Latest / Own More Doors / #28 Unlock Higher Returns with This Hidden Real Estate Strategy! (Lauren Capwell)

Transcript

#28 Unlock Higher Returns with This Hidden Real Estate Strategy! (Lauren Capwell) · Own More Doors

• 0:00
  SPEAKER_00: What's up everyone?
• 0:00
  SPEAKER_00: Juan Weezar here with the Own More Doors podcast.
• 0:03
  SPEAKER_00: This specific episode was first shared on our YouTube channel, Sage Real Estate.
• 0:08
  SPEAKER_00: Check it out.
• 0:08
  SPEAKER_00: And we're excited to bring it to you here.
• 0:11
  SPEAKER_00: We hope you enjoy the interview.
• 0:13
  SPEAKER_00: Cash flow is not king.
• 0:15
  SPEAKER_00: If you're a real estate investor or an apartment owner, you might be thinking that cash flow is king.
• 0:19
  SPEAKER_00: Well, today we're going to show you why that thought process is wrong and that actually you're losing money.
• 0:28
  SPEAKER_01: So today we're going to do a deep dive on the conversation about cash flow versus appreciation.
• 0:33
  SPEAKER_00: And we're going to be discussing a performance measure and investment strategy that a lot of investors truly don't know about, don't talk about, nor do they implement that otherwise would improve their overall yields on their investments.
• 0:46
  SPEAKER_00: Hi, I'm Juana Weezar, president of Sage Real Estate.
• 0:48
  SPEAKER_01: And I'm Lauren Capwell, sales specialist here with Sage Real Estate.
• 0:52
  SPEAKER_00: And let's dive right into it.
• 0:53
  SPEAKER_00: So a few common misconceptions that I see with apartment owners that have owned a property, you know, seven years or or longer is that they're making so much cash flow, why would they ever sell?
• 1:03
  SPEAKER_01: Right.
• 1:04
  SPEAKER_00: Part two of that is they've paid down their debt so much.
• 1:07
  SPEAKER_00: Why would they incur more debt?
• 1:09
  SPEAKER_00: And probably the third part is, yeah, my property is worth a lot now, but in order for me to buy something else, I'm gonna have to pay a lot.
• 1:16
  SPEAKER_00: Why would I do that?
• 1:17
  SPEAKER_00: So those are the three things that I commonly see.
• 1:19
  SPEAKER_00: It forces the owner to just do what?
• 1:22
  SPEAKER_00: Nothing.
• 1:23
  SPEAKER_00: Right?
• 1:23
  SPEAKER_00: They just sit there with their property, it's making good cash flow.
• 1:26
  SPEAKER_00: But today we're gonna highlight why sitting on your property and only focusing on cash flow is a real small piece of the puzzle.
• 1:34
  SPEAKER_00: And at the end of the day, you're leaving so much money on the table.
• 1:38
  SPEAKER_01: Yeah, that's exactly right.
• 1:39
  SPEAKER_01: I think one of the biggest things that people don't realize is that when they have those blinders on and they're only looking at the cash flow that their property is producing, you know, maybe you've owned your property for a while, maybe you've owned it for 10 years or longer.
• 1:50
  SPEAKER_01: I mean, you might have bought it like right after the crash, and so you got it by today's standards as a really good deal.
• 1:54
  SPEAKER_01: So compared to what you paid for it, to what it's cash flowing today, it seems really great.
• 1:58
  SPEAKER_01: But there's like a whole other piece of the puzzle, as you mentioned, that you're probably not seeing, and that is appreciation.
• 2:05
  SPEAKER_01: And so, like these cash flow blinders like keep investors looking at just this small piece, like this hyper focus, where there's actually a lot of money that gets left on the table at the end of the day because of appreciation and principal paydown and a couple of other concepts like leverage that we're gonna get into.
• 2:22
  SPEAKER_00: Next, we're gonna talk about return on equity because that's gonna summarize and we're gonna be able to show you what we're talking about.
