Jorge and Rafi discuss 4 ways to evaluate your real estate portfolio in the new year. They discuss cap rates, comparable market analysis, financing options, and insurance. The full transcription is posted below.
Rafi: Good afternoon and welcome to another edition, our first edition of the 2018 Graystone Brown Bag Sessions. I am Raffi, Chief Operating Officer of Graystone Investment Group
Jorge: I am Jorge Vasquez, senior of Greystone Investment Group
Rafi: Happy new year
Jorge: Happy new year, man, it’s been awhile.
Rafi: It’s been awhile.
Jorge: I know!
Rafi: I was sick, you were sick, we got the new year.
Jorge: Couple of vacations in the way.
Rafi: Vacations in the way, so we hope everybody had a great holiday season, and as always, we have the beautiful Stephanie Libagen in the background. Hi Stephanie!
Stephanie: Hello guys!
Rafi: There you go. Stephanie didn’t do the Facebook Live while we were out. We need to correct her to maybe do that next time.
Jorge: You gotta do it, Stephanie, you gotta do it.
Rafi: Now Jorge, where can they find us?
Jorge: Rafi, they can always find us at homes, the number four, income dot com, that is homes, the number four, income dot com. Cannot be easier than that, guys.
Rafi: Don’t forget to subscribe to our YouTube channel. It will be in the description. And also Stephanie’s adding the link to the comments so you can find them there. Today is a very, let me put this on mute… Today is a very important topic that you need to do. We recommend to do this every single January. You turn the page on the calendar, it is very important that you evaluate your portfolio, evaluate your real estate portfolio. Actually, your real estate, your mutual funds…
Jorge: Stocks, stocks, whatever I guess, maybe
Rafi: Stocks, whatever, perfect time to sit down. You probably have the CPA calling you, starting to set up the tax process, you know all that other stuff. What we are going to talk about today, it’s four tips to evaluate your real estate portfolio at the beginning of the year. So four things that you should be doing every single time at the beginning of the year to make sure that you’re on track to meet your goal.
Jorge: When it comes to your rental properties, right?
Rafi: Exactly, exactly, exactly. We’ll talk about your real estate portfolio today. Again, it’s important that if you have your GPS with a destination, once in awhile you need to check the GPS to make sure that you’re on the right track. Sometimes, guess what? The GPS says, “Hey, big traffic ahead. Take exit 28 instead of 34.” So what we’re trying to do is that here. We’re trying to make sure that we look at that portfolio, look at that GPS and hey, are we still en route to hit the real estate?
Jorge: Yes, it’s kinda hard once you’re in Jacksonville to go back to Miami, you know?
Rafi: I know, I know.
Jorge: That’s what we’re trying to do here.
Rafi: Yep. It is something that I’m sure you have done a lot throughout your career in real estate investment, right?
Jorge: Absolutely. It’s something that you got look at in a yearly basis. I’m a former financial advisor so I needed to have it. Even with real estate to check it in a yearly basis. ‘Cause you never know. You think that your assets are doing well, but if you don’t check them out, they could be going sideways.
Rafi: Yeah. And again, it’s very important that you–we talk about processes all the time. These has to be part of your processes–of your annual process. You know, yes, you’re giving him all the documents that the CPA need for the tax whatever. This has to be part of your process of things to do every year. By the way, we’re talking about something that you should do probably on a quarterly basis, but then on an annual basis you really need to get deeper–dive in to it and make sure that again, you are on track to meet those goals. You cannot put it on autopilot. Yes, we talked about passive income, and those of you that worry in this seminar that we have. We are friends of passive income, but that doesn’t mean that you are completely off the hook here. You have to have, again, we recommend it quarterly, but definitely, at least once a year, you need to have this deep dive, in terms of your portfolio. The first tip in terms of things to do to evaluate your portfolio is basically how is the portfolio doing? What is the performance of your rental portfolio? And of course, we use one metric–there’s several metrics, but the one metric that we like to use is:
Jorge: The cap rate.
