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How to Evaluate an Income Property [VIDEO]

irei summit market research Aug 19, 2020

The Basics of Calculating a Good Return vs a Bad Return

This is a hurdle for many aspiring and returning investors... We all go through it one way or another and often calculate entirely different results in the process. The ability to vet a deal and decide whether it’ll give a good return or bad is so important. So also is the skill of gauging the level of risk involved. So how do we get through it?

What even is a good return? 

It really depends. All deals are different and It’s important to look at each opportunity individually and break it down into numbers. 

Be sure to compare the real estate to similar properties in the area. If you're entirely clueless in this department, this is where an experienced full-time investor comes in handy. If you don't know any, the FIG team can help. Our feedback is free and we help people with their portfolio analysis all the time!

What Numbers Should You Look At? 

Whether you’re wanting to buy for appreciation, or for long-term rental income (or both): due diligence is the great risk-eliminator. When a deal makes sense in its numbers, it almost always works out in reality.

Learning to evaluate an income-producing property is a skill that comes over time. To help guide you through the process and get you to a point where going through a list of investments with ease, we've provided a free video from our investment summit last year. We hope you learn a few things and can use the techniques mentioned as you begin to start/grow your multifamily portfolio.

As always, if you have any questions, feel free to contact us at

Topics of this Video:

  • The 3 States of Money
  • What is an Investment?
  • Why Real Estate?
  • The Profit is in the Purchase
  • How to Evaluate an Income Property (a look at the numbers)

Other Helpful Links:


Randy is licensed in several fields as a Registered Mortgage Advisor, Registered Financial Consultant, Life Insurance Agent, Real Estate Broker, Mortgage Broker, Stock Broker, and an Educator. 

After serving thousands of clients, he frequently finds out that most people struggle planning for their retirement because it is too complicated and sadly avoids dealing with it altogether or they seriously underestimate how much money they will need to fund their retirement for 20, 30 years or more. Randy understands how busy his clients are trying to keep up with hectic schedules and added responsibilities. Due to these circumstances, Randy has found that most retirement plans either don't exist or they are seriously broken. They need help. He can help. 

For more information about the speaker, visit

Randy Luebke, President @ Lifetime Paradigm

Transcription of How to Evaluate an Income Property

This is the first of a three-part workshop. And I'm going to give all three parts of the workshop today. And I know there's a lot of different speakers here. I met most of the last evening, I think the topics at all of them are going to be good. So I'll understand if you all don't make it back to the other two sessions. But if you can, that would be wonderful. And I also understand that they're recording all these sessions anyway.

So we'll be able to pick up on anything that you miss. But this particular program, these three different programs are designed to work together. So the first part we're going to do right now is about how to evaluate income properties, right? I mean, it's wonderful to go out and buy income properties. The challenge is, how do you know a good one from a bad one? Right? So I'm going to give you some nice tricks and tips and how to do that. The second part, which I think is that right after this one, in the same room, I'm going to teach you how to integrate real estate into a financial plan.

As Steve Olson was saying, this is one of the things I do as a financial planner is recommend real estate as part of a portfolio because it is a great investment, right? That's why we're here, right? We all love real estate. So I'm going to show you how to do that. And then the third part is how to own real estate when it when it's not in your local market. Right. So I live down in the Newport Beach area, California, there's nothing there that makes sense as a rental, right?

It's just ridiculously expensive, and you can't get ridiculously high rents for it. So we have to manage everything from afar. And I have clients all over the country, from Honolulu to literally Florida and New Hampshire and Washington State, I think even have somebody in Alaska. So my clients own real estate all over the country. And you know, I don't play some Park City, Utah, right 700 miles away. So we're going to talk about talk to you about how to do that. So all three of these things and what we're going to talk about here.

Couple other things. This is a workshop to teach you stuff. Okay, so we're my professor's outfit, right? I got my yellow sweater on, don't patch yourself into the patches. But my point is this, I want you to interrupt me constantly with questions. That's totally okay. I have like 20 slides to go through. I don't care if we go through two of them. Right. So if you have questions, just raise your hand will address them right on the spot.

Make sure in case I do forget to ask me to repeat the question because those in the back of the room may not hear you asked that question of me. And in first, certainly on the recording, as well. But it's more important for me to interact with you and help you learn stuff. That is for me to get through a whole PowerPoint. That makes sense. And one other thing, I'm going to be recording this, all three of these workshops separately, do it as a webinar, which you'll be invited to listen to as well. And those recordings will be posted to the website. Right. So you have an opportunity to see them again and again and sharing with your friends.

Okay, any questions? so far? All good. Nobody has a question. And we're going to get rolling here. So I want to ask you, first of all, how many people in this room and I have a good idea from seeing this morning? How many of you already own investment properties? Wow. Alright, so keep your hands up. Right? So how many of you would like to start to own some investment properties? Right now? I got them. All right, I got everybody in this room. And that's why you're here. And you know, a lot of times when I thank you for sharing, by the way, a lot of times when I go to events like this the room, there's maybe just a handful of people, right that do that. Because you guys are here for a specific purpose.