• 2:27
  SPEAKER_00: So we're gonna get into this investment strategy that's gonna help you maximize your return.
• 2:30
  SPEAKER_00: And again, a lot of people don't know about it, don't talk about it, and certainly they don't implement it.
• 2:35
  SPEAKER_01: Yeah, so basically what happens is the longer that you own a property and the more equity that you build in that property, the lazier your money gets.
• 2:43
  SPEAKER_01: When you're an investor, like the way you wanna be thinking about it is you want your money to work hard for you.
• 2:48
  SPEAKER_01: And the longer that you hold a property, the lazier that your money gets in that property.
• 2:53
  SPEAKER_01: We're gonna do a deep dive on that and show you exactly how that works.
• 2:57
  SPEAKER_00: This investment strategy that the savviest investors, the what we call the pro investors, use is return on equity.
• 3:03
  SPEAKER_00: And let me give you guys an example.
• 3:05
  SPEAKER_00: So when someone buys a building, let's just say they put down$100,000 to acquire that property.
• 3:11
  SPEAKER_00: Well, after seven years, they still consider that$100,000 and they compare it to the amount of cash flow that the property is bringing in.
• 3:18
  SPEAKER_00: And if you do that analysis, the investment looks tremendous.
• 3:21
  SPEAKER_00: The one piece they're missing is that that$100,000 that they initially put in has now, through appreciation and debt pay down, has increased to call it$500,000.
• 3:32
  SPEAKER_00: And that is where we start the conversation of return on equity is let's look at all the equity that's been accumulated within the building.
• 3:38
  SPEAKER_00: And a lot of investors don't do that, Lauren.
• 3:40
  SPEAKER_00: And I don't know why that is, but today we're gonna kind of get into the nuts and bolts on how to calculate it, why it's important, and really if you want to maximize your investment, this is the one metric we need to focus in on.
• 3:52
  SPEAKER_01: So, what the heck is return on equity?
• 3:54
  SPEAKER_01: So we're gonna take a look at the formula.
• 3:56
  SPEAKER_01: How is this thing calculated?
• 3:58
  SPEAKER_01: And then we're gonna like really break it down and show you what it means and actually walk through a real life example that we're working through with one of our investors right now.
• 4:06
  SPEAKER_01: So, this is the formula for return on equity.
• 4:09
  SPEAKER_01: It's your total annualized return, basically the return that you get every year divided by the total equity that you have in the property.
• 4:19
  SPEAKER_01: What's your total annualized return?
• 4:21
  SPEAKER_01: It's made up of three different components.
• 4:22
  SPEAKER_01: First, you have your cash flow, then you have your principal paydown, and finally, you have appreciation.
• 4:28
  SPEAKER_01: That's the total annualized return.
• 4:30
  SPEAKER_01: Those are the three sources of return that you get on your property.
• 4:33
  SPEAKER_01: And then you take that number and you divide it by the total equity that you have in the property.
• 4:38
  SPEAKER_01: Your cash flow is all of the money that's coming into and going out of your bank account for that property.
• 4:44
  SPEAKER_01: So that includes all of your operating expenses, your taxes, your insurance, your mortgage payment, everything.
• 4:51
  SPEAKER_01: Next, you have principal paydown.
• 4:53
  SPEAKER_01: So that is the amount of your principal that you paid off this year.
• 4:56
  SPEAKER_01: Appreciation, that's the amount that your building has increased in value this year.
• 5:01
  SPEAKER_01: And finally, equity, that's the amount of cash that you would put into your pocket if you sold your building today.
• 5:07
  SPEAKER_01: Let's do a quick example.
• 5:09
  SPEAKER_01: All right, so the year is 2005.
• 5:13
  SPEAKER_01: You are an investor and you find a great deal on a property called 123 Forplex Street.
• 5:19
  SPEAKER_01: It's a fourplex that's listed on the market for$500,000.
• 5:23
  SPEAKER_01: You purchase it by putting 20% down.
