\n<\/p>\n
What sets apart your everyday real estate investor from an investing expert<\/strong>? While novice investors are focused on cash flow <\/strong>only, veteran landlords focus on something worth much, much more. Thankfully, even if you\u2019re just getting started on your investing journey, you don\u2019t have to go through the hard work<\/strong> that experts like Dave Meyer<\/strong> and J Scott<\/strong> went through. Instead, you can hear their time-tested advice<\/strong> today, and grab their new book Real Estate by the Numbers<\/em><\/strong><\/a>!<\/p>\n J, a techie turned master flipper <\/strong>has written numerous books on estimating rehab costs, calculating real estate deals, and recession-proof investing. Dave, our VP of Data and Analytics and host of <\/strong>On the Market<\/em><\/strong><\/a>, has been head-down in housing market data for the past decade. These two real estate investing juggernauts<\/strong> combined their knowledge to write a book that lets every investor, no matter their skill level, find better deals, calculate profits smarter, and build wealth faster<\/strong>.<\/p>\n In this episode, we talk about calculating cash flow<\/strong>, ROI<\/strong>, and other metrics that may, or may not, matter as much as you\u2019d think. You\u2019ll hear how these two experts use much more than the numbers to define which deals are worth buying<\/strong>. After this episode, you may look at your portfolio differently, or even think about selling some of the properties you thought were \u201cwinners\u201d before!<\/p>\n Rob: David: Dave: David: Rob: Dave: Rob: Dave: Rob: Dave: Rob: Dave: Rob: J: Dave: Rob: Dave: J: Rob: J: Rob: Dave: J: Speaker 5: David: J: Rob: Dave: J: David: Rob: Speaker 5: David: J: Dave: David: J: Rob: Dave: J: Rob: Dave: Rob: David: Rob: J: Rob: Dave: J: Dave: Rob: J: Rob: J: Dave: Rob: Dave: Rob: Dave: J: Rob: Dave: Rob: J: Rob: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPocketS show, episode 67-<\/p>\n
Rob, thanks for trying, but that was so bad. I cannot let that stand. Let\u2019s take this, and do it the right way. Watch and learn, my man. This is the BiggerPockets Podcast, show 673.<\/p>\n
You can\u2019t just lock in on one metric. You have to just learn to think like an investor. There\u2019s no magic formula. It\u2019s not like appreciation plus cash flow minus taxes divided by amortization. There\u2019s no magic formula. It\u2019s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It\u2019s stuff like compound interest. It\u2019s stuff like depreciation, like J said. It\u2019s stuff like amortization.<\/p>\n
All right, I will let you guys take it from here, but before I do, one quick tip for everyone listening. This show was recorded before the book is released, so you have an opportunity to go buy the new book that we\u2019re going to be talking about on the show today, Real Estate by the Numbers, written by BiggerPockets personalities, Dave Meyer and J Scott. If you go order it before it\u2019s released, you will get all of the bonus goodies that come with the pre-order as well as your opportunity to get a coaching call with J and Dave specifically just for you.
That\u2019s incredibly valuable. I would encourage you guys to go get the book. You can head on over to biggerpockets.com\/store, and look for Real Estate by the Numbers.<\/p>\n
Today, I am joined by my co-host, Dave Meyer. How you doing, man?<\/p>\n
I\u2019m great. I\u2019m super excited to be here. I have the very unique and weird position to be hosting this show, but I\u2019m also the guest on the show, so hopefully this goes well.<\/p>\n
Oh, listen, spoiler alert, I\u2019ve already lived through the interview, and I think it went pretty well, man. What are we going to be talking about today?<\/p>\n
We\u2019re going to be talking about how to think like an investor, which is what we should all be aspiring to, to not just think about an individual metric or anything like that, but to think more holistically. The reason that we are talking about this today, and we are bringing on my friend J Scott, is because Jay and I actually wrote a book about this. It is called Real Estate by the Numbers. In addition to the formulas and things you should be thinking about, we really aspire to just teach people how to think like an investor.
What are all the concepts and different elements of being a real estate investor, and how can you combine those many different things into a holistic strategy that works for you to pursue your financial goals?<\/p>\n
I\u2019m really excited to get into this one, man. I feel like I really took a journey through my own investment career over the last five years with this one. So really excited for people to learn more about this book. Before we get into today\u2019s podcast, let\u2019s get into today\u2019s quick tip. That\u2019s my David impression.<\/p>\n
You are good at it.<\/p>\n
I know. That\u2019s his Batman. I think I\u2019m working on it little by little.<\/p>\n
I like that.<\/p>\n
All right, so today\u2019s quick tip is to think more like an investor, don\u2019t just think of yourself as a short-term rental operator or a flipper or multifamily expert. You got to think of yourself as a more elevated investor, and think through more than just your cash on cash. Every investment is not about getting a 10%, 15%, 20%, 30% cash on cash. There are so many other variables in any investment that can make it a good investment, such as debt paydown, appreciation, tax benefits, and of course cash-on-cash return.
When you think through all those components, it can radically shift if a deal works for you, if not. With that, let\u2019s get into today\u2019s show. J Scott and Dave Meyer, how are you guys doing today?<\/p>\n
Doing great. Thanks for having me. Having us.<\/p>\n
Happy to be here. Thanks for having us on.<\/p>\n
I know it\u2019s our first time formally meeting here in the BP family, so this is an exciting day for me. Can you tell the listeners at home a little bit about your background? I mean, I\u2019m sure a lot of people are pretty familiar with both of you two. But for anyone that\u2019s just tuning in today for the first time, give us the scoop here.<\/p>\n
Oh, all right. Well, if you don\u2019t know me, my name\u2019s Dave Meyer. I do work at BiggerPockets full time. I\u2019m the vice president of data and analytics. In addition to that, I have been an investor since 2010. I mostly invest in Denver, but moved to Europe about three years ago, and have been getting into passive and multifamily investing over the last couple of years, and generally just love data and numbers. That\u2019s why I had the great honor of writing the book we\u2019re going to talk a little bit about today with J.<\/p>\n
For those that don\u2019t know who I am, I am J Scott. I don\u2019t work at BiggerPockets, though a lot of people think I do. I\u2019ve been involved with BiggerPockets since, wow, 2008 when I did my first deal. I actually found BiggerPockets when I was looking for information about flipping my first house, became friends with Josh Dorkin, the founder, and been involved with BiggerPockets in lots of different ways over the past 15 years, written four books for BiggerPockets, and here to talk about the fifth.
I guess for those that don\u2019t know my backstory, I\u2019m an engineer and business guy by education, worked in the tech space for a long time. I\u2019m basically just a geeky engineer who got into real estate 15 years ago, and has done a bunch of flips, and bought a bunch of rentals, and now owns a whole bunch of multi-family.<\/p>\n
Well, J, even if you don\u2019t work at BiggerPockets, I think it\u2019s safe to say you\u2019re an honorary part of the family here. Tell us a little bit about the book. Hey, let\u2019s start. What\u2019s it called, and where did it come from?<\/p>\n
The book is called Real Estate by the Numbers. It was something that I started thinking about probably a decade ago, but I actually started writing about five years ago. The whole idea behind the book was basically the math and the numbers behind real estate are something that confuse a lot of people. While there\u2019s lots of books out there that talk about the math and the numbers, there\u2019s flipping books by BiggerPockets, and rental books by BiggerPockets, and plenty of other books by BiggerPockets that talk about the math behind real estate investing.
I never felt like there was anything that was really holistic and captured, soup to nuts, all the math that we needed to know and the reasons behind the math that we needed to know. So, I started writing this book, I think 2017 or \u201918. I got about two years in, and very, very little done. It was just a really tough book for me to write. What I realized was I wasn\u2019t smart enough to write this book by myself. I don\u2019t like to write unless I feel like I\u2019m really an expert on every topic that I\u2019m writing about, and so I realized about half this book, I felt like I might have been smart enough to write, but the other half of the book, it just felt a little bit out of my wheelhouse.
So, sat down with the folks at BiggerPockets, and it took about two seconds for us to realize that Dave was the right guy to be writing this book with me. Two or three years ago, literally two or three years ago, Dave and I teamed up. From there, the book took shape really quickly. What we realized was we had a great set of complimentary skills. The stuff that I know really, really well is maybe not the stuff Dave cares about or is good at. The stuff Dave knows really, really well is not necessarily the stuff that I\u2019m really good at. But between us, we had all the knowledge that it took to put together this book that delves into all the math, all the finance, all the deal analysis that goes on with real estate.
Now, when we started writing the book, the original concept was let\u2019s teach people how to do deal analysis, how to analyze deals. But as we got in, what we realized was that was a way too narrow topic. It\u2019s real easy to give people formulas, and give people math, and give people tools, spreadsheets to plug numbers in and get numbers out. But until you really understand what those numbers mean, it doesn\u2019t do you any good. I\u2019ve had plenty of times where somebody has given me a great spreadsheet. I plug a bunch of numbers in. I get a bunch of numbers out, and I still have no idea if I should be doing the deal.
