5 Rules of Rental Property

[@freedom_mentor]

Get step by step help aquiring productive long-term rental properties through mentorship in my Apprentice Program. Apply to be my next apprentice here: www.freedommentor.com/apprentice

[@philmarsh7723]

The 12% productivity is the EXACT reason I didn't buy real estate. Good luck trying to find a property that does this. In my area, you'd be hard-pressed to find a house with gross income/price >6%.

[@MrNanah38]

I don't know where in the country he is going to find these kinds of properties, its good content for his KZbin channel thats all.

[@novadhd]

@@MrNanah38 im guessing highly desirable rental areas.

[@jennifercollinsbrever4898]

Air bnb in prime locations… Rental income= # of reservation days per month rather than just a single “renter” paying you once a month. Maybe you all need to consider purchasing outside your own community if the roi is that low where you live?

[@kabughoshifah.uganda256]

Actually I think it's very possible in my place I have sofar got two of 12% productity though they are too competitive I was slow and quick guys took them before me. I've counted the deal was 20% rule one

[@habitandoproperty2166]

Phil: 1) I never ever got a 12% Productivity... Max 7% I have to improve that... 2) equity , every deals came with 25% in it... 3) 1 year of cash in reserve... 4) insurance 150% of the value... 5) Every property I would love to live in it ... Location... Size... Etc. Thanks for the hints

[@TriDaddy]

I've love to see his example of 20% productivity calculation....

[@freedom_mentor]

@@TriDaddy Pigeon Forge Vacation Rental: Paid $235,000 for it; put $30,000 into it for furniture; generated $55,000 NOI in it's first year; which was 2017. In 2021, the NOI was $83,000.

[@TriDaddy]

@@freedom_mentor 31% is an incredible productivity number! That’s more than $7000 a month in gross earnings on that property. With the fluctuation in revenue you mentioned, what is your number of nights rented per year? Sorry, Midwestern mind here, I’m used to seeing a 1/4 million house gross $2-2,500/mo for rental and it’d have to be something special for short term like a lake house but they are seasonal.

[@freedom_mentor]

@@TriDaddy That same cabin would have rented for $2,000 per month to a long term tenant (maybe in 2021 it would have rented for $2,400 to long term tenant). To get extraordinary returns, you can't do ordinary deals.

[@TriDaddy]

AirDNA shows pigeon Forge Tennessee average AirBnB rate of $253/night. 71% occupancy and average revenues as 4,400 per month. That’s terrific! I’ll keep digging through your videos to better understand how to manage a short term rental.

[@mikepeek5655]

ROI return on investment measured over years if you keep long term. That's the other x factor. Appreciation, good cash flow , renters paying your mortgage, great location , adding value by improving property , and managing who you rent to will bring you the bonus of planting seeds with investments in time.

[@se6586]

ROI in time is my biggest metric as well. If it’s going to take 10+ years to get my money back I’d be better off saving it. Or using it for something more productive Excellent metric by Phil as well to measure bottom line cash flow / what you’ve got in it

[@freedom_mentor]

Are you referring to re-investing into the property to continue to improve its productivity? If the productivity is at least 12%, you will have a terrific cash on cash return no matter what. And if you do a cash out refinance a year or two after your value add, you may have a 100% or more cash on cash return and then it'll be infinite returns from there. If you are describing continuing to re-invest some of the cash flow into further property performance improvement, I agree with that. If it's worth keeping, it's worth improving it.

[@mikepeek5655]

@@freedom_mentor honestly Phil, in the beginning way back in 90s i winged it but I knew from other mentors that real estate long term was great if you bought low or reasonable. Believing in the immediate area was a big factor for me as well as having quality tenants. The ratios are important you preach. I did well keeping debt to income ratio low. No more than 70% and in time with the market going, keeping vacancy low, the D/I ratio obviously improved. Sometime refi with low rates to move on to others. The only 401k I had in the 90s for 4 years went south. Should have used that $40k in real estate. Got a lot of shudda cudda wuddas but happy overall.

[@freedom_mentor]

Thank you for sharing.

[@mikepeek5655]

@@freedom_mentor What you said about real estate beating other investments , I completely agree. In the most simplistic way , what other investment allows you to 1) borrow the money 2) then you go find people to pay for your investment and 3) after they pay for it , you get to keep it. Lol That is the real deal about real estate. No other investment vehicle has that magic. Most people don't see that your return is compounded and you are not having to earn and Invest ( gamble) in the stock market. While they are paying for your property then if so choose , cash in later. No comparison vs other investments.

[@eliot5220]

Phil I bought a property for 60,000 and I’m at a gross income of 15000 annually. After taxes and insurance I’m at about 13,000 so 21% return. My equity position is 25%.

[@freedom_mentor]

FANTASTIC! Congratulations. What a trophy asset you have. I love hearing these stories. Thank you for sharing.

[@twincherry4958]

@@freedom_mentor Push for more than full replacement...to their max 🤣🤣🤣 I liked that part!

[@dtsai]

After relearning accounting, I realize that we have tons of homeless because we are doing things in the incorrect order. Before any more vacation homes are built we should be finished building affordable primary renter or owner homes for people.

[@se6586]

Phil, regarding insurance I know of someone who was preparing a home for sale after renovation. Someone broke in and stole all brand new stainless steel appliances. The insurance company denied the claim saying since nobody was continuously occupying the home during the time it was being renovated it was uninsurable. So they sold him insurance they knew would not protect him in any circumstance as it was disclosed when buying a short term policy.

