Jim Zes teaches young people about investing in real estate, drawn from a financial intelligence conference Jim taught at Hope Baptist Church. Part 1 of 2.

My brother and I have been in business 47 years and throughout the years I've had lots of people come and be interested in real estate And instead of just trying to sit down with them, I put this notebook together. At least I could go through this with them and they would maybe retain some of it. So that's how this notebook came together. If you came to me and I tried to tell you a lot of this stuff, you'd forget half of it. So if you turn right after the table of contents, it says, Rebuilding America, one apartment at a time for the glory of God.

If you'd call me up and say, hey, how's it going? I'd tell you I'm rebuilding America one apartment at a time. And I need to tell you up front I'm a mega guy Making apartments great again. That's me. All right, page one.

I put this page in here just so just to let Christians know scripture talks a lot about business, work, entrepreneurship. For instance in how you treat people in business, Proverbs 16, 8, better a little with righteousness than much gain with injustice. Or Proverbs 18, 9, whoever is slack in his work is a brother to him who destroys. Colossians 3, 23 at the bottom, whatever you do work at it with all your heart working as for the Lord not human masters. Page 2.

I really like this quote from Archibald Brown. He took over for Charles Spurgeon. It says a man who does not feel he is called to do anything will succeed in doing nothing in particular. I think all of us, especially the men, need to pray about what you are called to do in this life, especially young men. It's hard for young men to figure out what they want to do for a living, to provide for a wife and children.

So I think it's doing what you love and spending time in prayer seeing where God wants you. But to finish the quote, it says, the force of a man's character is in great measure to be found in the strength of his conviction that has been called of God to do what he undertakes. It is the first grand essential for service. Let a man be persuaded that he is called of God to go and do a particular thing and what can stay him, meaning what can stop him. If you feel you're called to do whatever job it is, nothing can stop you.

And I like this quote from Martin Luther, every job is honorable before God. Every occupation has its own honor before God. Ordinary work is a divine vocation or calling. In our daily work, no matter how important or mundane, we serve God by serving the neighbor and we also participate in God's ongoing providence for the human race. I meet a lot of young people today, employees, and they want to be computer geeks and I know the trades in St.

Louis meaning electric or plumbing or physical work trades, they're hurting for young people because people don't wanna get their hands dirty. It seems like a lower job than if I can just play on the computer or do something. But Martin Luther, and I think scripture teaches us that every job is honorable before God. And page three, you can see Deuteronomy 8 once again. Just a reminder, verse 18, near the bottom of the page.

You shall remember the Lord your God, for it is he who gives you power to get wealth. Page four. Before you even consider owning apartments, you need to count the cost. Luke 14 28, suppose one of you wants to build a tower. Won't you sit down and estimate the cost to see if you have enough money to complete it?

I tell people who want to get in the rental business, once again, I'm teaching you one way to own rental property, in investing in real estate. There's a hundred different ways, this is one way. This is how my brother and I were taught. But it's one of the keys to success in rental property is delayed gratification. It's not a get rich quick scheme.

In fact, I tell people you don't, you make zero money the first five years you own the property. And by that I mean if you own a four family and let's say the positive income, your profit every month is $500. Well we were taught $500 a month times 12 is $6, 000 a year. We were taught you don't touch this money for the first five years. You let the account build up.

So you don't think, oh, now that I have $500 a month coming in, I've got $500 more to spend every month. No, you let the account build up. But, and you're taking this money and improving the property. So if you did have a property like this after five years, then you have $30, 000 in the bank. More about that later.

So you're reinvesting your wealth to create more wealth. So If you're going to go into real estate buying property, can you keep your hands off the money? My brother and I had 120 some odd units and we sold, they were duplexes in four families. We had them 100% paid off and we sold them to our employees. And sometimes we got the buildings back because the employee did not set up a separate checking account for the business and they thought they had extra money.

I remember one couple in particular, we had to take the building back from them. And this is back in the 1990s. And they had a vacant apartment that they, it was a duplex and they could not, they did not have the money to fix up the vacant unit. And I asked them, I met with them, I said, you should, you've owned this six months, why don't you have the money to put in the new furnace and put in the new appliances?" And the wife said, well, we were using that for our personal things. And it was, this was in January, it was right after Christmas.

And the husband said, well, my wife spent over $2, 500 buying Christmas presents for the kids from the rental money. And I said, well, you should have kept that separate. That shouldn't have been for your Christmas presents. And the wife got mad at me, indignant. She said, I wanted my children to have a nice Christmas.

I said, okay, well, you don't have the duplex anymore now. So, Count the cost of rental property in the method I'm showing you. Is anybody familiar with the Sanford University Marshmallow Study? They had these four-year-olds and they told them you can have one marshmallow right now, you can eat it right now, or if you wait 20 minutes we'll give you another marshmallow you'll have two marshmallows, But you have to wait 20 minutes to get the second one. Well, only I think one-third of the kids waited the 20 minutes for the second marshmallow.

So my question for you is, are you willing to wait for two marshmallows? Alright next page. Some thoughts on real estate and investing. My father had a theory. He said everybody's going to work a certain amount of hours in their life.