But in general mom and dad and sister and brother, you know, they hear about real estate, but they know the Robert Kiyosaki and all this kind of stuff. And they think it's too hard and too complicated. And the guy at Maryland says is terrible investments anyway. Right? You should invest in a read if you want to own real estate, right? That's a better way to better we don't real estate. Right? So my question to you is this, that there was really a better smarter, and safer way to find real estate buy it to evaluate real estate and manage it. And we talked about that for the next 30 or 40 minutes together? Would that be a good use of our time? Do you agree? Yeah, me too. So that's what we're going to do. I'm going to show you again, how to financially evaluate income property, how to integrate real estate into a financial plan. And then finally, how to find acquire and manage a real estate when you don't live nearby it. So

that's a duplicate slide. Am I going in circles here? No, I'm not. Okay. For those of you that don't know, there's a guy I think speaking in the next room there, his name is Mark Kohler. Does anybody know Mark Kohler heard Mark Kohler before? Yeah. So Mark, and I co-authored this book last year, it's available on Amazon, it's going to be a few copies of available out here, as well. But Mark and I have been working together for the last six years, we give a series of workshops and fall all around the country. And so this particular book, financial freedom, what Wall Street isn't telling you, I'm going to have a lot of little things I'm going to talk about today, they're in that book.

So you'll see a little, little mini book inside that slide. I won't say Hey, there, there it is, all the time, I mentioned it again. But if you want to get more detailed, go deeper, because again, only have 3040 minutes to talk about the topic. It'll be in the book. Okay. So it's a good thing to do. So what we're going to learn to evaluate, we talked about that, we're going to focus on evaluation right now. Another housekeeping thing, this is my disclosure, okay. Now, I will say, I'm guilty of this, most of the time, when you talk to a financial advisor, and they throw this disclosure on the wall, they just laugh it off, right, and they move on right there just because there's a lot to read. But I really want to focus on this part right here. Investments are subject to risk, including market interest rate fluctuations, investors can lose money, and unless otherwise noted, not guaranteed, right? It's important, right?

Your investors, you need to be smart, you need to be good stewards of your money, right? because nobody's going to protect your money more than yourself. myself, I'm a fiduciary, right? I'm responsible to do the best things for you. That's my job, my primary function is to always make decisions that are in your best interest. But rest assured, as good as I'm going to do for you, you're still going to do better if you watch over. So pay attention. And this is, again, why you're here learning today, right? We want to be good stewards of our money.

The 3 States of Money

So I want to talk to you about a concept and this is in the book, I think that yes, it's in the books, the little book in the upper hand corner, about the three states of money. Okay? How many of you remember back in high school, I think it was physics class, or maybe chemistry, the three states of matter, anybody, three states of matter, you remember what they were Curtis?

Gas-liquid is solid, right? So all of the matter in the universe exists in one of these three states. And what's also important to understand is it only exists in one state at one time, right? It can't be gas and liquid at the same time, or solid and gas, it's either gas, liquid or solid. That's it. Money has the same thing. It's in three states. And there's well and what I mean by that you, there are only three things you can do with it. You can spend, you can land and you can invest, okay?

There's nothing else. You can call it all kinds of different things, how all different descriptions of what it is. But it's always going to boil down to one of those three things. So spending, let's talk about that. When I spend money, we don't think about the rate of return on when we spend things, right, we buy things, right? We buy, you know, this bottle of water, right? But there is a cost associated with it that goes beyond the actual dollars, you pay for it. Know what that cost is? opportunity costs. Exactly. So if I have a lot of clients, they're so proud, God bless them. They're so proud that they own their homes free and clear.

I mean, that's a wonderful thing. And it actually does help when you go into retirement if you have, you know, free and clear real estate. But they think that you know because they don't have free and clear it's not costing anything. Not true, right? Because if I have $100,000 in the bank, and let's say I'm earning 5% interest, $5,000 a year, if I take that hundred thousand dollars and pay off the mortgage on my home, I no longer have a mortgage payment, but what did it cost me?

5000 bucks. Right? So spending has a cost associated with it, you're going to lose the opportunity to make money from that money forever. Right? taxes, when you pay taxes, you lose the opportunity, because you gave that money to the IRS to for that money to earn money forever. Right? So spending is one of the states of money, and it has negative consequences. My point here everything is 100% financed. Think about that for a minute. If I buy that bottle of water for $5. I bought it but what did I really do?

I financed it with my money. Right? When I paid off my mortgage, I now own that house free and clear, right. But I'm now the fine financier of my home. There's always cost, there's always an opportunity cost associated with it. So we want to be aware of that doesn't mean you shouldn't spend your money. There's a stuff when we may be thirsty, right? We may need some water to drink, we may be hungry, we may be wanting to go on one of those cruises that they're advertising downstairs, it looked like a lot of fun. We can do that. And that's why we work. But there is a cost associated with it.

Lending This is a little more tricky. Okay. So I go to the banks are just so good at making us feel really good about doing really dumb things. Okay, so you go to the bank, and what do you make a deposit of your money into their bank, their bank account, right? And a deposit, you know, feel so good, right? It's a warm, positive feeling thing. I put money in the bank. Now, what did you really do? Anyone loan money to the bank, by the way, how much interest they pay you for that money in your checking account?

Zero. I was having lunch today with somebody and they said they wanted to get money for nothing. That was what the goal of being here today was or one of the things they wanted to do. So that's not going to happen. So unless you're a bank, right? Because the bank, I can put all new billions, billions of dollars people give to them every day, lending them their money, right? In exchange for no rate of return. Right? So lending is, again, it's almost perverted because they make you feel good. Does anybody know what a bond is?

Anyone? Right to loan right? Now, if you were asked to lend, I don't know some corporation that you've never heard of before your money, right? Whether it's $5,000, or $5, or $150,000, you'd want to know all kinds of things about that company. You want to know their financials, you want to know who the owners are, you'd want to know all these important things about that company that you're lending your money to. But if you go to your stockbroker, and they say, Hey, I got this bond is paying 10%. Do you want to buy it? Bye, right?

