Latest / The Jon Sanchez Show / When Does A Rental Property Stop Being A Good Investment?
Transcript
- Jon G. Sanchez: Good Thursday afternoon to you. Welcome to the John Sanchez show on Newstock seven eighty KOH. Pleasure to be with you on this stormy day. Yeah, we need it. We need it. Put those fires out, Mother Nature. Around the horn we shall go, Mr. Dwight Millard of On Q Home Loans. Great to see you, my friend. Dwight Millard: Great to be here, John. How are you today? Jon G. Sanchez: Very good. Thank you. You gotta be happy with a nice, nice, benign Dwight Millard: I Jon G. Sanchez: PPI report. I mean, I thought of you this morning at five thirty when that data came out, so I knew you're gonna be in a good mood today. Dwight Millard: him in a great mood. Jon G. Sanchez: There you go. Aaron Clark of Edge Reality, good to see you, big AC. How you doing? Aaron Clark, Edge Realty: Yeah, doing good. Did you see there was a tornado watch today? Jon G. Sanchez: I did not. I did not. Got the got Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: the hail watches and the flood flash fli fast f or flood watch and I did not see that. Wow. Aaron Clark, Edge Realty: Yeah, they had a tornado watch. I thought I was in Wizard of Oz all of a sudden. Jon G. Sanchez: Yeah. It's we just never know being here in Northern Nevada. We never know what the weather's gonna be. That's for sure. Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: Hey, but I'll take this. I love this weather. I got a nice I got a nice big hot cup of coffee right now. It's you know, it's Aaron Clark, Edge Realty: Nice. Jon G. Sanchez: comfortable outside. A C's not blasting, you know. I'll tell I was I was telling my wife, I'm like, you know, this really makes me want to have winter back again. This is, you know, just nice. You just wanna kinda stay inside and you know, if Corey was here you'd say, Yeah, I want to stay inside and turn on Hallmark Christmas shows, but you we're not gonna go down that Hmm, that path that he goes down every Dwight Millard: No, no. Jon G. Sanchez: Yeah, it's true though, isn't it, Aaron? With a bicycle actually in his Aaron Clark, Edge Realty: With a box of Kleenex next to him. Dwight Millard: It is true. It is. Yeah. Jon G. Sanchez: in his in his cup of herbal tea. Aaron Clark, Edge Realty: Yeah. Dwight Millard: Yeah. Earl Grey, Jon G. Sanchez: that's so funny. Folks, it's all true. He is a Hallmark diehard. He really is. All right. Well, let me tell you what we have lined for today. We're going to recap today's report. again, good session today, record setting day for the SP 500. So we'll tell you what was behind that. Again, as Dwight and I were kind of joking, you know, the driving force today, of course, was a very, very quiet PPI number, the measure of inflation on the wholesale side of things. So we'll give you all the details of that in just a moment. Then we're gonna get into our real estate topic. Love this one. When does a rental property, Aaron Clark, stop being a good investment? When does a rental property stop being a good investment? Crazy topic, isn't it? Kind of makes you stop and think. And I can't wait Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: for some of the info you and Dwight are gonna be sharing on this one because I I love you know, you you talk to somebody and like, yeah, my rental's going great, you know. I've Bought it for three hundred and it's worth six hundred and boy things are great. And my tenant, boy, I love that tenant. They're making their payments every single month and everything else. And then, as we're gonna explain here, it's not all what it seems to be. You gotta you gotta get down to the real numbers, right, Aaron? Aaron Clark, Edge Realty: Yeah, absolutely. I mean, that's the problem is a lot of people put it on set it and forget it mode. Yeah. Dwight Millard: Please move. Jon G. Sanchez: the autopilot. I like that term. I like that term. Yep, absolutely. Well, it's gonna be a great topic. We'll get to it here momentarily. So let's get the stock market side going here. like I said, let's go back to this morning. This was really you know, kind of set the catalyst. We had pretty good strength in the pre-market session, even before the release at 530 of the PPI data. And you know, like yesterday's CPI, which was up just one-tenth of a percent, this one was even better. We got a goose egg. It was unchanged from the month of June to this month's report of July. 4.7%, however, this is the nasty number. 4.7% year over year is where wholesale inflation is. We strip out food and energy. Got a little bit of an uptick there, up two tenths of a percent, year over year on the core, up four point two percent. So you know, like I said, very very high, you know, on the year over year basis, not budging much, but hey, at least, you know, month over month, not bad whatsoever. So do I I dug up the numbers for you. I know you always like to know this. Like, all right, what does this Dwight Millard: Mm-hmm. Jon G. Sanchez: do to the potential of a next interest rate increase? Well, According to the September FOMC meeting, which now stands at a 34.6 chance that we're gonna get a quarter percent cut. Thirty-four point six. Dwight Millard: I love it. Jon G. Sanchez: That is a decrease from forty point six yesterday. This or actually, yeah, yesterday and you know, before this morning's report. So yeah, you know, again, you know, the the rate cut, rate hike, excuse me, you know, pretty, pretty small. I mean, that number, if I remember