Home Blog All

Beyond Cash on Cash: How Thinking Like an Investor Unlocks More Deals

The BiggerPockets Podcast
60 min read
Beyond Cash on Cash: How Thinking Like an Investor Unlocks More Deals

What sets apart your everyday real estate investor from an investing expert? While novice investors are focused on cash flow only, veteran landlords focus on something worth much, much more. Thankfully, even if you’re just getting started on your investing journey, you don’t have to go through the hard work that experts like Dave Meyer and J Scott went through. Instead, you can hear their time-tested advice today, and grab their new book Real Estate by the Numbers!

J, a techie turned master flipper has written numerous books on estimating rehab costs, calculating real estate deals, and recession-proof investing. Dave, our VP of Data and Analytics and host of On the Market, has been head-down in housing market data for the past decade. These two real estate investing juggernauts combined their knowledge to write a book that lets every investor, no matter their skill level, find better deals, calculate profits smarter, and build wealth faster.

In this episode, we talk about calculating cash flow, ROI, and other metrics that may, or may not, matter as much as you’d think. You’ll hear how these two experts use much more than the numbers to define which deals are worth buying. After this episode, you may look at your portfolio differently, or even think about selling some of the properties you thought were “winners” before!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Rob:
This is the BiggerPocketS show, episode 67-

David:
Rob, thanks for trying, but that was so bad. I cannot let that stand. Let’s take this, and do it the right way. Watch and learn, my man. This is the BiggerPockets Podcast, show 673.

Dave:
You can’t just lock in on one metric. You have to just learn to think like an investor. There’s no magic formula. It’s not like appreciation plus cash flow minus taxes divided by amortization. There’s no magic formula. It’s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It’s stuff like compound interest. It’s stuff like depreciation, like J said. It’s stuff like amortization.

David:
All right, I will let you guys take it from here, but before I do, one quick tip for everyone listening. This show was recorded before the book is released, so you have an opportunity to go buy the new book that we’re going to be talking about on the show today, Real Estate by the Numbers, written by BiggerPockets personalities, Dave Meyer and J Scott. If you go order it before it’s released, you will get all of the bonus goodies that come with the pre-order as well as your opportunity to get a coaching call with J and Dave specifically just for you.
That’s incredibly valuable. I would encourage you guys to go get the book. You can head on over to biggerpockets.com/store, and look for Real Estate by the Numbers.

Rob:
Today, I am joined by my co-host, Dave Meyer. How you doing, man?

Dave:
I’m great. I’m super excited to be here. I have the very unique and weird position to be hosting this show, but I’m also the guest on the show, so hopefully this goes well.

Rob:
Oh, listen, spoiler alert, I’ve already lived through the interview, and I think it went pretty well, man. What are we going to be talking about today?

Dave:
We’re going to be talking about how to think like an investor, which is what we should all be aspiring to, to not just think about an individual metric or anything like that, but to think more holistically. The reason that we are talking about this today, and we are bringing on my friend J Scott, is because Jay and I actually wrote a book about this. It is called Real Estate by the Numbers. In addition to the formulas and things you should be thinking about, we really aspire to just teach people how to think like an investor.
What are all the concepts and different elements of being a real estate investor, and how can you combine those many different things into a holistic strategy that works for you to pursue your financial goals?

Rob:
I’m really excited to get into this one, man. I feel like I really took a journey through my own investment career over the last five years with this one. So really excited for people to learn more about this book. Before we get into today’s podcast, let’s get into today’s quick tip. That’s my David impression.

Dave:
You are good at it.

Rob:
I know. That’s his Batman. I think I’m working on it little by little.

Dave:
I like that.

Rob:
All right, so today’s quick tip is to think more like an investor, don’t just think of yourself as a short-term rental operator or a flipper or multifamily expert. You got to think of yourself as a more elevated investor, and think through more than just your cash on cash. Every investment is not about getting a 10%, 15%, 20%, 30% cash on cash. There are so many other variables in any investment that can make it a good investment, such as debt paydown, appreciation, tax benefits, and of course cash-on-cash return.
When you think through all those components, it can radically shift if a deal works for you, if not. With that, let’s get into today’s show. J Scott and Dave Meyer, how are you guys doing today?

J:
Doing great. Thanks for having me. Having us.

Dave:
Happy to be here. Thanks for having us on.

Rob:
I know it’s our first time formally meeting here in the BP family, so this is an exciting day for me. Can you tell the listeners at home a little bit about your background? I mean, I’m sure a lot of people are pretty familiar with both of you two. But for anyone that’s just tuning in today for the first time, give us the scoop here.

Dave:
Oh, all right. Well, if you don’t know me, my name’s Dave Meyer. I do work at BiggerPockets full time. I’m the vice president of data and analytics. In addition to that, I have been an investor since 2010. I mostly invest in Denver, but moved to Europe about three years ago, and have been getting into passive and multifamily investing over the last couple of years, and generally just love data and numbers. That’s why I had the great honor of writing the book we’re going to talk a little bit about today with J.

J:
For those that don’t know who I am, I am J Scott. I don’t work at BiggerPockets, though a lot of people think I do. I’ve been involved with BiggerPockets since, wow, 2008 when I did my first deal. I actually found BiggerPockets when I was looking for information about flipping my first house, became friends with Josh Dorkin, the founder, and been involved with BiggerPockets in lots of different ways over the past 15 years, written four books for BiggerPockets, and here to talk about the fifth.
I guess for those that don’t know my backstory, I’m an engineer and business guy by education, worked in the tech space for a long time. I’m basically just a geeky engineer who got into real estate 15 years ago, and has done a bunch of flips, and bought a bunch of rentals, and now owns a whole bunch of multi-family.

Rob:
Well, J, even if you don’t work at BiggerPockets, I think it’s safe to say you’re an honorary part of the family here. Tell us a little bit about the book. Hey, let’s start. What’s it called, and where did it come from?

J:
The book is called Real Estate by the Numbers. It was something that I started thinking about probably a decade ago, but I actually started writing about five years ago. The whole idea behind the book was basically the math and the numbers behind real estate are something that confuse a lot of people. While there’s lots of books out there that talk about the math and the numbers, there’s flipping books by BiggerPockets, and rental books by BiggerPockets, and plenty of other books by BiggerPockets that talk about the math behind real estate investing.
I never felt like there was anything that was really holistic and captured, soup to nuts, all the math that we needed to know and the reasons behind the math that we needed to know. So, I started writing this book, I think 2017 or ’18. I got about two years in, and very, very little done. It was just a really tough book for me to write. What I realized was I wasn’t smart enough to write this book by myself. I don’t like to write unless I feel like I’m really an expert on every topic that I’m writing about, and so I realized about half this book, I felt like I might have been smart enough to write, but the other half of the book, it just felt a little bit out of my wheelhouse.
So, sat down with the folks at BiggerPockets, and it took about two seconds for us to realize that Dave was the right guy to be writing this book with me. Two or three years ago, literally two or three years ago, Dave and I teamed up. From there, the book took shape really quickly. What we realized was we had a great set of complimentary skills. The stuff that I know really, really well is maybe not the stuff Dave cares about or is good at. The stuff Dave knows really, really well is not necessarily the stuff that I’m really good at. But between us, we had all the knowledge that it took to put together this book that delves into all the math, all the finance, all the deal analysis that goes on with real estate.
Now, when we started writing the book, the original concept was let’s teach people how to do deal analysis, how to analyze deals. But as we got in, what we realized was that was a way too narrow topic. It’s real easy to give people formulas, and give people math, and give people tools, spreadsheets to plug numbers in and get numbers out. But until you really understand what those numbers mean, it doesn’t do you any good. I’ve had plenty of times where somebody has given me a great spreadsheet. I plug a bunch of numbers in. I get a bunch of numbers out, and I still have no idea if I should be doing the deal.
I can say I analyze the deal. I can say I have all the numbers, but I still don’t know, “Is this a good deal? Does it make sense for me? Does it fit into my portfolio?” So Dave and I, a couple years ago… It took a long time to write this book. It’s, I think, the biggest book BiggerPockets has published. It’s over 400 pages. But a couple years ago at the beginning, we came to this idea that knowing the numbers doesn’t really matter if you don’t know what you’re trying to answer, if you don’t know what information you’re trying to get.
So, we approached the book from this perspective of, “What’s the right questions to be asking every time you go into a deal, and then how do you use the math and the tools and all the other concepts to answer those questions?” As we’ll talk about, basically, the book is written from the perspective of, “What’s the right questions to be asking, and then how do we use the math and the tools that we have available to us to answer those questions?”