[@freedom_mentor]

You may be surprised by my response to your story...even if I had the correct policy in place to be able to file a claim and to actually get the insurance company to pay me, I would NOT file a claim over some stolen stainless appliances. The replacement cost of those appliances may be $7,000. But if I file that claim, I will pay MUCH MORE than $7,000 over time in increased insurance costs. Insurance companies have a very sophisticated database of anyone who has ever filed a claim, either under an entity or personally, and once you are on that list of "claimers", you pay much more on all insurance policies from there on out. Insurance is for catastrophes only.

[@se6586]

@@freedom_mentor very good to know. Thanks for sharing!!

[@Focused-ni9qh]

​@@freedom_mentorI work for a major carrier as an adjuster and I can confirm this, and yes there are vacancy provisions.

[@tam8479]

So happy I came across your channel since you have a wealth of information. I own a rental property in LA for about 25 years. It s been a great experience but I’m Getting older and tired of running it. Thinking about unloading it but don’t know what to do with the sale proceeds without all the tax consequences. Maybe invest in an Opportunity zone property? What is your take?

[@paulcarriere5530]

Hi Tam I’m also in Los Angeles did you sell your property? I would love to see it. Please respond I’ll give you my number. 😊

[@tam8479]

@@paulcarriere5530 Can’t believe it s already been a year since I made the comment. Nope, still own it :)

[@MrSaemisch]

Phil is completely right. Judging the performance of an asset by the manner in which it is financed is a common economic/investment fallacy

[@eliot5220]

Phil the insurance is so important. I came back from out of town and the windstorm ripped off 1/3 of the roof on my rental. I got the roof replaced myself with my reserves then got the insurance to reimburse me.

[@freedom_mentor]

Brilliant move! That gave you the leverage to really battle that insurer and not be at their mercy.

[@avelinovaz3174]

Phil, I agree with you 100% on your NOI numbers. The problem is finding those deals. In my area the numbers don’t make sense on about 99% of the properties for sale. The remaining 1% that do make sense to buy have about 50 to 100 buyers chasing them. To buy that one property you must have a very strong offer over asking price and now the numbers don’t make sense again 🤷‍♂️

[@freedom_mentor]

Watch this video: kzbin.info/www/bejne/gZ22aX6mjbyBmKM

[@drvinson8947]

My productivity is around 50%. 😎👍🏼

[@relevant.c5411]

just remember folks and i tell u this based on experience, you are renting (investing in) to people (strangers) that for the most part dont give 2 sh-ts about u, ur financial obligations or the house. people are not what they were 5 or even 10 yrs ago.

[@anthonya8412]

#6. Wait until the next Gov crisis and the next rent moratorium starts again and your renters live there rent free and tear your place up. Having rental house priceless but you can tell everyone your a landlord and feel proud of yourself.

[@freedom_mentor]

The Supreme Court ruled the eviction moratorium unconstitutional...twice. That's in the past. More importantly, of the thousands and thousands of units that my network owns/controls, pay rates were 89% during the depths of the eviction moratorium. It wasn't nearly as bad as the media portrayed it to be.

[@mottireshef]

The 2% rule is explained in details in this video. The 12% productivity is almost only to be achieved if the monthly rent is 2% of the investment. For example a $50K house that is rented for $1000/mo Taking in account that the expenses are half of the income . Phill mentioned the Capital expenses but he didn't calculate them.

[@juzefzoozoo]

After some thought about productivity, I now believe what Phil was referring to regarding a minimum of 12% productivity that results "after" the rehab and not the productivity of property at point of purchase. If so, then I know that a productivity of at least 12% is very possible and I'd agree is a sound target as most deals out there (on market) aren't achieving 12% productivity at time of offering but have the potential to with the appropriate renovations that should result in increase of NOI. I think it is a reasonable target, that you shouldn't buy unless you believe your plan for the property to achieve 12% or more productivity after rehab are good. If expenses=50% of gross income in the long run, then 12% productivity equates to the "2%" rule. For commercial multi-family property (greater than 5 units), raising NOI as much as possible forces appreciation which is a critical step before a refi-cash out strategy to pull "Init" money out for next investment. Phil makes a good point that took me a while to grasp, that a property's inherent productivity (NOI/Init) > 12% gives security against inflation + interest paid on mortgage+safety margin against problems that may arise. You may purchase a property at 7% Cap Rate and renovate it such that Productivity>12% meaning the resulting increased NOI/(Purchase Price + Rehab) > 12%. In this situation, you typically bought a B-, C property in a B-,C neighborhood. This is in contrast to purchasing a property at 12% CapRate at the start which would be a D/F property in a D/F neighborhood and thus typically, a very risky investment.

[@se6586]

Phil, around the 14:00 mark you had me laughing 😂😂 Excellent video as always. Thanks!

[@freedom_mentor]

Glad we could make you laugh! Thank you so much.

[@teslarex]

Phil, your video is a master class. If you buy these types of properties you will likely become very wealthy. I'm in Southern California and the cap rates are dismal. Brokers always hype the "cash-on-call return". "pro forma rents" but these alone will not get you there. I agree you need a good cap rate and equity. A good sustainable location will let you sleep at night. Thanks

[@garygretarsson]

Why don’t you try a different market like Vegas or phoenix?

[@freedom_mentor]

You're welcome!

[@jimberndt5819]

Yeah, the productivity matrix got me twisted. A NOI would have to be 30,000 to get 12% on a 250,000 investment. If you add the operating costs, gross income would be 40,400 / 12 = or 3,366 a month. I agree that finding a 250K investment that could bring 3,366 a month would be a good find. Did I get the numbers right?

[@Thejasonrogers]

Can’t wait for the next video !! Amazing knowledge as always

[@freedom_mentor]

Thank you! Have you had a chance to go through our online course?

[@josephjohnson8353]

Phil, I own 974 acres of income producing crop land worth millions. Yet, one of your associates gave up on me when we couldn’t connect via cellphone. I’m debt free, so I’m sticking with my inherited farm.