This is what he's telling us when you're younger. He said so every hour you're going to work, what can you do at your work to get the biggest bang for your buck? How can you make each hour really count? And so he would constantly tell us this stuff. He was teaching us basically how to be entrepreneurs.

He would tell us simple stuff like, collecting rent is good, paying rent is bad. Sounds simple. Collecting interest is good, paying interest is bad. So let's begin with number one. Owning property is an inheritance that you could pass down to the next generation.

It's something tangible that you've worked. Say you work at a concrete company and you're an employee there and you're pouring concrete and you do it 50 years and then you don't do it anymore. Well you you can teach your children how to pour concrete but you don't really have a tangible thing that you can give them, but property is an inheritance that you could pass down. If you look at the scripture verse there, Joshua 13, 23, It says, in the border of the children of Reuben was on the bank of the Jordan. This was the inheritance of the children of Reuben according to their families, the cities, and their villages.

I think this language where it is an inheritance for the families, it's mentioned like over a dozen times in Joshua chapters 13 through 17. And this is when the Israelites went into the promised land and the land is divided by the tribes and then from the tribes it's divided among the families. I think in God's providence he knew that if families owned land, that they could put up fences and have animals, they could put up houses, they could put up barns, they could sustain themselves on the land. So I think it's very important for Christians to own land, income producing land. Number two on top of page six, rental property brings in monthly residual income.

I tell people, you look here, I tell people it's like creating a money making machine. Pretend you've got this machine in your garage, and you're putting this part on it and this part on it and for five years you're working on this money-making machine. You've bought it now you're waiting five years to take any money out of it. And after the five years, you've created this money-making machine, and then for the next 40, 50 years, whatever, as long as you keep that machine oiled, it brings in monthly residual income. Number three, in 20 or 30 years your property will be paid off.

The tenant will be paying you rent and then you make your payment to the bank which you're paying down principal. Page seven. Number four, Owning income producing property is the best hedge against inflation and recession. My father tell us people always need a place to live. By God's grace, our company, we've been between 95 and 100 percent occupied the whole 47 years we've been in business.

And number five, well back to this inflation, if you have a property that's worth $100, 000 That's worth $100, 000. And the inflation rate is 6%. One year later, your property is worth 106, 000 because of inflation. That's one reason I love property. It's a hedge against inflation.

And number five, Kind of like number one, you have a tangible business you can actually sell. If you do concrete work all your life and you go to sell your concrete business, basically, or you have a print shop, your business is worth what you have in your equipment. Because why can't I just go buy the same equipment you own and start my own company. Why do I have to pay you more because of your business? Because when I hire subcontractors, I'm hiring it because of that person.

I believe in that person. They're going to complete the job. And if you sell your company to someone else, I don't know this someone else. And I'm going to get bids from a bunch of people and you may not even get the work from me anymore. So, how do you get the biggest bang for your buck for each hour you work?

Young men and women, I believe it is owning property. I don't know what else you could do for a living full-time and have this much going for you for every hour you work you're creating wealth. Page 9. This is an article from Grant Cordon. He owns 4, 000 apartments.

Supposedly he owns like 10, 000 now. But he argues that, he says in my opinion, the very first line, real estate is the best way to grow wealth. He argues that there's a certain population, certain percentage of the population that never wants to own a home. They want to work their 40 hours, come home and have their leisure time. They don't want to have to fix the furnace or worry about the roof or cut the grass.

They just want to work their 40 hours, do their leisure. They're always going to be renters. And it's getting harder and harder to accumulate some wealth to put as a down payment on a house that your payment would be low enough that you'd be comfortable with. So a lot of people flock to the apartments. On page 10, Right in the middle of the page, he says, real estate investing can give you the ability to use debt.

A $400, 000 purchase can be purchased for 25% of the price. Here's what he's saying here. If you have $100, 000 cash and you say I really don't like loans, I don't like banks, So I'm just going to pay cash for this property and spend a hundred thousand dollars. Let's say the inflation rate is six percent. Okay, I just, one year later, this is one year later, that property is now worth $106, 000.

I made $6, 000 because of inflation. What Grant Cordon is saying is you take the $100, 000, which is 25% of your purchase, and you purchase a $400, 000 building. So you're going to put $100, 000 down and you're going to borrow $300, 000. Now with inflation, it's 6 times 4, $24, 000. I made $24, 000 because of inflation with the same 100, 000.

This is what we were taught as kids. I don't like inflation, so how do you figure this out? This is a real life game of monopoly, and how do you play the game? Jim, could you answer this question? Yes.

How do you answer, you find this particularly with young people. They're looking for the cheapest property they can find. Yes I'll get into that a little bit later but You only have a certain amount of money that you've made, a certain amount of capital that you're able to use. How can you maximize what you have? So when I went in business, you only had to put down 10%.

So, for $100, 000, we could buy a million dollar property. And then, instead of 6, 000, you'd make 60, 000. Did you catch that? I want to just show you something here. If you own a million dollars in property, say you have five rental houses and they're all 200, 000 each.

