by | 27, Feb 2022

Bonus Episode: How To Make Passive Income In Real Estate

That’s right! You all are getting another BONUS EPISODE this week!

Today I put out a video explaining how to make passive income through real estate. I highly recommend you go watch it, just click the youtube link down below.

But… if you can’t watch and just want to give it a listen, then you’re in luck!

I break it down into 4 easy steps. So take a listen and discover the 4 best ways to make that passive income!

We will talk about these things…and more in another BONUS episode of Multifamily Investing Made Simple.

Tweetable Quotes:

“If we’re running a good business, then it’s going to generate more cash flow per month than it costs us in expenses and our debt service.”  – Anthony Vicino

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five rules of investing

The Five Rules of Investing

** Transcripts

Anthony Vicino: [00:00:00] Today, we’re going to talk about the four ways that you can make money investing in real estate. These are the four reasons why we at Invictus Capital Love Real Estate so much and why you should too. Hey, what is up, everybody? I’m Anthony Vecino with Invictus Capital, the author of Passive Investing Made Simple and the co-host of the podcast Multifamily Investing Made Simple. There are a lot of different types of assets. There are a lot of different business plans that you can execute when it comes to investing in real estate, but it all really boils down when it comes to making money for these four things. Number one is cash flow. So cash flow is the lifeblood of a healthy business. When we think about our real estate, we want to think about it as though it is a business. It’s not just a building with people living in it. It is a building with customers and it’s generating cash flow. And if we’re running a good business, then it’s going to generate more cash flow per month than it costs us in expenses and our debt service. And that’s a good thing. The more cash flow that we have, the healthier business is, the more likely we can sustain, you know, dips in the market or things not going quite to plan if there are more expenses one month or another. And the other great thing about having surplus cash flow each month is you can take that in the form of distributions. So it’s putting money into your own bank each month, which is awesome because if you want to get out of your W-2, if you want to replace your primary income or if you’re a passive investor who’s just looking to, you know, keep having new cash flows coming in so they can pay for their vacations or whatever, then this is going to be that thing.

Anthony Vicino: [00:01:43] Every month, a consistent check is landing in your mailbox. It’s awesome. That’s cash flow, the number two way that we can make money investing in real estate. And this is one of the ways that people often forget about is the mortgage pay down. So each month we own this building and inside of it, our customers are residents, they are living in our buildings and they are paying their rent. Now our biggest bill every month is going to go to the bank, to the person or the company that lent all that debt on to the building. So we have our mortgage and each month our residents are going to be paying that down. That’s awesome. So maybe we take out a loan initially for a million dollars, well, each month when our rent checks are coming in, that’s going towards paying down that loan. That’s equity in the property. And that’s going to be hard to realize. Like we’re not going to be able to go spend that at the grocery store, but we can do two things to get that money out and put it back into our pockets so we can actually go and do stuff with it.

Anthony Vicino: [00:02:42] One we could do what’s called a cash-out refinance and what this is is when we get enough equity into a building, say we took out a loan initially for a million dollars, but we’ve paid it down to seven hundred thousand and now our building is maybe worth a little bit more than what we paid for it. So maybe one point five million. There’s all this equity, say, $700000 of equity. Sitting in our building, we can go to the bank and take out a new loan for that new higher amount. We can pay off the old loan and then we can make the difference in the form of cash flow. That’s awesome. That’s powerful. The other thing that we can do is we can just sell the building, right? Just go sell the building. We have less debt on it than when we bought the building. That equity can now be realized, and that’s powerful. That’s one of the things that a lot of times we forget is one of the hidden benefits of owning real estate is that our residents are paying down this building year after year after year. Awesome. The number three way that we can make money in real estate and this is, I know, not a super sexy topic is the taxes you save so much when you own real estate in taxes because I think it was Warren Buffett, maybe, maybe I’m just falsely attributing it to him. It’s not about what you make, it’s about what you keep.

