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What If Your “Cash Flow” Is Pretend Money · Military Real Estate Rookie Show

• 0:00
  SPEAKER_00: Hello, welcome to the Military Real Estate Ricky Show.
• 0:03
  SPEAKER_00: I'm your host, Rena.
• 0:05
  SPEAKER_00: Today's topic is about deal looking good until you run the numbers.
• 0:11
  SPEAKER_00: Seven real estate investment mistakes that can cost you thousands of dollars.
• 0:17
  SPEAKER_00: And this episode is important because if you're trying to buy a house or you're thinking about buying a house, this episode is for you.
• 0:25
  SPEAKER_00: We're gonna get into the examples or running the numbers, all the things, so you guys can be very educated when it comes to buying real estate.
• 0:36
  SPEAKER_00: Okay, so let me ask you a question.
• 0:38
  SPEAKER_00: You find a house for$200,000, the neighborhood looks good, right?
• 0:43
  SPEAKER_00: And the house looks even better.
• 0:45
  SPEAKER_00: And the rent looks good on your numbers, right?
• 0:49
  SPEAKER_00: And you, somebody tells you, I want this house.
• 0:54
  SPEAKER_00: Girl, this is a deal.
• 0:55
  SPEAKER_00: Get this house, right?
• 0:57
  SPEAKER_00: So you start getting excited, you're ready, already think about the rent checks, you're already calculating how much money you're gonna make.
• 1:05
  SPEAKER_00: Maybe you're even thinking about, I'm about to become a real estate investor.
• 1:10
  SPEAKER_00: Yay! Well, hold on.
• 1:12
  SPEAKER_00: You got to run the numbers and you got to make sure this is the right property for you.
• 1:16
  SPEAKER_00: Okay, so close, because this is a problem, right?
• 1:19
  SPEAKER_00: A property can look like a great deal and still lose money.
• 1:23
  SPEAKER_00: And that's what we're talking about today.
• 1:26
  SPEAKER_00: Welcome to the Military Real Estate Rookie Show.
• 1:28
  SPEAKER_00: I'm your host, Rena.
• 1:30
  SPEAKER_00: This podcast is where we think about real estate investing, home ownership, and building wealth, especially for the military members, veterans, and people who are going to get started, right?
• 1:40
  SPEAKER_00: So, this is for mostly everybody, right?
• 1:43
  SPEAKER_00: I'm your host, Rena, Rena Barron.
• 1:45
  SPEAKER_00: Today we're talking about seven real estate investment mistakes that can cost you thousands of dollars.
• 1:51
  SPEAKER_00: And I'm going to give you something even better.
• 1:54
  SPEAKER_00: We're going to run the numbers because around here, we don't just ask what the rent is, we run the numbers.
• 2:01
  SPEAKER_00: We look at all the blueprint, we look at what is left after everything.
• 2:08
  SPEAKER_00: So let's get started.
• 2:10
  SPEAKER_00: All right, so mistake number one: only looking at the rent.
• 2:14
  SPEAKER_00: This is probably one of the biggest rookie mistakes that you can do as a real estate investor.
• 2:19
  SPEAKER_00: You find a property, the mortgage is going to be$1,400.
• 2:23
  SPEAKER_00: Great.
• 2:24
  SPEAKER_00: The rent is$2,000, even better.
• 2:27
  SPEAKER_00: And you're thinking, I'm making$600 a month.
• 2:30
  SPEAKER_00: Woo-hoo, not so fast.
• 2:32
  SPEAKER_00: You're not including some of the most important things that go along with that rent payment, right?
• 2:37
  SPEAKER_00: So, what about the property taxes, insurance, maintenance, vacancy, property management, HOA fees, landscaping, pest control, repairs, utilities that you might be responsible for, turnover, and unexpected expenses?
• 2:54
  SPEAKER_00: That$600 can disappear pretty quickly.
• 2:57
  SPEAKER_00: So instead of asking, how much rent can I collect, you need to ask, what is my actual net cash flow?
