4 Foolproof Ways to Get Rich with Real Estate Investing

this is real estate rookie more good deals will come on the market over the next couple of years but you do have to contend with some risks of declining value and high interest rates and I think that's just because over the last couple of years there's been super high competition and that makes it really hard for investors to land under Market deals now the markets are shifting a little bit away from probably one of if not the strongest sellers Market in history to one that is a little bit more balanced and so that could create some more opportunity for people my name is Ashley care and I'm here with my co-host Tony Robinson and welcome to the real estate rookie podcast where every week twice a week we bring you the inspiration information and motivation you need to kick start your investing journey and we often like to start these episodes by shouting on some folks who have left us some reviews and this week's review comes from the skids85 and the skid says this podcast has great tidbits for rookie investors anyone looking to start in real estate invest testing will find nuggets of valuable information throughout the podcast and if you couple this podcast with the original BiggerPockets real estate podcasts and all of the BP books it'll give you the courage to dive into investing which is what it did for me after five short months the rookie replies are shorter but I love them because that's what the all the good information is so the skids we appreciate you brother if you haven't yet please do leave an honest rating and review for the podcast because it helps us reach more folks and that's our goal here so Ash how about we skip the uh the boring dancer for today I think the guests were bringing on uh they're too boring enough guys so we don't need to add add to that huh you know Tony I was hoping that you would say that line because I was still like debating in my head was our producer joking when he said that we could say that no Ashley and I are joking we got we got two two absolute studs on the podcast today and I think I think that's why ash and I are like excited to get into the content we've got Jay Scott and Dave Meyer and you guys probably know Dave from the recently released on the market podcast Jay he ran the BiggerPockets business podcast he's ridden four now five books for Bigger Pockets and these are literally two of the absolute smartest guys I've ever met when it comes to real estate investing and I'm so excited we got to share their knowledge with you guys in the podcast today and by boring we mean there's no stories of bears coming on here Airbnb or you know exciting things like that to you know the click bait things in this this is basically what you need to know as a real estate investor they wrote this book about running the numbers and how to analyze a deal efficiently and effectively everything that you need to know I think the the book is like 450 pages long with all this data and it took them several years to write it because they really got got down into the nitty-gritty of it and it's not only like you have the Bigger Pockets calculator reports which are great but it's more than just plugging in the numbers it's understanding why you're plugging in that number and what that number means and what outcome you want from that so they break it down into four different ways that you can generate money off of your investment and we're not going to tell you you have to listen and listen to all the more yeah and like we I asked some two questions that I think most new investors are probably thinking as well is the first one is is now still a good time to invest if you're a new investor and you get to hear both of their explanations or answers to that question and the second question I asked him is like okay what is a good cash on cash return or like investment metric I should be using so these are two questions that I should not get all the time and like both the answers that Dave and Jay gave I think were phenomenal and you guys can get a lot of value from hearing it make sure you check out Jay and Dave's new new book real estate by the numbers available at the BiggerPockets bookstore and they'll tell you guys about all the benefits you get if you purchase it directly from the bookstore maybe even a call with them so listen for that and then at the end of the episode they give you a discount code and we're super excited to see who you guys like better because there might be a little competition at the end of this guys I am so so so so excited for today's episode you two are literally probably two of the smartest people that I know when it comes to real estate investing in the economy and just all the data points that folks should be looking at when they're thinking about investing in real estate so I am this is honestly probably the episode I'm most excited for so um Dave we'll start with you if you can just give a quick background on kind of who you are and and you know kind of what we're talking about here today sure so I work at Bigger Pockets full-time I'm the vice president of data and analytics where I handle a lot of our internal data analysis and business intelligence but also get to spend time studying the housing market and trying to to understand what's going on in different markets and different opportunities that exist for the Bigger Pockets audience and in that effort I am also the host of Bigger Pockets newest podcast which is called on the market and is focused on just that examining Trends data news that impact the lives of Real Estate Investors and Dave we also has you on the rookie podcast the camp Carver College episode it was but folks can go back and listen to that episode because it was I think it's one of our top performing episodes because people love when we talk about the economy and it just shows you know the kind of wealth of knowledge that you are man so excited to be chatting with you and our our next guest we've got two guests for you guys today and I I just want to give a brief introduction because um this man's resume is is quite impressive but he's written two books I think already for it for Bigger Pockets the book on flipping houses four books so I've read two of them so you can tell us what the other ones are um he was a number number 10 on the real estate podcast he was in episode number 10 he's been on multiple podcast episodes since then and successful house liberal now with successful Real Estate syndicator apartments indicator and I'm just super super I think humbled and happy to have this guy on the podcast so Jay tell the folks I guess what I what I might have missed no it's okay um so I found Bigger Pockets back in 2008 when I started flipping houses I was hoping my first house and doing an internet search for how to learn how to do it and found Bigger Pockets and started becoming involved in Bigger Pockets and um so a lot of people think I work for Bigger Pockets I don't but I've been so intimately involved with Bigger Pockets over the last 15 years sometimes it feels like I I do and so yeah I've written four books um I think the Brooklyn flipping houses estimating rehab costs also the book on negotiating real estate that I wrote with Mark Ferguson and my wife Carol Scott to amazing investors uh and then my most recent book up until now uh called uh real estate um uh wow I don't even remember the name it's called recession proof real estate investing which is a book all about economic cycles and how they impact Real Estate Investors and I was also the host of the Bigger Pockets business podcast for a couple years where my wife and I talked with literally over a hundred different entrepreneurs and business owners about all things business and that's still out there for anybody that's interested in that topic and want to learn more about Business and Entrepreneurship check out the BiggerPockets business podcast well Jay and Dave we have you guys on here for a reason because you have written another book it Is Real Estate by the number so do one of you want to kind of give us a brief description of what this book is about sure so um Dave and I have been working on this book for a really long time and the goal of the book and I I think I'm proud to say I think we've accomplished the goal but the goal of the book was very much to dive into and delve into all aspects of the math and the con Concepts and the Strategic thought that goes into real estate investing in fact I think if we were to rename the book today we'd probably call it think like an investor because that's really what the book's all about how to change your mindset and really learn how successful investors think again from a concept standpoint from a strategy standpoint and also from a math standpoint and so it's a it's a long