I can say I analyze the deal. I can say I have all the numbers, but I still don\u2019t know, \u201cIs this a good deal? Does it make sense for me? Does it fit into my portfolio?\u201d So Dave and I, a couple years ago\u2026 It took a long time to write this book. It\u2019s, I think, the biggest book BiggerPockets has published. It\u2019s over 400 pages. But a couple years ago at the beginning, we came to this idea that knowing the numbers doesn\u2019t really matter if you don\u2019t know what you\u2019re trying to answer, if you don\u2019t know what information you\u2019re trying to get.
So, we approached the book from this perspective of, \u201cWhat\u2019s the right questions to be asking every time you go into a deal, and then how do you use the math and the tools and all the other concepts to answer those questions?\u201d As we\u2019ll talk about, basically, the book is written from the perspective of, \u201cWhat\u2019s the right questions to be asking, and then how do we use the math and the tools that we have available to us to answer those questions?\u201d<\/p>\n
Wow, that sounds very, very comprehensive. 400 pages, man, I\u2019m excited to dive into that, because I think that analyzing deals, oh man, that\u2019s such a big conversation point. I think you\u2019re right. I think there\u2019s certainly a process that has to be taken when you\u2019re analyzing deals, because it\u2019s also very important to learn from someone as well who can teach you that. Because I remember I had someone that analyzed a deal, and they\u2019re like, \u201cThis is a 50% cash-on-cash return,\u201d but they weren\u2019t asking all the right questions, right? They were just looking at it on the surface of the deal. But I was like, \u201cWell, what about this, and what about snow removal, and what about this, and what about this?\u201d
By the end of our just back of the napkin calculation, it went from being a 50% cash-on-cash return to an 8% or something like that. There\u2019s definitely multiple layers of analysis that you can take when you\u2019re analyzing a deal. I\u2019m curious. I mean, when you\u2019re getting into one of your very first deals or just whatever deal that comes across your desk, do you feel like there\u2019s just one moment in which you\u2019re analyzing that deal, or is it a consistent level or a consistent mindset of analyzation from the day that you put an offer in to the day that you actually close?<\/p>\n
I\u2019m happy to answer that, but first, I just want people not to be scared. 400 pages, there\u2019s a lot of pictures. We got a lot of graphs in there. It\u2019s a very approachable book, and so we do talk a lot about math, but J and I\u2026 I think honestly the reason why it took so long to write is because we wanted to make it understandable and digestible for people of all experience levels. So even if you\u2019re not good at math, even if you are a new investor who haven\u2019t done a deal before, you\u2019re going to learn a lot from this book. It\u2019s not going to be overwhelming.
J and I spent hours banging our heads against walls to make sure that everyone could understand that. I love the idea of what you just asked, Rob, because, I think, people treat deal analysis and portfolio analysis as a point in time, and they want to just know a rule of thumb, or they just want to get an answer like, \u201cIs this a good cash-on-cash return?\u201d Unfortunately, at least this is the way I see it, is it\u2019s not that simple. You can\u2019t just look at a deal, and say, \u201cIt\u2019s good at this point,\u201d because even if it\u2019s good at the point of purchase, you need to be continually evaluating the performance of that deal to make sure that it\u2019s still working for you.
A good example is a situation where your equity in the property goes up significantly. We\u2019ve seen this over the last few years. People are generating a huge amount of equity. That means that although they might be generating good cash flow, they might not be generating a great return on equity, which means that their money invested into that deal isn\u2019t generating cash flow as efficiently as it could. So, you need to be continuously evaluating and determining how you should be redeploying your capital.
I\u2019ve definitely made this mistake in the past. There\u2019s actually an example in the book where I talk about my first deal. It kept going up in value and value, and I was so proud of that, but I wasn\u2019t reinvesting the money at the rate that I should have been. As a result, I was not building my portfolio as effectively as I could have. I think that\u2019s something that we talk a lot about in the book, and I think people listening to this should be thinking about is it\u2019s not just about the point of acquisition. It\u2019s about continuously evaluating your entire portfolio, and making sure that it\u2019s aligned to your own personal financial objectives.<\/p>\n
Just to add to that a little bit, like Dave said, it\u2019s not just about, \u201cIs this a good deal, or a bad deal?\u201d Is this the right deal for me is often the question we need to be asking, because I\u2019m sure Dave and I could look at the same deal, and Dave might say, \u201cYeah, this deal doesn\u2019t fit in my portfolio, because here are my goals, and here\u2019s how much cash I have, and here\u2019s how much time I have.\u201d Here\u2019s where I need to be in five, 10, 15 years.
I look at the same deal, and I say, \u201cWell, based on my portfolio, and based on my goals, and based on everything that I have going on, that deal\u2019s perfect for me.\u201d So, we\u2019re looking at the same exact deal, and it doesn\u2019t mean that the deal is good or bad. It means that the deal may not be good for him. It may be good for me, and so a lot of the times that we\u2019re looking at deals, it\u2019s not about objectively a good or a bad deal. It\u2019s, \u201cIs it good or bad for me?\u201d<\/p>\n
Now, to our Real Estate by the Numbers correspondent, what are you seeing out there, David?<\/p>\n
I just wanted to give you guys a practical example of how this information can be applied to your own wealth building. Now, the first thing that I think people should acknowledge is that it\u2019s better to buy real estate than not buy real estate. You\u2019ll often hear it say take action, get in the game, buy real estate. It\u2019s almost always better unless you buy a terrible deal that you bought something that you didn\u2019t. But there comes a point where the rules of the game switch, and instead of saying, \u201cShould I buy it or not buy it?\u201d You\u2019ve overcome that fear, and the question becomes, \u201cWhat is the best deal for me?\u201d
You heard J talking about that. That deal may have worked at one point in your career. It doesn\u2019t work now. It may work for a different person with different goals, but it doesn\u2019t work for you. Then sometimes, that will evolve as you progress. I\u2019ve got some good examples I can share of how this concept works in practical terms. I bought a house in Buckeye, Arizona probably seven or eight years ago. Now, that house was a goodbye. It gained in equity and appreciated, but the rents didn\u2019t keep up with the value of the home. That\u2019s because they were building new homes in the area.
So if people could choose between renting my home or a brand new one, they would rent the brand new one, so my rents didn\u2019t go up. However, the value of the home went up, because I was comparing it to homes that were brand new that were selling for more. So I realized my return on equity on this property was very low, and it no longer fit for the portfolio I had even though it fit when I bought it. I sold that house. I used the money to buy my first BRRRR property in north Florida. I got the money out of that property. I bought another one. I went on to buy about 10 properties with the equity that came out of that one sale.
Now, I\u2019ve got a presence in north Florida, so I kept buying. I built up to 25 homes in that area. That was jump started from the first house that I sold that no longer worked for me. Now, it continues to evolve. I now have 25 to 30 homes in North Florida that are all somewhere around $100,000 to $250,000 in value, and they\u2019re not appreciating at the level I want them to. I also want to take on more debt because I think inflation\u2019s coming. I sell the entire portfolio, and I 1031 into 10 much more expensive short-term rental vacation properties. The 10 properties are much easier to manage than the 25.
Less things are going wrong. It takes less of my time. I quadrupled the amount of debt I had on the original portfolio to the new one, and I put myself in a position where appreciation will be much greater, and the cash flow was greater as well because I went into short-term rentals. Now, if you had brought the end result to me eight years ago when I bought the Buckeye house, and said, \u201cDo you want to buy this 1.2 million vacation rental?\u201d I would\u2019ve said no. The Buckeye house made sense for me then. But by continually evaluating the portfolio, and saying, \u201cDoes this make sense for where I am right now? Can I get more out of this equity? Can I make my money work harder for me?\u201d
You take steps, and you can climb to great lengths when you just take it one step at a time. So now that I am redoing my portfolio, or at least big chunks of them, I\u2019m selling off the properties that weren\u2019t performing at the level I want them to now, and reinvesting into new properties. I\u2019m putting together a new spreadsheet that will make it easier for me to track the cash flow of every individual property as well as the equity that\u2019s in every single property, as well as the money that I have put into that deal. With that information, I can track the return on my equity.
If I can see what cash flow I\u2019m getting with the equity that\u2019s in every deal, and have that turn into a number on a spreadsheet, I can quickly look at what I call my investment property tracker, and determine which properties have equity that\u2019s working hard, and which properties have equity that is being lazy. It makes it very easy when the next opportunity to come around, if I don\u2019t have enough capital, to say, \u201cThese are the three homes that I\u2019m going to sell, because the return on equity is the lowest.\u201d Then I know it\u2019s time to make this money work harder for me.