correctly, guys, beginning of the week, I think we're you know, what high 40s, low 50 percent range. And then After we got the the quiet CPI number and then the PPI number today, the probability is coming down nicely. So we will see what happens there. We will see. So that was the big report. We did have initial claims check in. we saw a little increase here for the first time state unemployment benefit filings of 9,000 to 209,000. But the continuing claims, those that continue to stay on the state unemployment, dropped by 22,000 people to 1,777,000. Memory stocks were the drivers in today's market. we had Sandisk have a really strong day today, $183.82 gain up thirteen point six seven percent to one thousand five hundred and twenty-eight dollars and eleven cents. Dwight, we've got a lot of these stocks that are you know north of a thousand now. And I always whenever I give a quote like that, I always think about your n when your comment a few weeks ago and you said, John, where are the stock splits these days? You know, these stocks are getting real expensive, and you're right. It's still Dwight Millard: Is that just the thing of the past now, John, you think, or do you think? Wow, wow. Jon G. Sanchez: I really think it is. I I can't tell you the last time that I mentioned that you know this company was gonna have a stock split. I I think it was Nvidia, to be honest with you, which was what, year, two years ago, something like Dwight Millard: Mm-hmm. Jon G. Sanchez: that. It was a while, but yeah, we just don't see it anymore. And I guess because there's so much capital sloshing around in the stock market, they feel that, hey, you know, people can afford a fifteen hundred dollar per share stock. So I don't know. Dwight Millard: Right, yeah, yeah. Jon G. Sanchez: It's crazy. Western Digital was another star today up thirty thirty-three dollars and nineteen cents, seven point three one percent to forty-seven twenty-nine. let's see, Coherent was laggered at down about eight percent, twenty-eight dollars and twenty cent twenty-eight dollars and twenty-nine cent loss to three twenty-seven thirty-five following the its earnings report. workday, keep an eye on this one, folks. WDAY, big surge on the stock today, 17.78%, $31.16 gained $206.45. Reuters came out mid-session today, reported that Silver Lake, which is a private equity firm, is in talks to acquire the company. So keep an eye on that one. Your household names did well. Meta was up sixteen dollars and twelve cents. Netflix up four dollars and three cents. You know, like I said, pretty good. And just like I've said every day this week, no news out of the Iran situation. So oil prices were very, very favorable today. $2.20 loss to $81.06 a barrel. gold pullback $46.50, $4,420.50. And Dwight, let's just jump right into the rates here. four basis point loss Dwight Millard: Let's do it. Jon G. Sanchez: on the yeah, four basis point loss on the tenure. Yell four sixty four. How'd we do on the mortgage side? Dwight Millard: Well, you're to like the headlines. The headlines is the lowest rates in nearly four weeks. but yeah, but I mean, so that's the positive, right? But here's still the Jon G. Sanchez: Woo nice. Yeah. Dwight Millard: negative. So the 30 year fixed rate, according to mortgage news daily still sits at 6.69 on a 30 year fixed. John, I mean, that again, I don't know what other I'm going have to chat another word for stubborn, but Jon G. Sanchez: Ha ha ha. Dwight Millard: you know, this is just, I mean, it's high. It's it's, know, and, and, know, we talked about this a couple of weeks ago and Aaron was saying, you know, it's amazing. people still think the rates are significantly lower than what they've been for what now? We've been holding on, what, a year and a half, two years, three years Jon G. Sanchez: Right. Right. Yep. Dwight Millard: at this. I had somebody that, you know, I quoted the other day and they go, no way, you know, it was like a 6.5 or something. I go, yep, that's what we've been there. So it's still amazing how many people don't really pay attention. Jon G. Sanchez: Where where where would where would you say if if I put a room of of a a thousand people in a room and we did a survey, Dwight, of the public, where would you think they would come in from a consensus basis of where a thirty year mortgage is at right now? Dwight Millard: Is this another lobster dinner? Is this a trick? Yeah, I would. I Aaron Clark, Edge Realty: That would be a fun experiment. That would be fun. Jon G. Sanchez: Nope. Dwight Millard: John, I honestly would say I would think it would be the mid fives. A full percentage point or better than what is, yeah. Yeah. Yeah, yeah, yeah, yeah, yeah, because there's so much. Jon G. Sanchez: Mid fives? Okay. Okay. Would you agree with that, Aaron? Okay. So so a point, point and a half lower than what they really are. That's amazing. That's amazing. Yep. And and again, Aaron, you Aaron Clark, Edge Realty: Yeah, I would agree with that. Dwight Millard: mean, John, there's there's so informed about everything else. But Jon G. Sanchez: Sure, sure. Dwight Millard: yet this I I don't I don't understand it. I mean. Jon G. Sanchez: Well, it's a it's it's a you know, from a from a layman's perspective, it's it's a complicated world, right? They they see, Dwight Millard: Yeah. Jon G. Sanchez: they get tricked, you know, with advertising from a lender that says, you know, four and a half percent, but you know, they don't read the fine print with it's you know, with two points or you