Disclaimer: Transcripts were generated automatically and may contain inaccuracies and errors.

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Last night at about 11:00 PM I text Steve and I said, What do you think is the most important number that a real estate investor can consider? And I had the thought, I was like, If he answers what I think he’s gonna answer, which is my answer for what the most important number in real estate is. I was like, This is our podcast topic.

He comes back and says the exact thing. That was exactly what my response. Then we thought, let’s not just talk. What we think the most important number is, but let’s talk about numbers. What would your life look like if you could replace all of your working income with simple and conservative investments that could do it for you?

Over the last 13 years, we’ve helped thousands of clients transact over half a billion dollars in simple and conservative real estate transactions, allowing them to begin replacing their work income with real estate investment income. Each week, we’ll be pulling back the curtain on the ins and outs of.

Retirement based real estate transactions that will transform your financial future even if you have no real estate experience. This is Replace Your Income with me, Kevin Clayson and Steve Earl. All right, well, hello everybody. Welcome to Replace Your Income. This is episode 10. Steve, can you believe it?

Episode 10. Amazing episode. We’ve done it. That’s a good, I know. That’s awesome. Hey, again, thank you so much everybody, for all of your emails and your, your text messages and, and your reviews and oh my goodness, you guys are awesome. And, and I gotta say, Steve, that one of the things that makes me so happy is when somebody says that, Oh, this has been great, and they’ve shared it with a friend, they’ve shared it with a family member.

So thank you everybody for sharing this podcast. That means a ton. Yeah, it does. All I can say is thank you. It, it’s a lot. And I have to thank you Kevin as well. Like this is just this, just a lot of fun. Yeah, I’m really enjoying it. I really, I really am too. And uh, this is awesome. We hope you enjoyed last week’s episode.

You know, we hope that you enjoyed this stuff on is it a good time to buy real estate? What is taking place? Around us right now and what’s going on. And if you didn’t need to get a chance to listen to that episode, go back and check it out. And, and also, uh, we’ve had a lot of you that have gone on and requested the, uh, the Market Secrets kind of analysis packet and the market selection secrets.

And so thank you for all of you that have gone and done that as well. We’re so thrilled to be able to provide that kind of information and we’re gonna keep it coming, which is what brings us to today’s. Topic. And so I gotta tell you a little bit of background of where this topic came from. And it’s kind of fun because when Steve and I do these podcasts, and we were just talking about this, when we do these podcasts and recordings, we always have an idea of what we want to talk about, but we don’t have like a major outline or a major agenda.

We don’t have like a teleprompter up telling us that, you know, with our monologues of like how to re, you know what, We’re not reading stuff to give to you. We just literally are like, You know what? It would be so cool to talk about this. And then he. Sit here, we hit record and we just kind of riff a little bit and, and which is, which is awesome because these, we’ve told you from the beginning, these are the kinds of conversations that we’ve been having together for I don’t know how many years.

And so now we just get to do it with you guys. And so thank you for joining the conversation. And, uh, it all I will say it is a little weird to me to think that there’s people like running on a trail right now and our voices are in their ears that. Awkward, but thank you. I, Well, trust me, I’d rather be on the trail running right now than sitting in this chair.

Quite, quite frankly. I, I’m kind of, I’ve been missing doing that. Oh, that’s awesome. I would, I, I don’t wanna be running, I have no desire to do that. I don’t know if I’m ever gonna run. We’ve talked about it. Steve’s run a bunch of marathons. I’ve run four of ’em. I don’t know if I’m ever gonna do another one.

I don’t miss running . I don’t, Is that bad? Does that mean I’m not a renter? That makes you a very bad person, Kevin . So here’s the topic today. So some of you maybe know we are forbes.com contributors. So we get a chance to publish on Forbes, publish articles. They come and ask us questions from time to time and, and we could give some responses along with a panel of additional experts.

And there was a question that forbes.com was looking for responses to that kind of struck me. And so sometimes what’ll happen is they’ll, they’ll kind of give us a question and then I can see the responses of other people and I, and we could contribute our. And this question that came across one day, it was like something to the effect of what’s the most important number that a real estate investor ought to be considering when they’re evaluating a property or considering buying a property?

And so it was interesting. It caused me to just take a second and pause and I went, Okay, what is the most important. And I thought through it for a second. I went, Oh, okay. I totally know what that is. And so I type up my response. Well, I hadn’t really talked to Steve about this, and so when I was kind of thinking about doing the podcast today, I, last night at about 11:00 PM I text Steve and I said, Hey, Steve.

What do you think is the most important number that a real estate investor can consider? And I was like, Out wa we’re why we’re dog sitting a friend’s dog. So I was like out walking the dog and I’m waiting for Steve’s response with, And Kevin, by the way, that that’s not the first question you asked me last night when you, uh, sent the text.

