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Morris Invest: What is the 1% Rule for Real Estate Investing? - YouTube
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how to understand the 1% rule for real
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estate investing and what does that mean
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for your passive income every month
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that's today's show let's get to it
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hey everyone I'm Clayton Morris welcome
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to the investing in real estate show
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this is the show where we focus on
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building passive income and how we do
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that is with buy and hold real estate we
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find great real estate it's going to
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give us an enormous return on investment
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year after year after year and the idea
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is that we hold it for the rest of our
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lives that's what we focus on this
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channel specifically so if you're
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looking for other real estate talk if
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you want to learn about mobile home
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investing and you know giant commercial
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properties and investing in REITs
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rei t-- s and all that other kind of
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stuff or if you're interested in
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flipping houses that's not what you're
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going to find here we want to hold onto
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real estate in order to create great
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cash flow and increase our net worth for
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the rest of our lives today I want to
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talk about a tidge ethat I know it's
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something that my father-in-law uses to
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great effect and a lot of real estate
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investors use this as the standard by
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which they invest in real estate and
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that is the 1% rule so I want to dive
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into this today and help you understand
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a little bit about what this exactly
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means and what the 1% rule is now let me
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preface this by saying that you should
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never use this as the entire metric for
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your investing strategy so what I mean
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by that is yes it's a good way to kind
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of kickstart an ID and look and say
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yourself okay that sounds like it's
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going to be a good deal let me dive
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deeper so you only want to really use
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this as a jumping-off point in which to
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sort of figure out your real estate
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investing journey you don't want to just
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say yep that's it I'll I'll buy that
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property sold after you understand the
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1% rule again it's just a jumping-off
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place so let's dive into it what exactly
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is the 1% rule well at the basic level
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it just means that when you purchase a
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rental property or you purchase a piece
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of real estate that it should cash flow
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every month 1% up to 1% of the purchase
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price of that property now in round
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let's make it super simple so let's take
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for instance $100,000 property when you
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look at a $100,000 property that's the
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purchase price what are you going to get
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get out your handy little calculator can
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you anyone help me with the math real
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quick ding ding ding it's going to be
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$1,000 a month so the 1% rule on a
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property of a hundred thousand dollars
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in cost is $1,000 a month that's what it
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needs to cash flow in order for you to
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basically kind of breakeven and make
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sure that your investment isn't a bust
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now I know that many people use this to
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decide whether or not they're going to
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invest in real estate you may use this
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as your baseline metric deciding whether
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or not a deal is good or not I you know
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I'd like to go a little higher than that
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but that's because I'm going after cash
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flow but for a lot of investors 1
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percent is exactly where they want to be
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I've heard it on podcasts I've heard it
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I've seen it from real estate experts
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who I've witnessed I've been sitting in
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the audience listening to them and these
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are millionaires right who owned lots of
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properties around the world they follow
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the 1% rule to make sure that their
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property is in a cash flow 1% of the
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purchase price of that property so you
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can use that in your arsenal when you're
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deciding whether or not to buy a rental
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property the 1% rule now in terms of
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feasibility this is my process when sort
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of analyzing a set of properties what
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you want to look at though is not just
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the 1% so if it doesn't meet that 1%
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rule then I'm not going to buy it I'm
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gonna walk home I'm gonna walk away now
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a lot of investors I speak to you own a
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rental property that maybe you had in
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the family you lived in that property
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and then you moved to another property
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and you kept it I'm sure there's
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probably a lot of you listening right
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now raising your hands and yet that's me
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I have this townhouse that my wife and I
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had as our first property and we moved
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and we kept it and I'll ask them what is
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the return on investment very often they
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can't answer that
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well is it even hitting the 1% rule so
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you oh you bought it for a hundred
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thousand or you bought it for 80,000
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it's paid off great and it's only cash
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flowing maybe a hundred dollars above
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what you owe on it or maybe it you know
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you have to take in your expenses
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your taxes and all of the other things
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you're paying don't forget to include
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your home at your homeowners association
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so if you've got a townhome or a condo
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your HOA is going to eat into that 1%
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rule that's why I mean again the 1% is
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just a jumping-off point when you want
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to take it a step further and start to
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analyze that property and really get
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into the nitty-gritty we need to look at
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taxes we need to look at the HOA we need
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to look at your insurance costs as well
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and your property management costs so
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all those things need to be figured out
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before you just raise your hand and say
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yep I want to keep that property so if
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it does meet that 1% rule so when you're
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quickly analyzing a property if it does
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meet that 1% rule great then move on
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from there
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and run the numbers on the property I
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want you to start to check out what that
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cash flow will look like once you start
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to add in things like insurance and
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property taxes and things like that so
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again the 1% rule can be a really
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valuable mechanism to help you figure
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out just sort of as a
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back-of-the-envelope quick calculation
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is this property going to work for me
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I'm telling you though if it doesn't if
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for instance on that hundred thousand
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dollar property it's only going to
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cashflow eight hundred bucks a month
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walk away run for the hills
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because guess what when we start adding
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in taxes when we start adding in other
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factors repairs property management who