know, whatever the whatever the catch is, or it's Dwight Millard: Mm-hmm. Mm-hmm. Mm-hmm. Mm-hmm. Yeah. Jon G. Sanchez: not the APR and you know, so on so forth. So yeah, I think I I I think there's just a lot of confusion. Aaron Clark, Edge Realty: Yeah, you're paying for it somewhere. Jon G. Sanchez: Well, absolutely. No doubt about it. Dwight Millard: Well, but but John and their fairness to them, they're driving around, they go by subdivision things, they see rates as low as 4.9. You those are all buy downs and things. So they're Jon G. Sanchez: Mm. Good point. Yes. Dwight Millard: seeing some things that would, yeah, the advertisement that would lead them to believe that they're lower than what they are. Yeah. Jon G. Sanchez: Right, right, right. And again, Aaron, you would you would you would believe that that that around that five five and a half percent? Aaron Clark, Edge Realty: Yeah, I think definitely it'd be right around five percent. I think some some people might throw it up at like I mean, it could be really high, like six percent, but they're still gonna be way under what the actual market price is. Yeah. Dwight Millard: Yeah. Yeah. Yeah. Jon G. Sanchez: Yeah. Yeah. Yeah. Absolutely. Yeah, Dwayne it's you you have a you have a tough job. And I mean that in all seriousness. It's it's it's a tough one. like you said. Dwight Millard: Well, know, we talked about it the other day how much it trickles down. You know, it starts with me, you know, because I'm well, it starts with the consumer, right? Then it's made. Jon G. Sanchez: Sure. Right, right. Dwight Millard: That is the real truth. Title companies, appraisers, home inspectors. It's just it's been a rough. It's been a rough ride for. And here we're going to four and a half years. So. Jon G. Sanchez: Yeah. Yeah. It's like me being in a bear market in the stock market for four and a half years. Yeah, that's that's a different. Dwight Millard: Well, we talked about this was this is this has been a longer suffering duration than the meltdown of 08 because remember there was short sales. There was activity going on now Jon G. Sanchez: Mm-hmm. Sure. Yes. Yes. Dwight Millard: and people were refinancing and just different things going on here. got Jon G. Sanchez: Right. Dwight Millard: zero. I mean, you got maybe 2 % of people refinancing just off of life and then Jon G. Sanchez: Mm-hmm. Dwight Millard: the rest of just struggling. go, you know, they get in the market. They go out. They go in. They go out based on Jon G. Sanchez: Right. Dwight Millard: the market. Jon G. Sanchez: Right. Right. Absolutely. All right. You're now up to date. I'll tell you what the market did when we come back, and then we're going to get into our real estate topic. When does a rental property stop being a good investment? You don't want to miss this with Aaron and of course Dwight Millard. Welcome back to the John Sanchez Show on New Stock 780KOH with Dwight Millarovon Q Home Loan to Aaron Clark of Edge Reality. And I gotta apologize, folks. I I made a major screw up when I was telling you what the market did today. I I had a weird thing happen. I gotta give you the behind the scenes. So, you know, I run multiple monitors. And my quote system, this is gonna, you guys are gonna laugh when I tell you this. So I've got this quote system. And when you stare at a quote system for, you know, 14 hours a day, every day, like I do, your brain becomes trained to just look at a certain part of the screen and you know, all right. That's, you know, the Dow chart. That's the NASDAQ. That's the SP, that type of thing. Well, the company that we we get the quotes from this morning, I think it was after my second stock update. I look up at my quotes, it's like, wait a minute. They flip-flop three of my windows, right? My SP, my Nasdaq, and my Dow window. They flip-flopped them. I can't tell you how many times I screwed up this morning on the stock updates because to the far left, that's where the Dow was always at. They moved now the SP 500 window to where the Dow was. And so I just screwed up again at the when I was giving you guys the what the market did, and it hit me during the break, like, my gosh, I feel so stupid, but it is what it is. Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: It's just again, older you get the more habits you know, you know, you don't like things changing. So let's go, let's give you the correct numbers today. So the Dow rose 69, not the SP, the Dow rose 69, NASDAQ up 215, and the SP again record close up 50 points to a level of 7798. You guys find doing that, like you get so used to seeing certain certain things on your screen and Dwight Millard: yeah. Jon G. Sanchez: change it. It's like, I got you. I well, I called the company and I'm like, you change this. And like, yeah, we we changed it for this reason or that reason. I'm like, do you not realize this old guys? You you really Dwight Millard: Better, yeah. Jon G. Sanchez: screwed things. Yeah, yeah, it's always for the better. Yeah. I Dwight Millard: Yeah, yeah. Jon G. Sanchez: think they give us the option. Usually you can move the windows around, but no, not Dwight Millard: Yeah. Jon G. Sanchez: this time. So, anyways, sorry about that. Apologize. All right, let's get down to our real estate topic and get the question answered. When does a rental property stop being a good investment? So let me give an example. You bought a rental property years ago, right? Value went up, mortgage went down. You've built a ton of equity. Sounds great, right? You go