BROADCASTS.com

Learn how real estate pays you up to five ways simultaneously. Should you be playing offense or defense as an investor now? Learn how a return of less than 20 to 25% is disappointing. We’ll add up all five ways you’re paid and see what your Year One return is from: Appreciation, Cash Flow, Return On Amortization, Tax Benefits, Inflation-Profiting. See brand new construction SFRs and duplexes in central Florida at: www.GetRichEducation.com/Orlando Central Florida rent-to-price ratios are about 0.8%. Interest rates are at historic lows. What does late rapper Notorious B.I.G. have to do with real estate investing? You’ll see today. Kind of.  **Complete episode transcript below. Read along as you listen.** Resources mentioned: New construction Orlando income property: GetRichEducation.com/Orlando Mortgage Loans: RidgeLendingGroup.com QRPs: text “QRP” in ALL CAPS to 72000 or: eQRP.co By texting “QRP” to 72000 and opting in, you will receive periodic marketing messages from eQRP Co. Message & data rates may apply. Reply “STOP” to cancel. New Construction Turnkey Property: NewConstructionTurnkey.com Best Financial Education: GetRichEducation.com Top Properties & Providers: GREturnkey.com Follow us on Instagram: @getricheducation Keith’s personal Instagram: @keithweinhold   Welcome to Get Rich Education. I’m your host, Keith Weinhold. There are seasons in your investor life where you either play offense or defense. What should you be doing now? … as we refresh the “Up To 5 Ways That Real Estate Simultaneously Pays You.”   Anything less than a 20 to 25% rate of return in buy-and-hold real estate investing is disappointing. How can that be? Today, on Get Rich Education. ______________________   Welcome to GRE! From Asmara, (Air-UH-tree-UH) Eritrea to Ashtabula, OH and across 188 nations worldwide. I’m Keith Weinhold. This is Get Rich Education.   Thanks for being here, but you’re not here for me. You’re here for you.   In your investor life, are you playing offense? Or are you playing defense right now?   Or, in general, longer-term, are you a more offensively-oriented investor, which correlates with more risk-taking for higher returns.   Or are you more defensively-minded - where you’d rather have less risk and lower return?   Are your mindset and actions aligned toward offense or defense?   Well, I’ve got an answer for you here, and you’re going to have a really valuable takeaway.   Anything less than a 20 to 25% annual rate of return in real estate is really … actually … disappointing.    “What choo talkin’ ‘about, Willis?”   What I’m talking about … Will - is ...    Really, this all comes back to how - when you buy income property the right way - you are paid up to five ways simultaneously.   A stock typically only pays you one way, perhaps two.   I think that the easiest way for you to understand the five ways you’re paid - and even celebrate these five ways you’re paid - because … this ... is ... pretty compelling - is to use an example.   I’ve discussed this before. So if you’re a longtime listener, I’m going to put “The 5 Ways” through a new filter for you.   And if you’re a newer listener, say in the last year, this could completely change your investing thought paradigm for the rest of your entire life.    In fact, compound interest is lame and rarely, if ever builds real wealth in real life. I’ll tell ya what does here.    And yes, I know that this is abject heresy. It is replete blasphemy to criticize “compound interest” in the finance world.    I am surely guilty of committing financial profanity right there.   This is really fundamental stuff I’m about to share with you here - and yet the real paradox is that most real estate investors don’t even understand this.   This is pretty fun to do. We’re going to add up the five ways you’re paid and determine your total rate of return here.   Let’s say that you purchase a $100,000 property - $100K. And, no worries, if that’s too “small time for you”, this is all based on ratios, so it scales up to a $1M or $10M property.   (Ha!) And sometimes I wonder how much longer a $100K property will even be a feasible example as inflation makes $100K properties less common all the time.  But with your newly-bought $100K rental single-family home, you buy it with a tenant already residing there, where the monthly rent income exceeds the monthly expenses - that’s a big part of “buying right”.    With your 20% down payment, you have $20K out of pocket then, and an $80K loan.   The first of five ways you’re often paid is ...  1 - Appreciation Let’s just say that your property appreciates from $100,000 to $106,000. That is just commensurate with real estate’s historic appreciation rate of 6%. But here’s the big “a-ha” moment.    Your $6,000 gain is based on only your $20,000 down payment.  Well, that’s your ROI formula - your gain divided by how much you have invested. Well, your $6K divided by $20K is a 30% return to you. Really? How did that happen exactly?   