[@freedom_mentor]

I did some research into our records and it appears that you may have reached out to us back in 2018 and spoken to a staff member named Travis. He was a harsh fellow and we let him go because he was unkind to our Apprentice applicants. I apologize that you were treated that way in the past. It's never easy finding good people. We have great people these days so you are encouraged to reach back out to us.

[@guicraw99]

Be reasonable and realistic, to get 12% is difficult and it does not have to be that way. Following the 12% rule, you will never get the opportunity to obtain the rental properties.

[@yulanluo7328]

Haha.....My fisrt reaction after heard 12%, is to check when the video was posted. Today is February 18, 2022. I thought it was posted 8 years ago, while only 8 hours ago 😅😅😅

[@freedom_mentor]

Don't be realistic. You have one life. Why settle for mediocrity?

[@nvda2damoon]

NOI is in $... the official name of 'productivity' is the cash on cash return.

[@MrSaemisch]

As a survival guideline, productivity is a great metrics. In an economic sense though, cap rate is correct.

[@JS-oh5ui]

Love your enthusiasm! Thank you for this helpful info! ☺️🙏

[@freedom_mentor]

Thank you! You're welcome.

[@TheAntiDigital]

What is the difference between "In it" and Cap rate?

[@freedom_mentor]

Cap rates are primarily used as a quick rule of thumb to determine a commercial property's value. Different asset classes in different areas have different cap rate ranges. So multi-family properties in rural areas may have 8-10 caps. And so if the property is bringing in $100,000 NOI, then the cap rate makes it easy to estimate what the property should sell for on the open market; such as $1,000,000. Or, if you know the sales price and the market cap rate, you can estimate what the NOI should be. My productivity metric is focused on what you have "In It" vs what NOI you can get from the property. My Productivity does not contemplate what you could sell it for / what the market would pay for it. You don't want to sell it. You want to keep it long term. So Productivity is a similar calculation to cap rate but is also very different in what it is telling you, especially since it incorporates what you are putting into the deal to improve it's performance

[@shannonzittlow8462]

Also a government eviction moratorium fund

[@kkutube1972]

The reserve is very important. I have had 3 vaccancy in the same months many times in the 20 years of having rentals.

[@freedom_mentor]

Yup, it's important. How are your rentals going?

[@robhemmerle643]

Just bought our first property to market for Rent to Own. Can’t wait to try everything I’ve learned with you on this channel!

[@freedom_mentor]

Congratulations! Choose your tenant carefully!

[@guy3749]

Great video , you opened my eyes on quite a few things and I’m happy I found your channel. Thank you Sir for this information.

[@freedom_mentor]

You're welcome! What else on our channel have you found helpful?

[@mrprfct7069]

In your hypothetical scenario your NOI needed to be $30k. All expenses being equal that rent needed to be $3450 instead of $2k to make it work. In Texas I don’t know of a place worth $250k that could be rented for $3450. Most homes renting for $3450 have a price tag of $800k + and there are a lot of those being rented for those prices. We see new purchases at that price and the week later being rented for about $3500

[@freedom_mentor]

Watch this video on the Most Productive Rental Properties: kzbin.info/www/bejne/gZ22aX6mjbyBmKM

[@mrprfct7069]

@@freedom_mentor thanks for the link. Multi units and mobile home is something we are looking into. Great video. I forgot to say. We are realtors in TX and property managers for over 300 units to our investors. Sometimes we scratch our heads. Investors will buy $300k homes and rent them for $1800. They are seeking property appreciation most aren’t breaking even on a monthly basis. Guess having tons of money is a good problem to have.

[@freedom_mentor]

@@mrprfct7069 Betting on appreciation alone when buying long term rental property is so stupid because real estate investors can have BOTH cash flow and appreciation. They are not mutually exclusive.

[@aquabarman]

@@freedom_mentor In Texas, a rental home can Appreciate 25% a year, but RENTs often won't match that increase...leaving the owner partly relying on Appreciation realized upon sale [or a Reverse Mortgage if landlord is an owner-occupier of the rental property.] I'd also note that Appraised Value [aka sale sprice] for purporses of ROI on annual rents should be reduced by the cost of cap gains taxe at sale [assuming no 1031 exchange is contemplated at future sale].

[@mordykatsevman8161]

Amazing video! How can one see what hedge funds are buying?

[@r5yamaha]

Renovate ranch homes, no basements, small Lots, 3 beds 1 bath, replace hot water tank, furnace, all hard surfaces (no carpeting), no pets, or large non refundable pet deposit, little to no yard maintenance (no trees), aluminum or vinyl siding (no wood), windows and roof solid, upgraded/safe electric.... all for the long term.

[@tarawalton6778]

Your content is IMMENSELY appreciated.❤

[@freedom_mentor]

Thank you so much!

[@LordBlackNephew]

I just read all 96 comments, alot of the concern is that this doesn't exist, so are you saying to "house hack" a undervalued multifamily that needs a little work that would give you equity and your 12% return? BX STAND UP!!!

[@freedom_mentor]

That's next week's video.

[@novadhd]

This is great stuff. As a newbie investor it is what I was looking for. Is the "Productivity" also know as your ROI?

[@sainijat]

If a property is not listed as rental property earlier, then how we can calculate correct future insurance and property taxes. Which may be significantly higher for owner-occupied and rental property.

[@freedom_mentor]

Connect with the tax assessor to find out what the taxes would change to. You can figure it out.

[@frankferraro6797]

Gold as usual! Thanks Phil!

[@freedom_mentor]

Thank you! Appreciate the support.

[@johnestilio2147]

I'm honestly not sure how you can get 12% productivity in an Australian market. Even buying a 600k property you can rent reliably on Airbnb for $200/night (I don't think these even exist) after deducting costs you would be below 12%. Phil do you have any examples from an Australian jurisdiction of this or is this solely for North America? Or just a sign our market doesn't have "trophy assets" to buy off the shelf?