Well, yeah, , first question was, are you up ? I don’t know, you know, maybe he went to bed early. So I, I first texted him, Are you awake? Are you up? And then I said, Hey, here’s this real estate question. This is the kinds of things we do at 11:00 PM on a, whatever last night was Wednesday night or something. So, um, Kevin, it’s awesome to not have a life

We have zero things going on that we can have a text conversation at 11:00 PM about real estate numbers. Um, so I was like waiting, you know, I’ve seen Steve’s, you know, the dots, you know, on the, on the text message and they just kind of animate and I’m like, Any second now he’s gonna give that answer. And I had the thought I.

If he answers what I think he’s gonna answer, which is my answer for what the most important number I in real estate is I was like, This is our podcast topic because this was not set up. And sure enough, he comes back and says the exact thing. That was exactly what my response was. And so we wanna give you that response today.

And then we thought, let’s not just talk. What we think the most important number is. But let’s talk about numbers. So if you’ve been to our website, we put a bunch of proformas up there, right? And, and on the weekly scouting reports, uh, if you get those weekly scouting reports, sometimes they’re not weekly.

We do our best, but, um, we, we put proformas in there. And the proforma for us, it’s really just kind of a. Financial worksheet so that you can see the numbers on a property, you see a picture of the property, you know, the purchase price, the down payment, and then the returns. And then there’s multiple ways that numbers are calculated on there so that our clients can look at it and just kind of compare property to property and decide which one they wanna, you know, pull the trigger on.

And so we thought, what, how cool would it be if we went through one of our performance and we talked about what are the numbers that are important in a real estate investment? But let’s start with what we think the most important number is, uh, when you’re evaluating any real estate investment. Now, before we get into that, Steve, what are some of the numbers?

That, that we know people consider when they’re looking at investment properties and a lot of times there’s a few of ’em that I think that most people think are the numbers to look at when you’re investing in real estate. But just like everything else we do with replace your income and with our company, we’re not typical from the standpoint of we don’t, we don’t just take the, the standard number that, that all the other real estate podcasts say you should take.

But what are some of those? Yeah, so, so I’ll jump into those numbers, Kevin. And those are the numbers that I’m gonna describe are numbers that, you know, lots of investors use the rules of thumb, their, their quick gauges, their, their quick review so that people can, so investors can kind of, Decide quickly whether it makes sense to, to continue forward looking at this property.

Right. Yeah. Right. And what I’m gonna share with you, I mean, they’re, they’re good numbers, they’re important, But just to share with you really quickly, the performa is for us Yeah. What some of these other numbers are for other investors like these, the, the performer that we use, it’s a tool, right? So first and foremost, it’s a tool for us to evaluate, engage the worthiness of a property internally.

Because every property that we look at in the different markets where we’re buying property goes through a vetting process. And part of the vetting process is the performer. It is our quick way of analyzing the property. And so, So it’s a tool that we get to use and then, It’s also a, you know, a great visual for Yeah.

For our clients and prospective clients who can go to the website and take a look at, at these numbers and we’ll, and we’ll jump into some of those, but some of the numbers that, uh, um, investors will look at as they’re evaluating numbers are like rent ratios, cap rates, and I mean, there’s the rent ratio where, for example, in when evaluating a rental property, you know, some people like to look.

The rent should be one, basically 1% of the purchase price and, and, and that kind of a thing. And so what we’ve done is we’ve kind of put a number, several different numbers into the performa. And there are three critical numbers that we look at. Although there are, on the performa itself, there are dozens and dozens and dozens of numbers, right?

Because we’re actually a performer is a projection of what we think will be the performance of a. And as we look at and analyze, um, a property, some of the things that we look at are, you know, how, you know, the down payment. What are the closing costs gonna be? What’s the, you know, the percentage rate on the loan that we’re gonna get.

You know, what’s the property management fee we always kept, We always keep in there a number for vacancy and repairs. Annual appreciations, years one and two, and then three through five because our performa uh, extrapolates out five years. Yeah. And then we also take a look at, you know, what we believe annual rent increases will be in that particular area because every area is a little bit different.

And then the other thing that we look at on our performa that I don’t know if a lot of others, Include these because we like to include everything in the performa. Yeah. We, we include the closing costs on a future sale. Yeah. Because the, the final performance of a property includes either selling it or refinancing it or something.

But, but the conclusion of that property is when you sell it. Reap the fruits of that, uh, property, and then you roll ’em into another property via a 10 31 exchange. And so the three numbers that, all of these numbers that I just shared with you, well, and then there’s other numbers as well. Let me just throw these out because I mean, obviously you’ve got your purchase price where your down payment is gonna be.

