901: Season 9 Opener: What This Season is About
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00:01
Welcome to Episode One of Season Nine of the Growing Empire Show. Today is our intro for Season Nine and I'm also going to help you decipher some of those commonly used acronyms in real estate investing. So stay tuned.
00:15
Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:35
We are here with Season Nine and I am so excited to get started. The theme of our season is Method to the Madness; How to Know Which Method is Right for You. So the reason I chose this category for this season is because there is such an abundance of information on the web and I find that it's really critical to your success to be able to decipher which of those investment strategies is right for you, and is also right for the market that you're investing in. Today, we're going to talk a little bit about what each of the acronyms mean that you will commonly hear investors refer to because I want to make sure that we're all on the same page regarding what we're actually talking about. So you can take that information and use it for your benefit. But this season is going to have a wealth of information for you, we are going to have some very special guests that are going to talk about their real estate investment success, how they got started, what has propelled them to future success, and how they're creating their nest egg of financial freedom and financial wealth. And I think that that's going to be really, really beneficial to my listeners. We're going to talk about things like cap rate. We're going to talk about the BRRR method that everybody talks about. We're going to talk about the 1% method, and how to pick which of these methods is right when analyzing deals. We're going to talk about different classes of properties, and why that's necessary to know which class of property you're going after. We're going to talk about location and how important that is in your decision making for buying your real estate investments. We're going to do our question and answer segment, and we're going to talk a lot about value add and why that's such a key component to being able to fully appreciate and really create great wealth. And I want to make sure that we're all on the same page.
02:25
So gross income is the total of all income from all sources. So rent laundry, garages, parking. Here's a quick note though, when I'm factoring gross income on a property personally, I do not factor in miscellaneous items like laundry or parking, although you will commonly see that reference in income analysis. And that's simply because things like laundry and parking and garages are not always guaranteed rent. So you know, you can't really control how much somebody uses a laundry facility. So it's a nice added bonus, in my opinion. But it's not necessarily something to hang my hat on as far as my income. So when I'm doing an analysis, my gross income is only going to be my rent role. It's going to be the actual income that's coming in on the property at the time of acquisition. Net income is the income total after all landlord expenses are removed. So landlord expenses would be things like water, sewer trash, they're fairly typical. You're going to want to maybe deduct that service. Insurance, taxes, those are landlord related expenses. Again, you're going to want to make sure that you analyze the details because you could be walking into a building where you as the landlord are responsible for all utilities. And if that's the case, you want to factor that into your landlord expenses. So gross income is the total amount of income on the property that is coming in. Landlord expenses are the things that you are paying as the landlord that are not something that the tenant is responsible for. Your net income is the total income after all landlord expenses are subtracted. Capital expenses, or cap-ex capital, expenditures, are defined as new purchases or major improvement renovations that extend the life of our property. Such as replacing the roof adding an extension or finishing a basement. This term also covers equipment and supplies required to make these improvements. Generally, these are one time major expenses. Think of it this way. Why does it matter? Repairs and improvements ultimately extend the overall life and value of your investment property. So when it comes to things like capital expenditures, you're going to want to deduct them differently from your analysis than you would the normal operating expenses. While major improvements or upgrades are recovered through depreciation, general fixes or maintenance that keep the rental home in good operating condition are classified as repairs and they can be written off in a single tax year. So it's really important as you're analyzing the property to make sure that you are deciphering the difference between what a capital expense is and what a regular general repair and maintenance expense that is the upkeep of the property. Because they are drastically different and they should analyze differently. NOI stands for net operating income. And this refers to the income that you generate annually on your property after your expenses have been taken into consideration. So gross income minus landlord expenses equals your net operating income. ROI is your return on investment. And that stands for the calculated benefit of an investment. So it's commonly called your return, or your return on investment. Your return on investment, or your ROI, is impacted by several variables such as renovation, maintenance cost, and how much you originally borrowed in order to invest in your property. So return on investment, how much is that investment worth to you? The BRRRR method or the Brrrr method, it's commonly called stands for by rehab, rent, refinance, and repeat. Essentially, when you're buying these properties, you're rehabbing them, you're getting them rent ready, you're renting them out, you put your property management in place, and then you do a refinance after all of that is done to pull out your equity. And in this particular case, and the BRRRR method strategy, these are not flips, these are not fix and flip. This is a buy and hold strategy. So the BRRRR method as it's commonly called, buy, rehab, rent, refinance, and repeat is essentially a hold strategy that allows you to pull your equity out and why you might want to do this as you might want to pull that equity out for future acquisition purchases to continue to fuel your investment strategies. 1% rule is the rule that refers to the rent to expense ratio an investment property must have in order to be profitable. This is a really loose guideline. But while there are a number of expenses to keep in mind, the rent on an investment property must be at least 1% of the purchase price to have a positive ROI and be considered a favorable investment asset.
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The episode will continue in just a moment.
