It’s a fan favorite … another edition of Ask The Guy for this episode of The Real Estate Guys™ radio show!
We take on lots of great questions from our fabulous audience, including how to choose a good real estate market … which important trends to track and how … one of the most important jobs of any real estate investor: calculating cash flow … and MANY more!
Just remember, The Real Estate Guys™ don’t give advice… what we do is give you ideas and information and you then will sit down with professionals so you can get specific advice for your market.
In this episode of The Real Estate Guys™ radio show, hear from:
- Your Know-It-All Host, Robert Helms
- His Know-Nothing Co-Host, Russell Gray
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What Counts As Positive Cash Flow?
Our first question comes from Frank in Winkler, Manitoba, Canada … Frank wants to know, if someone takes a mortgage out on an investment property using current home equity and the investment property just barely covers the expenses, is this positive cash flow?
One of the basic understandings of investing in real estate is the basic income formula … where does the cash flow come from? You have income, which is pretty easy to calculate if you have a single-family home … and then you have expenses.
We say there are two sides: the math of being the owner and the math of the lender. In the United States … you can have a little negative cash flow on paper, and if you’re short, you can bring some of your own personal income to bear if you choose.
The main point is … you need to make sure you have a comprehensive budget and go in with your eyes wide open. Owners should be careful when working with a negative cash flow … you might want to build that into your capitalization budget to have reserves to carry you until you can get it to where it needs to be.
Buying a Property in a Different State
The next question is from Mike in East Grand Fork, Minnesota. Mike says he owns three single-family homes free and clear and wants to buy a property in Arizona for a warm weather escape. He says he pulls in $2,000 a month in profit after expenses and is looking for any strategies.
First thing is … why would anyone ever sell a property that was putting $2,000 a month in their pocket?
And the answer is, because you can re-allocate that to property or properties that might pull $2,500 or $3,000 or $5,000 a month in profit or you can move to a market you like better!
Assuming the owner is keeping the first three properties and likes the market… the obvious thing is to put a loan on them… take advantage of today’s low-interest rates… and redirect some of that $2,000 a month cash flow into what would be a down payment for the Arizona property.
The bottom line is … get together with your mortgage professional, find out exactly what loan programs are available to you based on your credit score, your balance sheet, the amount of equity you have in the properties where they’re located, and make sure this is somebody that can help you in both Minnesota and in Arizona.
Investing in Property in Another Country
Sean in Lima, Peru, says he and his wife are living there as teachers and plan to buy a home there, live it for several years, then rent it out as a long-term investment when they return home to New York or another destination. They secured a loan from a local bank in Peru, however, the interest rates are much higher than in the U.S.
The short answer is … there’s nowhere on earth where we have found financing as favorable as in the United States of America.
Many people who buy in another country often turn to the ability to borrow on property in the U.S. and use those proceeds to buy a property in other places. That’s method #1.
Method #2 … borrow locally. One of the reasons is that that loan and that creditor have nothing to do with U.S. credit or your tax returns and so often those loans are made locally by local banks who invest in the property … so it’s a lot less cumbersome.
There’s a whole other side to investing internationally … there’s the basis of law in the country, what property rights look like… what their expenses are … whether countries share a tax treaty. Just consider all those factors.
Know Market Trends
These next two questions are related.
Victor in Ocala, Florida, wants to know how to pick a real estate market to invest in, and Al, from Richmond, British Columbia, Canada, wants to know … what drives real estate trends and what resources can help us follow the real estate trends globally?
The trend is your friend. You need to understand what trends are in real estate.
Markets vary all across the world … so the big picture on finding market trends and discovering a great real estate market has to do with the suitability of the property, the viability of the income stream, and the age-old supply and demand question.
All things being equal … rents are strong where there is demand for people to live in places, and so as investors, we’re looking for places that have strong economies … favorable tenant landlord law … and good market metrics.
Demand is based on people wanting to live there and their businesses wanting to live there. Supply is building … the ability to build … the ability of the marketplace to expand supply.
Places like Manhattan and San Francisco can’t increase supply … so prices only have one way to go.
For 23 years on the show we’ve said … live where you want to live and invest where the numbers make sense.
If you’re going to invest somewhere other than where you live … then you do need to study the market and understand the direction.
A market could be really great and have a lot of jobs, but if the jobs are all tied to one or two employers or industries, that could be a risk.
Our premise is that you can’t really pay attention to more than about a half a dozen real estate markets … maybe 8 or 10 if you’re a full-time investor.
You need to know your markets on a granular level as real estate investors.
Ratio of precious metals in the portfolio
These two questions from different listeners are on the same topic.
Jason asks, what should be the ratio between how much silver, gold, and income property one has? And Gary from Idaho Falls, Idaho, wants to know about what percentage of an investment portfolio should be in precious metals?
We believe that before you’re a real estate investor, you’re an investor, and you better understand that “compared to what” factor.
If you approach the idea that you invest in real estate to make money … and you assume that those are dollars … then you need to know something about dollars and currency.
If you really understand what money is, you’ll recognize that for thousands of years, gold and silver have been money … and it’s only been since 1971 that gold and silver have not been money.
Gold and silver don’t make you money as much as they preserve your purchasing power, so that’s how they all fit together.
It depends on what you’re trying to do … there is no magic formula. It’s more important that you understand what the role of these different things are in your portfolio.
More Ask The Guys
Listen to the full episode for more questions and answers.
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