Rafi: The cap rate. So, what do you like to do in terms of the cap rate as to the value of the portfolio at the beginning of the year?
Jorge: Well, Rafi, it’s very exciting, it’s your first year, right? You’ve rented the properties been twelve months and you’re like, “Man, did I do what I was supposed to do? Did I make the money that I was supposed to make?” When you first bought the property, ideally you look up the cap rate, in order to understand more or less what you are going to get. Whether the cap rate was eight percent, ten percent, nine percent. The cap rate pretty much illustrates, Rafi, how much you’re going to get in a percentage basis. So, you take your income divided by your investment and that’s pretty much it.
Rafi: Again, there’s different stages and different cap rate. We have–for those of you that this is the first year that you are doing this, guess what? That first year is not going to look good, right? Why?
Jorge: That’s a good point, Rafi. The first year is your tryouts. To me, it’s your tryouts. There’s going to be a lot of things that go wrong. By the way, I met with a couple of, a bunch of guys that are smarter than me yesterday, and when they assessed commercial properties, what was that, Rafi?
Rafi: Smarter guys, I just pointed to me [Jorge laughing].
Jorge: That’s why I been saying smarter than me. Nobody’s smarter than you. I just said me. But seriously, when these guys are assessing five million dollar projects, ten million dollar projects, twenty million dollar projects, guess what? Their quote for the first year of cap rate is way less than year two, three–it goes in a scale.
Rafi: But why?
Jorge: Well, because at the beginning you’re getting to know your property, you don’t know the issues you’re going to have with your property, you’re getting to know your management, you’re getting to know your tenants.. There’s a few bumps that you’re going to have in year two that hopefully you won’t have–I’m sorry–on year one. Hopefully, you won’t have in year two.
Rafi: And when you think about it, it makes a lot of sense. The first year you probably are making major repairs to bring the property up to par again. So first year, you have high repairs, you may have closing costs, you know of acquisition, so you have a bunch of things that you spend on the first year that year two and after that, most likely are going to start lowering.
Jorge: Sometimes you get lucky. Most of the time, like I said, the profits, even the profits calculated lower year one, higher year two, and even higher year three. So it will average to a three year exit strategy, five year exit strategy, however, you want to do it.
Rafi: So, in terms of evaluating the cap rate for that first year, you want to know if you are hitting that target, right? So if your target was six, let’s say, because it’s the first year, so it’s six percent, did you hit six percent? And again, that’s for year one. You may have older properties in your portfolio that are on year two, year three, year four… Okay, maybe they go along those for eight percent. But, are you hitting eight percent? Was your vacancy too high? You really need to look at, and analyze, what we like to do is, we like to rank them. So before you just have all the properties in a spreadsheet, let’s say, but now, guess what? Let’s calculate the cap rate for last year. Okay, some of them will be year one, some of them will be year two, year three, but let’s rank them to see which properties giving me the most cap rate. Okay? And not only that, which properties giving me the most cap rate versus your goal. You may have a property that gives you nine percent, but your goal was ten. And then you have a property that your goal was six and it’s giving you seven. Well, guess which one is performing better? The one that gives you the seven. So, not only rank them by the cap rate, but how they performing against your goals and then make some decision. Right?
Jorge: Absolutely. Especially when you have a portfolio of multiple properties. You need to know which ones are doing better, which ones are doing less better, and decide maybe you want to sell one of them, perhaps.
Rafi: Sell one of them, maybe you want to increase your rent on some of them. You make a decision this one is not performing, but when you look up the rent is under market. We had that. We had several properties that we suddenly found out, “Wow, the market went up.” Significantly. So let’s see if we can get a bump, or hey, maybe your property manager is not, you know, you have high vacancy. So maybe it’s a conversation with the property manager, say, “Hey, what’s up?” Why are we getting high vacancy on my property? Bottom line is for you to make decisions based on that information.
