How to Live Off Rental Income: The Real Estate Wealth Formula
Published: 2024-10-25
Status:
Available
|
Analyzed
Published: 2024-10-25
Status:
Available
|
Analyzed
Predictions from this Video
Incorrect: 0
Prediction
Topic
Status
The speaker targets a 7% cash-on-cash return on real estate investments, equating to $7,000 profit annually for every $100,000 invested.
"I want this noi to give me a 7% cash on cash return turn out my money meaning if I invest $100,000 in my own cash I want $7,000 worth of noi $7,000 worth the profit every year after paying for my expenses"
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The speaker prioritizes investing in real estate locations experiencing population growth, business influx, and capital movement, believing these factors will drive future rental income and property value appreciation.
"I want this to be in an area where I believe the populations are growing where I believe businesses are moving too where I believe people are wanting to move too where I believe the money is moving too because that's going to help increase inrease the rental incomes in the future and also increase the property values"
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The speaker views real estate investing as a passive activity, relying on property managers to handle the day-to-day operations after purchasing the assets.
"for me this is a passive investment and what I mean by that is I take the money that I'm earning I put some of it aside and then I invest this money into real estate now I buy this real estate and I have it managed by a property manager"
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To achieve an annual income of $100,000 with a 7% return, an investment of approximately $1.42 million in real estate is required.
"if you want $100,000 a year and you get a 7% return on your money you have to invest $1.42 million in order to generate that return"
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The speaker prefers 'value-add' real estate deals, which involve improving distressed properties, because they offer higher potential returns and the satisfaction of community revitalization.
"Me personally I prefer these value ad deals because to me that's more fun I like revitalizing communities and I like the idea of getting higher rates of returns"
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Turnkey properties are defined as ready-to-rent real estate, such as fully occupied apartment complexes, where the primary investment goal is acquiring existing cash flow.
"TurnKey properties are your properties that are ready to go these might be apartment complexes that are fully rented out they have tenants already there that are paying rent and you're just buying the cash flow"
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Value-add real estate deals are predicted to yield higher rates of return due to their inherent risks, compared to turnkey properties which offer lower risk and consequently lower potential returns.
"Take guess which one do you think is going to pay you the higher rates of return this one the value ad deals higher risk but also higher potential returns"
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Business migration into a neighborhood is predicted to drive population movement, which in turn attracts capital, indicating a cyclical relationship between these three factors.
"what you'll see is that all three of these almost move always in Tandem and the reason why is because when businesses move into a certain neighborhood people have to work in those businesses and as people work in those businesses the money falls follows the people"
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The speaker advocates for investing in real estate markets where population is increasing or stable, specifically avoiding areas with declining populations due to anticipated lower demand for properties.
"I want to be investing in a neighborhood or a city where the populations are rising or at the very least staying the same I don't want to be investing my money into an area where people are moving out of because if people are moving out that means you have less demand for properties in the area"
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A formula for calculating real estate profit involves subtracting property taxes, insurance, maintenance, and management fees from rental income, even if self-managed, to account for potential future management costs.
"you take your rental income then you subtract your property taxes your insurance your maintenance costs because I don't care how nice a property is you always want to factor in some maintenance costs subtract your management fee even if you're not going to manage your property yourself add in a management Factor add in a management cost"
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A general rule of thumb suggests allocating approximately 15% of monthly rental income to property taxes, 5% to insurance, 8% to maintenance, 8% to management, and 8% to vacancy.
"your property taxes might cost you around 15% of your monthly rental income your property insurance might cost you another 5% of your monthly rental income your maintenance might be around 8% your management another 8% and then vacancy another 8%"
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Based on typical expense percentages, annual costs can equate to roughly one month's rent for vacancy, management, and maintenance, nearly two months for property taxes, and slightly less than one month for insurance, leading to Net Operating Income (NOI).
"every year about one month of rent for vacancy one month of rent for your management fees one month of rent for your maintenance costs and then almost 2 months of rent for your property taxes and a little bit less than one months of rent for your insurance costs what does this translate to"
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During the 2021-2022 housing boom, many investors acquired real estate with negative net operating income (NOI), resulting in monthly losses, expecting future appreciation to offset these costs.
"what I have seen especially in 2021 and 2022 when we were seeing the big boom in the housing market is a lot of people were investing in real estate with negative nois with negative returns here meaning they had to pay money every single month to keep these properties because they were cash flow negative"
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Key indicators for real estate investment location selection are the movement of businesses, people, and money.
"I want to see number one where are businesses moving to number two where are people moving to and number three where is the money moving too"
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Real estate properties can be broadly categorized into 'Turnkey' (ready to rent) and 'Value-add' (requiring renovation or improvement).
"in general you have two different categories of properties you have TurnKey properties and value ad properties"
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The speaker suggests that traditional views of generational wealth, focused on paying down mortgages on owned homes, are not the ideal model for true wealth transfer, implying a different strategy is superior.
"when most people think of generational wealth they're thinking I own this home that's worth $600,000 with a $500,000 mortgage then I'm going to work to pay down my mortgage to 0 that with then I can pass down this house to my kids but that's not what real generational wealth looks like"
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