book it's over 400 pages I think it's the longest book Bigger Pockets is published we've been working on it for many years but it's something I think Dave and I are very proud of I can't wait to read it because I think too for rookies and even experienced investors it's like going back to the basics of is it a good deal is it a bad deal should I do this deal we'll run the numbers like that's very very common where I think people are looking for somebody to give them the answer if they're making a good investment where if you run the numbers and you know how to properly do that then you'll be able to figure that out on yourself I just want to add to that this book I do think does make sense for rookies uh even if you're thinking math is not your thing or that this sounds complicated Jay and I it took us so many years because we've gone through painstaking efforts to make sure that this is applicable to anyone whether you haven't bought your first property yet or you're an experienced syndicator at this point we want to make sure that everyone whether you're a rookie or experience can analyze deals like a professional and as Jay said I think we've accomplished that one thing too I've noticed if you go out and buy like calculator reports or the Bigger Pockets reports that they do to analyze deals all of them will vary they'll have different formulas or ratios that they calculate for you or different inputs for them so instead of going out and buying all these calculator reports I would think it would make sense to buy your guys's book and kind of develop your own from it can you kind of go through that as to once you have this book how do you put it to use yeah well I mean I I would start with again for anybody that might be a little bit math phobic um I'm an engineer by education so I like the math and and I know Dave is a numbers guy but here's the cool thing if you take this book and you literally cut out all the math you cut out all the formulas you cut out all the all the anything math related from the book you're still left with a what do you think Dave 250 pages of concept and stories and narratives and examples of just deals that that Dave and I have done throughout our careers then you add in the other 150 200 pages and then that's all the math behind it you get everything but even if you don't care about the math and you don't want the math stuff I think anybody especially now I'm not even going to say including but especially new investors if you want to know how successful and experienced investors think this book is gonna Really Gonna help you achieve that and actually I think one of the things that um is tempting because the Bigger Pockets calculators are are extremely useful and helpful to people especially rookies is that you have to understand sort of the concepts and what the numbers deeply mean like of course you know that cash like a seven percent cash on cash return is not as good as a nine percent cash on cash return but when you actually go through the process of learning how to calculate these things it adds new meaning and I think it allows you to make more confident decisions here's the other thing we often talk about getting the right answers and figuring out if something's a good deal and and so we start with this assumption that we know what questions we're supposed to be asking so that when we get the answer we know that that answer is Meaningful to us Dave and I actually approached this book from the other side we approached this book not from the perspective of you asked the question we're going to give you the answer we approach this book from the perspective of let us help you ask better questions and in fact I I don't remember there's like 40 chapters in the book each chapter starts with here's a list of questions that this chapter is going to be answering so you know the right questions to be asking and because I I find a lot of new investors um they they happen upon a deal and they get into a situation and they think okay I need to know if this deal makes sense did the numbers make sense but they don't know how to formulate the right questions to be asking to look at the deal so for example a seller finance deal you're not going to evaluate a seller finance deal the same way you're going to evaluate just a regular purchase or a note or a commercial property or a deal where I give an example in the book of a deal I did where I'm going to sell a house and I I list the house and I get two offers and this was a true story I got two offers one was a full price offer basically quick close from a cash buyer the other one was a another investor who had a deal that was closing seven months later and basically said to me I really want your house but I can't afford it for seven months because I have another deal closing I'll get a bunch of cash in seven months so I'm happy to close on the deal now but I kind of don't want to pay you for seven months and I own the house for cash so I could afford to basically just not take the money for seven months but then I had to ask my question or ask myself the question how much more should I be selling it for if I'm not going to be selling this house for another seven months where it still makes sense how much more would I have to ask him to pay where his offer is now as good or better than the guy that was willing to pay me in two weeks full full price cash um and the nice thing is when you know how to ask the right questions when you know how to ask the question how much is this house going to be worth if sold in seven months compared to if it's sold in two weeks when you know to ask the question the right way then you can start evaluating the answer in the right way and so I think a lot of new investors they're not always sure what the right questions are and so we start with the questions and then we jump to the answers and so it kind of hits both sides of the equation Jay in that scenario would you go and would you look at okay what would my money look like in a year so if you got the money in the two weeks and you went and invested it into something else what would your return be in a year from that pile of money or if you waited in seven months and gotten it what would you actually do when you're asking that question is how would you run the numbers on that exact situation yeah and so I I'm I don't want to go into any of the math because a lot of us don't care about the math right now um but the concept behind it like you you just said is immensely important in real estate it's called the time value of money and it's basically this concept that a dollar that I I get today is worth more than a dollar I get a year from now or seven months from now because if I get it today what am I going to do with it I'm going to invest it and in seven or eight or nine or 12 months it's going to be worth more than a dollar and so I need to figure out that dollar that I'm not getting today how much more would it have been worth in seven months if I had gotten it and that's the amount more that I'm going to need to get for that property to make it worth it to wait seven months to get the money so I'm we're like five I don't know ten minutes into this episode episode already and you guys have dropped like an immense amount of knowledge which is why I was so excited to chat with you guys but I want to ask one question that I'm sure a lot of rookies are asking and then we can kind of get into the meat of the episode but there's there's a lot of information floating around that I think has some new investors afraid to get started there's the the two economics of uh or I'm sorry the two quarters of the GDP getting smaller which you know some people makes us feel that we're in a recession there's the climbing interest rates which we all have reason to believe might continue to climb um so I guess my question to you guys and Dave will start with you if I'm if I'm a new investor or an aspiring investor I have no deals it's now still a good time to get started oh you're hit you're hitting on our our most beloved topic that everyone loves talking about right now um I I think it's hard to say like categorically whether it's a good time or not um I think it comes down to individual investors and goals and Jay actually and I talk a lot about this in the in in the book is a big part of being a successful investor is identifying what types of deals are good for you personally so there might be um times like say for example you're a house hacker I think in almost any market conditions house hacking is usually a pretty good idea because if you're comparing that to paying rent and rent is super expensive right now it's really great um I don't flip houses but I'll just say I'm not going to start flipping houses right now I think that there are different strategies that people