0:00 hello and welcome to people making money I'm your host Kevin bemel and we are here every Wednesday morning well Wednesday morning on the Pacific coast where I live at 10:00 a. and uh 1 o'clock in the afternoon on the east coast and we talk about matters relating to professional success building a business uh Building Wealth all of those uh Financial oriented topics that give us the resources to live the kind of life that we want to live so today's show I'm going to I'm going to be
0:35 building on um a show that aired back on um Let me let me give you the right date I I'm holding it here I think right yeah July 26th of uh 2 of last year of 2023 it was a show on how you could quickly analyze an investment property and that that's just for one property that that show talks about and uh I'm I'm going to do just a very quick review of what I covered there um but you can go to our YouTube channel um which is
1:11 youtube.com theeway to wow and you can take a look at that show I do I do recommend that um it'll it'll take you more in depth um on on doing an initial analysis of of a piece of real estate investment real estate anyway um now but today I'm going to be talking about how you go from one property to a portfolio of properties using a concept known as leverage so in its simplest form leverage simply means using borrowed
1:46 money to expand your your ability to buy property um and and so if you have let's say $100,000 to buy a property you could either buy a property $100,000 and pay all cash although people rarely do that with real estate or you could borrow money um maybe you'll borrow say $300,000 and that along with your $100,000 gives you a total of $400,000 and you can buy a much larger property so by um by borrowing money you're using
2:25 $100,000 to control a property worth four times that and that's where the term leverage comes from you're leveraging your investment so the the now leverage can work in a number of ways you can have what's called positive leverage which is good um you can also have negative leverage which may be okay um but but you having negative Leverage is is not going to allow you in most cases to continue to build your portfolio so
3:02 we're going to look at several we're going to look at several issues related to this I'm GNA go ahead and share my screen I've got a notwithstanding my my hearty dislike of Google docs um for doing this kind of work Google Docs is is is the most efficient at least that I've been able to find so um as I mentioned back on um July 26th of last year I I did a show um on how you could analyze a it was an 8un apartment building um it at the time
3:38 anyway it was on the market um uh the address was 2495 Corinth Avenue in Los Angeles um that's in the West LA area um not too far from where I live and so I'm gonna I'm going to scroll down so you can see all of the analysis um and basically you see there's three columns there's the the asset summary column there's the performance summary column and there's the income summary column okay and I'm just G to move this up a little
4:14 bit more okay there we go yes okay and um well it justes it doesn't want to do that okay here let's do this there you go okay so in the asset summary column is the the the price for the property um what you know what the loan amount is in this case there was an existing loan and what the equity is or the down payment would have to be to to buy the building now this is based on the asking price of the building and you're you see we're going to we're going to change
4:50 that um to reflect uh contemporary conditions okay now I'm going to jump over performance for a minute I'm going to talk about income summary so whenever you're analyzing a a piece of income property or an investment property we want to get down generally speaking to What's called the net operating income or the noi and we do that by looking at how much rent the property generates which um well the the um most rent the property could generate minus losses for vacancy and and
5:27 collection okay getting down to the adjust gross income which should approximate the income actually collected from uh from operating the property and then you subtract the operating expenses for the property which generally come in a c in in six categories property taxes and other taxes and licenses Insurance management maintenance utilities and replacement reserves okay and um again I'm not going to go through the details on this you you can go look at the um watch the other show um to to find out how how did all
6:04 where did all these numbers come from okay um but suffice it to say you want to make them as realistic as possible um so that so that this number right here the net operating income okay that's the income available to make loan payments okay now you'll notice by the way um that the what's called The Debt Service or the loan payments on this on this loan um are greater than the net operating
6:41 income and that results in a negative cash flow of $83,000 okay which means there's a negative return on Equity so now let's look at the performance summary so with an apartment building generally speaking we look at um several um ways of of determining uh of comparing how this building performs uh to other buildings one is called a gross rental multiplier generally speaking that's done on the entire gross income in this case gross rent uh scheduled gross rents and schedu of gross income