[@freedom_mentor]

In next week's video, I'll explain this. But it may not completely answer your question because I am not in Australia and my expertise is in the United States and to a lesser extent, Canada. There are parts of the US that are nearly impossible to hit 12% productivity and other parts that are extremely easy. Australia is a big country with varied geographies. Some areas may have more potent opportunities than others.

[@cyberagentstanleydean7366]

Great insight with wisdom as always thank you Phil God Bless

[@cyberagentstanleydean7366]

Also Phil wanted your feedback planning to turn a SFH into a duplex split using a garage to turn into kitchen and bath with small Eat- in to increase cash flow and is in very lucrative area where all the dynamics for economy drives exist do u thing it’s a good move I’m cost for the value add is recoverable in 7-8 years Since property already has a 20% appreciation I just want increase my cost flow with dual dwellings

[@freedom_mentor]

LOVE the idea! That is a terrific way to generate high returns on investment. By creating that second unit (assuming you aren't breaking any zoning codes), you turn that house into a cash flowing machine.

[@shiggidyshigg2389]

Is there a Super Like button !!?? So informative .. I'm definitely more motivated after watching this video... thx a bunch

[@freedom_mentor]

Thank you! Maybe we can suggest it to KZbin lol. Great idea though.

[@anthonydunn755]

Thanks for this great REO information Mr. P P... stay 😷 safe website continues to 🐝 always blessed 🙏. 😇👍🏽

[@freedom_mentor]

Thank you!

[@dutruong8704]

great video Phil👍

[@freedom_mentor]

Thank you! As always we appreciate the support on the channel.

[@floridaman7]

Phil, great video as always

[@freedom_mentor]

Thank you!

[@mescnick]

I am on my grind

[@freedom_mentor]

Great to hear! How has it been going?

[@Bluewh174]

Thoughts, if real estate will crash before the end of year 2023 due to high inflation? Is it a good time to buy an investment property?

[@freedom_mentor]

Huh? Real estate is an inflation hedge.

[@Bluewh174]

You’re right, I mean money inflated

[@derryrental8478]

Great video. Im a little confused by the "in it" number concept. We just inherited 5 multi-family rental properties in New England. In calculating the productivity % for each property, according to your formula, should we be using the current market value of each property? Or the original purchase price, plus what improvements have made on the property over the time our family owned it?

[@tigaagul7]

Right now the purchase price for your inherited property is zero unless you paid a "inheritance tax" to assume those properties. If you refinance and take cash out use the new number as your purchase price. I think you should be more concerned with the "Cap rate" equation so look on your mortgage statement for the Price the divide by the monthly rent. You can also take that same Price and divide by the yearly rent gross. Monthly numbers should fall between 80 and 120. yearly numbers should fall between 5 and 20. Typically the annual Cap rate is often displayed.

[@freedom_mentor]

If you just inherited the property, your "In It" number is the net proceeds if you sold it. Because that is the money that you could take elsewhere to another deal. Your opportunity cost is keeping that money tied up into those multi-family properties versus selling and through a 1031 exchange, buying other rental property. Some would argue that you can have your cake and eat it too by doing a cash out refinance, keeping those 5 multi-families and then still buying another property. Maybe. But if you did cash out refinance, what would the debt service do to you cash flow? One of the reasons why rental property must be highly productive is so that when you do a cash out refinance, there is still a strong positive cash flow after debt service.

[@juzefzoozoo]

If understood this video right: how much you have in it (HMI) for a leveraged property equals down payment + closing cost + rehab + holding time costs. Producivity=NOI/HMI Cash on cash return (CoCR)= (NOI-Debt service)/HMI If true, CoCR is always less than Producivity.

[@freedom_mentor]

How much you have "In It" is the purchase + rehab + holding; it's how much you have have paid for the property regardless if you used a loan or paid all cash plus any other money you put into it before renting it. Cash on cash return is calculated based on the cash you invested; down payment + closing costs + rehab + holding expenses. But almost all intelligent investors refinance and pull their original cash out. So the cash on cash return for almost all rentals is 100% or more. That's why the cash on cash return is not a helpful metric, in my opinion, because it is 100% or more, almost always. If the deal is not Productive, then you can't do a cash out refinance. 12%+ Productivity creates terrific short term and long term returns of all kinds and allows for cash out refinances whereby the deal still cash flows.

[@juzefzoozoo]

@@freedom_mentor Thank You for your explanation. Assuming no rehab or holding, How much you have in it equals Purchase Price then. At purchase time, isn't productivity then, NOI/Purchase Price = Cap Rate? Buying in 12 cap could be a significantly riskier venture for a beginner than in an 8 cap.

[@freedom_mentor]

Cap rates are primarily used as a quick rule of thumb to determine a commercial property's value. Different asset classes in different areas have different cap rate ranges. So multi-family properties in rural areas my have 9-10 caps. And so if the property is bringing in $100,000 NOI, then the cap rate makes it easy to estimate what the property should sell for on the open market; such as $1,000,000. But that market cap rate does factor in risk, etc. However, the vast majority of great deals are NOT listed, are NOT wrapped in a bow, so market cap rates are not necessarily applicable.

[@juzefzoozoo]

@@freedom_mentor ok, i think I see your point now. so you're arguing that great deals are found that are typically off market that have productivity of > 12% that aren't in war zone or too risky. Had these deals been on market, they'd probably be quickly purchased and thus explains why they aren't any listed really. My struggle is, and I know you've addressed this, is the difficulty for a newbie (like me with limited connections and sphere of influence) to find such steals..i mean deals. I believe deals are made and not found. Meaning a value add play, for example, could turn a low productivity deal into a productive one. This entails the risk that things go according to plan. Of course, I'd love 12% productivity out of the gate, but I've never seen one...but ive only had access to listed properties. I do appreciate your guidance and patience.

