BawldGuy Audio Podcast

Defining capitalization rates by looking at local listings won’t help you at all. Most cap rates are fantasies at best.

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Transcript:   Let’s talk about cap rates today and what that means as capitalization rate. Let’s define it. All that is, is a net operating income of a property, divided by what you’re going to pay for it. What makes up a net operating income, NOI? All that is, is gross scheduled income, GSI, which is the income you expect for the year, real rents not projected. You take away a vacancy rate that you know is pretty spot-on because you researched it or your professional did. By the way, when you take away vacancy and the vacancy rate, from a gross scheduled income for the year, what’s left is what’s called gross operating income, GOI. Most people don’t even know that exists. Most pros don’t know that exists unless they’ve really been educated and trained at our old school. What comes after that is all the operating expenses are then subtracted, and you end up with a smoke-cleared, net operating income. That doesn’t take into account any loan payments you might have, so don’t get sucked in by that. A loan payment is not an operating expense. It’s what we call debt service. A payment is debt service. You’re servicing that loan. Let’s take a property that is selling for $100,000. The income from that property is $17,000 for the year. You look at vacancy rates, and you look at all the operating income, and you say you know what, we’re going to have a $10,000 net operating income for the year. You say that will give us a 10 percent capitalization rate, because remember, you’re taking that net operating income, $10,000 in this case, you’re dividing it by the purchase price, $100,000, and you get 10 percent. If you don’t get a percentage, you divided the wrong numbers. I know because I’ve seen you do it. Here’s the thing. Arriving at a cap rate is easy. Arriving at an accurate cap rate isn’t so easy. Here is the problem. Sellers all over the country will put their rental properties for sale, sometimes by owner. Sometimes, they hire Larry from their local real estate brokerage that sold their house for them. They think that he knows about investment property because he once bought a duplex back in ’89. What they do is they put an operating statement that says yeah, we’ve got $17,000 of gross rents, and we know this because here’s the leases. Okay, so far so good. When it gets to vacancies, they say that this neighborhood is so good that there are almost no vacancies. You can’t accept that. Even if it’s true, you can’t accept that. My rule is, when I used to teach analysis to other pros, is that you just chose 5 percent when you know it’s 5 percent vacancy rate, or anything less including almost 0. Use 5 percent. Nobody’s ever upset when it’s less. Here’s the deal. You’ve taken away your vacancy rate. Now you’re going down all the line items of the various operating expenses that apply to this property. One of the big ones is real estate taxes. That’s easy to get right down to the dollar. You just research it. There it is. The guy shows you his tax bills. If you know that they’re going to be reassessed upon sale, you know the formulas they’re using. It’s usually very transparent at the City Hall. You take care of it. Then you have property insurance. How hard is that to find out about? You talk to the Farmer’s Insurance or whoever you do business with, and you get a bid, and you compare it to the other guy and you take the one you like. Then you have repairs. You have maintenance. You have property management if you’re going to use that. You look at all those things, and you add them all up. You combine them with a vacancy rate figure, okay? What if the vacancy rate is 10 percent? That just means that your $17,000 a year scheduled rent is going to inflict $1,

Defining capitalization rates by looking at local listings won’t help you at all. Most cap rates are fantasies at best.