should be taking depending on their personalized situation and I know that's sort of like punting on the answer but I'll just say that my guess is that more good deals will come on the market over the next couple of years but you do have to contend with some risks of declining value and high interest rates and I think that's just because over the last couple of years there's been super high competition and that makes it really hard for investors to land under Market deals now the markets are shifting a little bit away from probably one of if not the strongest sellers Market in history to one that is a little bit more balanced and so that could create some more opportunity for people and Jay what are your thoughts yeah I 100 agree with Dave um there there are lots of factors at play keep in mind that when we say real estate investing if I say that to 100 people they're going to get I'm going to get 100 different thoughts of what that means if you're flipping houses that's a very different strategy than if you're buying notes which is a very different strategy than if you're buying RV parks which is a very different strategy uh than if you're house hacking and so there are Lots there are literally dozens and dozens of strategies out there and not all of them are going to work as well at different points in the market cycle some are going to work better during a recession or equally well during recession some are going to work really poorly during your recession likewise there are different um different strategies are going to work differently in different areas so what we've seen over the last couple years not only is the market changing but also demographics and populations have changed in the US people are moving from certain areas to other areas because we have a lot more remote work and people have the opportunity to kind of go where they want and so we're seeing certain areas that are still seeing huge population growth we're seeing other areas that are seeing population to decline and during even the best Market in history I don't want to flip houses in a place where we're seeing population decline so even going back to 2015 when it was a great time to flip houses it wasn't a great time to flip houses someplace where people were moving out of and so you can't just look at the economy you can't just look at any one or two factors you have to look at all of these factors you have to look at the economy you have to look at population growth you have to look at employment trends and you have to look at the strategy the specific strategy that you're looking to employ and then you kind of put all this stuff together and you ask the right questions about specific deals and then you determine does this deal make sense and so again like David said I'm not looking to punt on the answer but it really is it it depends it depends on what you're trying to do where when and how Okay so even if you're you know whatever strategy you're doing running the numbers the reason you're doing that is because you want to generate Revenue you want to make a profit or you want to have a good investment for download down the road what are some of the ways that you talk about in your book that you can you know generate money from making this investment into real estate and how does that kind of factor in when analyzing the deal yeah so first let me step back and just say this one another thing for anybody that's out there that's listening this is the rookie show so a lot of people that are listening are probably either just getting started or getting ready to get started in real estate something to keep in mind when we talk about the economy is that things move in cycles and so while we may be headed into a recession some people would say we're in a recession historically recessions last 12 to 18 months so even if Now isn't the best time for you to be doing whatever strategy it is you want to do in whatever location you have to be in there's a good chance that in 12 months or 18 months or 24 months it could be a really good time so it's always a good time to be learning so even if Now isn't the right time to be flipping houses in New York City or whatever it is now's a great time to learn about how to flip houses in New York City because in a year it may be a great time to be doing it again so let me start with that um but going back to your your question of how do you make money in real estate this is actually a really interesting question that we don't talk about enough a lot of us especially when we're new investors we tend to look at real estate returns one-dimensionally if we're somebody who is working a nine to five job and looking to escape that nine to five job it may be that all we care about is cash flow we want to make as much money every month as possible so that we can quit our job as quickly as possible we can replace our income with our cash flow from our real estate other people aren't in that situation other people might be thinking I love my nine to five job I'm going to be working for another 30 years all I care about is that I build up enough net worth enough equity over the next 20 or 30 years so that when I retire when I'm 50 or 60 I have plenty of cash that I can invest and get cash flow then other people are thinking they don't care about either of those things they care about the fact that they have a high high paying W-2 job right now or they're making a lot of money from some Investments right now and they want tax benefits real estate's a great way to get tax benefits so there are all different reasons why we may be want wanting to invest in real estate and the reason you invest may not be the reason I invest and so when we look at how real estate actually generates money for us generally it falls into four categories so number one is cash flow and that's exactly what we're saying that's the monthly income or the quarterly income or the annual income that your cash flow is going to pay you when you invest in it number two is this thing called appreciation and I know we think about appreciation as like if we invest today the Market's going to go up 10 tomorrow and we're going to have a whole bunch more money there's actually a couple different ways that that we see appreciation in real estate it's not just waiting for the market to go up and we can talk about that but number two is appreciation number three is this thing the fancy word is amortization the the layman's term is principal pay down if I get a loan on a property I'm paying that loan every month I'm paying my bank every month on that loan part of the money that I'm paying is interest and so interest kind of goes away it's an expense but part of the money I pay on my loan every month is actually paying down the balance of the loan and so on day Zero I might take out a hundred and fifty thousand dollar loan in 30 years after I've made my final payment that loan is now zero I've made a hundred and fifty thousand dollars by paying off that loan didn't really make 150 000 I still pay it but presumably my tenants paid it and so over time I'm paying down the loan and I'm accruing Equity I'm building up equity in the property so this principal pay down or amortization is the third way that we typically see real estate make money and then the fourth way I mentioned it is tax benefits so um real estate provides tax benefits that you really you can't get from any other investment on the planet so that's some amazing tax benefits and when you know how to think about taxes and you know how to think about the benefits of of real estate investing you can find ways of basically offsetting income that you're making today through those tax benefits which is really as good as it's as good as cash in your pocket today so cash flow appreciation principal pay down and and tax benefits those are the four ways that real estate makes money for us and anything else I mean there are lots of other things people can suggest but it's really going to probably fit into one of those four categories Jerry what what an amazing breakdown and I'm so glad that we kind of covered those four different categories because I think a lot of folks especially those that are getting started like you said they just kind of look at real estate investing as this like one-dimensional kind of return that they should be looking at but you really gave all these different categories that they can they can look at so if we can't I want to kind of just dive into each one of these in a bit more detail so you had cash flow appreciation principal pay down and then tax benefits um so Dave I guess I'll start with you first and we can go to you afterwards uh Jay but let's talk about cash flow what exactly do we mean when we say cash flow what kind of metrics should I be looking at when it comes to cash flow