• 3:06
  SPEAKER_00: What is left after all these expenses are paid?
• 3:11
  SPEAKER_00: And that's the number that really matters.
• 3:13
  SPEAKER_00: So, mistake number two is forgetting the vacancies.
• 3:18
  SPEAKER_00: Let's say your property rents for$2,000 a month.
• 3:21
  SPEAKER_00: You calculate$2,000 times$12 is$24,000 a year.
• 3:26
  SPEAKER_00: Good money.
• 3:27
  SPEAKER_00: Looks great.
• 3:27
  SPEAKER_00: But what happens if the property sticks vacant for one month, two months, three months?
• 3:33
  SPEAKER_00: Now you're at$22,000,$44,000, and the number gets bigger, and you still have expenses that you must pay.
• 3:40
  SPEAKER_00: The mortgage doesn't stop because the tenant moved out.
• 3:43
  SPEAKER_00: The insurance company doesn't say, Oh, you just have to wait, we'll wait till the tenant uh moves in, we'll skip them off.
• 3:49
  SPEAKER_00: No, you have to pay this according to the rules and regulations of what you sign on that dollar line when you purchase this property.
• 3:56
  SPEAKER_00: The bills keep coming, guys.
• 3:58
  SPEAKER_00: So investors need to plan for vacancies.
• 4:01
  SPEAKER_00: Your property isn't guaranteed to be occupied 365 days a year, you know.
• 4:07
  SPEAKER_00: So you must have that reserve, and we'll get into that.
• 4:11
  SPEAKER_00: Okay, so mistake number three: ignore maintenance.
• 4:15
  SPEAKER_00: Here's one of the biggest ones as well when you're here to buy real estate and you're going to be a real estate investor.
• 4:21
  SPEAKER_00: Everything works perfectly until it doesn't.
• 4:25
  SPEAKER_00: The HVAC, the HVAC breaks, the water heater goes, the plumbing backs up, the appliances die.
• 4:34
  SPEAKER_00: You know, a tenant calls you at 10:30 at night.
• 4:36
  SPEAKER_00: Hey, I've got a toilet that's overflowing, and I need to get this fixed ASAP.
• 4:42
  SPEAKER_00: This is why investors need reserves.
• 4:45
  SPEAKER_00: You don't want one major repair to completely destroy your investment plan.
• 4:51
  SPEAKER_00: A property can positively cash flow on paper and still create a major cash problem.
• 4:59
  SPEAKER_00: When a large property, when a large repair happens, you need that cash flow.
• 5:04
  SPEAKER_00: That's why cash flow is very important.
• 5:06
  SPEAKER_00: Cash flow and cash reserve is very important.
• 5:10
  SPEAKER_00: Okay, mistake number four: buying because the price is cheap.
• 5:15
  SPEAKER_00: Let's talk about this one.
• 5:17
  SPEAKER_00: It's only$150,000.
• 5:20
  SPEAKER_00: Okay, but why?
• 5:21
  SPEAKER_00: Why is it that low?
• 5:23
  SPEAKER_00: A cheap property isn't automatically a good investment.
• 5:26
  SPEAKER_00: Maybe it needs$30,000 in repairs.
• 5:30
  SPEAKER_00: Maybe the neighborhood has weak rental demands.
• 5:33
  SPEAKER_00: Maybe insurance is very expensive.
• 5:36
  SPEAKER_00: Maybe the property has structural damage.
• 5:39
  SPEAKER_00: Maybe there are title problems.
• 5:41
  SPEAKER_00: And maybe the property is difficult to finance.
• 5:44
  SPEAKER_00: Maybe there's a reason no one wants it.
• 5:47
  SPEAKER_00: The purchase price is just one number.
• 5:49
  SPEAKER_00: The deal is the entire picture.
• 5:52
  SPEAKER_00: It's the whole blueprint.
• 5:54
  SPEAKER_00: Okay?