They total a million dollars in property. And it's 6% inflation. Your net worth goes up $60, 000 a year just because you own the property. You did no remodeling, you didn't do anything to it. Now your net worth is 60, 000 more from that 100, 000 that you've invested.

My brother and I have made way more money because of inflation than we ever did on the cash flow, the rent you collect every month. In fact, my brother and I tease our friends. We tell them we're gonna start voting Democrat for now on, because they print all this money all the time and makes the inflation rate go up. So we might as well, just teasing, never vote that way. Yes sir.

What about the cost of borrowing the money? Because there is a cost to that. You mean paying a point? Yeah. And the interest?

The interest. Paying the interest? Yeah. Yeah, we'll get into that. You're looking for, this only works if you're getting a 25% profit.

25% profit on the property you're buying. I'll get more into that in a minute, but I just want to show you how inflation is a bad thing. I wish we were on the gold standard, but we're not. So how do you take the wealth you have and play this monopoly game? If you say, well, I'm only doing things with cash that's one way of doing it that's fine but if you want to maximize your the resources you have you you take out a loan and then your 100, 000 becomes 400, 000.

When I went in business, like I said, our 100, 000, we could buy a million dollars with the property. And the inflation rate was 5%, so, you know, our net worth would go up 50, 000 a year. Just something to think about, of how you take, my father'd say, a lemon and make it lemonade. Inflation's a bad thing. Let's use it to our, this is what the pagans are doing.

They're increasing their wealth this way. Next page, page 11. Here's four financial advantages of owning, what did I put there, a duplex. Just to reiterate, so at this duplex you have $25, 000 and You look at property Always per unit so this duplex is a hundred thousand dollars that is 50, 000 per unit each apartment rents for five hundred dollars total income of a thousand dollars You put twenty five thousand dollars down you borrow seventy five thousand This was when you could get a 4% loan. Your monthly payment is $396, 000.

And All your other payments, if you look in the column there, rents $1, 000, principal and interest $396, all other monthly bills $354, your positive cash flow is $250. So it brings in $1, 000, all your payments are $750, And your profit or positive cash flow is 250, which is 25%. That's what you look for when you're buying a property, a 25% profit. So with this example here, If you look at the bottom of the page, this is what you have going for you when you own a duplex. Cash flows, $2.50 a month times 12, that's $3, 000.

Principle paid to the bank is $1, 752. It just went up in value $6, 000 a year. So you add all that up and your net worth went up $10, 700 because you own a duplex and kept it rented for a year. What other business can you do that where you own a duplex on the side, which isn't much trouble, and you just made $10, 700 your net worth? I put on page 12 a loan amortization schedule where you can see how much interest you pay each month and how much principal and what your balance is.

For years, my brother and I would write in the date we paid it and draw a line under it, kept track of our payments. That's before all these computer stuff. So growing up, we'd tell my dad, dad, we wanna own apartments. So we wanna get the most bang for our buck. Page 13.

Here's just some sayings from my father. Don't throw your money down the sewer, means don't Spend your money foolishly. Don't marry a woman with a spending sickness. Don't waste your money on the kingdom of thingdom. But what my father did, if you look at the bottom of the page, mental math questions.

He loved to ask us questions all the time dealing with math but we had to do it in our head. No piece of paper and pencil, no calculator, no computer, didn't have computers back then really. But he would ask us questions like that first one there. Let's say you went out to the country and you met with the farmer and you bought 10 apples at two cents each. And you brought those apples into the city and you set up an apple stand and you were able to sell all 10 apples for a nickel each.

How much was your profit? How much was your profit if you sold each apple for six cents? He would tell us if you're question number three, if you buy a four-family apartment building and each apartment rents for $50, what is your gross amount of rent? Teaching us business terms. You'd say if all your monthly bills are $150, what is your monthly net profit?

Teaching us, I'm eight years old, nine years old, he's teaching us these things. He would ask us, if you borrow 3% on a dollar, how much interest will you have paid on that dollar after one year? So you borrow $1, just $1. At 3% interest, the other way, 3%, it's $0.03. Just one dollar, at three percent interest, the other way, three percent, it's three cents.

Now when we'd have cousins and friends come over, my dad would ask them some of these questions. They'd sit there and like, I don't know. They wouldn't know how to do mental math. And my brother and sisters, we'd all be looking at each other like, what they they don't know the answer of what 3% of one dollar is? What the what?

We're, How are they going to get anywhere if they don't understand math? So fathers, quiz your children. How much interest do you pay on $100 if you borrow $100 at 4% interest? How much interest will you have paid at the end of one year? Four dollars.

So I'm even at, sometimes when I'm checking out at the grocery store or one of the hardware stores, and they'll add it up, and I'll be like, wait a minute, I don't think that total is right, just because I'm used to adding it up in my head. But it was because of the constant training he gave us at the dinner table to Think like entrepreneurs, entrepreneur questions. You could think of other questions to yourself, quizzing your kids to use their brains. My father tell us, if you want to be successful in business, you got to use these muscles and this muscle. You've got to use both of them.

