Return on Amortization

Return on Amortization

Jason Hartman gives homage to the late Kobe Bryant, reading a letter Kobe wrote about money. Then he hosts investment counselor Naresh. They discuss different markets specific to Florida. Jason reexamines his “Refi ‘till you Die” strategy. Then ends the show explaining ROA (Return On Amortization).

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Announcer 0:18
Welcome to the young wealth show where you’ll truly learn how to make, spend and invest money for an awesome life. Get the real life stuff that wasn’t part of your school curriculum. Young will gives you innovative new ways of dealing with your finances, as well as the skills and tools you’re going to need to survive and be successful out on the road. Let the young wealth show be your GPS to take you from clueless to clued in. here’s your host, Jason Hartman. Young well.

Jason Hartman 0:50
Thanks for joining us today. Naresh has not been on the show for a while but here he is. Welcome back. nourish.

Naresh 0:56
Hey, good to be back on

Jason Hartman 0:58
now. Something big has changed about You since you were here last, and that is that you are now a dad. So I want to wish you a Happy Father’s Day. Tell us about your new arrival.

Naresh 1:08
Thank you. Yeah, he’s two weeks old, actually. 15 days old. So a little over two weeks old. And as healthy as as can be keeping those busy late at night. Definitely our lives changed for the better. And actually, I didn’t tell you this, but we listen to your podcasts late at night when I’m trying to put him to sleep. I’ll just turn on the show. And that serves as a little bit of white noise for him. And he actually so far the results have been quite good.

Jason Hartman 1:39
You mean you have him listening to the podcast? Yeah,

Naresh 1:42
yeah. Listen together. I

Jason Hartman 1:44
love this. This is great, folks. This is great. Okay, so we have our youngest listener now. Okay, fantastic. That is absolutely great. And a future real estate investor. Well, he’s gonna he’s gonna be asking A couple of questions before preschool niresh in the next couple of years number one is what properties should he buy? Number two is when he should refinance. Your son is going to be way ahead of the game here. So let’s talk about a property. You’ve got a couple you wanted to talk about today.

Naresh 2:17
Yeah, and I know that you really like the new home construction. So there are two new home constructions that I really, really like they’re currently up on your website, Jason The first one I want to go over is Jacksonville. New Construction four Plex. Yeah. So this is, again, for those listening, you can go to the Jacksonville section of Jason These four plexes are I mean, they look they look great. They’re brand new, they’re awesome growing areas in Jacksonville proper, not in kind of a mountainous suburb. 40 minutes away. They’re four units, so four doors. Each one is two bedroom, two bathroom. Estimated rent is 41 $100 and of course, that’s compared to what the the price of the overall for Plex is about $486,000. So this is on the pricier side because it is four units. It’s a four Plex. But the rent to value ratio is almost point 9%. It’s point eight 5%. You know, you know, you you just reminded me of something. And I’ve chronicled this story many times I got ripped off by a property manager. years ago. It was a four Plex that I bought in Missouri. Interestingly, the rent to value ratio for this property over 10 years ago, was not that far off of this one. And this is Jacksonville a more desirable market.

Jason Hartman 3:50
Yeah, it’s 10 years later. This is a really good looking deal. is I mean, I mean, $485,000 projected rent 40 $100 I don’t know how you’re not going to get 40 $100 for four units. I mean these are these are two bedroom two bath and they’re only renting for what is that? 1050 no less than 1050 each.

Naresh 4:14
Yeah less than 10

Jason Hartman 4:16
how other 1025 apiece How was that? How are they running so cheap?

Naresh 4:20
This is this is I’m not sure why the rents are they’re not single family they’re two bed two bath

Jason Hartman 4:25
Well, no, but even then

Naresh 4:27
I mean a two bedroom two bath for 1025 a month is pretty good new construction. It is it is quite good. You brought up $486,000 so that downpayment 20% down is is going to be quite steep. We’re talking close to $150,000 and downpayment on this, including closing costs. All the

Jason Hartman 4:48
other expenses are you got projected cash flow of $817 per month in projected cash on cash return of 8% for brand new construction in Florida, this video I love this.