7:16 are the same thing sometimes you'll have other income but you can have a gross income multiplier a gim or a grm you know not a lot of difference between the two typically okay so in this case the gross rental multiplier is is a little over 15 the price per unit is based on this price of $4.6 million is $575,000 now the price per weighted unit which takes into account the fact that these are larger units they're two bedroom two and a half bath units okay so um this price per weighted unit uses
7:52 a one bedroom as as sort of the standard so a two-bedroom is weighted at one and a qu units so 8 * 1 and A4 is 12 I'm sorry is 10 um and and that's how you get 460,000 per weighted unit this allows you to better compare different buildings because typically buildings have differ sized units in them so this gives you a a a better basis of comparison and then price per square foot so the building has uh 9600 square
8:28 feet Okay so so um that's that's where that number comes from four $4.6 million divided by 9600 fet four about $480 a square foot okay now um even for um so if if you were dealing with another type of property maybe it's a retail property an office building an industrial building okay typically in those cases you're going to be looking at What's called the cap rate or that's short for capitalization rate the capitalization rate is determined by taking the net operating income and
9:04 dividing it by the price so in this case the cap rate is 3.8% okay based on this again this is the asking price for the property okay now these are the same these are the same they're just copied here um so that you have them close by okay now in figuring out the loan payment okay you have what's called a loan constant now the the fact of the matter is let's say you've got a loan with an interest rate of 7% okay if you were to multiply the loan
9:40 amount times 7% That's only going to tell you what the interest portion of the payment is for that year most real estate loans you pay principal and interest so you need to know what the loan constant is which is the payment rate that takes into account the fact that you're paying uh interest and principal okay so in this case uh the loan con I'm just going to look at this note real quickly okay so there's there's an assumable uh Chase loan at 3.68% that's a much better loan okay and
10:17 we're gonna we're going to look at that in in in just a minute in fact I'm gonna just I want to check something real quickly here see if it if we know what the size of that loan is or what the remaining balance of that loan is uh it looks like we don't know uh land assessment nope we don't okay um no problem we'll we're gonna you know we we'll we're gonna you know kind of make something up just for the purpose just for learning purposes okay so and and this is because this loan is
10:55 because this loan payment is so high that's how we get into negative cash flow so um and and this by the way is an example of negative leverage so the cap rate of 3.8% okay is higher than the return on Equity the return on equity isga -6% which is an indication that although we invested almost $1.4 million we're getting a negative return on that of of a loss of $83,000 a year okay so you you you hopefully you're saying gosh this
11:30 doesn't look like a very good investment I I agree with you okay so in today's market okay a cap rate of 3.8% is is way too low keep in mind that the um the prime rate is8 and a half% right now okay so that doesn't mean that cap rates have to be higher than 8 and a half% um all I'm saying is is that um you know this property first came on the market when the prime rate was down around I think you know 3 4% something
12:09 like that okay so the reality is is is is the price of 4.6 million is is is much too high so um let's let's take a let's take a look at um another at at at lowering the price so let's just let's just lower the price for a minute to 4 million dollar and see what happens okay so you see that that immediately raises the cap rate to 4 and a half% okay and it it drops the return on Equity to a negative 3.5% instead of a negative -6% so that's
12:46 better we're still losing $42,000 a year okay but at least that's better than at a $4.6 million price okay so let's lower it again to 3.5 okay so we're getting closer now notice that the cap rate now is is about three 5.4% and we're almost at break even okay so on a million 50,000 investment we're losing about eight $8,000 a year okay so we got we have to go a little bit excuse
13:21 me we're still in negative leverage because we're we're Lo because the um return on Equity okay is lower than the cap rate so let's let's take it down um another 100 take the price down another $100,000 oh that's not quite far enough so let's let's go down to $3.3 million okay so um we're still okay so now at least we finally have a positive cash flow
13:56 okay but notice that the cap rate at 5.76% okay is still lower than the loan constant okay so we're still in negative leverage because of that okay so we probably going to have to go down let's let's let's take a real dramatic price drop okay so even at 2.8 million dollar you can see that the cap rate of 7% is below the loan consant of roughly 8% so we
14:33 would have to go down to let's let's try uh 2,600,000 okay so at 2,600,000 NOP we're still too low let's let's try two and a half million okay there we go so at $25 million price okay notice that the cap rate is 8% the loan constant is roughly 8% as well okay now we have a
15:08 $60,000 a year cash flow which gives us a return on Equity otherwise known as a cash onh return of 8% so all three of these are for all intents and purposes the same this is what's called neutral leverage so we're not getting a higher cash on cash return is as a result of borrowing money okay but we're also not getting a lower return on Equity as a result of borrowing money so our Leverage is neutral we're using leverage okay because we're still borrowing 70%
