How to Analyze a Multifamily Rental Property in 2023 - MATH 101

when we're looking at a piece of real estate is to make money. Believe it or not, these are investments. We want to make money. And there's 4 key metrics that Christian and I look at when we're talking about making money. Number 1, and the main reason we buy real estate, is cash flow. We've also got appreciation. We've also got depreciation, and we've got debt reduction. Now, there's a sliding scale in the real estate analytics space, and you've got cash flow on one end of the scale., and you've got equity growth on the other. Now, the quickest way to get rich is equity growth, and the quickest way and the best way to make sure you don't have to do this whole thing twice is cash flow. It's why a developer is going to get wealthier quicker than someone who's just buying for cash flow because they get to start multiplying their money.. And developers can be the richest people on the planet until they're not. It is the fat— one of the fastest ways to get a ton of money until you have to do it twice because you don't reinvest into cash flow. So there's a sliding scale where you have to balance, how do I multiply my money? A lot of people think flips in this case where they go flip, get a quick buck and keep rolling it up. Or do I just go straight into cash flow? Some people buy single-family houses in the Midwest like me. Yeah. And my philosophy is like, how do we get both? Yeah, I don't want to compromise at all. I'm just this selfish 22-year-old. I'm like, I want it all. I don't want to compromise and just get cash flow, and I don't want to just get equity growth. Granted, that would be a nice deal situation. However, people that just focus on equity growth and don't build cash flow along the way put themselves at risk of losing everything they've built. I don't know about you, but if you're like me, I don't want to do this thing twice. I'd rather do it once, even if it takes a little bit longer. There are going to be some people that put their money in Doge and are millionaires overnight, and I'm like, that's wonderful. But it's not repeatable and you could have lost everything you put in there. So I'm just going to go buy for cash flow. I'm buying based on cash flow for equity growth. This is my go-to line. I'm buying 100% of the time. It has to cash flow positive at least $1,000 a month.

And part of the way we stack that is we choose markets and areas that we believe are very likely to appreciate. So we'll stack the debt or the deck will stack in our favor. So we go, hey, we expect this market to go up. We, we can math out excellent debt paydown. All these factors are moving towards us, but we're going to choose the area for appreciation, the asset we're going to buy on cash flow because and is greater than or.

Yep. So cash flow is what keeps us alive. But our main goal, we put a dollar in, We want to walk away with 3 to 5 bucks. So if we can put $100 grand into a deal, whether it's our own money or not, we put equity in, we want 3 to 5x on our equity, and we do that through apartments. However, most people don't start with apartments. And since we're recording this for folks, you're probably not going to start with a 32-unit apartment building, even though Grant Cardone says go buy a 32-unit apartment building, start now. You can start with a duplex, and Christian did that. So today we're going to go through some examples.. And as you guys have questions, just tell us to stop and we'll run through those. Is that cool with you? Yeah. Yeah. Cool. So we're going to start sharing a screen. So I'm going to let Christian use his laptop here. Just press share and away we go. Boom.

All right, let's pull up your property. So here is the first property I ever bought.

You guys see this?

Yeah, cool. It is legally a house with an ADU. They're separately metered. You can see here. So I mean, it acts like a duplex. That being said, I was able to buy this property owner-occupied, so I used the conventional lending rules. I only had to go 5% down to pick this up. The top is a 5-bedroom, 1-bath house. And yes, I do feel bad for that 1 bathroom. That is too many rooms for 1 bathroom. I would, I would like to remind remodel that one day. So there's an upstairs bathroom. There's more rooms than you need upstairs.

I know the feeling. I grew up in a 4-bedroom, 1-bath house with 8 people living in it. Whoa, that's, uh, that's a lot of usage on that bathroom.

Oh yeah, no kidding. My grandparents had one bathroom and it was right by the kitchen. So it's like, that's not where you want your bathroom to be, like direct into the kitchen. It's like everything— yeah, you can hear everything. And smell everything from there.

It's like, yeah, it didn't work out well.

That, that builder just, that builder thought he was going to make money by cheaping out and just making sure all the plumbing was on the same wall. Yeah.

That's what it sounds like.

Christian bought this duplex, which is really just a house.

And you know, here's the lower unit.

It's basic, but this is in a phenomenal market. And you bought it, you did the owner-occupied route, which is a pretty easy way to get into the space.

