2479: Property Tracker: Understanding the Math of Income Property

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My name is Andrew and I live in the Pacific Northwest. So far I've got 6 properties in about 3 and a half years and I'm pretty happy about it. And it's all because his team of experts and just his, his knowledge and his time that he spent doing it. He can really guide you through it and his podcast is excellent. And I highly recommend it for anybody, whether you're a beginner or an expert. There's a ton to learn there, and it'll help you get to the next level.

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 that. He's a successful investor, lender, developer, and 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.

All right, if you've been keeping up with social media, especially with anyone that's in the UK, you know that hundreds to thousands of migrants are coming through the Dover port and Portsmouth. They're protesting. There's a man who owns a bed and breakfast. Take a listen to this audio clip that he released. I don't know how long ago it was, but it's just confirmation that every government funds their own terrorist attack. Take a listen to what the government has given him to house these refugees and what he's hiding.

People of England, Ireland, Scotland, and Wales, first of all, I want to apologize because I feel I betrayed you. This is going to be very hard for me to do, but it needs to be told. I'm not going to tell you my name. You can just call me the whistleblower because this needs to be told. I own a small bed and breakfast slash hotel On the outskirts between London and Bristol. Exactly where, I won't say. I was commandeered by the Office of 10 Downing Street to rehome refugee families. When the first lot of refugees came, there was not one woman, there was not one child. People that turned up were men from the age of 19 to 30, I would say. I have enough room for about 250 residents. I currently house 150 immigrants. Yes, I did receive quite a large sum of money for doing so. On doing so, the government told me that I had to fire all my staff. And they will supply their own, and also that they will supply security guards for the bed and breakfast. Well, about 2 weeks ago, I received a phone call to say that a large parcel will be arriving sometime this evening. Right about 2:30 in the morning, I received another phone call saying that the parcel has arrived and can I open up the rear servant entrance at the back of the B&B, which I went down and met some army personnel, which kind of surprised me very, very much. The person in charge, I don't know who he was, colonel or whatnot, asked me to show him to a secure room within the B&B, which I did. On doing so, they loaded in roughly between 60 and 70 really big crates. I asked what was in the crates and I was told that I was not permitted to know. He then handed me a smaller parcel and told me that I will receive a phone call to give me further instructions on what to do and when to open This parcel, which is very strange. So I've had this parcel now for about a week in my office, and I started talking to a friend of mine, and he said, well, do you know what, you don't know what's inside those parcels. It could be anything. It's your property. Whatever's inside your property, you own the right to open, and I should have a look what it was. And I was debating about it for a little while, and I I thought, you know what, you are kind of right. If it's in my property, I want to know what it is. So I opened the small parcel up, and inside was a letter with a list of names and numbers written next to the name. On realizing that each name On the letter was one of the refugees, and there was a smaller box inside the parcel. I opened that and there was a series of keys with numbers on them. So I went down to the secure lot where these crates were and noticed that each crate had a number on it and each key had a number on it. So I took 2 keys for 2 of the crates and I opened up the crates. Crate 1, there was a load of AK-47 machine guns. Crate 2 were a number of hand grenades. Now when I say this, I'm saying this as you could start a new war off with what I was looking at. There was enough ammunition inside one of the crates to Easy, wipe out my little village. Boom, gone. Easy. Now I'm a bit stuck because I don't want these refugees here anymore, but I'm contracted to house them for a period of time. I don't know if I can give the government their money back and tell them to sweet off or not. I don't know. All I do know is in good faith, I cannot, I cannot allow these men to have these credits.

Good day, Empowered Investors. Have you ever wondered, is this deal the right deal for me? How do I analyze a real estate deal with 100% clarity and certainty.

Well, nothing is perfect, but we're about to get as close as possible to perfection today.

You know, so many investors that I have worked with over the past 2+ decades are winning the game of real estate, and sometimes they just think they're treading water. Sometimes they even feel like they're losing. Because they don't know how to do the math. So today I want to help you do the math. Now, there's a great tool that I've been using since 2004 called Property Tracker, and I liked it so much I actually acquired the company many years ago. It's just a fantastic tool. It is literally the best evaluator in the real estate investment industry, and you can get it for free.

at propertytracker.com.