And by the way, we’re a little bit different. From other individuals that help people invest in, in, in real estate. A lot of the, of what you’ll hear online and in, in different podcasts and on YouTube videos is, Hey, you know, Zero down. Yeah. Right. You don’t need credit. And all these like, we’re kind of the opposite.

It’s, yes, it’s 20 to 25%. In fact, we. We really advocate 25% down, have one, have some skin in the game. Number two, by going to 25%, you’re gonna improve your interest rate by anywhere from half a point to a point. It’s considerable. Yeah. Yeah. You’re, I mean, so you’re, and, and let me be clear real quick cause I get this question a lot when I’m talking to people.

The difference between 20 and 25% down, you’re not buying down your rate, right? No. Like it’s not, you’re not just contributing more closing costs to be able to buy down a rate. In that sense, it’s just when lenders are evaluating risk and they’re evaluating credit risk, that what they like is if you, there’s more skin in the game.

If it, if the LTV or the loan devalue is as. 75% instead of an 80% on their pricing matrix, you become less risky. Since you’re less risky, they can give you a lower interest rate. So I always like to make that distinction cuz sometimes people hear, you know, I can get a lower interest rate if I, if I go from 20% down to 25% down.

It’s not a rate by down, it’s, it’s taking advantage. Pricing breaks that the lenders make available. It’s the, it’s the same thing. You know, you’ll, you’ll probably get a better interest rate if you have a a seven 20 credit score over a six 80. Right. There’s pricing breaks for credit worthiness and that’s what the, the 20 to 25% does.

Yep, exactly. Um, the other thing that we include on the performa is, you know, our fee, we’re super. Transparent in this is how we make our money. Right Steve? I don’t think, we’re not hiding it in the per the price of the purchase. I don’t think we’ve talked about that really. So let’s actually talk about that.

Go, go for it. So, so this is really cool and this is something that we put on the performa is how we make money as a company and, and not that we are anticipating that everybody listening’s gonna work with us tomorrow, but we think it’s super important that people know that cuz like everything we do, we wanna be very transparent, very.

So, you know, we do all this work for our clients, right? We go find em the properties. We, we’ve got our teams in the field that, that deliver the properties. We get the properties fixed up, you know, we get ’em insured and financed and, and leased up and, and managed and well, we do a ton of education. Before they even start that process, we take them through a pre-qualification process.

That’s right. So there’s a lot of like pre-work that goes into, you know, helping somebody get ready to buy real estate before and many times people aren’t in that position and whether or not we actually help them and give them a plan to work towards doing it. Yeah. We actually have a four phase purchase process and when you actually close on the property that’s on the border between phase two and phase three, it’s like halfway through everything we do with our clients.

And so there’s tons of stuff that we do with our. And our job is to make real estate investing as simple as possible, as easy as possible. But we also want our clients to be able to make a hundred percent of the profit and make a hundred percent of the appreciation and make a hundred percent of the gain.

And we want them to own the property a hundred percent, which again, is different from other guys out there. We know, you know, there’s a numbered. Guys out there that’ll let you put up all the risk and all the money and take the credit risk, and then they split the deal with you. No, you own it 100%. So for that, we charge a flat per property fee, regardless of purchase price of 4,000 and $195.

So just under five grand. We call it a teams fee. And what’s awesome is we don’t collect a nickel from our clients until they’re closing on a property. And then this, uh, teams fee this $4,995. It’s part of your total out of pocket expenses reflected on the proforma. And, uh, and it’s, it’s paid as a separate buyer, paid commission.

It’s on the closing documents. It’s totally disclosed and right there, and we’re super upfront about it. The very first conversation that we have with people. Investigating our company, we say, Hey, would you like to know how we make money? We are capitalists. We’re in this to make money, but we’re in this to make money by providing an unbelievable world class service that you would not be able to get and, and figure out on, on your own or to due to this level with this kind of experience.

And so that’s part of these numbers on the top. And so all of these on these perform. And we, I, we, by the way, stay tuned cause we’re gonna give you what we think is the most important number. But you know, all these other real estate investors, they talk about, okay, is the rent gonna be 1% of the purchase price?

What’s the cap rate gonna be? Right? And year one, based on what I’m cash flowing versus. What my purchase price is, what is my, And so there’s all these ways to look at numbers. And what’s interesting is a lot of them numbers are kind of funny things, right? We love to think that numbers are, you know, somehow just universal truth.

But the way that people can can shift numbers. And, and how they can interact with those numbers. It can mean that numbers may look better than they really are on a proforma. I don’t know if I, I don’t think I’ve told this story one time though. I was looking at a, at a website where there’s a lot of properties that are available for sale.