Rob:
Wow, that sounds very, very comprehensive. 400 pages, man, I’m excited to dive into that, because I think that analyzing deals, oh man, that’s such a big conversation point. I think you’re right. I think there’s certainly a process that has to be taken when you’re analyzing deals, because it’s also very important to learn from someone as well who can teach you that. Because I remember I had someone that analyzed a deal, and they’re like, “This is a 50% cash-on-cash return,” but they weren’t asking all the right questions, right? They were just looking at it on the surface of the deal. But I was like, “Well, what about this, and what about snow removal, and what about this, and what about this?”
By the end of our just back of the napkin calculation, it went from being a 50% cash-on-cash return to an 8% or something like that. There’s definitely multiple layers of analysis that you can take when you’re analyzing a deal. I’m curious. I mean, when you’re getting into one of your very first deals or just whatever deal that comes across your desk, do you feel like there’s just one moment in which you’re analyzing that deal, or is it a consistent level or a consistent mindset of analyzation from the day that you put an offer in to the day that you actually close?

Dave:
I’m happy to answer that, but first, I just want people not to be scared. 400 pages, there’s a lot of pictures. We got a lot of graphs in there. It’s a very approachable book, and so we do talk a lot about math, but J and I… I think honestly the reason why it took so long to write is because we wanted to make it understandable and digestible for people of all experience levels. So even if you’re not good at math, even if you are a new investor who haven’t done a deal before, you’re going to learn a lot from this book. It’s not going to be overwhelming.
J and I spent hours banging our heads against walls to make sure that everyone could understand that. I love the idea of what you just asked, Rob, because, I think, people treat deal analysis and portfolio analysis as a point in time, and they want to just know a rule of thumb, or they just want to get an answer like, “Is this a good cash-on-cash return?” Unfortunately, at least this is the way I see it, is it’s not that simple. You can’t just look at a deal, and say, “It’s good at this point,” because even if it’s good at the point of purchase, you need to be continually evaluating the performance of that deal to make sure that it’s still working for you.
A good example is a situation where your equity in the property goes up significantly. We’ve seen this over the last few years. People are generating a huge amount of equity. That means that although they might be generating good cash flow, they might not be generating a great return on equity, which means that their money invested into that deal isn’t generating cash flow as efficiently as it could. So, you need to be continuously evaluating and determining how you should be redeploying your capital.
I’ve definitely made this mistake in the past. There’s actually an example in the book where I talk about my first deal. It kept going up in value and value, and I was so proud of that, but I wasn’t reinvesting the money at the rate that I should have been. As a result, I was not building my portfolio as effectively as I could have. I think that’s something that we talk a lot about in the book, and I think people listening to this should be thinking about is it’s not just about the point of acquisition. It’s about continuously evaluating your entire portfolio, and making sure that it’s aligned to your own personal financial objectives.

J:
Just to add to that a little bit, like Dave said, it’s not just about, “Is this a good deal, or a bad deal?” Is this the right deal for me is often the question we need to be asking, because I’m sure Dave and I could look at the same deal, and Dave might say, “Yeah, this deal doesn’t fit in my portfolio, because here are my goals, and here’s how much cash I have, and here’s how much time I have.” Here’s where I need to be in five, 10, 15 years.
I look at the same deal, and I say, “Well, based on my portfolio, and based on my goals, and based on everything that I have going on, that deal’s perfect for me.” So, we’re looking at the same exact deal, and it doesn’t mean that the deal is good or bad. It means that the deal may not be good for him. It may be good for me, and so a lot of the times that we’re looking at deals, it’s not about objectively a good or a bad deal. It’s, “Is it good or bad for me?”

Speaker 5:
Now, to our Real Estate by the Numbers correspondent, what are you seeing out there, David?

David:
I just wanted to give you guys a practical example of how this information can be applied to your own wealth building. Now, the first thing that I think people should acknowledge is that it’s better to buy real estate than not buy real estate. You’ll often hear it say take action, get in the game, buy real estate. It’s almost always better unless you buy a terrible deal that you bought something that you didn’t. But there comes a point where the rules of the game switch, and instead of saying, “Should I buy it or not buy it?” You’ve overcome that fear, and the question becomes, “What is the best deal for me?”
You heard J talking about that. That deal may have worked at one point in your career. It doesn’t work now. It may work for a different person with different goals, but it doesn’t work for you. Then sometimes, that will evolve as you progress. I’ve got some good examples I can share of how this concept works in practical terms. I bought a house in Buckeye, Arizona probably seven or eight years ago. Now, that house was a goodbye. It gained in equity and appreciated, but the rents didn’t keep up with the value of the home. That’s because they were building new homes in the area.
So if people could choose between renting my home or a brand new one, they would rent the brand new one, so my rents didn’t go up. However, the value of the home went up, because I was comparing it to homes that were brand new that were selling for more. So I realized my return on equity on this property was very low, and it no longer fit for the portfolio I had even though it fit when I bought it. I sold that house. I used the money to buy my first BRRRR property in north Florida. I got the money out of that property. I bought another one. I went on to buy about 10 properties with the equity that came out of that one sale.
Now, I’ve got a presence in north Florida, so I kept buying. I built up to 25 homes in that area. That was jump started from the first house that I sold that no longer worked for me. Now, it continues to evolve. I now have 25 to 30 homes in North Florida that are all somewhere around $100,000 to $250,000 in value, and they’re not appreciating at the level I want them to. I also want to take on more debt because I think inflation’s coming. I sell the entire portfolio, and I 1031 into 10 much more expensive short-term rental vacation properties. The 10 properties are much easier to manage than the 25.
Less things are going wrong. It takes less of my time. I quadrupled the amount of debt I had on the original portfolio to the new one, and I put myself in a position where appreciation will be much greater, and the cash flow was greater as well because I went into short-term rentals. Now, if you had brought the end result to me eight years ago when I bought the Buckeye house, and said, “Do you want to buy this 1.2 million vacation rental?” I would’ve said no. The Buckeye house made sense for me then. But by continually evaluating the portfolio, and saying, “Does this make sense for where I am right now? Can I get more out of this equity? Can I make my money work harder for me?”
You take steps, and you can climb to great lengths when you just take it one step at a time. So now that I am redoing my portfolio, or at least big chunks of them, I’m selling off the properties that weren’t performing at the level I want them to now, and reinvesting into new properties. I’m putting together a new spreadsheet that will make it easier for me to track the cash flow of every individual property as well as the equity that’s in every single property, as well as the money that I have put into that deal. With that information, I can track the return on my equity.
If I can see what cash flow I’m getting with the equity that’s in every deal, and have that turn into a number on a spreadsheet, I can quickly look at what I call my investment property tracker, and determine which properties have equity that’s working hard, and which properties have equity that is being lazy. It makes it very easy when the next opportunity to come around, if I don’t have enough capital, to say, “These are the three homes that I’m going to sell, because the return on equity is the lowest.” Then I know it’s time to make this money work harder for me.
Now, if I’m at a point in my business where I’m not looking to evaluate new properties, and buy new stuff, and I’m busy with other things, I could just keep on tracking the progress, and making sure that they’re cash flowing, and I’m not losing money on them. But when I want to ramp up my buying, it’s very easy to see which ones I’m going to sell first. In this way, your portfolio continues to evolve to meet the new requirements and goals that you have for your life. I will now throw it back to J to finish his thought.