• 5:26
  SPEAKER_01: So you put down$100,000 of your own money to purchase this building.
• 5:29
  SPEAKER_01: What was this building's return on equity when you bought it?
• 5:32
  SPEAKER_01: So again, it's your annual return, which is made up of those three components, divided by your total equity.
• 5:36
  SPEAKER_01: In your first year, you get$7,000 in cash flow,$6,000 of your principal gets paid down, and$26,000 of appreciation.
• 5:46
  SPEAKER_01: Now take that number and divide that by your total equity, which is$100,000 that you have, and that gives you a 39% return on equity.
• 5:55
  SPEAKER_01: Not bad.
• 5:56
  SPEAKER_01: Now, fast forward.
• 5:58
  SPEAKER_01: So time plus property improvements.
• 6:01
  SPEAKER_01: So here you are, you still own 1234plex street, and the year is now 2021.
• 6:06
  SPEAKER_01: You've made some improvements, you've upped the landscaping, maybe you've done a little remodeling.
• 6:10
  SPEAKER_01: The new market value for your property is$1.5 million, and you have$1.2 million in equity.
• 6:17
  SPEAKER_01: And that comes from the appreciation of the property and your principal paydown and your down payment.
• 6:22
  SPEAKER_01: So now here's your new return on equity for 2021 for this same property.
• 6:27
  SPEAKER_01: So rents have increased in Long Beach, oh, between 2005 and 2021.
• 6:31
  SPEAKER_01: You're now getting$52,000 a year cash flow.
• 6:35
  SPEAKER_01: You're getting a$13,000 principal pay down for the year, and your building this year also appreciated by$96,000.
• 6:43
  SPEAKER_01: Not bad.
• 6:43
  SPEAKER_01: So that's$161,000 that you're getting this year in return divided by your$1.2 million in equity.
• 6:50
  SPEAKER_01: That means you have a 13% return on equity.
• 6:53
  SPEAKER_00: Lauren, so that was a lot to digest.
• 6:55
  SPEAKER_00: Okay, so we're gonna go from 2005 return on equity is this really high 39%.
• 7:01
  SPEAKER_00: Fast forward to current time, 2021, and we're now down to 13%.
• 7:06
  SPEAKER_00: And the reason why this is the case is we have more equity in the property.
• 7:10
  SPEAKER_00: You have more money sitting there, and the amount of equity that we've increased is not making enough cash flow.
• 7:17
  SPEAKER_00: In this example, again, it's a real life case study that we're working on now, but it really applies to a lot of the folks that we service.
• 7:24
  SPEAKER_00: And their question typically is I bought my property for so little, it's worth so much, and I'm making$52,000 a year.
• 7:32
  SPEAKER_00: Why would I ever consider selling?
• 7:34
  SPEAKER_00: And that's where it stops, Lauren.
• 7:36
  SPEAKER_00: They stop because they don't know this full picture.
• 7:39
  SPEAKER_00: Right.
• 7:39
  SPEAKER_00: Right.
• 7:40
  SPEAKER_00: And so they look at the$52,000 and they think, I've made it.
• 7:43
  SPEAKER_00: This is the best use of my money.
• 7:46
  SPEAKER_00: But show us the next slide.
• 7:48
  SPEAKER_00: Is it really the best use of their money?
• 7:50
  SPEAKER_01: This is a chart that shows how your return on equity actually changes over time.
• 7:54
  SPEAKER_01: And you can see it's actually an exponential function.
• 7:57
  SPEAKER_01: It always goes down, it's always this shape.
• 7:59
  SPEAKER_01: What the exact numbers are vary from property to property.
• 8:01
  SPEAKER_01: But here is starting at 39 and going down to 13%.
• 8:05
  SPEAKER_01: And then you're just gonna slowly decrease down to 11 and so forth out into the future.
• 8:09
  SPEAKER_01: I think one thing that's really important to remember is like a huge part of your equity is appreciation.
