s not leveraged that he can basically, you know, retire in five years and just make money. Right. That’s a different strategy. You know, me, I, I wanna, I wanna use leverage, like that’s different things, right? So for him, he doesn’t have a loan, so he doesn’t have a loan on it. He doesn’t have a loan on it. So, but what I’m gonna do is a deal like this. If an investor does like a significant rehab, they’re typically not gonna leave this repair budget of $35,000 like tied up in equity in the house, they’re gonna refinance it. Oh. So what I’m gonna do is I’m just gonna set this purchase price to $55,000.

Pat (01:22:51):

All right. And I’m gonna set the repair to $0.

Agent (01:22:54):

He’s all cash.

Pat (01:22:55):

Well, he’s all cash. But if, if another investor was doing this, typically they’ll do the repairs and then they’ll refinance it to pull the repair budget back out. It’s called a cash out refinance. Right. When we’ll talk more about that strategy later. Yeah. Yeah. Just, just to run numbers on it. So say $55k, th- that’s incredible. I mean, that deal does not exist on the open market. Even that’s an incredible, incredible deal. Right. But let’s run through the numbers on this incredible deal. Right. What’s it worth, you know, he could probably sell for $150k today. So say, say an 80% buyer, you’re probably at 4% property taxes, insurance is probably gonna be $750. Um so what is this deal? This deal is an incredible deal. It’s it’s wow. So yeah. So your… 42 is his rent multiple 42, right?

Pat (01:23:51):

That’s super low that’s. That means the rent’s $1300 times 42 equals his $55,000 purchase price. Incredible. That neighborhood really 100-110 is what the equity multiples should be. So that’s, that’s a way to evaluate if you see this deal and you’re like, holy shoot. I mean, that’s buy, buy, buy, like buy it now. Like don’t even, don’t even look at it, just buy it. You know what I mean? And, and, and really, you know, deal like that. I’d be happy paying an a rent multiple, like say you buy it for a $100,000, 76, I’d be happy to pay a hundred grand for that deal. I’d probably be happy to pay $120,000 for that deal. 92. Right? Yeah. You know, and, and, and most investors for $1300 in rent over there, they’d probably be happy to pay $140,000, 107. That’s what I said, 110x rent for that neighborhood, you know, so you can see, and that’s the other good thing about real estate is in the stock market, a stock like Amazon, there’s so many buyers and sellers that the price, you know, it’s very rare that you’re gonna be able to get a sweet discount on Amazon, Amazon shares because there’s so many buyers and sellers in that market.

Pat (01:25:07):

And it’s an easy, it’s a liquid. When I say liquid, I mean, it’s easy to buy and sell. And now the only opportunity you had to buy Amazon at a steep discount was during a Corona crash last year. Yeah. If you were, you know, smart enough to buy some, right. So the, the other cool thing about real estate is you can find deals like that. Lee sends out all his mailers. He found a deal. This deal has clouded title. That means no regular buyer. You have to buy that cash. Nobody’s even gonna lend on that, on that house. Like he, you can’t even take out debt. No lender’s gonna lend you money for that house because it’s got clouded title. Now he can go through a legal process. There’s things he can do. This is not an investor. You don’t know for sure who the owner is.

Pat (01:25:54):

Basically.

Wynn (01:25:54):

We don’t know who owns.

Pat (01:25:55):

Yep. Right now Lee’s got possession of it. He kind of has ownership, but it’s disputed. It’s kind of in dispute and it’s not somebody disputing Lee. Somebody’s disputing an earlier seller at some point in time. Who knows, could have been the guy who owned it three, three times ago. You know what I mean? That’s clouded title. In a couple years, Lee should be able to fix that and then he could sell it, you know, once he gets that fixed or there is a slight chance that somebody can make a legitimate claim against the property and take it that’s he rolled it for those kind of numbers. He rolled, he rolled the dice. Right. and that’s how he was able, you know, he sends out letters. He’s, he’s got websites, he markets. So he finds these deals off market. He goes to the seller, he establishes some rapport. He finds out what their problem is, how he can help. He finds these deals. Right. He found this, this sweet deal. So he’s on go back to his numbers. 55. Yeah. So he’s making $7,000 in cash. If, if he’s got it, you know, he turns around if he’s got a loan against it, if he doesn’t have a loan against it, what’s his cashflow gonna be?