15:44 of our price okay but we're not doing so in a way that enhances our return on Equity other words making it higher than our what's called our unleveraged return the net op the the cap rate the capitalization rate represents an unleveraged return other words if we paid $2.5 million in cash for this property okay we didn't borrow any money so just stay here our net operating income of $200,000 represents our cash flow for the property because there's no Debt Service if we pay $2 and a half million
16:20 in cash okay once we borrow and use leverage so now we're control we're we're using $750,000 in cash to control a property worth $2.5 million okay and in doing so we reduce our cash flow to $60,000 okay so we're using leverage but the Leverage is neutral because the cap rate of 8% is is the same as the return on Equity of 8% okay so let's just drop this one more time
16:56 oops oops not 24 million that's not going to do us any good okay and here we finally get to a point where we have positive leverage okay so at a price of $2.4 million our cap rate is 88.4% okay our loan constant which is 8% is lower than the cap rate this increases the return on Equity to 99.3% this is what we call positive leverage so by using leverage
17:34 and and and and taking $72,000 in cash to control a property worth $2.4 million okay we end up getting a higher return on Equity than our our unleveraged return our cap rate of 8.4% this is the point we want to get to we want to get to positive leverage okay so for any in real estate Investments you have you want to get to the point of
18:09 positive leverage okay now you may not be able to start there okay you may need to start W in negative leverage okay so we're now I'm going to show you some different ways of working on your leverage so let or working toward posit leverage so let's go let's go back 4.6 million is is is clearly too high let's go back to a situation where we're considering paying $4 million for the property okay and you see we're in negative we're in negative leverage now
18:45 because our cap rate is lower than our loan constant we end up with a negative return on Equity okay so how could over a period of time we get to the point where um excuse me we're now we now have positive leverage well one thing we could do is we could increase the rents okay so let's just look at this real quickly for a minute um 3,400 or 34,200 um divided by 12 divided by 8
19:22 oops okay so our our average rent for these units is is about 3200 a month okay these are um let's see there's they're 1,200 square foot units there's eight of them um let's see 8 time 12 8 times 8,6 yeah 1,200 square foot units okay so um so on that basis there's the the this this income that they're that they're telling us the building could uh generate if it if all the units were
19:58 occupied 100% of the time uh works out to be like I said about $3,200 okay now let's just look at this in a different way let's let's look at this figure here on a per square foot basis okay that's $2 $264 per square foot okay all right follow hopefully you're following me so far now let's say that the rents went up to $3 a square foot okay um here let me
20:35 let me uh translate these here we go that's what we want okay so if that's the case then each unit would rent for $3600 okay because they're 1,200 square feet times $3 per square foot is 3600 okay so 3600 uh we're going to we have one unit each unit rep uh each unit rents for 3600 okay times 8 I'm sorry times 12 gives the annual rent times 8 okay that
21:11 increases our rent to $345,500 a year okay so if we were able to increase our rents by 36 cents per square foot which is let's see 10% 20 it's about a 15% increase okay now let's see how this changes how the property performs so 345,000 okay now notice what happened here we
21:49 went from um a 3.5% negative return on Equity to almost to break even just by being able to raise the rents by um 36 cents per square foot okay does that make sense right so by increasing the income okay that improv the the pors of the property okay now can we raise rents 15% well maybe maybe not in one year but probably over maybe over two years you could I me
22:25 it depends on the market that you're in Okay so so let's let's go a step further let's say that um we want to raise rents by 50 Cents a square foot that takes us to $314 per square foot okay so this equals 1,200 times $314 per square foot okay that takes the rents up to uh uh $ 3768 which which makes sense because 50 cents a square foot time 12200 is a $0000 a month increase that takes our
23:02 income now to uh 361,662 okay and notice now first of all we have positive cash flow now we don't have positive leverage because our cap rate is still below our loan constant but at least we're not losing money so we now know that in order to get to just you know a little bit better and break even we've got to be able to increase our rents by um uh 50 cents divided by 2.6
23:39 $264 oops I need to put an equal sign in there there we go okay in other words we need to increase our rents by um about 19 nope other way by 19% okay so if we were to be able to buy this building for $4 million we need to increase the rents like I said by 19% and then we'll get to a break even could we do that in one year probably