Now, if I\u2019m at a point in my business where I\u2019m not looking to evaluate new properties, and buy new stuff, and I\u2019m busy with other things, I could just keep on tracking the progress, and making sure that they\u2019re cash flowing, and I\u2019m not losing money on them. But when I want to ramp up my buying, it\u2019s very easy to see which ones I\u2019m going to sell first. In this way, your portfolio continues to evolve to meet the new requirements and goals that you have for your life. I will now throw it back to J to finish his thought.<\/p>\n
The other thing to keep in mind is that it\u2019s not just one technique or tool or concept that works for every deal. I can look at a rental property, and I can analyze the deal and say, \u201cHere\u2019s all the return metrics,\u201d and that\u2019s great for a rental property. But what happens if somebody now hands me two different deals? Somebody hands me a rental property, and then they also hand me this note deal. Both of them are going to cost me $100,000, and all I have access to is $100,000. Well, what deal is better for me? Again, we can look at all the numbers, and Dave might decide that the note deal is better for him based on whatever criteria he\u2019s using to look at his portfolio right now.
I might look and say, \u201cNo, the rental deal is better for me,\u201d and so we need a way of not just being able to analyze deals, but we also need a way to compare deals. We need a way to make decisions. Sometimes, we have to make a decision. I have a story in the book about how I had been flipping houses for a couple years. I was flipping 30, 40, 50 houses a year. One day, I\u2019m looking at my expenses for my business, and I realized that I\u2019m paying literally $100,000, $150,000 a year in insurance costs for my flips. So I said to myself, \u201cWell, do I need to be paying for that? Is the amount of expense that I\u2019m seeing in terms of property insurance I need, do I really need all this insurance?\u201d
So, I used a decision-making tool called Expected Value. I know it\u2019s a term that\u2026 Again, I\u2019m not trying to get into the math. We want to explain these terms in real-life terms. Expected value, this concept, allowed me to plug in a couple numbers, and realize that I was losing tens of thousands of dollars a year by paying for insurance. Even if I had insurance claims, I would\u2019ve saved money by not insuring my products, and just paying for those costs out of pocket. So we have all these tools out here that allow us to make these decisions, to compare investments, to look at an individual investment, and look and see if it fits into our portfolio.
It\u2019s not one size fits all, \u201cHere\u2019s a formula that you plug everything into.\u201d Again, it\u2019s knowing what questions to ask, and then figuring out how to look at a problem based on the question you\u2019re trying to answer.<\/p>\n
That\u2019s really great. Here\u2019s what I love about that, especially for me where I am in my real estate journey. It\u2019s that yes, no deal is perfect for you, and when you\u2019re analyzing a deal, everyone has their own\u2026 I\u2019m going to put quotes on this \u201csystem,\u201d but for I would say the majority, especially the majority of new investors, we have systems. We have processes and everything, but they\u2019re not really written out. They\u2019re not\u2026 There\u2019s no terms assigned to them. It\u2019s always floating around in the ether, and so you have a way of doing things, but you don\u2019t have terms and analogies assigned to them.
This is why I really like David, because David\u2019s really great at bringing home an analogy that makes this very complicated real estate term very simple, right? The term you just talked about, expected value, and then Dave just talked about return on equity. These are really important concepts that I think the moment you assign a term and some system behind it and why it\u2019s important, it really starts making you analyze deals a lot differently. The return on equity is something that was really big for me recently, because a lot of people get scared to use the equity in their homes because they\u2019ve got a very cheap interest rate.
I\u2019ve got a house in LA. It\u2019s got, I don\u2019t know, half a million dollars of equity in it, but it\u2019s got a 3.25% interest rate. I\u2019m like, \u201cOh, man, I don\u2019t want to touch that, because it\u2019s such a great rate.\u201d But when you think about what you could do with that, and how you could leverage that into other deals, I\u2019ve never actually done the analysis on the return of equity up until recently where now I\u2019m like, \u201cOh, yeah. I mean, it makes a lot of sense to pay the extra 1% or 2% every single year if that means that I\u2019m actually going to be able to make more money in the long run in my real estate portfolio.\u201d
This is really great. This comes at a great time, because I think for me, I found myself really in love with single family acquisitions. That\u2019s how I was building up my portfolio for a long time. Then now, I really do have to ask myself every single time a deal comes across my desk, \u201cIs this right for me? Does it make sense in my scaling model?\u201d A lot of the times, the answer is no, unless there\u2019s something very cool about the single family acquisition. Someone sent me a house that had a cave underneath, and they\u2019re like, \u201cThis would be an awesome Airbnb.\u201d I was like, \u201cAll right, that one makes sense for me only because it\u2019s very cool.
But other than that, I\u2019m turning down so many things because I\u2019m at this point now where the actual scaling side of my strategy, it really does demand a lot of analysis outside of just analyzing an acquisition.\u201d Dave, I\u2019m curious on your end, what kind of deals are coming across your desk now that wouldn\u2019t really be a great fit for you that might have been a better fit for you maybe two or three years ago?<\/p>\n
That\u2019s a great question. I think you raised a great point, Rob, just about building up your own knowledge base. Like you just said, you started to learn and now you understand return on investment. I think we all follow this pattern in our investing career, where we fall in love with a couple of metrics that we might like, and don\u2019t fully understand and understand how to evaluate each individual thing. I totally identify with that. I just want to say that, because I really missed out on a lot of potentially beneficial analysis over my career.
Now, I\u2019ve gotten to the point to your question about where you can really have a well-defined buy box, and you understand exactly what you want to invest in. I think a good example is over the last couple of years, there has been this exception to the rule where you don\u2019t invest for market appreciation. Most people, most investors believe that appreciation is icing on the cake. I think for the last couple years, I even personally got away from that for a couple years when you look at short-term holds, because the market conditions were really favorable for market appreciation.
But now looking at new market conditions, I think that the type of deals that I would look for have to be much more fundamentally sound than what they were over the last couple years where you\u2019re looking for a better cash-on-cash return, for example. So for me, I am mostly a passive investor at this point. I am just looking for places that have a really strong cash on cash return right now. I still think value add opportunities, where you can get forced appreciation, are probably the best deals that I\u2019m seeing in these current market conditions. But I\u2019m curious J\u2019s answer, because he is a much more prolific investor than I am.<\/p>\n
It\u2019s not so much being prolific. Again, it\u2019s knowing what each of us is looking for at this particular point in time. I\u2019m at the point in my career where I don\u2019t necessarily need cash flow every month. I have enough cash flow coming in from other sources that if I bought a rental property today that was generating no cash flow, would it make sense? It might. I\u2019m not saying it would, but it might. So, I like to look at things in addition to cash flow for me because, again, it\u2019s not all about\u2026 I\u2019m not at a point where I need to quit my job, and I need to replace an income.
So what are some of those other things I look for? Number one, I do look at appreciation, but I\u2019m not a fan of natural appreciation. This is one of the things that Dave and I have talked about a whole lot, investing for appreciation. I tend to invest in places that don\u2019t see a ton of natural appreciation. The market doesn\u2019t just go up over the last 100 years in the places where I invest. The markets tend to reflect inflation. If inflation\u2019s been at 2%, or 3%, or 4%, real estate values have gone up at 2%, or 3%, or 4%.
Now, maybe in the last two years, that\u2019s not been the case. Everything\u2019s skyrocketed. But again, if you look over the last 100 years, I can expect 2%, or 3%, or 4% increase in value in my property every year. If I\u2019m not looking at natural appreciation, why do I like appreciation? Because I\u2019m somebody that I have the ability to renovate properties. I\u2019ve done a lot of flips, and because I\u2019m not scared to renovate properties, I have the ability to do this thing called forced depreciation, which means I can buy a property that\u2019s worth $100,000 today. I can put $50,000 into it, and now it\u2019s worth $200,000 tomorrow.
So, this property that I\u2019ve put up total of $150,000 into is now worth $200,000. I\u2019ve basically forced the increase in value of $50,000 on that property. Now, that\u2019s something that I can do, because I have time to do it. I have the knowledge to do it. Not everybody does. Dave mentioned he likes passive investing. He may not want to buy a fixer upper. He lives out of the country. He may not have the ability to manage a project from far away. So again, what might be a good deal for me may not be a good deal for Dave, but I\u2019m going to look at cash flow, number one.
I\u2019m going to look at that forced appreciation and even natural appreciation, so those are things I definitely look at. But in addition, I also look at two other things. I look at this thing called amateurization, and that\u2019s just a fancy word for principle paydown. When I buy a property, and I get a loan against it, let\u2019s say I get $100,000 loan, every month, my tenants are paying down part of that loan. After the first year, that $100,000 loan may only be a $98,000 loan. After year two, it may be a $96,000 loan. So every year, I\u2019m building up equity because my tenants are paying down the loan.
That\u2019s money that even though it\u2019s not cash flow, I\u2019m not getting that money in my pocket every month when I sell, I get to capture all of that extra equity that my tenants are paying down every month. That\u2019s the third thing, so cash flow, appreciation, principle pay down. Then the fourth thing is tax benefits. Let me tell you something. For a long time, I didn\u2019t appreciate the value of tax benefits. I think that\u2019s the way it works with a lot of investors. You\u2019re starting out. You buy a property. Maybe you\u2019re saving $600 a year in taxes, or you get depreciation of 600, so you\u2019re actually only saving 100 or 150.