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Transcript:   Let’s talk about cap rates today and what that means as capitalization rate. Let’s define it. All that is, is a net operating income of a property, divided by what you’re going to pay for it. What makes up a net operating income, NOI? All that is, is gross scheduled income, GSI, which is the income you expect for the year, real rents not projected. You take away a vacancy rate that you know is pretty spot-on because you researched it or your professional did. By the way, when you take away vacancy and the vacancy rate, from a gross scheduled income for the year, what’s left is what’s called gross operating income, GOI. Most people don’t even know that exists. Most pros don’t know that exists unless they’ve really been educated and trained at our old school. What comes after that is all the operating expenses are then subtracted, and you end up with a smoke-cleared, net operating income. That doesn’t take into account any loan payments you might have, so don’t get sucked in by that. A loan payment is not an operating expense. It’s what we call debt service. A payment is debt service. You’re servicing that loan. Let’s take a property that is selling for $100,000. The income from that property is $17,000 for the year. You look at vacancy rates, and you look at all the operating income, and you say you know what, we’re going to have a $10,000 net operating income for the year. You say that will give us a 10 percent capitalization rate, because remember, you’re taking that net operating income, $10,000 in this case, you’re dividing it by the purchase price, $100,000, and you get 10 percent. If you don’t get a percentage, you divided the wrong numbers. I know because I’ve seen you do it. Here’s the thing. Arriving at a cap rate is easy. Arriving at an accurate cap rate isn’t so easy. Here is the problem. Sellers all over the country will put their rental properties for sale, sometimes by owner. Sometimes, they hire Larry from their local real estate brokerage that sold their house for them. They think that he knows about investment property because he once bought a duplex back in ’89. What they do is they put an operating statement that says yeah, we’ve got $17,000 of gross rents, and we know this because here’s the leases. Okay, so far so good. When it gets to vacancies, they say that this neighborhood is so good that there are almost no vacancies. You can’t accept that. Even if it’s true, you can’t accept that. My rule is, when I used to teach analysis to other pros, is that you just chose 5 percent when you know it’s 5 percent vacancy rate, or anything less including almost 0. Use 5 percent. Nobody’s ever upset when it’s less. Here’s the deal. You’ve taken away your vacancy rate. Now you’re going down all the line items of the various operating expenses that apply to this property. One of the big ones is real estate taxes. That’s easy to get right down to the dollar. You just research it. There it is. The guy shows you his tax bills. If you know that they’re going to be reassessed upon sale, you know the formulas they’re using. It’s usually very transparent at the City Hall. You take care of it. Then you have property insurance. How hard is that to find out about? You talk to the Farmer’s Insurance or whoever you do business with, and you get a bid, and you compare it to the other guy and you take the one you like. Then you have repairs. You have maintenance. You have property management if you’re going to use that. You look at all those things, and you add them all up. You combine them with a vacancy rate figure, okay? What if the vacancy rate is 10 percent? That just means that your $17,000 a year scheduled rent is going to inflict $1,

Plan on purposeful planning means just that. Have a plan — execute it on purpose. Oh, and ya might wanna add, ‘be boring’.

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Transcript:   You know, nothing has had more traction and more of a draw to the average investor than what I call Purposeful Planning because it hits people where they live, because they want to do things on purpose and they want to have a plan that points out what they should be doing. I want to just talk now about the most important part of anybody’s plan as far as I’m concerned as an advisor. You should look at your plan as not being exciting. The results should be very exciting. Retiring maybe sooner than you thought was possible or at least was maybe more income than you thought you might be getting, that’s exciting. On the journey to retirement, you want everything to be as boring as yesterday’s mud. You don’t want things to be exciting because 9 times out of 10 in my experience, and I’ve been doing this for a lot of years, excitement isn’t fun. It’s because things went awry. Things that Murphy brought into the picture. Now we all know what Murphy said: “If anything can go wrong, it will and at the perfectly wrong time.” It was a buddy he had named O’Toole. O’Toole’s corollary to Murphy’s Law was even better and I think more realistic. O’Toole said that Murphy was an optimist, and I think he’s right. In almost 45 years of being licensed, I have learned that not only if it can go wrong, it often will and at the most horrific time, but that a lot of times, even though you might have anticipated that possibility, you never really anticipate the potential consequences for how horrible they might be. When you’re boring in plan, everything’s vanilla, never any chocolate topping even, it’s just ice cream in a bowl with a spoon and you alone in the room. That’s the kind of boredom you want in your retirement plan. You’re not trying to be a pioneer. God forbid you’re being on the bleeding edge. Lord, I hate that, and this whole thing about well yeah, we’re thinking out of the box. Well, when you’re out of the box a lot, you’re alone. There’s the box because the box works. Nobody’s going to really ask you how you got to your retirement until they find out the income you created with your plan was way more than the average. When somebody says, “Well, you’re going to retire in six months, huh?” “Yeah, I am.” “Well, what’s going to be, if you don’t mind, I’m a good friend, what’s that going to be?” “Well, we’re going to be doing around $16,500 a month.” All conversation stops at that point, doesn’t it? Now they want to know how you made that happen. Make your plan boring but just make it dynamic. Use synergy whenever you can. Stay away from the cliff’s edge. Don’t walk close to any red lines, and just be boring. You do that for long enough and you’re going to retire better than 98% of Americans.