Naresh 5:01
I absolutely love it. Yeah. And the pro forma you’re looking at that’s assuming a 25% down, downpayment. Oh, so the cash in cash is actually so it would actually be probably into 9% or 8% 9%. And it will be higher the numbers would be even higher. Okay.

Jason Hartman 5:21
Yeah, check that out at Jason Hartman, calm. All right, nourish. So anything else on this four Plex this deal looks pretty great.

Naresh 5:29
Well the four Plex is definitely a go to but I also like another property or a few other new home constructions outside of Memphis so not in Memphis proper. It’s actually in robinsonville slash Tunica resorts part of Mississippi. I myself closed on one of these homes recently. And there are new constructions. We have one available it’s $150,000. For those who don’t know Tunica resorts at one point maybe 1520 years ago. was named the number three resorts city in the United States after Las Vegas and Atlantic City. Think of like the Vegas of the South.

Jason Hartman 6:09
That’s really interesting. I’m surprised even Branson, Missouri didn’t make that list. That’s interesting. So this Tunica was number three, huh?

Naresh 6:17
Wow. So when it goes number three, and I think it’s because I went to Branson to the Ozark Mountains. So a couple years back, and I think the difference is in Tunica. It’s like a casino capital. So it’s like Atlantic City in Vegas. I mean, you got casinos everywhere. Whereas Branson I don’t think there are any casinos. It is an entertainment capital. There’s a lot to do there. It’s good for the kids. But I’m not sure that they have any casinos there. Yeah, I can

Jason Hartman 6:43
say I remember I don’t gamble so I don’t think much about casinos, but interesting. Okay, cool.

Naresh 6:49
So this property might rent for 1295. Again, about $150,000 home, so the rental value is close to point 9% which is for new construction, that’s pretty great. It is.

Jason Hartman 7:03
It is well, okay, so projected rent 1295 prices 149 nine, and with 20% down, that’ll give you a cash on cash around 9%. And even though I don’t like the metric crap rate or cap rate, this one 7% that is good. And overall return on investment projected at 32% annually. Now, if you’re new listener, and you think 32% is like really crazy, ridiculous high number. No, it’s not learn how to do the math of income property. Because income property is a multi dimensional asset class. Go check out the free video on the front page of Jason Hartman calm on how to analyze a real estate deal. And I will explain in detail how we come up with the overall return on investment. These are conservative projections. And they take into account vacancy rate management fees, maintenance expenses. You’ll see it all there on video where we look at a performance in depth for 27 minutes, and every single number on that performance is explained to you. That’s a free video on the front page of Jason Hartman, calm, beautiful, that’s great projected cash flow $283 per month. Okay, fantastic nourish. So my old neighbor from back when I lived in Newport coast, California, sadly died recently and everybody is going to know who we’re talking about because it’s been in the news, a world famous person that is Kobe Bryant. He had some good advice to his younger self I letter that you discovered, right?

Naresh 8:49
Yeah, so this is a letter he wrote what really impressed me was he retired in 2016. And when he wrote this letter to himself, he could have talked about His accolades his championships, he could have talked about any of that stuff. But instead he decided to talk about money and economics and specifically, the value of money and when it’s okay to give money to your family and how you should give money to your family and your friends, and his philosophy on money, I think aligns with with you and me and many other guests who you’ve had on your show, which is give people enough so that they can invest in themselves to improve themselves. Don’t just give them a bunch of cash whenever they ask for it so they can buy houses. He specifically lays out cars and houses I guess those are the two most popular things people like to buy. But he wrote this just really, really good piece a few days after he retired and they came back with after his death. Different economics. Actually the foundation for Economic Education is the one who reprinted this and added comments Terry to it, and tied it into the government inside look like this athlete got it. And he breaks it down like an economist would on the benefits of giving money to people or giving them enough so that they can help themselves. I think we should link to this piece. We’ll probably put it in the show notes. But he makes just a lot of good cases through experience because he had family members take from him, his parents, his mom, his dad, his sisters. They basically took from him spent all the money and then kept asking for more, and he cut them off. He specifically says gangers health and education, learn a skill, but I’m not going to give you money to just go and buy a house. Right? Obviously not a rental property but