Did you do FHA or did you do conventional? I did conventional because it's legally a house. 5% down didn't really make a difference to me between 5% and 3.5%. I figured you can pull PMI off conventional, you can't with FHA. So I opted to go that route, but you can do the same thing on all multifamily up to 4 units, single family, duplex, triplex, fourplex, you can do FHA, you can do the 3.5% down. So you can go really low down on some of these lower unit counts. That's how I got started. Cody started with bigger units and we'll do some math on some of the larger units, um, on the back end. But just for the fundamentals of how we look for, like, look at a deal, I wanted to give like real numbers. And this is a calculator that we will provide you after this call for how we look at a deal.

Okay. So how'd you, um, how'd you qualify for the FHA? Like you had to have a, is it just like the area of town? There's like some specific, uh, standard you had to qualify for, for FHA, right?

Yeah.

So it would be just like you'd qualify for a house. They'll, they'll look at your income. They'll look at your pay stubs, um, last 2 years tax returns, everything that you'd qualify for, for a house.

Fall into these rules. And granted, I didn't have any of that because I was fresh out of high school, so I had to play by different rules, which is why I ended up buying the type of real estate that I did. And we're gonna go over the numbers on how that makes sense, because if you've got a job, you can do this. And what I did— I have $3,000 in the bank when I bought my first deal, but I never spent that $3,000. So if you have $0 in your bank account and no credit. Turns out you can go buy a piece of real estate if you don't qualify for this. Wow. Granted, Christian's at, uh, 67 units today. He started with a house. Just putting that out there. That was like 15 months ago. That is true.

Yeah, congratulations, man. Thank you. And the only illustration there that I hope anyone gets is that it's doable. Um, I did leave a full-time job to go as fast as I did. So I mean, I don't want to create the expectation that you can just wander into over 50 units in a year. That being said, it is completely possible to go that fast. Uh, so deal number 1, this is my first ever multifamily deal. I purchased for $395,000. They actually told me I could have it for $385,000 and then at the last minute decided that they weren't going to sell it for less than $395,000, which Rule of thumb, if $10,000 makes a difference in the deal, it wasn't a good deal to begin with. Um, I loved the math at $385,000, $395,000. It still looked great to me. Down payment, I— it was really only the $19,750. That said, I had a couple of odds and ends that I immediately wanted to fix on the house, just little electrical things and minor repairs. So I included that in my down payment. I spent $25,000 down to close the property and get it looking the way I wanted. Closing costs were another $5,000. Interest rate on the property came just, just below this, but it was just about 3.25%.

Okay. Taxes and insurance. I mean, these are what it actually is. Mm-hmm. Taxes to me look low, but I'm not going to call up the government on his deal and say, hey, you're not collecting enough.

Traditionally, government will reassess as soon as you close on a property or shortly thereafter. They haven't raised my taxes yet. I've owned this for over a year. That's abnormal. It's usually, at least in Washington State, it's close to 1% of your purchase price. Usually it's just under. So my taxes are low. They will get raised at some point. But today, this is what I'm paying for appreciation. By the way, we put 3%. The last few years it's been closer to 8 to 10%. Um, but we always factor very conservatively. So I'm, I'm not going to assume that we have insane appreciation every year because we're not buying based on that.

We're buying based on cash flow. Right. Yeah. That makes sense. When you guys are looking at this spreadsheet, there's a, there's an inputs tab and that's where you input the data. You can put in property address, MLS number. If you're getting it off the MLS, you want to organize it. And then you've got all your factors down below. You can put in your monthly expenses, which are going to be variable based on the market you're investing in. Taxes in Texas are going to be higher than taxes here by about double— by, yeah, by quite a bit. And that can affect your net income. But at the very bottom, you put in your rental income, and then at the bottom of the page, you've got your different sheets. You've got a property analysis tab.

Mm-hmm.

And on your property analysis tab, if we just look here, this is how we quantify our returns. Now, when you put less money down, you're doing conventional, low money down, or you're doing FHA, your returns are always going to look higher because you have less money in and you're still leveraging a lot. You're adding a little bit more risk. So in this case, it just outlines our deal. We've got $395,000 purchase, down payment, closing costs, and then we've got a loan. We've got our monthly P&I, we've got our taxes and insurance. There's no HOAs. We don't recommend buying condos. And then we've got monthly maintenance repairs, utilities management. And these numbers are accurate to date with Christian's deal. And he's had it over a year. These have— this is about what he nets every month. And so we're looking at those 4 returns I mentioned earlier. We've got cash flow. We're looking at all these returns on an annual basis. So our cash flow on this deal is about $7,500 and change per year. The way we're quantifying our returns, we're taking our net cash flow, we're dividing that into our initial investment, and it's going to come out with a return. Now, these returns again are really high. There's not a lot of money in this deal relative to the purchase price Christian traded $30,000 for a $400,000 asset, which is phenomenal. Yeah.