to your barbecue and you're bragging to your neighbors, your friends, et cetera. But that really may not be the case. So today, what we're going to be doing is we're going to be asking the question most landlords never think about. When does a rental property stop being a good investment? So Aaron has Let's kind of start with an example, all right, just to drive this point home. So let's do a hypothetical. Let's say, you know, an investor bought a rental years and years ago. You sold it to him, Aaron, for $250,000. Today it's worth $700,000. The mortgage that the White gave them years ago, now down to $100,000. So they obviously have equity of about $600,000. And let's say they're doing pretty good on rent. Annual rent about $42,000. But after taxes, insurance, maintenance, all the things that a landlord pays, they're netting a cash flow of $24,000. And then the owner says, Geez, guys, this property is absolutely fantastic, fantastic. I'm making $24,000 a year. But what we're going to explain to you is you're now effectively deploying $600,000 of equity to generate $24,000. Aaron, you're fast with math. What kind of rate of return are we looking at there? Like 4%. Exactly. Aaron Clark, Edge Realty: Yeah, like four percent. Yeah. Jon G. Sanchez: we'd be fired by our clients if they had invested 600,000 with us and we only generated 4%. Trust me. And that's before considering taxes and future appreciation. So the question that Aaron is would ask you and Dwight would ask you is this would you invest $600,000 today to make $24,000 a year from the investment? Again, some of you may be happy with four percent, but most of you probably would say no. So with that said, kind of setting the background, here's the problem. Why do people fall in love with their rentals, Aaron? Why do they fall in love with their int rentals? Let's start with the the the emotional side here. Aaron Clark, Edge Realty: Well yeah. I mean, so many people get emotionally attached to their rentals. A lot of times it's because it's their first one or it used to be a home they lived in and their kids grew up in. They turned it into a rental. Jon G. Sanchez: Your point. Dwight Millard: Thanks. Aaron Clark, Edge Realty: it's paid for. They kind of put it in the set it forget it category. The the the tenants been there for ten years, they've been making the payment. I haven't raised rent on It's you know, I don't need to worry about it. They're great. They fix everything on their own. Jon G. Sanchez: Mm-hmm. Aaron Clark, Edge Realty: There's a there's a lot of potential reasons that somebody falls into the it falls in love with their rental and that status quo of just being used to it, you know. I mean, why do people not change insurance companies? Why do people not change cell phone carriers? Why do people not Jon G. Sanchez: Your point? Aaron Clark, Edge Realty: change cell phones from Apple to Android? We get used to it. We don't like change. You don't like the change on your new platform. I don't like Jon G. Sanchez: No. Aaron Clark, Edge Realty: the changes they do in MLS, you know, like that's just the way it is. We get used to it. Jon G. Sanchez: All right. Aaron Clark, Edge Realty: And unfortunately, we leave a lot of potential cash on the table when we just get to the place of complacency and not actually looking at that on an at least an annual basis to evaluate whether or not that equity that's sitting can't be turned into double or triple the amount of money that you're making. Jon G. Sanchez: There you go. There you go. And you will explain what you mean by that. Dwight, Aaron Clark, Edge Realty: Mm-hmm. Jon G. Sanchez: anything you want to add to why people I'll just use the term fall in love with their rental property? I w personal residence we can understand, Dwight Millard: Nah, Jon G. Sanchez: but we all see it way too often for all those exact reasons Aaron mentioned on the rental side. You never really would think about it. Dwight Millard: Yeah, but I think the biggest one, John, he covered is that it started out being your primary and you converted it into a rental and you just have this, I don't know, the sentimental value to it. But we've talked over the years and you've been really, really pushing the idea how to make more money off of that money. So we've got a lot of money tied up in equity today, John. Jon G. Sanchez: Dwight, we've got some we've got some audio problems with you. I'm sorry. I'm gonna cut you off here for just a second if I can get you to kind of reboot a little bit. Thank you. You're Dwight Millard: Okay. Yeah. Okay. Jon G. Sanchez: you're sounding like Alvin the chipmunk there for a second, right, Aaron? Never never had that happen before. It's gotta be the storms. I know, I know it's gotta be Dwight Millard: perfect. Aaron Clark, Edge Realty: That's why my face is making faces. Jon G. Sanchez: the the storms going through the area. We're gonna blame the technology areas. So yeah, that was really good. I try not to laugh Dwight Millard: There we go. Aaron Clark, Edge Realty: There you go. It's a tornado. Jon G. Sanchez: if you saw me on the on on the video there. all right, Dwight, we'll wait for you to come back in. You know, Aaron, but also, you know, I love everything that you said, but let's also throw in the financial side of things why people become complacent when they're a landlord. obviously they're terrified of paying capital gains tax if they sell it, right? What I hear a lot from the clients is, great, okay, because I I bring this ex that's why I