Rental Math - Yield vs Cashflow Per Door

Hey YouTube, Cody and Christian back for this week's video of Whiteboard Wednesday. We've got 5 more questions for you, some great questions today, and we're going to kick it off right away with Alicia. Alicia, would you purchase a property that you know will have area gentrification?

Ooh, that's a really tricky question. I'm going to make sure we answer this right. First of all, yes. Because in an area that's gentrifying, it usually means prices are going up. Now, what you worry about there is, as prices go up, some people get pushed out and get displaced. We work really closely with programs like housing authority and other local, either nonprofits or government programs that provide housing assistance. You need to account for low-income housing. A lot of our portfolio is entry-level housing. So it's something that we actually work with very, very closely. However, our job is to improve a community. We want to make it a better place to live for everyone, and that does cost money. As the area gets nicer, prices naturally will increase. As prices increase, you have to factor for affordability. Gentrification is a side effect. However, if you are a good property manager and a landlord who runs their property right, you can work with multiple organizations, make sure you take care of everyone as you expand the city and improve an area.

Awesome.

Next question, this is from Dion, Dion McNeely from Dion Talk Financial Freedom. Yield versus per-door cash flow, how do you think they're different?

Well, you're looking at a yield as far as what percentage are you putting in your pocket —based on what you invested. And there's people that look at, okay, what's my cash-on-cash return? What am I actually yielding? What's my actual return? And then what's the cash flow per door? Some people only buy a duplex if it cash flows $250 a unit. The duplex has to cash flow $500 a month. But if it has to cash flow $500 a month and it costs you $400,000 down, no, that's not a very good deal. And so I look at yield because I want to know what percentage am I going to make on my money. If I can invest $100,000 and I make 6% a year, that's $6,000 a year in cash flow, that's $500 a month. Versus the person who buys in a really expensive cost of living area, they put $300,000, $400,000 down to make their $500 a month. Maybe they're buying in California or New York. And all of a sudden they're making a very small percentage cash-on-cash return, but they are hitting their per-door cash flow. And at the end of the day, return matters more than cash flow per door. Now, if you have no money in a deal and you have an infinite return, but you only cash flow $50 a month, well, that might not be a very good deal because it's easy to burn through $50 a month. So you do have to have metrics for both. But if you have to put priorities on either one, put it on your actual return. Prioritize the return over the cash flow per door. Make sure you just have a physical cash flow that is big enough so you don't have to keep dipping into personal savings.

Dropping bombs today.

Thank you, Cody. Then from Zachary, how do you structure your deals for your investors? Is it a return on capital or a return on investment?

Well, unless I misunderstand the question, those are essentially the same thing. Their investment is typically their capital in the deal. So the return will be the same thing. That being said, how we structure any deal is going to be unique to the individual. If you're familiar with our circle drill, we map out for ourselves relatable points, our goal, where we're headed, and the significance behind that, the why behind everything we're doing. As we're meeting other investors, we're doing the same mapping for them. I know where we relate, what their goals are, and why they're doing what they're doing. That has different deal structures that match up to them differently. So, for example, if someone's looking to multiply equity, say they have a wonderful job, they don't need the cash flow today, they just want to multiply their money in the best deal possible, we may write a deal where we keep more of the cash flow day one and they have a larger payout in the future. We'll give them a larger equity stake in the project in exchange for us keeping more of the cash flow. If the opposite is true, if all they want to do is take their existing income or existing money and put that into a property to get as much passive income as possible, we'll likely put that as debt. We'll give them more of the cash flow and we'll do it on a property that has more upside. Especially on a zero-down deal, we can get paid on the back end and they can get paid on the front end. So it depends on who they are and the debt structure. The most important piece is you need to know who you are, what your goals are, and why you have them. And you need to be able to match that for a deal that hits their goals and hits their why. If you can match those up, the deal structure should follow. On this one, we have MD Naheed. I believe I'm saying that correctly. Do you get deals from local realtors? Yes. If so, does talking with realtors about buying investment properties Oh, sorry. How does talking with the realtors on buying investment properties usually go?