• 5:55
  SPEAKER_00: So, mistake number five, underestimating repairs.
• 6:00
  SPEAKER_00: Let's say you have a$180,000 house and you think I'll put about$10,000 into it.
• 6:06
  SPEAKER_00: And then the contractor says, actually, it's going to be$20,000.
• 6:09
  SPEAKER_00: And then you also found$25,000 to put in there.
• 6:13
  SPEAKER_00: And then you probably like, what?
• 6:14
  SPEAKER_00: And then you probably want to place that too.
• 6:16
  SPEAKER_00: And now it's up to$35,000 and it gets even bigger.
• 6:20
  SPEAKER_00: This is why investors need to conduct a due diligency, right?
• 6:25
  SPEAKER_00: Inspection, a real repair inspection, right?
• 6:29
  SPEAKER_00: HVAC, you know, all the appliances, all of that.
• 6:33
  SPEAKER_00: Because at the end of the day, you're going to be responsible for all of this.
• 6:36
  SPEAKER_00: Don't create your investment strategy using best case scenarios.
• 6:42
  SPEAKER_00: Run the numbers.
• 6:43
  SPEAKER_00: Use realistic assumptions.
• 6:46
  SPEAKER_00: Then ask, what happens if things cost more than I expected?
• 6:50
  SPEAKER_00: You need a plan A, B, and C.
• 6:52
  SPEAKER_00: Okay.
• 6:53
  SPEAKER_00: So moving on to mistake number six, not calculating the cost of selling.
• 7:01
  SPEAKER_00: Here's one thing that people forget is they calculate the purchase price, like I said, plus real estate investing, plus the renovation, and then think I'm going to sell for$300,000 and make$50,000 profit.
• 7:16
  SPEAKER_00: Hold on.
• 7:17
  SPEAKER_00: What does it cost to sell?
• 7:19
  SPEAKER_00: Potential expenses can include real estate commission, real estate closing costs, seller concessions, repair costs, taxes, other transaction expense.
• 7:32
  SPEAKER_00: And if you finance this property, you also need to consider the remaining loan balance.
• 7:37
  SPEAKER_00: And gross profit isn't necessarily your net profit.
• 7:41
  SPEAKER_00: And that's a mistake, important distinction between your net profit and your gross profit.
• 7:47
  SPEAKER_00: Okay.
• 7:48
  SPEAKER_00: So just be mindful of that.
• 7:50
  SPEAKER_00: Now, moving on to mistake number seven: falling in love with the property.
• 7:54
  SPEAKER_00: This is can be very dangerous because investors sometimes walk into a property and say, I love it.
• 8:00
  SPEAKER_00: That's great.
• 8:01
  SPEAKER_00: But your investment property doesn't need to make your emotions high.
• 8:05
  SPEAKER_00: It doesn't need to meet those.
• 8:07
  SPEAKER_00: It needs to make financial sense.
• 8:10
  SPEAKER_00: Your personal dreams come home.
• 8:12
  SPEAKER_00: Investment property may be two completely different things.
• 8:16
  SPEAKER_00: So you might love the kitchen, the flooring, the paint, the neighborhood, the backyard.
• 8:21
  SPEAKER_00: But who does your tenant care about these things?
• 8:25
  SPEAKER_00: You know, they they may care about location, price, bedrooms, bathroom, parking, transportation, schools, amenities.
• 8:34
  SPEAKER_00: You're not necessarily buying the property for you, you're buying it for investment, for a strategy.
• 8:41
  SPEAKER_00: So let's run the numbers again.
• 8:43
  SPEAKER_00: Let's pretend you bought a property for$250,000 and it rents for$2,200 a month.
• 8:52
  SPEAKER_00: That is about$26,400 annual gross rent.
• 8:56
  SPEAKER_00: Sounds good, right?
• 8:57
  SPEAKER_00: Really good.