That's a positive thing that makes you feel good. And it's a bond, right? So you feel good, you got security? You got What? You loan this company money. Right? So okay, this is another one. Look in your wallet. Does anybody have any dollar bills in their wallet? Okay. Now, if you look at the first of all, what's a bill? A bill is a short term loan. Right? And if you look at it, it says Treasury note or bill, right? You basically loan money to the federal government your money to the federal government, again, at what rate return? Zero, right?

All those dollars you got in your pocket, your loan to the federal government at zero percent, right. But it feels good because you have that greenbacks in your pocket, you see how this works, money can't do one of these three things. It has to be spent, it has to be land, right? Or it has to be invested. And investing means ownership. Right? So if you think of saving and investing, saving means lending, that's all it is saving means lasting, it just makes you feel a little bit about it. And then ownership is investing, right? We invest in real estate, we invest in stocks and bonds, you do own an interest in that company, you know, like this little bit of Apple, this little tiny little bit Apple you own right? You own it, you have no control over but you own it. You do own it. So three states of money.

What is an Investment?

Okay, so let's talk about the stock market. First of all, I am, by the way, I'm a registered financial consultant RFC. I'm an investment advisor representative. I'm a certified wealth protection Plant Protection planner, certified Medicaid planner. I have been a mortgage broker for 32 years, I'm a real estate broker. I'm a securities broker and a life insurance agent. Right? So I do everything. Except I'm not an attorney. I'm not a CPA. That's why I hang out with Mark Kohler because guess what he is? Turning to CPA, right. It's a good, good marriage.

When people come to me and they talked to me about their investments, we usually think of the market as the stock market. Would you all agree that for stock market and when they think of the stock market, they tend to think of what the Dow Jones industrials. Right? You see it on news every night. Right? Dow Jones industrials up, you know, 100 points are down 500 points, you know, depending on which way the news goes that day. This is what most people don't know about the Dow Jones, the Dow Jones, first of all, is not the market, it's only 30 companies.

There are over four or 5000 companies that make up the whole new york stock exchange. The New York Stock Exchange is not the only Stock Exchange. There's the Chicago Stock Exchange, there's foreign stock exchanges, as many exchanges were company shares trade. That was only 30 companies. Why is it such a big deal? Well, it's such a big deal because the Wall Street Journal owns the Dow Jones industrials name, right? And who's the voice of wall street but the Wall Street Journal, right? So they're just marketing their brand over and over again to us to make us think that that is the market, right?

By the way, Wall Street Journal is owned by News Corp. And guess who wants News Corp? Rupert Murdoch, right? eels? everything? Everything media, right? So that's why you see that on the news over and over and over again, it's not the market, what is the market, the s&p 500 is a much better representation. For those of you that don't know, s&p Standard and Poor's 500 are the top 500 companies on the New York Stock Exchange, ranked by their market capitalization mean how much they're worth, right.

So those 500 companies make up 80% of the net worth of the entire New York Stock Exchange, they really are the market. So what happens with the s&p 500 is important, is relevant. That, by the way, also is a little skewed these days, because the top companies in the s&p 500 are so big that they really overshadow so many of the ones underneath them little changes in Apple stock or the big bank stocks can have a really big impact on the whole s&p index, which makes it hard by the way to do you know, the exchange-traded funds where you just have an s&p index because you're really buying in like 10 or 20%. Nice, right? Again, back to this as this Dow Jones Industrial thing. But this is what most people think of as the market. Okay.

I looked up some statistics to bring into us today. Since 2007, this is really interesting. 55% of the investors that invested in the stock market have lost more than 50% of their money. Now they gain most of it back, right? Or if they hung in there, if they didn't need to spend it, they gain most of it back. But that's a lot. You know, if I had an investment, and I said, Hey, this investment is like so really awesome and safe and cool. And you know, I'm Merrill Lynch, and you know, I got a great brand new, I've been around forever, and it but half of you are going to lose half your money.

Would you do it?

I don't think so. Right? Only 13% made a profit between zero and 20%. And only 4% made a profit greater than 50%. How many of you guys own real estate? Again? How many of you have seen returns like that on your real estate investments over the last 10? years? None. Right? Because real estate doesn't work like that real estate doesn't work like the stock market, which is why we like it. By the way, just because I'm telling you this again, stocks are not bad. Just because they're stocks. They're just another type of investment. Yes, sir.

Started 2007 through 2017, I think was a sample. Yeah. So it's a really bad time, right? I mean, 2008, nine, that was a horrible year, horrible year for real estate, too, right. And, you know, here's a little Randy out there telling people, you should really be buying real estate. Now. This is in 2009, 2010.

And all you heard on the news was this guy lost his home and this lady lost her home. And you know, and it's like, No, they didn't lose their home, they didn't like going away. You know, they chose to give it up, right? Or maybe they lost their job. Or a lot of times I talked with people that you know, they were the good mortgage person, they had a job, they paid their mortgage, they own $250,000 on that mortgage and updated every day.

But the person across the street just bought their home through foreclosure. And now they got 425,000. And they're just wondering to themselves, why should they be paying their $250,000 mortgage, because they were good when this other person just took advantage of the opportunity. So no, people choose to give up their homes. Mostly, that's why they lost those homes. They didn't just lose them too, to foreclosure, just the way the news paints it, right? Again, making you safe to go back into the water with the sharks and in Wall Street. So stocks are not bad life insurance isn't evil. I don't know if we'll have a chance to talk about life insurance, but we use it a lot. It's an awesome financial tool. And real estate, by the way, is not a magic bullet. Sorry.