24:14 not okay but could we do it in two years about a 10% increase each year maybe it may be possible okay depends where the market is at depends how tight the market is for apartment rentals um you know it it just you know there's a number of factors that could affect that now of course you would want to look at this carefully to see if you could um if you could you know if this is achievable is the word I'm looking for all right so one way to to um improve our leverage even though we're
24:49 still in negative leverage one way to improve it is to be able to increase the income another would be to reduce the expenses okay now that may be pretty difficult but um let's say that um we're able well we're not going to decrease Insurance in fact insurance is probably low it's very very tough property taxes kind of are what they are because in California they um they just it's it's a rate set by law okay um and and by the
25:24 way this number here is fluctuating based on the price that we pay so as the price has gone down so has the property taxes okay um and by the way the the professional management for the property is also based on the the income so as that changes that that's just kind of is what it is gardening we're we're we're we saying about $150 a month that's probably about as low as it's going to go um pest control of $600 that's probably about as low as that's going to go utilities so isn't a real a lot of
25:59 opportunity for us to lower expenses um but in a building that you're looking at there may be an opportunity to lower expenses um this is a a newer property um and so um you know it's in pretty good shape but you might if if a property is has very high maintenance costs then maybe by doing some Renovations um although it's going to increase your capital investment you may be able to um significantly lower the cost of repairs and supplies I.E
26:34 maintenance and and that would improve your leverage as well so another thing to look at is is lowering um lowering the your your uh expenses so now let's just let's just take a look at something here let's say that instead of having to pay the top property tax and special assessments rate of uh 1.25% let's say that you can that the property is assessed at 1.2% okay so that lowers it by $2,000 and that that improves things a little
27:09 bit notice that our cash flow went up our return on Equity went up to 0.9% from 8% let's lower this a little bit ler let's lower it to 1.1% okay now it's gone down from 50,000 to 44,000 okay our cash flow is increased to 15,000 okay by the way look our our cap rate is almost 6% now we still have negative leverage but our return on Equity is over 1% so you can see how by lowering expenses it increases the cap the cap rate okay and it improves um our
27:48 leverage situation even though it doesn't make it go positive Okay so we've looked at changing the price we've looked at changing increasing the income we've looked at lowering the expenses okay now there's one other thing that we can do and that is remember I I said at the beginning there's a a loan on an existing loan on this property that's assumable so just to to make sure um everybody understands what this means so the original owner or the current owner I should say took out a loan from Chase
28:25 at a 3.68% interest rate
29:28 okay so even though we're paying $4 million for this building and we're we're getting it at a 6% cap rate um well actually let's let's let's let's go back now well yeah know I don't sorry I don't want to do and we're you know we're we're we're anticipating we can increase the rents by 19% that puts us in positive leverage okay that puts us in positive leverage now so now um our cash flow is $113,000 on an investment of $1.2
30:05 million so our return on Equity is over %. this is this is fantastic positive leverage and and really one of the best parts about this this opportunity this building is the fact that it has this very low interest rate assumable loan without it as as we were looking at before the owner could not hope to get anything close to his asking price of $4.6 million okay so all right so now we've
30:40 figured out how to get the property into positive leverage that's our first step in building a portfolio Okay now um you know again we we probably aren't going to you know get into positive leverage the first uh year that we um you know acquire this building but after a couple of years now we're in positive leverage okay so let's say that um we there's a you know we go another two years and we're able to increase rents
31:16 again um and and this time we're able to increase rents to $350 uh per square foot let me just okay $33.50 per square foot okay so um that represents a um a 94 cents per square foot increase over the original rents so that's a 36 that's a 36% increase over the original rents
31:51 okay and okay now our rents per unit are 4200 a month okay and so now our scheduled gross rents are over $400,000 a year now again could we do this obviously we're not going to do this in one year unless for some reason the rents were dramatically below Market which they're not in this case okay maybe it takes us four years to get here okay so that's about a 9% increase per year on average all right so let's now let's plug in our higher rent
32:29 okay okay now look we have a 7% cap rate based on our purchase price okay we've got and we've got a C A a return on Equity of 12 and a half per. okay now let's say that um Let me let me just go back to what that was before okay yeah 6% uh okay so let's say that a 6% cap rate is still the correct cap rate for this Market okay so what that means is