Jorge: Absolutely, absolutely.
Rafi: So again, that first tip is evaluate the performance of your portfolio and then make decisions based on that.
Jorge: Vacancy, repairs, sit down with your property manager. By the way, your property manager should know how to illustrate a cap rate. Should know how to help you set that up. If not, then there’ll be a little concern.
Rafi: A little?
Jorge: I’ll be very concerned.
Rafi: Very concerned. If a property manager doesn’t know how to show you a cap rate, run.
[Laughter and coughing]
Rafi: Man, I’m still sick.
Jorge: ‘Cause you there for the investment. You not there to use friends’ houses. You need to know.
Rafi: Absolutely. The second tip to help evaluate your portfolio at the beginning of the year. We looked up performance, but now, we’re looking at value. Let’s see how much is the value of your portfolio. There’s different tools to do it, but I know you have your favorite one is…
Jorge: Guys, the one I like the most is called a CMA, which is a comparable market analysis. The reason I like it is, one main reason, Rafi, is that it compares the subject property with the comps at the curb appeal level. In other words– ‘Cause you can go to Zillow and Trulia and it’s going to tell you, it’s going to match your property with other properties that are similar. But you can’t compare apples to apples. You might have a property that has the same square footage, but this one looks “fugly.” And then this one has a different curb appeal. So what I like about the CMA is that it gives you all the numbers, but it allows you to put your house next to other potential comps and say, “Okay, well you have the look, they have the same numbers, but this is not the same.” Let me take this one out. Let me take this one other out and at the end have a way more accurate representation of what the value is. That’s why I like CMAs.
Rafi: And this is something that you definitely as far as your real estate team–you want your realtor, someone kind of third-party, in a way, to do this number. It is not you going to Zillow and picking the number that you like the most, no, no. You want someone who tells you, “Hey, if I were going to sell this property today, I will sell it for this much.” And it is very important that you know the value. So now we have the performance, now we want to know the value of your property, because that impacts a lot of all of the decisions. Right? You may have for example–the first thing you did was look into the performance cap rate. Now you may say, “You know what? I may have something that is low-performing,” and then we do the CMAs–the equity has increased a lot. Guess what, maybe you sell that property. It’s not performing on your rental, but your equity has gone dramatically up so maybe it’s time to get out, buy another performing asset and move on. So that is why we like to do it in this order, presented because of that. First, you look up the performance, and then you look at the value.
Jorge: So you start with, to me, Rafi, you start with a PNL from your property manager and now your CMA. One, two and we’re going to be talking about the other three and four.
Rafi: So again, you have the performance but the value is very important. And I will do the exact same thing in terms of ranking. Okay? Rank which one has gone the most up from last year. Because you going to do this every year. So, you going to have this two thousand sixteen, two thousand seventeen, now 2018, so you going to rank them also by which one has gained the most equity from one year to another. That may trigger some decisions, again, in terms of what to do. Okay?
Jorge: And to me, that’s the fun part as the part of the Monopoly game that is fun. You know, you could now save up, like Rafi said, especially so you don’t do nothing for most of the year, this is the time that it becomes fun where you move your assets around to make sure that you’re maximizing your profitability.
Rafi: Excellent, excellent. So again we took out performance, now we look at value and based on those things you make decisions. Sell, increase rent, do more repairs, sell or not and then because of that we fall into the third tip.
Jorge: Before we go there, we going to say “Hi” to a couple people. Say “Hi” to Eric Vendejo, well thank you for joining. Dahlia, I don’t know who Dahlia is, you know I don’t know…
Rafi: Hey, hope you got better.
Jorge: We got Maria Obredor Silva…
Rafi: Maria Obredor Silva! Maria! Say “Hi” to Aldo, hope he gets better. He starts walking or you know what? Maybe not. It’d be better for her to just stay seated, whatever. Second, performance. Value, based on that you make decisions. But the third one is very important. The third one is you want to evaluate your financing position. So where you are based on that performance, based on the value, where are you in terms of your financing options? Okay? And this one can get very complex. But bottom line, what do you want people to look at when they’re thinking of financing?
