286: Evaluating Pro Formas, Self-Management & Financial Freedom Month with Lisa

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Welcome to the AIPIS Show. For accredited income property investment specialists and those who aspire to be. If you're a real estate, mortgage or financial professional, this is the place for you. We'll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator income property. Learn from the experts as they show you how to build a better business and a better life. I'd like to welcome back one of our clients for a second interview. This is a young millennial investor who is doing a great job and she was on just a while ago and now she's coming back to talk a little bit about case study stuff but also just sort of discuss some issues, ask some questions and some good things. And that is Lisa Tomida. Welcome back Lisa. How are you?

Good, thank you. Thank you for having me again.

It's great to have you. And you know your parents have been clients of ours for quite a while and maybe some other family members too, right? Who is working with us besides you.

Brought in my cousin's wife and then a family friend, my aunt and my uncle as well.

Oh, well, thank you for all the business. That's fantastic. How many properties do you know? How many the Tomita family has through our network?

Maybe around 20.

Yeah, great. Good stuff. And you've got four. And so you are just diving into investing at a young age. I love to see that. That's what I did and it worked for me. Let's start off with the quote for the day because I think this will bring us into a discussion that you want to have. And that is what I always say, invest in place that make sense so you can afford to live in places that don't make sense. So invest in places that make sense so you can afford to live in places that don't make sense. And of course what I mean by that is buy properties in good, solid, linear cash flow markets and then you'll be able to afford to live in a property that doesn't make any sense. Living in the lap of luxury for yourself, for your own personal enjoyment. And that's definitely one of the strategies we want to continue to share here on the podcast. And Lisa, you had some thoughts about the Performa and the properties that do make sense. So fire away.

The Performa actually has. Well, it doesn't actually. It has so much information on it. I think a lot of people would find that overwhelming, especially if they're just getting started. So I wanted you to go over three to five features that you look for in a proforma and why.

That is a great question. Great question. So first off, let me say this. This is somewhat market sensitive. For example, one feature, one metric on the performer that I really like, but I don't think anybody needs to use it too much right now in the market we're in. However, if we get into another, I mean, a lot of you might think this is a crazy market already, but another market where lending becomes really liberal and really imprudent. And of course as investors, hey, we can take advantage of that and use it to our benefit, but we also want to be cautious with leverage. Right? Leverage is a very powerful tool, but you got to be a little careful with it. That metric that is market sensitive and not, not super critical right now is the debt coverage ratio. The debt coverage ratio. Now the debt coverage ratio, Lisa, could also be called the how likely is it that I'll get into trouble with this property ratio? Okay? That's another name for the debt coverage ratio. And basically what it says is the debt compared to the income. How likely are you to be able to cover the debt based on the income the property produces and the expenses the property has against that income? Okay? And remember debt service or the mortgage on the property, the loan, that is a different metric than the normal property expenses that go into the calculation of what's called NOI or net operating income. Also a metric mentioned on the pro forma. Basically, when that debt coverage ratio is not favorable, you want to realize that you're in probably a very liberal lending environment or you're paying a high premium to borrow or something could be amiss. But right now we don't need to worry about that one too terribly much, okay? Because we're not in that type of a market now. So what metrics do I like right now? Well, my favorite metric is the total return on investment. And so anybody listening can go to jasonhartman.com properties or just jasonhartman.com and click on the properties page and they can look at these Performas in detail. And they're a one page Performa. We standardize everything, but looking at that total return on investment really tells you overall how the investment is projected to be based on the pro forma projections. Okay? So the one I'm looking at right now, for example, says 30%. And that includes everything except what I talk about as inflation induced debt destruction. It includes appreciation, principal pay down, cash flow, the whole ball of wax. So that is an overall thing and it's good to look at. But what if there is no appreciation or what if there is depreciation? Right. Obviously that would negatively affect that return, but it also might negatively affect your ability to hold the property in tough times. So the next metric, which by the way on the sheet happens to be right above that, one that I also like to look at carefully is cash on cash return, otherwise known as CoC, cash on cash return. Okay? And what that says is that regardless of what happens with the value of the property, how will it perform based simply on the income to expense ratio? And so, for example, in a market where values are declining, if you have a good enough cash on cash return, as long as you maintain that income and expense ratio, you're going to be okay and you're still going to get a decent return on your investment. And interestingly, in a declining market, if it's a deflationary type of market, a lot of times your maintenance costs will actually decline because all those contractors are looking for more work and all those materials, suppliers of materials for your property are putting everything on sale because things aren't moving and the economy is not booming, okay? And also the income may well go up because no one is very much enticed in a down market to move from being a renter to buying a house. They're just not motivated because they think, well, hey, you know, the houses are declining in value, I'm not going to buy right now. That would be a bad decision. So a lot of times the rents actually increase in that market. Okay? These are non correlating indicators, price to rent, because you start to see rents solidify more when the market is considered worse. But when the market's considered good and everybody's trying to buy a house, they move out of the renter pool. When it's easy to qualify for loans and they're very motivated to buy their own house, then you see a decline in the renter population, an increase in the homeowner population, and that means downward pressure on rents. Whereas when you have the opposite market, it means upward pressure on rents. What do you think, by the way, as an investor? I mean, you've got four properties now. What do you like to look at? Lisa?