33:07 we've increased the value of the building so now our net operating income is $276,000 in change and at a 6% cap rate the building is now worth $4.6 million okay and what that means is um and let's I'm GNA this is this is not exactly correct because um we would have paid off some of the principle here over
33:42 over four years but just for the sake of this example let's just say the the loan amount is is still 2.8 million okay so now we're going to have we've increased the equity we have in the property to oh whoops I'm sorry I did the wrong one uh minus um here we go Okay so we've increased the equity in the property to
34:17 $1.8 million in other words we've we've we've um we've gotten a 50% increase in our Equity okay while the value of the building has only gone up by 15% our e the the value of our Equity has gone up by 50% this is another advantage of Leverage okay so all of the incre by by using $1.2 million to control a building that you bought for $4 million okay all of the increase in
34:53 value of the building comes to you as the holder of the equity okay and so that's this is again one of the benefits of Leverage is a small increase in the value of the building 15% becomes a much larger increase in your Equity 50% okay so that's that's the next step in realizing what Equity can do for or what leverage can do for you okay so now you've got $1.8 million of of equity
35:28 there okay and let's uh let's see uh I'm G to I want to put it in another space here and oh I'm not going to be able to do that okay well shoot um this is this is my this is why working with uh with Google doc is is is sometimes a problem let me let me just see something here no vertically line no we don't want that uh uh insert oh okay here we go um okay this is this is what we want to do
36:12 so okay there we go okay so now we've got this all right so now that now that the value of the building has increased okay so let's look at let's say we go get an A a loan that's that's 70% of the new value okay so that the new value is this times 70% okay so now we can get a loan for about $3.2 million okay um because the value of the property has gone up okay so we
36:48 refinance the property and what we do by when we refinance is we pull out about $400,000 in cash see we're going to going to pay off a $2.8 million loan and uh we're going to pay off a we're going to get in essence we're going to get a check for $3.2 million we're going to pay off a $2.8 million loan and keep the other $400,000 okay again this is a benefit of Leverage now let's just say for the sake of this example we're able to get the loan at the same interest rate as the existing loan now obviously that can't
37:25 happen right now interest rates are much higher but let's say four years from now interest rates have gone back down okay so so now the new debt service is going to be this new loan amount okay times the same loan constant okay so the new debt service is $145,000 okay and let's look at our new cash flow
38:00 okay so our cash flow has gone from $150,000 down to $31,000 still a very healthy uh you know positive cash flow okay we've pulled out $400,000 so our equity in the property is no longer $1.8 million it's actually okay our equity in the property is $1.4 million so we weren't able to pull out
38:36 the entire 600,000 right we only pulled out $400,000 okay but our return on Equity oops our return on Equity is still 95% okay so look this is still this is still a great investment it's still a great building okay but now we've got $400,000 in
39:11 cash and we can go buy another building okay now we can't buy maybe we can't buy a building that's as expensive as this one um nonetheless what do we want here's what I okay nonetheless we still have another $400,000 to go and invest we maybe we buy a smaller building so remember this building we initially put in $1.2 million okay so um you know we we um um maybe we buy you
39:48 know a building a third of the size or let's let's look now let's let's play around with some examples let's say instead of borrowing $3.2 million we're able to borrow $3.4 million okay so now we still have our original investment of $1.2 million in here okay um however we now have 600,000 oops okay we now have
40:26 600,000 no yeah $600,000 to invest okay so this allows us to go and buy our next property and we go do the whole thing over again okay we may have to start out with um with you know a building that has negative leverage but we increase the rents okay over the years increase the income hopefully eventually get into positive Leverage okay and and then we refinance it pull
41:02 some of that cash out go by another building okay now let's look at a an even more posi right now we're we're basically saying you can only borrow 70% let's look at a situation and and actually let's let's see what this percentage is okay so this is a situation in in this case we're saying we were able to borrow in this new loan 74% now that's that's possible okay it depends on the lending climate so that's not outrageous
41:37 all right let's look at another situation let's say The Lending um environment has improved a lot and you're able now to borrow 80% okay so let's we take $4.6 million to times 80% okay so now oops no just want to make sure yeah now we're
42:13 borrowing almost $3.7 million okay so assuming we're able to borrow 80% of the new value of the building okay now um look what's happening here our debts service has gone up by $40,000 a year okay well we're still cash flowing $110,000 a year okay but we've reduced our equity in the building to $900,000 okay what does that mean that means that we now