So we're going to go over how to evaluate a real estate deal, how to analyze a real estate deal so that you can be way, way ahead of any other investor in terms of analysis.

So let's dive into this and we will go through it as quickly as possible but thoroughly at the same time.

So if you go to empoweredinvestormarketplace.com, you're basically seeing a version of the Property Tracker software, and you'll see this pro forma that tells you about all the properties listed there. And you can bring in your own properties and put them into an analysis as well. Now, the first thing I want to show you is that you see this Add to Portfolio button at the top. What that does is allows you to take any property off of the Empowered Investor Marketplace, add it to your own Property Tracker account, your own free Property Tracker account, And then manipulate all of the data any way you want. So you can look at the numbers in a whole, whole variety of different ways. So here is a sample property. This one happens to be in Oklahoma City area, but it could be anywhere. It doesn't even have to be in the United States because these are just numbers. So you can change the currency, you can change the market. You can be anywhere in the world and analyze a deal.

Now, tax laws will vary and so forth. Lending will vary, but you get the idea. The basic numbers of a real estate deal are the same worldwide, so you can use it anywhere you want. Just convert the currency to your local currency.

All right.

So for an example, let's go over each and every one of these numbers and let's go over them quickly. This property. has estimated square footage of 1,200 square feet. It's $248,900. It is brand new. And with 25% down on this property, that would come out to just over $62,000. Estimated closing cost of about $7,500.

I'm rounding off for speed here, obviously.

And then it shows your buydown points. In this example, $2,800. And then Total fix-up cost.

The property is brand new, so you don't need to fix anything up.

So the total cash you need for this is just over $72,000. And then we always recommend you have minimum cash reserves for every property of at least 4% of the value.

And the value could be the same as purchase price when you buy it, but that will change over time. So you may want to adjust your reserves accordingly.

But that's a minimum. It's not the maximum.

It's just a minimum.

So if you feel more comfortable with 5%, 6%, 7%, 8% reserves, please do that.

Just have at least 4%, no less than that.

It shows you the cost per square foot and the cost per bedroom. Now, why is the cost per bedroom interesting? Well, if you're looking at a co-living property or a multifamily property, you can analyze any deal. This deal could be hundreds of millions of dollars.

You analyze it just the same way you analyze a humble but usually the best investment, single-family home.

So same idea. And then monthly rent per square foot and monthly rent per bedroom.

So you can break it down both ways.

It shows the projected rent here of about $1,740.

You've got imputed vacancy losses, and here are our assumptions and projections on vacancy losses, inflation. So let's just go over that now. It's in the lower right-hand side of the pro forma.

Projected appreciation rate, 5%. Some would argue it's higher than that. That's fine. It depends on the time period and the market.

All real estate is local, et cetera, et cetera. But we're using a 5% standard. Now, you can change that in your own Property Tracker account. You can make it 0% or 2% or 8%, or, you know, in a really good market, it might go 20% in a year. You never know. And then the government inflation rate, the CPI, or the CP Lie as I call it, because it's understated, or at least most people in the know think it's understated in 3 major ways: weighting, substitution, and hedonic indexing. The government has pretty big incentives to understate the inflation rate. We won't go into that now. Lots more on the podcast and the YouTube channel on that topic.

Vacancy rate, 8%, essentially 1 month per year. Now, sometimes you'll have a property that'll be vacant for 2 months, but then leased for 2 years.

So that averages to 8%. I've had tenants stay as long as 9 years in my properties, and my mother has had tenants stay over 30 years. I kid you not. You can hear that story on my podcast and YouTube channel because I've interviewed her and talked about it.

This one has free property management. You can put the management number in there.

You can self-manage. We highly recommend you self-manage your properties.

We give you lots of tools and techniques for doing that.

More on that on the show, of course. But this one has free property management for, I believe, 2 years.

And then maintenance percentage—

remember, it's a brand new property, but we're still assuming you're going to spend 2% on maintenance. That's 2% of the Rental income. So let's keep going.