and in your mind maybe who is it what kind of investors should maybe value cash flow over some of the other types of Investments yeah cash classroom is a great place to start because I think most Real Estate Investors get into real estate investing because they want to generate cash flow I don't know about you Tony and Ashley but that's certainly where I was coming from when I when I first got started and basically I was just hoping I produced more cash than I spent each month and that was sort of the extent of my knowledge of these four different things like I knew of the other ones but that that's really what I was hoping for when I got started but cash flow is is wonderful because it basically can and supplement or eventually replace your W-2 income and it provides something that you can live on if you're investing in the right way then it is a very reliable source of income and it could be used for whatever you want either reinvesting or for covering your regular expenses and cash flow is relatively simple to to calculate we give some some ways to to do that in the book but basically you add up all of your income you subtract all of your expenses and after that you have your cash flow and you can also calculate easily once you have that once you know that and how much you've invested into the deal you can calculate what's probably I don't know I'm just assuming this is like the most popular metric in real estate investing which is Cash on cash return and that basically is a great measurement for how efficiently your investment is producing cash flow for you because it's great you know I hear a lot of investors say like I did this deal it's producing 300 a month of cash flow is that a good deal well yeah if you if you invested 10 grand it's a great deal if you invested 300 Grand not such a good deal so you have to be able to to calculate both the absolute number of cash that you're getting in your bank account every month and uh be able to calculate how efficiently you are your your Investments are generating cash flow for you before you go on there can you just tell us find cash on cash return as to what the formula is it's how somebody can figure that out sure yeah so you just basically take your your annual cash flow and you divide it by the amount you invested into that property and so for each person that's going to be a little bit different for most people getting started it's going to be your down payment maybe some closing costs and if there's any you know maintenance that you did right at the beginning of a uh that that came out of your pocket not like your mortgage like basically the cash that you took put into the property so um you take the annual cash flow divide it by all of your expenses that's going to get you your cash on cash return in the book we also talk about how you can sort of Advance your thinking about cash on cash return over the course of your investment using a a a metric called return on Equity but we won't get into uh that nerdery here one one follow-up question and Jay I'll point this to you first and Dave we can go back to what what is a good cash on cash return in today's market say I'm buying maybe like a long-term single-family house what's a good cash on cash return that's it's a great question and it's a question we get all the time let me step back before I answer that question um but as Dave said it's really important when we think about cash on cash return it's an indication of how efficient our investment is generating cash so if I invest a hundred dollars in a deal and obviously not real estate it's only 100 but let's say I invest a hundred dollars in something and I get back ten dollars at the end of the year I then invest a hundred dollars in something else and I get 11 back at the end of the year the second thing that I invested in is doing a better job of of it's it's it's more efficiently returning me cash on the money I invested ten percent eleven percent it's just numbers but the important thing is the more money I'm getting back means that the money I invested is working harder for me and obviously we always want our money to work harder for us we want it to be more efficient um but here's the other Nuance that we really need to to keep in mind and too many newer investors don't think about this returns are correlated with risk and if I told you I could give you an investment that generates 50 returns or an investment that generates 20 returns which one's better well you may want to just jump to of course 50 is better but in the real world returns are correlated to risk and a deal that returns 50 percent are projected to return 50 percent is typically going to have a lot more risk associated with it than a deal that's projected to return 20 percent so that 50 return deal you might have a much higher risk of losing all your money or you might have a much higher risk of making zero return or losing a little bit or making a little bit your chances of actually making 50 return is going to be lower than your chances of actually making a 20 return on the deal that projects to return 20 percent so anytime you see returns always think about it from the the lens of how much risk is involved and what is the specific risk what kind of risk is it is it a binary risk so if I told you that we have a deal where there's a 50 percent return projection and another deal where there's a 50 return projection even though the risk might be the same it may not be the same type of risk for one the risk could be yeah there's a good chance you're going to lose all of your money but there's also a good chance that you're going to make a hundred times your money or a small chance you're gonna make 100 times your money well Jay I have a question too do you think dude is time put into the deal kind of considered into that too is to like okay you can look at the cash on cash return you only put 10 grand into the deal you're getting a 20 cash on cash return but you also didn't hire anyone to do the labor for the rehab so is that another thing besides just risk is taking into consideration the time that you're putting into the deal too yeah absolutely and and this is where things this is where this this idea of hourly return comes in um and so yes I I one deal might might generate 10 cash on cash return another deal might generate eight percent cash on cash return is the 10 percent better well no if I spent 10 times as many hours doing that deal and and and generating that return that 10 percent might be a whole lot worse than the eight percent return if that April return is completely passive and so certainly in addition to risk we need to be looking at things like what is the amount of time we spent and what is our hourly return and this is why it gets back to the the fact that there's not just any single metric that we want to look at certainly there are certain some metrics that are more important than others especially depending on our goals but we need to be able to think about things multi-dimensionally from different aspects and you have to be able to put all these things together so at the end of the day you can say okay I have two Investments which one is better and generally the answer is it it we don't know until we answer a whole lot of other questions about what our goals are what we're trying to achieve and what the risks are gee I think so often like new investors they just want the answer given to them around these different decisions that they need to make in their businesses which I get right because it's scary you're investing maybe your life savings you're buying this you know several hundred thousand dollar investment it's your first time doing this you want some research reassurances that you're doing the right thing but like you said it's hard for for Tony or for Ashley or for Jay or for Dave to know all the intricate details of that person's life their goals their personalities their skills their abilities to be able to tell them yes this is the right deal for you and I'm glad we're talking about these four different categories because like you said if someone's focus is appreciation maybe them buying a deal that only cash flows six percent makes sense for them because they know 10 years from now that building will have doubled in value but for the person that's focused on cash flow maybe they want a 15 cash on cash return and they don't care about appreciation so everyone's personality situations Etc will dictate something different so Dave I just want to kick it back to you any any other comments on that cash on the cash on cash return piece well hopefully you're picking up on the trend if you try and pin Jay and I down to answer any question directly we're gonna say it depends but it really does like it really is like you said it really well Tony that that you you