• 8:14
  SPEAKER_01: And now this is where leverage comes in because when you borrow money from a bank, like you put in 100,000, the bank put in the other 400 when you purchased this property.
• 8:23
  SPEAKER_01: But what's appreciating is 100% of the property and 100% of the appreciation is yours.
• 8:29
  SPEAKER_01: So basically, like the bank is like paying 80% for you to get all of the appreciation.
• 8:35
  SPEAKER_01: And that's what I think most investors don't think about.
• 8:38
  SPEAKER_01: Let's take a look at what you can do uh with your$1.2 million in equity.
• 8:42
  SPEAKER_01: So you could do a 1031 exchange and you can trade up to 456 10plex Avenue.
• 8:49
  SPEAKER_01: And I think right here it's also a really good reminder like these are real actual numbers that we're working on with an investor right now.
• 8:55
  SPEAKER_01: 1234plex street is a real property, and so is 456 10plex Avenue.
• 9:01
  SPEAKER_01: 456 Tenplex Avenue has a market value of$4 million.
• 9:04
  SPEAKER_01: So you can take that$1.2 million that you have sitting over at 4plex Street, use that as your 30% down payment to get 456 10plex Avenue.
• 9:13
  SPEAKER_01: So in your first year, you're gonna get$27,000 in cash flow,$55,000 in principal pay down, and$246,000 in appreciation.
• 9:24
  SPEAKER_01: What Juan was pointing to and what most investors look at is they're just looking at like, okay, so if I keep Fourplex Street, I get$52,000 in cash flow.
• 9:33
  SPEAKER_01: But if I trade up, like, oh my gosh, like I'm gonna drop down to just$27,000 in cash flow.
• 9:38
  SPEAKER_01: Like, why on earth would I do that?
• 9:39
  SPEAKER_01: And the answer is because of the other numbers that are here, because of the appreciation and the principal paydown.
• 9:45
  SPEAKER_01: Now, instead of your$1.2 million generating a$160,000 return, it's generating a$330,000 return for you.
• 9:54
  SPEAKER_01: And that brings your return on equity up to 27%.
• 9:57
  SPEAKER_00: When we're talking about is your money making you money, this illustration is a perfect example of it.
• 10:03
  SPEAKER_00: Now, going back to cash flow not being king, going back to cash flow, it's just a small piece of the pie.
• 10:10
  SPEAKER_00: This is a perfect illustration.
• 10:11
  SPEAKER_00: And so where someone goes from making$52,000 cash flow down to$27,000 cash flow, most investors will stop there.
• 10:19
  SPEAKER_00: But what they're not looking at is the next piece of debt pay down.
• 10:22
  SPEAKER_00: So when you look at um the templex pay down, that's$55,000.
• 10:27
  SPEAKER_00: That is more than the cash flow that you're getting.
• 10:30
  SPEAKER_00: Now I know that an investor is gonna say, yeah, but I'm not getting that money.
• 10:33
  SPEAKER_00: But all that really is is just forced savings, right, Lauren?
• 10:36
  SPEAKER_00: So your annual return goes up, the return on equity goes up every single time that you trade up.
• 10:43
  SPEAKER_00: And a lot of those reasons are the property's gonna appreciate, you're gonna use positive leverage to your favor, right?
• 10:49
  SPEAKER_01: And I think actually this is the perfect time to talk about lazy money.
• 10:54
  SPEAKER_01: So this is what we mean when we say that your money gets lazy.
• 10:57
  SPEAKER_01: So for anybody who's read the book Rich Dad, Poor Dad, you know that treat your money like an employee.
• 11:01
  SPEAKER_01: You want it to be working hard for you.
• 11:03
  SPEAKER_01: Well, in the beginning in 2005, your money was working hard for you.
• 11:06
  SPEAKER_01: It was working really hard for you because it was getting you a 39% return on equity.
