Jeff, Brett, and Richard discuss the intricacies of real estate investment, focusing on return on investment (ROI). Brett highlighted the importance of understanding both gross and net ROI, emphasizing that while many investors initially prioritize gross figures, net ROI, factoring in expenses like management costs and taxes, provides a more accurate reflection of true profit. Brett debunked get-rich-quick schemes promoted by some real estate seminars, urging prospective investors to adopt a more realistic, cautious approach and consult experienced professionals for sound advice.
Brett
0:00:43 – Welcome back to another episode of It’s 5 O’Clock Somewhere Real Estate Podcast. I’m Brett Barnard. With me is Jeff McNett, Jerry Zigman, and our Wanker producer, Richard, is also here. You want to get a mic so you can participate? I’d like for you to participate. Be more fun if you do that. We are sponsored by Title Assurance and Escrow, 901-737-3332, and we’re also sponsored by the Stamps Real Estate Company. We are the investment division of that. We deal with investors around the world, across the country, buying, selling, rehabbing investment properties and we do a lot of work helping young investors get educated and Teaching them about the investment world and help them get started. So 901-692-7401 or You can go to our website MyMemphisInvestmentProperties.com and check us out. We’d love to hear from you So Jeff made a comment to me as we talked last night about digging more into ROI, cap rate, return on investment, whatever term you want to use, but basically it’s what is your return on the amount of money you invest. So Jeff, specifically, what question would you have?
Jeff
0:01:50 – Well, I just want you to explain it in more detail. I thought I had it figured out until you had mentioned you had spoken with one of your investors and just gave you a whole different outlook and take on the whole ROI situation. Can you just explain it to us?
Brett
0:02:06 – Yeah, ROI, return on investment, cap rate, whatever you want to call it, everybody determines their own rate of return. They all have their own formula, but for simplistic reasons, let’s take $1,000 a month in rent on a $100,000 house. So you paid $100,000, you’re all in, your rent’s $1,000 a month, your gross cap or your gross ROI is 1% or 12% a year, 12% annually. But out of that, you’ve got to determine your management costs, your taxes, mortgage payment if you took a loan out, and then your reserve account. So there’s different areas of money out of that $1,000 you have to pay out in expenses and put away. So let’s say $250 is, after you pay all your expenses, how much you’re making on that house per month. And I’m not a math whiz, so let me figure that out. So at the end of the day, we’ve got a $100,000, it’s pretty simple to figure out. That puts your net ROI at 3%. Net, clear. But most investors don’t worry about net ROI. Their concern is mainly, what’s my gross cap? What’s my gross ROI? Because then from there, they can hit a base point of return that will grow year in and year out as rents go up, as values go up, they recalculate it to get their return higher. The goal is pulling at least 8, 9, maybe 10 percent and then 15 years from now, you know, your house is paid for. So keep in mind, your net ROI is really dependent on your expenses. If you mortgage a property, your net ROI is going to be less. Your gross is going to be the same before you take out your expenses. But in that ROI or that cap rate, you don’t really calculate your taxes and interest into that ROI calculation. You just calculate the principal balance of that expense. Some guys calculate everything, some guys don’t. So at the end of the day, the easiest way to look at this is you should be starting out at a 12% gross cap, 12% gross ROI. However you want to figure your expenses is up to you. Which that raises the question with this gentleman I was talking to over in Israel, who manages some trust funds with a ton of real estate in them. And his question to me was, Brett, if you mortgage a property for $100,000 and you only put $20,000 down, you borrowed the other $80,000. And at the end of the day, you’ve got a tenant in place that’s paying your rent of $1,000 a month, and that’s covering your expenses. So what’s your true investment? Well, a beginner investor would say $100,000. No, you’re not writing a check every month. You are writing a check to the mortgage company every month, but you’re collecting income against that. Now, at the end of the day, your actual ROI is about the same. But when you look at it from that perspective, it opens people’s eyes up to what’s called leveraging. So you take that $100,000 you would have paid cash for a home and you split it up five ways and buy five houses. As long as you’ve got tenants in place covering your expenses, then you can recalculate your ROI in a different manner because you’re not physically investing money into that property every month out of your own pocket. It’s rented, the tenant is paying those expenses for you. So in essence, the tenant’s putting money into your investment account, into your investment asset for you every single month with a rent check. It covers your taxes, it covers your payment, it covers your management, it covers your surplus account, it covers your maintenance, and you still put $250 profit in your pocket. So if you take that $250 and people say, yeah, but that’s only 3% of my gross investment. No, it’s not. Now you recalculate that $250 times 12, which is $3,000, into $20,000. That’s all you’ve got invested. Now your net ROI is actually 15%. Does that make sense? And that was his point. He says a lot of these young, I forgot the term he used for them. There’s a Jewish term because I’d never heard it before anyway. He says a lot of these young investors get all caught up in, oh well, you know, I need to have, I need to buy it at 80 cents on a dollar to make money at this level and that level, they don’t truly understand what kind of return they’re getting on their little bitty $20,000 investment. And if they did, it would change the way they calculate investing in real estate. So these clowns in California that do these seminars that I keep knocking on and keep talking about, I talk about them because unfortunately we have to deprogram a lot of the guys that call us who get out of these seminars about how to invest in real estate because these guys are pitching a pie in the sky process that doesn’t work. It works for them because you’re paying them the $1,500 or $2,000 to be there for the day, but it doesn’t work for you in the real world. My attitude is if I had a genius idea that no one else knew about that worked and make me millions and millions of dollars and make me a real estate investment tycoon, why would I go out and sell it to everybody else?