Why Real Estate?

Okay, it's not perfect, right? It's just not perfect. It's a great tool, but it's not perfect. And my point going back to that initial disclosure chart, right, the slide I mean, is investments, lending money, investing in things, all this stuff comes with risk, right? You just need to be smart. You need to be educated. That's why you're here today. And thank you again, very much for being here for that. So why do we like real estate? Right? Number one reasons is that right rate return, most of the folks in this room that have own real estate for a while now you're looking at 1020 30% rates of return on average if you bought it, you know, at the right time and didn't manage it the right way. They also have great tax benefits, in fact, because tax planning, doing taxes, helping my clients save on taxes is one of the things I spend the bulk of my time on.

I don't know of an investment as good as real estate for taxes, you get a deduction for just owning it for the depreciation that's guaranteed by the IRS to pay you every year, year after year, for decades, right?

I mean, that's pretty amazing. And in and of itself. There are not too many investments that do that. There's a couple of others, but not many. At all. Yeah. And then if you sell your home at a profit, what do you get to do with it to not pay the taxes on it? 1031 exchange right or use another thing called the deferred sales trust? Anybody ever here for deferred sales? Trust, by the way? A couple of people?

No, that's different. The question was a part of an opportunity, fine. That's different if we can have time to talk about opportunity funds, their new, just briefly a deferred sales trust, think of it as a 1031 exchange kind of on steroids. Because what do we love about 1031 exchange?

You don't have to pay the taxes, right? What do we don't like about a 1031 exchange, you have 45 days to find your new properties. Right? Now you have 180 days to close. That's cool. But if you have 45 days to find properties, that can be tough. I had a client back in 2010. So the beach, this is a great one that beachfront home in, in Orange County in 2010, when the market is just you know, horrible, right? They sold it for $5 million. Now, grandma bought this place for about $32,000. Back in the 1920s. Right? It's just a little shack happened to be on the sand, right?

So we had $5 million dollars that we had to 1031 exchange into a little hundred $50,000 homes. And we had to find all those little hundreds and $50,000 homes in 45 days. And literally, they own me for two months, we just scoured the country came up with those who did a successful exchange on the entire Yeah, that was a big project that was really big. So another thing we don't like about 1031 exchange is a lot of you have how many event properties that appreciated in value. Recently. Right. Right. Right.

So the markets hot right now, do you think the markets going to correct? At some point, it's cooling a little bit a lot of markets, right? Where I live homes go like this, right? I mean, they don't swim, but they go up and down in value. So if you're selling in a high market, what happens you have to buy in high market. And so you know, that's not cool, right? You made all this money, because the real estate, appreciate it. And now you're going to sell it and put them and overpay for the next stuff you're buying.

That doesn't make any sense, either. So what's the deferred sales trust does is allows you to sell your house, but the money into a trust, and then you can have literally decades to redeploy that money into real estate in the future or anything else. You could take the money and put it into a business, you can put it into stocks, you can do all kinds of things. And if anybody wants to learn more about the deferred sales trust to send me an email for DST in the subject line, I'll send you a little brochure on it. 1031 on steroids, yes, in a way back in the room. And by the way, you got to talk really loud, because I'm 66 years old next month or two months from now. So I need to hear from you about the deferred sales price.

Yeah, so great question. So the question was for deferred sales trust, how much does it cost? That's another thing I want to say about 1031 relatively cheap, right? For a few hundred bucks, you can get this whole thing set up. And, and that's a beautiful thing. The first sales dress is going to be much more expensive, right? And it's really, it's about, let's say 2% of the value of the asset to get into it. So if I have a $2 million asset, I'll spend $20,000 in legal fees to set up the trust. And I have ongoing expenses as well. Yes, sir.

Trust? Yeah, so the question was, hi, how high up the IRS hierarchy is that trust approved? So meaning is if it was audited, right, and the IRS was looking at it wouldn't hold up? Yeah. And the answer is the right again, this is good. We want to go down these, these rabbit trails, it's okay. If I get to one more slide. We're awesome, right? Eventually. So the deferred sales trust is really a combination of an installment sale and a trust. Okay, so follow this, if you can, when I sell something on an installment sale, this is IRS code been around for eight years, right? If I sell something on an installment sale, like you sell the house to carry back a note on it, right? I only pay the tax as I received the money, right?

That's the way it works. So. So the way the deferred sales trust were Oh, but if I sell something, I take back a note, I sell it an installment sale, what's the biggest risk I take? Pay off right? default, my borrower, I'm now a bank, right? My borrower might default on it, right? So with the deferred sales trust, we take care of that problem. Because we basically sell the property to the trust to sell the trust sells the property to the third party. Now the Trust has the cash in exchange for a note. So we took away the problem the default because it's already liquidated. Now to answer your question, now, all I have is a note to trust, right?

That's been around for eight years. And that note is paying me a minimum of interest only, right? I don't even have to receive the principle for four decades. So that's how it works. And that's why it's so expensive, by the way, because you have to set up this multitude of parties. And it's a cool tool. It's not for everybody. And but it's an option. And my point with this, and I'm going to get your question a second with this with tax benefits. And when we finish the 1031 exchange story, what happens?