I mean, the down payment is so low because you said it was owner occupied, right?

You said you moved in there. Uh, I bought it owner occupied.

He, uh, did not stay very long and it ended up not working out for his commute to work.

No, I changed, I changed jobs very shortly. After that, which, which is an exemption that the lender was amenable to. I know there's a lot of people who will actually buy these and not necessarily move in. In this case, I literally left my job within 30 to 40 days of acquiring and moving into that property. So there are multiple ways to do it. This particular property, I was exempt from having to live in it full-time, so it was rented out Very shortly after I moved in.

And so we've got cash flow and then we got debt reduction. Tenants are really, really nice people as long as you take care of them and they actually pay off your loan for you over time. It's this beautiful process that we call debt reduction. And this is not money that you get to go blow on a Lamborghini. However, it is building your net worth and you start stacking enough of this And over time, your net worth starts to grow like crazy. Today I've got about $5.7 million in debt, and a little bit of that every single month gets paid off. I wish I was $57 million in debt because, you know, you start stacking this much debt paydown, start multiplying that, you start to get a net worth gain pretty dang quick. So we are looking at this as not something you can just spend today, but it is a long-term return on your equity. We've got depreciation. Oh, what's that? I said that's something that like, it's really hard for me to mentally get ahold of. It's like I've my whole life I've had it like pounded in my head. That's bad. Don't want that. You need to pay cash. And it's just, it's really hard to, to think about that. Yeah. And, and we're going to go chat about that more in the future. There are ratios you should look at. You want the debt service coverage ratio, and we'll talk about that in the future. Section to be in check. I mean, if it costs you $100 a year and you're netting $100 a year, that's not a good debt. You know, that's not a good debt service. It's not a great deal because you're not making any profit. We want to see a margin on this. And if you're barely getting by, even some people will say, well, it's paying for itself, it's good debt. Like, well, not really. You should have enough margin so that the only money you have to put into this deal is what you initially budgeted for to acquire it. That's the way that we view this stuff. We don't want to feed a property, we want the property to feed us.

Correct.

And before we hop off debt reduction, the beautiful thing about it is, one, it's a forced savings account. You don't really feel it, you don't really notice it because it's not money you can spend. Your net worth just goes up. The other beauty is you're not the one paying that debt your tenants are really nice like that and they cover that whole debt for you. So if you roll this thing for the whole 30 years, because it's purchased conventionally, it's on a 30-year note, your tenants will buy the entire property for you and you'll be paid to wait. So debt reduction is really cool. It's one of the ways you grow a lot of wealth. You just— it's the one that you don't really notice until you go to sell the property. Like, oh yeah, my tenants paid off a lot of the debt on this.

Feels good. Then you've got depreciation. Now, depreciation is a tax benefit that you get to structure with your CPA. We have it listed here. However, everyone's situation is a little bit different and usually a lot different, so we don't dig too deep into that. But that last piece, appreciation, if the property value goes up 3% in value, In this case, it's just under $12,000. You put $30,000 down, it's about a 40% return on investment, which doesn't suck. It's not that bad. I mean, it's phenomenal when you leverage. If you did FHA, 3.5% down and your property went up 3.5% in value, you double your money. So the beautiful part about leverage— now some people say, well, I'm going to go get a whole bunch of those. I'm going to go get some condos, get a pretty it'll appreciate. It's not a great business model if it doesn't cash flow. I want to get paid to wait for my money to multiply. So in this case, Christian put in $30,000 and his projected return was about 86.5% year one. Now it absolutely crushed this because his property over the course of a year is worth about $475,000. He made a ton of money. Now, that's wonderful, but that's not why he bought it. It's a wonderful byproduct of being in a phenomenal market and the Fed printing out a ton of money. Mm-hmm. That is not indefinitely repeatable. However, that's not why we buy it. We're buying based on cash flow for standard equity growth. We want to multiply the money, but we don't need to do it in a year. We can do this thing in 5 years where we could put in $100,000, come out with $300 grand. Or if we can put in $30,000 and walk away with $90,000 over the course of 5 years, we're happy campers. This was wonderful because he bought in a phenomenal location. Great investment, great return, but not always the norm.