Jorge: You want to uncover possibilities. You know, is it lower your interest rate if you have a mortgage. If you don’t have a mortgage, uncover the possibility of pulling cash out and buying the next deal. So those are two possibilities, either take cash out or refinance your deal, therefore, helping your cap rate.
Rafi: And again, here’s where you look at that value. Let’s go by the first route. Mortgage. You have some mortgage on your houses. Well, guess what? Maybe when you took that mortgage at the beginning, you took 80%, you know, loan to value. But the property has gone up 20% when you do the analysis today. Guess what? It’s 60%. If you do that you’ll probably get a lower interest rate. You talk to your financing partner because you have it, you know, a financing partner in your team. You do, right? Oh, you don’t?
Jorge: It’s kinda late.
Rafi: Get it. But you should have it because if you’re watching this video, you should know that a banker is part of your team. Anyways… You talk to that person, saying, “Here’s where we are. What are the options? Should I lower interest rate? Should I increase the loan so that I can have possibilities to buy more properties? From the mortgage side, a lot is… The cash out is one that a lot of people don’t think about.
Jorge: Right. I bought it in cash! Perfect!
Rafi: Well guess what? There’s a view, let’s use an example. If you buy something for a hundred thousand, right? And you want to buy more, and you get eighty thousand out of that, and you use that to buy the exact same property giving twenty percent, now you can buy 4 properties. With the same money, no putting one additional cent, with some money you already put, and you pay your eight, ten, twelve percent, whatever the interest is, but you’re, and this one is of my favorite tricks, you’re cash on cash percent is off the hook.
Jorge: Absolutely. You know what’s worse than a simple savings account at a bank?
Jorge: Money sitting in equity doing nothing especially, if you own, let’s say you own a property and you have two hundred thousand dollars in equity, well that return is doing zero. It’s making you feel, maybe making you feel good at night, whatever the case might be, but that two hundred could be gone if the market turns, so it’s really not doing nothing for you, put that money to work. But do it the smart way, Rafi. One thing that we been talk about, a lot of times when we buy a property, year one: we opt to get short-term financing, therefore, a lot of times there’s no principal being paid, and the loan starts due pretty quick.
Rafi: High interest rates.
Jorge: The beauty about high interest rates the beauty about now is that I been investing for twenty years, the beauty is that there so many options. There so many investors, willing to lend money at decent rates, that there’s no excuse for you to lose some irresponsible land deal.
Rafi: Yes. A couple of key things that Jorge says. We are huge proponents of how to stop work. Principal is part of that payment. You want to lower that, keep that loan for value, no higher than eighty percent. We are friends of seventy percent, but make sure that that loan to value is always below eighty percent. Do not, I repeat, do not go to ninety, one hundred percent loan to buy. That’s where people got in trouble in two thousand six and eight because they were completely off the hook and then, if you have one hundred percent and it goes one percent down, you’re already in the water. Okay? So, responsible, but at the same time, it’s almost irresponsible to have that hundred thousand sitting there and not diversify your portfolio. Because now, if you have five properties and one goes down, you still have four. You still have four that are performing. But if you have just one and that one goes down, how many you have performing? Zero.
Jorge: Rafi, one thing that is little events for people who don’t think about this, but I’ve met with lawyers in the past, who say to me, “A property without a mortgage is an easy apple to grab.” Because easy target because you don’t have a mortgage, guess what? You hit somebody in a car accident and something happens, they’re going to say, “They have any assets that are paid off?” On that asset statement you’re going to have to, by law your going to say the truth the first thing they’re going to say, “oh, let’s go for the house.” So that’s why we know mortgage also helps you with that a little bit.