We bought, we sold at a private we 1031 we bought we sold the property 1031. And what eventually happens? We die, right? We die. And then our kids and grandkids get to inherit these properties, right with a step up and basis under current tax law and pay no income tax at all. On all those gains. It's awesome. I love real estate. You can't do that with stocks. You just can't do it. What was your question? The trust? Yeah, yeah, that's not a question though.

The question was, is a deferred sales trust like a 1031 exchange? Only on an income property? The answer is no. deferred sales trust can be on anything can be on stocks, it could be a business a farm, right? It could be any type of highly appreciated asset could be on a Bitcoin. I've had people with Bitcoin, that wish they would have talked to me. You know, before the big crash into bitcoin, I had a client last year that won the securities lotto, he had to $50,000 as a part-owner, in a family health business that sold for 2 billion.

So his share was like five and a half million dollars, right. And he was really excited because it's turned 50,000 is now worth over 5 million until he realized he had to give $2,300,000 to the IRS to check. Instead, we put it in the deferred sales trust. And you know, he's happy. And by the way, now, what is he doing? He's taking the money into deferred sales trust, investing in the stock market, investing in real estate investing in other businesses, because that money is this cash, right? And he can do all of the things we want to do with it. And he doesn't have to pay taxes on it, is that the poor guy has to receive $80,000 a year four times a year.

For the rest of his life? And you know, that's too bad. Yeah, yeah. So it's first Yeah, I'm like 1031. We have a total range of investment options that can be deferred. Okay. Okay, so tax benefits are good. Next one, multigenerational. That's really important. You know, I sell annuities, annuities are great tools for people that provide income, but most of the annuities are generally one generation or maybe a husband and wife, you know, if the husband passes, the wife gets the income or vice versa.

But real estate, something that can go on for generations, right? You can pass that down to your kids, your grandkids, and so on. There are not many investments that you can do that. You just need to teach them how to be, you know, interested in good manager, the real estate. So we like real estate for a lot of reasons. And this is the biggest one here, number one, or I put it to number four, but it's the number one reason I bet if I asked with a show of hands, if this is important to you, that you're in control what I get a lot of hands up in the air. Yeah, you bet. Because with Wall Street, you have zero control, right?

You go along for the ride, we put you in the market, you know, cross our fingers that we did everything right? And you know, if it works out, it does. And if it doesn't, it doesn't, you're not going to do anything about it. But we're real estate, you have your own creativity. You have your own ingenuity, you have your own everything to make your decisions about what's going to happen to that personal responsibility. I wish I could remember more of coaching that guy, this wouldn't be awesome, by the way. Just Yeah, I can't wait to show my kids that video that was so it was such an inspiring presentation.

I don't know what goes on that guy's brain. But I'd like to buy some of it. Really, really good. Good stuff. Yeah. So control right controls a big reason we love real estate. All of us agree. Yeah. Yeah, yeah. Okay. What don't we like about real estate? It's complicated, right? hard to find properties, hard to keep them how to manage them. You know, it's just, it's just a messy process only real estate. I think we just told you, I don't know if I own a property in Park City, Utah owner for 12 years. It's a vacation rental. Right? Instead of having somebody check out once a year and have somebody check out once a week, right? It's, it's, it's a messy thing, right? But the rewards are worth it.

Right? The rewards are well worth it. Now the things expensive, I think to spend, I can take, you know, literally $1 and buy a stock, I can't take $1 and buy a house can't do that. That's a benefit, right? All these negatives, by the way, are benefits to us. Right? Just because it's complicated, messy, and expensive, keeps a lot of the people out of the market, right allows us as investors will take the time and energy to get into the market. That's why the profits are there for us. Right. And then the last one, this is a financial planner, the biggest one, I gotta drill into my client's head, real estate is ill liquid, right? liquid, right, I put my money in the checking account, I can take my ATM card and get it out the second after I put it in its liquid. Real Estate isn't anything like that the date the day you buy it, you know where you're going to pay sales commissions to get it out title and escrow and all this other stuff, if you want to sell it, you may not be able to sell it ever.

Right? I was listening to the gal in here, the previous speaker talking about crowdfunding, and how she was in Vegas with some of her investments took her 10 years to get a hold on all those investments that you had there. That's how illiquid it can be. Right. So again, all the reasons that are bad are really good for us, as long as we're aware of them and can manage through that. Would you all agree? Right? Is that a good description of real estate? Right?

The Secret of Buying Real Estate: The Profit is in the Purchase

Alright, cool. So the secret in buying real estate is simple. I say this over and over again, the profits in the purchase, you can buy it right in the first place, you'll likely it'll probably do what you want it to do. It'll provide you the cash flow, you'll get the appreciation, whatever your objective of that particular property. If you buy it right in the first place. it'll likely do what you expect. But if you buy it wrong, you have to hope for a miracle. Okay, now the cool part about real estate is miracles happen. They really do. Right?

Miracles in my area of the country are called appreciation, right? It's amazing, you know, short little story and this is you know, just to put things in context, I bought a house in Corona Del Mar, which is a little kind of subdivision in Newport Beach, South part of Newport Beach in 1993. For $625,000. Pretty decent price, it was 1993. I sold it for $2.3 million. Okay, so I didn't do that, because I did any work.

