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Earlier this morning we had an hour long live training call for Inner Circle Members. In that training call we covered some questions that I had received from a few listeners and also some additional information on personal accountability and getting yourself to take action as well information on marketing.
Learn what we covered and to listen to the audio, you can download the recording of the show using the link below or become an Inner Circle Member to access live calls, ask questions and download calls from our call archive.
First on the call, I made a couple announcements and the changes we made over the last week to the daily training calls.
Next, I talked about the importance of personal accountability: keeping promises that you made to yourself. I talked about part of the daily training calls will include a short section on accountability to help all of us become more effective in our real estate businesses.
After that, I did a short follow up to the question I was asked before I left for the seminar I attended late last week on using Net Operating Income and a financial calculator (or Excel) to determine the maximum amount of debt the property can cover. You can also see an article that I wrote about it called How To Calculate The Most Debt The House Can Afford on the blog. In the article (and on the live call), I walk you through how to use the payments you are making on a potential income property along with an assumed interest rate (hopefully from your mortgage broker or private lender) and the term of the loan to be able to calculate the largest loan amount that the property can afford. This was a question that stemmed from the recordings we have on how to analyze real estate deals:
- How To Analyze Deals Volume #1
- How To Analyze Deals Volume #2 (also included with free download bundle)
After the discussion of using NOI to calculate maximum loan amounts, I go on to answer another listener submitted question on getting the motivation to take action during the day. I referenced going back and listening to some of the call archives from previous episodes but also give some tips for taking immediate action to implement the things that you already know you should be doing.
After fielding questions, I recapped quickly what we covered for the previous week of live calls so that you could go back and reference those and then resumed teaching from our course outline. We had left off talking about marketing to buy properties. I continued by talking about using car signs. We discussed what type of response you might expect, whether it was one or two step marketing and other related topics to marketing to find properties using signs on your car.
Then, I talked about using yellow page advertising to find properties to buy. We discussed the effectiveness, pros and cons of using it and much more.
Afterwards, I started talking about a marketing methods that I really prefer to use: door to door. Door to door consists of four major types: flyers, sticky notes or Post It notes, door hangers or door knocking. I managed to make it through talking about flyers on this live training call before ending the call for the day.
One of the things I did discuss on the call is expected response rate and cost to generate leads using flyers including a discussion of an investor in a nearby city that I met on Saturday that was not doing flyers anymore because he had an unrealistically high expectation on response rate from doing the flyers. After I walked him through the numbers, costs and talked about some of the deals he found doing it, he is going to go back to doing flyers. Sometimes, it takes a new perspective and someone to demonstrate what you’re actually looking at to see whether or not something is worthwhile. That was the case here.
Tomorrow, I will be covering the details of how to hire someone to do flyers for you including copies of the very effective ads I run plus I will be giving you a copy of my independent contractor agreement for hiring a flyer delivery person correctly. You will not want to miss tomorrow’s live call so be sure to become an Inner Circle Member today to be on the call live.
Download Episode 2010-08-30 of The James Orr Show (the live call we described above) or become a Inner Circle Member to access live calls and the call archive.
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I just received a question from one of the listeners to our daily training calls that also purchased How To Analyze Deals Volume #1 and they asked a great question that I have explained before but that I don’t think I ever wrote a short blog post about.
The way that I recommend analyzing a potential property for purchase includes doing a full Net Operating Income calculation where you determine how much income the property produces, subtract out for expected vacancies, subtract out for property management, subtract out for taxes, insurance, HOA, maintenance and any other expenses that you can think of. In fact, I cover how to do this in How To Analyze Deals Volume #2 which is included in the free download bundle for real estate entrepreneurs.
Once you figure out the income and remove all the expenses from it you are left with a number that tells you how much money is left over (either per month or per year depending on whether you were working with annual numbers or monthly numbers). This money that is left over is called Net Operating Income. If you were using yearly numbers, go ahead and divide by 12 to get the monthly Net Operating Income.