Rafi: Absolutely., I want to say “Hi” to Nouria Diablo, Nikki, my friend from DC and [foreign word]. She’s back from Puerto Rico. She was in Puerto Rico, having some fun over there. We have a great question we took about financing and Tony Santos made a good question. Do ten thirty one exchanges work for investors?
Jorge: Absolutely, we doing one right now. Stephanie can tell you about the process right now. We got an investor that sold his condo because he was tired of those fees. You know the condo fees, three or four hundred dollars a month, it was insane. He sold the condo for like one thirty and he’s buying two properties with the exchange. Stephanie, how many, has he bought the two properties or he only gotten one so far.
Stephanie: One and looking for the next property.
Jorge: So, and he’s a foreign national. So I think he’ll do it.
Rafi: I think it’s one of those things I—are you a CPA?
Rafi: Am I a CPA?
Jorge: I don’t think so, Rafi.
Rafi: So, always check with CPA, but most of the time, absolutely. They did want an exchange there’s some rules, you have to be very specific, you have to buy within ninety days, and there’s a lot of specifics. That’s why we always advise you to go to a CPA. But most of the time, man, go for it. That’s why we want to make that analysis on a quarterly basis, because guess what? You needed to make that decision last year. So that then when you sold last year, now you have ninety days to buy a new one.
Jorge: By the way, we have a couple articles about ten thirty one exchanges in homes4income.com. Go to homes4income.com on the search bar put “ten thirty one”.
Rafi: Put “ten thirty one” on the search bar and you’ll find a couple articles
Jorge: At least three or four.
Rafi: Absolutely, absolutely. Great question, Tony, thank you very much and it’s something that again, most people don’t know is part of their tool box and it sit there and they don’t use it and then suddenly they go, “Hey Uncle Sam, let me just give it away.” We’re not saying don’t pay taxes, right, although Jason will love to say it. We’re just saying don’t pay a cent more than what you have to pay. And if a ten thirty one exchange is a way of them make a transaction without paying additional taxes. Hey, the more the better. So again, we have three so far, evaluate your performance, using cap rate, evaluate the value of your portfolio using CMAs, evaluate your financial position sitting down with your banker to make sure that you understand the options either to refinance or to cash out, and then this one. This one, I have to say, come to me as a surprise. This one that a lot of people don’t think about. At the beginning of the year, to check on their portfolio. The fourth tip is to verify your insurance position. Every year you want to do that.
Jorge: Absolutely, absolutely. I mean there, you know, you going to look for the opportunity to go either, can you lower your insurance? or increase your insurance? Depending on the asset did that year, perfect time because we went through some hurricanes we went through some tough weather to say, “Okay, how was my property affected and figuring out how you want those insurance to be. Thank God we had insurance. This year was a… to me, it put insurance on the top of the list.
Rafi: It should be number one. But, let me tell you something, even if something you have to do every year, like I said, either to lower your insurance rates, to increase your coverage, but you need to sit down with your insurance broker, agent and understand where you are now, okay, because remember you already verified the value, the new value, maybe with that new value you need to increase your coverage? Because now, before you were covered up to two million but now your portfolio is worth three million dollars. So guess what? If you have a two million dollar policy, you are underinsured by a million dollars. Okay? Let’s dissect what we’ve gone through with the hurricanes. If you suddenly make a major repair on your property, okay then guess what? You may have to increase the coverage of that property because now it’s worth more, at the same time, you might lower the deductible. Guess what?
Jorge: You have your roof.
Rafi: You have your roof, you fixed almost everything, so why have a five thousand dollar deductible when guess what? You may have a low deductible, I’m sorry, it’s the other way. You may increase it because now you know you most likely are not going to spend. By the way, the deductible amount is one of the biggest factors on increasing or decreasing the premium. So maybe you say, “You know what? I fixed this house, we’re doing one of our duplexes in Lakeland, we’re going to fix basically from the ground up. I’m going to take the deductible the highest possible once I fix it. Because the likelihood of a major expense happening now is lower because I just completely renovated that. So those are the things that you need to sit down with your insurance agent and go, “Here’s my new value. Okay, here’s the amount of repairs that I did last year and here are the ones that I did major repairs. Here are the ones that sometimes cities re-do flood zones. Before there was not in a flood zone, now it is. So, it is very important and it’s one that I bet less than ten percent of the people watching this video do on an annual basis. I think they think about it when they buy the property and then, that’s it.