Right. And uh, I was taking a look at the website cuz I was actually preparing a presentation I was giving in Hawaii and I knew. Some folks in the audience had used this particular company or considered this company, and this is actually a company, if I said the name, you’d be familiar with it. It’s one of these VC backed kind of real estate investment companies where it’s like, you know, the Netflix or real estate you go on and there’s a billion homes you could choose from, but they don’t really do the kind of handholding we do, but they’ve got a lot of available.

So I’m looking at the numbers, right? I’m looking at homes in a market similar to where we invest, and I’m looking at the home that they’ve got on their website and I’m looking at it and I’m going, Wait a second, these are the homes. This is bread and butter stuff for us. These are the types of homes that we do all day, every day.

Why are their numbers so weird? And here’s what I found is their numbers. So this is just goes to show you there’s a billion ways to look at numbers, right? You have to dig into and understand the. Behind the numbers in order for the numbers to be worthy of being evaluated, right? So I look at the purchase price, I look at the cash on cash return, and I look at the annualized return, and I’m.

Okay, well on this particular property, the based on the purchase price, the, the, the, oh, it wasn’t cash on cash return. It was cash flow, so it was purchase price, cash flow, and then annualized return. And I’m like, based on what it’s telling me, that cash flow is, and based on what the annualized return is supposed to be, there’s something off.

I start digging in and here’s what they did. They gave you a purchase. Then they said, this home is likely to be financed. But then they gave you a cash flow number as if you were buying it cash. Then they gave you the annualized number as if it was a leveraged purchase. So in other words, and we’re gonna talk about that today, there’s a difference in numbers when you’re looking at a.

Finance proforma or a finance set of numbers versus a cash set of numbers. So what they were doing is they were picking and choosing the very best numbers, even though it was through two separate buying processes and trying to ball it all into one and saying, Hey, no, really look at your cash flow and look at your return.

But those numbers were in competition with one another because they weren’t being fully transparent. And so on our pro performance, we take the opposite approach as conservative as we can go, and we. See all the numbers and we wanna actually build in stuff to the calculations and numbers that make the numbers less attractive because if we, meaning we’re taking out eight or 10% of vacancy and, and repairs and, and we’re putting in closing costs when on the future sales.

So we’re trying to suck out as much as we can from the numbers because that’s giving us kind of painting a worst case scenario picture. If this. Even in a worst case scenario, or maybe not worst case, but in a, a very conservative scenario, still makes sense and looks good for my financial life, well then I’ve got more upside, right?

It’s kind of the, it’s kind of the under promise, over deliver as opposed to the opposite approach, which is what the vast majority of real estate companies and gurus out there take. Awesome. Ke Well, in fact, just to kind of illustrate a little bit differently, that numbers aren’t always what they appear to.

I remember walking in and talking to my accountant and, and it was weird, like in looking at my taxes, like these numbers, they’re kind of weird. It’s like, how are you figuring this out? And he is like, he’s like, Steve, I mean in accounting and numbers, like it’s not necessarily like total signs. You would think that two plus two equals four.

And I’m like, I’m like, Wait a minute, Richard, you, you’re telling me that two plus two is not always equal to four? And it’s like, no. It’s like you can ask me the question. It. Asked me what two plus two is. I said, Okay, what’s two plus two? And he kinda looked at me and, and, uh, kinda turned the light down a little bit low, closed the shade on his windows.

It was like Steve, What do you want it to be? . and that, and that’s the reality, right? Is, is numbers sometimes aren’t, I mean, you described it very, very eloquent quote, Atlas shrug when it comes to numbers, especially on performance, A is not always a right. It can, That’s right. It could, it could vary. And I it just real quick, another little anecdotal side note thing, I, I read this book, so I went to a school called Brigham Young University, which is a kind of a religious, private univers.

And so you don’t hear many of the swears at byu and I was in this political science class and we read a book and I remember there was like a, there was like a vocal gas across the class. It was political science 200. And he had us read a book called Damned Lies and Statistics. And I remember all the people go, What did he say?

It’s a book we have to read. But what was so cool about that book, it was this short little book and it’s, it started out with a statistic and it said it was like a gun violence s. And it said, Here’s the statistic. Most people would just take that as, here’s the statistic. Then it goes in and it looks, and it says actually the, the statistic can be looked at five different ways and give you five different numbers, but it’s using the same exact data.

And the number that’s selected is the one that has, uh, that, that is, is fulfilling whatever the agenda is of the one using the number. And I would just say that as a caution to everybody, listen. When you go and you look at real estate, when you’re looking at numbers, always consider is there an agenda behind the number that’s being presented to me?

Whether you’re working with a company or you’re a maverick and you’re going it alone, or if you looking at, if you’re just looking at information on. On the internet. Oh, for sure. Um, yeah, you know, in a particular area trying to decide, Hey, is this a good area to buy? You gotta take a look at it. You, you have to, you have to look at all that stuff.