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knows what else you're going to be
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adding into that property then it's
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going to start to dwindle it down to
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zero next to nothing at least with a 1%
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buffer you know that you're probably
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going to be coming out on top and then
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you can analyze the deal from there some
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investors like to go up to 2% now if you
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go up to 2% chances are you're going to
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have a lot of other things to experience
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you're going to have a lot of other
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things to to fix up that if eclis it's
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going to be on properties that are a
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little bit less expensive like the ones
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that I like to buy so you get properties
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you know in the 40 50 thousand dollar
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range well yes you're going to Prabha
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and that's what I do so 15 20 thousand
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dollars of fixing up and then the total
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cost is $50,000 $45,000 so I might you
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know acquire the property for 25 and
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then I've got to put twenty twenty-five
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into it so okay great now can I hit the
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2 percent rule meaning you know it will
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then we'll the monthly rent be about two
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cent of the purchase price of the
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property and then you kind of move into
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those higher territory numbers these are
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incredibly difficult to find these types
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of properties and you've got to have a
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lot of smart pieces in place in order to
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make a 2% rule work for you we try to do
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that on every property that I do but
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it's incredibly difficult and by the way
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these properties are very hard to find
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especially in the good neighborhoods
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where you're going to have stable
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tenants
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good job growth and you're not going to
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have any headaches to worry about you're
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not buying them in a war zone right yeah
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you can go I had to somebody email me
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the other day and say hey I found a
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$3,000 property he was on some college
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campus somewhere I don't know what state
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and he just wanted some advice and I
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said well I need some more details than
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that right if it's $3,000 and it's been
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sitting there on the market for a long
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time and it's been kind of publicly seen
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by people chances are the thing should
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just be torn down
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I mean $3,000 what are you paying for
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really probably just the value of the
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land at that point so yeah that may
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sound like a great deal but then when
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you realize you've got to put $50,000
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into the house because all it is is a
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bombed out fire shell of a house I mean
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their houses in New Jersey near my house
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that I've seen that are literally shells
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their shells there they burned inside
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him it's like a like a candy shell you
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know you might as well just knock the
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whole thing down because it's worthless
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so you know when you're looking at those
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numbers yes you can find 2% properties
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they're very hard to find and they
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require a lot of work and they require a
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lot of education in order to make them
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get you that type of cash flow so you
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know if you're at 1% good if you can be
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a 1.5 percent
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great 2% yes that's great but you really
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have to take into a lot of consideration
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a lot of factors again these are just
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rules of thumb these are good
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jumping-off places and it's a good way
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for you to kind of quickly do a quick
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analysis when someone throws you a
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property and says hey I've got a
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property for 150,000 dollars it cash
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flows a thousand dollars I'm going to
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throw that out to you right now is that
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a good one here's the property it's
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you're going to buy it for a hundred and
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fifty thousand dollars it's going to
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cash flow 1,000 dollars a month
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ding-ding-ding-ding no I'll walk away
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from that in a heartbeat
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you know a hundred thousand one hundred
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and fifty thousand dollar house it's
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only in a cash flow a thousand bucks
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no thank you I'd rather buy three
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properties they're going to cash flow
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you know seven hundred eight hundred a
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month and I'll nearly triple that amount
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of cash flow so again just a quick back
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of the book analysis then it enables you
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to dive in a little bit more deeply and
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do some deeper research about the cash
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flow about the history of the property
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the homeowners association if there is
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one you know my feelings on homeowners
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associations I've got a whole series on
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what why I don't like condos and
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townhomes and those types of things
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because those special assessments by the
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condo association can come out of the
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blue and charge you you know annexed
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additional two thousand dollars to fix
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the roof on the whole complex which
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happened to me so you know I'm not a big
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fan of those but again that is the 1%
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rule it's a tool that a lot of investor
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you used to great effect in order to buy
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a rental property I know my
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father-in-law did it and when he found
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out that he could get great deals at you
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know 1% or above he was able to jump on
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those deals and invest quickly so that's
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it's a tool in your arsenal in order to
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help you invest in rental properties
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quickly I hope you found this useful you
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know these are things that we don't
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learn right away when we're investing in
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real estate but once you understand the
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things like 1% rule then it's always
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something you can keep in your pocket in
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your purse in your wallet that you can
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pull out in a moment's notice in order
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to analyze a deal and then take it from
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there I hope you found this helpful I
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know I found this helpful when I was
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first starting in real estate investing
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if you have any questions I would love
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to hear your thoughts if you're watching
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this on video please leave some comments
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in the thread below and ask any
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questions we always respond I would try
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to respond very very quickly to
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questions and thank you so much for
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subscribing and leaving all of your kind
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reviews as well I really really
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appreciate it we publish this show
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multiple times per week everyone we
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really try to help you go out there
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become a real estate investor we really
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want you to take action and to build
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legacy wealth for you and your family we
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want you to have all the tools here in
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order to do that much love to you all
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we'll see you next time here on the
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investing in real estate show bye
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everyone
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