Original subtitles

see the beauty about real estate

is you learn to use debt to get rich

if you're going to be rich you have to

learn to use

debt it's called other people's money

the six words that are basics of

financial education financial

intelligence

income expense asset liability and the

two other words are cash flow

so when you look at the average person

they have a job

money comes in here they pay for their

house

and the money goes to a bank through a

mortgage

so it's not an asset because the cash is

flying flowing out

so it's a liability so the definition of

liability

does it take money from your pocket and

for an

asset does it put money in your pocket

so when i have a rental property here

it puts money in my pocket so if i live

in a house it's a liability

because even i have no debt on it i

still have taxes depreciation repairs

and upkeep insurance and all this

when i rent a property i've done a good

job buying it and structuring it

every month it sends me money so i

started

off when i was 25 i had a little

one bedroom condo and it put 25 bucks in

my pocket

it was a start so this was good debt

you say this the debt also went out and

paid

but it also put 25 dollars in my pocket

so net net i was making money from my

little house so today my wife and i own

six thousand

five hundred of them and every month

six thousand five hundred houses

put money in my pocket my my people who

live in them love paying all this

because they have a place to live but

all of this comes from debt

so we don't oh we have a 100 percent

finance here

it's all debt so this is good debt

and what makes a good debt is the two

most important words

cash flow noi means net operating

income so if you really think about it

it's just income minus expenses

that's all it is and so it's important

to know

where you are financially so a banker is

going to look at your income

after expenses so that's a great way to

say it yeah it's really it's really

quite

simple so let's say look keep the

numbers simple you have a thousand

dollars income

and you have five hundred dollars

inexpensive this is a prop

yep so you have a 500 noi or net

operating income

so why is that important well

the banker looks at that number because

that's the number that they see

to be able to pay back any debt you

might want right this is where this

comes in right

correct so so they're going to look here

and they're going to say okay this

person has 500

in noi therefore we can give them a loan

say up to say 350 250

or something like that so they're not

going to give you a loan for the whole

amount because

they don't want you know that you to be

that tight except what they're going to

do is they're going to look at the noi

and say how much can we loan you so when

kenny

calls me says i have this property

it's a horrible condition there's no

income there's expenses all over the

place you get excited right

a lot of people get hung up here because

they don't have a financial statement

any way to go to a banker let's say but

sometimes a banker will look at the

property itself

so they'll say this has a bad noi on it

why would we give you money

you know what i mean and then so that's

when the financial education comes in

and you say well

this is what i plan to do with it

correct what kenny is saying we've had

i'm keeping the numbers simple he's had

income

of zero yeah and this is a thousand

yeah so you'd have a negative and a y

and the banker goes tell me why i can't

lend on that

right right because there's there's it's

a higher risk

of being able to be paid back the noi or

the net operating income

determines the value so um

you what you back into it a another

vehicle called the capitalization radar

cap rate

so it's actually we're getting a little

technical but

typically the cap rate or capitalization

rate

uh divided into the noi determines the

price

so that's generally how that works but

in the case that we were talking about

the the value of the building with no

tenant in it

is way low it's way low and there's

really no income

so it's basically whatever

you know the structure is so i've seen

lots of situations where a vacant

building somebody might have spent

five ten million dollars on a building

that's completely vacant

you know vacant warehouses vacant

whatever's right sometimes you see them

get converted into clubs or whatever

well there's value there somebody spent

a lot of money on it well one time

somebody owns it too it could be a bank

it could be whatever

so taking that and creating value

sticking a restaurant in it a gym in it

a club in it it doesn't really matter

who's in it

what does because you want them to pay

you but but

you know now you're creating the income

and then that's how you create value so

in that example let's say let's say you

buy a building for a million bucks you

know on a on a block

um with a tenant in it it could be worth

three four five million

so what if it's if it's a tenant in it

the value is

yeah right because now then what you do

is you put all that together and then

you can actually sell it

got it and so even if the noi is

negative

if you create a plan that creates value

for the property and shows the increase

that you're going to give the property's

value the bank will give you the loan

oftentimes yeah and yeah not always but

there are there are ways to do it so in

that particular case

you might get a loan from somebody like

robert and say hey you know i need a

million bucks

and this is my plan and then once you

get a tenant in it then you go back to

the bank

and you say hey give me a loan and

and then they give you a loan and you

pay robert back so the thing that

kenny's always looking for

is after we stabilize

can't tell me because look in five years

i'm going to get this from

1 000 to 10 000.