I didn't do that, because I was smart. I didn't do that, because I was anything but lucky, right? That I lived in a market where real estate values just went to whack. All right. And we have, you know, clients in San Jose in Cupertino and all any little place where Amazon or Apple happens to show up and you know, there goes your real estate. Yeah, so miracles do happen. But we don't want miracles. What we want is what we bought the property to do we expect it to do. And if a miracle comes along, yeah. Yeah, that's awesome. We love it. Okay, so

what? That little thing I just slipped through back there. What makes it right, what I mean by buying it, right, is that it makes financial sense from the day you buy it. Right? It should make financial sense that day. Note that if this happens, and if this happens, and if this happens? No, no, that doesn't you shouldn't buy a property that doesn't need things to have done to it.

Another story San Jose. Okay, so San Jose is like not I mean, these people are absolutely not. I thought real estate in Orange County was expensive. And I did a presentation up in San Jose. It was like two or three blocks from the apple headquarters there. Is this stupid, the prices that they're paying for homes there. So So this particular fellow bought a property that had a big enough light, that he could have it subdivided into two lights. Right. And the street that he was on was a very busy street. Right? It happened to be just a few blocks down the street from the owner of Facebook. Yes, it was still a good neighborhood.

Yeah, good neighborhood. Yeah. But that side street, the home prices were like 20, 30% more in value than the street that he was on because he was on the busy street. So he bought it. Then he went and did all the work to get it subdivided, built another house on that side street with a new address on the good street made a huge profit on doing that. So that's work, right. So that's part of the plan to make it happen. He didn't hope for that to happen. That was part of a strategy. That's real estate, right? You can be creative and, and do creative things with it.

We're not talking about that today, though, we're talking about income property. So what I'm looking for is, I think I clicked through a whole bunch of things here.

How to Evaluate an Income Property: A Look at the Numbers

Okay. So what we're looking for is these things, cash on cash returns, which is one of the metrics and I'm going to get into a spreadsheet that I created to show you this. And then we're gonna look at three other numbers, RV factor, debt coverage ratio, and cap rate. And I'm digging deeper on these in a few minutes. Let me show you this little spreadsheet here. This is live, right? We're going to actually do this here. audience participation.

Okay, so um, so when you go out, look at real estate, right? in real estate markets, you're going to, you're going to be presented with the opportunity to buy thousands of homes. That's the way the nature of the real estate market problem is how do you sift through those thousands of homes to get to the few homes, you really want to do your research on. So what I developed in this spreadsheet.

So my clients can get down to the really the four or five or six properties that they really started to look then at the thing, other things that are important, like a neighborhood for crime statistics, and schools in the neighborhood, and you know, things that that are important to people for living quality life things. But the numbers got to make sense first. So this spreadsheet, or am I still showing the PowerPoint, maybe have to crash the PowerPoint first.

As there's a live spreadsheet, now we see it, okay, cool. So this spreadsheet will do this for you. So we're going to do this together. I have $150,000 home here, where I'm putting 20% down, I'm going to pause on that thought for a moment right now. 20% down, versus 25 versus paying cash. Okay. By the way, I'm a big advocate for self-directed IRAs, I don't know if I'll have time to talk about that later, there's a lot of reason to not invest in real estate. And let me put it this way. investing in real estate with an IRA is a good option.

But if you can invest your real estate outside of the IRA, you're going to get a lot more bang for your buck. Why? Because you can get the depreciation, you're going to get better loans, you're going to get better terms on those loans. It's just everything's going to be better for you. So in general, with my clients, we try to do everything we can to find ways to get money out of the retirement accounts and in real estate, and then when they're done buying real estate with the money they have outside their accounts, then we'll start investing with the money inside their account instead.

Anyway, 20% down. So leverage is really a benefit, especially with rental property for a few reasons. First of all, it's going to increase your rate of return, right? It's going to increase your return because you have less money in the property, but you're going to get the same income. Now you got to service the debt. But I can show you the actual numbers here, what it means to have leverage in a property versus putting more money down and having less lunch because remember the three states of money, right? Spend London invest, everything's a financial hundred percent.

So either This place is going to be financed with your money, or it's going to be financed with somebody else's money, or it's going to be financed with both, there's no choice it this is how it works, right. So we're going to show 20% down, that's $120,000 loan will need $30,000. To do that. I have a five and a half percent interest rate and have a 30-year loan

today, and I've been a mortgage broker for 32 years, I still do mortgages every day. Today, I'm still advocating for 30-year fixed-rate loans. Why? Because 30 year fixed rate loans are still the lowest they've been in decades. When I started in the mortgage business back in 1987. Interest rates 30 year fixed rate loans were about 15%. Right, and people were glad to get them. I can remember going in front of the board of realtors announcing the 30 year fixed rate loans are just below 10% and getting a standing ovation right now I'm a hard money lender right at 10%.

So 30 year fixed rate loan you're getting, you're getting another benefit because that interest rate is locked in for three decades. Think about those three decades, right? And interest rates will go up your interest rate won't, but won't your rents go up? Right. So that's just going to continue to help you increase your rate of return. So the mortgage payment is calculated $681 got to pay some points and fees to get that have a place for the rehab, rehab costs other credits now maybe the builders gonna throw in some money for you whatever. But in this particular example, any $36,600 to buy this property pretty simple and straightforward, right? Good.

Now, as a financial planner, one thing I know about real estate, again, is what is illiquid, right? If I buy this thing, I'm stuck with it for a while. So I want to have cash reserves on hand, right? Because what happens, tenants move out, you know, roofs get blown off. You could be you know, you saw it California, we had massive wildfires and floods and landslides. And there's hurricanes in the east. So I mean, there's always stuff that happens, nobody loses their home, they don't lose, they're home, they give it back, a lot of people have to give back their home because they don't have a way to survive when it's empty.