J:
The other thing to keep in mind is that it’s not just one technique or tool or concept that works for every deal. I can look at a rental property, and I can analyze the deal and say, “Here’s all the return metrics,” and that’s great for a rental property. But what happens if somebody now hands me two different deals? Somebody hands me a rental property, and then they also hand me this note deal. Both of them are going to cost me $100,000, and all I have access to is $100,000. Well, what deal is better for me? Again, we can look at all the numbers, and Dave might decide that the note deal is better for him based on whatever criteria he’s using to look at his portfolio right now.
I might look and say, “No, the rental deal is better for me,” and so we need a way of not just being able to analyze deals, but we also need a way to compare deals. We need a way to make decisions. Sometimes, we have to make a decision. I have a story in the book about how I had been flipping houses for a couple years. I was flipping 30, 40, 50 houses a year. One day, I’m looking at my expenses for my business, and I realized that I’m paying literally $100,000, $150,000 a year in insurance costs for my flips. So I said to myself, “Well, do I need to be paying for that? Is the amount of expense that I’m seeing in terms of property insurance I need, do I really need all this insurance?”
So, I used a decision-making tool called Expected Value. I know it’s a term that… Again, I’m not trying to get into the math. We want to explain these terms in real-life terms. Expected value, this concept, allowed me to plug in a couple numbers, and realize that I was losing tens of thousands of dollars a year by paying for insurance. Even if I had insurance claims, I would’ve saved money by not insuring my products, and just paying for those costs out of pocket. So we have all these tools out here that allow us to make these decisions, to compare investments, to look at an individual investment, and look and see if it fits into our portfolio.
It’s not one size fits all, “Here’s a formula that you plug everything into.” Again, it’s knowing what questions to ask, and then figuring out how to look at a problem based on the question you’re trying to answer.

Rob:
That’s really great. Here’s what I love about that, especially for me where I am in my real estate journey. It’s that yes, no deal is perfect for you, and when you’re analyzing a deal, everyone has their own… I’m going to put quotes on this “system,” but for I would say the majority, especially the majority of new investors, we have systems. We have processes and everything, but they’re not really written out. They’re not… There’s no terms assigned to them. It’s always floating around in the ether, and so you have a way of doing things, but you don’t have terms and analogies assigned to them.
This is why I really like David, because David’s really great at bringing home an analogy that makes this very complicated real estate term very simple, right? The term you just talked about, expected value, and then Dave just talked about return on equity. These are really important concepts that I think the moment you assign a term and some system behind it and why it’s important, it really starts making you analyze deals a lot differently. The return on equity is something that was really big for me recently, because a lot of people get scared to use the equity in their homes because they’ve got a very cheap interest rate.
I’ve got a house in LA. It’s got, I don’t know, half a million dollars of equity in it, but it’s got a 3.25% interest rate. I’m like, “Oh, man, I don’t want to touch that, because it’s such a great rate.” But when you think about what you could do with that, and how you could leverage that into other deals, I’ve never actually done the analysis on the return of equity up until recently where now I’m like, “Oh, yeah. I mean, it makes a lot of sense to pay the extra 1% or 2% every single year if that means that I’m actually going to be able to make more money in the long run in my real estate portfolio.”
This is really great. This comes at a great time, because I think for me, I found myself really in love with single family acquisitions. That’s how I was building up my portfolio for a long time. Then now, I really do have to ask myself every single time a deal comes across my desk, “Is this right for me? Does it make sense in my scaling model?” A lot of the times, the answer is no, unless there’s something very cool about the single family acquisition. Someone sent me a house that had a cave underneath, and they’re like, “This would be an awesome Airbnb.” I was like, “All right, that one makes sense for me only because it’s very cool.
But other than that, I’m turning down so many things because I’m at this point now where the actual scaling side of my strategy, it really does demand a lot of analysis outside of just analyzing an acquisition.” Dave, I’m curious on your end, what kind of deals are coming across your desk now that wouldn’t really be a great fit for you that might have been a better fit for you maybe two or three years ago?

Dave:
That’s a great question. I think you raised a great point, Rob, just about building up your own knowledge base. Like you just said, you started to learn and now you understand return on investment. I think we all follow this pattern in our investing career, where we fall in love with a couple of metrics that we might like, and don’t fully understand and understand how to evaluate each individual thing. I totally identify with that. I just want to say that, because I really missed out on a lot of potentially beneficial analysis over my career.
Now, I’ve gotten to the point to your question about where you can really have a well-defined buy box, and you understand exactly what you want to invest in. I think a good example is over the last couple of years, there has been this exception to the rule where you don’t invest for market appreciation. Most people, most investors believe that appreciation is icing on the cake. I think for the last couple years, I even personally got away from that for a couple years when you look at short-term holds, because the market conditions were really favorable for market appreciation.
But now looking at new market conditions, I think that the type of deals that I would look for have to be much more fundamentally sound than what they were over the last couple years where you’re looking for a better cash-on-cash return, for example. So for me, I am mostly a passive investor at this point. I am just looking for places that have a really strong cash on cash return right now. I still think value add opportunities, where you can get forced appreciation, are probably the best deals that I’m seeing in these current market conditions. But I’m curious J’s answer, because he is a much more prolific investor than I am.

J:
It’s not so much being prolific. Again, it’s knowing what each of us is looking for at this particular point in time. I’m at the point in my career where I don’t necessarily need cash flow every month. I have enough cash flow coming in from other sources that if I bought a rental property today that was generating no cash flow, would it make sense? It might. I’m not saying it would, but it might. So, I like to look at things in addition to cash flow for me because, again, it’s not all about… I’m not at a point where I need to quit my job, and I need to replace an income.
So what are some of those other things I look for? Number one, I do look at appreciation, but I’m not a fan of natural appreciation. This is one of the things that Dave and I have talked about a whole lot, investing for appreciation. I tend to invest in places that don’t see a ton of natural appreciation. The market doesn’t just go up over the last 100 years in the places where I invest. The markets tend to reflect inflation. If inflation’s been at 2%, or 3%, or 4%, real estate values have gone up at 2%, or 3%, or 4%.
Now, maybe in the last two years, that’s not been the case. Everything’s skyrocketed. But again, if you look over the last 100 years, I can expect 2%, or 3%, or 4% increase in value in my property every year. If I’m not looking at natural appreciation, why do I like appreciation? Because I’m somebody that I have the ability to renovate properties. I’ve done a lot of flips, and because I’m not scared to renovate properties, I have the ability to do this thing called forced depreciation, which means I can buy a property that’s worth $100,000 today. I can put $50,000 into it, and now it’s worth $200,000 tomorrow.
So, this property that I’ve put up total of $150,000 into is now worth $200,000. I’ve basically forced the increase in value of $50,000 on that property. Now, that’s something that I can do, because I have time to do it. I have the knowledge to do it. Not everybody does. Dave mentioned he likes passive investing. He may not want to buy a fixer upper. He lives out of the country. He may not have the ability to manage a project from far away. So again, what might be a good deal for me may not be a good deal for Dave, but I’m going to look at cash flow, number one.
I’m going to look at that forced appreciation and even natural appreciation, so those are things I definitely look at. But in addition, I also look at two other things. I look at this thing called amateurization, and that’s just a fancy word for principle paydown. When I buy a property, and I get a loan against it, let’s say I get $100,000 loan, every month, my tenants are paying down part of that loan. After the first year, that $100,000 loan may only be a $98,000 loan. After year two, it may be a $96,000 loan. So every year, I’m building up equity because my tenants are paying down the loan.
That’s money that even though it’s not cash flow, I’m not getting that money in my pocket every month when I sell, I get to capture all of that extra equity that my tenants are paying down every month. That’s the third thing, so cash flow, appreciation, principle pay down. Then the fourth thing is tax benefits. Let me tell you something. For a long time, I didn’t appreciate the value of tax benefits. I think that’s the way it works with a lot of investors. You’re starting out. You buy a property. Maybe you’re saving $600 a year in taxes, or you get depreciation of 600, so you’re actually only saving 100 or 150.
But as your portfolio starts to scale, as you start doing larger deals, which what you realize is that you pay a lot of money in taxes, and real estate is literally the best way to hedge those, or defer or completely eliminate that tax burden. So for me, this year, I’m likely to have over a million dollars in depreciation, which means I can make a million dollars in profit in all my businesses this year, and I’m going to pay zero tax. Now, I’m not going to not pay tax forever. Eventually, I’m going to pay it. But if I can put off paying that tax for five years or 10 years, or best case, I put it off till I die, and now it’s my kids’ problem, literally, I’m now saving literally hundreds of thousands of dollars this year in taxes.
If I can do that every year, I’m going to make millions of dollars over my career just in not paying taxes. So, one of the topics that we focus on in the book is it’s not just about cash flow. It’s not just about appreciation. It’s not just about principal paydown. It’s not just about tax savings, but it’s all of these things put together that really help you define, “Is this deal good? Is this deal not good?” Again, more importantly, is this deal good for you or me, or not good for you or me?