know we all wish someone could just tell us what to do but ultimately financial decisions are deeply personal and they should be you know you should have your own set of goals and ideas about what you want and I'll give you a quick example in March or April I sold a proper rental property and I wanted to do a 1031 exchange and I had an intention to buy a small multi-family and I just couldn't find a deal that penciled uh as you guys might know I live in Europe so it's really hard for me to like go look for deals and so I was looking at syndications but I couldn't find one in a market I understood and so I didn't have time to to understand a new market and I wound up doing a deal that took uh about five percent cash on cash return which is lower than a lot of people would accept and it's lower than other syndications that I um that I was looking at but it was in a market I really understood I felt like there was very little risk and my primary objective with the 1031 exchange was to preserve my capital and to defer my taxes and so I was able to accomplish all those things and did I take a less cash on cash return Yeah but I as Jay said I think I took a lot less risk to and with this set of money that I had my goal was long-term preservation of capital and so I think I made a good decision there where someone might have made a totally different decision you know someone might have taken that money and rolled the dice and been willing to take on more risk than I was because they wanted a 12 cash on cash return so I I think you guys said it really well but um just wanted to hammer home the idea that you have to really factor in everything and and personalize these decisions to your specific circumstance yeah keep in mind I mean uh going back to whole this whole risk profile thing there are investments out there that have zero risk if you want to invest in treasury bonds like government bonds you can do that you can make two or three percent per year on your money now a lot of us would sit here and say we're Real Estate Investors I'm not willing to to make an investment that only generates two or three uh percent per year even if there's zero risk but there are trillions of dollars worth of investors out there who are very happy to invest for two or three percent at zero risk their goals are very different than ours or yours um the fact that that maybe they're retired and they have enough money that two or three percent and is is great but they didn't want zero chance of losing that money so again every everybody's goals are going to be different everybody's risk tolerance is going to be different if you want super low risk deals then you're going to have to accept super low low returns if you want super high risk if you want the potential to make tremendous amounts of money you're gonna have to accept super high-risk deals um and so and then there's everything in between so you really need to figure out where you are on that risk slash reward Spectrum to determine the types of deals that you should be doing and Jay for our next one appreciation can you go through and Define appreciation and then what metrics are tied to appreciation that you talk about in the book then also who's the ideal rookie listener that actually should value appreciation maybe even compared to cash flow yeah so uh so again cash flow is the amount of money that or the money that our deals are giving us every month for investing in them um we're basically getting spending money or investing money every month or every quarter every year after we invest appreciation is is kind of just the opposite of that that's the money that um that builds up in the investment that we're not actually getting back so for example if I buy just the simplest example if I buy a house for a hundred thousand dollars today and in 10 years I sell that house and it's worth two hundred thousand dollars that's appreciation that value the value of that property went up a hundred thousand dollars over over ten years um there are two types of appreciation that we typically talk about the first is this thing called natural appreciation um and this is the idea that just holding real estate over time it's going to go up in value why because it always has um realistically speaking real estate tends to go up in value over time we've seen it for 150 years it'll likely continue um that said a lot of people are they don't have a true industry standing of how much real estate tends to go up over time especially for younger investors if you started investing in in 2008 or 9 or 10 and you've only seen what's happened with real estate over the last 10 years or worse yet if you started investing two or three years ago and you've seen what happened with real estate values over the past two years you probably think real estate tends to go up five percent a year or ten percent a year or even 20 a year but the reality is over the past hundred or so years on average in most places in the U.S real estate has tracked inflation so if inflation has been somewhere between two and three percent real estate values have tended to go up two or three percent per year not bad but it's it's not something that's going to make you rich basically your real estate is going to keep you from losing money to inflation so that's the first aspect of appreciation just the over time the market is going to tend to go up in value or houses are going to tend to go up in value and you're going to make money typically at least enough to cover inflation hopefully a little bit more but the real value of appreciation in real estate is what we call forced appreciation and this is the idea that as Real Estate Investors a lot of us have the ability to buy real estate that's undervalued and we have the ability to increase the value through the work that we do and so when we talk about that work it's it's really in two areas number one we can do physical Renovations on the property we can improve the property so when we think about flipping a house we buy a house for a hundred thousand dollars by the time we sell it it's worth two hundred fifty thousand dollars let's say that's appreciation we've added value through Renovations that is that that we can then capture when we sell the house the other way we can capture appreciation is through management Improvement so number one is is you you make a whole lot of money by by improving the physical aspect of the house number two is you actually lower the cost of holding that house so if you if you're a landlord and you can buy a property and you can make it a whole lot less expensive to hold you can appeal your taxes or you can get your insurance turns cost down or you can get your your other holding costs down you've now increased the value of that property so as good Real Estate Investors yes we love the natural appreciation we love that two or three percent per year that we're going to get that's going to offset inflation but we should also love the idea of we can increase the value of a property through Renovations and management improvements and then once we increase the value we then have the ability to capture that increase in value either by selling the property for a profit or refinancing the property and pulling out some of that cash some of that value that we've added David let me let me ask you a follow-up question here and then we'll go back to you Jay what what kind of rookie investor is the focus on appreciation best for like what kind of questions should I be asking myself to determine if focusing on appreciation is the right kind of I guess wealth tool for me to focus on well to Echo what Jay said I think for for rookies uh really the key is to focus on forced appreciation and particularly in this type of Market cycle that we're in right now um even you know uh I just think that's even more important for most rookies I would recommend being very cognizant about the amount of work that goes into forcing appreciation and making sure that you take on an appropriate amount of effort risk and capital that needs to go into a renovation when I was getting started I did a lot of what you call like a cosmetic value add where you're you know painting you're updating the appliances maybe you're putting in some vinyl flooring to make it look better that to me is a little bit more manageable especially if you're handy yourself or you know a good trades person I wouldn't be looking for places with Foundation issues or who need a new roof if this is your first uh you know time out there if you're a contractor if you've experience in construction maybe maybe you could but for me that's just my my personal advice people can take that on as much as possible but for your first deal I think those types of uh cosmetic value ads are are really can be achievable and are relatively low