[@juzefzoozoo]

A property with productivity of 12% at point of purchase translates to the following % rule [gross monthly rent / (purchase price + rehab)] assuming 40% expense rate in a high value deal: %Rule=productivity/(12×0.6), so 12/(12×0.6) = 1.67% 1.67% rule properties are very hard to find these days, but I guess they're out there in more abundance, off listing.

[@tonycadiz891]

Thank you Phil!! Looking forward to the follow up video!!!

[@freedom_mentor]

You're welcome! Thanks!

[@SOLDbyYOU]

Dr Phil… I “ DISSED on you”… in another video… but in that one I also added an apology. In this video… you had me at “ 30% equity”. Where do I sign up… Oh…. There’s a link. Thx

[@freedom_mentor]

No worries! Glad we could be friends again lol here is the application link: www.freedommentor.com/apprentice/

[@ma53n]

This is amazing wizardry. You should teach a course at Harvard Business or Yale SOM.

[@freedom_mentor]

Thank you for such a great compliment!

[@christophergordon5641]

The thing with productivity...you can create it....stuff I've bought isn't great the day I bought it, it's great 2 years later when rents are at market and the property improved

[@freedom_mentor]

ABSOLUTELY! Agreed. Productivity doesn't have to start with the day you buy; but it could start from after the performance enhancements. Thanks for your comment. Well spoken.

[@LordBlackNephew]

@@freedom_mentor so the goal is to purchase now with keeping the future in mind, invest for the future? BX STAND UP!!!

[@sueandwill393]

Thanks Phil for your valuable investment insight. However shouldn't the "in it" number always be what l can sell the property for today? If l can do better with the money l get for it, then shouldn't l sell it regardless of how little I have "in it". Or if I have more "in it" then what I can sell it for, wouldn't it be foolish to sell simply because the inflated "in it" number brings down the productivity percentage? I'm a small time investor and my investing knowledge is inferior to yours for sure but I think the "in it" number should always be what you can sell it for on the day.

[@freedom_mentor]

I used to have that perspective but as the years have worn on, I no longer think in terms of the Return on Equity. What happens is that as you acquire highly productive rental property, you end up holding onto it for many, many years. And the value might drastically increase over time but it doesn't keep pace with rental income. So your productivity based on equity slowly continues to decline. Meanwhile, your returns relative to what you originally bought it for and originally renovated it for, remain incredibly high. You may not want to cash out refinance because it may lower cash flow so you end up just seeing your net worth escalate, your cash flow remain very strong, but your return on equity drop. There are worse things in life :) I don't know if I made this crystal clear because it is somewhat difficult to communicate but suffice it to say, I no longer consider my "in it" amount to be the equity in the property; instead, just the initial purchase price plus initial renovations.

[@jrod7929]

I feel like your productivity metrics attempts to remove equity. Because the higher the equity you make the lower your productivity rating will be. That doesn't make any sense to me.

[@josephmitchell8283]

AMERICAN HOME SHIELD (Warranty) = Got me complete heating system, dishwasher(s), Fridges, Etc. About $500.00/year

[@freedom_mentor]

It can certainly come into good use!

[@pablovargas6606]

Then , is better to buy multifamily properties???

[@freedom_mentor]

This will be addressed in my follow up video on what deals can pull 12%+ productivity

[@AberrantArt]

Phil, how would you advise people find high productivity properties in today's insanely competitive and expensive market?

[@freedom_mentor]

I'll explain this in next week's video.

[@AberrantArt]

@@freedom_mentor looking forward to it

[@cooldy6]

Hi Phil, HUGE fan of your videos and recently received your book. I'm a working professional looking to purchase a property I could live in and rent out simultaneously. I'm trying to find a metric I can use to quickly identify properties worth my time to investigate further. Is there a specific list of criteria you look for you in finding properties at or over the 12% productivity metric? (i.e. only looking in certain locations (near airport, schools, etc), neighborhood, amenities). I live in Central FL (Celebration) and spend a lot of time in Volusia County if this is helpful. Any advice would be greatly appreciated!

[@freedom_mentor]

Hello Central Floridian! You want to go after a property with several units; 4 being perfection. A 4 unit will give you the best loan program while also providing you with the maximum number of units you can get away with for a residential owner occupied loan. BUT, if you are open minded, you don't have to have a "quad" that is 4 apartment-like units. You could buy a unique property that has several units, and turn them into vacation rentals (if you can find something near Disney in Polk County); such as a farm property with several mobile homes, etc. But your perfect scenario is 4 units, whereby you live in one. And you could still do the 12% productivity calculation for all 4 units and if you live in one, that's fine. You are just taking up 3% of the productivity but living for free.

[@cooldy6]

@@freedom_mentor Thank you, Phil!!

[@georgevalente4223]

Genius!

[@freedom_mentor]

Thanks!

[@dliv1687]

Great video

[@freedom_mentor]

Thanks :)

[@ethelperry4529]

Thank You👍❣👵🐢👋

[@freedom_mentor]

You're welcome!

[@usapinas8864]

Hi Phil! New to your channel. I don’t have a property yet but planning to have a rental property (long term plan). How do I start? Thanks for sharing your expertise.

[@freedom_mentor]

Start here: courses.freedommentor.com (it's free)

[@johnadan3509]

Keep a good job 👍

[@freedom_mentor]

Thanks!

[@divertiti]

How do you find the properties that meet these criteria?

[@freedom_mentor]

My video next week will cover that.