Pat (01:26:58):

If he doesn’t have a loan, what’s his cashflow?

Agent (01:27:04):

Cashflow would be his rent minus

Pat (01:27:07):

Minus what?

Agent (01:27:08):

Insurance

Pat (01:27:09):

Minus expenses. Yeah. What do we call that metric?

Pat (01:27:13):

There’s a word for it.

Agent (01:27:22):

We call that metric. Why am I drawing a blank?

Pat (01:27:27):

It’s an income metric, right? Because we’re talking about an income.

Agent (01:27:30):

Net operating income?

Pat (01:27:31):

Net operating income, NOI NOI. So if he pays and he did pay $55,000 straight cash, his NOI is $10,000. He, he has $55,000 invested his, his NOI because it’s straight cash is $10,000. Now, if he did take out a loan against it, right. 80% of $55,000, his cashflow would then be $7,500 because he’s paying $2,500 in principal and interest. Right. So let’s just say he has a loan and it’s still pretty good. Here’s his total return, right? Which is cashflow plus appreciation plus principal pay. Now $12,000 total return on $55,000 invested. So if he’s got this loan, let’s run the numbers like he doesn’t have the loan because he doesn’t. Yeah. Let’s, let’s take a look. 0% loan to value. So Cash ROI, 17%. He’s making 17% on his cash without a loan. It’s incredible. Total ROI, 25% on that $55,000 investment, basically he’s got if with the 25% ROI, how many years does it take for him to get his initial investment back? At a 25%?

Pat (01:28:52):

Four years. So in four years he’s got all his money back. Right? Now. Yeah. Let’s, let’s put the loan back on it though, because most are gonna have a loan. So we put the loan on it. Hey, look at the numbers. Now 56% cash ROI in two years, you’ve got all your money back from your down payment. Two years. Right? Now, two things first. I’ve not, not talked about ROE yet. So I’m gonna talk about that. But I’m also gonna to talk about this purchase price of $55,000. Not a lot of lenders will give you a loan for that. Most lenders. I actually had a deal. I found a guy, an awesome deal on New Mexico street a little over a year ago. Killer deal, smoking. Good deal. Just as an owner-occupant, right? It was off market. I had to get Denise to do it because nobody wanted an assignment contract.

Pat (01:29:40):

Like all the other lenders where I talked to, were like we don’t do assignment contracts. Denise was like, we’ll figure it out. I was like, Denise. You’re awesome. Yeah. So, so you know, it was, it was so complicated to get all the contracts and everything, but we got it straight. She closed on it, but the price we were under contract for like $65,000 and she was like, it’s got to be at least $75,000 or I won’t lend on it. I was like, you telling me that we have to spend more money? And she’s like, yeah. And I, you know, I- I called my client. I said, we got you this great deal, but you have to pay more for it. And I walked him through it. He still did it because he was like, well at the end of the day, you know? So basically the seller got some more money. You know, and I think, yeah, I was like, all right, well I’ll buy you like a nice Home Depot gift card or something. You know what I mean? But anyway, that’s the other thing you could probably get private money, but you got to pay more for private money. You know, I’m talking your regular conventional loans, right. So, but return on equity, you see how low these two numbers are? Yeah. Why are, what, what is if return on investment is return over cash invested, what’s return on equity?

Agent (01:30:49):

Return on equity. I mean, that’s just getting money from the house itself.

Pat (01:30:54):

What, what’s our equity? So, so what, what is, what is the equity

Pat (01:30:59):

That, that Lee has in this property?

Agent (01:31:03):

So he has, I mean, it’s right around a hundred, a little less $95k. Because of it’s after repair value? $95K?

Pat (01:31:15):

So that is his free equity, right? That we talked about $95k is his free equity. But his total equity is, is what? How much equity

Agent (01:31:31):

Would just be $150k?

Pat (01:31:33):

Would not be $150k. So, but he’s got well for him because he doesn’t have a loan. Okay. For him it would be one $150k because he doesn’t have a loan. If you have a loan, your total equity is basically that ARV minus the loan amount. Okay. Right.