Plan on purposeful planning means just that. Have a plan — execute it on purpose. Oh, and ya might wanna add, ‘be boring’.

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Transcript:   You know, nothing has had more traction and more of a draw to the average investor than what I call Purposeful Planning because it hits people where they live, because they want to do things on purpose and they want to have a plan that points out what they should be doing. I want to just talk now about the most important part of anybody’s plan as far as I’m concerned as an advisor. You should look at your plan as not being exciting. The results should be very exciting. Retiring maybe sooner than you thought was possible or at least was maybe more income than you thought you might be getting, that’s exciting. On the journey to retirement, you want everything to be as boring as yesterday’s mud. You don’t want things to be exciting because 9 times out of 10 in my experience, and I’ve been doing this for a lot of years, excitement isn’t fun. It’s because things went awry. Things that Murphy brought into the picture. Now we all know what Murphy said: “If anything can go wrong, it will and at the perfectly wrong time.” It was a buddy he had named O’Toole. O’Toole’s corollary to Murphy’s Law was even better and I think more realistic. O’Toole said that Murphy was an optimist, and I think he’s right. In almost 45 years of being licensed, I have learned that not only if it can go wrong, it often will and at the most horrific time, but that a lot of times, even though you might have anticipated that possibility, you never really anticipate the potential consequences for how horrible they might be. When you’re boring in plan, everything’s vanilla, never any chocolate topping even, it’s just ice cream in a bowl with a spoon and you alone in the room. That’s the kind of boredom you want in your retirement plan. You’re not trying to be a pioneer. God forbid you’re being on the bleeding edge. Lord, I hate that, and this whole thing about well yeah, we’re thinking out of the box. Well, when you’re out of the box a lot, you’re alone. There’s the box because the box works. Nobody’s going to really ask you how you got to your retirement until they find out the income you created with your plan was way more than the average. When somebody says, “Well, you’re going to retire in six months, huh?” “Yeah, I am.” “Well, what’s going to be, if you don’t mind, I’m a good friend, what’s that going to be?” “Well, we’re going to be doing around $16,500 a month.” All conversation stops at that point, doesn’t it? Now they want to know how you made that happen. Make your plan boring but just make it dynamic. Use synergy whenever you can. Stay away from the cliff’s edge. Don’t walk close to any red lines, and just be boring. You do that for long enough and you’re going to retire better than 98% of Americans.

Strategies helping strategies almost always result in synergy.

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Transcript:   How many times have we all seen marketing material of some sort that praises the synergy that they create for their product or service? Synergy shouldn’t be a marketing term. It should be something that produces better results or maybe results that come sooner. That’s what I talk about when I say that your purposeful plan, if possible, should include some synergistic interaction between two or more strategies used simultaneously, and I only have two measuring sticks: either you got better results or you got really cool results sooner than most would using different strategies, or you got both, which happens more than people think. Synergistic use of multiple strategies is what often, if done correctly, executed wisely and for the right reason at the right time, can produce results far superior than using the old school ways of we’re going to do A first, then we’re going to do B, then C and on down the line. We don’t have to do that now. We have experience. I’ve learned from my mentors, my dad first among them, I’ve been doing this for 38 years since we opened up Brown and Brown Investment Properties in January of 1977. What we’ve learned is that not only can you develop portfolio A, and then portfolio B and then maybe even a C. You can use two or all three of those pillars of your retirement plan even though in and of themselves, all three might be standalone producers of retirement income, not reliant on the other two at all. While you’re getting to that retirement, you can use two or all three of those, to enhance each other so that it either happens more quickly or more as far as income and retirement, or the best of all, it happens sooner and more because that is much more better in my experience.