David:
This is one of my favorite topics to get into with real estate investing. I love it. Dave makes a very good point that in the last couple years, the environment was geared more towards market appreciation. My opinion about that is because the government has printed more money through quantitative easing, and houses went up in value, but not necessarily because their value increased, but because the value of money decreased, which led to appreciation. J makes a really good point that at this stage in his career, some deals could make sense if they don’t cash flow.
Let me give an example of a deal that I bought six years ago, and see if you do the same. I had opportunity to buy a house that had to be an all-cash purchase of $150,000 from a wholesaler that had to close in I believe three weeks. The ARV on the property… No, sorry, not even the ARV, just the value as is was $250,000. Now, when I ran my numbers on this, it was going to lose about 125 bucks a month for the first year, and the next year, it was probably going to lose about 25 bucks a month. Then in year three, it was going to make $50 to $75 a month.
Would you buy a deal that you were walking into with a little over $100,000 in equity if you are going to lose money on it every single month to the tune of 125? Would you do the same thing if you were going to lose 300 a month? What if you were going to lose 500 a month? You were not going to lose that money forever, but just for a couple years until the rents caught up with what your mortgage was. Now, for me, that made a ton of sense, because I could afford to lose $125 a month on a property because the rest of my portfolio would cover that, or the money that I made at my job would cover that. I wanted that $100,000 of equity. My guess is most of you would too.
But what if you were in a position that you could not afford to lose 125 bucks a month? You’re living paycheck to paycheck. Now, of course in this example, you’d probably buy that house, and then sell it, and get the money. You turn it into a flip to someone else, but you see my point. There are stages in your investing career where it doesn’t make sense unless it cash flows incredibly strong. That’s usually the time where you have a job, and you’re trying to get enough cash flow to quit your job, to get your time back, to focus more on finding more deals or becoming a better real estate investor.
Then there’s other times in your career, like J mentioned, where he has cash flow coming in from businesses he owns, previous real estate, books that he’s written, different things that he does that the cash flow from a specific property just isn’t as important. He has cash flow from other places, so he could buy a deal that has a lot of equity but doesn’t cash flow, and it’s not irresponsible. The point here is evaluating where you are in your journey, and looking at every deal on its own merits.
Dave Meyer made the point there that he wants to find a house with a stronger cash-on-cash return because he doesn’t think it’s going to appreciate. That is a solid point. However, let’s expand it a little bit. Are we assuming that the only way that you gain equity in a property is by market appreciation? That’s surely one way the value of the property going up. Well, you also have natural appreciation, which is you could buy a house anywhere, and it’s going to go up in value because we diminish our money supply. Then you have what I call market appreciation, which is you buy a house that has geographic barriers, limitations, unique amenities, so it’s forced to go up more than houses around it.
This could be a house on a beach. This could be a house in a city like Austin that only has so much ground actually within the city limits that you can build on. You certainly increase your odds for appreciation by playing the market appreciation game, but then there’s other kinds like forced appreciation. That’s where you add value to the property, and make it worth more by executing a vision. Surely, we shouldn’t throw that out and just lump it into the category of appreciation is risky, and cash flow isn’t. Then you also have what I call buying equity. It’s not even based on appreciation.
You just got to deal at a lower price than what it’s worth, because you found a deal with a motivated seller that was marketed. You negotiated really well. I use that all the time. Appreciation comes in many forms. It’s not just I hope the price goes up. There’s things you can do to make the price go up. There’s things you can do to put the odds in your favor that the price will go up. I just want to highlight that there’s lots of different ways to execute on this, and at times, cash flow is important, but cash appreciates also.
If you bought a house in Malibu 30 years ago, I’m pretty sure the cash flow would be much higher than it is right now. If you bought a house 30 years ago in a low appreciation market like somewhere in Indiana or the Midwest, the cash flow would not have gone up to the same degree that a beach house in Malibu might have. These are all things to take into consideration, and like J says, “Ask yourself where are you in your journey? What is most important to you?” Then what I will add into the conversation is plan ahead. Don’t assume that you’re going to be in the same place in five years.
The house you’re buying right now in Ohio might make a ton of sense for you, but be planning your exit strategy when you buy it. Assume you’ll be in a different situation with different needs and different goals, so have a way that you can sell that property later. That’s why I always look for value add. I want to know that I added value to this property so that if I want to sell it or if I want to refinance, I can get my equity back out, put it into the next deal. These are BRRRR principles that don’t always work into a specific BRRRR deal, but they’ll benefit you all the same.
Let me give you a quick example of how I use the principles that I just described in my own investing journey. I’m buying a property right now that’s going to be a short-term rental in Georgia, where people from Atlanta would visit to if they wanted to stay in the mountains as a vacation rental. I don’t know that I’m going to want to own that property forever, because short term rentals are a lot of work. The cash flow is great, but the work is going to be very high. So, I’m buying a property that I don’t know if I’m going to hold forever, because I can add value to it.
I’m basically going to be able to turn a two-and-a-half acre property with two structures on it. One is a home. The other is a garage into two different homes. Now, that will add a ton of square footage to the property. It will also add a ton of cash flow to the property. If I ever get sick of owning it, and having to manage it, and the pain that comes from managing a short-term rental, I can either sell it, and it’s worth much more because there’s now two homes on it. I can reparcel it, and sell it as two different homes, and get more money, or I can sell it to another investor who’s going to buy it based on the cash flows of the property, which I will also have increased by adding the second structure.
If I want to keep it, I can keep it. If I want to exit, I can exit. I know in a couple years when I’m looking at my goals, time may be more important to me, and I may want that time back. By adding value to the property, and thinking ahead, I put myself in a position where I can get that time back if I want without actually losing money on the deal.

Rob:
This is huge. I mean, this is… You just touched upon… Even with just those four things, I think the biggest thing that most investors really don’t think about… I’ve been talking about this a lot, because I’ve had this really big renaissance, a big revelation and evolution in my journey where cash on cash, that’s all I cared about. Give me that 20%, 30%, 40%, 50% in short-term rental’s cash flow. Let’s do this thing. But you’re so right because when you think about your tax deductions, and paydown and all the other things associated with the actual return on the investment of your property, your actual ROI can double from that cash on cash when you think about all the money that you are making or depreciating and all that kind of stuff.
For me, J, you just really… You triggered a little PTSD here, because this year was the first year that I’ve had to pay a substantial amount of taxes, multiple six figures. The only reason I didn’t pay, I don’t know, a lot more, let’s say two times more in taxes was because of depreciation and cost segregation. Had I even known about that, I didn’t even know really about it too much until about a year, a year and a half ago, and now that I’ve figured this out, I’m like, “Oh my goodness, I feel like I’ve just unlocked the greatest real estate superpower of all time, and it’s depreciation.”
Had I really thought about that when I analyzed some of these deals, I really started to think about all the deals that I walked away from, because I just didn’t understand how many layers of things could benefit me from that specific deal, or how many deals I’ve taken simply because the cash flow “was really good,” and I didn’t really think about any of the quadrants, right? I’m really glad to hear you talk about that, because I think that this is something that really anyone can learn. Real estate is about making money, right?
If you’re not paying in taxes like we’re talking about, if we’re kicking them down, we’re making that money that we can then use and reinvest in real estate, and do it over and over and over again.

Speaker 5:
Let’s head over to depreciation station. David?

