Keys to Understanding Real Estate Cashflow

I'm Ken McElroy with Ken McElroy comm so what happens a lot of times when people are trying to buy real estate is they focus on the price and while I totally understand that you need to look at the price the price is not necessarily the first thing to look at what we're trying to do here was right we're trying to buy real estate that cash flows we're not trying to buy real estate that goes up in value massively and sell it because if we sell it we have a lot of tax and we're trying to avoid tax so most of our investors when I started out it was just my money and eventually I ran out of money so maybe like a lot of you where you use your own money buy one thing then you use your own money to buy a second thing and eventually that money runs out so you have to learn how to raise money so this video will also help you understand how to raise capital because people that invest in you they also invest in the deal so they invest in you as the management team and they want to know who you are what your track record is and what kind of team you've generated but more importantly that's a check the box but they really want to know does the deal cash flow does a cash flow or you're trying to time the market most deals are trying to time the market that's why if you learn this information you'll have a huge competitive advantage if you can understand how to put people's money to work generate massive income create massive value and then give it back to them tax-free you'll have investors for life so that's what I'm going to teach you now so the very first thing that we're gonna go through are some of the very basics that you need to review on every single deal so every single deal has four components the first one it's very simple its income no income can come in many forms so let's say that you're a flower shop your income are the people that walk in and buy flowers if you're an apartment building there your renters they come in and they pay you rent that's your form of income for a reoccurring business model on the internet it might be a subscription base of $9.99 or $29.99 a month you know for Amazon you know it's selling products right so so every and for Starbucks its selling coffee so income is income and you personally have your own income it's called a paycheck for a lot of use so when you go to work and every two weeks you get your paycheck that's your income so it's really not a complicated subject but in this particular case income for me primarily our renters and so so I focus entirely on renters and what I'm trying to do here is I'm trying to grow the income so the properties that I buy I'm looking for properties that have problems I'm looking for properties that have low occupancy I'm looking for properties that have income potential so just like everything else let's say let's say you go down to your neighborhood Starbucks when you walk in there they don't just have coffee they have food they have stuff at the register you can buy CDs you know there's all kinds of things all around same thing in a grocery store that you can buy as you're walking through it's the exact same process except we're talking about real estate so for us for income we're looking for ways to monetize pets we're looking for ways to monetize views we're looking to put washers and dryers and units and to be able to monetize that so so back 10 years ago we were buying properties that had washer and dryer capacity they had laundry rooms but they didn't have washers and dryers so we were buying hundreds of thousands dollars of washers and dryers every year and putting them in and then charging the ten at fifty to seventy-five dollars per month so that's part of generating income another way is to put up car ports because people love their cars and so covered parking you know garages these are all ways to monetize your income through real estate and from it's been multifamily and there's hundreds of ways and we spend a lot of time on this but income is a very important piece and most people don't understand this so what they do is they'll try to buy things that say hey it's sitting at ninety five percent we're gonna grow it to 97 or 98 percent that's not realistic you can't grow your occupancy beyond what the markets doing so the income is a very very important piece and we spend a lot of time here working on income okay we work on the occupancy side and work on the other income side it's a very important piece the second piece is expenses and this is typically a negative so obviously expenses are everything from payroll to marketing advertising and marketing it would be your taxes it would be your insurance would be all your utilities so again think of yourself you probably have a mortgage you might have a rent you might have a car payment you might have some vacation stuff you want to do you have to buy food maybe you have a pet so you have that those are all expenses so the same thing happens in real estate except for us it's I have to pay a utility bill I have to pay the electric company for all the lights I have to pay a water company for all the water that the tenants are using it for the landscaping and I have to pay a trash bill for the people that come and pick up the trash so these are all expenses with every single rental everything every single commercial building industrial building that's what expenses are taxes insurance and those are some of the things I've already mentioned but all those things happen in this line item and so what we're doing is we're trying to minimize our expenses now you're not going to get away with minimizing them to zero of course because every property has expenses so what we're trying to do however is figure out ways how do we minimize our expense in other words if if we have the the trash vehicles coming to the property three times a week can they come two times a week and pick up bigger dumpsters that's less because it's one less trip so that's a trip charge that we don't have to pay anymore so those are the kinds of things that you start getting into when you start buying real estate same thing with marketing and advertising in the old days they used to advertise in the newspaper and then it went to these rental books with distribution now it's all up on the internet and they're trying to and the Internet companies are trying to get you to pay for ads just like Facebook Ads same kind of thing so it's all moved to the Internet and so the for our company what we're trying to do is we're trying to minimize our marketing expenses but but keep our traffic to our properties high so we've been doing that through blogging and all kinds of other things to get people to come to our websites so instead of paying for online ads and so our company now doesn't pay any money in marketing and advertising except for salaries because the people that we pay here at our company generate enough marketing more than we would have gotten for paid advertising so those are the kinds of things that you do on the expense side we have full-time