2405: Mastering Income Property Math- Discover the Hidden Secret to Multi-Dimensional ROI

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit HartmanMedia.com. I just wanted to say, you know, Jason, I've been following you for a long time. 10 years ago is when I first saw your course, and I'm telling you, the way that things have played out are way better than you projected for me personally. Obviously, it's been, you know, a good 6 years, but now I'm ready to kick it into high gear. As you know, I want to really build a portfolio that's, you know, 5 or 4 or 5 times what I have already. Obviously Honestly, your advice has been fantastic. It's been life-changing for me.

Welcome to the Creating Wealth Show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques, and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self-made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer, an entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman, with the complete solution for real estate investors.

Greetings, empowered investors. Today I want to talk to you about something that is so critically important. You know, over the 22 years that I've been working with 100% investors, and over the many, many years in my traditional real estate career, owning my own real estate brokerage that I later sold to Coldwell Banker, being a top agent for many years as well, and working with investors there too, but 22 years, 100% investors, I have noticed that The vast majority of questions and concerns and problems deal with understanding the math of income property. And if you just understand that, you will be so much better off as an investor than the vast majority. Then, you know, 98, 99% of the investors do not know how to do the simple math. And the math of income property is really quite simple. It's, it's not complicated at all. It's easy to learn and it's really easy to actually master. Now, maybe the reason I was kind of predisposed to this is when I was 19 years old, my first year of college, I got my real estate license and I attended Century 21's classes. I took every course they offered back then and they had some really good courses, mostly centered around commercial real estate investing, but the commercial people focus on the math. And so that's how I got very good at it. I used to figure IRR, which is sort of the ultimate investment metric. Some consider, I don't even think it is anymore, but it's pretty good, but you know, it doesn't include inflation-induced debt destruction and things like that. Right. So I got really good at doing that math. I used to do internal rate of return by hand. We had to figure that out with longhand math. So it was, it was a pretty good experience. So I want to go over this today and I want to show you at the same time our updated enhanced pro formas and projections. Now, these were literally updated this morning again. So if you hear me, if you heard me say that over the past few months, we have been enhancing the pro forma and making more and more updates to it. And it is really good now. It's really good. So let's dive into this. If you are listening on audio only, That will not be a problem. You are going to learn a lot from this episode, but this is one that you will want to go back later after you go through the audio and look at the video on YouTube or any of the other video platforms. And it'll be on JasonHartman.com as well, ultimately. So let's get into it. All right. I've got my screen up. This is your favorite website, JasonHartman.com. And of course you can see that we have a live event coming up that's Empowered Investor Live, and you can get your tickets for for that. We really recommend that you attend these events. Everybody that attends them universally says they are so glad they attended the live event because you get to meet us, you meet our team, you meet our affiliates, our vendors. It's just really good. So please attend the live event. You can get your tickets right at the front of JasonHartman.com. So clicking on the properties page here, you'll see that we've got a whole bunch of different markets from Atlanta to several Alabama markets to a couple of Memphis markets, St. Louis. We were talking about St. Louis many, many years ago. I hosted a property tour in St. Louis in about 2011, so that was like 15 years ago. And Indianapolis, long-running market. I've owned properties in almost all of these markets personally or through one of my entities. We've got some Florida markets, we've got the Phoenix market, a bunch of different metro areas. Okay, so you can see those now. Just for the purposes of this example, I'm going to click on Huntsville, Alabama. And of course, all of these markets, you'll see some narrative comments about them, some highlights of the market, just some background for you. And then click on Browse Huntsville Properties in this example. And let's pick a property here. Well, actually, I'm going to pick two properties. Why am I going to pick two properties? For purposes of the example, I want you to, I want you to kind of just understand how this works. We've got two properties. They're almost the same price. They're both in Huntsville, Alabama metro area. One is $320,900, so we'll call it $321,000. Another one is $322,400, so they're almost the same price. And both of them, four bedrooms, three baths, similar size, just under 2,000 square feet, brand new construction. But here's the difference. One is a cash deal, and almost never would I recommend paying cash for a property. But when there are big, big incentives from the seller-builder, it can make sense to do what's called delayed purchase financing. And you buy cash now, you get a giant discount. They vary on properties, but anywhere from $20,000 to $30,000 or $40,000 discounts. And then you just finance the property after you close, and that can be a great deal. But ultimately, You don't want to keep it as a cash property. You want to use leverage because that, of course, is very, very powerful. But what's interesting about this is one property is showing a projected return on investment of 29% annually. And for those of you who don't know how to do the math in real estate yet, and you're going to learn that with me today, you might think, well, that's ridiculous. 