Jeff
0:07:18 – You wouldn’t.
Brett
0:07:19 – That’s right. They sell it to everybody else because it doesn’t work the way they tell you it does. So for those of you who have gone to a seminar, if you’re about to start investing, rethink what you learned because the truth is the investment world can be a very windy road and there are a lot of different turns that you can take and a lot of those turns can be disastrous So you need to get with an expert get with somebody like us give us a call so we can talk to you about it So that is the one thing they’re not preaching right is They’re telling these kids that you need to go buy a house 80 cents on a dollar Well, that’s that’s great in theory But if you have a house at 50 60 70 or 80 cents on a dollar, you know where you’re going to be. In a D neighborhood, where you’re probably going to lose all of the $10,000 of improvements you put into the house before you even rent the house back out. But if you get into a C or C plus neighborhood, and you only have $20,000 down on a $100,000 purchase, your true ROI is cash on cash is 15% or 16%. That’s something the so-called experts won’t talk to you about. What they’ll talk to you about is you buy this house for $80,000, it’s worth $110,000, then you put a little money into it, then you go take out $10,000 or $15,000 or $20,000 equity and you roll that into buying your second house. It’s the BRRR method, which is great, but eventually you run out of equity to tap into. I have guys that will go pay $100,000 for a house, get it renting, get it cash flowing, then they’ll refinance 80,000 of that back out and then reinvest the 80. That’s the same thing as putting 20 grand down. You’re still only have 20 grand invested. Figure it out R.I. There’s a million ways to do it. The truth of it is all you do is determine how much cash you’re going to invest and how much money you’re making, period. That’s it.
Richard
0:09:10 – One of the things that we’ve spoken about before is the fact that the market has shifted so much it doesn’t really make any sense anymore to look for that property that you’re going to fiddle around put money into and waste time doing a remodel of it’s actually better going to a new property and having something ready to go that’s got the warranty with it that’s got new technology that isn’t likely to fail in the first 12 months and to me part of ROI calculation needs to be risk mitigation. What can I do to mitigate my risk?