risk another thing that I've done pretty successfully a few times now is repurposing space is a great way to force at least rent appreciation and value some value appreciation for example if you take a place that has a lot of living space but doesn't have another you know only has two bedrooms can you add a third bedroom can you add a fourth bedroom given the existing structure so that you're not building new walls and taking on a lot of construction risk you're just sort of repurposing the space in a more manageable type of value-add situation that can add value to the property and can increase your cash flow as well and I think Dave and I both ignored um the question uh both Tony you and Ashley both asked the same question we both kind of ignored the answer so let me show trying to cover the answer that we ignored um who was the who is the right person that should be thinking about appreciation um generally you're going to think about appreciation when you have a longer term wealth Horizon when you're thinking about Building Wealth over time um somebody that wants cash flow is somebody that needs the income every month maybe somebody who's looking to quit their job and wants to replace their income somebody that's looking for um for appreciation is looking for a bucket of cash at some point that could be a bucket of cash in three months by flipping a property it could be a bucket of cash in 30 years when you sell your rental property but typically the the the the person that's looking for for appreciation is the person that's looking for that bucket of cash which I talk about how real estate has tremendous tax benefits sometimes it doesn't when you're getting buckets of cash um but in general if you're looking for to to increase your net worth over time appreciation is one of the best ways to do that let me also answer a question that that you sort of have asked I used to work for eBay and at the time the CEO a woman named Meg Whitman used to say to the to the company she had a really popular uh quote that she would always say which was embrace the and too often we think about do we want a or do we want B without thinking of is there a way for us to get a and b where a and b and c and d and in this case when I say cash flow is right for this type of investor and appreciation is right for this type of investor what I would encourage every investor to do is think about what's most right for you but don't exclude those other things so maybe your your your primary goal is cash flow but still think about how you can get appreciation at the same time because even though cash flow today is great you're going to want that bucket of cash when you sell the property in 20 years and you're looking to retire so um so embrace the end and don't just think about these returns as which one is most important or what's the only one I want think about maybe which one's most important but how do I get the others as well Jim I'm so glad you mentioned that and it reminds me of uh you and I were having lunch in Maui and when I asked you about why you switched from flipping houses to apartment syndication that was kind of what you mentioned to me is that when you look at at flipping it was these big chunks of cash but there wasn't that that consistent cash flow there wasn't the like the necessarily like the appreciation long term but it's like when you went to apartment syndication you kind of got the best of both worlds where you're able to generate these big cash flows and oftentimes these big chunks of cash refinancing and the the fees that come along with putting those things together and then when you go to sell you know raising the value of an apartment complex is significantly bigger than you know one single family home and when I think about why I started investing in airbnbs it was really the same thing I felt like when you talk about like Risk adjusted returns and like accessibility to a new investor I feel like airbnbs and short-term rentals were like the best asset class to do that because you know it you don't need to raise funds typically like you would for a syndication but you get these these much bigger cash flows than you do from from long-term rentals but necessarily it's not the same as like flipping because it's not as as risky about like if the market turns today I'm not going to be stuck holding this property that I'm I'm going to lose money on so I mean I just love that point of thinking of all the different ways you can kind of combine some of these things together to get the best like end product for yourself yeah and sometimes appreciation can be a tricky thing um and and it isn't always obvious um like when we want appreciation there's cases and we talk about this in the book where appreciation might hurt you so for example let's say I buy a rental property for a hundred thousand dollars um and I can rent that property out for X dollars a month um I also have the option of doing a renovation on that property and now I can rent it out for more money per month should I be doing that renovation so that I get more money well it's it's a difficult question because depending on how much I spend and how much more money I put in that's going to affect my cash flow so the decisions I make around appreciation I could potentially do a huge renovation I could knock the house down and rebuild it and not make that hundred thousand dollar house worth a million dollars potentially but that's not necessarily a good idea if the rent's only going to go from a thousand a month to two thousand a month I've created a ton of appreciation but now I've reduced my cash on cash return that other metric that we talked about with respect to with respect to cash flow so all of these things play off of each other and so maybe appreciation maybe doing a renovation on the property is a smart thing to do before I sell but maybe it's not a good thing to do now maybe it's a good thing to do five years from now or ten years from now and so we constantly have to be looking at all of these different scenarios and again it goes back to asking the right questions and not just saying more appreciate is good more cash flow is good yeah in a lot of cases it is but in other cases now might not be the right time or it might not be the right thing to do for this particular property for this situation for my particular goals so we've hit two of the the kind of ways that that real estate can generate wealth and profits I want to focus on those last two um so principal pay down Dave I'll start with you if you can same as the other two Define what principal paydown is and what metrics I guess we should be looking at to kind of measure uh how well a property does with that specific metric sure yeah so principal pay down is basically a way of generating returns that exists for pretty much any long term investment basically when you take out a mortgage you pay back the bank every single month and there are two components of that payment you're it's you know it stays the same every month but every month you're spent sending the bank principal which is basically repaying the loan that the amount that you borrowed slowly over time and then there's in interest which is the bank's profit unfortunately with interest that's just gone as Jay was saying earlier that's just the bank takes that you don't get anything back but when you pay down your loan that means that you owe the bank progressively less and less and less and over time when you go to sell it you may owe the bank half of what you used to owe them or hopefully maybe you pay it off over 30 years and then you don't own the bank anything at all and the beauty of this is that it's not you who's paying the bank back it's your tenants who are paying the bank back they you are taking part of their rent and paying the bank back with them and so over time basically they are allowing you to owe the bank less and when you go to sell your property you're going to realize that gain and unlike cash flow it's not something you realize immediately it's much more like appreciation that we were just talking about that you see the benefits of loan pay down when you actually go to either refinance your loan and pull some cash out or go and ultimately sell your property I like to think of of the principal pay down sort of like cash flow um so every month if we've done things right with our property we get this cash flow we get this profit that goes into our pocket principal pay down it's not quite as good as cash flow we don't actually get money every month that goes into our pocket but what we are getting every month is equity we're getting value added to the ultimate to the property when we resell it or refinance it and so we can look at we can evaluate this principal pay down in a lot of ways the same way we we evaluate