But as your portfolio starts to scale, as you start doing larger deals, which what you realize is that you pay a lot of money in taxes, and real estate is literally the best way to hedge those, or defer or completely eliminate that tax burden. So for me, this year, I\u2019m likely to have over a million dollars in depreciation, which means I can make a million dollars in profit in all my businesses this year, and I\u2019m going to pay zero tax. Now, I\u2019m not going to not pay tax forever. Eventually, I\u2019m going to pay it. But if I can put off paying that tax for five years or 10 years, or best case, I put it off till I die, and now it\u2019s my kids\u2019 problem, literally, I\u2019m now saving literally hundreds of thousands of dollars this year in taxes.
If I can do that every year, I\u2019m going to make millions of dollars over my career just in not paying taxes. So, one of the topics that we focus on in the book is it\u2019s not just about cash flow. It\u2019s not just about appreciation. It\u2019s not just about principal paydown. It\u2019s not just about tax savings, but it\u2019s all of these things put together that really help you define, \u201cIs this deal good? Is this deal not good?\u201d Again, more importantly, is this deal good for you or me, or not good for you or me?<\/p>\n
This is one of my favorite topics to get into with real estate investing. I love it. Dave makes a very good point that in the last couple years, the environment was geared more towards market appreciation. My opinion about that is because the government has printed more money through quantitative easing, and houses went up in value, but not necessarily because their value increased, but because the value of money decreased, which led to appreciation. J makes a really good point that at this stage in his career, some deals could make sense if they don\u2019t cash flow.
Let me give an example of a deal that I bought six years ago, and see if you do the same. I had opportunity to buy a house that had to be an all-cash purchase of $150,000 from a wholesaler that had to close in I believe three weeks. The ARV on the property\u2026 No, sorry, not even the ARV, just the value as is was $250,000. Now, when I ran my numbers on this, it was going to lose about 125 bucks a month for the first year, and the next year, it was probably going to lose about 25 bucks a month. Then in year three, it was going to make $50 to $75 a month.
Would you buy a deal that you were walking into with a little over $100,000 in equity if you are going to lose money on it every single month to the tune of 125? Would you do the same thing if you were going to lose 300 a month? What if you were going to lose 500 a month? You were not going to lose that money forever, but just for a couple years until the rents caught up with what your mortgage was. Now, for me, that made a ton of sense, because I could afford to lose $125 a month on a property because the rest of my portfolio would cover that, or the money that I made at my job would cover that. I wanted that $100,000 of equity. My guess is most of you would too.
But what if you were in a position that you could not afford to lose 125 bucks a month? You\u2019re living paycheck to paycheck. Now, of course in this example, you\u2019d probably buy that house, and then sell it, and get the money. You turn it into a flip to someone else, but you see my point. There are stages in your investing career where it doesn\u2019t make sense unless it cash flows incredibly strong. That\u2019s usually the time where you have a job, and you\u2019re trying to get enough cash flow to quit your job, to get your time back, to focus more on finding more deals or becoming a better real estate investor.
Then there\u2019s other times in your career, like J mentioned, where he has cash flow coming in from businesses he owns, previous real estate, books that he\u2019s written, different things that he does that the cash flow from a specific property just isn\u2019t as important. He has cash flow from other places, so he could buy a deal that has a lot of equity but doesn\u2019t cash flow, and it\u2019s not irresponsible. The point here is evaluating where you are in your journey, and looking at every deal on its own merits.
Dave Meyer made the point there that he wants to find a house with a stronger cash-on-cash return because he doesn\u2019t think it\u2019s going to appreciate. That is a solid point. However, let\u2019s expand it a little bit. Are we assuming that the only way that you gain equity in a property is by market appreciation? That\u2019s surely one way the value of the property going up. Well, you also have natural appreciation, which is you could buy a house anywhere, and it\u2019s going to go up in value because we diminish our money supply. Then you have what I call market appreciation, which is you buy a house that has geographic barriers, limitations, unique amenities, so it\u2019s forced to go up more than houses around it.
This could be a house on a beach. This could be a house in a city like Austin that only has so much ground actually within the city limits that you can build on. You certainly increase your odds for appreciation by playing the market appreciation game, but then there\u2019s other kinds like forced appreciation. That\u2019s where you add value to the property, and make it worth more by executing a vision. Surely, we shouldn\u2019t throw that out and just lump it into the category of appreciation is risky, and cash flow isn\u2019t. Then you also have what I call buying equity. It\u2019s not even based on appreciation.
You just got to deal at a lower price than what it\u2019s worth, because you found a deal with a motivated seller that was marketed. You negotiated really well. I use that all the time. Appreciation comes in many forms. It\u2019s not just I hope the price goes up. There\u2019s things you can do to make the price go up. There\u2019s things you can do to put the odds in your favor that the price will go up. I just want to highlight that there\u2019s lots of different ways to execute on this, and at times, cash flow is important, but cash appreciates also.
If you bought a house in Malibu 30 years ago, I\u2019m pretty sure the cash flow would be much higher than it is right now. If you bought a house 30 years ago in a low appreciation market like somewhere in Indiana or the Midwest, the cash flow would not have gone up to the same degree that a beach house in Malibu might have. These are all things to take into consideration, and like J says, \u201cAsk yourself where are you in your journey? What is most important to you?\u201d Then what I will add into the conversation is plan ahead. Don\u2019t assume that you\u2019re going to be in the same place in five years.
The house you\u2019re buying right now in Ohio might make a ton of sense for you, but be planning your exit strategy when you buy it. Assume you\u2019ll be in a different situation with different needs and different goals, so have a way that you can sell that property later. That\u2019s why I always look for value add. I want to know that I added value to this property so that if I want to sell it or if I want to refinance, I can get my equity back out, put it into the next deal. These are BRRRR principles that don\u2019t always work into a specific BRRRR deal, but they\u2019ll benefit you all the same.
Let me give you a quick example of how I use the principles that I just described in my own investing journey. I\u2019m buying a property right now that\u2019s going to be a short-term rental in Georgia, where people from Atlanta would visit to if they wanted to stay in the mountains as a vacation rental. I don\u2019t know that I\u2019m going to want to own that property forever, because short term rentals are a lot of work. The cash flow is great, but the work is going to be very high. So, I\u2019m buying a property that I don\u2019t know if I\u2019m going to hold forever, because I can add value to it.
I\u2019m basically going to be able to turn a two-and-a-half acre property with two structures on it. One is a home. The other is a garage into two different homes. Now, that will add a ton of square footage to the property. It will also add a ton of cash flow to the property. If I ever get sick of owning it, and having to manage it, and the pain that comes from managing a short-term rental, I can either sell it, and it\u2019s worth much more because there\u2019s now two homes on it. I can reparcel it, and sell it as two different homes, and get more money, or I can sell it to another investor who\u2019s going to buy it based on the cash flows of the property, which I will also have increased by adding the second structure.
If I want to keep it, I can keep it. If I want to exit, I can exit. I know in a couple years when I\u2019m looking at my goals, time may be more important to me, and I may want that time back. By adding value to the property, and thinking ahead, I put myself in a position where I can get that time back if I want without actually losing money on the deal.<\/p>\n
This is huge. I mean, this is\u2026 You just touched upon\u2026 Even with just those four things, I think the biggest thing that most investors really don\u2019t think about\u2026 I\u2019ve been talking about this a lot, because I\u2019ve had this really big renaissance, a big revelation and evolution in my journey where cash on cash, that\u2019s all I cared about. Give me that 20%, 30%, 40%, 50% in short-term rental\u2019s cash flow. Let\u2019s do this thing. But you\u2019re so right because when you think about your tax deductions, and paydown and all the other things associated with the actual return on the investment of your property, your actual ROI can double from that cash on cash when you think about all the money that you are making or depreciating and all that kind of stuff.
For me, J, you just really\u2026 You triggered a little PTSD here, because this year was the first year that I\u2019ve had to pay a substantial amount of taxes, multiple six figures. The only reason I didn\u2019t pay, I don\u2019t know, a lot more, let\u2019s say two times more in taxes was because of depreciation and cost segregation. Had I even known about that, I didn\u2019t even know really about it too much until about a year, a year and a half ago, and now that I\u2019ve figured this out, I\u2019m like, \u201cOh my goodness, I feel like I\u2019ve just unlocked the greatest real estate superpower of all time, and it\u2019s depreciation.\u201d
Had I really thought about that when I analyzed some of these deals, I really started to think about all the deals that I walked away from, because I just didn\u2019t understand how many layers of things could benefit me from that specific deal, or how many deals I\u2019ve taken simply because the cash flow \u201cwas really good,\u201d and I didn\u2019t really think about any of the quadrants, right? I\u2019m really glad to hear you talk about that, because I think that this is something that really anyone can learn. Real estate is about making money, right?
If you\u2019re not paying in taxes like we\u2019re talking about, if we\u2019re kicking them down, we\u2019re making that money that we can then use and reinvest in real estate, and do it over and over and over again.<\/p>\n
Let\u2019s head over to depreciation station. David?<\/p>\n
Now if I may, I\u2019d like to give you an example that introduces just how powerful depreciation and specifically bonus depreciation through real estate can be. It ties into the whole cash flow argument that we\u2019re going back and forth with. Last year, I bought a property near the beginning of the year. That was a triple net property. That was the most expensive property I bought. You guys have heard me talk about this on podcast where the mortgage was just so high. I think it was around $80,000 a month. I took a lot of fear to get over buying a property that was that expensive.