wanted to do this topic. I bring this exact issue up because I hear this is real life stuff, folks. I hear it from people. Yep, my rental is doing great and everything. And that's the first thing that I do is I say, okay, how much equity do you have in the house? And they'll come up with a number, how much rent? What's your net rent? And then I do exactly Aaron Clark, Edge Realty: Mm. Jon G. Sanchez: what we just did, run the calculation, divide the net rent by the amount of equity. And I say, geez, did you know you're in trust me in this example that I created, this is, you know, we're using 4%. Aaron, I don't know about you, but I see a lot of two, 2.2, 2.5, I you know, cash on cash Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: return. And I'm like, do you realize that's what you're getting? And they kind of you know, and you hate to say that because it makes a person feel dumb. And I'm not doing it by any means to make someone feel dumb. My job is to say, look at look at your rental like a Wall Street firm looks at capital, right? Every dollar's got a use, and you need to maximize the use of that capital. If not, you are not being a good steward of your money or of your family's money. so you know, then you say, okay, look at you're only making two, three, four percent. They go, okay. Well, what about the taxes? Well, that's a consideration, right? We, Aaron, we know capital gains tax, depreciation recapture, so on and so forth. And then, you know, common question. Okay, great. So I understand all that. Maybe I can do a ten thirty one or if I want to cash out, what the heck am I gonna do with the money? Can you make me more than that? And you know, that's where the conversation ends up going. But my my my purpose of it is just to bring it to their attention because so many people again have all the reasons you mentioned, and then and in reality it's not not as good as they think. Aaron Clark, Edge Realty: Yeah, and it's and it's overwhelming. It's you know, how do you eat an elephant one bite at a time? Jon G. Sanchez: It is. Yeah. Aaron Clark, Edge Realty: So, you know, people get stuck in that position where they think to make the change or even look into what they could do, or call me or you or Dwight or whatever and ask what the possibilities are, it's it's a big thing to go through. I get it. But the potential upward swing of that income when you see it on paper. Dwight Millard: Mm-hmm. Aaron Clark, Edge Realty: should be a huge motivating factor to at least check it once a year because the potential is huge. And we can offset those taxes. Ten thirty one exchanges, we talk about them all the time. Jon G. Sanchez: Sure. Yep. Aaron Clark, Edge Realty: We can make it to where you're never going to pay them. And the day you die, they're wiped clean. So there's ways to do it. Jon G. Sanchez: That's right. Absolutely. So last thing that we'll leave you with on this portion of the conversation is here's the question. If you inherited six hundred thousand dollars in cash today, would you use all six hundred thousand dollars to buy this exact rental property? Isn't it though? Really makes you start to think. And so Aaron Clark, Edge Realty: Such a great question. It is. Dwight Millard: Thank you. Jon G. Sanchez: that's kind of, you know, again, with some of the things that you need to be thinking about when you're sitting on a lot of equity. All right, when we come back, we're gonna get into the next area of this, which is the numbers every landlord should know. Should know like the back of their hand. We'll continue that discussion with Aaron and Dwight. Welcome back to the John Sanchez show on New Stock 780KOH Aaron Clarkovage, Reality, and of course Dwight Millardov on Q Home Loans. Once again, we finished with a gain of 70 on the Dow. The Nasdaq closed with a nice gain of 216. And the SP, our record finish there at 50 to 7,798. All right. When does a rental property stop being a good investment? So we kind of laid out some scenarios with you. once again, it comes down first thing you got to look at is your cash on cash return, right? What is your equity? Take your net profit. After paying all your expenses when the rents come in, et cetera, take that number, annualize it, divide it by your equity. And that's telling you, hey, if I had, in our example, used a person with $600,000 worth of equity. If I had $600,000 and I went and invested it, what percent can I, you know, re receive? My ROI, as we call it, return on investment. And if you're, you know, probably anything less than 6% or so, you need to pay attention to it. Now again, we're not accounting for appreciation, which is where most of you make your money in the real estate, but you get the point. So now let's get down to the numbers, Aaron, that every landlord should know. So they don't need to be saying, Am I making money? What they need to be saying is, What is my current equity? Take it from there. Aaron Clark, Edge Realty: Yeah, I mean, you need to know where you sit on everything and you need to know what your true net income is. And a lot of a lot of landlord investors will just calculate that, you know, I'm making twenty-four thousand dollars a year in rental income and I paid this much. And yeah, maybe I have some taxes involved, and that's kind of the end of the story for them. But Jon G. Sanchez: Mm-hmm. Aaron Clark, Edge Realty: the reality of it is is when you sit there and crunch all the numbers You have to include your insurance, your HOA fees, any repairs that you need to do. You