Now here you have your operating income after vacancy, and on this property it's $1,601 per month. The property taxes are estimated at $228 per month, and then they've got the annual numbers for all of these as well: insurance, management fees, leasing, advertising, HOA dues if any, maintenance costs that we just talked about, other expenses, utilities, etc.

And then you've got your total operating expenses, and now.

Now you've got your NOI, or net operating income. By the way, on the vast majority of the numbers on this sheet, you see this little i with a circle. That's what's called a tooltip. And you can see an explanation of most of these numbers that need explanation or may not need it, but it's still here for you. Just hover over that little i with a circle, and you can also see the equations used to do the math on each of the numbers. And you can literally take out a traditional simple hand calculator and you can calculate any of these numbers yourself.

It's quite easy to do because the equation is right there for you.

So now we go to mortgage payments or debt service and then our cash flow after everything. On this property, it's projected at a whopping $68 per month. For people who don't understand how to do the math of real estate investing, they will think, why would I bother for $68 a month? But just remember, like an iceberg, most of the benefit, most of the return on investment is below the surface of the water. Just like the iceberg, there are 8 major areas where you get return on investment with income property. And we only tend to notice 2 of them. The people who don't understand the math notice cash flow and appreciation.

Those are kind of the things they usually notice, but they do not notice all of the other ways we make money, and those are included in the pro forma.

Okay, so moving on, we've got our principal reduction.

Our tenants are basically paying down our mortgages on this property to the tune of $170 per month. Hover over the eye. You've got a little explanation of that, which is handy.

And then we've added this recently. This feature cost segregation is an incredible tool that can get you a whole bunch of accelerated tax benefits.

Now I always say I'm not a tax expert. I'm not a tax advisor. Talk to your CPA or other professional about legal tax and other issues like that, and bring to them this pro forma and tell.

Them about these strategies.

They usually know about them, but you can't be for sure. Or they should know about them, or maybe you need a better advisor.

And what cost segregation does is it brings the best tax benefit of income property forward in your direction. So it's better to save on taxes now and to pay taxes or anything later, right? You always want to get the advantage of something as soon as possible, and that's what cost segregation does, it allows you to accelerate the depreciation of certain items in the property and take that benefit this year rather than waiting till later. Now, it's a little bit more of a complex topic. Not everybody qualifies for it.

Not every property. It doesn't always make sense to do, but when it does make sense, it is an amazing, amazing feature. So we're going to go into that and show you how much it adds up to.

Then you've got your inflation-induced debt destruction.

Well, let me go over the numbers though.

Potential tax savings on cost segregation amounts to about $15,000. That's in this one year.

This is a one-year pro forma. So in the year that you do it right, it could amount to around $15,000.

Now divide that by 12, it's $1,245 per month. The next one we go down to, we do the same thing, and that applies to everybody Whenever there is inflation and there is financing, when you're using leverage, you're using a mortgage, and that is inflation-induced debt destruction. My trademark strategy—

that's literally trademarked— that I have been teaching for the last 22 years. Now, what is this? It is an amazing hidden wealth creator that very few people really understand, but it is truly amazing. And it is a privilege to have it.

Basically what it says is you borrow money at today's dollar value, and as inflation happens over time, it debases the value of the dollar. And the debt is denominated in—

you guessed it— dollars. So those dollars become less valuable, yet the debt cost, if you're using a fixed-rate mortgage, stays the same.

So think about it. If your payment on a property is $1,000 per month, just for round numbers, and you have 10% inflation occur—

that could be in 1 year or 3 years or whatever the time period— 10% inflation has occurred, you're still paying or writing a check for $1,000 a month. But the real value of that check is only $900.

Because inflation has debased the value of the debt, and this is incredibly beneficial to all of us as real estate investors. The same thing happens not only on the monthly payment but on the mortgage balance. And here's how you do the math. Hover over the tooltip here, it explains the math, but I'm going to explain it to you because it is so incredibly and deceptively simple you won't even believe it. Remember, this property was $248,900. We got a 75% loan-to-value. That means our loan amount is just over $186,000—

$186,675 to be exact.