[@divertiti]

@@freedom_mentor Looking forward to that, thanks Phil

[@Eager2BFit]

Hello. Im trying to get into this game. My husband owns a 3 family in Brooklyn, NY for about 16 yrs. Yes, we got one of those shady mortgage deals back in 2006 because his credit was in the 800's. They were throwing money at him. We modified the loan back in 2010. However now, the market value of the property doubled (54% equity). By using your productivity calculation: Gross annual rent minus gross expenses (mortgage, insurance, taxes, utilities, maintenance) and dividing that NOI by the total mortgage owed, we are only at 6.61% productivity. Even though we have a "net income $3930 per month. How do I get that number to 12% when the tenants are already paying at or slightly below market rents?

[@freedom_mentor]

You have two choices; either (a) You sell the property, using a 1031 exchange, and purchase a more productive property. Or (b), you refinance that property (please see this video: kzbin.info/www/bejne/l4jWpq2ufbaJmac) and use the cash you pull out to purchase another property.

[@platoasadov]

Is the productivity same as cap rate?

[@freedom_mentor]

It is but it isn't. Cap rates are primarily used as a quick rule of thumb to determine a commercial property's value. Different asset classes in different areas have different cap rae ranges. So multi-family properties in rural areas my have 9-10 caps. And so if the property is bringing in $100,000 NOI, then the cap rate makes it easy to estimate what the property should sell for on the open market; such as $1,000,000. My productivity metric is focused on what you have "In It" vs what NOI you can get from the property. And it's very possible that your Pro Forma Productivity metric is quite different from the as-is actual Productivity. But my Productivity does not contemplate what you could sell it for / what the market would pay for it. You don't want to sell it. You want to keep it long term. So Productivity is a similar calculation to cap rate but is also very different in what it is telling you.

[@09Germ]

This was really excellent advice especially for a beginner like me who is trying to decide where to start in real estate investing. Thanks for sharing this 👍.

[@freedom_mentor]

You're welcome! Have you started investing yet? If so, how is it going?

[@Joe-oz6xr]

I would like to make sure I am understanding your “in it” number correctly. If I purchase a 200k (slightly below market value) and put 20% down, 40k. Is my “in it” number 200k or 40k?

[@freedom_mentor]

$200,000 + closing costs + renovations + holdings costs until it is rented

[@ericbrown1484]

Is 12% productivity possible with a single family home? This would mean a $300k house would have to be rented out for about $4,000 per month or more?

[@freedom_mentor]

YES! I will explain how it's possible in next week's video. But if you are itching to know now, although this video has some outdated information (student rentals are not as good anymore thanks to COVID): kzbin.info/www/bejne/rarSoHxrf55ki68

[@daveharness70]

Like he says, it IS possible. However, my guess is that it is very difficult with SFR. I only have 2 SFR rentals. I bought them both with cash (next door to each other) and rehabbed and rented at reasonable rates for Central Indiana. Same renters in each one for 3 years now. The best one is at 11% Productivity and I'm very happy with it. The other one is coming up. However, I wanted to make sure I improved the neighborhood and not chop the large home into several units like many run-down neighboring properties. I've found that building officials are more agreeable to your requests when they see what I'm doing for the neighborhood. Plus, this obviously isn't my profession, but I do plan on getting a couple more when SHTF in the next 24 months. But I do have the last four points covered. I know Phil said #1 is most important, and it is when following his strategy.

[@daveharness70]

@@pearlperlitavenegas2023 My plan is whenever that occurs. If you could let me know the future date I would appreciate it!

[@BatistaInvests]

The 70% rule is pretty legendary

[@freedom_mentor]

Thanks!

[@kabughoshifah.uganda256]

Wooow thank you Soo much

[@freedom_mentor]

You're welcome 😊

[@ShawnDeLaCruz]

What's the difference between Productivity and Capitalization Rate?

[@freedom_mentor]

Cap rates are primarily used as a quick rule of thumb to determine a commercial property's value. Different asset classes in different areas have different cap rate ranges. So multi-family properties in rural areas may have 8-10 caps. And so if the property is bringing in $100,000 NOI, then the cap rate makes it easy to estimate what the property should sell for on the open market; such as $1,000,000. Or, if you know the sales price and the market cap rate, you can estimate what the NOI should be. My productivity metric is focused on what you have "In It" vs what NOI you can get from the property. And it's very possible that your Pro Forma Productivity metric is quite different from the as-is at-time-of-purchase actual Productivity. But my Productivity does not contemplate what you could sell it for / what the market would pay for it. You don't want to sell it. You want to keep it long term. So Productivity is a similar calculation to cap rate but is also very different in what it is telling you, especially since it incorporates what you are putting into the deal to improve it's performance.

[@ShawnDeLaCruz]

@@freedom_mentor thank you Phil. So Cap Rate = NOI / purchase price whereas Productivity = NOI / total investment? Confirm. But... In a leverage situation, does total investment = capital improvements + purchase price OR down payment?

[@freedom_mentor]

@@ShawnDeLaCruz CAP Rate = NOI/Price Productivity = NOI/"In It" "In It" = Purchase Price + Any Additional Closing Costs + Renovations + Any Holding Costs until leasing commences

[@nancy-ls2oj]

amazing!!

[@freedom_mentor]

Thanks!

[@patrickcase9977]

Hey Phil, what would you consider a high deductable? How much?

[@freedom_mentor]

The highest the carrier will allow

[@henrye2501]

and What about the interest rate of the mortgage why is out of the equation ?? imagine i bought a condo for 103000 at 1.65 % per year 5 years variable, putting 28 grand down and taxes per year 1100, plus strata 200 per month and insurance per year 650, do you think it will work ?? rent is 1100 per month, thanks and greetings from Canada

[@freedom_mentor]

That interest rate will change. In Canada, your rates stay fixed for only 5 years. And even in the US, with 30 year fixed rates, investors typically do a cash out refinance after 4-5 years anyways. If a property is extremely unproductive, then even if you have a very low interest rate loan (or no loan at all), it's still not a good property to own as a rental long term.