I keep it a much more simple. I just look at a lot more simply. I look at the mortgage, if I can afford the mortgage, if I'll be okay almost no matter what with that mortgage, and then I look at the rent and subtract it, and that's how I picked the Four that I have.

Right, right. So you're. You're basically looking at cash flow, right? Okay. So that feeds into cash on cash return. Cash on cash return just expresses that same exact thing as a percentage. So it's really the same metric in essence. Okay. And what I probably should have mentioned, even starting, is that the first thing that you should look at is the assumptions, okay? And on our performance, there are four of them. Appreciation rate, vacancy rate, management fee, and maintenance percentage. Okay? So you got to make sure those assumptions are in line first because they drive everything else. And if those assumptions don't show a vacancy rate or they show a ridiculous projected appreciation rate, or they don't take into account maintenance or management, nothing's going to work until you get those assumptions to be at a reasonable level. Okay? That's the first thing you've really got to do. So before you even look at anything else, you got to look at what are the assumptions on which these numbers are based. Okay. Another one that I think is pretty interesting, and it's a really simple one, is cost per square foot. Okay. That shows you if you are getting a property that is a good value, because if you are buying at or near the cost of construction, the likelihood of you getting hurt on that property is pretty darn low. Okay. If they can't rebuild that property for somewhere near what you're paying per square foot. And this varies by area, obviously. And we've done shows about this. I did a big show where I looked at the Building Industry association statistics of the cost to build a home in all of these different markets across the country. So if you want to find that one, just go to Jason Hartman dot com. Use our search engine on the website. It's a really handy tool. We don't necessarily think, if you're new to the show, that you have time to go back and listen to 1200 episodes. So use the search engine to find exactly what you're looking for. And that's right@jason hartman.com and it's a very handy tool. Also, Lisa, you know, one of the things we were talking about before we started is for new listeners, we have a Quick Start podcast. So if you're using itunes or any of the podcast platforms, you just type my name and look for the podcast that is called quickstart. Jason Hartman, quickstart Podcast. It's got a green bar on the podcast icon. That's a good one. Where we've hand selected some episodes that are really good for newer investors, newer listeners, to kind of get the fundamentals Because a lot of times, you know, we talk about some sort of heady, esoteric concepts that are important for investors, but sometimes you just want to know, what do I do? Tell me what to do specifically. So the Quick Start podcast will be very helpful for that. But Lisa, you're looking at cost per square foot, right?

Well, now I am.

Yeah. You know, of course, driving cost per square foot, is the square footage accurate in the first place? So make sure you double check that and ask. And you know, your appraiser will do measurements and these will vary a little bit, by the way. You know, everybody measures a little different. It's not exactly perfect, but as long as it's, as the saying goes, close enough for government work. So. Yeah, but you know, on this Performa, everybody listening should go, you know, every six months or so, go to Jason Hartman.com and listen to that 27 minute video right on the front page of Jason Hartman.com. it's just a free video and it's, it'll really just go through the Performa line by line by line. Like if there's nothing else anybody does and they want to become a good real estate investor, just watch that 27 minute video. It's. That covers a lot of it. It's very, very helpful for people. Okay, what's next? Or do you want to talk more about the proforma?

No, we can talk about self management now. What are some tools that you're loving?

I love what you were telling me before we went on the air and you know, we've talked a lot about different tools, but you were telling me, and I'm going to throw it back in your lap, that you like using Lowe's, right? Lowe's, the big hardware store, the competitor of Home, Home Despot, as my mom calls it. Home Depot. Tell us why you like Lowe's.

Living in California, our prices are higher than what it actually costs in places like Mississippi, where I have my houses.

Where you have two of them. You have two in Little Rock, two in Mississippi. Right? Okay.

And I'm also self managing and I didn't find this out until I called the store to ask about the installation services that I found on the website. So I'm talking to the guy and he's like, oh, well, I was trying to get a security door. So he was like, oh, how about this one? It's a hundred. I don't remember what the exact numbers were. It was, I think it was like $160. And then I'm looking at it online. I'M like the closest store that fits that description is $180. Anyway, so I ordered it over the phone, saved $20, and then they installed it for me. And since their installation guys are also independent contractors, he called me, I started talking with him and basically he's now my handyman.

Great. So you buddied up to the person that Lowe's referred their independent contractor and that person became your handyman. That is awesome. Good job, good job, good job. So what did you negotiate with them? Like, are you paying him hourly? Tell us how that's working out, your handyman?