29% annually. No way, Jose. Well, it's a multi-dimensional asset class. You earn your return on investment from at least 6 major categories, 6 major pillars of return on investment for income property investors. So that is very realistic, and we will get into the math here. Now, the other property is offering an 11% return on investment. That's the projected ROI, 11%. Why the difference? Properties are the same size, they're the same metro area, but one is a cash deal and one is a leveraged deal using good high-quality debt. Okay, now the 29% return on investment property actually offers much less cash flow than the 11% all-cash property, because if you don't have a mortgage, obviously there's going to be more net income. But the paradox here is that you can have more income. But lower return on investment. And this is just one of those most basic things that even so-called sophisticated investors, they don't get it. It's amazing to me. It's amazing to me that wealthy, sophisticated investors will focus on cash flow as a metric when the higher your cash flow, the lower your return most of the time. Okay, so on the one that offers 29% projected ROI, $2,100 projected cash flow, $2,109 to be exact. On the 11% ROI property, $17,171. Both brand new properties. Okay, so let's look at the cash deal to kind of just understand the problem there. This has no leverage, so you don't get any inflation-induced debt destruction. You don't get any multiplier effect because you bought the property with cash. So definitely not as good a deal, not a good way to structure your investment. All right. So let's look at the proper property to look at, and that is the properly leveraged property. You're putting 25% down. You're not using a lot of leverage, still very conservative leverage, but 75% loan to value, 25% down. Let's go through it super fast. And of course, I've done much more detailed things with our old pro forma, which is you know, somewhat similar to this one, but this one's enhanced. It's got a lot of new good stuff. So you're paying $321,000— I'll just round that off— for this property. You need about $86,000 to close on it. Cost per square foot is $165,000. Cost per bedroom is just over $80,000. That's a new metric we put in— cost per bedroom. Why did we do that? Because when you're looking at co-living properties, which we offer, the cost per bedroom becomes a really relevant metric. In a normal long-term rental single-family home where you're doing the traditional thing, not as relevant, but we put that in especially for the co-living properties. Then monthly rent per square foot, 98 cents, and $475 per bedroom. That's the monthly rent. Okay, now co-living property, that monthly rent per bedroom would be dramatically higher, but we're not going to go through one of those performance today. Projected Rent is $1,900 a month. We always assume— and let's go to the assumptions here— we always assume vacancy losses. A lot of hokey promoters that are lying to you, that are misleading you, that are hyping investments up, they are not using conservative assumptions like we are. They are saying the property will never be vacant. That's just not true. We assume it'll be vacant 1 month per year on average. And that equates to about 8% vacancy rate. And on this one, you've got some free property management incentives, or you can just self-manage, which is what we recommend. Self-management, we show you how to make that easy. You can do it remotely. We teach that in depth, in detail, and help people do it with a whole bunch of tools that can make it very easy. Every one of our investors that converts over to self-management seems to have Totally good things to say about it, that it's so much easier than they thought it would be. It's so much more profitable than they thought it would be, and they don't have to wait for their rent. It comes to them right away on the first of the month, as soon as the tenant pays, and they are in control. Remember, of my Ten Commandments for successful investing, thou shalt maintain control. Commandment number 3, very important commandment. But you don't have to do that. You can do it either way. It's your choice. It's your property. Okay. So we've got that vacancy rate assumption in there, and then we've got our operating income. We've got our expenses here, property taxes, insurance, et cetera, et cetera. And that brings us down to a monthly cash flow projected at $176 per month or just over $2,100 per year. Wow, Jason Hartman, why would I spend $86,000 to make only $2,100 a year? Well, multi-dimensional asset here that produces phenomenal returns overall, even if the cash flow doesn't look that great. Because wait, there's more. Your tenant is repaying your mortgage