Jason Hartman 10:44
good stuff a hand up rather than a handout, and I couldn’t agree more with that philosophy. Interesting coming from Kobe Bryant. You know, you don’t usually see an athlete. Usually these guys are not that smart. Okay. They blow their fortune they spend stupidly. You know, they spend like drunken sailors and a lot of them for example, in the NFL, of course, yesterday, we had the Super Bowl. You know, we’re recording this before the Super Bowl. So hey, we don’t know what happened, folks. But, you know, they end up broke these guys. I mean, you know, these NFL players that make millions and millions and millions of dollars that just go bankrupt. You know, how do you use or lose your money like that so irresponsibly? It’s really it’s really sad, but you know, Kobe talks about wise generosity, and economics and human action in this article. That’s, that’s pretty interesting. And I like it. I like this group. You know, Effie, I’ve donated money to them myself, foundation for economic education. That’s a good group so that this article is on their website, and we’ll share it in the show notes. Yeah, and

Naresh 11:49
let me just read one paragraph from the article which I think the listeners will will like, and here it goes, quote, invest in their future. Don’t just give us your Success, wealth and influence to put them in the best position to realize their dreams and find their true purpose. Put them through school, set them up with job interviews, help them become leaders in their own right. Hold them to the same level of hard work and dedication that it took for you to get to where you are now, and where you will eventually go. As time goes on, you will see them grow independently, and have their own ambitions and their own lives. And your relationship with all of them will be much better as a result. Before you sign that first contract, figure out the right budget for your parents, one that will allow them to live beautifully, while also growing your business and setting people up for long term success.

Jason Hartman 12:49
Hmm, good. That’s good advice. Good advice. You know, he could be seen at the grocery store the same one I would go to all the time in Newport coast Vaughn’s market on Newport coast Boulevard. He lived right around the corner from me. Oh, wow. Just I lived on coral reef. And he I don’t know, I can’t remember what street he lived on. But I used to walk my dog near his house and you could walk to Kobe’s house for mine and seven minutes, five minutes, maybe. Yeah.

Naresh 13:15
Oh, wow. Right. I had no idea. Well, you lived in a hotspot of La so I’m sure many Yeah,

