Real Estate Investing for BEGINNERS - Understanding Cash Flow

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Everybody can. So today we're going to talk about understanding cash flow and, of course, why cash flow matters. So before we start. Please be sure to hit the like button. Hit the subscribe button and definitely the notification bell, because I'm starting to do lives now. And on Mondays, I'm actually doing a live for an hour. And you're definitely not going to want to miss that. So this is a video that I did two years ago that I think will help a lot of people. Cashflow is everything in real estate investing. So now let's break that down to what that actually means. First of all, cash flow is defined as your income minus your expenses. Like I have here, it's really that simple. So your income, of course, is positive or should be at least four. That's your revenue coming in. And your expenses, of course, are the things that are going out. That is your cash flow in real estate terms. That's called the net operating income. And if you don't have any debt, then that, of course, is your cash flow. But if you do have debt or a mortgage payment, that is the next step. And then after that is your actual cash flow. And there's lots of things that we can do inside of the income, the expenses and the debt to grow your cash flow. And we're going to go over those now. Your income is the rent that your tenants pay you. And your expenses are obviously what it needs to pay for your property each and every month. So a lot of you are probably wondering how we go about ensuring that a property will cash for that is where all the magic is made to start. I look for properties that have untapped income potential. This generally means the properties that are being underutilized or have some obvious problems. Maybe the property looks worn out, maybe the owner has given up on marketing it. Maybe it's a decent location, but the occupancy isn't as high as it could be. When I look at a potential property, I'm always looking for things that we can monetize. Specifically, how are the current owners leaving money on the table? What do I see that they don't see? That can include many things. I like to monetize our tenants pets by charging them extra for that. We can even monetize the views by making those units more expensive. One thing I especially like to do is monetize washers and dryers. So the property that we're buying right now, they actually have laundry rooms in every apartment with hook ups and everything. And all we had to do was buy the actual appliances and give them to the tenants and then charge more rent. A few years ago, we specifically sought out properties that didn't just have washers and dryers, but they also needed renovations. So we literally spent hundreds of thousands of dollars buying washers and dryers and renovating properties, which enable us to charge residents an extra 50 to sometimes over two hundred and fifty dollars more per month for that convenience , for nicer places, for new appliances, for upgraded kitchens, for better flooring. Those kinds of things. And the thing is, is we only pay for all of this work one time. Keep in mind that all of the money that we use to upgrade these properties for washers and dryers and renovations and all the things we just talked about , all that money is spent upfront typically in the first year. And then we recoup that expense many times over through the increase of income by charging more rents over the long term. When you're deciding whether or not a property will cashflow, be sure not to just base your income projections on an overly optimistic projection. The typical occupancy rate for a multifamily property in the area of, let's say, 90 percent don't project a ninety eight percent occupancy. That's not realistic. You need to be realistic about your market and you need to be realistic about what renters will pay for. You can't be a pioneer here. So what you're looking for are properties with room for improvement that, you know, will appeal to renters in your market. At the same time, driving up your income, driving up your net operating income and driving up your cash flow. So now I'm going to. So now I'm going to show you some tricks of things that we do at our own manager company right now. So when we're looking for a property, we're always looking for five ways that we can always grow the income. The first and most obvious thing is occupancy. And you'd be super surprised how often you get management companies or managers or owners that are horrible at this. They don't they don't return emails. They don't answer the phone. They're not open. And so they'll have vacancies sitting all the time. And this drives down income. This is so simple, this stuff. It's literally just being open, having some very basic marketing things like how do they get off? Hold of you. How do they look online and be able to rent and ask questions? How can they see you on social media? And these are not things that are expensive either, guys. But all these kinds of things, when people want something, they want it now. They want to be able to get their answers pretty quickly on pricing and size and all those kinds of things. So these are very simple things. Oddly enough, that are very overlooked on a number of properties all over the country. Vacancy is the next thing. And that is so simple, guys. Let me tell you what happens. We have taken over so many buildings where people haven't even cleaned the units on the people that moved out before. And so vacancy can oftentimes go up. The other thing is, is you can manage just just by taking care of the people that live there. Now, a lot of times, management companies or owners, what they do is they pay attention to only their vacancies are more focused on the sales process of getting new people than they are at handling and managing the people that are there, your customers. They're the reason that you cashflow focus your efforts on the people that live there, take care of them, and your vacancy will always stay low and your occupancy will always stay high. There's lots and lots more around these two categories, guys, and