I'm paying him by the task. There's not that much to get done. I just have a gate that needs to be fixed and another door that should be installed. Just a better security door. I didn't like the ones that were on the house that I have. I'm replacing both of those for the tenant and he's going to install them for me.

Uh huh. Good. Good stuff. You got this door replaced. Why did you need that? Did the tenant tell you I have to have a security door or were you just sort of doing them a favor? And, and when you say security door, what do you mean? Like bars on the outside? You know, like a sort of the screen door? That's like a security screen door? Is that what you mean?

Yeah. So it's just a black steel door. It's metal. I don't really know how to explain it.

Yeah. Okay, well, I know what you mean. It lets the air in, but it doesn't let the bad guys in.

Right, right.

Okay, good.

So the reason why I got the front, the one on the front door, which was the one I called Lowe's for, was because everyone around her house has gotten broken into and she was a little bit concerned. So I just ordered her the door. And then when the installation guy got out there, who's now my handyman, he also told me that the doors were hollow core and he wasn't sure if those were suitable for outside.

Okay. So. Yeah, I don't think they are either, by the way. So that's good. So you got the tenant of security door. They feel better. Overall cost was what, 170 bucks?

About.

That's pretty cheap for nice security there. That's great. Okay, good. And where was that? Is that the Mississippi or the Little Rock properties?

That was in Mississippi.

Okay, good. So now you've got a handyman in Mississippi. You know, it's always good to have a few of them. And Lisa, as you know, we are launching and by the time of this recording, it may already be launched, I'm not sure, or by the time this show airs, the empowered investor network. So that, and we're going to do this one market at a time so that investors in these markets, our clients, and maybe some that aren't our clients will have a chance to know, network together to hold their property managers accountable. Okay. Because they're going to be sharing information behind their back and also they will really have the network, the friends, the advice and the tools if they want to self manage their properties. So I'm just really excited about this. I think it's going to be the best thing we've ever done. And the empowered investor community is just going to be great. So for the cost of it, if you have one property, you will easily pay for it. Easily, easily. Probably many times over in the first year. Just a cinch. So that's going to be a good thing. Monthly conference calls, community forum so everybody can post and share information. Special event of some sort at our Prophets in Paradise and Meet the Masters events every year. And we'll get all these empowered investors together and they'll just have a nice little community. And I think one of the main things is sharing information of who the best contractors are, who the best handyman are, who the best H Vac company is, all this kind of stuff. And knowing if an estimate on something, if a quote on something from a vendor is out of whack or if it's reasonable. Right. Because you'll be able to post in the forum, hey, I got this quote, quote, here it is. You know, show it to everybody. Is this reasonable or unreasonable? What they're quoting me for what they're doing. So I'm just super excited about. This is going to be a great, great service.

I'm excited for it as well.

Yeah, yeah, thanks. I think you'll really like it. Okay, what else do we want to go over? And then let's wrap it up.

Lastly, I wanted to talk about financial independence.

Yes. Financial Freedom Month actually. Right. We got a whole month that we have officially dubbed Financial Freedom Month. And Lisa, it's July. That's when we have, you know, the fourth of July. So for the non Americans, you know, that's just our theme here. We're connecting it with Independence Day and we want everybody to be financially independent. So. Good stuff. Tell us a little bit more about this.

So do you want to talk about how the idea came about?

Yeah, I liked it, I liked it. You know, everybody's got these funky little holidays and you actually submitted one for us, right?

I did.

Thank you. Tell us more.

So for Financial Freedom Month, what we want people to do is go on social media and talk about what financial independence means to them. So set a goal. Talk about how you already got there. Talk about why you want to be financially independent. We just want to create some sort of opportunity for people to talk about it. We think it'll help people accomplish their dreams better.

Yeah, good. Good stuff. When you have something where you kind of memorialize it and you say, look, it, July is Financial Freedom Month, then it becomes more real. You know, we all pay more attention to it. Right. And that's really the purpose of these ceremonies in life and these holidays and things like that to. To just bring it to our attention, to get us to remember it. Right.

Awareness.

Yeah, yeah. Good stuff, Lisa. That's excellent. Well, great. Thanks for joining us for the second time, and thanks for being a great client. We appreciate the business and especially your whole family. Now, some of your family, I know you live in Cerritos, but some of your family lives in Hawaii, right?

No, we're all in LA.

Oh, you're all in SoCal. Okay, got it, got it, got it. Yeah. And Cerritos is Los Angeles County, Right?

Right.

You know, I told the story. Cerritos, the Cerritos mall changed my life. You heard that story before, right? Folks, we ought to do a contest to see if anybody can remember what I'm talking about.

Anyone besides me.

Yeah, yeah. You remember, right? Because I went to Walden Books when they had bookstores back in the day. Yeah, yeah. Good stuff. All right, Lisa, thanks for joining us, and happy investing to you and everybody listening.

Thank you for having me.

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