Jason Hartman 13:20
yeah. Well, you know, Newport coast, California, Orange County, California, south of LA is a really, really high end area. So there were there were lots of mostly business celebrities, I’d say that lived there. The Broadcom people and while they didn’t live in Newport coast, but they live in I think cameo shores, which is technically Corona Del Mar right around the corner. But yeah, Orange County as they call it, orange on the Riviera. It’s a risky place. So no surprise that Kobe live there. Dennis Rodman live there. You know, all kinds of Dennis Rodman are ambassador of North Korea, you know, yeah. That’s a joke, by the way. Good stuff. Okay. Well, hey, you had a couple of questions. You wanted to go over. So refinancing? That’s a question we get asked all the time near rash. When is the best time to refinance my properties? What is the reason to refinance my properties? and so forth? And the answer to that question is multi dimensional. But the thing I want to say about it, and by the way, pardon my voice, I’m still a little bit sick here. So hopefully, when you hear me tomorrow, I’ll be better. I’m on the mend. But on the rails for refinancing, first off, keep in mind my refi till you die plan, okay, that refi to you die plan, which is the model of how to refinance and extract wealth from your real estate portfolio in the most tax efficient manner possible, which means zero tax because there’s no tax on borrowed money. It’s a it’s an absolutely beautiful thing. So that’s the first thing to keep in mind. Now remember, Rifai till you die, which was the plan I’ve been teaching people for Oh 1516 years now is mutually exclusive from what we talked about at the last meet the Masters, which was the big boring idea, which is our Oh a, or not to be confused with ROI, our Oh a, we we made that one up its return on amortization. And it isn’t quite as sexy or impressive as some of the other stuff we talked about and some of the other techniques we teach. But it isn’t bad either. It’s, it’s, it’s deceivingly. Good, actually. And we showed at that meet the Masters how much return people could get from simply letting their tenants pay off their loans. That’s it. Because when you get later into that cycle, five 710 1215 years into that cycle of amortizing those loans down Just the return on amortization becomes pretty significant. For example, one of the properties you just mentioned, offered a projected return of 32% annually. Now, what people need to realize is this is a first year performer when we quote those numbers, okay? though all those projections are based on first year performance. On first year, your principal pay down is almost nothing, it’s it’s nil. Okay? But when you get 712 15 years in to your loan, you are really chunking that loan down. And that return on amortization can add 457 8% to your annual return on investment in a very simple fashion. But you’d Don’t get to refi till you die. Now, what I want to tell you though, there is a best of both worlds option, a best of both worlds option, because one of the thing we never really get into on the refi to die plan, but we’ll touch on it here just quickly is that when you refinance, it doesn’t mean you have to refinance per se. Okay. And what do I mean by that? What the refi to die plan is really all about is simply pulling cash out of your property’s out of your portfolio because there’s no tax on borrowed money. So this is cash that you can just simply take, you can keep, you can spend, you can enjoy. You can go buy crappy depreciating assets, like yachts and sports cars, or take vacations and you can blow it Okay, and you don’t pay tax on that money. You get to blow. So it’s it’s pre tax dollars, essentially. But that’s implying that you’re actually refinancing the first loan you have against that property. You don’t have to do that. You could simply do a HELOC or a second loan on the property and take your cash out that way. And that may be an acceptable alternative. Now, why do I say maybe not for sure? Well, because I don’t know. It depends on what’s being offered at the time that you’re thinking of doing this. as regular listeners and clients will know. The refi to you die plan is based on either a seven or a 12 year cycle of refinancing your properties. And that’s just used as an example. Because with the rule of 70 twos, in seven years, at a somewhat average and we can slice and dice that discussion forever. 6% appreciation, your portfolio will increase in value by 50%, in seven years, or by 100%, it will double every 12 years. And so we just use that as an example of how you might refi till you die, okay, but you could also do a second loan, and pull cash out that way and leave the first loan in place and continue to get the full our a or return on amortization. So, this stuff, it raises several questions. It’s complex. And this is why we have investment counselors to help you with these things. We’ve been catering to investors only for the last 16 years. Before I was in traditional real estate, there’s a lot to some of this stuff. So just reach out to us when you’re having these questions and thoughts and we’ll be happy to help you with it. Okay. You had another question about down payments, I get this question quite a bit. And that is, when should I consider putting down 25% or 30% instead of 20%? down? What are your rules for that there’s not going to be a good hearty fast rule for this. And the reason is that I would always always always want more leverage, rather than less. The mathematician and philosopher Archimedes of ancient times, said, Give me a lever long enough and a fulcrum to place that on and I will move the entire world. And that’s literally true. Okay, you can move anything with a long enough lever and a fulcrum to put that lever on, right because that leverage makes a small amount of power much, much bigger. And so we all understand that concept of mechanical leverage. With income property, the beauty is we have an incredible amount of financial leverage. And you get more leverage when you put less into the deal. When you put less money down, that makes your lever longer, your leverage shorter and it gets shorter the more money you put into the deal. So if you put 100% down, you have zero leverage. If you put zero down, you have Infinite Leverage, and everything else is in between the two, so your lever is longer. When you have less money down, your lever is shorter, meaning you have less leverage when you have more money down. So I always want as much leverage as possible. However, I can only play within the game that the lender will allow. And currently the lender will only allow 80% leverage maximum and 20% of my own cash my own downpayment. However, the lender will give Have a better rate on the mortgage? If I put more down sometimes many times, most times, actually. So if you put 25 or 30% down rather than 20%, you’re probably going to get a little bit better rate. So it is very difficult to analyze. If the rate is quarter point, should you put the extra five or 10%? down? I don’t really know. Because you can’t really do math on that. What would the math be? Well, I can tell what my payment difference will make how much less interest all I’ll pay, right? That’s easy. But the hard part is analyzing what is the opportunity cost of having less leverage and having that cash outside of the deal to do another deal with because if it was 5%, more down, and I was buying four properties, if I didn’t put the extra 5% down, then that would give me another 20 percent to buy one more property, right? So I could buy five properties instead of four. That’s kind of how you have to look at it. It’s a little bit hard to analyze that. So generally speaking, though, my answer is put less down, if you can, so that you can have more cash to do more deals, that’s going to be the better option, almost always, then what are your thoughts on PMI? So a lot of lenders will allow you to put 10% 15% down, but they’ll charge you the PMI. Well, that’s now we’re not talking about investment properties anymore. we’re only talking about owner occupied properties. And PMI, by the way, for those who don’t know, is private mortgage insurance. So whenever the loan to value ratio is below 80%, LTV or loan to value, lenders will require private mortgage insurance or PMI. Even then, I would say it’s usually worth paying the PMI to get more or less leverage. So if you’re buying your own home, you know, and you can put 10% less money down just by carrying that mortgage insurance policy, that by the way goes away. When your property appreciates. To have that loan balance below 80% LTV, you can just go and ask the lender to take away the PMI at that point, I would usually want more leverage. That’s pretty much you know, the least risky thing is to have less cash in the deal. That’s always the least risky way to invest. And that’s what we would recommend, as I always say, no rush. The best insurance is a high loan balance. Hmm. So hope that makes sense. Let’s wrap it up. Yours. Thank you for talking about those properties. Did you have one more you wanted to talk about very quickly?