Now, it doesn\u2019t cash flow amazing. It\u2019s a triple net property. They typically don\u2019t cash flow super solid, because they\u2019re very hands off. But it covered all of the taxes that I\u2019m going to make for the next two years. This property saved me almost three million in taxes by buying it. If I only looked at the cash flow, I would\u2019ve said, \u201cNo. Why would I buy that? The ROI is too low.\u201d But when I look at holistically how much wealth it saves me over time, that\u2019s a lot of money. You may not be in a position where it\u2019s going to save you $3 million over a couple years, but you might be in a position where buying a property and using the bonus appreciation could save you $50,000 to $75,000 a year.
Now, keeping $50,000 to $75,000 is making at a W2 job $75,000 to $100,000. So buying a property under the right tax conditions could be the equivalent of getting a job that pays you $75,000 to $100,000 a year that you barely have to work at. When you start to look at it from that perspective, it really jumps out at you that this is how people build big wealth through real estate. When you\u2019re only looking at ROI, cash-on-cash return, I should say, and cash flow, you miss some of these opportunities.<\/p>\n
It\u2019s interesting when you think about the different ways of making money in real estate. I have conversations all the time with a bunch of non-real estate investor friends, and we have this debate between the stock market and real estate, or real estate and crypto, or real estate and precious metals, or real estate and whatever it is. They always come back to stock market is typically 8% to 10% per year. Obviously, it\u2019s volatile, but on average over time, it\u2019s 8% to 10% a year. These days, in real estate, cash flow is near zero. I mean, over the last couple years, we just weren\u2019t making a lot of money because we were paying a lot for our properties.
I don\u2019t want to say near zero. Some people are doing a great job of finding properties that are generating 6%, 8%, 10%, 12%. But me personally, somebody that doesn\u2019t hunt for properties that much anymore, I\u2019m not getting a lot of cash flow. Likewise, these days, I mean, I\u2019ve been getting appreciation over the last couple years, but I expect anything I\u2019d buy today probably isn\u2019t going to appreciate much over the next couple years. So if we look at a deal that\u2019s essentially very low cash flow, essentially no appreciation over the next couple years, shouldn\u2019t it be obvious that the stock market\u2019s a better place to put your money if you\u2019re going to get 8% to 10%?
Well, at first glance, it might be. But if you take just those other two things I talked about, the principal paydown and the tax benefits, and we talk about this a lot in the book, just those two things, especially in our low interest rate environment. I mean, things are higher\u2026 Interest rates are higher now than they were six months ago, but they\u2019re still low. In our low interest rate environment, we\u2019re building up a lot of principal every month right from the beginning of the investment. So even if you ignore cash flow, even if you ignore appreciation, and you just look at principle paydown and tax benefits, I\u2019m getting more than 8% on every single one of my rental properties that I\u2019ve bought over the last couple years.
So, I\u2019m beating the stock market without cash flow and without appreciation. So if I get that cash flow, which I will, I\u2019ll get more cash flow over time, and appreciation, eventually, we\u2019re going to be in a better economic situation, and we\u2019re going to see values rising again. At that point, I\u2019m going to be much higher than 8%. So again, if you only look at cash flow, or you only look at appreciation, or you only look at the two of those, it really gives you a stunted view of what the investment\u2019s really returning. But when you take a holistic view, and you look at all the return metrics, and you look at it again relative to your entire portfolio and what you\u2019re trying to achieve, a lot of times, the obvious answer is real estate is better than other investments, or it\u2019s better than you think it is.
I\u2019m not saying there isn\u2019t the right time to be buying stocks or bonds or crypto or other things, but what I\u2019m saying is don\u2019t take a myopic view of real estate, and not really understand all the benefits it\u2019s providing because a lot of times, it\u2019s performing even better than you think it is because you\u2019re not looking at each of these factors.<\/p>\n
That\u2019s such a good point. It\u2019s such a false comparison too because like, \u201cOh, the stock market gets 8% or 9% cash flow, and real estate is bad,\u201d but the stock market generally doesn\u2019t produce cash flow. The best dividend stocks produce one, maybe a 2% yield. If you\u2019re looking at the total return of the stock market, and comparing it to cash flow in real estate, that\u2019s not an apt comparison. I think what I love about what J was just talking about, and Rob, you before, is you can\u2019t just lock in on a single metric. I\u2019m sure you guys get these questions on social media or wherever where people are like, \u201cIs a 4% cash-on-cash return good?\u201d
It\u2019s like, \u201cI don\u2019t know.\u201d You have to explain so much more. I think that\u2019s what J and I really\u2026 After debating how to structure this book, we kept coming back to this idea is that you can\u2019t just lock in on one metric. You have to just learn to think like an investor. You have to\u2026 What Jay is talking about combining these four different topics, there\u2019s no magic formula. It\u2019s not like appreciation plus cash flow minus taxes divided by amortization. There\u2019s no magic formula. It\u2019s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It\u2019s stuff like compound interest.
It\u2019s stuff like depreciation, like J said. It\u2019s stuff like amortization. If you can educate yourself to the point where you at least have an understanding of these concepts, and you don\u2019t need to be able to calculate every single metric in your head\u2026 There are calculators. There are spreadsheets that can do it. But if you can learn the concepts, then when you\u2019re evaluating deal, the numbers start to make a lot more sense, and you can combine them, and get a fuel for the deal, and how it\u2019s going to help build your portfolio and how to compare them against one another, because they\u2019re not always apples to apples.
There\u2019s going to be\u2026 A multifamily deal might be better in cash flow and amortization, but like J said, it could be in a low appreciation area, or you can invest in somewhere. I invest in Denver where\u2026 Not anymore, I agree with J on that. Over the last couple years, there was a good chance of market appreciation but, maybe it didn\u2019t have as much cash flow. But since we understand the concepts, you can think about them holistically, and just honestly feel more confident about your investing decisions.<\/p>\n
This is a very solid point that is particularly applicable to the market that we\u2019re in right now. One of the things that I\u2019ve noticed that can be very misleading is that people are starting to use cash flow and ROI synonymously. So, return on investment has been reduced to being what is the property cash flow in a month? I just think it\u2019s inaccurate, because the return on your investment incorporates a lot of things. It incorporates your loan paydown. It incorporates appreciation that you\u2019ve had in the deal. It incorporates the fact that cash flow over a five or 10-year period of time should be increasing every single year.
I\u2019m on a mission right now to differentiate cash-on-cash return versus ROI, because they\u2019re not the same thing. I think J is highlighting that. Now, part of the reason that you\u2019ll hear us say cash flow isn\u2019t great, man, we\u2019re not trying to say don\u2019t buy cash flow and properties. The fear is that cash flow tends to be stronger at the lower end of quality and price. The higher end properties that you get that tend to build wealth over time better, and tend to appreciate more, and tend to have better tenants, they don\u2019t cash flow as strong because they\u2019re priced higher.
Now, the problem is when the market gets competitive like it is right now, and more people are chasing after cash flow. There\u2019s this pressure that pushes you further and further down into markets that can become like a D class neighborhood. They\u2019re the areas that you don\u2019t want to own rental property, but the price to rent ratios are so strong that they make cash flow look good. This is why we give warnings about don\u2019t only look at cash flow. It\u2019s not that cash flow is bad. So many people hear this, and they just get defensive.
It\u2019s that if you chase cash flow, and you only look at cash flow, it will push you into these markets that you don\u2019t want to own long term where all the headaches come from, that will make you not like real estate investing. So the great advice that we can offer to you is to look at it holistically, and include in your analysis, \u201cHow much time would this take, and how much headache would this give me?\u201d<\/p>\n
To add on to that, Dave used the term think like an investor. If we were to retitle this book, I like the title Real Estate by the Numbers. It says what the book is, but if I had to go with a different\u2026 If we had to go with a different title, I think, Think Like An Investor is the title of this book. Because this book, while we do focus on real estate, and basically, 95% of the examples are real estate related. Everything we teach in this book is applicable to any type of investing you might do. So again, this book isn\u2019t just about analyzing rental properties, or analyzing flip deals. It\u2019s learning to think like an investor.<\/p>\n
That\u2019s awesome. There are a lot of tools like the BiggerPockets calculators out there that make deal analysis relatively simple. What do you think is missing from this?<\/p>\n
I don\u2019t know if there\u2019s anything necessarily missing. It depends on the deal, but I think we\u2019re trying to inject two things into the conversation. First and foremost is context. I got my start in investing or in real estate I should say. I got an internship in college just randomly at a construction management company. I was building financial models, and I learned how to calculate something called internal rate of return or IRR. We talk about this in the book. I could calculate it. I could throw it out there, and I had no idea what it meant.