And if we have an inflation rate which is, according to the government, 3.4% as of last month, that the last time the inflation was calculated and published. Then that 3.4% is applied to the loan balance.

By the way, I do want to say something here.

This example, or the way it's calculated on the pro forma, is simplified. If it was the more complex way to calculate it, it would be better than the example on the pro forma.

So it actually is slightly better. But the simplified way we calculate it is we just take the loan balance $186,675, and we multiply that times 3.4%, which is the official inflation number from the government. Inflation is likely higher than that, which means the benefit to you is actually higher than that. But we're just going to go with the official, maybe conservative government numbers.

So we take that, and that means we get an inflation-induced debt destruction benefit of $6,347 per year.

If we divide that by 12, that's $529 per month. Now you can get a pretty nice car on a 3-year lease for $529 a month.

So if you want a free car, you can buy a property like this Take advantage of the inflation-induced debt destruction, this invisible wealth creator that's making real estate investors who use leverage, who have a mortgage, richer and richer and richer as time goes by.

And it essentially pays for your car lease.

And remember, that's only one of the 8 return on investment vectors.

That's inflation-induced debt destruction. Now let's go to appreciation. This is one most people notice.

Remember, our projected appreciation rate here is 5% annually. So So we take the price of the property, which is $248,900, and we do 5% on that, and that is $12,445 per year.

We divide it by 12. That means the appreciation is $1,037 per month.

Pretty good. So our gross equity income—

now hover over the little tooltips, the eyes, if you ever want an explanation of anything.

Is $3,048 per month or over $36,000 per year.

Now let's go back up to the top and let's just briefly look at the mortgage info.

By the way, the pictures of the house— this is a beautiful brand new property.

You can scroll through and see interior pictures as well and outside pictures, and that's all there for you. And then our investment counselors will be happy to get you in touch with our local market specialists for more details on any of our properties. Remember, this is a 75 5% LTV, or loan-to-value ratio.

Shows you the loan amount, the monthly payment. It shows you what type of loan it is. It's an amortizing fixed-rate loan, which means amortize is from the Latin word amort, which means to kill, to kill the mortgage. And the way you kill it is you pay interest and principal every single month until it's completely paid off. And the term is 30 years.

Now, this is a feature we added, uh, a few months ago, and we show the nominal interest rate on the mortgage and the real interest rate on the mortgage.

There's a little i with a circle, you can hover over it for an explanation on that, but I'll give it to you right now. So the note rate on the mortgage says 6.625%, but to know the real rate, we have to subtract what? The inflation rate of 3.4%. And when we do that, we get the real interest rate. It's just the note rate, the nominal rate—

nominal just means in name only, that's the name of it, that's the rate—

and then we subtract inflation, we get the real rate. But wait, there's more.

It's even better than that in real life because we would also want to subtract maybe the real inflation rate, not the government's number. I'll leave that up to you, and lots of information on my podcast and YouTube channel about that. But we'd also want to subtract the deductibility of that mortgage interest, and that would really give us the real interest rate. We're not even doing that here, we're just simplifying it.

Now let's go to the empowered investor indicators. This may be the most important section on the pro forma. The rent-to-value ratio.

0.7%. Okay, and basically what that says is that's about the lowest you want to go.

At the time of this video and this pro forma, the deals are not the greatest they've ever been.

And basically what's happened here is we've had massive appreciation in these property prices, and they keep going up even in the higher interest rate environment that we have.

And it takes a few years for rents to catch up. Rents always lag prices.

Price appreciation happens much faster than rental appreciation, and I've explained that in detail on the podcast many times.

The debt coverage ratio, 1.06%. For those of you who want to get DSCR loans, this property would probably qualify for most DSCR loans.

Those are very easy to get. And really handy. A lot of our investors use them, so our investment counselors can refer you to the right sources for that. The annual gross rent multiplier, you know, this metric we're actually thinking of taking off because people don't use it that much anymore, but it's here. It's 12.

The cap rate, I kind of call this the crap rate. I don't love cap rate, and the reason I don't love it is because it doesn't take into account the benefits of the financing or the benefits of appreciation.