know, depending on the type of tenant you have, you might have more or less. If they got kids, you're gonna have more repairs probably, just because kids are a little more rough on a property. and then you have your regular normal wear and tear repairs, you know, like new roof, new water heater, new furnace, new microwave, new oven. All those things are expensive over time. And if you're using a property management company, Typically right now, unless you have a bulk number of properties, you're gonna be paying anywhere from 10 to 12% of the rental income per month to a property management company. If you have more than two or three, sometimes they'll knock it down to like eight percent and give you a deal on it because they're doing a bulk amount. Jon G. Sanchez: Mm-hmm. Aaron Clark, Edge Realty: your vacancies, if you get a lot of vacancies, so if you're renting to a lot of college students, especially, I have a lot of investor clients that do, they're gonna have vacancies on a regular basis. Or they'll rent rooms specifically. of a large property with a shared common area. So you have to include that. your landscaping costs, you know, our prices are going up here on water and gas and things like that. So you gotta take that into consideration as well. and you know, obviously your mortgage interest and any other unexpected things that you're not thinking about. You know, whatever maybe city requirements or things like that. So Jon G. Sanchez: Okay. So your formula to first number we need to know our net income. Take the gross Aaron Clark, Edge Realty: Correct. So you're gonna take all of that, your total gross, you're gonna deduct all of that to get your annual net cash flow from whatever's left over. And then as you said earlier, you're gonna divide that by your current equity, and then that's gonna come up with your percentage. So using our example before, four percent on that six hundred thousand dollars in equity after Dwight Millard: Thanks Aaron Clark, Edge Realty: all expenses paid, we need to parlay that into some other things because we're sitting in a position where if you're only making 4% on your 600,000 sitting in that situation, not calculating that you might need to do a new furnace, new carpet, new paint, all of these types of things, then we probably can do a lot better, maybe not even in real estate necessarily. There's other opportunities Jon G. Sanchez: Mm-hmm. All right. Aaron Clark, Edge Realty: out there that aren't that way. or we can parlay that and take that $600,000 and put it into two rental properties using a 1031 tax-deferred exchange. We're not paying any taxes. We get to use all six hundred thousand as a down payment, three hundred on each one or two hundred on each one. And we get three of them, depending on what they cash flat. And now we've taken that and increased it to maybe we're sitting more around six, seven, eight, ten percent. Who knows? And you have more upward Jon G. Sanchez: There you go. Aaron Clark, Edge Realty: trend possibility because now you have three properties building equity, not just one. Jon G. Sanchez: And you you you bottom line, you've diversified three different homes, hopefully not in the same neighborhood. That's right. There you go. That's Aaron Clark, Edge Realty: Yep. Your vacancy isn't a hundred percent, it's thirty three and a third percent. Yeah. Jon G. Sanchez: right. That's right. And you know, Corey brought this up the other day, and I think it's a good point for you and Dwight to mention. There's nothing wrong with going out of the area. you know, right? I mean, you nothing says Aaron Clark, Edge Realty: No, not at all. A lot of people do that. Jon G. Sanchez: you have to stay right here in northern Nevada. I mean, there's a lot of opportunities. Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: I mean, Dwight, you you see some of the numbers, you know, back east and stuff where homes are cheaper. Right. And and therefore mortgages and expenses in Dwight Millard: Mm-hmm. Jon G. Sanchez: some cases are cheaper. So you could really get a nice you know, increase in your ROI just by to Aaron's point, do a ten thirty one, buy cheaper properties. Yeah, Dwight Millard: Go somewhere else. Jon G. Sanchez: rents are you know equivalent to here, but Dwight Millard: John, I want to add a couple of things. I've been doing some training and one of the things that we got onto this investment and one of the biggest, I guess, myths to it is you're not making money if your payment's 2000 and you make 2010 dollars. That's how they Jon G. Sanchez: Mm-hmm. Mm-hmm. Right. Dwight Millard: think, I'm making money. I'm not breaking, I make, you You see what I'm saying? And you're not with what Aaron just alluded to. All this other stuff makes that cost a lot higher than what, how people just think of it in their head. Yes. Jon G. Sanchez: Well, it's the opportunity. It's the opportunity but plus what no one thinks about, guys, to get re pure, you know, real Wall Street on everybody. It's the opportunity cost of the money. It's right, Aaron and Dwight Millard: Yeah. Jon G. Sanchez: and Dwight. It's not just, geez, okay, I'm only making four percent when let's say the market's doing 10%. Okay, market, but next year could market could be down eight percent. But it's the opportunity cost of that money, right? And it's tied up. And and Dwight, you know, I'm I'm gonna I'm gonna spearhead you on this because you have emphasized so correctly over the years where you said, Look at It's foolish to have a significant