Naresh 24:49
Yeah, I do have one more if we do have Yeah, just quickly. Okay, so this is one close to the Sarasota, Florida area.

Jason Hartman 24:57
Sarasota. I’m going there this week. Beautiful area.

Naresh 25:00
Yeah, so it’s in citrus Springs, Florida. So I’m about half an hour outside of Sarasota. It’s a duplex. And this one has, it sells for $230,000 approximately, with a gross rent estimate of $2,000 per month. So we’re looking at a rent to value ratio. Not at point 9%. But about point 8%, which is still new home construction, new home duplex, solid cash on cash return of 7% capper and crap rate, as you say,

Jason Hartman 25:36
is the we shouldn’t be so sarcastic because a new listener doesn’t know what we’re talking about. So the cap rate,

Naresh 25:42
Yeah, go ahead. Yeah. So cap rate somewhere between seven to 8%. Assuming 20% down so the cash on cash return would actually be about somewhere between eight to 9%. Total ROI would be 31%. So similar to the other new home constructions that we talked about earlier. numbers look good. I think citrus springs people may not be as familiar with citrus springs or even Sarasota, as much as they are Jacksonville or Orlando or some of the other markets that we cover. But here the numbers make a lot of sense. It’s a new home duplex two doors. And well, what are your thoughts? Jason?

Jason Hartman 26:23
I think that’s pretty good in when you say two doors, you don’t mean the number of doors The house has? Yeah, probably has a back door and a front door on each unit, a door equals a unit. So in duplexes, it’s two units. Okay, good. That sounds like a great deal. And by the way, folks, if you’re listening to this, and you haven’t, at some point or another explored Florida a bit, the next time we do profits in paradise in Florida, which probably be later this year. Well, we did it in Orlando last time, give yourself some time and explore some of these areas like Sarasota for example. Just Farming area. St. Augustine, many of our listeners own properties in St. Augustine just absolutely charming, charming area. You know, of course there’s Jacksonville which has been great for a lot of our clients and really, really just it’s such a big world out there and I couldn’t believe it. You know, when I when I lived next to Kobe Bryant and Newport coast there was this mentality that Southern California is the whole world. And you know, it’s it’s pretty nice area you may live in So Cal or some other nice area, but there are many, many very, very desirable areas around the country. And 16 while really 17 years ago, when I started getting interested in nationwide investing, and I started flying to all these different cities and exploring all these different markets. I was just amazed at the quality of life, one can achieve the Great investments, they can get the opportunity to live in no income tax or low income tax states, and still have great opportunities. So just want to throw that out there to any of you. And that’s not just from an investment perspective. It’s from a where you might live someday perspective as well. So just wanted to make you think about that. Go to Jason For more properties, the video on how to analyze a real estate deal. If you’ve already seen that video, you should watch it every six months or so get yourself a review of that video, and make sure you are staying focused on how to really be a disciplined investor. Thanks for joining us, everyone. And until tomorrow, happy investing.

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