It is simply looking at the cost of the property versus the expenses on the property.

Essentially, that's what it is.

Hover over the I for a more detailed explanation, and the income on the property too, of course. That is 6.1%.

Cash-on-cash return— well, this would be higher if we were putting less money down, which I definitely recommend. But you know what? What gets worse with less money down?

Cash flow gets worse.

And so many people are myopically focused on cash flow.

I believe that is the wrong thing to do. You should be focusing on return on investment. That is much more important than cash flow.

But I get it.

It's old thinking that a lot of people just don't overcome. So it is what it is. Okay. So we wanted to present a more balanced property here rather than a property that would have a higher return on investment. It'd be the same property, just financed differently, but we're not going to go into that.

So the base return on investment—

and again, hover over the I with the circle, it'll explain the way that math is done—

here it's projected at 21% annually. If you add in the benefit of the inflation-induced debt destruction right down here, that's $6,347 per year. That brings the return on investment into a new category. We call it inflation-enhanced ROI with IIDD.

IIDD is the abbreviation for inflation-induced debt destruction. I know that's a mouthful, but it does explain the idea really well.

So that's 30% annually. And now if we add one more benefit to And that is the cost segregation we talked about earlier. That is the tax-optimized ROI that includes the base ROI, the inflation-induced debt destruction, and the cost segregation, assuming you qualify for all of those benefits. Remember, this only lasts for one year. It does not repeat year after year because it is pulling the depreciation tax benefit forward into the year that you use the cost seg study.

And we can refer you to the vendors that have the best deals on cost segregation studies. That brings this return on investment up to 50% for that year. 5-0%.

Now, what I always say, and I've said this for many, many years, is let's just be super pessimistic and super conservative.

And let's assume that everything only goes half as well as expected, because like Yogi Berra said, the future is uncertain, or the future ain't what it used to be, I think he said.

So we would cut all of these numbers in half. We would bring this base return down to 10.5%. We'd bring the inflation-enhanced return down to 15%. But remember, If inflation is higher, the return is dramatically better.

So keep that in mind.

A lot of people are worried about future problems of higher inflation and so forth.

Well, that's only going to benefit you as a real estate investor who's following the right plan. And then assume that the tax-optimized ROI is only half as good as expected. That would be 25% annually. Or 25% in the year you use the cost seg study. Amazing.

Income property is the most historically proven asset class in the entire world. It's the most tax-favored asset class in America, and thankfully it is the most debt-favored asset class in America. And I'm using debt in a good way there because the debt is part of the asset.

The fact that you can get 30-year fixed-rate debt at even now comparatively compared to inflation, compared to history, and compared to financing other things, relatively low interest rates even now at the time of this recording where most people would call this a high interest rate environment.

So there you go. I hope that helps. I hope that you will go to propertytracker.com, get yourself a free account, and run these numbers yourself. Just do that. Open up that free account, takes only a moment, and then go to empoweredinvestormarketplace.com and add a property to your portfolio.

Just have Property Tracker open in the same browser as you have the Empowered Investor Marketplace.

Open it here, change the numbers until your heart's content, run different scenarios.

Run a best-case scenario, a moderate scenario, and a negative scenario, and you will be amazed when you do the math right how good the numbers are. It really is an incredible asset class because it is multi-dimensional.

In most asset classes, you earn your return one way. The whole strategy is buy low, sell high.

That's it. That's the whole game. And once you sell high, you're gonna have to pay big, huge capital gains taxes.

The next strategy, if it's like a dividend-paying stock, buy low, get some dividends, sell high. Okay, 2 dimensions. Income property, it's an 8-dimensional asset class.

So take advantage of this most historically proven asset class in the entire world, and you will love it. Income property has made a lot of people a lot of wealth, and I am grateful to have helped a lot of people do that.

We have investment counselors who are available to you, and they will be happy to do a free portfolio makeover, a free portfolio review if you're already investing, and help you determine the highest and best use for any assets you have.

Reach out through empoweredinvestor.com, and we'd love to help you. I want to wish everybody 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 guest 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 not miss any episodes. We look forward to seeing you on the next episode.