You want to know how to earn great returns on every deal?
Truth is that there are lots of ways, and you don’t have to use your own cash and/or credit to do the investing.
So let’s say you took my Cashflow Creators course that is available to you as a Cashflow Core Member.
If you aren’t yet a member, there’s no better time to give it a whirl than right now…
That means you already know how to find investors and how to get them to let you use their private money in your deals.
Hey, you should even know how to explain your deals and how your investors will earn returns on the money they are letting you use, because you are utilizing my Profit Analysis Quadrant™ (a.k.a., the P.A.Q.) tool that is not only inside the Cashflow Creators course, but also as a course of its own inside membership.
If you haven’t taken those courses and have no clue as to what I’m talking about, I’ll give you a peek in this article.
Before I go further, you need to understand something…
The long and short of it is that your investors earn returns across one or more of the four quadrants in the P.A.Q.
I talk about the P.A.Q. in some detail in my book. If you haven’t grabbed a copy, it’s still available in print. But right now you can get a copy of the e-book version for free.
In my P.A.Q. you will see that there are four quadrants where investors can earn returns: Appreciation, Depreciation, Amortization and Cashflow.
Once you understand how these areas can be used in any deal, you’ll be able to explain how investors will earn returns by working with you. And the great thing is that you don’t need to have a deal to get people to invest with you.
What do I mean?
Maybe you should go listen to one of my earlier Cash Flow Diary podcast episodes so you can understand a bit better…
In episode #008 I discuss how to talk to prospects. (And you’re going to want to a lot of that if you want to get investor dollars for all your deals.)
Want a quick look at what’s in each quadrant?
But you have to understand that this is just a peek under the hood. The descriptions of each of the quadrants is only going to give you the most basic of understanding.
It’s something I touch on a lot in my live presentations. It would help you to listen to the podcast episode where I lifted the audio from a live presentation I did more than a year ago in Chicago. (It’s the first in a three-part series.)
For now, here’s a brief overview of the four quadrants that will help you explain how your investors can earn returns in your deals.
BTW, you can combine the quadrants in different ways to make your deals even more appealing. You get returns; your investors get returns; everyone is happy!
1. Appreciation – There are five ways a property may appreciate, but the three I’m most concerned about as a real estate investor are Found, Forced and Phased.
- If I find a property that is undervalued in my market I can do a happy dance. That means there’s appreciation from the get-go in that deal. This happens more frequently than you might think, but not often enough. This is FOUND
- I can also do some improvements to a property. If I do, I have FORCED the appreciation to occur. Maybe it’s just minor curb appeal stuff, painting and a little bit of repair. Or maybe it’s a whole lot more, like adding a really nice laundry facility to my apartment building so the tenants will stay there to use my pay washers and dryers, plus they don’t have to lug their heavy laundry to town and back.
- If appreciation is PHASED, that may have nothing to do with me as a property owner or investor. It’s more about what’s happening to the neighborhood where the property is located. If I’ve done my homework right, I’ll know if there’s a new something coming in that is going to add value to the neighborhood and the investment property. There are plenty of ways to learn that sort of thing. Start by reading that area’s local newspaper and reading up on plans for the city online. If you find out that a new school is being built, or maybe a cool park or other community amenity, ding-ding-ding… you have a winner!
- The two types of appreciation I don’t focus on, because I can do nothing to affect either of them, are PASSIVE and INFLATED. If you want to learn about them, give a listen to podcast episode #8.
2. Depreciation – I’ll keep this short. I’m not a tax guy, and I’m not giving tax advice, but with every property comes a depreciation schedule. That’s something that your tax guy can go over with you, but your residential property can be depreciated over about 27.5 years. Commercial property allows for longer depreciation… more like 39 years!
Further, you can depreciate over a scheduled time frame lots of items in the property, like door knobs and other parts. You can depreciate all sorts of line items. How far you go is up to you and your tax guy!
But what does this mean to your investors? Plenty for some and nothing to others! Some need big tax benefits; some don’t. When you first start your conversations with investors you will learn if they need depreciation or not. If not, you can take it.
In fact, sometimes investors are disallowed from taking depreciation. For example, when investor dollars are coming from a self-directed IRA. There are a lot of rules about that. So many, in fact, that I asked an associate who helps people with their self-directed IRA accounts to do a webinar with me to explain all the in’s and out’s!
3. Amortization – I don’t want to get into a math lesson here, but just like a bank amortizes a loan over time, you can structure the terms when an investor wants to “loan” you his/her private capital in your deals.
If you’ve ever seen me on my live weekly Q & A with J webcast, you have also seen me explaining deals and terms. I get the question, “But, J., what if the seller wants $500,000 for his property?”
“Okay. He can have it if you are willing to pay that much,” I may say. “BUT that doesn’t mean he will get that lump sum or even 20% of it right away.”
The deal can be amortized over time, like your investor will receive $XX per month from you for XXX number of months, and the first payment doesn’t start till XX date. In this quadrant you are agreeing to pay back over time at an agreed rate of interest. That’s where you get to have a lot of fun with math and help people, too!
How are you helping the investor?
Let’s say he has money sitting in an account somewhere that is earning him a whopping 1%… maybe 2%. You can set the pay-back terms at 3% or 4% on the sum he invests with you and he’ll be pretty happy.
I talk about this a bit in episode #19 of my podcast. Give it a listen now…
You may wonder how long you’ll be paying the investor back on the amortized schedule. That is up to you and your deal structure.
It could be that the investor will want to keep letting his money work with you, because he will keep getting his interest-only check for years to come. He will also get his money back.
The question then becomes, “When do you want me to stop sending you a monthly check?”
4. Cash Flow – You’ve heard about how you can earn big cashflow as a real estate investor using little to none of your own cash or credit.
Yep, it’s true.
I’m living proof.
Cash Flow truly is King! (And we all want it.)
But how do you get it?
- If you’re a wholesaler who finds an undervalued property and you find a buyer who gets the property at a discount, but still pays close to market… excellent! You earn cashflow.
- If your investment property has appreciated… that means more cashflow to you that comes in the form of equity.
- If that property is rented out, you get cashflow in the form of rent every month. The rent needs to cover all your expenses. What’s left is your cashflow. In a single-family home that might be a couple hundred dollars or so. In a multi-family property or an apartment building, it’s going to be greater because you earn per door. (That’s why I like multi-family housing and apartment buildings.)
We just released our Multi-Family Moguls course. If you haven’t checked it out yet, head over to this page: Link Coming Soon
Truth is that cashflow is created in a number of ways. Too many, in fact, to include in this article.
I invite you to browse my other articles on this blog to learn more about real estate investing and creating cashflow! (There’s some GREAT stuff in my blog!)
Now that you understand a bit more about the quadrants in the P.A.Q., perhaps you have a better idea of how investors are able to earn returns across the four quadrants.
If you want to take a deeper look, I have a gift for you…
It’s an e-book that takes you deeper in to the best tool in my real estate investor’s arsenal that helps me explain deals to my investors…
…and all you need in order to use it effectively is a pen and the back of a cocktail napkin!