people that are just working on the insurance and the taxes for all our properties because we have over 10,000 units and so we're paying millions of dollars every single month on tax and insurance and we need to make sure that we're minimizing those all of those have to do with generating the next number which is called the net operating income or Noi so a lot of people call this Noi so this is Noi so all Noi is is your expenses after your income how much money do you have left over after expenses now for many of you that's zero or even negative so if you don't have a job your expenses are higher than your income probably but if you do have a job hopefully your income is higher than your expenses same thing with an apartment building if I have expenses of a hundred thousand a month and my income is 120 thousand a month then my income for the month my net operating income is twenty thousand dollars a month but if my awkward see drops down and it's 90,000 and my expenses are a hundred then I have a negative net operating income so that's why managing expenses and managing income is so important because if you don't take care of these things then this here will go up or down dramatically and what you'll find and this is essentially what we're going to be discussing the rest of the video net operating income is the way to drive value and this is the way that you create massive wealth for your investors and for yourself if you can understand how to generate high net operating income then you'll do very well in this business like I said most people buy something and they hope that it goes up they don't understand real estate at this level and if you understand real estate at this level you're gonna do very very very well so the next piece that we need to add is is debt or the mortgage so when you're buying a piece of real estate the very next piece is called debt now again let's say it's a single-family house that you're buying most people are going to the bank and getting a loan to buy that house that's this so with big commercial real estate deals same thing we're buying using debt now the cool part about debt is that it comes from other people if you think about so thank you by the way from putting all your money in the bank because now the bank's going what the heck now I have to lend it right because when you put money into a bank when people go to posit their cheques into a bank it's a liability to the bank the bank is sitting on a whole bunch of people's money and they have to pay you interest so they lend it to guys like me in the form of debt to buy big real estate deals that's the way the banking system works yeah that's why they give you free things to put money into the bank free checking deposits and free this and free that they want your money because they lend it out higher they give you 1% on your bank account and then they charge me 5 or 6 to borrow it that's how banks make money so so debt is a very important P of buying real estate because it's really OPM or other people's money if you can use debt then you can get massively wealthy another really important piece on debt is you've all heard of leverage even when you're buying your home let's say you buying a home that's a hundred thousand dollars and the bank gives you seventy thousand dollars in a loan you only have to come up with thirty thousand dollars to buy a hundred thousand dollar house the rest is in the form of debt they've given you seventy percent of the amount to buy that house or seventy thousand dollars on a hundred thousand is seventy percent that's called loan to value LTV so the debt is a very important piece because you don't have to come up with the whole down payment you don't have to buy the house all cash you can actually go to the bank and this is a very important piece to understand but the cost of debt is very very important and banks will give you this money if you can qualify so why wouldn't you put thirty thousand dollars down to buy a hundred thousand dollar house and this is all I'm doing in a larger scale with the ten thousand units that we owned so obviously we're heavy in debt and I'm very excited about how being in debt because the tenants that I have here are actually paying this off the last piece after debt is cash flow so cash flow is what we're trying to do on every single model every single deal I look at goes through this process it's the exact same process so if there's no cash flow it could be that my debt costs are too high it could be that my expenses are too high or it could be that my income is too low but that doesn't necessarily mean that it's a bad deal because I might buy something that has a 50% occupancy let's say and has low income it has a negative net operating income but if I can increase the income over one or two years then I can massively generate higher net operating income and cash flow so I'm costly looking at how much do I have to put down in the form of equity how much can I get in debt and how much cash flow do I generate because I'm investing people's money and investing my money this is the only thing that matters cash flow nothing else I'm not looking at how much is the property going to be worth in one or two or three or four years now I'm making sure that it goes up but I'm actually driving the value myself by generating that operating income because when you go to the bank to borrow money this net operating income is what the bank looks at and you would - so they're saying okay if I'm gonna give this person debt or a mortgage I want to make sure that this is higher than this because if my net operating income is not higher than my debt I'm not gonna be able to pay my debt so this here has to be in a really good position be able to get maximize your debt and to maximize your cash flow every single deal on the planet goes through these things and then once you understand this you can be massively wealthy it's way different than buying something low and trying to sell it high has nothing they don't look at any of these things what we're trying to do is we're trying to invest for the long term cash flow massively which what eventually what we call an infinite return so how do I take people's money generate massive value by managing these things take it back out in the form of debt and return it in a cash flow back to the investor every single quarter every single year that's why our investors keep coming back to us because we are generating massive cash flow returning their equity back tax-free and they now are in our deals on an infinite return thank you

Channel: Ken McElroy

Views: 173,417

Rating: 4.9212203 out of 5

Keywords: Rich Dad, Entrepreneurship, Investing, Personal Development, Get Wealthy, Earn Wealth, Ken McElroy, Entrepreneur, Rich Dad Advisor, Success, Business, Self-Help, Coaching, Real Estate, Real Estate Entrepreneur, Real Estate Investing, Freedom, Lifestyle Business, Hustle, Cashflow, Debt, Infinite Return, Buy Real Estate, Investing in Real Estate

Id: mgUSZ-va1mw

Length: 15min 15sec (915 seconds)

Published: Tue May 28 2019