amount of equity sitting there. Sure, it sounds good. Hey, my property's almost paid off. I'm sitting on $600,000 worth of equity. First of all, let me throw my two cents in while I'm thinking about it. First of all, unless you have that property properly titled, i.e. an LLC, you are a I just had this conversation with a client the other day. You are a sitting duck for a lawsuit. Dwight Millard: Mm-hmm. Jon G. Sanchez: If an attorney, right, Aaron, if an attorney says you know, you get sued for whatever reason, whether it's on the property or some other event in life, first thing they do that you have to list all your assets and liabilities. When they see you have this rental property with $600,000 worth of equity and you own it in your name or in your trust name, they're like, well, bingo, jackpot, there's the first chunk of money I'm going after, right? But Dwight, what happens if they have a mortgage on that property and maybe they only have a hundred thousand equity? Dwight Millard: Yeah, yeah. mean, there's a lot that they're going to get a lot of money. They're going to get a lot of Jon G. Sanchez: That's right. Dwight Millard: it. You John, I also had to take some certifying classes for reverse mortgages. And one of the top reasons to do a reverse mortgage was to invest, to deploy capital back into the market rather than putting it all down. It was fascinating how they demonstrated that. Jon G. Sanchez: You talking the stock market? Dwight Millard: any market, right? The stock market. Yeah, Jon G. Sanchez: Any market. Okay. Dwight Millard: just you have, you don't have to have it on a reverse mortgage, depending on age and all that stuff. You don't have to have as much money to on a, a, a refinance or even a purchase on a reverse mortgage. But it was fascinating. That was one of their top items was the money that you would have that you are able to save or whatever. And you could redeploy into other investment opportunities. But you know, Jon G. Sanchez: Mm-hmm. Dwight Millard: John, and I think it's just real quick, sorry. You got $36 trillion of equity sitting out there right now. $13 trillion Jon G. Sanchez: Yeah. Yeah you do. this this is Dwight Millard: was 65 and over. I mean, there's Jon G. Sanchez: Mm, mm-hmm. I believe it. Dwight Millard: 55, 56 million people. To your point, why are we letting it sit? Jon G. Sanchez: Right. And and there's always the argument, and there's nothing wrong with it. Every situation is different. Your your dream may be I want to pay it off house. God bless you. But if you're really looking at it again from an investment standpoint, and we're talking investment properties today, that's not a smart thing to do. Aaron, if it what do what does your your sophisticated real estate clients do? The ones that have multiple properties. Do they sit there on, you know, hundreds of or millions of dollars worth of equity, or do they have A little bit of equity that they've leveraged into ten more properties. Right? Give us some stories like that. Aaron Clark, Edge Realty: Yeah, they c they they keep dominoing it. you know, they like I I use the word parlay because we're in a casino town, but they Jon G. Sanchez: Yeah. Aaron Clark, Edge Realty: just keep parlaying that equity into another one and another one and another one and another one. As soon as there's enough enough equity to borrow for a down payment, they do it again. Now I will say, as you said, there are people that just don't have that comfortability in their mind and their goal is Jon G. Sanchez: Sure. Absolutely. Aaron Clark, Edge Realty: to pay something off and keep it and they want to do a long term parlay, if you will. Jon G. Sanchez: Mm-hmm, mm-hmm. Aaron Clark, Edge Realty: There's nothing wrong with that. So If you're not comfortable with it, it's okay. And there's also other ways to do things where we can help, you know, where it's a little more comfortable. So it's not so because there I mean a lot of those guys, they're living on the razor's edge. I mean, they're yeah. Yes, I get it. Jon G. Sanchez: Mm-hmm. And nothing says you have to take. Yeah, good. Yeah. they are. And that's not, yeah, that's not where a lot of people want to be. No, but but Dwight Millard: Mm-hmm. Yeah. Jon G. Sanchez: and especially, you know, the the younger listener right now, where they have the time, if something does go wrong, they've got time to rebuild versus let's say a retiree. And again, that's all Aaron Clark, Edge Realty: Absolutely. Absolutely. Jon G. Sanchez: part of working with your team and saying, How much risk, you know, Aaron Clark, Edge Realty: Mm-hmm. Jon G. Sanchez: am I personally Dwight Millard: Mm-hmm. Jon G. Sanchez: comfortable? How much risk does my team think I can take? And, you know, come up with a decision at that point. But just to automatically sit there and go, my gosh. Yeah, I'm sitting on a half a million dollars worth of equity. I I look Dwight Millard: you Jon G. Sanchez: at it and I'm going, it feels good. It sounds good. Yep. Aaron Clark, Edge Realty: It's your easiest way to increase your income right away. Jon G. Sanchez: Yep. You got it. You got it. All right. We come back. We'll talk about our next point. Appreciation can change the entire equation. Welcome back to the John Sanchez Show and New Stock 780 K WH. Let's get some phone numbers going, boys. Mr. Clark, let us start with you. Aaron Clark, Edge Realty: six seven three sixty seven hundred. Jon G. Sanchez: Beautiful. And Mr. Millard. Dwight Millard: 240-2022. Jon G. Sanchez: Perfect. All