So I want to make sure you can use this muscle. Page 13. Is real estate a good investment? About in the middle of the page he says pay with cash. People ask me, well, I've got a lot of equity in my house.

Should I use that equity to buy some property? And typically that's a bad idea. Because when you're paying, when you're doing all borrowing and putting no money down, That's how you get in trouble. By that I mean, what difference does it make if your house payment is a lot higher now, but you have the money to put it down on the apartments, you're getting over leveraged. Now you've got a house payment that's higher and it's basically like you just borrowed all the money which you did to buy this building.

So I would tell you sell that house and then you put the money down on the apartments. Because if your house payment is $750 and now you borrowed some money for the apartments and your house payment just went up $400. What difference does it make if the $400 is on your house or you paid all cash for it and your apartment thing is $400 more. This is how you get over leveraged. This is why you need to be saving money to invest it.

So when you buy up any questions on that, but you may have a house that's 100% paid for and you say, well, I can take out a loan for 20 to 50 percent of it. If you did that, let's say your house was worth $100, 000 and it's debt free, which we've owned apartments like that. And if we wanted to refinance it, we would only borrow 50, 000. Even though the bank, they would lend us 80, 000 or 75, we don't max it out because then that's another reason how you get over leveraged because just because your house is worth a hundred thousand now it could go down in value. Houses and real estate doesn't just keep going like this.

It goes down, then up, then down. It's gradually getting worth more. But when it goes down and you get caught, that's how people get in financial trouble. Page 13, plan out all your expenses. Always figure what your monthly profit will be.

That's how we would buy property. More about that in a minute. Page 14, research the property carefully. You must do your due diligence. My father would call it having a full deck of cards, meaning learn as much as you can about the property.

If you don't have a full deck of cards, how do you know if you're making the right decisions? Investing is always a risk, right in the middle of the page. You can lose all your money. Start small. If you're interested in buying rental property and you buy one, it's like having a baby.

Your life totally changes. Because guess what? Now you're on call 24 hours a day for emergencies. It's a big responsibility. So start small.

Maybe investing in rental property is not your cup of tea. It's not for everyone or everyone would be doing it. Page 15. Some factors to make a wise decision. Once again it's planning to be a good steward of what God's given you.

Taking the talents, the five talents, or every many you've been given, and creating more. Okay, deciding where to buy apartments. To your point, Scott, we like to buy in the better neighborhoods because they're going up in value. My father and his partners built an apartment building down in the city of St. Louis.

And they built it in the 60s, 1960s, and they spent one million dollars building the building. 104 units. They sold it 25 years later for 850, 000. If they would have built that out in the county, just they bought the land there in the city because it was cheap. If they would have bought in the county and built it, that project would have been worth probably two and a half million.

So they sold it for 850, but if they would have spent a few thousand more, they could have bought it in the county. So it's very important where you buy your property. They learned the lesson the hard way. So my father made sure we didn't make the same mistakes. Page 16, more about that later.

Page 16, my father's two important questions. You should always ask yourself before you buy rental property. The first question is, is this neighborhood on the way up or the way down? Or another way to ask the question is, what's this neighborhood going to look like in 20 years? If the neighborhood is right on the edge of a bad area, You probably don't want to buy there.

There's a couple at our church, they have nine children, and they moved to St. Louis, it's probably been 25 years ago, But when they moved to St. Louis, they bought a house in an area that was right on the edge of a not so good part of town. And They lived there where they paid 50, 000 for the house. And they lived there 21 and a half years.

And the neighborhood just went downhill. So they decided to sell it because it's getting too bad for them. So they ended up selling it for $17, 500, which believe it or not, they were very thankful for. Because right before this offer came in, their highest offer was $12, 000. If they would have bought a house in the county for a hundred thousand, 21 and a half years later their house probably would have been worth 250.

So in order to take advantage of inflation and being, buying a property with up value, you want to buy in the better neighborhoods. People are like, well, I can't afford that. Well, I argue you can't afford not to. Look what happens. My father got, he sold it for 850, 000.

These, this family got 17, 500. They were sick about this. They said we should have never bought this house. We bought it because it was one reason. It was cheap.

They didn't like the neighborhood. So that's question number one. What's the area you you're buying in? And you can drive around the neighborhood surrounding the property you want to buy. Are there boarded up windows?

Are businesses investing any money? Are there new quick shops going up or office buildings or any new construction going on? If there isn't, then it's... They do a lot of research to where to build these quick trips or whatever else. If nobody else is investing in there then you want to stay away from it.

In the second question he says you should ask yourself is the neighborhood safe enough for you and your family to live in. Would you move in that apartment with your wife and small children? I got a friend in St. Louis. He bought five or six houses in this neighborhood that was not so good.

And he came to me and said, I want to sell these six rental houses, but I'm, I paid this for them, but if I sell them, I take a loss. He goes, what am I gonna do with them? He goes, and that's harder to collect the rent because those people don't have as much money in that neighborhood. I said, well, why did you buy there? He said, well, it was cheap.