• 11:10
  SPEAKER_01: But by the year 2021, like this is what we mean when we say lazy money, because you have$1.2 million in equity that's only generating you a 13% return on equity, when it could be generating$330,000 as a return and a 27% return on equity.
• 11:28
  SPEAKER_01: So I think now this is a perfect time to address the concern of cash flow.
• 11:31
  SPEAKER_01: Because the other thing to remember is that what we're looking at here is 10plex Avenue in the year 2021.
• 11:36
  SPEAKER_01: This will be your first year of ownership, but cash flow goes up with time.
• 11:41
  SPEAKER_01: So this is a chart of annual cash flow and it compares 1, 2, 3, 4plex street with 456 10plex Avenue.
• 11:50
  SPEAKER_01: Fourplex Street is in gray, 10 Plex Avenue is in blue.
• 11:54
  SPEAKER_01: What you see is in the year 2021, like we talked about, and these are like the actual numbers, fourplex street is getting about$52,000 and 10plex is getting$27,000.
• 12:05
  SPEAKER_01: But by the year 2025, that is where 10plex Avenue in cash flow overtakes Fourplex Street.
• 12:13
  SPEAKER_01: If you can just wait those four years, and actually even in the year prior, 2024, you're almost at break-even between the two properties.
• 12:20
  SPEAKER_01: And then if you just look at where the graph goes from there, like if you're planning to own this property for like another 10 years, by the year 2031, I mean 10plex Avenue is crushing Fourplex Street.
• 12:32
  SPEAKER_01: So this is projecting out into the future, basically to help you make a decision today about how important is cash flow to you compared to all of these other factors.
• 12:41
  SPEAKER_01: And if cash flow is still important to you, I think that this is a really important graph to look at and to think about that just because on the first day that you purchase it, the first year, two, three, or sometimes maybe four of ownership, you're not getting as much cash flow.
• 12:54
  SPEAKER_01: You will.
• 12:55
  SPEAKER_01: The cash flow will catch back up and then far exceed what you were making before.
• 12:59
  SPEAKER_01: And not only what you're making before, but what you would otherwise be making that year if you still owned Fourplex Street.
• 13:04
  SPEAKER_01: So this is the total annualized return.
• 13:06
  SPEAKER_01: Now remember the annualized return, that's what's on the top side of the division sign.
• 13:09
  SPEAKER_01: It's made up of your annual cash flow, your annual principal paydown, and your annual appreciation.
• 13:15
  SPEAKER_01: And so you can think of each one of these bars as basically being like a little pie chart for that year that shows like what portion of your total annual return that you're getting from that property, what portion is made up by the cash flow, the principal paydown, or the appreciation.
• 13:29
  SPEAKER_00: Lauren, so one thing that stands out here, and I'll let you explain it, you know, the one color, the one part of the graph that keeps going up is appreciation.
• 13:37
  SPEAKER_00: It also makes the biggest component, right?
• 13:39
  SPEAKER_00: Yes.
• 13:39
  SPEAKER_00: So when we're telling the folks, our viewers, that cash is really not king, we're showing them.
• 13:45
  SPEAKER_00: Yes.
• 13:45
  SPEAKER_00: We're showing them it's that it's appreciation that that is king and really trumps anything else that you're comparing it to.
• 13:52
  SPEAKER_00: Because when I look at that graph, where you're seeing the biggest jumps is with appreciation, not on cash flow.
• 13:58
  SPEAKER_01: Exactly.
• 13:59
  SPEAKER_01: Let's go ahead and scale this down and compare it to 456 10plex Avenue.
• 14:04
  SPEAKER_01: Notice that all of the bars on four Plex Street just got a little bit shorter.
• 14:08
  SPEAKER_01: And that's because I just put them on the same scale as 10 Plex Avenue, where basically your total annual return, the scales both go from$0 to$1.6 million.
• 14:17
  SPEAKER_01: So now this is an apples to apples comparison.
• 14:20
  SPEAKER_01: And this is what we're talking about when we say that if you're just focusing on cash flow, this is all of the money that you're leaving on the table.