How do you have a 30% return from just this first of five ways you’re paid?    This is because you achieved a 6% return on both your $20K of skin-in-the-game and the $80K borrowed from the bank. This is what is known as financial leverage. Financial leverage means that your return is 30%.    No wonder that I’m known for saying that compound interest is lame and leverage builds real wealth. More on that soon.   2 - The second way you’re simultaneously paid is with Cash Flow It’s your monthly rent income minus all the expenses (like mortgage, vacancy, insurance, maintenance, taxes, utilities, management). We’ll be conservative and say that leaves you with only $100 of residual income in this case.   Annually, that’s $1,200 more for you, divided by your $20,000 down payment.    Yes, it’s $1,200 still divided by that same $20K of skin you have in the game.    This another 6% return for you. This portion is what is known as the Cash-On-Cash Return.    So, so far you’ve got a 30% return from leveraged appreciation PLUS a 6% cash-on-cash return from that monthly cash flow & we’re still going.   3 - Loan Paydown Unlike your own home where you pay down your principal mortgage balance with money that you had to earn, well, here, your tenant pays the monthly principal portion of your $80,000 loan on this property!    At a 6% interest rate (and you know you can do better than that today, but we’re being conservative here) on a 30-year mortgage, that’s about $1,000 that the tenant pays down your loan for you annually.    Divided by your (still the same) $20K of “skin-in-the-game” means that’s ANOTHER return for you of: 5%. This portion is known as your ROA - your return on amortization. We are still going - still adding up all the ways you're often paid in real estate.   4 - Tax Benefit You can have a mortgage interest deduction, an ability to pay zero capital gains tax with a 1031 Exchange, and tax depreciation - which can tax-shelter part of your rent income.    This is hard to measure. We’ll conservatively call your investment tailwind another 5%. There’s something else called “bonus depreciation” that can certainly make this 5% tax tailwind higher, but let’s just leave it there.   And the fifth and final way is what I call Inflation-Profiting. Few people understand this.    Like inflation erodes the value of your lump of savings, it also degrades your mortgage debt balance.    How is that? It’s because your $80,000 loan today gets easier to “pay back” as wages and prices escalate over time. Your bank only asks to be repaid in nominal dollars (while your tenant pays the interest), not real, inflation-adjusted dollars.    So just say that over a few years, you had 10% cumulative inflation. Well, then rather than paying back the bank $80K, you really only need to pay them back $72K in inflation-adjusted terms.   Inflation has been low lately. We’ll call this benefit a return of another … just 2% to you.   Well, there were all five ways. Let’s add them up to see what your total rate of return is. You got a return of:   30% from leveraged appreciation, then… 6% from cash flow - which is that portion known as your cash-on-cash return, plus another 5% from your ROA - that Return On Amortization, where you tenant pays down your loan for you. Then another … 5% from tax benefits … 2% from inflation-profiting ...   And your first year total Return On Investment from this income property is 48%   You just achieved a 48% return - and without taking any INORDINATE risk. Now, your real-life return probably won’t be exactly that - it’ll be higher or lower.   A few other caveats here. I think you probably realize this example is simplified.    If we had 18 spreadsheets, then we could probably get an exact number, like rather than a 48% total rate of return for you - then it might be 46.16% or something like that. …   … but eighteen spreadsheets doesn’t work in audio format as we’ve just broken it down here on Get Rich Education Episode 302.    1) Note that in the example, we did not factor in your buyer mortgage loan closing costs (the seller can often help you pay these).    Of course, risk still exists. If you buy property in a losing job market, or hire a disreputable property manager, for example, your return can erode.    3) You will still have SOME inevitable problems along the way. It just happens in real estate.   Also, note that your property insurance premium WAS considered in the example. That hedges you from a lot of major loss types.   And that your management cost was considered here, meaning your income is largely passive.    Also, be mindful that after your 48% return in Year One of this hypothetical example, your return typically DROPS in future years.    Maybe it’s down to 38% in the second year and 29% in the third year.    Why is this? Well, primarily due to the fact that equity accumulates in the property, and equity has zero rate of return.   Compound interest? Well, you’re typically not leveraging other people’s money with