I said, that was the wrong reason to buy there. He said, It's so bad down there now, I don't even like to go down there at night. If you're owning property, you have to be a salesman, you know, you're showing the apartment, trying to rent it. You have to believe in your product. If you don't even want to go down there at night, you shouldn't even be buying it.

Does that make sense? So where you buy your property is very, very important. Is very, very important. Okay, page 17. Knowing the price of apartments, becoming an expert in apartment values.

We always, yes sir. Just a comment on what you were saying about location so you can also. Can you give him a microphone? Just a comment on where to buy. You can also visit, like for example Wake Forest.

The city of Wake Forest will have a website or the town of Roseville or Youngsville. Those are just cities around here and they'll tell you what their plans are for that city in the next five ten years what companies are going to be coming in what are they tearing down what are they doing with this neighborhood to whether it's regenerating it or other things as well so that just might be another helpful thing to not just rely on driving around, looking around, but also what is the city saying it's going to be doing in the next 5, 10, 15, 20 years as well, if it's a long-term thing you're looking for. That's good information. My father would tell us, don't be the pioneer, meaning, well, this area, it's coming back. I see some people fixing up this house.

Well, that's OK that the next three are all boarded up, but look, this person's doing something. I've had friends that tried that and they ended up losing their shirt because the neighborhood was not on the way back. Someone just bought a house in that neighborhood because it was cheap and put some money into it and they lost their shirt along with my friend who lost his shirt because it was an up and coming neighborhood but it wasn't. But it wasn't. So knowing the price of apartments, I graduated from college in 1975.

I did not want to go to college. My father made my brother and I go, because he said we were ready to start buying apartments. But he told us we had to go to college. And I asked him years later, why did you make us go to college? He said, well, I thought you guys were too immature when you got out of high school, so I thought it'd be better for you to go to college.

So I get out of college in May of 1975, and in that summer, my brother, myself, and my father, we drove all around and looked at all the rental property that had been sold the past year, everything that was for sale, so that We got a really good feel of what apartments cost. And we always broke it down to what is the per unit price of the apartments. So we could, my father would play a little game. He'd say, all right, come on, we're going to go for a ride and he'd pull up to some four family building and he'd say, how much do you think these units are worth? And we got to be pretty good at guessing of what the apartments were worth.

And that's a really good feeling if you are going to invest in something, that you know the value of what you're investing in. Because if you do get a contract to buy some property, you're probably going to be awake the night before the closing. And you'll be awake for one or two reasons. You may be laying in bed thinking, I don't know if this is a good deal or a bad deal. The real estate agent told me it was a good deal.

I don't know, oh man, what am I getting myself into? Or the other reason you're awake, I'm getting a great deal. I can't wait to get there tomorrow after the closing and go over and start working on it because I know this is good compared to the research I've done. So you have to know for yourself that it's a good deal. You're not going to depend on someone else.

All right, next page. Page 18. Once again, doing your due diligence before buying apartments. What you pay for the apartments or house that you buy, a rental house, is key to whether you're going to make a profit or not. If you overpay, You could still make it all work, but it's going to take a longer time before you really start seeing positive cash flow every month.

So you have to do your due diligence. He says here, check out the physical condition of the property. My father, when we were little kids, he would pull up to some apartments and He would say, all right, we're going to, it wasn't even for sale. And we would walk around, my father would say, okay, this is what you're looking for when you're thinking about buying a piece of property. What does the foundation look like?

What does the roof look like? What does the siding look like? How much remodeling have they done? What do the condensers look like, you know, for the AC out in the yard? When was it built?

Are they...does this look like a well-maintained property? All these little things, so then, when we were ready to buy property, we had a good idea of what we were looking for. Check out the neighborhood, meet the neighbors, talking to tenants. Almost every place my brother and I bought and we bought 12 families we bought 30 families. We bought a hundred and something unit places 200 300 unit complexes We always go up and knock on the, knock on tenant doors and say, we'll ask them, what do you, what do you like about living here?

What's good? What's bad? We'll ask the maintenance men. What do you think about the place? What are the major problems?

What do you like about the place? My Brother was thinking about buying this campground that had cabins. This was just this past summer. And it seemed like a good price. There were 68 cabins on like 150 acres.

And it seemed to make a lot of money. Well they went and talked to the ex-maintenance man that worked there and he said, oh what the seller did not tell you is, which they were supposed to, that all the septic tanks are shot. They're no good anymore. They want a lagoon put in and a new sewage line put from each cabin down to the lagoon, which is going to cost, could cost up to a million dollars, which is why it looked like a cheap price of, you know, a reasonable price for the property. So you have to do your due diligence and talk to the people, talk to neighbors.

There was one complex we, my brother and I, were looking at in Illinois, And we were worried about it, and it was a quick shop in front, and behind it were all the apartments. And we could see it was a rough complex, but we liked those places. So we asked the guy working the quick shop, hey, do you know anything about the apartments behind you? He says, yeah, what do you wanna know? We said, well, what do you think about them?

Is it a nice place? Could it be a nice place? He says, oh man. He said, there's been two murders back there in the past three months. My brother and I looked at each other.