we have lots of videos on this as well. Location is something that you can charge for. We found that there are lots of people that like to live upstairs, like single women as an example, but seniors like to live downstairs. So there's ways that you can price those corner units or how long is it to the parking area or what kind of light is there? What kind of view is there? Is that overlooking the pool or overlooking the parking lot? Does it have a view? Does not have a view? Is it nine foot ceilings or not? You know, sometimes there's a big difference between upstairs units and downstairs units. So all of these things come into play, especially around square footage. And a lot of times we find when we take over properties that management companies and owners just charge flat numbers for all one bedrooms, all to bed. So sometimes when we get into there, we can with 10 and 20 and 30 dollar increases all over the place, can turn into thousands of dollars a month. So be very cognizant of location because your renters will tell you what they want. So the next one is value added. We already kind of touched on washers and dryers. We're buying a building right now. We're getting 40 or 50 dollars a month, but you can also do other things. So we talked about washers and dryers already. But another thing that we started doing is we started putting in pet areas and even fencing the areas around people's individual units so that they can leave their doors open and their pets could run in and out. As an example, when we started getting 50 dollars a month just for that small thing. Another one was we started adding storage units on the property. We had areas around where we actually put in storage facilities. And people were paying anywhere from 50 to one hundred dollars a month just for storage. These are all things that people can pay for in certain markets. You have to make sure that the markets will support those kinds of things. But those are all kinds of things that we look at every single time. In addition to renovation on the inside and putting washers and dryers in and upgrading the interiors, these are things that you can do on the outside. Now, the fifth one is other income. And this is something that a lot of people overlook. So a couple of ideas on the other income are things like pet rent. So what we do typically is somebody who has a pet. They love those pets. We usually charge 10, 20, 30, 40, 50 dollars a month for pet rent because pets do have damage in addition to the deposits and things like that. And people with pets typically pay pet rent, and this can add up over time. Another one is collecting for the utility costs. So we started to pass through the electric, the water, the sewer and even the trash expense as an income line item, even though we're paying an expense somewhere else. So we're not eliminating the expense, but we're actually having the residents, just like they do in a house, pay for all those extra things. And that's income. And all it does is offset the expense, but it's income that you didn't have before. Another one is smart home technology, which we're doing, keyless entry we're doing, and be able to control your lights and your air conditioning and all that stuff from an mobile app so people can literally turn on and off their expenses in their own home through an app, through smart home technology. And people are paying for that right now. And of course, as a landlord, it helps to eliminate any kind of lockout's if people have that on their phone. Another one is trash pickup. You'd be surprised at how many people like that. They literally put their trash outside their doors and the magic comes through and picks it up and dumps it. And you can charge extra for those. And I'm seeing people doing this with closet remodels and all kinds of things that you can do inside of the units. And the last thing is renters insurance. So we charge the tenants, say, 20 dollars a month for renters insurance, and then maybe we pay 10. And so the landlord or the owner gets another 10. Dollars per month by negotiating a bulk renter's insurance policy for the property. Next, you need to calculate your operating expenses. So owning a rental property includes a lot of overhead. First, there's your mortgage. We talked a little bit about that. But then there's these other things. There's the management that could be you or could be somebody else that you pay the property taxes. Every property has property taxes, insurance expenses. This protects you for any kind of a lost utility. So you're going to have water, sewer, trash, gas, electrical, all those kinds of things. Marketing, payroll and repairs and maintenance. And this does not include capital expenditures, which we've talked about in other videos. But that is a one time expense that you might have to fix everything right when you buy it. So now we're going to talk it some ways where you can potentially lower your expenses to also grow your cash flow as you grow your net operating income. The first thing is management. Now, this is something that you got to decide. Do you have the time? Management is a real cost. It's going to take your time or someone else's time. Make sure that you shop this around. I've seen all kinds of fees around management fees, and you really need to do your homework. The second one is property taxes. And I found that there could be massive inconsistencies even on the same block, from house to house, from property to property. And then you better appeal your property taxes each and every year. And in many states, you're going to have personal and real property taxes, which are the personal property and then the real property. And sometimes those have very different rates. So you really need to appeal these each and every year. The third one is insurance. Now, insurance agents a lot of times will give you way more insurance than you need. So by shopping that around, you can really determine that you get exactly what it is that you do need, because a lot of policies have a lot of extra things that you might be paying for that you don't necessarily need. Another little trick is that you can grow your deductibles