Agent (01:31:50):

That makes sense.

Pat (01:31:50):

Yeah. Equity, um when you, when you look at a you know how a company has like a balance sheet, you can look at the balance sheet of a company? Are you familiar with that at all? Like and on a balance sheet you have assets, you have liabilities and then you have equity. Right? Are, are you familiar with that terminal? Yep. So you have, and, and it’s the same thing with a company or real estate. It’s a very similar thing. So if you look at the balance sheet for this property, you have assets of $150,000. That’s the asset that’s worth $150,000, right. Asset, $150,000 boom. Liability is your loan. What is your loan? What’s 80% of 55? $120. Well, no um

Agent (01:32:36):

Oh wait, what? Oh, 55

Pat (01:32:38):

55. So $55k is the purchase price. 55 times 0.8 equals 44. Because

Agent (01:32:44):

I was going on theARV, which is incorrect.

Pat (01:32:47):

So $150,000 asset. Liability, $44,000. Right. and then we have equity. What is, what is our equity? All our equity is, is 150 minus 44. All right. So $106,000. So

Kelly (01:33:08):

Equities, ARV…

Pat (01:33:11):

Minus loan amount. Right. So whenever you look that that’s, that’s how you figure out your equity. Right. and any, any business, if you look at their balance sheet, right? You, you, the, the assets are gonna equal liabilities plus the equity, the shareholders equity, right. And any property it’s, it’s the same thing. It’s, it’s a, it’s a balancing. So you know, the more you pay down the loan, that’s why you have more equity. You see what I mean? Yep. Yep. So

Speaker 7 (01:33:42):

I was just doing it off of the ARV, which is incorrect.

Pat (01:33:45):

Well, no ARVs, correct. That’s that’s what it’s worth. That’s the asset value. It’s worth 150,000

Agent (01:33:50):

Or originally loan to value. I wasn’t taking it off the purchase price.

Pat (01:33:52):

Yes. You take loan to value off the purchase price.

Agent (01:33:54):

That’s where I messed up.

Pat (01:33:55):

Yeah. Loan to value isn’t. I mean, in this case, there’s two different ways when, when the difference between the asset value and the purchase price is so different, a more correct way to say would be loan to cost.

Speaker 7 (01:34:08):

Oh, okay.

Pat (01:34:09):

But for this, we’ll just leave it loan to value. It means to the lender LTV 80%, they’re gonna, they’re gonna lend on 80% of the purchase price or the value of the property, whichever is lower for your standard investor. It’s a little different when we do a cash out refinance, that’s a little bit out of the scope. Right? So anyway, equity, he’s got a shoot load of equity in this deal. Right. That is the bottom of the return on equity equation. So even though right, both of these equations have an enumerator cash flow. When, when the denominator of equity is so much greater than the cash invested, that’s why that number so low. Why do we look at return on equity then? Why does it, why does it even – because it’s good. It’s good that he got so much equity, right? Why do we wanna look at this return on equity? What happens as our equity goes up? Watch this let’s let’s say it’s worth $200k, say, say in five years, it’s worth $200,000. Look how much our return on equity went down. It almost cut in half, right? As your equity goes up

Pat (01:35:17):

And you’re making the same amount of cashflow, your return on equity gets lower. And so what that is telling at least me as an investor is I have a lot of equity that if I pulled this equity out, I could put the equity into another property. And as long as I’m making more than 3.68%, that’s a better use of that money.

Pat (01:35:38):

That’s why we look at return on equity. Right. I have, for example, an investment property with about $50,000 worth of equity in it. Right. somebody wanted to buy that off of me. And so what I looked at is what’s the return I’m making on my equity in this property, you know? And I ended up not selling it because I said, well, I have a lot of equity, but I’m still making a good return on it. I don’t think I could take that equity and put it into another investment and make a significant amount of extra money.