Okay, thank you. We passed on that one. So talk to the people that are around there. I looked at this one, 10 family down in the city, 10 families here and there's a little store right here. And I went over to this store and I went in and asked the guy, what do you think about those apartments?

He says, oh, they need a daddy. Meaning they need someone that cares about it to take care of it. Otherwise, it would be a good piece of property. So it's helpful when you talk to people who know the property. You're just trying to get a full deck of cards of what you're getting yourself into.

Once again, you're gonna be awake at night probably the night before the closing. Okay, what else on this page? Do your due diligence review the rent roll income and expense statements? My nephews bought a piece of property and they told them the rents were, say, 800 for each unit. That's what it said on the first page of the lease.

But on the back page, it said if you sign a year lease, your rent is $7.25. Well, the people selling it said they put it in a way like all the leases say $800, which they do on the first page, but then when you get to the bottom of it, it's 725. So, you have to do your due diligence because there are some shady people out there. Make sure you look at the income and expense statements certified by the owner is accurate. You should access every apartment and every part of the property so you know so there's no surprises.

Examine all parts of the building, the roof, mechanical areas, common areas, basements. In summary, remember the goal for due diligence. Confirm your assumptions made about the investment during your first tour and look at the returns. When we look at property to buy, we usually walk through it and think about how we can improve it. When we're looking at a property, we'll say, one of the first things we look at is, where can we put a washer dryer hookup in this unit?

A full-size washer and dryer, so that we don't have to furnish it, the tenant can furnish it. How can we remodel this? We like to have the apartment look like when we're done with it, like it was built last year. That may, You don't typically want to do all the remodeling at once. You do it over several years, but you have a game plan.

All right, page 19, the 1% rule. The 1% rule simply means this. If an apartment is renting for $700, that is 1% of 70, 000. So it's just a quick rule of thumb. If you're looking at a bunch of property if if they're getting 700 a month and they're asking 80, 000 per unit then that's that's not good If they're asking 60, 000, that's under this, that's good.

You're looking to, It's a quick way to run through a bunch of property and tell you if it's a deal worth looking at or not. That's the 1% rule. Next page. Cap rates. Here's what I think about cap rates.

Forget about them. Who cares? Cap rates are unreliable. Cap rates tell you how much profit you'd be making if you had no loan. But that's, it's so subjective.

Look at the shortcomings of, on page 21. The net operating income can be calculated in different ways. It reflects a limited period in time. Doesn't include mortgage payments. Doesn't reflect expiring leases.

Six, it assumes a stable asset. Let's go to page 22. We were taught what is your monthly payment. So I've got an example here on page 22. You bought a four family and the rents are you're bringing in $2, 000 a month.

So you're bringing in $2, 000 a month. All your payments are $1, 500 and this is your positive cash flow. I don't care what the cap rate is, I want to know what my cash flow is every month. This is real life. Because these real estate agents, they always want to tell you, oh, the cap rate is this, but after you buy it, it will be that.

It's going to be so much better. Forget all that. How much do I make profit each month? This is the important thing. And you're looking for, once again, this is a 25% profit.

A lot of businesses, they're surviving on 10 to 20 percent profit. Real estate, you're looking for a 25 percent profit. So on page 23, this is a rental property positive cash flow calculator. I've done this a hundred times. You write in the gross amount of rent that it's collecting and then you're going to subtract the principal and interest, the taxes, the monthly taxes if you take your tax bill and divide it by 12, Your insurance bill, divide it by 12.

What your monthly utilities are, add those up. As your total, don't worry about lawn care, snow removal. Add those up and see if your positive cash flow is 25% profit. Any questions about that? Okay.

Page 24. Here's a four-family building that was for sale in St. Louis. If you look on the right-hand top, it says the rent is 800 a month times four. It brings in $3, 200.

The rent is 800. Now look at the pricing, one-third from the bottom. Sale price, $435, 000. That's $108, 750 per unit. But wait a minute, they're only getting $800 a month rent.

See, you would throw this one out right away because it doesn't fit the 1% rule. So you probably don't even... The most you should pay for this is 80, 000 per unit. We always figure the per unit price. Most should be paying is 80, 000, they want 108, that's $28, 000 difference.

You're probably not going to get together on this one. So you could throw it out and go on to the next building. The 1% rule is just a way, a quick way to throw some out as you're going through property. On page 25, look in about the middle of the page, it says, over the past 10 years of operating results, the average profit margin is as follows. Retail makes 28.7% profit, apartments 23.7% profit.

That's a pretty good profit. Offices make 16.5%, industrial 10.8. Next page. Page 26. Buying property with up value potential.

Apartments are rated, A being the best, then B, C, D, F. My brother and I try not to buy A property Because we like to buy a D property or a C property or a B property, put some capital into it and raise it up a letter grade and increase the value. We're increasing the value of the property from our sweat equity and what we're putting into the property plus inflation. And we don't buy F properties because F properties are typically in bad neighborhoods or areas that aren't any good. So we like to buy a C property or a D property in a really good area and raise it up putting in maybe we put on new siding we got the apartments, we put laundries in.