[@jonwoolf8176]

You’d have to rent for 5000 per month to get 12 per cent on 250000 property. Pretty unlikely.

[@freedom_mentor]

This video explains the ways in which it is done: kzbin.info/www/bejne/gZ22aX6mjbyBmKM Unlikely is true; but since most investors buy 1-2 properties per year (or less), then why is "unlikely" a problem?

[@tcpa8283]

With respect to the productivity rule, are you recommending to invest only in properties with high cap rates (12% or higher) since the formula used to compute cap rates is practically identical to the formula used to compute productivity?

[@freedom_mentor]

Great question! I feel like cap rates are more of a measure of market value for selling or refinancing purposes more than a measure of pro forma productivity. So while you may buy an “8 cap”, after value adds, it may be a 12% Productivity deal; whereas the cap rates for that asset type & class in that area may still be 8.

[@nicolas7487]

Hey, For productivity, to calculate the "in it", do you take the cash downpayment only, or the actual purchase price? thanks

[@freedom_mentor]

Purchase Price + Closing Costs + Any Renovations

[@nikhilgupta3297]

I'm ur follower based in New delhi and am developing student housing near universities for rental ..can u give some other examples where in rentals are good ..like , industrial sheds/ warehouses, ..my commercial office spaces lying vacant due to covid..can I put them to alternate use ...keep educating Phil ..god bless

[@freedom_mentor]

I really like applying creativity to produce exceptional returns. Turning a big garage into RV or boat storage. Turning a house into a duplex, etc. I am going to go deeper into this subject next week.

[@nikhilgupta3297]

@@freedom_mentormany thanks for ur reply Phil .I've been following rental property developing since 5 years now before for 15 years I've been building apartments and selling them ..that sure gives ur instant profit but cumbersume.fir every project and u tend to loose long term appreciation on the property ..now I'm focusing on rent building whether it is student housing , retail shops , industrial sheds , commercial offices ..i try to do it all .😂..but limited money is the only restriction 😂

[@freedom_mentor]

That is GREAT that you have more opportunities than cash to invest. It won't always be that way so cherish these times :)

[@nikhilgupta3297]

@@freedom_mentor okay I got ur signal..i will try to comfortably and intelligently leverage this boom wave of real estate..

[@ramonmirabal101]

I don’t believe those are realistic numbers I have few rental properties I average about 7%, I’m very happy by the way they are paid. I talk to other investors in my area and that is a typical average. I am in Florida.

[@sandorvarga.6982]

SÚPER. Fratelo.oke.

[@freedom_mentor]

Thanks!

[@JayRozay313]

How does this work when using the VA loan? I usually buy my house 0 down, live in it for a year then rent it out

[@freedom_mentor]

At the point to which you turn your primary residence (that you originally put nothing down) into a rental, if you can calculate how much money you would make if you sold the property, that is your cash investment and therefore you could calculate the opportunity cost of keeping that equity stored in the property vs selling and taking the proceeds and buying a different rental property. That would be a different metric, such as "Return on Equity"

[@larrymoore6640]

Phil I wish you would have given more detail to what you consider a reasonable high deductible on insurance. Thank you

[@freedom_mentor]

The highest the insurer will allow is the answer. Every carrier I have ever dealt with over my entire career has a max deductible ($5,000 is typical). So I don’t see any reason to be any more specific than the highest they will allow.

[@wilfredogonzalez1422]

Hey Phil thanks.

[@freedom_mentor]

Hey! You're welcome.

[@savannahsmiles1797]

Most landlords NEGLECT maintenance altogether hence the slum lord.

[@freedom_mentor]

As they say ...."If you take care of your property, it will take care of you"

[@beaupearson9959]

Love your channel. Been a subscriber for years. I have always thought of my rentals as great long term holds. However, looking at my actual NOI, I am under the 12%. And I purchased both of them when the market was cheap. One I bought for 110,000 in 2013 and it rents for 1,525 even though I’m under market. Do you factor in closing costs into your “in it” figure ?

[@freedom_mentor]

Yes; "In It" includes closing costs. If you have owned since 2013, you may be in a different universe now. What is your NOI these days?

[@beaupearson9959]

@@freedom_mentor I just completed my Profit/Loss statement for this property. Bear in mind I've had good long term tenants so I'm under market rent. Way under. Maybe 3-400 under. My NOI was 9,610.47. Purchase price was 131,000. I did not include closing costs. Second property NOI was 11,799.06 on a purchase price of 110,000. No property manager for either. And I am way under rent for this one as well. Was waiting for the next cycle of tenants to raise it to market. I have raised it slightly the last few years. If I'm at market rent then I'm close to the 12%

[@GeorgiaMade404]

The best investment is starting a REAL business where transactions are made daily. This will make you way more money than owning a few rentals which is only a waste of time. Real Estate money is too slow unless you’re raising a capital fund to buy a couple thousand houses. You can’t quit your day job just cause you have a few rentals, even if you own 20.

[@freedom_mentor]

What do you do with all the profits from all those daily transactions? Answer: Buy highly Productive rental property so that you continue to grow your wealth while running a very profitable business too. I describe this formula on this video: kzbin.info/www/bejne/gJnMlGqMfa6goKc

[@GeorgiaMade404]

@@freedom_mentor 100% agree. Gotta have somewhere to park the money. Thanks

[@inmate0054]

Is productively same as cap rate?