Brett
0:09:41 – Well, as anything, any investment, higher risk, higher reward. So there is a level of guys that have experience that want to go into a neighborhood and buy a $60,000 house, dump 20 into it, it gets appraised at 95, it rents for 1,000 a month to give them that big boost. New construction, in my opinion, is key for anybody that is looking for turnkey cash-flowing properties that don’t need a lot of maintenance or a lot of work, and that’s where the new construction home and you put down 20% so you’ve got $35,000 invested and it’s producing $1,695 a month. Your ROI is still well up in the 15, 16, 17% range. Now if you pay cash for it and do a cash on cash return then obviously that number is going to come way down because you’ve got that much invested. But if you pay cash for it, your next move should be to get it occupied, get it cash flow and go to your bank, refinance it, take out 80% of that money so you’ve only got the 20% invested and roll that 80 into another property and do it over and over and over. But for new investors who don’t have 100 grand, 200 grand just laying around in their bank account to do something with, borrowing money is the right way to do it. Leveraging what little money you have is the smart way to do it. But when you calculate your ROI on leveraging money, don’t get caught up in the gross numbers. Look at the true investment versus the true return. And when you start doing that, then you understand why so many people are involved in buying rental real estate. And new guys typically don’t get that. They look at gross numbers, apples and oranges, and they get all caught up in this, well, that’s only 8% ROI. How much are you investing? 20 grand. No, they’ll tell you I’m investing 100 grand. No, you’re not. The bank’s investing 100 grand or 80 grand, you’re putting in 20. As long as you’ve got a tenant paying your expenses, what’s your true return? When you think of it, when he said that to me, and I’ve been in his business a long time, it never really had an impact on me when I thought of it that way until the way he put it to me, and then it made sense. And now I feel like that’s something that we should be talking to new young investors about. So when you asked a couple episodes ago about what does someone truly need to get started to buy their first house, I’m going to say $20,000. If you can do $20,000, if you have 20 grand you can invest, you know, you have a credit score, you know, over 600, you don’t have some crappy credit score, you can buy your first house. And if you can buy a house that’s going to rent for $1,000 a month, that’s going to clear you $250 a month, your ROI, your returns, is going to run 14, 15, 16% on that first property, period.
Richard
0:12:38 – Of course, that $20,000 doesn’t take into consideration some things that someone who was fiscally conservative might like to have there, such as a reserve fund.
Brett
0:12:47 – Well, I mean, most likely when you do your calculation off your expenses of the rent of a thousand a month, you should net two to two fifty, maybe even three hundred a month. And that includes a reserve account, your principal, your interest, your taxes, your management. And that reserve account is for your maintenance, right? For you to take care of that cracked window or the clogged toilet or the leaky pipe under the sink. If you don’t have any of those things, in four or five years, the HVAC blows up, you’ve got, you know, four or five grand sitting there to buy a new one. But again, that’s not your money, right? That’s money you’ve gotten from the tenant. That’s someone else that has paid you that money that you’ve put away to take care of those expenses. So even though if you put true numbers on paper and you deal with it in a simplistic form, you still only have 20 grand invested in that asset, which eventually that tenant or tenants are going to pay off that mortgage. Now what’s your true ROI?
Richard
0:13:42 – Well, that’s the long-term view, isn’t it? On the front end, you should create a very good plan as to what you want to do and when you’re going to execute your exit strategy and what that exit strategy is going to be. If over the course of 20 years, I accrue 30 properties that are in the $100,000 range, when I come to sell those, I just need to consider how much have I put into each of these houses over the course of ownership, subtract that from the sales price, and then factor out my ROI from that.
Brett
0:14:11 – Well, if you’re smart, you would do a 15-year mortgage, 20% down, 15 years from now. Let’s say you just buy one a year, very conservative movement. You’re not going to go jump out and buy 30, and you’ve got 15 properties that were worth 100,000 when you bought them. Rule of thumb tells me that 1.5 million in real estate that you now only have 300,000 cash invested into is now worth, it was 1.5 when you purchased them and now it’s worth 2.5, somewhere in there as an asset. Take your investment and divide it into 2.5. Take your 300 grand and divide it into 2.5 million. Let’s say that’s the value of the property. So you got 300 grand, let’s see, 15 properties, 300 grand invested, cash. Now let’s just throw in another 50 for shits and giggles. Let’s say you had some instances where you had to pull money out of your pocket to fix something because you didn’t have enough reserves. That’s still a 14% return on your money in 15 years on the actual just cash on cash value. It has nothing to do with your income portion of that ROI. That’s just your increase in return on your overall cash on cash investment. Does that make sense, Jeff? Or did I lose you?
Jeff
0:15:28 – It makes sense. Fourteen percent is a lot better than five to seven percent on the stock market over the course of the same amount of time, for sure.
Brett
0:15:37 – You know, we preach that investment is a good investment tool, but it is not, I’m going to buy this today and it’s going to double in value tomorrow and I’m going to get rich. That’s not the focus of investing in real estate. You invest in real estate for long-term asset wealth building. If you want to get rich overnight or go broke overnight, then put all your money in the stock market and hope that it goes up 20-30% tomorrow and cash out on time or you end up losing it. Investing in real estate is never going to be that way. You’re never going to put in money and make double your money overnight. It’s something that’s going to take time and it’s going to have to grow. But please take the time to understand what your true investment and true return on investment is compared to what these clowns in California or whatever seminar you went to are telling you because they’re selling you a bill of goods and an idea. Basically they’re reinventing the same old idea that’s been around for a hundred years. They’re throwing in a new twist here and there, a new word here, a new acronym here to try to make you think it’s something new but it’s not. Investment is very simple. You put money in, you make money out. That’s investment. So determining the investment depends on how much money you put in how much money you can make back out of it So figure your numbers correctly
Richard
0:16:57 – Yeah, I’m just thinking about your math there because you know 14% What you’ve calculated is the proportion of what you’ve invested It’s not the what you’ve actually made and my point is that when you get to it and you sold it, you’ve now got 600% of what you actually put in.