for you. I love debt when I can get someone else to pay my debt. And that's called a tenant. Your renters pay your debts. And so you're getting your mortgage paid down at the rate of $324 per month in this first year. That's almost $4,000 that the tenant has paid down on your mortgage the first year. And now you get inflation-induced debt destruction that's on the performance. So you can really see the effect of it. So many investors feel like they've got these mediocre investments, or sometimes they even feel like they're losing. They feel like, why did I do this? Why did I invest in real estate? How is it that so many people have gotten so rich with income property? How is it that income property is the most historically proven asset class in the entire world, yet I'm making $176 a month? Why bother? Well, There's more. Remember that iceberg? Most of the return on investment is below the surface of the water, just like the iceberg. What we see on the top? Appreciation and cash flow. What we don't see? Tax deductions, principal paydown on the mortgage, inflation-induced debt destruction, the leverage multiplier effect. It's so much better than it looks, but so many people are deceived because they just don't know how to do the math. So let's, let's keep going. So $602 per month of inflation-induced debt destruction. Think about it. You buy this property and then the bank puts down 75% and you only put down 25%. Now that leaves you with a loan amount on this $321,000, slightly rounding off their purchase price, of about $241,000. And the inflation rate projection is now right in the pro forma. 3% is the assumption here. That's our default assumption. But you, if you go to propertytracker.com and create a free account, you can do these pro formas for free, no strings attached, because I want people to learn how to do the math of the market and the math of their properties and really understand how multi-dimensional, how much better income property is than anything else. It's just the best asset class going. So we're assuming 3% inflation, but you can put in whatever numbers you want for any of these things. When you're at JasonHartman.com in the property section, the pro forma is static. It's got the numbers on the pro forma, but if you want to remake this pro forma and make it for yourself on this property or any other property, Just create a free account at propertytracker.com. Okay, so you take the loan amount, $241,000 rounding off, you take 3% inflation because remember you're borrowing at today's dollar value and inflation is debasing the value of that debt over time. It is making it cheaper to repay. This is my trademark strategy. That I've been teaching for 22 years, inflation-induced debt destruction. And I actually did trademark that phrase because it has become such an in-demand, such a very, very popular topic. So let's get back to it. We take that $241,000 and we multiply it times 3%, and that gives us $7,220 per year. We divide that by 12. That's $602 per month. So the tenant and inflation between the two of them are repaying over $900 per month of your loan. And you might be thinking, I'm only getting $176 a month in cash flow. Understand the math and that will make you a genius successful investor. And first year appreciation based on modest 6% appreciation. And I know the last couple of years has been just boring. The market has been just, you know, super boring, appreciated about 2% last year, depending on which survey you look at. But, you know, during the COVID era, we saw during that, you know, that couple of years of COVID like 50 to 55% appreciation. So just call it an average of 6%. Okay. Most experts will agree that's about the average. So there you're getting $1,605 per month in appreciation. How do we calculate it? Purchase price times 6%. Go to propertytracker.com, make your own proforma, put in 5% appreciation, put in 0%, put in 90%. I don't care. You can do whatever you want on those proformas at propertytracker.com. Just make your own version and see how every number affects the other numbers. That's what really made me a good investor, is that I really started playing with these proformas, running different scenarios, saying, What if the rent is lower? What if the maintenance cost is higher? What if the vacancy is higher or lower? How does that affect the bottom line? What if I get a loan for 80% LTV versus 75% LTV versus 60% LTV? How does that make it all look? Really, that's what will hone you in to being a really good investor, understanding the math of income property. So over in this section, We have now named that section Empowered Investor Indicators. And if you are an empowered investor, which I hope you are, and to be an empowered investor, you must know the math. That's why we're doing this. But we have separated and made this section the main indicator section. It's really the most important section, the Empowered Investor Indicators. And here We've got the rent-to-value ratio, the debt coverage ratio, the annual gross rent multiplier, the cap rate, the cash-on-cash return, the return on investment, and then the return on investment with inflation-induced debt destruction. That's a new enhancement as well as some of the other things, but this is a major one because we didn't just use the return on investment projected at 29%. When we add in the, how much is it? Go down here. The $602 per month or $7,220 per year that inflation is paying down on your mortgage. That gives you an overall return on