and lower your insurance expense just by growing your deductible. It takes risk off of the insurance company and puts that back on you. But if you have a property that hasn't had a lot of claims or you don't think we'll have a lot of claims, which of course, is not easy to predict, but sometimes you can lower your insurance costs that way, utilities. Now, this is a wild card. So every property has utility, typically electrical water, sewer, trash, gas, those kinds of things, and even trash. I've found that there's a lot of ways to lower your utility costs through photo cells and timers and things like that for the electrical. As an example, we have meters on the water that oftentimes determine your sewer costs. We even take a look at how often the trash company is coming. For example, if all your trash bins are a quarter fall, you might be able to skip at least one pickup that particular week and lower your trash bill a lot. Marketing costs are really fun right now because a lot of this stuff can happen organically through really good social media and through some kind of consistency. Back in the old days when I started, because I'm old, is, you know, putting newspaper ads and finding these different kinds of ads that you would actually pay people for today. The gloves are off and people are filling up their properties very easily by just letting them know where they are, what's available and keeping the place clean. This is a big way to do it. One of the best ways is going to your existing tenant base and having them refer friends and family, because if that happens, they're less likely to move payroll is something that a lot of times a lot of management companies, a lot of owners throw a lot of money at because they don't understand it. And this is a great area that you can look at to just to see, is everybody really efficient? Is everybody really manage? We just bought two properties. We combine them and we were able just on payroll to reduce our operating expenses by one hundred and fifty thousand a year. The last one is Ranum. This is repairs and maintenance. Now, this is your normal turnover stuff. This can be really high on properties that have a lot of move outs and move ins like you would see, let's say, in an area like Las Vegas or maybe around a university. What you could do here is there's lots of strategies to be able to lower your turnover costs, to be able to drive those repair and maintenance costs down, because every person that does not move out saves carpet paint, maintenance vacancy, all the things that are hangovers from people moving out. You can really reduce your Arnim here, as well as just being able to price out the things that something might need. As an example. One time I set my maintenance guys down and said, how much money are we paying for water heaters? And we had like eight or 10 different prices because they were going all over the place. And so sometimes you can consolidate all that down and take a look at your pricing and try to get it as low as you can and use one vendor for lots of things, which will really lower your Arnim as well. So when we're buying properties, these are all the things that we're looking at. We're not only looking at how do we grow our income, but how do we? Use or minimize our expenses without compromising the property the way it looks or the marketing or any of the things without tying the hands of any of the people that are managing it. How do we keep this at the bare minimum and run the most efficient that we can? These are all strategies to grow your net operating income. So if you can figure out how to generate a higher net operating income, you'll do very well in this business. When I'm investing, I'm not scared off by a low net operating income. I look at why these numbers are low and see if there's an opportunity to raise this. This is different from buying a property in the hopes that a market or a neighborhood or some other external factor changes and makes a better investment. I'm not looking for the thing to go up. I'm looking to drive equity here. I look at cost effective ways that I can drive up the NOI. I'm in a good a.y. Will determine whether or not you can finance your property in the first place. When you go to a bank, they will want to look at this number right here, this net operating income, to make sure that this deal even makes sense for them. That's how they determine the debt. If the bank see the low end and why, they will not lend you very much money. So if you find a property, let's say, that has a low NWI and you have a strategy to grow it, then this is how you do cash out, refinance. You grow your analy, you go back to the bank, you refinance with new debt, you pull your cash out. At the same time, everyone wins because of lots of cash flow. So this was just an overview of the fundamentals of real estate cash flow. Investing for cash flow is totally different than trying to buy low sell high. That's what we're trying to do here. We're investing for the long term. I never buy a property that doesn't cash flow, and neither should you. We want a property that will make money for you right away. So thanks for listening, guys. If you like this, please hit the like button. Please hit the subscribe button. And of course, hit the notification bell, especially because we're now going to be doing these one our lives every Monday.
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Channel: Ken McElroy
Views: 58,131
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Keywords: Rich Dad, Entrepreneurship, Investing, Personal Development, Get Wealthy, Earn Wealth, Ken McElroy, Entrepreneur, Success, Business, Self-Help, Real Estate, Real Estate Entrepreneur, Real Estate Investing, Freedom, Lifestyle Business, Hustle, cash flow investing activities direct method, free cash flow investing, real estate cash flow model, passive income 2021, cash flow investing, passive income, financial literacy, financial literacy for beginners, investing for beginners
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Length: 16min 59sec (1019 seconds)
Published: Fri Aug 20 2021
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