I couldn\u2019t have any less concept of what a good IRR was. Even if I knew a 20% higher IRR is better than 14%, I couldn\u2019t really understand what that meant. So while there are great calculators out there, like the BiggerPockets ones, if you don\u2019t really understand what the numbers mean, it\u2019s hard to judge whether or not a deal is good for you and if it\u2019s going to help you meet your financial goals. Then on top of that, I do think the BiggerPockets calculators are excellent for rental property analysis, but there are some things\u2026 J gives some really good examples of this in the book where a traditional rental, like cash-on-cash return or just the annualized rate of return doesn\u2019t help you understand rates of return when you have a lot of inputs and outputs.
So, J gives us\u2026 J, you could probably give a better example, but this deal where he has to put some money in, and he does a ReFi, then he does another renovation. It\u2019s like, \u201cHow much money is even invested in that deal? What\u2019s the rate of return?\u201d It\u2019s a little bit more complicated when you\u2019re doing value-add deals, when you\u2019re doing development deals, when you\u2019re doing multi-family deals. I think in this book, we introduce some new concepts and formulas that aren\u2019t traditionally covered in the calculators that you can apply to some more advanced deals.<\/p>\n
In addition to what Dave said, and let me address this, so it\u2019s a good question like, \u201cIs there things lacking in the BiggerPockets\u2019 calculators?\u201d There are things lacking in every calculator, and the BiggerPockets calculators are the best in the world. When somebody hands you a rental property and says, \u201cAnalyze this deal,\u201d or somebody hands you a flip property and says, \u201cAnalyze this deal,\u201d or somebody hand you a BRRR property, and says, \u201cAnalyze this deal.\u201d The problem is a lot of the decisions that we make as investors aren\u2019t going to be covered by one of those three or five calculators.
I give an example in the book of a deal. I did a flip deal. I listed the deal. I don\u2019t remember exactly. It might have been, let\u2019s say, $100,000 I listed it at. I got two offers pretty quickly. First offer was an all cash offer at list price. This was a long time ago. I got to offer all cash at list price. Then I got another offer from an investor who said to me, \u201cI really want this property. I\u2019m going to hold it as a rental, but I can\u2019t pay for it for seven months. I have another deal that\u2019s closing in seven months. I\u2019m getting money back from\u2026\u201d I think it was a syndication or something in about seven months.
\u201cI\u2019ll buy it now, but I want you to sell or finance it to me. I basically want you to hold the note. I want you to not take money from me for seven months. I\u2019ll pay you in seven months, and I\u2019ll pay you more than the $100,000. Just tell me how much you want, and I\u2019ll pay you more. I just can\u2019t pay you for seven months.\u201d So, if I said that to you, what do you do with that information? How much more does he need to pay me in seven months so that his offer\u2019s better than that $100,000 today?
There\u2019s this whole concept called time value of money, this idea that money today is worth more than money tomorrow or next week or next year, because I can invest it if I get it today or that tomorrow or next week or next year. So, I now have seven months that I can\u2019t do anything with the money until I get the money, so how much more does he need to pay me in seven months for that to be better than getting $100,000 today? That was a real problem that I had to answer the question. It turns out there\u2019s a pretty simple formula for me to figure out how much he needed to pay me. So if he would pay me at least that much or more, his offer was better than the guy that was going to give me $100,000 today.
These are the types of questions that you get asked all the time that you can\u2019t just go to a BiggerPockets calculator or any other calculator, and just plug the information in. You have to understand, \u201cWell, what is this concept of time value of money? What is this concept of seven months from now is a worse time to be getting money than today, so I need more of it in seven months than I need today, and exactly how much more do I need?\u201d So, by understanding, by thinking like an investor, we can answer questions like that. Then you can\u2019t just plug into a calculator, because calculators weren\u2019t designed to answer questions like that.<\/p>\n
Oh, I see. So basically, what you\u2019re saying is there are the tangibles of every deal, things that are very objective. That\u2019s like, \u201cWhat\u2019s the property price? What\u2019s the rehab price? What\u2019s the interest rate?\u201d But then there\u2019s also the intangibles, like what you\u2019re talking about, which is the value of your money over time. Money\u2019s going to be less valuable in seven months than it is today. You really have to consider the impact of your money just sitting in a bank account for that amount of time, or money that\u2019s owed to you.
I totally understand that. There really is an intangible aspect of analysis. This is something that David and I talk about quite a bit on the podcast, which is that analyzing a deal is, oh man, I don\u2019t know, it\u2019s part art. It\u2019s part science. That\u2019s how we feel. But I\u2019m curious, what\u2019s your POV on that, Dave? Is that something that you\u2019d agree with, or do you feel like analysis is somewhat objective?<\/p>\n
I think there\u2019s two sides to it. The numbers\u2026 One of the reasons I just love math is because it is objective and you can get real numbers. To J\u2019s point, if you just put in good numbers into a calculator like BiggerPockets, you\u2019re going to get the right answer, but there are assumptions in every deal that there is some art to. That\u2019s something like rent growth. We\u2019ve seen rent going up over the last couple of years, and we can look at data to look at historical trends, but no one knows for certain what\u2019s going to happen in the future.
You need to use some art, a lot of experience talking to other investors to figure out what assumptions to put into those deals. I think there\u2019s an even bigger subjectivity into what J was talking about, which is what is a good deal for you? You can get an objective answer about what a good cash-on-cash return is, but that doesn\u2019t necessarily mean it\u2019s good for you. I think there\u2019s a good example, especially now with rising interest rates. It\u2019s like, \u201cWhat kind of loan should you use? Should you be putting more down on a deal right now?\u201d
Should I use a HELOC instead of a conventional mortgage? The calculator, if you tell it what to do, it will give you the answer, but you sometimes don\u2019t even know what questions to ask yourself, and the analyses that you could do to optimize a deal even further beyond the objective numbers unless you understand some of these concepts. I do think there is both a subjective and objective part, and that\u2019s honestly what we\u2019re hoping to help teach people in this book is how to answer both sides of that.<\/p>\n
Certainly. I mean, let me clarify. I mean, part art, part science. What we mean by art is not just, \u201cOh, I viscerally feel this way about a house.\u201d What we mean is the strategy behind real estate investing. However, when you say part art, part science, that sounds a lot better than saying part strategy, part science.<\/p>\n
A frequent theme of this episode is asking yourself what are the right questions to ask? Here\u2019s an example of a great question you should be asking. In five years, what will this property look like, and how will it be performing? In five years, what will my goals be, and how will they be different from today? Here\u2019s an example of if you take the bait of the high cash flowing property right out the gate, you go buy in some Midwest state where there\u2019s not a whole lot of rental demand, but there\u2019s tons of properties that meet the 1% rule. You buy that property that\u2019s going to cash flow, let\u2019s say, $100 a month.
In five years, it\u2019s going to be cash flowing $150 a month. There could be a scenario where inflation has been so great over a five-year period that $150 in five years is worth less than $100 today. So even though it looks like your cash flow has grown by 50%, which would be a healthy number, the actual value of that money has diminished so long over time that it\u2019s worth less. Your return has actually gone down. Now, this becomes even more clear when you compare it to investing in a growing area. That might have been harder to find the deal. You might have to work longer and harder to get it, but your cash flow has gone from $100 a month to $500 a month or $400 a month over a five-year period, which is not uncommon in areas that I invest in at all, particularly coastal markets.
If you\u2019re asking the question of what\u2019s it going to look like in five years, the right answer becomes really, really clear. If you\u2019re asking the question what\u2019s it going to look like right now, it can become muddy because the cash flow looks much more solid than where you can get anywhere else, and the deal is easier to find. Then to further elaborate on this, you\u2019ve got the art and the science position that Rob talked about, and that Dave Meyer supported. Real estate is part art and part science. You can\u2019t focus too much on either end. The people that focus only on the art, they miss out on opportunities, because they don\u2019t understand if the property\u2019s going to actually pencil out.
They don\u2019t rent it by the numbers. The people that focus only on the science miss all the ways that they can improve the way a property is valued. Particularly in the short-term rental space, I see this a lot. There\u2019s a lot of creativity that you have in the art side with the short-term rental that can actually increase the science side, which are the numbers. You got to understand both, and you got to be good at both. But man, real estate is nothing else because when you do well at this, it grossly, grossly beats all of its competition.
J mentioned earlier in the show that his friends want to compare crypto to precious metals, to real estate to stocks. It\u2019s really not a fair comparison. Real estate is going to be all of them, but that\u2019s because they\u2019re not apples to apples. When you buy precious metals or stocks or crypto, there\u2019s no work that goes into it. You just click a button on a computer. There\u2019s none of your time that\u2019s involved. Real estate does involve some of your time. It\u2019s not as passive as those investments, which is why it outperforms them, just like most of the time, running a business will outperform real estate from a cash-on-cash perspective, but there\u2019s way more effort and way more risk that goes into running the business than real estate.
