1 00:00:00,000 --> 00:00:04,720 Hey, Winston here and today we are going to talk about how to run your numbers if you're 2 00:00:04,720 --> 00:00:09,480 looking at buying a new home or building a new home or whatever assets you want to buy. 3 00:00:09,480 --> 00:00:10,480 How do you run the numbers? 4 00:00:10,480 --> 00:00:13,240 How do you figure out whether you're going to make a profit or not make a profit regardless 5 00:00:13,240 --> 00:00:14,420 of what you're buying? 6 00:00:14,420 --> 00:00:16,960 So this right here we're going to be talking about buying a home obviously because that's 7 00:00:16,960 --> 00:00:21,040 what I center around but you can take what we're talking about and you can apply it to 8 00:00:21,040 --> 00:00:23,160 whatever you would like to apply it to. 9 00:00:23,160 --> 00:00:27,360 So we're going to buy a home right now and the cost of that home is going to be $200,000. 10 00:00:27,360 --> 00:00:31,640 When you're running your numbers you're going to insert whatever number you think you're 11 00:00:31,640 --> 00:00:34,240 buying this house for or whatever number you're offering on the house and you're going to 12 00:00:34,240 --> 00:00:36,280 put your number there. 13 00:00:36,280 --> 00:00:38,360 That number interchange is whatever you want to put in there. 14 00:00:38,360 --> 00:00:40,120 The next thing we're going to do is we're going to figure closing costs. 15 00:00:40,120 --> 00:00:44,360 Now I'm figuring closing costs at 6% on this because this particular deal as we're looking 16 00:00:44,360 --> 00:00:47,800 at it, I'm sorry at 3%, we're not paying for a bank to do anything. 17 00:00:47,800 --> 00:00:51,640 This is an all cash deal so we're not paying as much in closing costs. 18 00:00:51,640 --> 00:00:55,800 If we had a bank loan being done there would be some origination fees and some more costs 19 00:00:55,800 --> 00:00:57,560 that's added from the bank side. 20 00:00:57,560 --> 00:00:59,340 So we're not doing that on this one. 21 00:00:59,340 --> 00:01:06,240 So that closing cost if you're doing a loan or something that may go up to 4% to 6% somewhere 22 00:01:06,240 --> 00:01:07,240 up in there. 23 00:01:07,240 --> 00:01:11,120 You just got to call your bank, find out what it's going to cost for origination fees and 24 00:01:11,120 --> 00:01:12,120 everything on your loan. 25 00:01:12,120 --> 00:01:14,320 I'm going to go through this real fast. 26 00:01:14,320 --> 00:01:15,400 What are our closing costs? 27 00:01:15,400 --> 00:01:19,480 We've got attorney fees, origination fees from your bank, we've got prepaid interest if you're 28 00:01:19,480 --> 00:01:24,720 going to buy down your rate, escrow deposits, that's taxes and insurance you put in a deposit 29 00:01:24,720 --> 00:01:28,740 so that the bank always has that money to pay your taxes and insurance when it comes 30 00:01:28,740 --> 00:01:31,480 due every year and you don't have to actually save for it. 31 00:01:31,480 --> 00:01:34,640 Recording fees, there's going to be a fee to record it with the state and the county. 32 00:01:34,640 --> 00:01:36,760 There's going to be a fee that they're going to charge you to underwrite it, they're going 33 00:01:36,760 --> 00:01:39,700 to check over your books, they're going to make sure everything is legit, everything 34 00:01:39,700 --> 00:01:42,840 is okay, you can afford to do it and they're going to charge you a fee for that because 35 00:01:42,840 --> 00:01:44,400 that takes time for somebody to do that. 36 00:01:44,400 --> 00:01:48,000 Then they're going to have some prorated taxes they're going to do, some insurance, home 37 00:01:48,000 --> 00:01:51,280 inspection fee if you're going to get a home inspection which I would definitely recommend. 38 00:01:51,280 --> 00:01:54,200 So on this particular house we said we had 3% closing costs. 39 00:01:54,200 --> 00:01:57,040 I'm also looking at the house and I'm like okay I've got to put some money into it so 40 00:01:57,040 --> 00:02:00,560 we're going to put a new kitchen in it, we're going to put a new roof on it, we're going 41 00:02:00,560 --> 00:02:01,640 to do several things to it. 42 00:02:01,640 --> 00:02:05,480 So I'm going to do $48,000 worth of repairs so my total investment in this particular 43 00:02:05,480 --> 00:02:08,800 home will be $254,000. 