investment of 38% annually. Another enhancement. Do you see if you're watching on video, these little i's, they're a little lowercase i on this sort of grayed out faded thing next to each of these numbers. If you hover over this, it will tell you each equation on the pro forma. So if you want to know return on investment, it shows you how that's calculated. And this is going to make you a great investor because you understand the math. And the math is not hard. It's way easier than the trigonometry, the geometry, and the algebra I took. Okay, in school, this is much easier math. and it's much more fun because it's how much you're profiting. It works in the real world for you. So just see that those things on the performance have been enhanced dramatically for you. Another enhancement we just made a few days ago is on the interest rate. Now remember, when you borrow money, the lender will quote you a rate, and that's called the nominal rate. The word nominal simply means in name only. What is the name of the rate? Well, if the lender says the rate is 6%, that's the nominal rate. But the real rate is different than the nominal rate. And to calculate the real rate, you would have to take out the inflation rate because inflation is debasing or lowering your interest rate. So if you have 3% inflation and a 6% face rate or nominal rate or coupon rate on your mortgage, you're really only paying 3%. It's the nominal rate minus inflation that gives you the real rate. A very easy equation to understand. And in fact, you could also argue that that's not even the real rate. Why? Well, Remember, mortgage interest is mostly deductible. Now, I'm not a tax advisor. That gets a little complicated because if you have a high-end property and it's a personal residence, there are limitations on the amount of the deduction. And on rental properties, it goes into the whole soup of the equation as to, you know, whether you're getting positive cash flow or not. And it's complicated, but basically the interest rate is deductible. On itself, right, on a lower-priced rental property. So think about this: if you were paying a 10% interest rate and you were in a 40% tax bracket, you would have to deduct that 40% from that interest rate because the government is paying for part of it with you. So your real rate would be 6% in that example, and then you would subtract inflation In this example, 3%. So your real interest rate is only 3%. Our nominal rate only takes out inflation because we don't know your tax bracket and we don't know the whole soup of the investment as a whole as to whether or not you can actually use that deduction. But just understand it is on its own in isolation deductible. And so the government is paying for part of that. So your real rate is actually lower. Than what we're saying. In this example, this has a builder buydown incentive with it. So your interest rate here is 4.5%. And when you take away the projected inflation rate of 3%, it makes it only 1.5%. The interest rate is lower than you think it is. We just wanted to point out the real interest rate. So we added that to the performance. So I hope that's helpful to you, and I hope you can see how income property is just so powerful because it's a multi-dimensional asset class. You earn your return in 6 major ways. Investors who are in the know, they would say you earn your return in 5 major ways, but they're not including the all-important Hidden Wealth Creator, inflation-induced debt destruction, that finally, now that I have really publicized that and popularized it, so many people are just copying me and talking about it a lot nowadays. But they didn't used to 22 years ago when I started doing this. So there you go. All right. Hope that's helpful. Join us for Empowered Investor Live. It's coming up in May. Go to JasonHartman.com. Get your tickets right on the front page. Or you can go directly to empoweredinvestorlive.com. For my yacht, superyacht mastermind events, go to mastermindyachtadventures.com. A lot of you have been asking me about those, so go check that out. mastermindyachtadventures.com. That's just my nonprofit passion project. And go to propertytracker.com, create a free account, free, and do these pro formas for yourself. The first time you do one of these pro formas, putting in the data, there are 3 major components of the data you need to input, and it's pretty simple stuff. It'll take you maybe 12 minutes, maybe 15 minutes at the most. The first time you do one of these pro formas, it's so easy. The second time you do it, it'll take you 5 minutes. And the third time and beyond, it'll take you 3 minutes to do them. And the software just helps you understand the math. Play with different numbers, change assumptions, change the scenarios, and see how it impacts other related numbers and the bottom line. This is how you will become a very good investor, is by understanding this all-important math, understanding how to analyze a deal, whether or not you should buy the deal, and if you own the deal, whether or not you should sell it, keep it, or what you should do. So very, very powerful. PropertyTracker.com, free account. It's all there for you. Until next time, happy investing. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, HartmanMedia.com, for appropriate disclaimers and terms of service. Remember that guests of Opinions are their own, and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do to not miss any episodes. We look forward to seeing you on the next episode.