Yeah, I factored for this and 86% is a phenomenal return no matter what way you cut it. I mean, that's just an excellent return on investment for your money. The reality of it is I turned $30,000 into $130,000 partially because of luck. But again, we stack the deck in our favor for that. Generally speaking, you end up getting rich in real estate on appreciation, but it doesn't matter if you lose the property, which is why we buy on cash flow. Cash flow gives you stability that you can count on. The appreciation and debt reduction ultimately are typically what are going to make you rich.

Yep. You will not go broke. If you keep increasing your cash flow above your expenses. If you have long-term debt with no short-term balloons, you consistently grow your cash flow. You're going to be reducing your liability to having to write a check every month to feed properties. It's super important. Now, this was an analysis on a residential property, house with an ADU. It's Christian's little duplex. Christian then went on to buy another duplex, and then we started buying some real real estate to get— not just kidding, I, I kind of, I kind of dig on small stuff, but, um, I love the commercial residential side. I love multifamily 5+. As you guys know, my first deal was 12 units, and the reason that I love the multifamily space is 5+ units is it's value-based on the income. Christian's property was subject to the comps, subject to the properties next door, homes with ADUs, duplexes. He was dependent upon valuations going up for those properties. The stuff I buy, and now that we're buying together, is valued based on the income. And if you think about this like a dividend, if it pays more to the investors, it's worth more because it can be sold to the next guy or gal for a higher price and make the same return as when you bought it. So in real estate, we're looking at returns and ratios. So we're going to go— Christian, you want to pull— is it sheet 1?

Let me ask you real quick. So in the calculations here, are you— so you're not accounting for any vacancy rate or any like little fudge there in case you were to have a property, the tenant turn like one month out of the year or something on average?

We always account for vacancy. That said, Christian's little duplex, he's in a sub-1% vacancy market. It is, it is fueled by one of the only naval bases around. So there is never vacancy. But that said, when we're looking at bigger complexes, always 100% of the time budgeting for vacancy, because we'd be lying to ourselves if we said it was always going to be full. Yeah. And as I've mentioned in the past, everybody's going to lie to you.

You can't lie to yourself.

Right?

Exactly.

All right. Okay. So let's talk about rental increases. And this is where it gets really fun. If I raise rent $100, do my utility bills go up?

If you raise rent $100, your utility bills go up?

No, everything's the same. Yep. Say the same. If I raise rent $100, does my insurance bill just go up? What about my taxes? Look at that. It's just free money that you're leaving on the table. So the game that I'm playing earlier in the call, I mentioned I am buying based on cash flow for equity growth. And I'm a stubborn 22-year-old that wants it all, and I don't want to compromise on equity growth or cash flow. So I buy apartments with owner contracts, seller financing. I get to write those notes, the promissory notes to the seller, in a way that makes the deal cash flow. And I am looking for a mismanaged opportunity where it's got these fixed costs, taxes. Yeah, they're going to go up a little bit when you buy it, but you've got taxes, insurance, utilities, maintenance, management. Repairs. You're going to have your fixed costs that we can expect on a property. I'm looking for mismanagement over long periods of time that allow me to go in, get rents up. I'm not pushing above market rent. I don't need to do that, but I'm looking for discrepancies where I can raise it most of the way to market, where I'm still keeping it just slightly below so that I have happy tenants. I'll always have tenants if I'm slightly below market. And I just want to raise rent and I'm looking for $100. So in this case, if I raise $100, we're always looking at our valuation on a 12-month period. It's on an annual basis. If I raise rent $100, how much is that per year? $1,200. $1,200. Now I made a video on YouTube, Why Cap Rates Don't Matter. Because if you can borrow cheaper with the seller finance notes, you can borrow cheaper than your cap rate, you make the spread, you make money. Well, in this case, we take what's called net operating income. It's that new net income. Income went up, expenses stayed the same. So this is all net income to your pocket. We're going to divide that by the market cap rate. What's a fair market cap rate, Bill?

Oh boy.