[Applause]

and on top of that we're going to reduce

the expenses

back to 500. noi goes

up the value goes up the debt goes up to

let's say 10

000. so i have a friend for example he

actually bought a building in a town up

in idaho where

i have a vacation house for about a

million bucks and it was sitting it was

an old

elks building a beautiful building

downtown but it had been vacant for a

long time

he bought it and he put

like 30 offices in there small offices

you know

1500 to 2000 feet each and

grew the the revenue right so everybody

pays

so they so the income went up yeah you

know what i mean yeah

so he broke it up and and and then

leased it up

and his you know so he has his expenses

but now he's got 30 people paying rent

as opposed to just you know one big

vacant building

he turned it into a pretty cool

workspace you know

for everybody but the what and then

kenny's

in his third book you know the advanced

guide to real estate

his job is to get this up keep this

stable

then he goes back to the banker and says

look we've got all these tenants monies

going up

and so we now want 12 000

yeah because he's improved income

kept expenses low buildings more

valuable

yeah the key there is the the bank's

always looking at your noi

to pay back their loan so the the more

you can grow that

the more loan you can get and so

essentially the renters are paying

your debt of course okay yeah

essentially so

if that building i was referring to goes

to 50

vacant now he's in trouble but if you

can keep it full so now you're getting

into management but regardless of that

that's how you do it you there's

opportunities like this

everywhere and i know another thing that

you always mention in all your books in

the abcs of real estate investing

is that property management is very

important

poor property management equals poor

profits right

and so i wanted you to kind of explain

the importance of the property

management

well essentially all property management

is is taking care of

the property in every way so taking care

of the people that might be inside of

this building

you know for the various things that

come up from day to day

collecting the rent and paying all the

expenses that's really all it is

and so the property manager's job is to

make sure the place is clean

and and that things are getting rented

and all those things and so the owner of

the building

would hire a company like that or they

can do it themselves and

and basically keep the place full so

in our world you know we have a property

management company that we have about

300 employees

all we do is focus on this these these

two

things how do we keep our expenses low

and keep our

our income high because we're always

trying to grow our noise so our noi

you know we have a budget for let's say

2017 or 2018 or 2019

the goal is to grow that in a why each

year and kenneth does such things as

the way he grew the income he put

washing machines

right yeah in the united states and so

when we put washing machines in the

building

this went up right yeah so uh

in my apartment houses um we would buy

apartment houses that had

washer and dryer hookups but no machines

and so the people would walk down to the

laundromat or whatever

and it was a bit of an inconvenience for

the people and all that so

i said well let's just buy for 650

dollars we can buy a washer and dryer

set and stick them in all there

and we did that and so i probably bought

uh three or four thousand

sets of washers and dryers um for a lot

of our properties

and so now all of a sudden we can charge

75 or 100 more in rent

and this goes up yeah this doesn't go up

as much

it's a win-win because they have to go

spend some money anyway

to go do their laundry now they can do

it here

and for me if i can pay back those

washers and dryers in one year

because it's only 650 for a set and if i

can get 75 dollars

more then all of a sudden i've got 900

to almost a thousand dollars more in

rent

so i'm actually it's a it's what i call

a one-year payback

on so kenny does he borrows the money

here yeah

to put washing machines in here

again the tenant pays it all off and the

washing machine stays

right yeah and i think that's a

brilliant idea because i know that both

of you have created incentives for the

renters

so for example if they stayed for a year

you would do certain renovations like

including the washing machine

and so every year there was another

incentive which not only

increased the property's value but also

the renters paying for it essentially

and the banker was happy

yeah what would you guys respond to the

critics who say

that real estate is a slow lane approach

to getting rich

that's fine with me i i can't think of

another

i mean i think i think it's really super

simple wow

real estate is very slow and very dumb

every month we got cash flow yeah you

know it's

i like that i like you know we're not

banking on something going up we're cr

this is called

creating value we're not parking our

money in something and hoping it goes up

that this is very strategic

perfect so everybody's got their point

of view most people want to get rich

quick

that's why they never get rich yeah this

is not bad

yeah this this is financial education

this is smart

this is having your banker be your

partner yeah and these are long-term

assets by the way these are these are

this is like

this is a business this is like managing

a business we would not sell these

so unlike the stock market or something

you know we're not trying to time things

we're trying to generate cash flow here

and then move to the next one okay so

can i give you one last thing

because those guys always upset me so

what kenny does he increases this

fixes this and then when this

goes up he gives my money back

so i might give kenny a million dollars

for five years let's say

he increases this decreases this the

bank says oh yeah noi is up

so he puts all this money in there i get

my million dollars

back i still own the property

i still have the cash flow going in so

all you guys want to get rich quick

it's called an infinite return right

yeah and it's tax-free

it's tax-free the reason it's tax-free

is because

when we use debt to pay back

debt it's debt so it's owed

so when robert gets his money back it's

actually tax-free

yeah let me say i lent kenny this is

pretty common numbers

i'll end up 1 million he fixes all this

the bank gives him 3 million

i get my million dollars back right and

that is tax free