uh cash flow so Dave talked earlier about the metric that we use for cash flows this thing called Cash on cash return so for every dollar that that we get out of the property that dollar is is is is is working for us um or for every dollar excuse me that we put into the property that dollar is working for us and is allowing us to to get money out of the property and the more money we get out compared to the amount we put in the higher our cash on cash return is um we can do kind of the same analysis we can use do the same kind of calculation on principal pay down so if at the end of the year we have a property that we paid a hundred thousand dollars for um and we paid down five thousand dollars of our of our loan balance after a year we've basically earned five thousand dollars out of that hundred thousand dollars we invested we've now made five percent not cash on cash return because it's not cash that we're getting but what I like to call five percent equity on cash return so we're getting five percent of of whatever we invested back in equity now how do we capture that well since it's a lower amount of our loan we capture that by either selling the property in which case it costs less to pay off the loan than the total loan that we took out and that goes into our pocket or we refinance the property we can actually take more money money out of the property based on the amount that we've paid down on the loan so this idea of equity on cash return is is very similar to cash on cash return and when I look at a a rental property I'm going to look at my cash on cash return so let's say I put a hundred thousand dollars into the property let's say I get five thousand dollars in cash flow at the end of the first year five thousand divided by a hundred thousand dollar investment that's five percent cash on cash but then when I say when I realized that I've paid down five thousand dollars in that loan the first year that's another five thousand dollars that I've gained in equity so a five percent equity on cash return When I add those two together I've now made the equivalent of ten percent return on my investment now obviously again the the equity on cash I can't actually capture that unless I resell or or refinance but I'm gonna do that eventually so I can look at my return now as ten percent return not just five percent if I were just looking at the cash on cash and a lot of people ignore the fact that they're building up Equity every year by paying down their loan but this can be a huge part of the total returns that you're generating and if you ignore this it your returns are going to look a lot smaller than what they actually are gee I'm so glad you mentioned that and and it kind of gets my mind spinning here a little bit but is there we've talked about metrics for each one of these individually right metrics for cash flow a message for appreciation for principal pay down is there like one master metric that I can use to kind of combine all four of these things together to say okay cool this is this is the one there isn't um and and unfortunately I wish there was some Grand unification metric um like there's one formula that you can plug all your numbers in and it comes out and it tells you this is how much money you're making but at the end of the day um again each of these four ways of making money in real estate are going to have different benefits and and drawbacks for different in in individual investors and so you need to know what's important to you and then you need to analyze those metrics if you really have no care in the world about tax benefits well you can ignore that you can just look at the other three but most of us care about all four of these and so what we do is is the last part of the book there are several different parts of the book The last part of the book kind of puts everything together and analyzes and looks at a couple different types of deals and at the end of the day it really boils down to you need to run the numbers for cash flow you need to run the numbers for appreciation you need to run the numbers for principal pay down you need to run the numbers for tax benefits and then put kind of all of those numbers together in a way that you can see a holistic view of of the of the investment itself Dave let's start with you for the last one the tax benefits so how are you generating money from the tax benefits of investing in real estate well let me just start by saying that I think taxes are probably the last thing most investors start thinking about I know when I first got started I really wasn't even thinking about this you're kind of if you're a rookie you're like I just want to generate money first and I'll figure about taxes and hanging on to it later and I definitely fell into that camp and I think as you mature as an investor you realize how important taxes are because the more money you can keep the more money you can reinvest and if you're familiar with the concept of compound interest which we talk a lot about in the book basically if you're able to keep more money into your investment machine that means you can generate more and more returns and you can defer your taxes for longer and longer and maybe in some cases you can defer them all together and so basically similar to to some of the other Concepts that we've been talking about here taxes are obviously they're not putting more money in your pocket every single week but if you can strategically use real estate to optimize your Taxman 6 you wind up having a lot more money to invest into your deals that can generate you more appreciation more cash flow and more loan pay down over the course of your investing career here's something a lot of people don't think about they think how do I lower the amount of taxes I ever have to pay but it's just as important to be thinking about how do I put off paying taxes for as long as possible I talked earlier about this concept of time value of money a dollar today is worth more than a dollar ten years from now because I can invest that dollar today well likewise having to pay um my a dollar in taxes not today but five or ten years from now allows me to keep that money not pay it to the government and invest it for the next 10 years so I can earn more on it before I actually have to give it away to the government um so a lot of what we talk about when we talk about uh tax benefits of real estate it's not necessarily that you're going to pay lower taxes throughout your entire life you will actually and and there are a lot of tax benefits there but a lot of the things that we tend to think about less is how do we just push off paying our taxes till next year or the year after or five years down the road so that we can take that money and we can invest it in the meantime and make a whole lot more money before we have to give any of it to the government and so real estate kind of gives us these two benefits one it gives us the ability one to pay less total tax over our lifetime of the investment but two more importantly it gives us the ability in a lot of cases to defer those taxes for a long time and we can do that through a couple ways number one we have this thing called depreciation and basically what that means is just like anything else we buy for our business and real estate is a business expense that thing is going to to wear out over time if you buy a car for your business the government says yeah your car is going to wear out about 20 per year for five years and they're actually going to let you take a tax deduction for 20 of the car's value every year for five years I'm making that up I think it's five years but it's some amount of time and you can take a deduction every year for your car likewise if you buy a printer you can take a deduction because the government knows your printer is eventually going to go obsolete or if you buy basically anything a piece of office furniture a computer basically the government allows you to take a deduction against that every year as a tax benefit same way with real estate so the physical real estate that you buy is going to deteriorate over time your properties you basically need to maintain them and upkeep them so the government's going to allow you to take a deduction against the value of your property over time for a for a residential property a single family house you can take that over 39 years so if you buy a property that the physical structure is worth a hundred thousand dollars the government's basically going to let allow you to deduct twenty five hundred dollars a year over 40 years 39 years actually um and and that's a tax deduction that you get every year you eventually have to pay it back when you sell the property you're going to have to pay it back but you can defer taxes for as many years as you hold it and remember deferring