• 14:27
  SPEAKER_01: This is all of the money that could be going basically like into your total net worth that you're just not taking.
• 14:32
  SPEAKER_01: And so that's what I sit mean when I say the most money that you'll ever lose is the money that you didn't make.
• 14:39
  SPEAKER_01: Basically, the chart on the right, 10 Plex Avenue, like that's the money that you're not making by holding on to a property that you've had for seven years, 10 years.
• 14:48
  SPEAKER_00: So so for someone who doesn't want to take the risk, right?
• 14:51
  SPEAKER_00: And they're just, it's easy it's an easier decision to just not do anything.
• 14:55
  SPEAKER_00: What they're losing or they're passing up on is the the the opportunity to double their appreciation, really is what the graph is showing me.
• 15:03
  SPEAKER_01: Yeah, so the rate of appreciation will be the same across the buildings.
• 15:07
  SPEAKER_01: However, it's because 10 Plex Avenue is just such a bigger property and worth so much more.
• 15:14
  SPEAKER_01: It's like, would you rather have like a 6% slice of a small pie or a 6% slice of a really big pie?
• 15:21
  SPEAKER_01: Like which slice is bigger?
• 15:22
  SPEAKER_01: And this is not a trick question.
• 15:23
  SPEAKER_00: It's right.
• 15:24
  SPEAKER_00: Yeah.
• 15:25
  SPEAKER_00: So what we're talking about is that you have a vehicle here that's much larger that's appreciating at the same rate.
• 15:30
  SPEAKER_00: A few of our savvy investors will tell us every property is gonna double every 10 years.
• 15:36
  SPEAKER_00: So if you have a million dollar property, it's gonna go to two.
• 15:39
  SPEAKER_00: But if you have a four million dollar property, it's gonna go to eight, right?
• 15:43
  SPEAKER_00: In the same amount of time.
• 15:44
  SPEAKER_00: And that's where we're talking about appreciation, is the number one thing that we should be focusing in on if you're in a position where time is on your side.
• 15:53
  SPEAKER_01: Yeah, I think that's where a lot of people can get really tripped up is the difference between when you're talking about something as a percentage versus when you're talking in absolute numbers.
• 16:02
  SPEAKER_01: So what these charts are showing you are the absolute numbers.
• 16:06
  SPEAKER_01: So these properties, the way that I've set up these charts, they're both appreciating at a rate of 6% per year.
• 16:11
  SPEAKER_01: However, it's because 10plex Avenue is a larger property, the number of dollars, the number of absolute dollars it's appreciating is significantly more than fourplex street.
• 16:22
  SPEAKER_01: Okay, so just to recap, if you've owned your property for more than about seven years and you're not trading up, you are leaving a lot of money on the table.
• 16:31
  SPEAKER_01: Number two, cash flow is not king.
• 16:34
  SPEAKER_01: Appreciation is king.
• 16:36
  SPEAKER_01: And point number three is that appreciation is even better when you use the bank's money to do it, when you leverage.
• 16:42
  SPEAKER_01: That's where you get the maximum return on equity.
• 16:46
  SPEAKER_00: And what we wanted to show you today by highlighting return on equity is to show you what the pros, the pros who are maximizing their wealth and putting themselves in a position for these massive returns, this is what they're doing, is they're analyzing return on equity.
• 16:58
  SPEAKER_00: If this is the first time you've heard of this, this is the real way you should be looking at your property every single year.
• 17:05
  SPEAKER_00: What do I do with my money?
• 17:06
  SPEAKER_00: Is my money working as hard as it should?
• 17:09
  SPEAKER_00: And if you would like, if you're interested, please feel free to reach out to us.
• 17:13
  SPEAKER_00: We could do this exact same analysis for your specific property.
• 17:16
  SPEAKER_00: And it won't be us, the real estate brokers, trying to sell you on something, it'll be the data showing you so that you can put yourself in a situation for exponential growth.