If you think about it, the amount of money left over monthly after all the expenses for the property have been removed like vacancy, property management, taxes, insurance, HOA and a maintenance reserve is really how much money the property could support in debt (because debt was the only thing we did not list as an expense of the property when we were calculating it). As a monthly number that is the most the house can afford to pay in monthly payments and it is a critical number to know.
The question that the listener asked me about was: how do you take that number and use it to determine the most that you can afford to pay for the property?
Well, there are four variables in the calculation for loans (five if you have a balloon): the payment amount (usually monthly), the number of payments made until it is paid in full, the interest rate and the amount of money borrowed.
If you know 3 of the 4, you can use a financial calculator to determine the fourth.
One of the calculations that I like to do is to figure out how much total debt the property can afford. If I take the amount of monthly payment and set it equal to monthly Net Operating Income and enter that in a financial calculator that you can buy at just about any store like Best Buy, Staples, Office Max, Office Depot, WalMart or KMart. On my calculator that is the PMT key (presumably an abbreviation for payment) but it may vary depending on which you use.
Enter the interest rate that you can get on the loan with how you will be structuring your financing. If you are getting a bank loan, then enter in what your bank or loan broker has told you as your interest rate. Maybe it is 6.5%. Enter that as interest rate. On my calculator that is the I/Y key (presumably for interest rate per year).
Next, enter in the number of payments you will be making. If it is a bank loan and I am doing a 15 year loan, I would use 180 since I would be making 180 monthly payments. If it was a 30 year loan, I would use 360 since I would be making 360 monthly payments. I’ll use 360 months in the example below. On my calculator this is labeled the N key (presumably for number of payments).
Lastly, I would then calculate how much money I could borrow at 6.5% making monthly payments of the Net Operating Income for 360 months by pressing the CPT (presumably for compute) and then the PV key (presumably for present value of the loan amount). The calculator will “whirl” for a moment and then spit out the amount of loan that makes sense with payments of Net Operating Income at 6.5% for 360 months such that you have it paid off at the end of 360 months.
That number tells you the most you can afford to pay for a house with 100% financing and have break-even cash flow with 360 payments at 6.5% interest. I will definitely be talking a lot more about this on the daily training calls for Inner Circle Members. Join today and download dozens of past episodes (I think there are about 60 right now).
Until my next post,
James
Inner Circle Membership - Daily, Live Training for Bird Dogs, Wholesalers, Real Estate Investors and Real Estate Entrepreneurs with Q&A and consulting and more.
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Last Thursday, before the Memorial Day weekend, on The James Orr Show we discussed deal analysis and deal structuring when considering doing “subject to” and lease options real estate deals. It was a follow up to the previous day’s podcast where James talked about what “subject to” and lease options deals are, the differences and similarities between them and the pros and cons of doing them.
In this live recording with Q&A of the show, you can hear how James would structure a typical “subject to” deal, how to determine the most he would be willing to pay when buying it with no money down and just making payments with very attractive terms, how he would deal with any needs for cash on the deal and much more.
This show is now available as a digital download: The James Orr Show – Episode 8 or get access to all future live episodes, consulting during the calls and many of the previously recorded episodes as an Inner Circle Member.
Inner Circle Membership - Daily, Live Training for Bird Dogs, Wholesalers, Real Estate Investors and Real Estate Entrepreneurs with Q&A and consulting and more.
Or, become an Inner Circle Member and get much more...
The following is a video from Zillow talking about how accurate Zillow’s automatic valuation model is in your market.
I have discussed this concept before and talk about possible ways it can be wrong in each of my deal analysis posts, but this video gives some additional information straight from Zillow.
Enjoy the video.
Until my next post,
James
Inner Circle Membership - Daily, Live Training for Bird Dogs, Wholesalers, Real Estate Investors and Real Estate Entrepreneurs with Q&A and consulting and more.