Brett
0:17:19 – Sure. Yeah. I don’t know the exact percentage, but if we sat down and figured out month in, month out cash flow, take all the expenses out, then the sale of the property at whatever the proposed value would be at that time, you’re probably right. You’ll never get that in the stock market. I don’t care what expert you talk to.
Jeff
0:17:37 – Yeah, all I heard was you made almost $2 million with a $350,000 investment over the course of 15 years, one house at a time, and you never had to, and your tenant paid your mortgage, your expenses, your property taxes, your insurance, and you capitalized on the equity, not the tenant. That’s all I heard. That’s how simple it is for me.
Brett
0:17:57 – But that’s not what you hear at these seminars. No. They’re not talking about it. Not at all. They’re looking for, most of these guys that call me out of these seminars are looking for a get rich quick scheme, right?
Jeff
0:18:09 – There’s a zero chance you’re going to get rich quick in real estate.
Brett
0:18:11 – I’ve got $100,000. I’m going to turn it into $2 million in the next two years and I’m going to buy 30 properties and I’m going to do this and do that. And that mindset is dangerous. I’ve watched a lot of young investors blast off like rockets and just crash within a year, like total belly up because they just didn’t plan properly. There are so many aspects to investing in real estate and these guys that you just paid $1,500 to are not going to tell you all those aspects. Why? Because they will make you cautious and they don’t want you to be cautious. They want you to be fired up, ready to set the world on fire tomorrow so you’re writing that check and buy their book and buy their plan and all the stuff they’re going to sell you to go out and get rich by giving you caution and giving you things that will cause you to take a step back and rethink doesn’t really incite you to write checks to them to buy their material. So that’s the only problem I have with these seminars. If they would teach these kids the right way to invest, then it would be worth something. But just teaching the kid a pie in the sky dream so you could pitch him, you know, your ongoing support, your once a week webinars that they can get on, and the instruction manual that they give you on step-by-step how to do it. That’s all they want from you, is they’re selling you a product. They don’t care if the product works or not. On our end, our investment team, we actually care if the product works because here’s why. You come to me and I get you your first rental property, well guess what? If I screw you and it’s not a good rental property, are you ever going to buy from me again? No. But every one of our investors have bought 5, 10, 20, 30 properties from us over and over again because we do the job right on the first one and on the second one and on the third one and so on and so on. Listen, if you call us 901-692-7401 and you talk to me and you don’t like me because you just don’t like my name or you’ve talked to Richard and you think I’m a wanker like he is. Then I send you to Jeff and you don’t like Jeff because he just seems like he’s just too laid back. You talk to Jerry and you don’t like Jerry. So what? At least call us and get some valid, true life investment information from us. Use us for that purpose. I will venture a guess that if you called us, you’d be buying property through us in a matter of a week or so, once you’re done talking to us. But for whatever reason, if you don’t like us, still pick up the phone and call us. I will be glad to sit and talk to you free of charge about real estate investment. I’d really love to hear your take after getting out of real estate seminar on your investment strategy. I won’t laugh at you, but I will give you some worldly advice based on what you tell me. I mean, let’s face it. Many men have tried to reinvent the wheel. The wheel is the wheel. It always is round. It rolls. Everybody tries to reinvent it. It doesn’t work like the original wheel. is I liked your analogy though. You’ve taken a $350,000 investment and made over $2 million in 15 years. With little or no risk involved. Call your stockbroker at Wall Street and tell them, I’m going to give you $350,000. I want $200,000 back in 15 years. He’ll laugh himself right off the 80th floor window and end up splattered in Madison Avenue. It’s just not doable. It’s 5 O’Clock Somewhere Real Estate Podcast, 901-692-7401, MyMemphisInvestmentProperties.com. Check us out, give us a call. Appreciate it, thanks.