Pat (01:36:06):

Make sense? Yes. What are our two ways to free up equity? There’s two ways to do it

Agent (01:36:13):

Refi,

Pat (01:36:14):

Refi, or

Agent (01:36:17):

Only to refi

Pat (01:36:18):

Or sell the asset. Oh, okay. All right. Yeah. I guess the other one. Yeah. So that’s why return on equity is more important. When you already own the asset and you’re gonna see that return on equity, probably go down as the, as the asset becomes more valuable. At some point in time, the investor’s gonna say, you know what, let me free up some equity, either in a sale or in a refinance or you could even do a HeLOCK, you know, perfect. That’s why I keep it in here. It’s not super important when you’re, when you’re gonna buy the place. You’re more interested in your return on investment, but if you already own it for 10 years, run numbers on something you already own. What’s my return on, oh, it’s not that great. I should sell this. Maybe buy something else or refinance it. And so, you know, yeah. Return on equity. There we go. Make sense?

Agent (01:37:06):

Yes. Now, now that does.

Pat (01:37:07):

Yep. So, alright. So before we wrap it up, this is a sheet that I made and I’m gonna change my screen share now. So anyway, we did this neighborhood 110x rent kind of in this, in, in the states In the state streets, 110x rent versus Ardsley park, 150x rent, right? Two different neighborhoods two different valuations, right? What’s what would the cap rate be? Let me, let me do the cap rate on

Pat (01:37:51):

So what did I say for $1300 somebody would probably pay $140k for $1300 in rent. Yeah, we were right there. So cap rate, 6%, 6% cap, 6.16% cap rate versus what was the one in ours? It was like 4.3. It was, it was lower 4.3. Right? So Ardsley, more desirable neighborhood, more desirable asset, lower cap rate. Makes sense. Yeah. So that’s why if you’re looking in a deal in Ardsley park and if you can get a deal in Ardsley park, that’s a cap rate of 5%. That’s good. You say, you know what, this is a better investment than most of the other investments in this neighborhood. And you could say to your investor, Hey, this is a better deal than most of the deals that you can buy this neighborhood. Meanwhile, over here in the states now to think about the state streets and in this here I’ll point with my mouse. So anybody on the video can see it. And this side of Savannah is it can be, it can be very block to block. So you, you have to drive the block, you really have to drive the block. And that’s what I was doing down there. I was checking out that whole area. And, and like, for example, like some of these parts in Mississippi are, are kind of gross, you know what I mean? You know, if you’re buying something in some of these parts, you probably want to get 90x rent.

Pat (01:39:08):

Whereas, you know, so this is Mississippi there’s where’s that Vermont. All right. Just right over here, just a couple streets. This is a lot more desirable over here. Um a lot more desirable over here, a lot more desirable over here. Then you even got Gordonston, which is like, you know, nice, nice. You know, and that’s just a couple of blocks. That’s how Savannah is. Ardsley is more homogenous. Like all this is pretty solid, you know, but Parkside, you know, on this street you would pay 150x rent for a place on street, 100, 110, couple streets, really just crossing 52nd street. That’s something you get, you, you just get a feel for it. I mean, there’s, there, there there’s a block, um you know, one of my clients bought a place I think like right here just a dumpy block.

Pat (01:39:52):

There’s a fricking like a literal trap house on this block. You know what I mean? But you know, just over here, so bad. You know, and that’s yeah. So property evaluation metrics. I’m gonna, I’m gonna jump back to just this one screen real quick. Because I want to go over, this is a spreadsheet I put together my rent versus own spreadsheet. So made this a little more little more user-friendly, I guess, you know, for like a, this is not, this is more home buyer, but still wants another getting a good deal. Right. So, you know, let’s look at well, let’s look at the one on Columbus. What did he pay? 2, $294k I think. You know, he was all in it for I think he got a lot of his closing costs. Let’s just leave it at $3000 and then he did, you know, $5,000 of work.

Pat (01:40:54):

All right, cool. No down payment, no PMI. Because it’s a VA loan. Yep. Interest rate long term. Perfect. All right. Now we say, Hey, if you’re gonna rent this place or if you were gonna rent any place, what would you paying to rent? You know? Right. Maybe $1500. I don’t know. You know, $1500. I think you said $2000. Yeah. Well that’s that’s current market rent for the property being analyzed $2000. I’m just, you’re gonna have to talk to your buyer. Hey look, you’re renting right now. What’s your rent. Okay. It’s $1500. Cool. Right? You know so Hey, how long do you want to own it? This only goes out to 8 years. So it says I gonna hold on it forever. All right. 8 years. How long you gonna live here? Two. Okay, cool. And then we have, you know, appreciation 3% property taxes. I got a little calculation here, Savannah tax, $5,100.