And so, uh, just, and so for us, our performa, our numbers, the numbers we’re talking about here, these are numbers that yes. They’re for us, but they’re for us to paint what we think is the most comprehensive picture of the performance of a real estate investment. So that when we’re looking at a property, we have a mathematical data driven approach to saying, Is this property worth it?

Cuz then we can reject or accept properties based on this method. And so there is some kind of, I. It’s proprietary from the standpoint of this is what we do all day, every day. And it’s something that’s been developed over more than a decade. And so let’s, let’s kind of dive into the numbers so that you guys know what are the numbers we’re looking at?

What are some of these things that, that are important? And, uh, and Steve, before we do that, Let’s tell ’em what we think the most important number is on the performa. And as we’re looking at a real estate investment, then what we’ll do is from that number we’ll back out of it and tell you what is on our performance and how do we arrive at that number.

Yeah. So, so let’s jump into what, what is the most important number that we look at and in order to arrive at the most important number, there are two other numbers that lead up to it. So the, so there’s three numbers. That we actually, we highlight and bright yellow on our bright proforma, because these are the three most important numbers.

So the third, So well, let’s do a countdown, Kevin. Yeah. Countdown. So the, the top three numbers, three of the most important numbers in real estate investing comes at coming in at number three is cash flow. Just kidding. . Cash on cash return is the, it’s, it’s the percentage based on a number, which is based on cash flow.

So you take your total out of pocket cost and divide that by the net income generated by that. Notice he said net income generated by that property, not gross income. Cuz there are people that will use gross cuz the numbers look better. But we wanna suck out every, all of the potential expenses, say what’s our net income?

And then when we look at that, right, you could take that net income on a monthly basis, multiply it by 12, so you figure what is it for the year and then you divide that against your total out of pocket, which is your down payment, your team’s fee that we charge in order you. $4,995 that on our performa right, This may not be on everybody’s, but the, the, the down payment, the teams feed, the closing costs, and even potential rehab expenses because we wanna know what your effective, real, total, out of pocket is in order to, uh, buy property A, B, or C.

Yep, exactly. So that’s the very first number that we look at. Cash. Cash, and, and we look at cash on cash. The cash on cash return, we look at the percentage, but then we look at the actual amount of cash flow in dollars that’s coming back because we have kind of a target, we always shoot for about three 50.

That’s kind of what, what, what we’re shooting for. And if it’s a little bit lower, then we’ll look at some of the other numbers to, to decide whether or not, you know, they make up for the little bit lower than, than the three 50 number. But, and, and, and if it goes below three 50, There’s gotta be some pretty good reasons why.

Yeah. You know, we think it’s still a great number to look at. Wait a second, Steve. Only $350. That seems like a terrible cash flow. Why would anybody buy a deal like that? . But really, let’s talk about it because, um, this cash on cash return this number. What is the, So we’re, just so you guys know, we’re actually looking at perform right now.

Perform the monthly net cash flow is and tell ’em, tell ’em where the property is. Okay. So this is in Florida. It’s in a city called Davenport. Purchase price is about two 20. Well is 2 24 down. Payment is 25%, so 56,000. We’ve got the estimated closing costs. We’ve got the teams fee in there, so a total out of pocket of $65,475.

So there’s your total out of pocket. That’s that number that we use at the top to do all the other calculations with. Yep. Your net operating income is 13,574 based on a rent of 1595. And at the end of the day, that generates, you know, $329 per month and that’s a 6.03% cash on cash return. And just think about that cuz this is, I mean we, I know we’ve kind of talked about this, but I love this right.

If, if I’m gonna go invest 60, what was the total out of pocket? Uh, 65. 4 75. Okay. So if I’m gonna go, if I’m gonna go invest 65 grand in whatever mutual fund, index fund or whatever I’m at, like I’m not getting $320 a month in cold, hard, spendable cash coming back to me. $329. Oh gosh. Sorry. Oh boy. You. You looked at $9.

What a bonehead mistake I made. It’s two Little Caesars Pizzas . Yes. Or it’s like one of the biggest, most bestest pizzas with tax. And that is how I actually measure things in terms of just. In terms of pizza. Yeah. Yeah. So that’s one thing that we don’t include on the performance, but that’s like the, The insider information is we measure our returns and potential pizza purchases.

Yes. And that’s that particular Little Caesars . I’m trying to see if I could get them to be a sponsor for the. That’s the podcast one. Awesome. Oh my gosh, I love it. Measure. Here you go guys. The tip of the day. Measure your real estate Returns in pizzas Potential. We should put that number on there.

Potential pizza, purchasing power. That’s what we should. Oh, I love it. I love it. So this cash on cash return in this cash flow, I mean, you’re getting $329 of cold heart spendable cash every single month from a property. Just think about that. That is awesome. So we got this cash on cash return, that’s 6%, which that 6%.