Nowadays, well, like maybe 4, 4% in some nicer areas where I'm buying. It's a little bit more tertiary. And so I'm paying 6— I'm doing usually 6% cap rates, 5 to 6. Now, the stronger the market, the lower the cap rate. If it's more stable, investors can justify making less of a return. If it's a little bit farther out there, your cap rates are going to go up. If you're investing in Detroit, you're probably not going to buy on a 6% cap rate. You're definitely not going to buy on a 4% cap rate. So you get to pick really, really solid, stable markets. Your cap rate's probably going to be in 3 to 4%. If you're picking in strong markets, a lot of blue-collar workers, you're likely in the 5 to 6% range today. Where I invest, we're looking at 6%. So all I do to figure out what my value increases is I take the new net income the $1,200 and I divide it by 0.06, 6%.

Does this make sense so far?

Yeah, I think so. I still don't even like fully understand like the whole cap rate thing.

I'm trying to learn all that too. So the simplest way that I can think of to explain cap rate is that is the return that an investor expects if they paid all cash That is the return that they expect. So say I invested $100,000 into a property in Seattle and it's a 4-cap market. I expect every year my $100,000 will return $4,000 in cash flow.

And that is—

if I paid cash.

If I paid cash, I paid cash. And the idea behind the cap rate, there's so many different asset classes. You got self-storage, You've got leased land, you've got apartment buildings, single-family homes. They're all different. And the idea behind the cap rate is if I paid cash for all these different asset classes, what is a collective return that I can look at? What is a return that I can compare apples to apples, even though it's never apples to apples amongst houses, apartments, storage facilities? What is a return that I could expect to make? So if I buy a $100,000 house in Memphis, and at the end of the year I made $6,000 net to my pocket. I'd paid cash for the house. I made 6 grand. What cap rate is it? That'd be a 6%. You got it. If I bought a house in Seattle for a million bucks cash and my net cash flow on that deal was $20,000, What's my cap rate? You're still looking at 20% or 2%.

2%.

Yeah, yeah, a million. The $20 grand, I was thinking $100,000 for some reason. Yeah, no, that's fine. It's 2% cap rate, which is gonna happen in a lot of Seattle home investments if you're paying a million bucks for it. So different markets are gonna have different returns, but the goal is If we know what a market return is, if we can look at an average, whether it's a 4, whether it's a 2, whether it's 10, we take the new net income, we divide it by that market return, and we know how much value, how much the price increases for the next investor to where they get the same return that you did when you bought it.

Okay. So if the income that you're paying for is— so take this example here, a 6 cap. So all you do is, okay, if this is the new income, this is 6% of what? And that will be the new value you've created. If someone in your market's willing to pay for a 6% return, and that is the market average, all you do is you take this number, your annual revenue, divide it by that 0.06, and that's how we get a new creation of value. And that's how a lender is going to look at commercial real estate.

Type in NOI. So you've got what's called net operating income. That's the money that you've got after all the operating expenses are paid. We're talking about taxes, insurance, utilities, maintenance, management. Notice I did not include a mortgage. Your net operating income, NOI, is the money that you've got to pay your mortgage, and pay yourself in a cash flow. It's the number that you get to look at a deal and say, okay, this is how much debt I can take on and still pay myself cash flow. Net operating income minus debt equals cash flow. That is the equation 100% of the time. Net operating income divided by if you want to put that there, divided by your cap rate. Income divided by your cap rate equals value. That's, that's the equation. That's it. If you can master this, you're set. Does that make sense? Yes. Cool. So we raised around $100, you make $20,000 a unit. What if you have 12 units? You just made a quarter million dollars for raising around $100. Not too shabby. Notice my first deal I bought was 12 units. It was about $120 grand down total. You raise around $100, you turn $120 into $360 because you get $240 plus your $120. You just tripled your money and you got paid to wait for that to happen.

I remember Grant talking about that with some of the bigger complexes, you know, raising valuation like $2 million just because you raise your rent like $100 per unit.

Yep. If you raise rent $200 on a 12-unit, yeah, man, make half a million bucks.