So again, asking the right question, \u201cIs this a property, or is this an opportunity that\u2019s going to make me money without a lot of time, or is this an opportunity that\u2019s going to have a higher ROI, but a lot of my time will be required?\u201d<\/p>\n
I really love what you guys talked about here, which is thinking like an investor, because I think this is also something where we pigeonhole ourselves very quickly in our real estate careers, where we brand ourselves as a house flipper or a short-term rental operator, or a multifamily expert. But really, what we are is we\u2019re investors. I\u2019m very guilty of this. As someone that I\u2019m very pro short-term rentals, I\u2019m like, \u201cI\u2019m a short-term rental investor, and this and that.\u201d
But really, I do think that it devalues the fact that I am an investor, and should be thinking a lot more broadly than what we talked about earlier, the cash-on-cash metric. So, what are ways that our audience can be thinking like investors?<\/p>\n
I think, again, it goes back to figuring out what the question you\u2019re trying to answer is. Don\u2019t just stick numbers into a calculator, and get numbers out. Start with what are you trying to figure out? Here\u2019s just something that I think was fun that we added in the book. On social media, if anybody is on Facebook, or I guess mostly Facebook, people like to pose this question. I don\u2019t know why they do it, but I guess it gets interaction. They pose this question, \u201cIf you could have $2 million today, or you could have $200,000 every year for the rest of your life, which one would you rather have?\u201d
I mean, we\u2019ve all gone on Facebook, and seen somebody post that question, and then there\u2019s hundreds of responses. Half the responses are like, \u201cI\u2019d rather have the $2 million today, because I\u2019ll turn it into $100 million tomorrow.\u201d The other half are like, \u201cI\u2019d rather have $200,000 today, because then I never have to work again the rest of my life.\u201d Then people will argue, \u201cWell, this one\u2019s objectively better than this one,\u201d but nobody ever gives any reasons. The interesting thing is you can actually do the math to figure out what one is better.
This is very analogous to a lot of situations we run into in the investing world where you have the choice of a lump sum amount of money today, or cash payments every month, or every quarter, or every year for some amount of time into the future. If you think about it, that\u2019s all investing is. If I buy a rental property today, all I\u2019m doing is taking this lump sum. I\u2019m trading this lump sum for monthly cash flow. So, it\u2019s the equivalent of saying, \u201cWould you rather have $2 million today or $200,000 per year for the rest of your life?\u201d Well, if I\u2019m looking to buy a $2 million rental property that\u2019s generating $200,000 a year in cash flow, that\u2019s the same question.
So, when you look at people on the internet, and they can\u2019t answer this question with any objective response, they just say, \u201cTwo million sounds better, or 200,000 sounds better,\u201d if you don\u2019t understand that question in that form, you\u2019re also not going to understand the question in the form of, \u201cIs a $2 million rental property that generates $200,000 per year in income, is it worth it?\u201d So, you have to learn to recognize that these are the types of questions that are universal in investing. There are a whole bunch of questions that are universal in investing.
So instead of asking the question, should I buy this rental property? The bigger question is, \u201cShould I be willing to spend X amount of dollars in order to generate X cash flow over the next however many years?\u201d That\u2019s the more generic question. Chapter eight in the book is literally, how do you answer the question, \u201cShould I invest X dollars for Y amount of cash flow over the next number of years, or how much should I invest for this much cash flow over the next couple of years?\u201d Now, once you learn the concepts and the math and the formula behind answering that question, you can now apply that to a whole bunch of situations.
You can apply it to buying a rental property where you pay money now, and you get cash flow over the next couple of years. You can apply it to life insurance, where you might pay money now. You live a certain number of years, and then you get money later. You might be able to apply it to a note. Let\u2019s say somebody\u2019s going to sell you a note. I have this note that\u2019s going to pay $312 a month for the next eight years. How much are you willing to pay for that note today? These are all questions that are predicated on the same\u2026 or these are all situations that are predicated on the same question, which is, \u201cHow much should I be willing to pay today for a set of cash flow in the future?\u201d
Once you start thinking about things in that question-answer, that more generic format, it allows you to start thinking like an investor, because now you don\u2019t just need a formula for rental properties and a formula for notes and a formula\u2026 You get the idea that all of these things to some degree are the same, and I can use this one formula for all these things. Then there\u2019s a whole bucket of other things over here that fit into the same different category, and we can use these techniques for that category. There are all these categories.
Once you start to recognize these patterns of different types of investments, you\u2019ll also start to recognize how we evaluate these investments, and compare them to each other.<\/p>\n
Makes a lot of sense. I was just\u2026 I\u2019ve had this troubling deal that\u2019s really haunted me since the day we sold it. We had a property that we built from the ground up. We operated it for maybe, I don\u2019t know, two or three months. We sold it for\u2026 I think it was around a $400,000 profit, me and my business partner. It was set to gross between 130. I think our net on that was going to be 100 to 110. We sold it. Not really sure, right? It\u2019s like what you\u2019re talking about. There\u2019s all these different levers, but we just didn\u2019t have a system or a methodology to think through the ramifications of both sides keeping it or taking the lump sum.
In that moment, I think for us, we thought, \u201cIf we sell it for a profit, we can 1031 that into more properties,\u201d which we ultimately ended up doing. We ended up buying four more properties. Then we\u2019ve sold some of those properties, and now we\u2019re 1031-ing that into other properties. Overall, our portfolio is growing, but it was something that really troubled us for a long time, because we just weren\u2019t really sure how to analyze that deal. This is something that definitely\u2026 Some kind of system, some methodology to how to think through this would\u2019ve really helped me sleep better at night, because I think him and I\u2026
We switched back and forth every month. One month, we regret it. The next month, we\u2019re like, \u201cOh, this was a great decision.\u201d Where we\u2019re at now in that philosophy, I\u2019m not sure. I\u2019m not sure. We\u2019ll let you know pretty soon. I think we\u2019re still flip flopping on that one. But Dave, what about you? I\u2019m curious, is there any other way that the audience can be thinking more like investors?<\/p>\n
The first one that I think a lot of people overlook is how to keep score. There\u2019s this idea. You might have heard this term in business. It\u2019s like, \u201cWhat gets measured gets done.\u201d Honestly, I didn\u2019t really do this for first years of investing. I kept a P&L. I knew profit and loss for my individual properties, but I wasn\u2019t keeping track of my net worth and how much equity I had out into different deals, and how much cashflow I was really generating on a holistic sense, and whether or not my\u2026 All these individual things about my investments were all over the place. I think that is a key component to being an investor.
If you don\u2019t know how to keep score\u2026 We talk about this creating your own personal financial statement where you track your net worth. How much money\u2019s coming in? How much money\u2019s going out right now? How do you know if you\u2019re doing better or worse? If you don\u2019t know to keep score, how do you decide on a particular deal if you need more cash flow? Maybe you can take a long-term approach, and look for more appreciation over time. I think that\u2019s one concept is learning how to keep track of where you are in your investment journey in a real numbers quantifiable way is super important.
We already talked a little bit about the time value of money. Man, I feel like learning the time value of money at some point in your career is like a superpower. Once you really understand the time value of money, your life will change. I promise you that. You will not think about any purchase you make in your life the same ever again. Once you learned that $10,000 today, if you went out and bought a new car or whatever, how much that could be in your retirement, I promise you, you\u2019ll stop buying stuff now, and you\u2019ll start investing it. Those are two-<\/p>\n
Let me interrupt you real quick, Dave. I\u2019m sorry to interrupt, but this is so important. This whole time value of money thing, this concept, we\u2019ve all heard that term, time value of money. But honestly, the difference in my experience between successful investors and not successful investors in a lot of cases is literally the understanding of that concept in more detail than just the term time value of money. I found\u2026 One of the reasons why we devote a lot\u2026 There\u2019s five parts of the book, and we devote three quarters of one part of the book to this time value of money concept, because there are so many different aspects to investing and measuring investment returns, and analyzing deals that\u2019s related to it that literally, it\u2019s probably 10% of the entire book focused on time value of money.
The reason for that is because I\u2019ve seen so many articles, and texts, and blog posts, and books that talk about time value of money, but they talk about it from a formula standpoint. They talk about it from, \u201cPlug the numbers in. Get the numbers out.\u201d I\u2019m lucky that\u2026 Again, I have an engineering background, so I understand time value of money, but let me tell you something. If I handed one of these texts that\u2019s out there to the average, non-mathy person, their eyes are going to glaze over. It\u2019s like they don\u2019t want the formulas. They want to understand what does time value of money mean.
Obviously, the formulas are important, and we need to include that as well, but we also need to tell stories about why this is important. We need to tell stories so that people can understand why this matters. So, a very large part of this book was focused on just that concept of time value of money, but telling it over many chapters so that people really get why it\u2019s important. Again, I honestly believe that just that concept in and of itself is going to make a lot of people better investors, and is going to differentiate the not so good investors from the good investors. I apologize, Dave, for interrupting.<\/p>\n
No. No, you\u2019re totally right. I genuinely believe, once I understood, that it completely literally changed my life. J gave a brief example of what it means. It means money now is worth more than money in the future, because you can invest it. But once you really\u2026 It\u2019s not just knowing that. It\u2019s like once you see the numbers, and almost can feel it, I know that sounds weird, but can really internalize it in a way that it becomes a part of your decision making in almost everything that you do. It will change your life, so I totally agree with you, J.