right. We're talking about once again. When does a rental property stop being a good investment? So, Aaron, we made it really simple. Take your gross rents, subtract all the expenses. So you have a net true annual rent divided by the equity. That tells you your cash on cash return. Well, we didn't Aaron Clark, Edge Realty: Mm-hmm. Jon G. Sanchez: factor in, which we said clearly, but we are now the appreciation. How does that change the equation? Aaron Clark, Edge Realty: Well, I mean, you have to look at what the appreciation amount is. And if you're sitting there in a position where you might get, you know, three or four percent cash return versus another five percent annually because you have an appreciation, you're in a in a market that's increasing. So a lot of I a lot of clients I have have fifty five plus community rentals. They love Jon G. Sanchez: Yes. Aaron Clark, Edge Realty: them. and though people that move into those, they don't want to buy necessarily. So they have a pretty high rate of of return on equity side. And so if you're in a position like that where you have a 4% rental return versus like a 6% investment return, the owner potential has that cash flow plus appreciation plus principal Jon G. Sanchez: Mm-hmm. Aaron Clark, Edge Realty: reduction plus the tax benefits. And so leverage can dramatically affect the economics. So what we need to do is we have to sit down, crunch all the numbers, look at what the possibilities are. Look at projections for growth, increased equity, et cetera, and then make a determination whether or not it's worth selling or and pulling that equity, or maybe it's worth sitting there. And it's I mean, yes, it's just numbers, but also there is that emotional side. And sometimes w like when we sit down and find out your comfortability level, even though it might make more sense to do something, we're not gonna advise you to do something you're not comfortable with or you don't Jon G. Sanchez: Of course. Aaron Clark, Edge Realty: feel like you can handle. So if the numbers jive and you don't because you don't like it, that's okay. We'll we'll at least go over it and make you understand where you're sitting. Jon G. Sanchez: Correct me if I'm wrong. This is just my experience. In all my years of doing this, and when I run these numbers for my clients, I've never once used this formula of adding in a potential appreciation. Should we? Aaron Clark, Edge Realty: I mean, rule of thumb is you should never buy an investment property and take into consideration the potential equity increase because you're using it to generate residual income on a monthly basis. So you shouldn't technically, but at the same time, if you're really into the world of ten thirty one exchanges and you understand that equitable parlay, Jon G. Sanchez: Uh-huh. Aaron Clark, Edge Realty: and we can get a pretty good basis number for that, and we know we're going to sell. best story I have, I had a client. That had five rental properties. They were getting up there in age. They didn't want to deal with them anymore. We sold all of them. We bought a ca a gas station in Texas with an oil change lube shop on it. Now they make $20,000 a month in rent. They own the build they they own the building in the land, but all of it has a hundred-year lease with a company that's a well-known company out there. And they paid to build the building on it. They pay for all the maintenance, the hazardous material, everything. They just collect a check. That's all they do. They do nothing else. So Dwight Millard: Yeah. Aaron Clark, Edge Realty: We took that equity into consideration when we made that move because that was a big move. They were pulling money out Jon G. Sanchez: Absolutely. Aaron Clark, Edge Realty: of the Sparks and Reno area and putting it into Texas with strangers they've never met, never talked to, never anything. It was heavy. And all of it was under the restriction of a ten thirty one exchange timeline. And we completed it all. And they're they call me once a year, thanking me for that. Yeah. Jon G. Sanchez: Amazing. That that's a that's I bet they do. Great job. That Dwight Millard: Mm-hmm. Mm-hmm. Jon G. Sanchez: it and that's a great point you bring up because people think, you know, if I'm gonna do 1031, I'm gonna go from single family to single family. It doesn't work that way. You can as long as it's an investment related, you can raw land, commercial buildings, in this case, you Aaron Clark, Edge Realty: Isn't yeah. Mm-hmm. Dwight Millard: Mm-hmm. Mm-hmm. Mm-hmm. Jon G. Sanchez: know, a business like that. There it the the you know, I won't say the world's open to you, but think outside the box. And you as a great real estate professional, you thought outside the box and you got it done for your client. Look at the look at the Dwight Millard: and Jon G. Sanchez: great side of it. Good job, man. I love hearing those stories. Aaron Clark, Edge Realty: Yeah, yeah. Dwight Millard: Advanced Monopoly. Jon G. Sanchez: Yeah, there you Yep. Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: all right, guys. We got to wrap things up. excellent job, as always. fascinating topic. And once again, we unfortunately ran out of time, but we'll we'll pick this topic up again at another point. But the bottom line is this the numbers don't lie, right, guys? The numbers don't lie. So crunch the numbers, have your team crunch those numbers and then make your decision there. God bless everybody, have a great afternoon. We'll see you tomorrow on the John Sanchez show.