Strategies helping strategies almost always result in synergy.

Download Audio

 

Transcript:   How many times have we all seen marketing material of some sort that praises the synergy that they create for their product or service? Synergy shouldn’t be a marketing term. It should be something that produces better results or maybe results that come sooner. That’s what I talk about when I say that your purposeful plan, if possible, should include some synergistic interaction between two or more strategies used simultaneously, and I only have two measuring sticks: either you got better results or you got really cool results sooner than most would using different strategies, or you got both, which happens more than people think. Synergistic use of multiple strategies is what often, if done correctly, executed wisely and for the right reason at the right time, can produce results far superior than using the old school ways of we’re going to do A first, then we’re going to do B, then C and on down the line. We don’t have to do that now. We have experience. I’ve learned from my mentors, my dad first among them, I’ve been doing this for 38 years since we opened up Brown and Brown Investment Properties in January of 1977. What we’ve learned is that not only can you develop portfolio A, and then portfolio B and then maybe even a C. You can use two or all three of those pillars of your retirement plan even though in and of themselves, all three might be standalone producers of retirement income, not reliant on the other two at all. While you’re getting to that retirement, you can use two or all three of those, to enhance each other so that it either happens more quickly or more as far as income and retirement, or the best of all, it happens sooner and more because that is much more better in my experience.

Situational formulas, generally speaking, are reliable ’til the day they’re not. Your retirement is far to important for you to bank it on various formulas.

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Transcript:   All the time I get people that want to talk with me and the first thing out of their mouths is, you talk about EIULs for tax-free cash and retirement. An EIUL just stands for equity indexed universal life. It’s a type of insurance that’s not necessarily structured primarily for a death benefit, it’s for retirement income. It’s structured to be tax-free. Or those say, “Hey you talk about notes and getting them on a discount and all the ways you can buy it in your own name or in a tax-free envelope like a ROTH or even a normal, traditional IRA or 401k. You talk about real estate. When do you do what? Do you do all three?” There is no formula. There almost never is. One of the things that my dad taught me about formulas along with one of my oldest, oldest mentors was that almost any formula they’ve ever used successfully over time worked like a charm until the day it didn’t. I have had to learn that twice the hard way. I’m not learning again. When I tell people, “Look in general notes are great bought at a discount. Real estate, cash flow and retirement is superb. Get an EIUL and get tax-free income. Have a business and set up a solo 401k for small business owners. You can do this and that and the other, and it’s way better than what you’ve been doing.” Everything’s different for different folks. If you’re married with four children and you’re 38 years old, I’m not going to tell you the same thing. I tell the widower in Kansas getting ready to retire, all his kids are grown, he doesn’t need what you need. He needs some things that don’t make any sense for you. What we have to look at is the big picture. The first thing we do is to find out where you are now. That’s the most important thing to do first and there are no exceptions. You have to find out, not just, “Well here’s my point B, how do I get there?” Have you ever noticed when you’re going to get in your car or you’re going to go to the airport? You take a different way to Detroit from San Diego than you do from Sarasota, Florida. It’s funny how that works. If you don’t know you’re in Florida you’re going to try to drive northeast and you’re not going to get far. You’re going to have fun because you’re going to be on the beach. But you’re not going to get far. You have to look at, everybody is unique in the sense that, they might share factors with another person, another investor, even 80%. But man it’s that 20% difference that can just change your entire approach. Maybe not in the beginning but you can see 10 years down the road where you might have to change where the other guy wouldn’t. There’s this all kinds of reasons why certain people who have never invested in real estate and are at a certain age with a set of certain circumstances, should just not at least immediately maybe never buy real estate as an investment. Time is not on the older investor’s side. If they’re just getting started, their real goal, their point B is, “You know what I’m retiring in 11 years not 31 years, I need income and I need to build it to as large as it can possibly be safely in the next decade or so. Because if I fail doing that, I’m not going to be happy pointing to all the real estate I own that’s not enough for retirement.” Same thing with the EIUL. It’s really to point and say, “My son got an EIUL and when he is 60, it’s going to give him a $140,000 a year, tax-free for virtually the rest of his life.