Right. cash reserves are your key. So what I like to see is about three months of rent and cash reserves. Now, if you have 10 properties, that'd be 30 months of reserves, right? What's the likelihood that you're going to have 30 months of vacancies out of all those properties, like zero, right? I'm going to happen. So it's a little riskier initially. But the more properties you have, the less risky that becomes that I want you to have three months. And the reason I'm putting that in there is that remember, three states have money spend Linda invest, I have to have this money sitting aside, even though it's sitting in the bank account earning nothing, right, I still have to have, and I'm going to calculate it in as part of my routine rate of return on this investment. So I had another 4140 $500, I got $41,100 to buy this house.

Now, this is another really important one that I didn't get for years. When you buy a house, you get two things with it, you get a piece of dirt in a building on top of it, right, get a piece of dirt, and building top of it. Now, the dirt, we don't get to depreciate. For some reason, the IRS thinks the house on top of it is going to turn into you know, twigs or sticks after 30 years, 27 and a half years, right? So they let you depreciate this house, right? It's going to last longer than 30 years in the last, you know, four or 500 years like they do in Europe if you take care of it. But the IRS doesn't care, we get to depreciate it, right?

So in areas where they have high land values, like where I live, it's just the opposite of what I'm showing here, where the land might be at 90%, maybe 99% of the class of the property. Right. And the building is nothing. There was I was talking at lunch, there's a property in Laguna Beach that was listed for sale. It was a 400 square foot house, like a nice hotel room. 400 square feet. Okay, and it was building like the 20s or the 30s or whatever, 14 and a half million dollars. Yeah, yeah. So I mean, you know, it was like 99.999% dirt.

And it was a card table for the was a beach chair, you know, that that's it. So we want to buy properties that have low land value in high improvement value because we want to get the production, we want to get that depreciation deduction. So I'm going to rent it for 1500 dollars a month in this example. And then as again, as a planner, remember, we're modeling this out, this isn't reality, this is what we want to plan for. Let me hold that question for just one second. But don't not yet. Just hold Yeah. We want to model out for like a worst-case scenario. Again, as a planner, I'll say look, let's you know, hope for the best plan on the worst know, we're going to be somewhere in between.

That's fair, right? So I'm gonna preamp plan an 8% vacancy, 7% maintenance, and 10% management, I'm gonna take 25% of the rent and throw it out the door. 8% means I can have my property vacant one month a year. Right. So every year I could lease it up having Vega at least it up having vague and we stop having vacancy 7% maintenance 10% management that you know, that's about numbers.

But you know, Fannie and Freddie both won 25% off the top anyway, we're going to deal with that number, we're going to say, yeah, we're going to take 25% of our gross rents, and retail, we're not going to get it you put in property taxes, insurance, I got a prop up a place for your Hoa. And I'll skip over this part for now. So now I'm down to this number of net operating income. This is an important number. net operating income is the number of the gross rent minus all of the expenses before the mortgage. Right? net operating income. Remember that one before? Do you want to ask your question now, by the way? Yeah, for going to the next deal? Yeah.

So the question was, as a rule of thumb, do you find that condos have a really low land value? And, yeah, that's a tough question. Because technically, technically, a condo, you don't own any land, right? You'll own the airspace inside your four walls. Technically, right?

In a townhome, you actually own the airspace and side, your four walls plus the dirt underneath us, you do have some land value, but you also have a common shared interest in all of the land that the HOA does own. So typically, what I see on tax returns is they'll just go at 20 odd across the board, right? Because again, you don't technically own any land. But because you have an ownership interest in that common Hoa that does own all the land, you do have land as part of the equation. I kind of thought that to evolve this get this condo and make 100% you know, didn't work but at 20 Yeah, it would be wonderful. Okay, so now we have net operating income from which we subtract our mortgage $681. And now we have that beautiful thing, that positive cash flow of $169 a month.

All right to get to 169 bucks. How we doing on time, by the way, pretty good. Five minutes. Hurry. Okay. Okay, I have to don't really. Oh, wow. Okay. Okay. Okay, so uh, so now I have my three little tests. Okay. RV factor, debt coverage ratio, and then cap rate. So what's RV factor? RV factor is rent value, is the easiest thing to figure out why?

Cuz you'll need to know two things. You need to know what it's going to rent for and what you're going to pay for it. Right? How do you find out what things rent for you can ask the person that's selling to you? And they might tell you the truth, right? You can look at the listing. But you can go to Craigslist, right today. And I can look in any market in the United States and figure out what a renter would be looking at competitive properties around the US is pretty simple. So I just need to know what it rents for in the value of the property get the RV factor, I want it to be greater than point 7%. So $100,000 property should rent for $700 a month. Right? If it rents for more than that, then I'm probably going to be okay.

Right now, you can't make this the only measurement because what you don't know all about the other stuff. You don't know if it's an HOA What does the thousand dollars a month Hoa do? Right? That could really blow a hole in that RV factor. But it's a starting point, it's a way to get rid of a whole bunch of properties that you might want to not take the time to look at. The debt coverage ratio is your, basically your security blanket. So I had to put three months of cash reserves away in case you had stuff happen.

But I also want to have more money coming in every month than the mortgage. Right? And I want it to be about 25% more than the mortgage hundred. That's why it's 1.25 is then it needs to be greater than 1.25. Ours is 1.248. Pretty darn close, right? How do we fix that? Make a bigger downpayment, right? So if I put a 22, or three or 4% down payment, I already get that debt coverage ratio, the sacrifice by making the larger down payment is my rate of return is going to go down because I'm going to lose the leverage. But it's fixable.