David:
Now if I may, I’d like to give you an example that introduces just how powerful depreciation and specifically bonus depreciation through real estate can be. It ties into the whole cash flow argument that we’re going back and forth with. Last year, I bought a property near the beginning of the year. That was a triple net property. That was the most expensive property I bought. You guys have heard me talk about this on podcast where the mortgage was just so high. I think it was around $80,000 a month. I took a lot of fear to get over buying a property that was that expensive.
Now, it doesn’t cash flow amazing. It’s a triple net property. They typically don’t cash flow super solid, because they’re very hands off. But it covered all of the taxes that I’m going to make for the next two years. This property saved me almost three million in taxes by buying it. If I only looked at the cash flow, I would’ve said, “No. Why would I buy that? The ROI is too low.” But when I look at holistically how much wealth it saves me over time, that’s a lot of money. You may not be in a position where it’s going to save you $3 million over a couple years, but you might be in a position where buying a property and using the bonus appreciation could save you $50,000 to $75,000 a year.
Now, keeping $50,000 to $75,000 is making at a W2 job $75,000 to $100,000. So buying a property under the right tax conditions could be the equivalent of getting a job that pays you $75,000 to $100,000 a year that you barely have to work at. When you start to look at it from that perspective, it really jumps out at you that this is how people build big wealth through real estate. When you’re only looking at ROI, cash-on-cash return, I should say, and cash flow, you miss some of these opportunities.

J:
It’s interesting when you think about the different ways of making money in real estate. I have conversations all the time with a bunch of non-real estate investor friends, and we have this debate between the stock market and real estate, or real estate and crypto, or real estate and precious metals, or real estate and whatever it is. They always come back to stock market is typically 8% to 10% per year. Obviously, it’s volatile, but on average over time, it’s 8% to 10% a year. These days, in real estate, cash flow is near zero. I mean, over the last couple years, we just weren’t making a lot of money because we were paying a lot for our properties.
I don’t want to say near zero. Some people are doing a great job of finding properties that are generating 6%, 8%, 10%, 12%. But me personally, somebody that doesn’t hunt for properties that much anymore, I’m not getting a lot of cash flow. Likewise, these days, I mean, I’ve been getting appreciation over the last couple years, but I expect anything I’d buy today probably isn’t going to appreciate much over the next couple years. So if we look at a deal that’s essentially very low cash flow, essentially no appreciation over the next couple years, shouldn’t it be obvious that the stock market’s a better place to put your money if you’re going to get 8% to 10%?
Well, at first glance, it might be. But if you take just those other two things I talked about, the principal paydown and the tax benefits, and we talk about this a lot in the book, just those two things, especially in our low interest rate environment. I mean, things are higher… Interest rates are higher now than they were six months ago, but they’re still low. In our low interest rate environment, we’re building up a lot of principal every month right from the beginning of the investment. So even if you ignore cash flow, even if you ignore appreciation, and you just look at principle paydown and tax benefits, I’m getting more than 8% on every single one of my rental properties that I’ve bought over the last couple years.
So, I’m beating the stock market without cash flow and without appreciation. So if I get that cash flow, which I will, I’ll get more cash flow over time, and appreciation, eventually, we’re going to be in a better economic situation, and we’re going to see values rising again. At that point, I’m going to be much higher than 8%. So again, if you only look at cash flow, or you only look at appreciation, or you only look at the two of those, it really gives you a stunted view of what the investment’s really returning. But when you take a holistic view, and you look at all the return metrics, and you look at it again relative to your entire portfolio and what you’re trying to achieve, a lot of times, the obvious answer is real estate is better than other investments, or it’s better than you think it is.
I’m not saying there isn’t the right time to be buying stocks or bonds or crypto or other things, but what I’m saying is don’t take a myopic view of real estate, and not really understand all the benefits it’s providing because a lot of times, it’s performing even better than you think it is because you’re not looking at each of these factors.

Dave:
That’s such a good point. It’s such a false comparison too because like, “Oh, the stock market gets 8% or 9% cash flow, and real estate is bad,” but the stock market generally doesn’t produce cash flow. The best dividend stocks produce one, maybe a 2% yield. If you’re looking at the total return of the stock market, and comparing it to cash flow in real estate, that’s not an apt comparison. I think what I love about what J was just talking about, and Rob, you before, is you can’t just lock in on a single metric. I’m sure you guys get these questions on social media or wherever where people are like, “Is a 4% cash-on-cash return good?”
It’s like, “I don’t know.” You have to explain so much more. I think that’s what J and I really… After debating how to structure this book, we kept coming back to this idea is that you can’t just lock in on one metric. You have to just learn to think like an investor. You have to… What Jay is talking about combining these four different topics, there’s no magic formula. It’s not like appreciation plus cash flow minus taxes divided by amortization. There’s no magic formula. It’s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It’s stuff like compound interest.
It’s stuff like depreciation, like J said. It’s stuff like amortization. If you can educate yourself to the point where you at least have an understanding of these concepts, and you don’t need to be able to calculate every single metric in your head… There are calculators. There are spreadsheets that can do it. But if you can learn the concepts, then when you’re evaluating deal, the numbers start to make a lot more sense, and you can combine them, and get a fuel for the deal, and how it’s going to help build your portfolio and how to compare them against one another, because they’re not always apples to apples.
There’s going to be… A multifamily deal might be better in cash flow and amortization, but like J said, it could be in a low appreciation area, or you can invest in somewhere. I invest in Denver where… Not anymore, I agree with J on that. Over the last couple years, there was a good chance of market appreciation but, maybe it didn’t have as much cash flow. But since we understand the concepts, you can think about them holistically, and just honestly feel more confident about your investing decisions.

David:
This is a very solid point that is particularly applicable to the market that we’re in right now. One of the things that I’ve noticed that can be very misleading is that people are starting to use cash flow and ROI synonymously. So, return on investment has been reduced to being what is the property cash flow in a month? I just think it’s inaccurate, because the return on your investment incorporates a lot of things. It incorporates your loan paydown. It incorporates appreciation that you’ve had in the deal. It incorporates the fact that cash flow over a five or 10-year period of time should be increasing every single year.
I’m on a mission right now to differentiate cash-on-cash return versus ROI, because they’re not the same thing. I think J is highlighting that. Now, part of the reason that you’ll hear us say cash flow isn’t great, man, we’re not trying to say don’t buy cash flow and properties. The fear is that cash flow tends to be stronger at the lower end of quality and price. The higher end properties that you get that tend to build wealth over time better, and tend to appreciate more, and tend to have better tenants, they don’t cash flow as strong because they’re priced higher.
Now, the problem is when the market gets competitive like it is right now, and more people are chasing after cash flow. There’s this pressure that pushes you further and further down into markets that can become like a D class neighborhood. They’re the areas that you don’t want to own rental property, but the price to rent ratios are so strong that they make cash flow look good. This is why we give warnings about don’t only look at cash flow. It’s not that cash flow is bad. So many people hear this, and they just get defensive.
It’s that if you chase cash flow, and you only look at cash flow, it will push you into these markets that you don’t want to own long term where all the headaches come from, that will make you not like real estate investing. So the great advice that we can offer to you is to look at it holistically, and include in your analysis, “How much time would this take, and how much headache would this give me?”

J:
To add on to that, Dave used the term think like an investor. If we were to retitle this book, I like the title Real Estate by the Numbers. It says what the book is, but if I had to go with a different… If we had to go with a different title, I think, Think Like An Investor is the title of this book. Because this book, while we do focus on real estate, and basically, 95% of the examples are real estate related. Everything we teach in this book is applicable to any type of investing you might do. So again, this book isn’t just about analyzing rental properties, or analyzing flip deals. It’s learning to think like an investor.

Rob:
That’s awesome. There are a lot of tools like the BiggerPockets calculators out there that make deal analysis relatively simple. What do you think is missing from this?

Dave:
I don’t know if there’s anything necessarily missing. It depends on the deal, but I think we’re trying to inject two things into the conversation. First and foremost is context. I got my start in investing or in real estate I should say. I got an internship in college just randomly at a construction management company. I was building financial models, and I learned how to calculate something called internal rate of return or IRR. We talk about this in the book. I could calculate it. I could throw it out there, and I had no idea what it meant.
I couldn’t have any less concept of what a good IRR was. Even if I knew a 20% higher IRR is better than 14%, I couldn’t really understand what that meant. So while there are great calculators out there, like the BiggerPockets ones, if you don’t really understand what the numbers mean, it’s hard to judge whether or not a deal is good for you and if it’s going to help you meet your financial goals. Then on top of that, I do think the BiggerPockets calculators are excellent for rental property analysis, but there are some things… J gives some really good examples of this in the book where a traditional rental, like cash-on-cash return or just the annualized rate of return doesn’t help you understand rates of return when you have a lot of inputs and outputs.
So, J gives us… J, you could probably give a better example, but this deal where he has to put some money in, and he does a ReFi, then he does another renovation. It’s like, “How much money is even invested in that deal? What’s the rate of return?” It’s a little bit more complicated when you’re doing value-add deals, when you’re doing development deals, when you’re doing multi-family deals. I think in this book, we introduce some new concepts and formulas that aren’t traditionally covered in the calculators that you can apply to some more advanced deals.