42:53 have $800,000 when to make sure I'm doing this right uh 3.6 yeah we have $800,000 900,000 yeah we paid off yeah yeah yeah yeah okay um we have $800,000 in which to make a new investment okay now that's not the 1.2 million we had before okay um but but
43:28 it's still a lot of money to go buy another building now by the way maybe you didn't come up with this whole $1.2 million yourself maybe you have a partner in this okay and so maybe each one of you put up $600,000 okay so while you're working the real estate investment maybe you're the managing partner of the partnership or the managing member of the LLC right and and by all of your hard work okay you've been able to generate another $800,000 in capital to invest in another
44:07 property in the meantime your partner's been working on his business maybe he's come up he's got another $400,000 that he can put into another building and so he puts up 400,000 oops not 40,000 okay and now what have you got well you've got you've got another $1.2 million to invest in another property
44:43 okay and now you can go out and buy another property maybe similar to this one do it all over again now you say wow that takes an awful lot of time yes that's true it it can okay you're not going to build a real estate portfolio overnight okay you're you're not now how can you speed up this process well let's look at how we how we went from having negative leverage to positive leverage one way is we were able to increase the
45:18 income so what smart investors often do is they look for properties where the income is sign significantly below the market rates and they know going in that they're going even if the market even if Market in rates don't change there's still such a big gap between um what what the tenants are paying now and what the market will bear now so let's just take a case where the tenants are currently paying about $3,200 a month
45:53 but right now if you look at similar uh Apartments in the area tenants are paying $4,200 a month so you've got what's called upside in your rents of about ,000 a unit or 36% so if you could find a building like that where let's say over a year you're able to bring the rents just up to Market you can do all of this in a one-year period okay and you can go from a negative leverage building to a positive leverage building in a year instead of what we were
46:29 talking about before which is maybe waiting having to you know wait four or five years in order to do this because you know the original assumption was this $3,200 a month was Market okay now we're changing the Assumption and we're saying no 3200 is is below Market by 36% and so over the year we're going to work to bring the rents up to Market okay if we're able to do that okay now in in Los Angeles you can't because there's rent control but in most places in the country there isn't rent control so you can raise rents up to Market um pretty quickly
47:06 assuming there's you know enough demand okay so then maybe you're able to get rents up to Market in a year you increase them this 36% and now you're in a position to refinance the property pull out your cash of $800,000 okay maybe you find a third partner to put up $400,000 and so for your next building okay now you still you have another $1.2 million or maybe your current partner you did such a great job on this one so he's willing to put up another $400,000 of capital okay
47:41 and in that way you can do it much more quickly okay another way of making this happen more quickly excuse me is to buy a fixer upper where the rents are low and the expenses are high because the property is not in great shape okay so so by um buying the property let's say this is a fixer upper now okay and we originally bought it it was $3,200 a month okay and we paid $4 million for it let's say we've got to
48:16 invest a couple of hundred, to really get all the units fixed up maybe put in some new appliances um paint them all fix up the landscape but we put in that money and it so improves the look um and the and the maintenance quality of the building that we're able to rent increase the rents more quickly hey fantastic and again we can achieve these higher rent numbers much faster than just waiting for the you know the R Market rents to increase over the years okay so buying a fixer
48:51 upper is another opportunity now there are risks right if you're buying a fixer upper are C you know can you be sure that you know a a $200,000 additional investment will be enough to really fix up the property what happens if we get a spike in inflation like we've had over the last couple of years and now all of a sudden our cost to renovate has gone way up well see that's a risk okay on the other hand it may be a risk worth taking um because Al although maybe you think well we'll we we'll renovate it in a
49:26 year get the rents up okay so maybe it'll take you two years but two years is still better than four years right so it's still faster so buying a fixer upper can be another way of doing this now I'm talking about doing this in a you know multi-residential building if if you look at smaller buildings uh one to four units you can do the same thing okay it it it works all the same way okay it's just that the numbers are probably going to be a little bit smaller okay and likewise you can look at larger buildings 10 12 15 20 30 40