[@freedom_mentor]

Cap rates are primarily used as a quick rule of thumb to determine a commercial property's value. Different asset classes in different areas have different cap rate ranges. So multi-family properties in rural areas may have 8-10 caps. And so if the property is bringing in $100,000 NOI, then the cap rate makes it easy to estimate what the property should sell for on the open market; such as $1,000,000. Meanwhile, Productivity focuses not on what the property can sell for or appraise for, but instead, what it produces, especially after adding in improvements. Cap Rates are market driven as opposed to Productivity which is NOI to "In It" driven.

[@jerremyvinson6310]

If it can’t outperform the stock market it’s a waste of your time. That’s why 12% is so important.

[@freedom_mentor]

Actually, that's not an apples to apples comparison. Because my definition of rental property Productivity is based purely on cashflow, not appreciation or tax benefits. A rental property could beat the 12% stock market even if it had a Productivity of much less than 12%.

[@se6586]

Different ball game. However if that’s how you define your “hurdle rate” that it a decent benchmark. You know it’s beating a bond lol

[@jerremyvinson6310]

Well say you put 100k down for a multiplex property that’s 500k and a mortgage of 400k. Mortgage payment at 3.5% 1762.81 not including taxes, maintenance etc. So total close estimation with taxes maintenance etc would be 2700 +- 100. Per unit rents for 1100 a month or so 4400-2700= 1700. 1700x12= 20400. Take 20,400 that’s your return and divide by 100,000 Initial investment nets you 4.90%. Obviously if your rent is higher then it could work but realistically unless it’s an amazing deal like you said it’s not worth it. Yes you could defer taxes and there is tons of variables in simple example. You need to find needle in haystack to make it worth it. Diversification is name of game

[@LordBlackNephew]

@@jerremyvinson6310 I think with according to the "Productivity" formula he's basically saying to "house hack" a multifamily that needs renovation (updating) to bring up to value, so your "in-it" number is low and your "apr"(after repair value) helps in equity. Thats what I take from it. BX STAND UP!!!

[@jerremyvinson6310]

@@LordBlackNephew I get what your saying but if the initial investment is higher then the potential rents etc needs to be higher by a good amount to get a better return. The example I gave was to break it down for people that it’s a miracle in itself to find a property that beat the market status quo. This also doesn’t take into account you have no idea what the “value added” will be huge gamble for a potentially small pay off. Diversifying is your only safe bet. I do both and when one underperforms the other one picks up the slack. Do your own due diligence and own research also talk to your accountant before listening to someone on KZbin.

[@SymphonyScavarda]

hello - where do I apply for apprenticeship?

[@freedom_mentor]

Apply here: www.freedommentor.com/apprentice

[@om8652]

Just get rid of the house when all is said and done based on not meeting 12% productivity? That’s all… cash flow coming in as passive income doesn’t matter?

[@freedom_mentor]

Do a 1031 and take the equity from the low productivity rental property and move it into a high productivity deal. This video explains why it makes no sense to settle for mediocrity in life: kzbin.info/www/bejne/gZ22aX6mjbyBmKM

[@Smittyschannel]

Think of it like comparison to other investments- if you have stocks in the stock market that are only doing 5-6%, you're not even beating inflation right now. 12% is a good number for a return on your money; shoot for that.

[@freedom_mentor]

12% Productivity can produce 30%+ returns. 12% Productivity is not a measure of the return

[@Godblack1]

Please Phil if you can do follow up video - I have no idea where to get these assets in

[@Siyar612]

Hi Phil, im confused about something. If I buy a property worth 200k, and I loaned 100k and put 100k of my own money in it. What number should I put in the formula? 100k or 200k?

[@freedom_mentor]

$200,000 + Closing Costs + Renovations + Holding Costs + + + ; it is how much you are "In It"

[@Siyar612]

@@freedom_mentor Woa, no way. Bro but then in my example, lets say in total I've put 250k in it, and I want to get 12% productivity, I need to get 30k in rent, which is like 2500 a month MINUS all the costs expect mortgage costs. I dont know thats very realistic.....

[@freedom_mentor]

@@Siyar612 Watch this video: kzbin.info/www/bejne/gZ22aX6mjbyBmKM

[@crocky4938]

Owning rental property is a nightmare when you want to get the tenants out good luck they destroy the property and the only way out is to sell

[@freedom_mentor]

Agreed. That is why it's so important to properly vet your tenants. Don't rush the process...

[@AlexSami-qw4qu]

If you insist of following these 5 rules, you will stay on the sideline a long time.

[@freedom_mentor]

Thanks for commenting on the channel! That's not true. You have to focus on off market deals.

[@guicraw99]

Following the 12% rule, you will have a hard time to obtain the rental properties in today's market.

[@DivendresGreetings]

Especially in southwest Boston metro area, where I live. I just closed the sale of my previous home in CT, which I had been renting for 2.5 yrs with a decent productivity (1.8/month and was 200k in it) or so I thought. Trying to find anything close to that is impossible around here.

[@freedom_mentor]

You'll like my video next week on this subject

[@Kiama17]

Why 12 % ? You didnt give a reason for that ?

[@freedom_mentor]

That's my determination as the minimum after all of my years of experience. It helps overcome all kinds of problems that you may be faced with. Not to mention, if you end up owning it free and clear, that's slightly better than the S&P 500 over the long haul.

[@Kiama17]

@@freedom_mentor Thank You. You are a wealth of knowledge and a service to all poor humans out there. I guessed you were mostly like comparing it to an Sand P 500 lol after scratching my head lol.

[@berkunis]

why yelling?

[@freedom_mentor]

Passion

[@dfleish290]

How does the BRRRR play into this analysis?

[@freedom_mentor]

The "Refinance" portion is irrelevant; as that has nothing to do with Productivity or the other rules. However, renovation may play a role in getting the property into peak performance. This is my video on the flaws of BRRRR: kzbin.info/www/bejne/an6yk4FviMqJZrc

[@radicalttc]

Never accept sec8.