Anthony Vicino: [00:03:52] And the biggest expense that you’re going to have at any given point in your life is Uncle Sam. He’s coming for his due. Now, one of the benefits of owning real estate is we get to defer so much of our taxable liability, and it’s because Uncle Sam wants to incentivize us to invest in real estate. It’s not shady. We’re not evading taxes. See, the government is incentivizing us because they realize what a value proposition we bring to society. Think about this. Think about how well the DMV is run. Now imagine that you had to rent your building from the government and like, how horrible that would be every month. Right? The government doesn’t want to get involved in that. They want us as private investors to do that. And so they incentivize it by making it really advantageous. And the way this works out, then, is something called depreciation, which we’ve shot multiple videos on it. It can be a complicated topic, but it pays so much value to go and learn how this works so that you can take maximum advantage of it in your investing career. So that’s number three, is the tax advantages. Number four and this is my favorite, this is this is the Mack daddy. There’s a little word called appreciation that goes a long way. Now, when we talk about appreciation, there are actually two forms of appreciation that really matter. Number one is organic appreciation, and no two is forced appreciation. Let’s first talk about organic because this is the one that most people are familiar with.

Anthony Vicino: [00:05:18] Now, here’s a little backstory. When? I started my investing career, my active investing career. I went and bought a triplex and I bought it for two hundred and forty-six thousand five hundred dollars, and I got it with an FHA loan, which is just a fancy little loan. That means I have to live in the building, but in exchange, I get a really I can buy it by putting three percent down payment. So that was like seven thousand five hundred dollars. It was like practically nothing. It was great. I was living in this building that I paid two hundred and forty-six thousand four. And then nine months later, I went back to the bank and it had appreciated to three hundred and seventy-five thousand. So in nine months, it somehow miraculously became worth one hundred and twenty-five thousand dollars more than what I paid for it. Now you might look at me and say, Anthony, you must be a genius. You must be like a really good investor. And you’re right, I am. But that had nothing to do with it. I just got really lucky because I bought it in a neighborhood that was benefiting from organic appreciation, which means that all the other buildings around me were selling at a huge premium. And as because there was new development coming in and people were just wanting to live there for various reasons. As a consequence, my building got to be lifted up on that tide and I did really well on that investment.

Anthony Vicino: [00:06:32] Now that’s organic appreciation. The problem with it is that you have no control over it. It is what it is. The market is what the market is. And if you time it right and you’re in the right place at the right time, you can do very well. But that could have easily gone against me, right? I didn’t do anything to deserve that extra. One hundred and twenty-five thousand I could have easily lost one hundred and twenty-five, which leads us to the second form of appreciation, which is the one that I really love. It’s forced depreciation. Now to understand forced depreciation, you have to understand the difference in how, say, a single-family or a duplex or a triplex or a quad are valued, versus how larger multifamily or industrial retail office building is valued. Now my little triplex, it was considered residential and residential loans. They’re valued based on comparables. So whatever the building across the street sold for, if it’s pretty comparable to my building, that’s more or less what my building is going to be worth right now. If Jim across the street had to sell at a big discount, that was going to negatively affect the value of my building. If Jim across the street sells at a massive premium, well, that’s going to do great things for me. In both of those equations, I have no control over what Jim does, so whether my building goes up or down is kind of outside of my control.

Anthony Vicino: [00:07:49] That’s different than commercial real estate, and this is why commercial real estate so cool is because they’re not based on comparables. Their value is based on the income approach. So we think about these buildings more as businesses and we say, well, how much profit is this building generating? The more profit it’s generating, the more valuable it is. That makes sense. Right now, as owners, we can go in, we can buy these buildings and then we look for ways to make them more profitable. And really, that boils down to two things we go and we increase revenue or we decrease the expenses. And either approach, we’re making our buildings more valuable through forced appreciation, which is awesome because once you understand all the different levers that you can pull, you can make really just enormous returns with the confidence that the returns are actually going to be there. It’s something that’s inside your control. So those are the four ways that you can make money in real estate investments regardless. If that single-family homes, industrial, mobile home parks, apartment buildings, whatever it comes down to appreciation, you get the mortgage paid down, the tax benefits, and, best of all, appreciation. So that’s going to do it for us, guys. Hopefully, you got a little bit of value out of this video. If you did, make sure that you smash that like button. Go hit, subscribe and we’ll see in the next video.

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