J:
In addition to what Dave said, and let me address this, so it’s a good question like, “Is there things lacking in the BiggerPockets’ calculators?” There are things lacking in every calculator, and the BiggerPockets calculators are the best in the world. When somebody hands you a rental property and says, “Analyze this deal,” or somebody hands you a flip property and says, “Analyze this deal,” or somebody hand you a BRRR property, and says, “Analyze this deal.” The problem is a lot of the decisions that we make as investors aren’t going to be covered by one of those three or five calculators.
I give an example in the book of a deal. I did a flip deal. I listed the deal. I don’t remember exactly. It might have been, let’s say, $100,000 I listed it at. I got two offers pretty quickly. First offer was an all cash offer at list price. This was a long time ago. I got to offer all cash at list price. Then I got another offer from an investor who said to me, “I really want this property. I’m going to hold it as a rental, but I can’t pay for it for seven months. I have another deal that’s closing in seven months. I’m getting money back from…” I think it was a syndication or something in about seven months.
“I’ll buy it now, but I want you to sell or finance it to me. I basically want you to hold the note. I want you to not take money from me for seven months. I’ll pay you in seven months, and I’ll pay you more than the $100,000. Just tell me how much you want, and I’ll pay you more. I just can’t pay you for seven months.” So, if I said that to you, what do you do with that information? How much more does he need to pay me in seven months so that his offer’s better than that $100,000 today?
There’s this whole concept called time value of money, this idea that money today is worth more than money tomorrow or next week or next year, because I can invest it if I get it today or that tomorrow or next week or next year. So, I now have seven months that I can’t do anything with the money until I get the money, so how much more does he need to pay me in seven months for that to be better than getting $100,000 today? That was a real problem that I had to answer the question. It turns out there’s a pretty simple formula for me to figure out how much he needed to pay me. So if he would pay me at least that much or more, his offer was better than the guy that was going to give me $100,000 today.
These are the types of questions that you get asked all the time that you can’t just go to a BiggerPockets calculator or any other calculator, and just plug the information in. You have to understand, “Well, what is this concept of time value of money? What is this concept of seven months from now is a worse time to be getting money than today, so I need more of it in seven months than I need today, and exactly how much more do I need?” So, by understanding, by thinking like an investor, we can answer questions like that. Then you can’t just plug into a calculator, because calculators weren’t designed to answer questions like that.

Rob:
Oh, I see. So basically, what you’re saying is there are the tangibles of every deal, things that are very objective. That’s like, “What’s the property price? What’s the rehab price? What’s the interest rate?” But then there’s also the intangibles, like what you’re talking about, which is the value of your money over time. Money’s going to be less valuable in seven months than it is today. You really have to consider the impact of your money just sitting in a bank account for that amount of time, or money that’s owed to you.
I totally understand that. There really is an intangible aspect of analysis. This is something that David and I talk about quite a bit on the podcast, which is that analyzing a deal is, oh man, I don’t know, it’s part art. It’s part science. That’s how we feel. But I’m curious, what’s your POV on that, Dave? Is that something that you’d agree with, or do you feel like analysis is somewhat objective?

Dave:
I think there’s two sides to it. The numbers… One of the reasons I just love math is because it is objective and you can get real numbers. To J’s point, if you just put in good numbers into a calculator like BiggerPockets, you’re going to get the right answer, but there are assumptions in every deal that there is some art to. That’s something like rent growth. We’ve seen rent going up over the last couple of years, and we can look at data to look at historical trends, but no one knows for certain what’s going to happen in the future.
You need to use some art, a lot of experience talking to other investors to figure out what assumptions to put into those deals. I think there’s an even bigger subjectivity into what J was talking about, which is what is a good deal for you? You can get an objective answer about what a good cash-on-cash return is, but that doesn’t necessarily mean it’s good for you. I think there’s a good example, especially now with rising interest rates. It’s like, “What kind of loan should you use? Should you be putting more down on a deal right now?”
Should I use a HELOC instead of a conventional mortgage? The calculator, if you tell it what to do, it will give you the answer, but you sometimes don’t even know what questions to ask yourself, and the analyses that you could do to optimize a deal even further beyond the objective numbers unless you understand some of these concepts. I do think there is both a subjective and objective part, and that’s honestly what we’re hoping to help teach people in this book is how to answer both sides of that.

Rob:
Certainly. I mean, let me clarify. I mean, part art, part science. What we mean by art is not just, “Oh, I viscerally feel this way about a house.” What we mean is the strategy behind real estate investing. However, when you say part art, part science, that sounds a lot better than saying part strategy, part science.

David:
A frequent theme of this episode is asking yourself what are the right questions to ask? Here’s an example of a great question you should be asking. In five years, what will this property look like, and how will it be performing? In five years, what will my goals be, and how will they be different from today? Here’s an example of if you take the bait of the high cash flowing property right out the gate, you go buy in some Midwest state where there’s not a whole lot of rental demand, but there’s tons of properties that meet the 1% rule. You buy that property that’s going to cash flow, let’s say, $100 a month.
In five years, it’s going to be cash flowing $150 a month. There could be a scenario where inflation has been so great over a five-year period that $150 in five years is worth less than $100 today. So even though it looks like your cash flow has grown by 50%, which would be a healthy number, the actual value of that money has diminished so long over time that it’s worth less. Your return has actually gone down. Now, this becomes even more clear when you compare it to investing in a growing area. That might have been harder to find the deal. You might have to work longer and harder to get it, but your cash flow has gone from $100 a month to $500 a month or $400 a month over a five-year period, which is not uncommon in areas that I invest in at all, particularly coastal markets.
If you’re asking the question of what’s it going to look like in five years, the right answer becomes really, really clear. If you’re asking the question what’s it going to look like right now, it can become muddy because the cash flow looks much more solid than where you can get anywhere else, and the deal is easier to find. Then to further elaborate on this, you’ve got the art and the science position that Rob talked about, and that Dave Meyer supported. Real estate is part art and part science. You can’t focus too much on either end. The people that focus only on the art, they miss out on opportunities, because they don’t understand if the property’s going to actually pencil out.
They don’t rent it by the numbers. The people that focus only on the science miss all the ways that they can improve the way a property is valued. Particularly in the short-term rental space, I see this a lot. There’s a lot of creativity that you have in the art side with the short-term rental that can actually increase the science side, which are the numbers. You got to understand both, and you got to be good at both. But man, real estate is nothing else because when you do well at this, it grossly, grossly beats all of its competition.
J mentioned earlier in the show that his friends want to compare crypto to precious metals, to real estate to stocks. It’s really not a fair comparison. Real estate is going to be all of them, but that’s because they’re not apples to apples. When you buy precious metals or stocks or crypto, there’s no work that goes into it. You just click a button on a computer. There’s none of your time that’s involved. Real estate does involve some of your time. It’s not as passive as those investments, which is why it outperforms them, just like most of the time, running a business will outperform real estate from a cash-on-cash perspective, but there’s way more effort and way more risk that goes into running the business than real estate.
So again, asking the right question, “Is this a property, or is this an opportunity that’s going to make me money without a lot of time, or is this an opportunity that’s going to have a higher ROI, but a lot of my time will be required?”

Rob:
I really love what you guys talked about here, which is thinking like an investor, because I think this is also something where we pigeonhole ourselves very quickly in our real estate careers, where we brand ourselves as a house flipper or a short-term rental operator, or a multifamily expert. But really, what we are is we’re investors. I’m very guilty of this. As someone that I’m very pro short-term rentals, I’m like, “I’m a short-term rental investor, and this and that.”
But really, I do think that it devalues the fact that I am an investor, and should be thinking a lot more broadly than what we talked about earlier, the cash-on-cash metric. So, what are ways that our audience can be thinking like investors?