Pat (01:41:44):

You see the islands is a little cheaper because it’s yeah. So HOA dues, nothing in Ardsley maintenance. So you know how on the other sheet I had maintenance and CapEx together? On this one, I broke it apart. Um because your CapEx, if you spend $10,000 on a new roof, right. And you had an old roof before and now you have a new one, typically your house is gonna be worth close to $10,000 more. So CapEx is kind of like paying down your, your, your loan it’s that goes out of your pocket, but kind of back into your house, whereas a repair or regular maintenance, that’s not making your house more valuable. That’s just stuff you’re supposed to do anyway. You know what I mean? So now, all right, here’s the results. If you live in this house for two years and you own it for eight, you will be better off to own right.

Pat (01:42:30):

It doesn’t always say this. I don’t rig it. You know what I mean? This is how much money has, how much more money you’ll have. When you sell versus if you never bought it: $153,000. In eight years, he’s gonna have 153,000 more dollars in his pocket than if he just rents and doesn’t buy anything. Pretty sweet. Right. and this is the check he’ll get when he sells it, right? Why is this number so different? A couple of reasons. The biggest one is that’s $1,500 every year he’s not paying him rent. $1500, you know, $1500 times, 12 times 8 is $144,000. Right now he’s paying anyway, but this that’s why that’s so different. It now here’s, you know, here’s his cash flow. So why is still living in it? He’s actually kind of losing money cumulatively because his mortgage payments is, is more than a rent he was gonna pay.

Pat (01:43:29):

Right. So, so I’m saying, Hey look, year one, you know, you’re $3,600 in the hole, you know, year two, you’re 7100 in the hole cumulatively, you know, that, you know, say, say, we’re say we’re on 5 years. Right. You can see how that, how that changes. So I say, look, you’re paying a little more in rent. You know, whatever, if, if you were already paying $2000 in rent, there you go. You got more, right? Why is that? Because your mortgage payment’s lower than $2000, right? And then this is how much profit or loss you get every year when you’re renting to somebody see, and you see he’s got $1100 bucks in cash and it goes up every year. Why? Because typically rents have increased more, you know, your rent goes up, your mortgage payment stays the same. Right. so this is the sheet that I use for people.

Pat (01:44:23):

And this is a good, like, I, I don’t send this to everybody. Not everybody wants to see this, you know what I mean? But some people do you just kind of feel out the client, you know, like, Hey, is this something they wanna see? Maybe if you got somebody who’s on the fence, like, oh, these prices are so high. You say, look, I mean, here’s yeah, the prices are high, but what do you, you know, and it might not, it might not work out for everybody. I, I run into some people and I’m like, you know, for what you want to buy, you know, sometimes, typically it comes out better to own, but for some people, you know, like say, say he’s like, I don’t want to ever rent it out. I just wanna sell it. So he’s gonna sell it in two years.

Pat (01:44:56):

All right. Well, he is still better off owning it, but he is gonna have to cut a check to sell it, you know? Because basically the VA loan, you don’t have any equity. So when you sell it, you got realtor expenses and stuff like that. So, so you can see you can see the difference. Most of this is from appreciation though. You can see if we change appreciation. So we set it to zero, you know, that changes the number quite a bit. But yeah, that’s a good spreadsheet. So we are, we’re basically at two hours now.

Pat (01:45:30):

I don’t expect you to know. I don’t expect any of you guys to know it all. I mean, this is, you know, we can do more of these and get into more detail, but you should now have a baseline. If you wanna go do your own reading and your own research, you know, hopefully it’ll be more productive. Yeah, it’s good stuff. So there it is. So for the Wynn’s, Wynn’s listening in here for the for the YouTube watcher I will put contact information for me and, and my company and the comments. We are Trophy Point Realty Group located in Savannah, Georgia. My name is Pat Wilver. I’m co-owner of the company. This was a regular agent training. We try to do this once a week. We’ll be putting this up on YouTube. So got any questions you’re interested in talking about Savannah or real estate investing or whatever. Please do not hesitate to reach out. Awesome. Alright. Take care guys.
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