It's such a big—

yeah, such a big difference. So I look at this stuff and I'm like, I'm investing with no money at a young age, and that's what Christian and I are doing now together. And like, we need each other to go do this stuff because it You know, you should have an accountability partner. I could not do this without Christian. And I think he'd say the same thing for me. Absolutely. So now imagine that you bought a property. I'll give you an example. We bought the 38-plex and the rents were about $400 and they should be $1,000. Well, we're not going to raise rent $600 all the way to market because we want to be slightly below market and get it full. We raised rent $400 on 38 units. We bought this for $0 out of pocket, by the way. Oh, there it is. $3 million. So when I, when I say look at bigger deals, I mean it. It's easier to go make money Now there's going to be people watching this that say, well, you're not accounting for vacancy, or you're not accounting for this, or not accounting for that. I'm like, all right, let's take 10% off this number. Am I— is it acceptable to make $2.7 million on a $0 investment? Yeah. So we operate on different rules than most people. Most people are like, well, what am I paying now? I'm like, okay, well If the market cap rate is 6%, let's pay 6%, whatever. And whatever it costs us to buy it will not exceed what it costs us not to do the deal. Because in this case, we brought in a loan, we brought in investment money where it was a 2-for-1. It costs us $300,000 that we're borrowing and we got to pay back 6. Well, I can make the argument that I could be half wrong on my $3 million valuation bump and still pay back $600 grand. This is why I love this type of real estate. It's not a question of if I can afford to buy it. It's I can't afford not to buy it. Let's go figure out how to do this. It's the easiest math. Once you figure this out, it's the easiest math to comprehend and just go do. If you raise rent, $83. Put that in on a 6-plex. You make $100,000. It's so ridiculous. People are like, I don't have any money. Go figure out how to buy a 6-plex. Well, I got to borrow at 12%. So what if the property cash flows and you could just raise $83? I'm not saying go above market. I'm saying find an opportunity where it's $83 low. You make $100,000. And if people are going to be worried about that and they're like, well, that's not enough margin, find a property where you can raise rent $200. Just go find that opportunity. Because if you can raise rent $200, you make a quarter million. That could be your first quarter million. It is the easiest money you will ever make. And by the way, you're going to get paid cash flow while you wait. You get paid monthly to make a quarter mil. It is the best thing ever.

Now, there's one thing that Cody said on the BiggerPockets podcast that we had to clarify, and people still hated it, uh, which I love, where we basically said cap rates don't matter. And I don't mean they don't matter at all, but that's not our primary reason for buying something. It's not the analytic like whether it's low or high, the common knowledge is buy high cap rates because there's more cash flow. But if you found a deal at market rate and let's say it's a 3-cap market, well, now if I have the same rental increase but it's a 3-cap, now all of a sudden you just make more money on equity.

That was what was interesting, um, at Grant's conference too, where there's that light bulb moment because it's like, whoa, a lower cap rate's going to be evaluation, but it makes sense. But it was a really weird thing at first to think about it.

Whoa. Think about it like a pie. If you got a pie and you give the next person less, you get more. Yeah, it's wonderful. But the problem with 3% cap rate, it's hard to cash flow because most, most debt products, most loan options, you're not going to be able to borrow cheap enough to cash flow a 3% cap rate. You're going to be borrowing and paying more on the leverage that you take. So if you leverage a ton, you're losing money. It's why a lot of those big institutional buyers are getting, you know, if they can get interest-only debt at 2%, I know some people that are getting in the mid-2s, you can buy a 3% cap rate and you still make a margin. They're making money on that leverage. That's the key to making those big deals work. That's also why we're not buying 3% cap rate deals. I mean, we, we don't have options for that right now for everything that we're working on. We haven't negotiated a low enough interest rate on seller financing.

Well, it's going to be challenging. Uh, yeah, it's going to be challenging for them to sell if, if, if they're only getting 3%, then that means that people are going to think their property's too expensive probably too.

Okay. So this is how we run the numbers. We're buying based on cash flow. But when we're looking at this bigger stuff, we're looking at 6-plexes, we're looking at 8, 12, 16, 38, anything bigger or in between. We're looking for opportunities where there is a mismanaged property or community. We want to find a way to push some value into that market, into that little community. We want to push the net operating income up by boosting rents. Or lowering expenses. And that is what allows us to go make a ton of money in this real estate game, that we can then go get some equity. And you can either do a cash-out refi, which is the preferred option, or you can sell it, take money, pay off the money you borrowed for the down payment, which is what I had to do on my stuff because I started this thing with a loan from someone that I never met. Get them paid off, take the money and go buy some more stuff. This is why no one can have an excuse for not getting started, because you don't need your own money. You just have to figure out who has the money you need to go get started and find a mismanaged opportunity.

So then when it comes to the valuation of property being based off of its NOI, that's over 4 units, is that right?

Yep. So when you're 5 units plus, so looking at the net operating income— that's commercial. 4 or less, you're looking at comps.

That's okay. Yep.

Okay.