Then there are so many in the book, but the last one I really think people should understand the concept of is leverage too, because it\u2019s unique to real\u2026 It\u2019s not unique to real estate, but it is more common in real estate, and that\u2019s the concept of borrowing money to purchase an asset like a home. We talk a lot about that too, which is another thing that I think really is a mindset thing that helps people. It\u2019s not really about the formulas. We do go on the formulas, and it\u2019s helpful, but that\u2019s another thing, I think, learning to think about leverage and how to use your financing strategically, and not just treating it as this hurdle across.
I think a lot of new investors are like, \u201cI need to just find a loan.\u201d They\u2019ll take any loan. For your first deal, that could be okay. But I think over time, you learn to think strategically about how to use your financing to create better deals. We do talk about that a lot. I think those are three of the highlights in the book. There\u2019s plenty more in there, but those are three that I really like.<\/p>\n
I mean, all of those really do hit home for me truly. I mean, I wish I would\u2019ve had this book five years ago when I got started, because one thing that people really did try to\u2026 I don\u2019t know. They saw the bullet train heading towards me, and they\u2019re like, \u201cI can save you. Just listen to me. Keep track. Do proper bookkeeping. Have a personal finance statement.\u201d Because when I was starting out, it\u2019s no big deal. I was keeping track of expenses on a spreadsheet. That even worked for the first two properties, maybe even the first three.
But very quickly, the bolts start falling off the tires there once you actually have to get really into the nuts and bolts of taxes, and getting all that information to your CPA. So, for me now, I scaled so quickly that I remember my CPA was basically like, \u201cHey, we need to get you on doing proper books and QuickBooks.\u201d We did that. Then last year, he was just like, \u201cHey, that QuickBook file, we need to throw that away. I want to put that into the trashcan. Pour gas on it. Light it on fire, because you need to be keeping track of your books this way.\u201d
It\u2019s a very specific way that\u2019s going to actually inform you on cash coming into your account and cash coming out. That\u2019s very, very important because a lot of the times, you think that you\u2019re making a lot of money, but then once you actually track it correctly, you realize that maybe you\u2019re not. That can drastically change that investment. So if you\u2019re not keeping track of all those different things, you\u2019re not able to cut costs at all, because you don\u2019t know what\u2019s crucial and what\u2019s not, what\u2019s eating your budget.
For me, keeping track of your finances, that\u2019s a huge one. I cannot overstate how important it is to do proper bookkeeping. Start it from the very beginning, pay a bookkeeper, learn how to do it, however you have to do it, but it\u2019s going to be so crucial. I promise you, it\u2019s going to save you so much time and money with your CPA, because CPAs could be\u2026 They could be a very costly expense. The other thing you talked about is leveraging too. I mean, we talked about that one for hours.<\/p>\n
We tried to make this book. Again, it\u2019s a thick book. It\u2019s 40 some chapters. We wanted to devote at least a few chapters to the bigger picture. It was just what you and Dave were talking about, this whole idea of tracking your business\u2019s success, not just on a per deal basis but on a business basis. Because when you think like an investor, it\u2019s not just thinking about making everyday decisions. It\u2019s thinking about making decisions for a year out or five years out or 10 years out. The way we do that is we understand how our business is performing.
Just like you just said, Rob, understanding how your business is performing is all about creating these financial statements, and doing accounting correctly. For a lot of us, that whole idea of accounting and financial statements is just like your eyes glaze over when you hear about it, but we spend several chapters basically talking about breaking down financial statements in a way that makes it really simple to understand. We give an example of a fictitious flipping business, and we say, \u201cThis is what a financial statement for this business would look like. Here\u2019s how you categorize income. Here\u2019s how you categorize different expenses.\u201d
Then how you can then look at that, and then say, \u201cIs my business operating efficiently? Is it operating efficiently from a business standpoint? Is it operating efficiently from a project standpoint? Is it operating efficiently from a people in a labor standpoint?\u201d Basically, by keeping that accounting and creating those financial statements, it doesn\u2019t just give your CPA or your account the ability to do your taxes at the end of the year, but it gives you insight into how efficiently your business is running. It gives you insight into, \u201cWhat can I do today to make my business more efficient?\u201d
It gives you insight into, \u201cIs my business\u2026\u201d This is the most important thing, \u201cIs my business running as efficiently as 99% of other flipping businesses out there?\u201d Because really, at the end of the day, we have this thing called profit margin. It\u2019s a division of a couple different numbers in your financial statement, but this idea of a profit margin is a way for you to compare the efficiency and the success of your business to somebody else\u2019s business, or somebody else\u2019s business, or all the businesses in the industry as a whole.
So again, it\u2019s not just about analyzing a deal for today, or analyzing a flip deal over six months, or a rental deal over five years. It\u2019s really analyzing your business over the lifetime of your business, and forecasting and planning to get to some place. We\u2019re all doing this. We\u2019re not doing this because\u2026 Well, maybe some people are. I\u2019m not doing this because I love flipping houses. I\u2019m not doing this because I love buying rental properties. I\u2019m doing this to get to financial freedom, and to provide a legacy, a financial legacy for my kids. The only way I can do that is to have a plan, and I can\u2019t have a plan from today until 20 years from now unless I know what 20 years from now looks like.
So, I need to figure out what 20 years from now looks like, and then I need to design my business so that I can get from today to that point. So, using financial statements, using the correct accounting techniques, understanding the income and the expenses in your business and how they work together is how you get from today to whatever your 20 years from now looks like.<\/p>\n
Awesome. Yep. I\u2019ve just learned a lot of this stuff the hard way. I think most people learn this stuff the hard way.<\/p>\n
We all have.<\/p>\n
Totally.<\/p>\n
But here\u2019s the good news, you don\u2019t have to.<\/p>\n
Honestly, when we\u2019re talking about this book, I realized maybe the value of this book is it just speeds up all the painful lessons by five to 10 years. You get there eventually, but it\u2019s through some pain. We\u2019ve all probably seen a tax bill, and you\u2019re like, \u201cMan, I could have done that better.\u201d For me, I told you earlier about failing to reinvest. I think that was a consistent problem I had for the first few years of my investing career. I\u2019m sure you guys have your own as well, but there are so many things to think about as a new investor. We hopefully can help you consolidate the things that you should be thinking about to optimize your investing through the course of this book.<\/p>\n
This is really great because I\u2019ve really just developed the emotional roller coaster of breaking out in hives, sweating the PTSD of doing it all the wrong way, and then knowing that there is a light at the end of the tunnel here where I could have just probably, like you said, saved five years of gray hairs on my head. But that\u2019s okay, because I\u2019m still going to pick it up. There\u2019s still so much to learn. Even talking in this conversation, I\u2019m like, \u201cThere\u2019s actually a concept to this whole thing like return on equity.\u201d Who would\u2019ve known that that\u2019s a thing, right?
You don\u2019t really think about some of those more advanced concepts, so thank you guys so much. Is there something that we didn\u2019t cover in this book? Is there one final nugget that you guys want to leave the audience with before we end today\u2019s podcast?<\/p>\n
Obviously published through BiggerPockets, and you can go to numbersbook.com, and you can buy it there. I do also want to add. In addition to this book, it also comes with a bunch of bonuses. We talked about a personal financial statement, how to create a balance sheet. Those kinds of things are in the book. We do have some downloadable Excel documents that come with the book for free. So if you are wondering, that is\u2026 We make it easy for you. We explain the concepts, and then we give you some tools to do this for yourself.
Check it out if you want to learn how to think an investor. We\u2019re really excited and proud of the book, and think that whether you\u2019re a newbie or an experienced investor, there\u2019s a lot in here for everyone.<\/p>\n
Everybody\u2019s asking me, \u201cIs there an audio version of the book available?\u201d There is, I believe already, or there will be an audio version of the book, but what I recommend to anybody is definitely get a physical copy of this. You may want to get a hard copy as well.<\/p>\n
Great tip. The models and everything like that, the Excel, that stuff is worth as weighted gold. I\u2019m excited to start plugging and playing with that kind of stuff. Dave, can you tell us where people can find out more about you on the internet?<\/p>\n
Sure. Well, you can find me on Instagram, where I\u2019m at the DataDeli. I also host a BiggerPockets podcast called On the Market where we talk about news, data, and trends that impact the lives of investors. You can definitely check that out as well.<\/p>\n
Awesome. What about you, J? Where can people find out more about you?<\/p>\n
Real easy. If you go to www.connectwithjscott, just letter J, scott.com. Connect with jscott.com. That\u2019ll link you out everywhere you need to go.<\/p>\n
Awesome. Well, thank you guys for your time. I\u2019m really excited for the book. I guess, let\u2019s see. David always does this much better than I, but I\u2019ll give it a shot. This is Rob, for Rob missing Dave Greene, Abasolo out. I think that\u2019s how he does it. Bye, everybody.<\/p>\n