44 00:02:08,800 --> 00:02:13,040 That is going to be the number we're working with, the $254,000 for the purchase price. 45 00:02:13,040 --> 00:02:14,680 It will include all of this. 46 00:02:14,680 --> 00:02:16,800 That's total out of pocket money. 47 00:02:16,800 --> 00:02:22,040 Our yearly revenue is going to ramp for $2,500 a month, $2,500 a month, we multiply that 48 00:02:22,040 --> 00:02:24,960 times 12 months and what do we get? 49 00:02:24,960 --> 00:02:26,160 $30,000. 50 00:02:26,160 --> 00:02:28,800 Simple math, even Nick can do that math. 51 00:02:28,800 --> 00:02:29,800 You can do that right? 52 00:02:29,800 --> 00:02:33,880 Probably got to have your phone out and stuff like that still maybe. 53 00:02:33,880 --> 00:02:38,200 It's amazing how dumb we get as I am getting more and more like I use my phone for everything 54 00:02:38,200 --> 00:02:40,040 where I used to never use it. 55 00:02:40,040 --> 00:02:41,760 Two times six. 56 00:02:41,760 --> 00:02:43,520 So $30,000 a year on revenue. 57 00:02:43,520 --> 00:02:47,800 I'm going to do the revenue, I'm going to do everything by the year, not necessarily 58 00:02:47,800 --> 00:02:48,800 by the month. 59 00:02:48,800 --> 00:02:52,560 A lot of times when I break stuff down I'll break it down yearly and monthly because I 60 00:02:52,560 --> 00:02:54,480 want to look at it both ways. 61 00:02:54,480 --> 00:02:57,680 But ultimately to get my return on investment I need to know what I'm going to produce for 62 00:02:57,680 --> 00:02:59,780 a complete 12 month period of time. 63 00:02:59,780 --> 00:03:01,220 Now we're going to do a vacancy factor. 64 00:03:01,220 --> 00:03:02,400 What is a vacancy factor? 65 00:03:02,400 --> 00:03:06,240 A vacancy factor is I'm going to look at that house and I'm going to say well you know once 66 00:03:06,240 --> 00:03:09,720 every 14 months that house is going to come vacant. 67 00:03:09,720 --> 00:03:12,560 Once every 14 months it will be a 7% vacancy factor. 68 00:03:12,560 --> 00:03:18,120 So what I want to know is I want to know if this house goes vacant and I am really getting 69 00:03:18,120 --> 00:03:22,240 by by the skin of my teeth in my financials every single day. 70 00:03:22,240 --> 00:03:26,080 So I don't have a lot of extra money to come up with $2,100 for this month if I needed 71 00:03:26,080 --> 00:03:27,160 the $2,100. 72 00:03:27,160 --> 00:03:28,560 So I need to do that. 73 00:03:28,560 --> 00:03:32,120 I charge a vacancy factor then I would divide that by 12 and I would put that much money 74 00:03:32,120 --> 00:03:34,120 into an account every single month. 75 00:03:34,120 --> 00:03:37,600 So at the end of the year I have that money in an account and then I would let it build 76 00:03:37,600 --> 00:03:38,640 up a little bit too. 77 00:03:38,640 --> 00:03:39,640 So you just keep on putting it in there. 78 00:03:39,640 --> 00:03:42,940 If you don't use it you don't use it but at least have it there that way you always 79 00:03:42,940 --> 00:03:44,800 got that cushion and you don't have to worry about it. 80 00:03:44,800 --> 00:03:46,600 So vacancy factor is always important. 81 00:03:46,600 --> 00:03:50,400 I use one month every 14 months pretty much on everything. 82 00:03:50,400 --> 00:03:54,000 I never use less than a 7% and this would be unique to your investment. 83 00:03:54,000 --> 00:03:58,640 I mean if you go into an assisted living place and you're renting out a room to somebody 84 00:03:58,640 --> 00:04:03,200 that's in assisted living you may be renting to them until the day they die. 85 00:04:03,200 --> 00:04:05,780 So you don't have a huge vacancy rate. 86 00:04:05,780 --> 00:04:08,600 If they're 85 maybe your vacancy rate may only last 12 months. 87 00:04:08,600 --> 00:04:14,280 If they're 65 you may have 10 years, 15 years they're going to rent from you in that little 88 00:04:14,280 --> 00:04:16,240 portion of real estate that you own. 89 00:04:16,240 --> 00:04:17,360 So it is unique. 