Situational formulas, generally speaking, are reliable ’til the day they’re not. Your retirement is far to important for you to bank it on various formulas.

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Transcript:   All the time I get people that want to talk with me and the first thing out of their mouths is, you talk about EIULs for tax-free cash and retirement. An EIUL just stands for equity indexed universal life. It’s a type of insurance that’s not necessarily structured primarily for a death benefit, it’s for retirement income. It’s structured to be tax-free. Or those say, “Hey you talk about notes and getting them on a discount and all the ways you can buy it in your own name or in a tax-free envelope like a ROTH or even a normal, traditional IRA or 401k. You talk about real estate. When do you do what? Do you do all three?” There is no formula. There almost never is. One of the things that my dad taught me about formulas along with one of my oldest, oldest mentors was that almost any formula they’ve ever used successfully over time worked like a charm until the day it didn’t. I have had to learn that twice the hard way. I’m not learning again. When I tell people, “Look in general notes are great bought at a discount. Real estate, cash flow and retirement is superb. Get an EIUL and get tax-free income. Have a business and set up a solo 401k for small business owners. You can do this and that and the other, and it’s way better than what you’ve been doing.” Everything’s different for different folks. If you’re married with four children and you’re 38 years old, I’m not going to tell you the same thing. I tell the widower in Kansas getting ready to retire, all his kids are grown, he doesn’t need what you need. He needs some things that don’t make any sense for you. What we have to look at is the big picture. The first thing we do is to find out where you are now. That’s the most important thing to do first and there are no exceptions. You have to find out, not just, “Well here’s my point B, how do I get there?” Have you ever noticed when you’re going to get in your car or you’re going to go to the airport? You take a different way to Detroit from San Diego than you do from Sarasota, Florida. It’s funny how that works. If you don’t know you’re in Florida you’re going to try to drive northeast and you’re not going to get far. You’re going to have fun because you’re going to be on the beach. But you’re not going to get far. You have to look at, everybody is unique in the sense that, they might share factors with another person, another investor, even 80%. But man it’s that 20% difference that can just change your entire approach. Maybe not in the beginning but you can see 10 years down the road where you might have to change where the other guy wouldn’t. There’s this all kinds of reasons why certain people who have never invested in real estate and are at a certain age with a set of certain circumstances, should just not at least immediately maybe never buy real estate as an investment. Time is not on the older investor’s side. If they’re just getting started, their real goal, their point B is, “You know what I’m retiring in 11 years not 31 years, I need income and I need to build it to as large as it can possibly be safely in the next decade or so. Because if I fail doing that, I’m not going to be happy pointing to all the real estate I own that’s not enough for retirement.” Same thing with the EIUL. It’s really to point and say, “My son got an EIUL and when he is 60, it’s going to give him a $140,000 a year, tax-free for virtually the rest of his life.

Are most investors investing in the right regions? If they are, most of ’em are merely fortunate they happen to live in one of them.