What does everybody say? Well, if you invest in the stock market over the long run, it should get you somewhere between six and 7%. So we’re getting it monthly cold heart spendable, cash in real estate, just with this and that. And that’s the number right. Base number with this tiny little $329 cash flow.

It’s not tiny. It’s awesome. It’s a real estate single. So coming in at number two, coming in at number two. The second most important number on the proforma is average annual combined cash on cash. And what combined means, and I don’t know anybody else that talks about this, Steve, so I love this. Like this average combined cash on cash.

You guys perk up your ears cuz this is something that, that we look at and it’s a real, extremely important number, but I don’t know many people that consider it this way. There’s three things that we add back into that number that in all reality contribute to cash flow because this is cash, literally.

Like it’s literally. Well, not literally, but kind of literally going into your bank account. Yeah. Um, in terms of this, number one, we add back in the amortized, uh, closing costs. Number two, we add back in depreciation. And then number three, the principle paydown. That’s right. Those three things. Literally you have to consider those because those are all real time, real life.

Those are real numbers. Yeah. Those are true tangible benefit that you get. Uh, on a monthly basis. Okay. That gets calculated into, you know, the, the overall return on your investment. So our performing, you got the cash on cash return, which is kind of measured and where you kind of know what your net net net cash flow’s gonna be, right?

On a monthly basis. Then you’re combined, and then you got your combined, um, cash on cash, which is taking into account the depreciation, the principle pay down, the cash flow, all. Things. And then anything else you wanna mention about the combined cash on cash? No, just if you can do a drum roll for the number one.

Yeah. Drum roll and coming in at number one on the most important number to consider when looking at this is like my, I don’t know if this is like how Casey Casem sounded, but that, I’m assuming that it’s something like this maybe higher pitch coming in at number one on the countdown for the most important real estate number you need to consider is.

Annual average return. Wait, did you say annual average return? Yes. So you. Those two prior numbers. That’s why they’re, they’re numbers three, two, and, and you combine those with appreciation that’s right over. And we, we do it over a five year period of time. This is projected appreciation. We don’t know what the market’s gonna do, but we have all of that.

Data that we compile and we subscribe to that really high level data set. And so we have ways to really project out and then we can still be conservative with our appreciation projections. But what Steve is saying is we take that appreciation, take that cash on cash, that combined cash on cash, and we’re rolling it into a number that is this.

Average annualized return on a property. Yep. And so just to give you the numbers on this, so cash on cash came in at 6%. The combined cash on cash came in just over 13% and the average annual return came in just over 21%. There you go. 21%. Oh my gosh. Like just thinking about that over, over the last decade, like these numbers have actually been on the, On the conservative side.

Yeah. They really. So it, it is pretty phenomenal. Unbelievable. Like when was the last time, like if somebody said, Hey, got a great investment opportunity, it ought to get you 20%. You’d look at ’em and be like, Cool. So what’s the name of your Ponzi scheme right back? That, that’s the way most people would consider that.

Yeah. But this is simple, conservative, basic real estate, single type real estate that is doing this for our clients. And listen, we’ve got a bountiful track record to say. This is not unrealistic when you actually look at conservative appreciation, when you look at conservative cash flow, cuz remember the cash on cash and the cash flow, it’s being generated on our performance after we’re sucking out as many expenses as we can consider that that would be realistic for owning the property.

And then so when you’re taking all of these numbers into account on this simple and conservative purchase that had a purchase price, what was the purchase price? Uh, 2, 2 24. 2 24. And then, you know, you’ve got your total out of this is a home built in 2011. It’s uh, just under 1500 square feet, three beds, two bath, amazing neighborhood.

And by the way, that 21% annualized return, that was not your down payment. And then all of your potential gain that was total out of pocket expenses as the number that were divided against. Yeah. A lot of people don’t like we’re including in that total out of pocket your closing. Our team’s fee. Any other, any other cost associated with getting into that property?

So it’s based on more than just your down payment. Now, if we just, and this is what you know, a lot of investors will do, They’ll only include their actual down payment. They don’t consider the other costs to get into the home. Right? And in fact, in many cases, even on, on brand new homes, We always have a little bit of rehab, right?

Cause there’s some things that we do to even the new construction homes that that adds in a little bit of out of pocket costs. Like there’s some secret sauce that we add to the property still that given the choice between our property and another brand new home, like people are gonna choose our home because it has certain features in it.

Yeah, that’s right. And that just, that just comes. D devising a system over time that we know gets homes rented really quickly. So there is some, some rehab and, and really even on new construction, you know, I, when I bought my first home, uh, I was like, Wait, that, does that come with window coverings? Like, there’s little things that are additional expenses when you get into a home that some people don’t.