90 00:04:17,360 --> 00:04:20,760 You got to figure it out but I'm going to tell you right now before I would ever undercut 91 00:04:20,760 --> 00:04:24,680 it and try and make my numbers look good I would overestimate it and make my numbers 92 00:04:24,680 --> 00:04:28,680 look bad because I want my numbers to work in the worst case scenario just like I want 93 00:04:28,680 --> 00:04:30,560 them to work in the best case scenario. 94 00:04:30,560 --> 00:04:33,280 So if I figure my numbers up and they don't work in the worst case scenario I need to 95 00:04:33,280 --> 00:04:37,600 walk away from that deal because if I don't then that's going to cause me eventually 96 00:04:37,600 --> 00:04:41,340 it's going to cause me some type of a failure, catastrophic failure. 97 00:04:41,340 --> 00:04:43,200 So the total revenue will take the $30,000. 98 00:04:43,200 --> 00:04:45,280 We'll subtract the $2,100. 99 00:04:45,280 --> 00:04:46,280 Now we've got $27,900. 100 00:04:46,280 --> 00:04:52,200 We're going to use that number as far as our total revenue rather than using the $30,000 101 00:04:52,200 --> 00:04:54,840 because I want to take into consideration this vacancy factor. 102 00:04:54,840 --> 00:04:58,520 Now after we do the vacancy factor I'm going to put in here property management fees and 103 00:04:58,520 --> 00:05:00,280 I'm going to use 8% on property management fees. 104 00:05:00,280 --> 00:05:04,480 You say well I'm not going to use a property manager I'm going to manage it myself and 105 00:05:04,480 --> 00:05:08,720 I manage my own properties but my labor isn't free. 106 00:05:08,720 --> 00:05:11,160 The people that work for me their labor isn't free. 107 00:05:11,160 --> 00:05:15,160 So if you're going to manage it yourself you should get paid for that time you spend 108 00:05:15,160 --> 00:05:16,640 managing it. 109 00:05:16,640 --> 00:05:20,600 And if the business won't pay you for the time you spend managing your home then you 110 00:05:20,600 --> 00:05:22,360 probably don't need to get that home. 111 00:05:22,360 --> 00:05:25,520 If you start saying well I'm not going to charge you, I can spend time over there I'm 112 00:05:25,520 --> 00:05:27,160 not going to charge that. 113 00:05:27,160 --> 00:05:30,400 At least understand that you're cheating yourself out of a little bit of profit on 114 00:05:30,400 --> 00:05:31,400 that. 115 00:05:31,400 --> 00:05:32,400 I do that myself sometimes on stuff. 116 00:05:32,400 --> 00:05:36,280 I mow my own grass because I want to and I look at it like I ain't doing nothing else 117 00:05:36,280 --> 00:05:38,120 so I just go mow the grass. 118 00:05:38,120 --> 00:05:41,140 That may be your case that's fine but just understand it. 119 00:05:41,140 --> 00:05:45,760 That $2400 something happens to you and your spouse has to come in and manage that right 120 00:05:45,760 --> 00:05:48,760 there do they have the ability to manage it or are they going to use a property manager? 121 00:05:48,760 --> 00:05:52,200 If they're going to use a property manager it's going to cost them 8 to 10 percent. 122 00:05:52,200 --> 00:05:56,640 We need to put that in there so that when they run the numbers it's there. 123 00:05:56,640 --> 00:05:59,240 Never leave any numbers out there may cause you some issues. 124 00:05:59,240 --> 00:06:00,240 Next thing we're going to consider is insurance. 125 00:06:00,240 --> 00:06:05,920 So we've got a $254,000 house that insurance is going to be about $1500 a month or I'm 126 00:06:05,920 --> 00:06:06,920 sorry a year. 127 00:06:06,920 --> 00:06:07,920 We've got to put that in our equation. 128 00:06:07,920 --> 00:06:10,160 Next we're going to go into our property taxes. 