We think, why hasn't this guy been successful? How can we turn that around? What can we do to this property to be successful? And why is a tenant, a prospective renter, gonna rent your apartment versus the one down the street? So my brother and I would fix it up if the average rents were, say, $1, 000 in that area.

We would probably rent it for 9.50. We would give them laundry, we would give them more for their money and be cheaper than our competition. So our tenants would stay longer, less move-outs, because every time someone moves out we figured it cost us at least $2, 000 because you have lost rent, you have to go in and maintenance the apartment, you have to paint the apartment, you have to clean it, you have to spend time re-renting it to someone. It's typically around a $2, 000 loss. So if I'm getting $50 less than market value and people don't move as often, because we did a study of our units, this was 30 years ago, and we found our average tenant stayed 18 months.

Well, once we gave them more for their money, a little up value from our competition, like we'd give them a frost-free refrigerator, which was a big thing at the time, but we would give them an ice maker too. The competition gave them a frost free, but we gave them an ice maker. We put a new stove in, but our stove was self-cleaning. The competition had a new stove, but it was not self-cleaning. We gave them laundry hookups.

So then we found out that our tenants started staying an average of like three and a half years. So we were saving tons of money on the move out, and we could run a complex with fewer employees. Complex with fewer employees. In fact, we were running 144 unit complex with three people, which is the banks could not believe we could do it that cheap. They should, they said you should have a staff of at least five people there.

And then we had 168 unit place, believe it or not. And we are running it with two people. Two full-time people, a manager and a maintenance man. Because we had given people more for their money, a little cheaper rate, people don't move as often, you don't need as much staff there. So we were making way more money, a lot more money than our competition because they were charging more rent but they had more move outs.

So it's just different philosophies in real estate. You can get the top rent, but then you're going to have more movement. And So look on page 27. Example of the BRRR method. Buy, rehab, rent, refinance, repeat.

So I gave you an example here, the original purchase price of a building, let's say it's a D plus property, you buy it for 200, 000, it's a four family, 50, 000 each, and you own it five years and you put money back into it and now the properties worth 268, 000 it's gone from 50, 000 a unit to 67, 000 a unit And the rents have gone up because you've improved the property and inflation. So now you borrow 201, 000 and at the closing you get a check for $51, 000 that you can take and go buy another building. So this $200, 000 building is now worth $268. It's gone up in value. You want to take that same 50, 000 out of there and buy this other property as long as you can make your new payment of borrowing 201, 000.

Any questions about that? It's called the Burr Method in real estate. Page 28. Just more information about the Burr Method. Page 29.

How much do you need to save for your first investment property? This person argues you need at least $50, 000 to get into real estate. If you're wondering, people ask me that all the time, well, how much do I need to save? I think 50, 000 is a good value. Page 30.

Okay, when buying apartments, Okay, when buying apartments, you need two things going for you. Once again, this is one way of the 100 different ways to make money in real estate. You need the cash flow and you need appreciation. If you just worried about cash flow, you've thrown away most of the profit you could be making because of appreciation and inflation. I was talking with a young man about a year ago and he said I own a house, a duplex, and a mobile home and I'm renting those units out and he said but my my best property is my mobile home.

I said, you mean your worst property? He said, no, no, it's the best property. I make the most money there. I said, no, you don't. He goes, yes, I do.

I can show you. I said, well that mobile home, what'd you pay for it? He said, well like 25, 000 and I put it on the land. I said, well what's that mobile home going to be worth that you paid 25, 000 for in 20 years? He said, oh, probably about 5, 000.

I said, well, you just invested in something that's going down in value. That's a no-no. You've only got a certain amount of capital. Why would you put it into something that's going down in value? Then you, you're just worried about cash flow, you're not picking up on appreciation.

Any questions about that? Once again, I don't know what he paid for the land. This was just a mobile home. But Remember, appreciation on a million dollars at 6 percent is $60, 000. Your net worth goes up per year.

You're not going to do that with a mobile home. This is how you make money in real estate. That's in one year. You're not going to collect $60, 000 in positive cash flow. So we have to have, as Christians, think about how inflation can work for us.

Page 31. Here's some. This is the first twelve family my brother and I bought. It was, there were, each unit rented for $100. It brought in $1, 200 a month.

All our monthly, our payment and all our bills were 900 a month. And it was positive cashflow, 25%, 300 a month. So it had a yearly potential profit of $3, 600. Well, we did improve the property and five years later the rents were 150 each, so now it's bringing in 1, 800 a month, but our payment to the bank is still the same. And now it's making, instead of 300 a month positive cash flow, it's making 850 a month.

Then five years after that, now the positive cash flow is 1, 400 a month because now the units are running for $200 each. And then 15 years later, the rents are $250 and now it's bringing in $1, 900 a month, $1, 950. And after 16 and a half years we sold it for 270, 000 we had paid off 38, 000 we made a profit of 230, 000 dollars just because of inflation. So we were taught not to go out and flip houses. You buy it and hold onto it so you can take advantage of inflation.

If you buy a house, fix it up, sell it, that's great. Now you pay capital gains tax on that. And now you've got to go find another house and do the same thing over and hope you don't spend too much fixing it up and still be able to make a profit after you pay taxes. Page 32. My parents bought a house in 1978.