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Transcript:   What we want to talk about today is how does a newbie investor get started, or maybe you’re not quite brand new in it. Maybe you have a rental that was your previous primary residence and you’re an investor by default. One of the things that I tell people is that before you do anything, kick back and check out your local market. Is it really worst investing in? Does it measure up to many areas of the country that might be superior and give you overall better results? Look it, we’re all investing for one reason for the most part. We’re investing to have a bigger net worth down the road, but mainly so that when we retire we have more income. The more income in retirement the better it is. We don’t want to spend our net worth. We want to spend our cash flow. Here’s the thing, first check out your market, and even more than that, spread that search out. Make it what I call a macro-analysis. Look at the region, however you may want to define that. For instance, I live in Southern California so I just would look at California in general. I look at California in general, how would they treat people who are landlords vs. tenants for instance. In San Diego, where I live, if you go to court as a landlord you are Satan’s child before you walk into the room. In other parts of the country that’s not true. They treat the contract as the pivotal factor in ruling in a landlord-tenant dispute. Now that’s just one thing. How does your region treat both income taxes for citizens and income taxes for business? How do they treat that? Let’s use California again. In California they tax anything that moves and half the things that don’t. If they can’t tax it they regulate it. California is not fond of investors. The only reason they like free enterprise business is because it provides tax money to the treasury. Now compare that, and before you go to another region for that comparison, look at what you found out. Now if you live in California what you’ll say is “Why would I invest in a place that is biased against landlords, the taxes are very, very high, they’re going into debt at an alarming rate, and all the things with regulations. Then you start digging a little deeper, going a few layers beyond that. You find out that it’s not just people that are leaving my state, it’s business. What’s the main thing business does from a citizen’s point of view? It employs them. We have jobs leaving California right and left. The latest one that will get your attention is the Toyota headquarters. They just moved to a city in Texas called Plano, or they announced it. If you find out all these things and you’re in another state somewhere in the country, and it gives you this bad taste in your mouth, then stop thinking about investing in your own market. I’ll tell you the number one reason that makes uncomfortable, because you want to be able to drive by, don’t you? That’s the worst reason to invest in real estate, because if it turns out well you lucked out if that was your driving force. What you have to understand is that you’re in it for the long haul, and if you’re long-term investing and you’re in a place like California you’re not going to win over the long haul, or at the very least you not going to do as well in a state that welcomes your capital as an investor, that welcomes businesses, that don’t overtax their citizens. In many state they don’t even have an income tax, where their courts are fair and they go by the contract, not each side of that contract.

Are most investors investing in the right regions? If they are, most of ’em are merely fortunate they happen to live in one of them.

Download Audio

 

Transcript:   What we want to talk about today is how does a newbie investor get started, or maybe you’re not quite brand new in it. Maybe you have a rental that was your previous primary residence and you’re an investor by default. One of the things that I tell people is that before you do anything, kick back and check out your local market. Is it really worst investing in? Does it measure up to many areas of the country that might be superior and give you overall better results? Look it, we’re all investing for one reason for the most part. We’re investing to have a bigger net worth down the road, but mainly so that when we retire we have more income. The more income in retirement the better it is. We don’t want to spend our net worth. We want to spend our cash flow. Here’s the thing, first check out your market, and even more than that, spread that search out. Make it what I call a macro-analysis. Look at the region, however you may want to define that. For instance, I live in Southern California so I just would look at California in general. I look at California in general, how would they treat people who are landlords vs. tenants for instance. In San Diego, where I live, if you go to court as a landlord you are Satan’s child before you walk into the room. In other parts of the country that’s not true. They treat the contract as the pivotal factor in ruling in a landlord-tenant dispute. Now that’s just one thing. How does your region treat both income taxes for citizens and income taxes for business? How do they treat that? Let’s use California again. In California they tax anything that moves and half the things that don’t. If they can’t tax it they regulate it. California is not fond of investors. The only reason they like free enterprise business is because it provides tax money to the treasury. Now compare that, and before you go to another region for that comparison, look at what you found out. Now if you live in California what you’ll say is “Why would I invest in a place that is biased against landlords, the taxes are very, very high, they’re going into debt at an alarming rate, and all the things with regulations. Then you start digging a little deeper, going a few layers beyond that. You find out that it’s not just people that are leaving my state, it’s business. What’s the main thing business does from a citizen’s point of view? It employs them. We have jobs leaving California right and left. The latest one that will get your attention is the Toyota headquarters. They just moved to a city in Texas called Plano, or they announced it. If you find out all these things and you’re in another state somewhere in the country, and it gives you this bad taste in your mouth, then stop thinking about investing in your own market. I’ll tell you the number one reason that makes uncomfortable, because you want to be able to drive by, don’t you? That’s the worst reason to invest in real estate, because if it turns out well you lucked out if that was your driving force. What you have to understand is that you’re in it for the long haul, and if you’re long-term investing and you’re in a place like California you’re not going to win over the long haul, or at the very least you not going to do as well in a state that welcomes your capital as an investor, that welcomes businesses, that don’t overtax their citizens. In many state they don’t even have an income tax, where their courts are fair and they go by the contract, not each side of that contract.