J:
I think, again, it goes back to figuring out what the question you’re trying to answer is. Don’t just stick numbers into a calculator, and get numbers out. Start with what are you trying to figure out? Here’s just something that I think was fun that we added in the book. On social media, if anybody is on Facebook, or I guess mostly Facebook, people like to pose this question. I don’t know why they do it, but I guess it gets interaction. They pose this question, “If you could have $2 million today, or you could have $200,000 every year for the rest of your life, which one would you rather have?”
I mean, we’ve all gone on Facebook, and seen somebody post that question, and then there’s hundreds of responses. Half the responses are like, “I’d rather have the $2 million today, because I’ll turn it into $100 million tomorrow.” The other half are like, “I’d rather have $200,000 today, because then I never have to work again the rest of my life.” Then people will argue, “Well, this one’s objectively better than this one,” but nobody ever gives any reasons. The interesting thing is you can actually do the math to figure out what one is better.
This is very analogous to a lot of situations we run into in the investing world where you have the choice of a lump sum amount of money today, or cash payments every month, or every quarter, or every year for some amount of time into the future. If you think about it, that’s all investing is. If I buy a rental property today, all I’m doing is taking this lump sum. I’m trading this lump sum for monthly cash flow. So, it’s the equivalent of saying, “Would you rather have $2 million today or $200,000 per year for the rest of your life?” Well, if I’m looking to buy a $2 million rental property that’s generating $200,000 a year in cash flow, that’s the same question.
So, when you look at people on the internet, and they can’t answer this question with any objective response, they just say, “Two million sounds better, or 200,000 sounds better,” if you don’t understand that question in that form, you’re also not going to understand the question in the form of, “Is a $2 million rental property that generates $200,000 per year in income, is it worth it?” So, you have to learn to recognize that these are the types of questions that are universal in investing. There are a whole bunch of questions that are universal in investing.
So instead of asking the question, should I buy this rental property? The bigger question is, “Should I be willing to spend X amount of dollars in order to generate X cash flow over the next however many years?” That’s the more generic question. Chapter eight in the book is literally, how do you answer the question, “Should I invest X dollars for Y amount of cash flow over the next number of years, or how much should I invest for this much cash flow over the next couple of years?” Now, once you learn the concepts and the math and the formula behind answering that question, you can now apply that to a whole bunch of situations.
You can apply it to buying a rental property where you pay money now, and you get cash flow over the next couple of years. You can apply it to life insurance, where you might pay money now. You live a certain number of years, and then you get money later. You might be able to apply it to a note. Let’s say somebody’s going to sell you a note. I have this note that’s going to pay $312 a month for the next eight years. How much are you willing to pay for that note today? These are all questions that are predicated on the same… or these are all situations that are predicated on the same question, which is, “How much should I be willing to pay today for a set of cash flow in the future?”
Once you start thinking about things in that question-answer, that more generic format, it allows you to start thinking like an investor, because now you don’t just need a formula for rental properties and a formula for notes and a formula… You get the idea that all of these things to some degree are the same, and I can use this one formula for all these things. Then there’s a whole bucket of other things over here that fit into the same different category, and we can use these techniques for that category. There are all these categories.
Once you start to recognize these patterns of different types of investments, you’ll also start to recognize how we evaluate these investments, and compare them to each other.

Rob:
Makes a lot of sense. I was just… I’ve had this troubling deal that’s really haunted me since the day we sold it. We had a property that we built from the ground up. We operated it for maybe, I don’t know, two or three months. We sold it for… I think it was around a $400,000 profit, me and my business partner. It was set to gross between 130. I think our net on that was going to be 100 to 110. We sold it. Not really sure, right? It’s like what you’re talking about. There’s all these different levers, but we just didn’t have a system or a methodology to think through the ramifications of both sides keeping it or taking the lump sum.
In that moment, I think for us, we thought, “If we sell it for a profit, we can 1031 that into more properties,” which we ultimately ended up doing. We ended up buying four more properties. Then we’ve sold some of those properties, and now we’re 1031-ing that into other properties. Overall, our portfolio is growing, but it was something that really troubled us for a long time, because we just weren’t really sure how to analyze that deal. This is something that definitely… Some kind of system, some methodology to how to think through this would’ve really helped me sleep better at night, because I think him and I…
We switched back and forth every month. One month, we regret it. The next month, we’re like, “Oh, this was a great decision.” Where we’re at now in that philosophy, I’m not sure. I’m not sure. We’ll let you know pretty soon. I think we’re still flip flopping on that one. But Dave, what about you? I’m curious, is there any other way that the audience can be thinking more like investors?

Dave:
The first one that I think a lot of people overlook is how to keep score. There’s this idea. You might have heard this term in business. It’s like, “What gets measured gets done.” Honestly, I didn’t really do this for first years of investing. I kept a P&L. I knew profit and loss for my individual properties, but I wasn’t keeping track of my net worth and how much equity I had out into different deals, and how much cashflow I was really generating on a holistic sense, and whether or not my… All these individual things about my investments were all over the place. I think that is a key component to being an investor.
If you don’t know how to keep score… We talk about this creating your own personal financial statement where you track your net worth. How much money’s coming in? How much money’s going out right now? How do you know if you’re doing better or worse? If you don’t know to keep score, how do you decide on a particular deal if you need more cash flow? Maybe you can take a long-term approach, and look for more appreciation over time. I think that’s one concept is learning how to keep track of where you are in your investment journey in a real numbers quantifiable way is super important.
We already talked a little bit about the time value of money. Man, I feel like learning the time value of money at some point in your career is like a superpower. Once you really understand the time value of money, your life will change. I promise you that. You will not think about any purchase you make in your life the same ever again. Once you learned that $10,000 today, if you went out and bought a new car or whatever, how much that could be in your retirement, I promise you, you’ll stop buying stuff now, and you’ll start investing it. Those are two-

J:
Let me interrupt you real quick, Dave. I’m sorry to interrupt, but this is so important. This whole time value of money thing, this concept, we’ve all heard that term, time value of money. But honestly, the difference in my experience between successful investors and not successful investors in a lot of cases is literally the understanding of that concept in more detail than just the term time value of money. I found… One of the reasons why we devote a lot… There’s five parts of the book, and we devote three quarters of one part of the book to this time value of money concept, because there are so many different aspects to investing and measuring investment returns, and analyzing deals that’s related to it that literally, it’s probably 10% of the entire book focused on time value of money.
The reason for that is because I’ve seen so many articles, and texts, and blog posts, and books that talk about time value of money, but they talk about it from a formula standpoint. They talk about it from, “Plug the numbers in. Get the numbers out.” I’m lucky that… Again, I have an engineering background, so I understand time value of money, but let me tell you something. If I handed one of these texts that’s out there to the average, non-mathy person, their eyes are going to glaze over. It’s like they don’t want the formulas. They want to understand what does time value of money mean.
Obviously, the formulas are important, and we need to include that as well, but we also need to tell stories about why this is important. We need to tell stories so that people can understand why this matters. So, a very large part of this book was focused on just that concept of time value of money, but telling it over many chapters so that people really get why it’s important. Again, I honestly believe that just that concept in and of itself is going to make a lot of people better investors, and is going to differentiate the not so good investors from the good investors. I apologize, Dave, for interrupting.

Dave:
No. No, you’re totally right. I genuinely believe, once I understood, that it completely literally changed my life. J gave a brief example of what it means. It means money now is worth more than money in the future, because you can invest it. But once you really… It’s not just knowing that. It’s like once you see the numbers, and almost can feel it, I know that sounds weird, but can really internalize it in a way that it becomes a part of your decision making in almost everything that you do. It will change your life, so I totally agree with you, J.
Then there are so many in the book, but the last one I really think people should understand the concept of is leverage too, because it’s unique to real… It’s not unique to real estate, but it is more common in real estate, and that’s the concept of borrowing money to purchase an asset like a home. We talk a lot about that too, which is another thing that I think really is a mindset thing that helps people. It’s not really about the formulas. We do go on the formulas, and it’s helpful, but that’s another thing, I think, learning to think about leverage and how to use your financing strategically, and not just treating it as this hurdle across.
I think a lot of new investors are like, “I need to just find a loan.” They’ll take any loan. For your first deal, that could be okay. But I think over time, you learn to think strategically about how to use your financing to create better deals. We do talk about that a lot. I think those are three of the highlights in the book. There’s plenty more in there, but those are three that I really like.