It's the only one of these three that are fixable, right, I can put a more down payment and improve my debt coverage ratio, the final thing is kept cap rate is generally used in a commercial property. But it basically means if I own this place free and clear, right? If I spent my money now, right? If I spent all of it and I'm financing my property hundred percent gross rent minus all my expenses, that net operating income, multiply that times 12 divided by the cost of the property. And that's my cap rate, right?

That's it. This is like, if I put the money in the bank, what are you gonna give me for it? Right. So in this case, the cap rate is 6.51%, I want it to be greater than 5%. In a market like this, right? As interest rates go up, that 5% will get higher, right. But if you don't get at least a 5% cap rate. And by the way, remember, this cap rate is based on all kinds of terrible stuff. It's vacant once a year, you're paying all kinds of maintenance and management fees, right, I've done all the things I could do to reduce your income. And I still have a 6.51% cap rate.

So if I keep my tenant in for more than one year, my income goes way up, right, I get way more benefit of this. I just want to do this for modeling. I want to do this for filtering. Okay, so let's put this all together. And I have my little hundred $69 a month, I'm getting $2,024 a year, still, not an impressive number, and you're not going to retire on $2,024 a year, anywhere in America, right? Not even a month.

But it's still a 4.9% return on my investment. Because remember, I didn't invest $150,000, I only invested about 40,000. Right? So 4.9%, then I get this little hidden gem because that tenant is paying my mortgage down, right? So every month, a little bit of principal gets paid down. By the end of the first year, I paid down 1600 dollars, I got another 3.9% of my money back. I don't get to see it. I can't spend it. But it's there. Right. And by the way, it's another guarantee, right?

It's not a hope I get that as long as that mortgage is paid, I'm going to get 3.9% of my money getting back coming back to me every year, that number goes up every year. Because as I Oh less, each payment pays more and more principal down. That's a cool thing to all right. And then my favorite depreciation 10.6%. Wow, I love it. Temporary 6%. Put these the idea of no appreciation. Right? That's the gift, right? That's a little miracle.

So we left that at zero. So in this little house, I invested $36,600. And you told us all up, I have a 19.5% return on my investment $1,000 a year. That's pretty cool. Like that. Yeah, so this little spreadsheet, which is what we use with all our clients, we cheat, we give you the spreadsheet, we teach you how to use it right, and let you go shop. And I have I think eight properties on here. And in the end, it gives a little summary. So you can pair them one to the other. And see which ones look better than others. Yes, sir. Do I really have five minutes?

All right, go ahead. Say it again. What's the tax rate us on the deficient? It's not the tax rate. It's just it's the value of the depreciation per year. So you take the property, the building, and 27 and a half years, divided by 20 minutes, and it's just not a tax rate. I get that money no matter what tax rate I'm in right. Now for some people, if you're making a lot of money, that deduction worth more than it is for others, but to everybody, it's worth that amount of money per year. That makes sense. Great question. Okay, so, okay. Oh, boy.

Okay, let's summarize. Okay, so session one takeaways.


Money exists in three states, you can spend the lender invest. Real estate is a great investment. But it's not a magic bullet. The three basic three financial metrics, we look at our RV factor, debt coverage ratio, cap rate, we use all those intervals spreadsheet, the secret to investing in real estate, the profits into a purchase, buy it right, it'll work should work by Ron Hofer miracle. Okay. You know, that's our summer here. Oh, and by the way, all this is in the book too.

And then I just hopefully have a minute to go through this. Corey, my production partner who lives in Salt Lake is passing out to you a financial assessment, we have 25 copies of that book out here to sell you, the $20 apiece, there's only 25 of them. So I'm going to do three sessions with these people. So if you want to buy and buy now, right? Correale, take your money for that. And if you want you to autograph it, I'll do that.

And more colors here too. And we could probably get him to sign it as well. If you want an autographed copy of our book, everybody will get this financial independence tool kit. It's really cool. It's 100% free, you are going to learn about how to create a budget that won't money a budget your money every month successfully. Awesome. Okay, most of us struggle with that. So I'm going to teach you a way to budget like no brainer works every time how to build up your cash reserves and use what we call a three-tier cash reserve system.

And then I'm also giving you 12 financial guides. So caregiving, how to take care of elders, college funding, Medicaid, Social Security, there's like 12, different financial guides, we give you all that stuff's free. And then the third thing is, as I said, I'm a consultant, normally a charge to 65 an hour for my time, I'm going to give everybody here 30 minutes of my time for free. And your ticket is to give me that financial assessment before you leave here.

Okay, so you fill out the financial assessment, and you can just give it to us anytime today. You don't have to do it now. But you do that, turn it in, and then we'll get you on my calendar. And during the assessment, this isn't like, I mean, during the 30 minutes, this, isn't like initial consultation. But this is anything you want to talk about. You got tax problems, you're getting divorce nuts, you're getting a divorce, you get married, not just getting married.

All that good stuff, whatever you want to talk about, we'll cover it because as again, as a financial planner, we're addressing all those things, asset protection, estate planning, tax planning, investment management, all those things. So you can get 30 minutes for me, I gotta do is turn in your golden ticket or your green ticket or whatever color it is, and we'll be good to go. So if they don't throw me out of the room, I can still answer questions if you guys have questions...

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