• 8:58
  SPEAKER_00: Now let's start subtracting the expenses, the mortgage, the property taxes, you know, the insurance, the maintenance, the vacancy, the management.
• 9:06
  SPEAKER_00: If you have it, the HOA.
• 9:08
  SPEAKER_00: Let's say after all the expenses, the actual projected cash flow is significantly less than that initial$22 difference that you said.
• 9:18
  SPEAKER_00: And that's why you cannot look at rent minus mortgage equal property.
• 9:22
  SPEAKER_00: That's not the complete cash calculation.
• 9:25
  SPEAKER_00: You need to account for full operating picture.
• 9:29
  SPEAKER_00: Now, let's get into that full operating picture.
• 9:32
  SPEAKER_00: This is a rookie investor formula that I want you guys to understand.
• 9:36
  SPEAKER_00: Now I'm gonna go through the steps, okay?
• 9:38
  SPEAKER_00: So here it is.
• 9:39
  SPEAKER_00: Here's a simple framework.
• 9:41
  SPEAKER_00: Step number one, calculate your total acquisition cost.
• 9:44
  SPEAKER_00: How much did it buy?
• 9:45
  SPEAKER_00: How much did the purchase price plus all the closing costs and all the other costs cost you to buy this property?
• 9:52
  SPEAKER_00: Step number two, calculate your renovation costs.
• 9:55
  SPEAKER_00: Be realistic.
• 9:56
  SPEAKER_00: It happens, it's going to happen.
• 9:57
  SPEAKER_00: So you need to calculate that.
• 9:59
  SPEAKER_00: Step number three, estimate your monthly rental income.
• 10:03
  SPEAKER_00: I mean everything.
• 10:04
  SPEAKER_00: Use realistic market data, not your hopes of how much you're gonna make.
• 10:09
  SPEAKER_00: Step number four, calculate your operating expenses, taxes, insurance, maintenance, management, HOA vacancies, other recurring expense is going to happen.
• 10:21
  SPEAKER_00: And then step number five, calculate your financing costs, mortgage payment, interest, and any other loan expense that was a part of the loan.
• 10:29
  SPEAKER_00: And then step number six, calculate your cash flow, income minus expenses.
• 10:34
  SPEAKER_00: And then step seven, do the stress test, the deal.
• 10:38
  SPEAKER_00: What if certain things happen?
• 10:40
  SPEAKER_00: What if the rent is lower?
• 10:41
  SPEAKER_00: What if the repairs are higher?
• 10:43
  SPEAKER_00: Whether property sits vacant for a number of months, what if insurance increase?
• 10:47
  SPEAKER_00: You know, what is what is the uh major repair that probably would break if the deal completely falls apart under realistic stress?
• 10:56
  SPEAKER_00: You need to know that before you buy.
• 10:59
  SPEAKER_00: So, with that, I hope that helps with that stress test because it's very important as you go through all those scenarios so you can make sure that you actually are, you know, realizing that these things will happen.
• 11:11
  SPEAKER_00: Now, now let's talk about my military family.
• 11:15
  SPEAKER_00: One thing about real estate is that military members may have an opportunity to build wealth through real estate over time, as we talked about over and over again.
• 11:24
  SPEAKER_00: But here's the key: don't buy your investment property just because you're a veteran.
• 11:29
  SPEAKER_00: Your military status doesn't make a bad deal, and it doesn't make a good deal.
• 11:33
  SPEAKER_00: Your financing doesn't make a bad property, a good property.
• 11:37
  SPEAKER_00: And your BA benefits doesn't eliminate investment stress.
• 11:42
  SPEAKER_00: The strategy here is to have to make the have it make sense to you.
• 11:46
  SPEAKER_00: If you're going to move because of PCS and you need to think about what's happening to the property, can you rent it?
• 11:53
  SPEAKER_00: You know, what are the expenses?
• 11:54
  SPEAKER_00: You know, who's going to manage it, and how much cash should you keep in reserve?
• 11:59
  SPEAKER_00: Those are the things that you need to think beyond the purchase.