129 00:06:10,160 --> 00:06:12,760 How much do we need to pay in property taxes a year? 130 00:06:12,760 --> 00:06:16,360 Understand whenever you're buying a piece of property that if you look at Zillow you 131 00:06:16,360 --> 00:06:19,200 look at the different places they have property taxes they're going to give you the property 132 00:06:19,200 --> 00:06:23,640 taxes on this house but the property tax is going to be at whatever value it was assessed 133 00:06:23,640 --> 00:06:24,640 at the last time. 134 00:06:24,640 --> 00:06:28,760 So if somebody bought it and they raised it 2, 3, 4 percent a year, year over year over 135 00:06:28,760 --> 00:06:33,740 year and it doesn't keep up with inflation and you go buy it and their tax appraisal 136 00:06:33,740 --> 00:06:39,360 says it's at $160,000 and you got it at $250,000 and that's what you got in it. 137 00:06:39,360 --> 00:06:42,440 They're going to charge you $250,000 on your taxes so it's going to go up that much. 138 00:06:42,440 --> 00:06:45,860 So understand you need to do the math on that right there on your property taxes. 139 00:06:45,860 --> 00:06:46,860 Do not assume anything. 140 00:06:46,860 --> 00:06:48,440 Do not assume anything on insurance. 141 00:06:48,440 --> 00:06:50,940 Call an insurance agent and find out that the insurance is going to be right. 142 00:06:50,940 --> 00:06:54,320 Make sure that you know exactly what you're going to pay and don't guess and don't take 143 00:06:54,320 --> 00:06:57,800 fictitious numbers off of Zillow and different sites like that. 144 00:06:57,800 --> 00:07:02,760 Verify with your local provider, whoever you're using for your insurance, your local real 145 00:07:02,760 --> 00:07:05,920 estate agent will help you get some of the property tax and stuff. 146 00:07:05,920 --> 00:07:07,880 Just make sure you got everything. 147 00:07:07,880 --> 00:07:10,640 Don't just run off of it, get it. 148 00:07:10,640 --> 00:07:11,640 Make sure it's right. 149 00:07:11,640 --> 00:07:16,280 It doesn't do us any good to go out and work our behinds off and work our behinds off and 150 00:07:16,280 --> 00:07:20,160 save up and save up and save up and go buy a house and that house still costs us money. 151 00:07:20,160 --> 00:07:21,160 We got to get that right. 152 00:07:21,160 --> 00:07:27,960 We're going to put a maintenance fee in there of $500 so I figure $500 a year on maintenance. 153 00:07:27,960 --> 00:07:32,080 All of my properties whenever we put them in there 100% I don't rent something that 154 00:07:32,080 --> 00:07:33,080 isn't. 155 00:07:33,080 --> 00:07:35,480 So if you're renting a property and you say well it's going to need a water heater then 156 00:07:35,480 --> 00:07:38,920 you need to put something in there so you can replace that water heater in 12 months 157 00:07:38,920 --> 00:07:39,920 or whatever it is. 158 00:07:39,920 --> 00:07:41,740 Add a little bit of money to an account. 159 00:07:41,740 --> 00:07:44,440 You got stuff that needs to be done to it. 160 00:07:44,440 --> 00:07:46,040 You have to figure in. 161 00:07:46,040 --> 00:07:49,680 If your air conditioner is 10 years old you may have a couple of service calls in that. 162 00:07:49,680 --> 00:07:53,440 Those service calls may cost you $800 a year if you're not careful. 163 00:07:53,440 --> 00:07:55,800 If you got a bad water heater that's going to cost you more. 164 00:07:55,800 --> 00:07:59,280 If you don't fix it in a timely manner and you got to fix it on a Saturday because that's 165 00:07:59,280 --> 00:08:01,640 when it breaks that's going to cost you twice as much money to fix it. 166 00:08:01,640 --> 00:08:04,680 So just pay attention, pay attention, pay attention. 167 00:08:04,680 --> 00:08:09,180 But I use a $500 number on that and I got multiple properties so I kind of spread that 168 00:08:09,180 --> 00:08:12,180 across everything and I dial a cost average on some of that also. 169 00:08:12,180 --> 00:08:14,080 You have to do what works best for you. 170 00:08:14,080 --> 00:08:20,140 So in legal and accounting I factor in about $400 a year to cover any legal expenses I'm 171 00:08:20,140 --> 00:08:23,960 paying to if I got to talk to an attorney about something or anything like that. 172 00:08:23,960 --> 00:08:28,760 And then I also have accounting I'm going to pay my accountant something for each individual 173 00:08:28,760 --> 00:08:32,800 property that they're managing for me so I got to pay the piper. 