50:02 unit buildings okay and maybe the price per unit is much lower in a larger building something like that and and and so then that's another way of looking at it where um if you're if you're looking at a more moderately priced building you may have more upside opportunity um but it is going to be more work because you're going to have more tenants Okay so those are all things to look at in terms of how you use leverage so um the the main point that I hope you'll take away from this is um even if you decide
50:40 to buy a building using negative leverage at first you want to have a plan for how you're going to get to positive leverage okay there's a famous saying about real estate investment that says you make money when you buy the building you say how can you make money when you buy the building what that means is at the time you buy the building you have your plan set for how you're going to increase the rents incre
51:15 decrease the expenses increase the value of the building in such a way that even if you didn't buy it at positive leverage you're going to get to positive leverage which will allow you to sell at a profit even here notice you bought the building for $4 million it's now worth $4.6 million even after cost of sale you've got a profit of about half a million dollars that's what we mean about buy making money at the time you buy the building you may not realize that well you won't realize that profit until you sell it of course but you know
51:51 how you're going to make money off it at the time you buy it as opposed to just buying on spec calculation and saying I'm going to buy this building and hope that the rents are going to increase and I'll be able to raise the income or lower the expenses and make the building more valuable that's speculative that's not how smart investors handle things they have a plan going in for how they're going to make money okay and it has to do with this concept of Leverage of getting to the point where their capitalization rate okay their unleveraged rate as we as we pointed out
52:26 before is higher than the rate they're paying on their loan so now their return on Equity is higher than their cap rate and they have positive leverage okay that allows them to increase the value of the building refinance it and pull out cash and with that cash they now have funds available to buy another building that's how you use Leverage in order to build your real estate portfolio Okay so um you you might not
53:05 have followed all of that on you know first time through it can be a little bit complicated I'd encourage you to you know watch the show again um it'll be posting in just a few minutes after the show is over um and again um you know if you want to learn how to do that initial um the initial proor it's called a proforma it's a it's a estimate of how the building will operate um I I'll post the link to that previous show in the show notes the one from July 26th of last year take a look at that review this episode and you're GNA have pretty
53:40 much all you need in terms of basic knowledge to start looking at properties and seeing if you can find something that will allow you to start Building Wealth through real estate that's the that's the name of the game okay so um if you have any questions feel free to drop them in uh various social media um chats or or U you know social media posts I'll be happy to answer them and if it's something you know personal and individual you can always email me my email address will be in the show notes
54:16 and um you know just just know that if it's not something in my area of expertise uh I'll I'll say so and I'll you know if you want me to refer you to someone who can help you if it's a tax issue or something like that um I'm going to you know refer you to an accountant or something or if it's a legal issue I'll refer you to an attorney because because I'm neither okay um but I do encourage you this is this is how everyone who's who who's made money in real estate including me you know for for working with clients and such this is how we've this is how we've made money okay that that it's how
54:52 it works um it's there's no magic to it okay it's it's candidly it's it's hard work it's a lot of hunting looking for a good investment okay and it's a lot of hard work you know fixing up your building finding uh you know increasing your rents or finding new tenants finding a good loan okay you can see they're going to be you're going to need to work with lots of people you need a good loan broker or a good source of real estate loans you need good vendors who can help you keep your building and good repair and get it fixed up you're
55:28 going to probably want some Partners especially if you're going to buy a $4 million building you may not be able to buy that with your own Capital um you know first time out you may need to start with something smaller or find a couple of Partners to buy a building with together all of that means working with good people that you feel are honest reliable okay that will treat you um you know in a reasonable way um and and not and not you know gouge you and you know in terms of your vendors Etc okay so you can and all of those things you can be you can be creating those relationships
56:04 even as you're looking for properties to invest in okay um you know it doesn't cost you anything to meet people talk to them ask them questions find out um what their abilities are and what their interests are all of that you can be doing right now even if you don't have the capital to buy a piece of property
57:19 [Music] fantastic rest of the day and a wonderful rest of the week and looking forward to seeing you again on the following week all the best in signing off as I always do Marie you are my bell all the world all the all the best folks