So when you texted me last night and you asked me what this, like the, you. V t. Yeah. Capital t t h e. The most important. I hesitated for a minute to kind of just think through my mind and it took me about 30 seconds to, to decide what was the, the number and I texted back. Average annual return. That’s right.

And then you, you texted back with, you know, Yeah. I was like, exactly. That’s because here’s the deal. At the end of the day, your real estate, at least the way we do real estate, right, we’re hitting real estate singles when the, when we’re replacing your income, the idea is property number one becomes the fuel for properties number two and three.

And so when you’re evaluating that property, yes, you’re gonna be collecting cash flow. But if we had, if we had our druthers, isn’t that a thing? People say, I don’t know what a dru is, but, um, it what you would be, Can you gimme the definition of dru? Let me look it up. So what we would be doing is, and, and by the way, this is what we prefer, what we love to see clients do is they take a hundred percent of that cash flow and it’s there, it’s spendable if you need it, but if you could just throw it down on the principle and you could pay down that home, that would be best.

Because we are in this for the long term, for the, in the long run, right. We’re, we’re hitting real estate singles so we can replace our income one property at a. Overtime. And so with this property, if I say, Okay, my purchase price on this property was, what was it? 226,000 or whatever, my total out of pocket expenses is gonna be, what was it?

60 65. 65,000. That’s total out of pocket in order to get this property, but it’s gonna generate a 6% cash. On cash. It’s gonna give me an and a, uh, it’s gonna give me a cash on cash. Um, a combined cash on cash of, what was it? 13% and then it’s gonna give me a total annualized return if after five years I were to sell this proper.

After I pay out all the closing costs on the sale of the property, if I take a look at all of my returns and all the income that this property is generated, and I take that, that large number, and I divide that against what my total out of pocket was, I’m seeing a 21% annualized return on this property.

But what’s cool, and this is another number that we put on the proforma, talk about the number of total capital available to reinvest. Do you have that? Um, yeah, So at the end of five years, the total capital that you have to reinvest is at the end of five years, is 127,000 4 25. Okay. Let’s talk about that number.

Where does that number come from? Because what was the total appreciation on that property? Um, so that’s assuming a a 6%. Okay. You know, increase. So here we go. You got a 6% appreciation, but that’s not gonna make up 120,000. So where’s that 120,000 coming from? We’re saying, Hey, when you close on this property, after you pay your closing costs, you’re getting effectively a big chunk of your down payment back plus the appreciation and proceeds that have come from that property.

And now that 120, by the way, that’s maybe enough to go and buy. Two more properties, utilize a 10 31 exchange. We’ll do a whole podcast on 10 31 exchanges. Maybe we can get Mark to come in and kind of talk through some of that stuff. But you take those proceeds, you reinvest in two properties, and then the profor has look the same.

What’s your total out of pocket? What’s your cash flow? What’s your projected appreciation? What’s your combined cash on cash return? What’s your annualized return? And then it’s if one property can help me go by two in five years and seven years, whatever, if those two could potentially buy me an additional three or four.

Once I sell those, you organically grow the portfolio bit by bit, property by property, one property at a time until you get to the point where you own enough real estate that once you get that real estate paid off, free and clear, your income is. There’s the income replacement model. It takes time. It’s a bunch of real estate singles, but it’s using these real numbers that we’re really looking at in, in, in, through a lens of, of actual math that matters.

Not just math that looks good on a website, so somebody decides to pull a trigger, but we don’t care about what they’re gonna do. Sure. And the only reason we. Soapbox on this is because listen, we know not everybody listening’s gonna work with us. We know some of you will. We want you to know the way we look at it.

But if you’re working with someone, if you’re doing real estate on your own, we think this is, and nobody in the forbes.com forum had said this number, see this annualized return, which means one of two things. Either they’re all looking at real estate their way and it’s good for them, or uh, or it means we’re crazy.

Well, we know we’re not crazy cuz we see people really replace their income in real life. And so here’s the deal, the we want. Know this and have these numbers and have this, this, uh, perception of how you can view numbers and, and your total out of pocket expenses and your cash on cash as well as your cash flow and your combined cash on cash.

And you’ll an and your annualized return so that you have an arsenal of tools available to you when you’re evaluating the real estate deal. That can actually put you in a better position in the long run where you’re mini mitigating and minimizing that risk, but maximizing your potential to truly let this real estate become something phenomenal for.

Very well said. And I’d I’d add to that it’s important for everybody to understand because our whole mantra is replace your income one property at a time. Well, you’re not gonna replace your income obviously, on property one, Correct. Month one. Yes. It, it’s a process over, over a period of 5, 10, 15, and even 20 years.