07:02
I recognize that as an active investor, you want to implement best practices that drive the highest returns on your properties. Everything we do at Empire is designed to make life a lot easier for you so you make sound decisions regarding your portfolio. Whether that's through this Growing Empires podcast, our company of services of property acquisition, construction and management, or by becoming an Empire Capital Fund investor, we want you to be as successful as possible. However, using the right methods is critical to achieving your ROI. There's a lot of advice out there and it can be overwhelming, especially if you're using a method that isn't working. Don't take a chance on an approach that may not be right for you. If you want to be sure I can help you assess if your current strategies are fit to your properties end goals. Book a call with me today to see if there's a better way. Go to JenniferdeJesus.com and click book a consult and I can confirm that the method you are using is the right one for you or suggest a simpler, more profitable alternative. One quick conversation and you'll feel better about the choices you're making regarding your real estate investment portfolio and the value of converting to long term.
08:04
Equity is a difference between the current market value of the property and the amount you owe on the property's mortgage. That is your equity. Ultimately, we are playing the equity game here and we do want to make sure that we can buy properties that will appreciate to build equity so that we could pull that equity out and use it to fuel our investment acquisitions by buying additional properties. Debt service is the cash that's required to cover the repayment of interest and principal on a debt for a particular period. Rent control. These are limits controlled by the court or public authority which limits the amount of rent a landlord may charge in order to ensure the affordability of housing. PA does not have rent control. So again, something to make sure that you really dig deep into. If you're going to invest out of state out of your local area, you want to make sure that you know whether or not rent control is in place and whether that's going to be a factor for your investment strategies. Fix and flip. That's the purchase, likely of a distressed property, with the expectation that you can renovate it and sell it at a much higher value than the purchase price and rehabilitation costs. ARV. This is an estimate based on comparable properties near the subject property of the value of the home and it stands for after rehab value. And it's the value of the home after has been repaired and remodel. And this is a common term that you find in flips. People will ask you, or you may ask your broker, what is the ARV the after rehab value. Because if I'm buying a property for x, and I know I'm going to spend y in renovating it, I need to make sure that I get z as my you know final sale price to make sure that there was value in that actual acquisition and rehabilitation. T-12 is a financial reporting representation of the trailing 12 months of expenses. So T-12 is trailing 12 months of expenses. A 70% rule is a rule that states that a rehab or flipper should pay no more than 70% of the ARV less any repair costs or expected profits. This rule is utilized in order to determine the max offer they should make on a potential investment property. When we're talking about fix and flip properties, it's really common to work backwards in the numbers. So you start with the after rehab values, you subtract off the expenses that it's going to take to rehabilitate that property, less any carrying costs. And then that should help you get to the max purchase price that you should entertain for a distressed property. What is wholesaling? It's a lower risk means of working in real estate. A wholesaler will get a property under contract with some sort of assignment clause and prior to closing, they will line up a buyer for that property for greater costs and they originally got the property under contract for. The lower risk is that they do not have any involvement in the rehabilitation of the property. They simply extract a fee for getting it under contract at a wholesale price. This is really only something that can be successfully done by somebody that has extensive time and methods to attract off market sales. So if you are really good at networking, and creating a database of potential clients, you might be really good at wholesaling. But it does take an awful lot of work. The risk is minimal because if you do not have the buyer lined up on the back end, you may only have to forfeit your escrow money or you can also purchase the property and then do something with it. The scale is what really in the lining up of the deal at a discounted price and then being able to find a buyer on the back end prior to settlement. It is key to structure this deal as a double closing to avoid paying double transfer tax. Okay, so that's what wholesaling is. Cash on cash return refers to the annual cash return on a property divided by the amount of cash invested, cash on cash return. So how much did I put in? How much do they make back on that money? And that does not include debt service or leverage. That is strictly the amount of cash that you put in divided by the amount of cash that is returned on the property. Cap rate. The capitalization rate, or cap rate, is a formula used to determine the value of a real estate investment. How you factor this is simply this you want to take your net operating income divided by your purchase price and that helps you determine what your cap rate is. And before you go buying anything based on cap rate, I would state this; it is not the end all be all determination factor of what you should buy and not buy. Because there's a lot of other factors that go into an analysis of a deal other than cap rate. However, you should be really familiar with what cap rates are typical in that marketplace that you're buying. And I would just ask your broker that information they should have this information readily available. And if you're in a one to four family or residential category, I would ask them what the cap rate is for that purchase. And then for a commercial deal, five plus units or mixed use, I would ask them what the capitalization rate you should expect for that would be as well. And then just make sure when you're analyzing your investment purchase potential that the cap rate is something that is in line with the rest of your analysis. Vacancy rate. This is a percentage of all of the available units within a property that is occupied. This is typically calculated with larger apartment complexes or hotels but even more important for investors is the vacancy rate within a particular city or region. So before you go and add in a vacancy rate or factor into your analysis, you want to find out what is typical customary for that marketplace. And then you want to use that analysis. You want to make sure that you are assuming some loss. Not every unit can stay rented 100% of the time throughout your entire hold period. It would be unreasonable to think so. So a vacancy rate is something that we're building into our analysis to help us analyze and prepare for potential vacancy, which could happen for a variety of reasons. The IRR method is the last one we're going to talk about this is the internal rate of return. And it's the investment point at which the net value of the investment equals the net value of the asset income. They are both calculated at the current value of the investment and not the purchase or future value of the property. The Internal Rate indicates At what point in investment could be considered profitable. If an IRR is above a predefined number, it's an acceptable investment. It also establishes the growth potential of an investment. That concludes our segment on glossary of terms. I hope you found it useful and please stay tuned for the rest of Season Nine. We got an awful lot to offer for you. Until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit growingempires.com