That's what I thought. And this is realistic. And like, Cody got a 6-plex where rents can be increased $200. What did you end up—

what was— what did you actually pay for that 6-plex? I mean, I got it for a phenomenal deal. I got it for $380 grand, which was a great deal stabilized. The place is worth $750,000. Not bad for a zero-down investment.

Yeah, that's pretty good.

You're getting out of that. I'm getting anywhere right now between $7,000 and $8,500, but those will be going up in a little bit. I'm re-renting some of the units. I'm going to go in and remodel it. Uh, we're doing some creative stuff on the backend for getting some cash-out refis done, but, uh, gonna pull some money out, put some money in, no equity of my own. I'm pulling equity out of the property to reinvest into the property to multiply the equity again.

It's ridiculous, but yeah. So you're getting pretty high NOI, it sounds like then, um, just cause you bought it for so cheap too.

Yeah. And I would never recommend just buying on price. I don't want to buy real estate based on how cheap it is. Yeah. But that said, there are opportunities where you are getting below market value. And I only got that deal at that price because I built a relationship with the seller. Okay. And I'm good friends with him today. He's phenomenal, phenomenal human being. He had offers closer to $500 grand and he sold it to me on a contract, seller financed for $380,000. Wow. I didn't know the guy 2 years prior.

That's why he didn't need anything down.

You just seller finance the whole thing. Well, he needed money down, but I borrowed that down payment. Ah, okay. The $90,000 down payment that I've since paid off for that investor that loaned it to me, I raised that money as a loan. I borrowed it against real estate second lien position over a piece of pie at Sherry's. Wednesday night, free pie night, by the way. I didn't know that guy a year prior to that. Relationships are everything. They're what determines how far and how fast you can go. Because all these people I'm working with today, Christian included, I did not know 3 years ago. I didn't know Christian a year and a half ago. Yeah. Wow. What we've done together in a year and a half. Yeah. That's because our stories and our whys resonate. We understand the math and we work together. We don't always align on everything, but we know why we're doing what we're doing and we know how to get there together quicker than we could do it on our own. Yeah.

I think we nailed it there, the relationships. Yeah. Cause with me, it's pretty much like go to the bank. Oh, I don't have enough money. Oh, how am I going to qualify for that loan? Hitting brick walls. And you're talking about the seller financing and the relationships with raising the funds and then everything kind of falls into place. And it's not like you got to sit on, you know, $100 grand or more in cash just to be able to even move.

I've never had $100 grand in my bank account for more than 24 hours. I've had money come in, but it's instantly gone. Yeah. Now I get $200 grand in, gone next day. So I don't believe in keeping a ton of cash around. Have liquidity for your properties, but don't— you don't need a ton of personal liquidity. What's going to happen? Is your house going to get struck by a meteor? Well, call up insurance. You know, you don't need that much money sitting in your personal accounts. Maintain reserves for the properties. Go multiply your money. You find a great opportunity where you can raise the value just by bumping rents a little bit. Go get someone else's money back. It is a loan. Give them a great return. A lot of people were upset. They're like, why? Especially my family. They're like, why are you paying 12% interest? I'm like, it costs me more not to buy the deal. Right. They don't get it. Percent of something. I'm paying a percent of what I'm making. I get to keep the other huge percentage of it. So let's just go multiply the money, pay the return. By the way, the tenants will pay for it if you buy right. They go multiply the equity, get paid to wait for your money to multiply.

And here's the beauty of real estate. It's one of my favorite pieces of the whole thing. The math isn't that hard. Like, we explained it in a few minutes. Here's, here's commercial valuation. If you didn't master it the first time through, it doesn't take that many passes of practicing. I mean, it's, it's fairly simple algebra, and that's as complicated as it gets. It's some addition, subtraction, multiplication, and division. That's it. You don't do all that much. You have 4 things when you're looking at a deal to evaluate. Cash flow, debt reduction, depreciation, and appreciation. If you understand those 4 concepts, you understand the deal and what your returns are going to be. The only reason that cap rate comes into play is because when you build that equity, you get to go to the bank and you get to pull money out. And that is how you multiply your money again and again and again. So in week 1, we talked about what is our cash flow goal, and everyone threw out a number and we all wrote it down. And that's, that's what we're building towards. Well, now we look at what are the returns. If you're getting a 6% return, how much money do you need to hit your goal? For those who said $10,000 a month, that's going to be $2 million. How many times do I need to multiply this equity to get $200,000 or to get $2 million of equity in a property? Once I hit that, I'm done. If I push those returns higher, I'm making more. If I've hit my goals, now I can adjust. You set new goals. If getting out of the rat race was $10,000 a month, well, now you can get out of the rat race. You can scale to $20,000, scale to $30,000, scale to $50,000. That's the beauty of this. But that's all we're doing with cap rates is I want to see how am I going to multiply my money pull that money out and redeploy it.