Jorge: There’s so many options you could cover your rents, you could cover specific plumbing issues, I mean, there’s so many options, you got to sit down with your insurance agent and confirm that what you got is what you really pay for. But not being sure for the right amount but the property needs to be insured for, it could take you back two or three years.
Rafi: That’s a killer. That’s a killer. And sometimes for a couple of ten, twenty bucks a month more than you pay, but you save yourself from a major headache if something happens to it. We also have Jaime Yepes[?] that joined. Jaime! Happy new year! We need to sit down, we need to eat some [foreign word]. I want an excuse to eat [foreign word]. Edina Marouska, my partner in a play, some of you know that I’m doing some things into acting.
Jorge: It’s an honor to have you with us.
Rafi: And then Victor Rodriquez also, thank everyone for joining. So again, four. Four things that you should be doing, and by the way…
Jorge: There’s more.
Rafi: There’s more. These are the four that you must do. There’s a lot of stuff that you should do. But again, these are the four that I would say, before the end of January, you should at least complete these four. Okay, the number one. Verify the performance of your portfolio last year using cap rate.
Jorge: Sit down with your property manager with the PNL Statement or the losses coming from vacancy, repairs. Find ways to strategize to make more money
Rafi: Absolutely! Number two. Evaluate the value of your portfolio.
Jorge: Get a CMA, get it done the right way, guys, to make sure you have the true value of your asset.
Rafi: Definitely. Then, understand your financing position, okay. Where you are in terms of financing, and you have basically two options.
Jorge: Two options. Make sure that you have the best mortgage possible, or if you have cash in the property, pull it out to invest more, pretty much.
Rafi: Exactly. Number four. Watch your insurance position, where you stand.
Jorge: After you build up your empire and you got your portfolio, the last thing you want is to lose a property because you were under insured. Or to find out two, three years later that you overpaid and your cap rate could have been a lot better.
Rafi: Exactly. So those four tips. Very, very important that before the end of January, you look at your portfolio you go with those things and make sure that you are set up for success this year. And again, you got to make adjustments that you make them on time and you make them the right way. That’s it for today if you have any additional questions, Stephanie over there in the comments. Its the beginning of the year, people are like a little bit lazy still. They’re still in holiday mode. Hey look, I’m going to stop. Mario Catalino joined from Miami. Thank you, sir, for joining, see you this weekend in La Sunset. So, Jorge- where can they find us?
Jorge: Rafi, they could always find us at homes the number four income dot com, that is homes the number four income dot com, where you invest–we do the rest.
Rafi: And don’t forget to subscribe to our YouTube channel it will be in the description of the video and also Stephanie’s adding it to the comments right now. We’re going to start adding media, we just added our brand new one today. You’re going to see that we’re going to start adding on a weekly basis most likely, we’re going to try on a weekly basis to add some of these videos.
Jorge: Very close to giving away the first hundred hours.
Rafi: So definitely join there. Thank you very much, Stephanie, thanks for everything.
Rafi: Waiting to our lunch, man, I’m hungry.
Jorge: I’m starving.
Rafi: I’m starving so we’re going to do it. Don’t forget, homes the number four income dot com. Subscribe to our YouTube Channel, we’ll see you next week in our next Graystone Brown Bag Session.
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in Tampa Bay. We serve clients who flip homes in as little as 30 days, as well as clients who hold high cash flowing rental properties.
Unlike other wholesaling groups, we provide clients with a turnkey process at no extra charge. We find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years.