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Keys to Understanding Real Estate Cashflow - YouTube
Channel: Ken McElroy
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I'm Ken McElroy with Ken McElroy comm so
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what happens a lot of times when people
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are trying to buy real estate is they
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focus on the price and while I totally
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understand that you need to look at the
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price the price is not necessarily the
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first thing to look at what we're trying
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to do here was right we're trying to buy
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real estate that cash flows we're not
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trying to buy real estate that goes up
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in value massively and sell it because
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if we sell it we have a lot of tax and
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we're trying to avoid tax so most of our
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investors when I started out it was just
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my money and eventually I ran out of
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money so maybe like a lot of you where
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you use your own money buy one thing
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then you use your own money to buy a
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second thing and eventually that money
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runs out so you have to learn how to
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raise money so this video will also help
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you understand how to raise capital
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because people that invest in you they
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also invest in the deal
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so they invest in you as the management
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team and they want to know who you are
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what your track record is and what kind
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of team you've generated but more
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importantly that's a check the box but
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they really want to know does the deal
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cash flow does a cash flow or you're
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trying to time the market most deals are
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trying to time the market that's why if
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you learn this information you'll have a
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huge competitive advantage if you can
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understand how to put people's money to
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work generate massive income create
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massive value and then give it back to
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them tax-free you'll have investors for
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life so that's what I'm going to teach
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you now so the very first thing that
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we're gonna go through are some of the
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very basics that you need to review on
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every single deal so every single deal
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has four components the first one it's
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very simple its income no income can
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come in many forms so let's say that
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you're a flower shop your income are the
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people that walk in and buy flowers
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if you're an apartment building there
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your renters they come in and they pay
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you rent that's your form of income for
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a reoccurring business model on the
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internet it might be a subscription base
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of $9.99 or $29.99 a month you know for
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Amazon you know it's selling products
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right so so every and for Starbucks its
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selling coffee so income is income and
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you personally have your own income it's
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called a paycheck for a lot of use so
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when you go to work and every two weeks
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you get your paycheck that's your income
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so it's really not a complicated subject
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but in this particular case income for
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me primarily our renters and so so I
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focus entirely on renters and what I'm
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trying to do here is I'm trying to grow
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the income so the properties that I buy
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I'm looking for properties that have
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problems I'm looking for properties that
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have low occupancy I'm looking for
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properties that have income potential so
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just like everything else let's say
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let's say you go down to your
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neighborhood Starbucks when you walk in
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there they don't just have coffee they
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have food they have stuff at the
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register you can buy CDs you know
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there's all kinds of things all around
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same thing in a grocery store that you
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can buy as you're walking through it's
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the exact same process except we're
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talking about real estate so for us for
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income we're looking for ways to
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monetize pets we're looking for ways to
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monetize views we're looking to put
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washers and dryers and units and to be
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able to monetize that so so back 10
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years ago we were buying properties that
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had washer and dryer capacity they had
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laundry rooms but they didn't have
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washers and dryers so we were buying
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hundreds of thousands dollars of washers
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and dryers every year and putting them
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in and then charging the ten at fifty to
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seventy-five dollars per month so that's
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part of generating income another way is
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to put up car ports because people love
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their cars and so covered parking you
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know garages these are all ways to
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monetize your income through real estate
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and from
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it's been multifamily and there's
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hundreds of ways and we spend a lot of
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time on this but income is a very
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important piece and most people don't
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understand this so what they do is
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they'll try to buy things that say hey
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it's sitting at ninety five percent
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we're gonna grow it to 97 or 98 percent
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that's not realistic you can't grow your
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occupancy beyond what the markets doing
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so the income is a very very important
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piece and we spend a lot of time here
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working on income okay we work on the
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occupancy side and work on the other
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income side it's a very important piece
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the second piece is expenses
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and this is typically a negative so
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obviously expenses are everything from
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payroll to marketing advertising and
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marketing it would be your taxes it
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would be your insurance would be all
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your utilities so again think of
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yourself you probably have a mortgage
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you might have a rent you might have a
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car payment you might have some vacation
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stuff you want to do you have to buy
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food maybe you have a pet so you have
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that those are all expenses so the same
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thing happens in real estate except for
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us it's I have to pay a utility bill I
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have to pay the electric company for all
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the lights I have to pay a water company
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for all the water that the tenants are
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using it for the landscaping and I have
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to pay a trash bill for the people that
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come and pick up the trash so these are
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all expenses with every single rental
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everything every single commercial
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building industrial building that's what
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expenses are taxes insurance and those
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are some of the things I've already
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mentioned but all those things happen in
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this line item and so what we're doing
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is we're trying to minimize our expenses
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now you're not going to get away with
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minimizing them to zero of course
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because every property has expenses so
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what we're trying to do however is
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figure out ways how do we minimize our
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expense in other words if if we have the
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the trash vehicles coming to the
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property three times a week can they
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come two times a week and pick up bigger
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dumpsters that's less because it's one
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less trip so that's a trip
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charge that we don't have to pay anymore
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so those are the kinds of things that
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you start getting into when you start
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buying real estate same thing with
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marketing and advertising in the old
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days they used to advertise in the
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newspaper and then it went to these
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rental books with distribution now it's
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all up on the internet and they're
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trying to and the Internet companies are
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trying to get you to pay for ads just
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like Facebook Ads
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same kind of thing so it's all moved to
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the Internet and so the for our company
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what we're trying to do is we're trying
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to minimize our marketing expenses but
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but keep our traffic to our properties
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high so we've been doing that through
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blogging and all kinds of other things
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to get people to come to our websites so
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instead of paying for online ads and so
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our company now doesn't pay any money in