• 12:02
  SPEAKER_00: You know, and here's my rules for today's episode.
• 12:05
  SPEAKER_00: Never fall in love with a real estate deal before you run the numbers.
• 12:09
  SPEAKER_00: The house doesn't care about your feelings, the spreadsheet doesn't care about your feelings, and the mortgage company definitely don't care about your feelings.
• 12:17
  SPEAKER_00: So before you say this is a great deal, prove it.
• 12:22
  SPEAKER_00: You know, run the numbers and all the things I said before, you know, and I created this checklist because I want to make sure that you guys understand that when you go in and run these numbers, so remember this, right?
• 12:34
  SPEAKER_00: Before you buy an investment property, ask yourself, what's the purchase price?
• 12:38
  SPEAKER_00: What's the realistic rent?
• 12:40
  SPEAKER_00: Not your dream wish, but realistic rent.
• 12:43
  SPEAKER_00: What are the property taxes?
• 12:45
  SPEAKER_00: You know, what is the insurance cost?
• 12:47
  SPEAKER_00: What is the estimated maintenance?
• 12:50
  SPEAKER_00: What is the vacancy assumption?
• 12:52
  SPEAKER_00: And will I use this property management?
• 12:55
  SPEAKER_00: Are the HOA fees realistic?
• 12:58
  SPEAKER_00: Are there some restrictions?
• 13:00
  SPEAKER_00: And what are the repairs that are needed?
• 13:03
  SPEAKER_00: And how much cash will I have left after closing?
• 13:07
  SPEAKER_00: And the big question is: if something goes wrong six months from now, can I afford it?
• 13:12
  SPEAKER_00: If the answer is no, you need to stop.
• 13:14
  SPEAKER_00: You need to run the numbers again, and you need to do it all over again.
• 13:17
  SPEAKER_00: Because once you sign on that dollar line for a loan or you pay cash for this property, it belongs to you.
• 13:24
  SPEAKER_00: So, my military members and then all the other community people that I have watching my show and listening, now I want to hear from you.
• 13:32
  SPEAKER_00: Are you thinking about buying your first rental property?
• 13:35
  SPEAKER_00: Do you have only, do you already own one?
• 13:39
  SPEAKER_00: You know, are you trying to figure out whether a property is actually a good deal?
• 13:44
  SPEAKER_00: Send me your questions.
• 13:45
  SPEAKER_00: And if you're listening to this episode with somebody who always saying, I found a great investment property, send them this episode and tell them, okay, show me the numbers.
• 13:56
  SPEAKER_00: Help them out, guys.
• 13:57
  SPEAKER_00: And don't forget to follow me or subscribe to my Military Real Estate Ricky podcast and leave a review and share this episode because you never know the person you share this with could be calculating from avoiding a very expensive mistake.
• 14:13
  SPEAKER_00: Okay, so real estate investment isn't about building the prettiest property, it's about finding the cheapest house.
• 14:20
  SPEAKER_00: It's not about to find the cheapest house.
• 14:22
  SPEAKER_00: No, and it's definitely not about believing everyone would get rich with real estate stories you see online, right?
• 14:29
  SPEAKER_00: It's about understanding the numbers and understanding the mistakes and understanding the risks and the mortgage and the market and having a plan.
• 14:38
  SPEAKER_00: So I hope this episode helped you all.
• 14:41
  SPEAKER_00: And my name is Rena Barron, your host of Military Real Estate Rookie.
• 14:45
  SPEAKER_00: Thank you for listening.
• 14:46
  SPEAKER_00: And if you got something out of this episode today, follow my podcast, Military Real Estate Rookie.
• 14:51
  SPEAKER_00: Leave a review and share it with another rookie investor.
• 14:54
  SPEAKER_00: And remember, don't just buy real estate, understand real estate, and I'll see you on the next episode.
• 15:00
  SPEAKER_00: Military Real Estate Rookie out.