Right. As you go through this five year cycle, you. You know, and then I’ll call it five to seven years, just depending on what the market actually does. At the end of the day, the market determines, you know, how, how your property’s gonna perform. But what we’ve seen over time is that it’s a, it’s a five to seven year cycle, and over the course of 20 years, you could cycle through, you know, as many as, as four times.

Call it three times. And if you start with one home, and then you take that one home as you just described, you turn into two and then it turns into four, and then it turns into. On your fourth cycle and many of those, and the opportunity there is, I mean, you’re putting 25% down each time, right? So if you could, at that point, instead of having eight properties that you’ve leveraged, you might leverage four of those properties and pay cash for four of them.

That’s right. And so it’s over that 20 year period of time. That you’re replacing your income one property at a time. And it’s a combination of the cash flow and the appreciation combined together. And that’s why this number is so critical is because it, uh, encapsulates both of those numbers, and I’ll even call them processes such that at the end of 15 or 20 years, then your, your income has become replaced, utilizing the benefits of both cash flow and appreciation and then of.

The, the other tax benefits that, that come along with owning real estate. So that’s critical. The other thing to look at real quick, Kevin, is that we also, uh, you know, have set up our, our, uh, performance in such a way that we can take a look at, you know, when you start paying cash for ties, right? What is your average annual return?

That’s right. Well, if you pay cash for, for this property, same one that we’ve been talking about. I mean, your, your annualized return isn’t gonna be 21% anymore because you. Leveraging 75% of the property, you’ve paid a hundred percent cash for it, and so your average annual return shows up at just under 10%.

Okay, so there you go. So same property with a cash purchase. It, it basically cuts your average annualized return in half just because you’re not leveraging, which is why we talk about the benefit of leverage and the power of it right at the beginning of the process. But once your income is, is, has been replaced and, and, and, and no, I’ll, I’ll just hedge that as.

Real estate, it’s not anticipated that’s gonna replace all of your incomes because you’re, Cuz we don’t tell you to have all of your eggs in, in one basket. Exactly. Yeah. So this is gonna be replacing a portion and who knows, It might replace all of it. Yeah. And, and then your other investments might be all your play money, whatever.

But at the end of the day, If you continue on, let’s say that you’re done, you’ve replaced your income in 20 years, and at this point, let’s, let’s say that you’re 50 or 60 years old, even 70 year old, 70 years old, I mean, you’re, you’re still gonna have several decades left of continuing to do this. That’s right.

And you’re still going to want to turn your properties every five to seven years in order to continue to maximize your return, and which will just increase and build your PFO portfolio. More. It’s exactly right. So you guys, I, I hope this was beneficial, this talking about real, real estate numbers and talking about what we think is the most important number on your, as you’re evaluating your real estate, this idea of this annualized return on your real estate being such a critical number.

But we hope you’ve enjoyed the discussion about how we look at our performance and what are some of the other numbers that matter and that, that we really should be looking at and consider. Now if you wanna see a bunch of examples, all you have to go, all you have to do is go to d fy dash real estate.com on d fy dash real estate.com.

Up at the top you’ll see kind of a little menu bar. Okay? And there’s always gonna be a section there because you know, somebody may be listening to this, you know, five years from now I guarantee there’s still gonna be a section on our website that says, See properties, right? And so you can go and take a look at properties, go click on the performance.

We actually list our perform. Online for properties. Now, the, just so everybody knows the performance online, we are not a meat market. We do not list properties online and have people just get like a, create a bidding war. We’re not the eBay of real estate. These are properties that are recently transacted, recently closed, but we refresh them frequently so you can see in real time what are properties that people are buying and closing in each of the markets.

And so you could go on there, click on the pro form and look at the numbers. Look at how the numbers. You know, kind of shaping up based on this conversation today. Anything you wanna add, Steve, before we conclude the episode? Nothing other than, um, if my voice, it sounds like it’s a little bit muff, its because I am wearing a mask and I’ll point out that, that Kevin isn’t, and that’s totally fine.

It’s not that we have different philosophies, it’s just that. I started wearing a mask. You know what in public, that kind of thing. And I just like my looks a lot better with the mask on. There you go. As it hikes, you know, three four of my, my, my face I, So anyways, you know, you are a lot more handsome with it on.

Yeah. That’s for your benefit. I wore the mask today so that, you know. Thank you. I think thank you. It made it so much easier to look at you during this conversation, so hopefully my voice wasn’t too much here today. , you guys, we love you so much. Thank you so much for tuning in. Thank you for joining us on Replace Your Income with Kevin and Steve, and we will see you next week.

Sure. Thanks so much for listening to Replace Your Income with. Steven, Kevin, if you’re not subscribed already, be sure to head over to your favorite podcasting platform and do that now. If you enjoyed this episode, we’d love it if you could do us a quick favor and rate and review the podcast on Apple Podcast.

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