Rob:
I mean, all of those really do hit home for me truly. I mean, I wish I would’ve had this book five years ago when I got started, because one thing that people really did try to… I don’t know. They saw the bullet train heading towards me, and they’re like, “I can save you. Just listen to me. Keep track. Do proper bookkeeping. Have a personal finance statement.” Because when I was starting out, it’s no big deal. I was keeping track of expenses on a spreadsheet. That even worked for the first two properties, maybe even the first three.
But very quickly, the bolts start falling off the tires there once you actually have to get really into the nuts and bolts of taxes, and getting all that information to your CPA. So, for me now, I scaled so quickly that I remember my CPA was basically like, “Hey, we need to get you on doing proper books and QuickBooks.” We did that. Then last year, he was just like, “Hey, that QuickBook file, we need to throw that away. I want to put that into the trashcan. Pour gas on it. Light it on fire, because you need to be keeping track of your books this way.”
It’s a very specific way that’s going to actually inform you on cash coming into your account and cash coming out. That’s very, very important because a lot of the times, you think that you’re making a lot of money, but then once you actually track it correctly, you realize that maybe you’re not. That can drastically change that investment. So if you’re not keeping track of all those different things, you’re not able to cut costs at all, because you don’t know what’s crucial and what’s not, what’s eating your budget.
For me, keeping track of your finances, that’s a huge one. I cannot overstate how important it is to do proper bookkeeping. Start it from the very beginning, pay a bookkeeper, learn how to do it, however you have to do it, but it’s going to be so crucial. I promise you, it’s going to save you so much time and money with your CPA, because CPAs could be… They could be a very costly expense. The other thing you talked about is leveraging too. I mean, we talked about that one for hours.

J:
We tried to make this book. Again, it’s a thick book. It’s 40 some chapters. We wanted to devote at least a few chapters to the bigger picture. It was just what you and Dave were talking about, this whole idea of tracking your business’s success, not just on a per deal basis but on a business basis. Because when you think like an investor, it’s not just thinking about making everyday decisions. It’s thinking about making decisions for a year out or five years out or 10 years out. The way we do that is we understand how our business is performing.
Just like you just said, Rob, understanding how your business is performing is all about creating these financial statements, and doing accounting correctly. For a lot of us, that whole idea of accounting and financial statements is just like your eyes glaze over when you hear about it, but we spend several chapters basically talking about breaking down financial statements in a way that makes it really simple to understand. We give an example of a fictitious flipping business, and we say, “This is what a financial statement for this business would look like. Here’s how you categorize income. Here’s how you categorize different expenses.”
Then how you can then look at that, and then say, “Is my business operating efficiently? Is it operating efficiently from a business standpoint? Is it operating efficiently from a project standpoint? Is it operating efficiently from a people in a labor standpoint?” Basically, by keeping that accounting and creating those financial statements, it doesn’t just give your CPA or your account the ability to do your taxes at the end of the year, but it gives you insight into how efficiently your business is running. It gives you insight into, “What can I do today to make my business more efficient?”
It gives you insight into, “Is my business…” This is the most important thing, “Is my business running as efficiently as 99% of other flipping businesses out there?” Because really, at the end of the day, we have this thing called profit margin. It’s a division of a couple different numbers in your financial statement, but this idea of a profit margin is a way for you to compare the efficiency and the success of your business to somebody else’s business, or somebody else’s business, or all the businesses in the industry as a whole.
So again, it’s not just about analyzing a deal for today, or analyzing a flip deal over six months, or a rental deal over five years. It’s really analyzing your business over the lifetime of your business, and forecasting and planning to get to some place. We’re all doing this. We’re not doing this because… Well, maybe some people are. I’m not doing this because I love flipping houses. I’m not doing this because I love buying rental properties. I’m doing this to get to financial freedom, and to provide a legacy, a financial legacy for my kids. The only way I can do that is to have a plan, and I can’t have a plan from today until 20 years from now unless I know what 20 years from now looks like.
So, I need to figure out what 20 years from now looks like, and then I need to design my business so that I can get from today to that point. So, using financial statements, using the correct accounting techniques, understanding the income and the expenses in your business and how they work together is how you get from today to whatever your 20 years from now looks like.

Rob:
Awesome. Yep. I’ve just learned a lot of this stuff the hard way. I think most people learn this stuff the hard way.

J:
We all have.

Dave:
Totally.

Rob:
But here’s the good news, you don’t have to.

Dave:
Honestly, when we’re talking about this book, I realized maybe the value of this book is it just speeds up all the painful lessons by five to 10 years. You get there eventually, but it’s through some pain. We’ve all probably seen a tax bill, and you’re like, “Man, I could have done that better.” For me, I told you earlier about failing to reinvest. I think that was a consistent problem I had for the first few years of my investing career. I’m sure you guys have your own as well, but there are so many things to think about as a new investor. We hopefully can help you consolidate the things that you should be thinking about to optimize your investing through the course of this book.

Rob:
This is really great because I’ve really just developed the emotional roller coaster of breaking out in hives, sweating the PTSD of doing it all the wrong way, and then knowing that there is a light at the end of the tunnel here where I could have just probably, like you said, saved five years of gray hairs on my head. But that’s okay, because I’m still going to pick it up. There’s still so much to learn. Even talking in this conversation, I’m like, “There’s actually a concept to this whole thing like return on equity.” Who would’ve known that that’s a thing, right?
You don’t really think about some of those more advanced concepts, so thank you guys so much. Is there something that we didn’t cover in this book? Is there one final nugget that you guys want to leave the audience with before we end today’s podcast?

Dave:
Obviously published through BiggerPockets, and you can go to numbersbook.com, and you can buy it there. I do also want to add. In addition to this book, it also comes with a bunch of bonuses. We talked about a personal financial statement, how to create a balance sheet. Those kinds of things are in the book. We do have some downloadable Excel documents that come with the book for free. So if you are wondering, that is… We make it easy for you. We explain the concepts, and then we give you some tools to do this for yourself.
Check it out if you want to learn how to think an investor. We’re really excited and proud of the book, and think that whether you’re a newbie or an experienced investor, there’s a lot in here for everyone.

J:
Everybody’s asking me, “Is there an audio version of the book available?” There is, I believe already, or there will be an audio version of the book, but what I recommend to anybody is definitely get a physical copy of this. You may want to get a hard copy as well.

Rob:
Great tip. The models and everything like that, the Excel, that stuff is worth as weighted gold. I’m excited to start plugging and playing with that kind of stuff. Dave, can you tell us where people can find out more about you on the internet?

Dave:
Sure. Well, you can find me on Instagram, where I’m at the DataDeli. I also host a BiggerPockets podcast called On the Market where we talk about news, data, and trends that impact the lives of investors. You can definitely check that out as well.

Rob:
Awesome. What about you, J? Where can people find out more about you?

J:
Real easy. If you go to www.connectwithjscott, just letter J, scott.com. Connect with jscott.com. That’ll link you out everywhere you need to go.

Rob:
Awesome. Well, thank you guys for your time. I’m really excited for the book. I guess, let’s see. David always does this much better than I, but I’ll give it a shot. This is Rob, for Rob missing Dave Greene, Abasolo out. I think that’s how he does it. Bye, everybody.

 

Watch the Episode Here

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover:

  • The math behind the real estate deal and which metrics matter more than most
  • Calculating which properties work best for your portfolio
  • Defining your “buy boxand using it to filter through deals so you can build wealth faster
  • Why your property’s ROI (return on investment) might be even better than you think
  • How to start thinking like an investing expert and the lump sum vs. cash flow debate
  • Understanding the time value of money and how it’ll make you richer quicker
  • And So Much More!

Links from the Show

Book Mentioned in the Show:

Connect with Dave & J:

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.