Okay, man, this is the math and it doesn't get much more complicated than this. There are people that are going to throw out these terms and they're going to act like they're super duper important, and that's okay.. But, um, the rest of us will just focus on making money. Keep it simple. We can go into DSCRs, we can go into debt yields, we can go into all this fun stuff. But if you simplify it and just understand, makes more money, it's worth more. There's some returns and some percentages, numbers we associate with the actual value. But this math alone is enough to go make $1 million in 2022. And the exact math, let's just say that we can raise rent $200 on 24 units. How do you go buy 24 units with a $200 rent bump? So what if you borrow the down payment at 12%? You don't know where that money is coming from. So what? That's not the important piece. The important piece is find an opportunity. Let's get the owner to finance it for us so we can buy low or no money down. Let's see if we can bump rent $200, still be below market, and let's go pick up $1 million. That's what Christian and I have been focusing on. That's why we went to 38 units. Totally makes sense. It's not about what it costs you to buy it. Does it cash flow? And back to Christian's line, how do we buy it? Yep.

How do we buy it and how do we keep it?

Never want to lose this asset. So let's figure out how to buy it. I don't care if it's not in the traditional box. I've never fit in the traditional box. Figure out how to buy it with creative finance and figure out can you increase the net income so that you never lose this asset? Because while we're looking at making $1 million in equity, if you raise rent $200 on 24 units, it also just so happens that you increase your cash flow by about $60,000 a year. If you keep raising your cash flow by $60,000 a year, you're not super likely to go bust. If you've got long-term debt. I've never seen someone get upset by making more money.

And word of encouragement on this, because Cody's talking about doing one deal— about 3 months ago, we brought, um, a couple of 18-year-olds into our mentorship program, and they didn't start with the highest skill level of all time, but they have the right attitude. These guys know how to grind on deals.

It's amazing.

The amount of time they do spend on this, they are about 3 months in right now. They submitted an offer today on a 32-unit seller-financed in Texas. They got permission to walk a seller-financable 12-plex also in Texas with low rents. Yep. And it's a gorgeous property.

This thing is beautiful. I mean, they, they hit all the checkboxes, 10% down, seller finance, low interest, long-term. I mean, low rents. It's— they hit every box. And it's—

this wasn't even off market.

Yeah, this has been sitting on LoopNet forever, which by the way is exactly how my first 12-plex was. Sat on the market for 551 days. Still able to do this because I understand how the math works. The best part about small towns— a lot of small towns don't really care about this. Insiders do not control the market. Outsiders do. People coming in that actually know how to utilize numbers, returns, are the ones that are going to make all the money in the small towns.

Yeah. And so these deals are sitting there. I mean, you can find them sitting on the market, you can find them off market through— and we'll go through scripting next week for how we talk to owners, which is my favorite week of all time. Um, easier than that, you can also talk to brokers whose total job is just to help you find deals. Uh, the trick there is getting to the top of their list above everyone else. Yeah, but a lot of these deals, if it's been on market forever, people got stuck on the price. Since we write our own terms, all I care is that, again, how do I own it? How do I keep it? If I am in an area that I absolutely believe is going to appreciate, my tenants are paying it off and it cash flows every month. I don't care if it's overpriced as long as it cash flows. And I love that margin of cash flow. I'm not going to lose that property.

I'm going to make money. And let's put this in perspective. I overpaid for my first 12-plex, and there's a little saying I've come up with. I've overpaid for every property I've ever purchased on yesterday's dollars. People seem to forget that inflation's a thing. But my first 12-plex, I probably overpaid by $100 grand. I had a 30-year note with no balloons. Well, I got a stellar interest rate. I don't really care if I overpay by $100 grand. It barely affects my cash flow. I'm buying an appreciating asset. I get amazing tax benefits. The debt's getting paid down. It's just ridiculous. Like, I'm getting paid every month and it costs me nothing to buy it. If my tenants are going to pay it down over time, I get amazing tax benefits. I'm getting paid every month to hold it and it doesn't cost me a dime. So what if I overpaid by $100 grand? My tenants are going to pay it off, right? As long as I have metrics to support the cash flow, it's irrelevant.