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marketing and advertising except for
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salaries because the people that we pay
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here at our company generate enough
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marketing more than we would have gotten
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for paid advertising so those are the
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kinds of things that you do on the
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expense side we have full-time people
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that are just working on the insurance
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and the taxes for all our properties
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because we have over 10,000 units and so
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we're paying millions of dollars every
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single month on tax and insurance and we
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need to make sure that we're minimizing
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those all of those have to do with
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generating the next number which is
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called the net operating income or Noi
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so a lot of people call this Noi so this
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is Noi so all Noi is is your expenses
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after your income how much money do you
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have left over after expenses now for
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many of you that's zero or even negative
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so if you don't have a job your expenses
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are higher than your income probably but
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if you do have a job hopefully your
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income is higher than your expenses same
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thing with an apartment building if I
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have expenses of a hundred thousand a
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month and my income is 120 thousand a
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month then my income for the month my
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net operating income is twenty thousand
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dollars a month but if my awkward see
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drops down
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and it's 90,000 and my expenses are a
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hundred then I have a negative net
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operating income so that's why managing
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expenses and managing income is so
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important because if you don't take care
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of these things then this here will go
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up or down dramatically and what you'll
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find and this is essentially what we're
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going to be discussing the rest of the
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video net operating income is the way to
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drive value and this is the way that you
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create massive wealth for your investors
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and for yourself if you can understand
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how to generate high net operating
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income then you'll do very well in this
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business like I said most people buy
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something and they hope that it goes up
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they don't understand real estate at
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this level and if you understand real
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estate at this level you're gonna do
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very very very well so the next piece
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that we need to add is is debt or the
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mortgage so when you're buying a piece
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of real estate
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the very next piece is called debt now
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again let's say it's a single-family
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house that you're buying most people are
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going to the bank and getting a loan to
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buy that house that's this so with big
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commercial real estate deals same thing
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we're buying using debt now the cool
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part about debt is that it comes from
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other people if you think about so thank
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you by the way from putting all your
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money in the bank because now the bank's
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going what the heck now I have to lend
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it right because when you put money into
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a bank when people go to posit their
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cheques into a bank it's a liability to
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the bank the bank is sitting on a whole
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bunch of people's money and they have to
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pay you interest so they lend it to guys
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like me in the form of debt to buy big
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real estate deals that's the way the
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banking system works yeah that's why
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they give you free things to put money
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into the bank free checking deposits and
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free this and free that they want your
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money because they lend it out higher
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they give you 1% on your bank account
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and then they charge me 5 or 6 to borrow
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it that's how banks make money so so
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debt is a very important P
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of buying real estate because it's
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really OPM or other people's money if
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you can use debt then you can get
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massively wealthy another really
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important piece on debt is you've all
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heard of leverage even when you're
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buying your home let's say you buying a
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home that's a hundred thousand dollars
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and the bank gives you seventy thousand
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dollars in a loan you only have to come
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up with thirty thousand dollars to buy a
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hundred thousand dollar house the rest
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is in the form of debt they've given you
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seventy percent of the amount to buy
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that house or seventy thousand dollars
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on a hundred thousand is seventy percent
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that's called loan to value LTV so the
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debt is a very important piece because
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you don't have to come up with the whole
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down payment you don't have to buy the
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house all cash you can actually go to
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the bank and this is a very important
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piece to understand but the cost of debt
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is very very important and banks will
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give you this money if you can qualify
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so why wouldn't you put thirty thousand
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dollars down to buy a hundred thousand
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dollar house and this is all I'm doing
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in a larger scale with the ten thousand
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units that we owned so obviously we're
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heavy in debt and I'm very excited about
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how being in debt because the tenants
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that I have here are actually paying
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this off the last piece after debt is
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cash flow so cash flow is what we're
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trying to do on every single model every
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single deal I look at goes through this
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process it's the exact same process so
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if there's no cash flow it could be that
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my debt costs are too high
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it could be that my expenses are too
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high or it could be that my income is
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too low but that doesn't necessarily
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mean that it's a bad deal because I
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might buy something that has a 50%
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occupancy let's say and has low income
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it has a negative net operating income
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but if I can increase the income over
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one or two years then I can massively
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generate higher net operating income and
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cash flow so I'm costly looking at how
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much do I have to put down in the form
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of equity how much can I get in debt and
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how much cash flow do I generate because
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I'm investing people's money and
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investing my money this is the only
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thing that matters cash flow nothing
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else I'm not looking at how much is the
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property going to be worth in one or two
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or three or four years now
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I'm making sure that it goes up but I'm
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actually driving the value myself by
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generating that operating income because
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when you go to the bank to borrow money
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this net operating income is what the
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bank looks at and you would - so they're
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saying okay if I'm gonna give this
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person debt or a mortgage I want to make
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sure that this is higher than this
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because if my net operating income is
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not higher than my debt I'm not gonna be
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able to pay my debt so this here has to
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be in a really good position be able to
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get maximize your debt and to maximize
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your cash flow every single deal on the
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planet goes through these things and
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then once you understand this you can be
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massively wealthy it's way different
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than buying something low and trying to
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sell it high has nothing they don't look
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at any of these things what we're trying
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to do is we're trying to invest for the
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long term cash flow massively which what
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eventually what we call an infinite
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return so how do I take people's money
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generate massive value by managing these
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things take it back out in the form of
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debt and return it in a cash flow back
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to the investor
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every single quarter every single year
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that's why our investors keep coming
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back to us because we are generating
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massive cash flow returning their equity
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back tax-free and they now are in our
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deals on an infinite return thank you
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