taxes is good because time value of money um number two um so so depreciation is number one number two we have this thing called a 1031 exchange which allows you to take an investment property of rental property or commercial property and it allows you to sell that property for another similar property under certain circumstances and not have to pay taxes on that sale you can then basically hold off paying taxes until you sell that second property or you can do a 1031 exchange on the second property and defer paying taxes potentially until you die so between depreciation and 1031 exchanges there are two great ways to basically put off having to pay taxes on your property for potentially years or even decades there are plenty of other ways but those are the two big ones so Jay um kind of a follow-up to that is what rookie investor would make this I guess route of investing their priority like who would choose this one as this is the way I'm going to generate money off of my investment yeah so there are a couple things to to to answer in that question number one if you're buying rental property you're getting depreciation um a lot of us if if we buy a single family rental we're going to pay close to zero taxes these days um on that rental property simply for the the depreciation that the government gives us we have to take that well we don't have to take it but we're gonna have to pay it back at the end so we might as well take it every year so what we typically find is if we buy a rental property we may not be saving taxes on all the other things in our life but we're going to typically save taxes on that particular property and for a lot of my single family rental properties the income I earn from the rent that I collect I pay close to zero taxes on that every year so if I buy 20 rental properties I may pay close to zero taxes across those 20 rental properties now in some cases I may even get more tax benefits than I made in income on those properties and now I might be able to use that income to offset income I'm making from other places I might be able to offset income I'm making from a consulting job I'm doing or from stock stock income that I'm making or from a W-2 job and so it it has nothing to do with whether you're a rookie investor or you're a seasoned investor it really depends on the type of properties you're buying if you're flipping properties you're not going to get any tax benefits flipping properties is if you're getting into real estate for for tax benefits don't flip properties I've I've paid more in taxes than most people should have in in a lifetime because I flip so many properties but if you're buying investment properties if you're buying rentals or you're buying commercial property you're automatically going to get some of these tax benefits and then if you're smart about the way that you get rid of your properties when you sell them or exchange them you have the ability to push off paying taxes so it's not a question of who should be focused on the tax benefits I'll get into that that question in a second but all of us if we're buying rental properties or commercial properties we have have the ability to take advantage of those tax benefits even if we don't try so that's number one then we get into the question of who should be investing primarily for the tax benefits there are a couple people one if you are a real estate professional which means you spend most of your time in real estate but you make a lot of money doing other stuff you can then take the tax benefits you're generating from Real Estate and you can apply it to all the other stuff so just to give an example and I don't say this to brag or to to kind of mention numbers but the reality is I work in apartment complexes now we buy and sell apartment complexes this year I'm going to have over a million dollars in tax benefits that I can use for any income that I might generate literally if I make a million dollars from selling books or a million dollars from consulting or a million dollars in the stock market I can take them this million dollars in tax benefits I'm getting from Real Estate and I can offset all that other income and I can literally pay zero tax this year thanks to what I'm doing in real estate no matter where my income might be coming from so for me if I'm making a lot of money selling books or if I'm making a lot of money uh consulting or if I'm making a lot of money flipping houses the fact that I'm doing apartment complexes and have a million dollars in tax write-offs I basically pay zero tax on anything now again I'm not going to pay zero tax forever I'm just deferring that at some point I'm going to sell these apartment complexes at which point the government's going to say okay now you owe us all the taxes that you saved on but at that point I'm going to buy more apartment complexes and do the same thing with the income I made from those and so I'm able to kind of push my tax burden down the road hopefully I can push it down the road until the day I die at which point it's my kids problem um but more importantly if I die a lot of it's just going to go away because state tax allows me to kind of generate a certain amount of net worth before I have to pay any any taxes so um so somebody that's a high net worth earner that's working primarily in real estate they may be looking for tax benefits um but even if that's not you even if you're just a new investor that doesn't make any other income and you're just buying your first rental property you're going to be able to benefit from the tax benefits if no other place than just in that rental property that you're buying you might make ten thousand dollars on that rental property just an income this year and you might pay close to zero dollars in taxes that's a huge savings and even for rookie investors if you don't even have your first deal yet it's great to start your tax planning um and BiggerPockets does have a book for this by Amanda Han it's um the book on Tax Strategies and it goes through all basically a lot of what Jay just talked about and kind of breaks it down for you if you want to learn more about it and then that's where you can take it to your account or your CPA but better yet to find somebody who's going to tell you to do these things during your your tax planning instead of having to figure it out on your own but speaking of books uh Dave and Jay can you tell everyone where they can find your new book yeah you can find it on the Bigger Pockets store or you can go to numbersbook.com either one will take you to the bigger pocket store where you can find the book and we just wanted to let everyone know if you order now it is still during the pre-order period And if you buy it now you have the opportunity to attend a webinar that Jay and I will be hosting to talk about the state of the economy we'll also be giving away coaching calls so if you buy the book you might be able to win a coaching call from either Jay or myself and you can use the free code Dave for a discount of 10 or I think you can use the name Jay as well I think Jay Scott or Dave if you put that into the uh the coupon code you get to save 10 percent a whole bunch of other uh bonus materials as well that haven't been announced yet but you'll see them in if you if you go over to uh to the bookstore but yeah a lot of bonus content the book is called I don't know if we've even mentioned the name but the book is called uh real real estate by the numbers and like Dave said if you want to get it you can go to the BiggerPockets bookstore biggerpockets.com store or you can go to numbersbook.com which will take you right over there and where can everybody find out more information about each of you Dave uh yeah so either on Bigger Pockets or Instagram where I'm at the data Deli or check out the on the market podcast yep and for me uh obviously Bigger Pockets or you can go to www.connectwithjscott.com and that'll kind of link you out to everything I have going on well thank you guys so much for joining us today on the real estate rookie podcast I'm Ashley at welcome rentals and he's Tony at Tony J Robinson and we'll be back on Wednesday with another episode [Music] So High um [Music]

Channel: Real Estate Rookie

Views: 14,867

Keywords: real estate investing, invest in real estate, real estate, get rich, get rich in real estate, how to build wealth, build wealth through real estate, how to invest in real estate, rental property, rental properties, rental property investing, interest rates, mortgage rates, housing market, cash flow, how to analyze real estate, analyze real estate, rental property calculator, rental property calculation, how to start investing, cash, biggerpockets, real estate rookie, podcast

Id: CchgTEk1FEk

Length: 66min 28sec (3988 seconds)

Published: Sat Oct 08 2022