Well, the first things first, you get deals from either owners or brokers. That's your deal flow, and you get to pick which one you want to work with. I work with both. So I've gotten deals from owners, I've also gotten deals from brokers, and both of those categories I've done very recently. I'm writing up two deals right now with an owner that I've built a relationship with, and I really like talking to them. I hang out with them and they're great. So I'm working on buying a couple duplexes. I've also bought, like, within the past couple months, I bought two triplexes from a broker. You can do both. But the conversation with the broker, you need to outline what you're looking to accomplish. You need to outline when you're looking to accomplish it by. So you set a goal and a timeline. And you need to put out your financial capacity. What's your wherewithal? How much money you have to throw at a project? And if you don't have money, how are you going to put those deals together? Because when I bought those triplexes, I didn't really have the money. I had money that I could come up with though. And so I let them know, hey, this is how we need to structure it. This is what I'd be looking to do. These are the terms. I want to do seller financing. I want to put this much money down. This is how I'm going to manage it. And then I'll probably sell it and flip it. Or in that case, I'll probably just refinance it when I get to that point in the future when the rents are up. You just need to outline exactly what your business model is, what your plan is, and how you're going to get there. Give them a clear, concise path and model to follow, and then let them do their job.

In addition to that, if you're a broker and looking to work with another broker— because that's— Cody and I don't do a ton of transactions, but we're licensed brokers. I've seen other brokers get stuck on, well, I don't want someone else to get the commission. If that 2% or 3% commission makes a difference in that deal, you're you're looking at the wrong deal. Value the relationship with a professional in your market over the little percentage that you're gonna get for brokering. Remember, you're competing for the other 97% of that deal. Focus on that. That deal should make sense regardless of who gets the commission. Exactly.

And then lastly, from Colin Young, "Hi guys, what if you call the owner of a multifamily property complex but they're hesitant to talk and open up?" Hmm.

We run across that fairly often. And sometimes you just botched your call. So sometimes it's on you, you don't deliver the call correctly, and that just merits a follow-up call. And you can add a lot of humor to this. I know Cody's done this call before where you messed up at 19 trying to be really transactional. And what was your intro next time you called them?

Well, I just said, hey, and I won't use their name, but I'll do, hey John Doe, this is Cody, I'm that 19-year-old who botched the phone call with you. Tried to buy your place. He laughed at me and hung up. I mean, I've done that before, and then they laugh and then we go meet up over coffee. You can mess up, but in reality you need to just stay true to your intentions and share what you're looking to go accomplish.

And that's if you messed up the call. Sometimes you just reach someone who's— you catch up at the wrong time. If I'm in the middle of a date with my wife and you call me about a property, I'm not answering no matter who you are. And if I make the mistake of picking up the phone, I'm getting you off the phone as fast as possible. First thing you do is try again. In addition, people get beat up all the time by people who have no idea what they're doing asking to buy their property. "Hey, you looking to sell? Do you know what your property is worth?" They're really tired of people calling to buy their property. If you don't do a good enough job in the first few seconds of making it clear why you're calling and that you want to learn how they did what they did, you're calling to learn and meet them, not buy their property, you're going to have a negative response. Easiest thing you can do in any case, try again. You're not going to meet with everyone, but the third time you call me, try and do the same thing, I'm probably going to listen and go, okay, this guy's really trying to get a hold of me. It's different. First time you're making this call, it's not always going to land. Just know that. Go into it with the same amount of confidence, add humor if you can, keep going at it.

And just keep it simple, right? At the end of the day, you're trying to build a relationship. This isn't a transaction. There's no one thing that can crumble a relationship. Usually don't, don't go that far off the deep end, but it's very hard to screw up a relationship on a phone call. So just stay true to what you're trying to accomplish, try and book that meeting and keep it simple. That sums up today's 5 questions though. So if you've got more questions, put them in the comment section below, like and subscribe if you haven't already. And as always, we'll see you guys next time.