174 00:08:32,800 --> 00:08:36,040 Next thing I'm going to do is I'm going to take my total expenses so I add all my expenses 175 00:08:36,040 --> 00:08:38,280 up that comes to $8,500. 176 00:08:38,280 --> 00:08:39,920 That's going to be our total expenses. 177 00:08:39,920 --> 00:08:42,780 We're using a $27,900 as our total revenue. 178 00:08:42,780 --> 00:08:48,240 That's going to give us $27,000 minus the $85,000 is going to give us $19,350 a year 179 00:08:48,240 --> 00:08:50,360 that we make off of the house. 180 00:08:50,360 --> 00:08:52,640 We take all our expenses out of it for the year. 181 00:08:52,640 --> 00:08:55,320 We put all of our revenue to $30,000. 182 00:08:55,320 --> 00:08:58,240 We take out the vacancy factor right there and now we've got $27,000. 183 00:08:58,240 --> 00:09:00,320 We're taking everything from a worst case scenario. 184 00:09:00,320 --> 00:09:01,320 What if this happens? 185 00:09:01,320 --> 00:09:02,320 What if that happens? 186 00:09:02,320 --> 00:09:03,320 What if we make it? 187 00:09:03,320 --> 00:09:07,040 We make it and yes, we got $19,000 so let's see what that return is. 188 00:09:07,040 --> 00:09:12,520 To get your return what you got to take is $19,350 and you have to divide it by that 189 00:09:12,520 --> 00:09:13,520 $27,900. 190 00:09:13,520 --> 00:09:16,880 I'm going to fast forward through your slide right here. 191 00:09:16,880 --> 00:09:18,800 While I say that we'll just go down and read it. 192 00:09:18,800 --> 00:09:21,960 So right here we're talking about your rents equaling your income and whenever we're figuring 193 00:09:21,960 --> 00:09:23,560 everything out we want your total expenses. 194 00:09:23,560 --> 00:09:25,640 That means every single expense you have. 195 00:09:25,640 --> 00:09:28,800 If you're going out and buying a nail it needs to go into that property. 196 00:09:28,800 --> 00:09:32,580 We need to charge it off of that property and we need to know where our numbers are. 197 00:09:32,580 --> 00:09:34,440 Take your rents, subtract them from your expenses. 198 00:09:34,440 --> 00:09:35,600 This gives you your total cash flow. 199 00:09:35,600 --> 00:09:37,480 We just saw that on a previous slide. 200 00:09:37,480 --> 00:09:40,040 Your income minus expenses is cash flow. 201 00:09:40,040 --> 00:09:42,760 Other known as your net operating income. 202 00:09:42,760 --> 00:09:46,960 NOI total cost of property gives you your return on investment. 203 00:09:46,960 --> 00:09:51,320 So your NOI divided by total cost of the property gives you your total return on investment 204 00:09:51,320 --> 00:09:52,320 and that's what it's all about. 205 00:09:52,320 --> 00:09:53,320 We're going to invest money. 206 00:09:53,320 --> 00:09:54,700 We want to know what we're getting for it. 207 00:09:54,700 --> 00:09:56,280 So now we divide that. 208 00:09:56,280 --> 00:09:58,120 It comes to 7.6%. 209 00:09:58,120 --> 00:10:01,480 So that would be a cap rate or that would be our return on investment. 210 00:10:01,480 --> 00:10:05,160 Some people have struggled with the fact that I'm using the word cap rate. 211 00:10:05,160 --> 00:10:06,800 That's just how I was taught. 212 00:10:06,800 --> 00:10:09,720 Cap rate is used more on commercial than it is residential. 213 00:10:09,720 --> 00:10:10,800 But it's the same thing. 214 00:10:10,800 --> 00:10:14,720 Your return on investment, your net operating income, it's all the same. 215 00:10:14,720 --> 00:10:15,720 It doesn't matter. 216 00:10:15,720 --> 00:10:18,540 So I got 7.6% right there on the cap rate. 217 00:10:18,540 --> 00:10:20,440 Would you buy it for 7.6%? 218 00:10:20,440 --> 00:10:25,560 I think right now in today's market, Nick, 7.6 is about as good as it gets. 219 00:10:25,560 --> 00:10:31,400 It's not a bad return right now and it ain't what it was a couple years ago but it's not 220 00:10:31,400 --> 00:10:32,400 bad. 221 00:10:32,400 --> 00:10:33,400 All right, we're not going to go over that. 222 00:10:33,400 --> 00:10:35,720 We'll come back and do a different slide in a little while. 223 00:10:35,720 --> 00:10:37,080 That covers running the numbers. 224 00:10:37,080 --> 00:10:57,480 Y'all have a great day.