They bought it for $115, 000. They lived there 36 years. They did nothing to it. They remodeled the kitchen a little bit and that they sold it for $355, 000. They made $240, 000 just because they owned it.

And then there was a real estate guru when cable TV first came on in my neck of the woods, this real estate guru came on television. And he was an investor and he said he was always trying to talk his relatives into buying some rental houses. And they would get mad at him and tell him, quit bugging us about that. We don't want any other property. Well, he finally broke them down and they bought another house on the same street they lived in.

And they paid, he said they paid 60, 000 for it. They owned it 16 years. And the tenant, they had paid down $30, 000 in principal, and then they were ready to sell their house and move to Florida. So they sold the house for $130, 000, and they paid the bank $30, 000, and they went to Florida with 100, 000. And he said his in-laws were mad at him again.

They wanted to know why he didn't tell them to buy 10 houses and they could have moved to Florida with a million dollars instead of just one house and making 100, 000 on it. Next page, page 33. Finding an apartment complex or how to buy one. Okay, you want to buy in a good or excellent area. You don't want your property to go down in value.

Consider hiring a real estate agent. Yes, hire an agent. Hire two agents. Hire three agents. Just don't sign an exclusive to work with that agent.

If they bring you a property, sign, and you're interested in it, sign something with the agent that they get their commission if you buy that one property. Because if you hire an agent and you just sign a blank sales contract, I mean an agreement with them. If you find a duplex and the agent had nothing to do with it, they still get a commission when you buy that. So just sign something when they find you a property that you like that you want to put a contract on. Page 34.

Visit the complexes, figure out what the problems are and how you'll fix them. Once again, talk to the current owner, talk to the employees, tenants. There was a 33 unit complex my brother and I wanted to buy. We knocked on a tenant's door and it was an older man there and we said, what do you like about the place? What don't you like?

He said, well, the sewer, this is a brand new building. It's like five years old. He said, the sewer always backs up two or three months. He said but my toilet starts gurgling right before it happened so I always called the owner and then they cable it out and we said okay well they didn't tell us that. We ended up buying it and it was a long building.

And it was on two different levels. And they had ran the sewer line through there. What they came to the split in the building, they went up and over the foundation wall so there was a belly right here. So after we had bought it, we were cabling it out every two or three months. And the cable company told us, you know what, when we put the cable in, it always, the clog is always 130 feet in.

So they told us, so they used that, put a chip in there and they could tell exactly where it was at. So we dug down right here and fixed it and no problem for the next 30 years. But we knew what we were getting into. Page 35, ask information on current tenants. Profitability, you're aiming for a 25% profit.

Estimate your expenses using that monthly calculator, page 36. Run the numbers, double check them. Page 37. I put this example in here. Let's say you just bought a four-family building and it has two vacant apartments.

The scope of work that needs to get done is, it needs new Windows, cabinets, appliances, new furnace, air conditioner, water heater, bathroom needs remodel, needs laundry hookups. But guess what? You just went in business, you don't have much money. So You would do what we did. You scotch tape it back together is what we would say.

In other words, I'm putting in nothing at the beginning. I'm just fixing it up and renting it. Then I'll let the cash flow come in and I'll use that money to put in new windows. We put in lots of new windows with people living there. We've even done bathrooms and kitchens with people living there.

They tell us we know our bathroom needs to get done, we're going to be out of town the next two weeks, and we're looking for something to do. We're like, okay, we'll go in and remodel your bathroom while you're out of town. You can do a lot of things with the people living there. I put in tons of new cabinets with people living there. It's America, you can do that.

That's what my dad would tell us all the time. Do you know in Greece, in Sparta, Greece, where my family's from? My relatives wanted to start, one relative wanted to start a tile company, ceramic tile, laying ceramic tile. He had to wait a year to get permission from the government to get a license to open a tile business. And then he had to wait another year to buy a truck for the business.

Hey this is America you could you could do it tomorrow. You could start a tile company. So People go bankrupt in real estate because they do not get vacant apartments ready to rent. One employee, we sold a six family to, and when this person moved out of one of the units on the end That this gal Older gal the son lived there with her and they had tore up the apartment. They punched holes it needed a lot Well, he started using it as a store room for, because he had another apartment.

And the bottom line is, he did not rent that apartment for 14 years until he sold the building. My brother and I estimated that he lost over $80, 000 in rent by not renting that apartment. His excuse was, I could never get the money together to fix up the apartment. We said, you can't, then get another job, get three jobs, get the money together and get that one rented. I bought lots of property where they don't get the apartments ready to rent.

My brother and I bought a 339 unit complex at an auction. This doctor in California owned the property. He went bankrupt because there were too many vacancies. The bank took it over and they went bankrupt. The federal government owned it and they were selling it at the auction.

In 339 units, guess how many were vacant? 204 vacant apartments. My brother and I go over there, and there's a manager there. The government has 16 employees working at this complex. And...

Yeah. So we asked the manager, how many apartments are 100 percent ready to rent? And she says, well, this one down the hall, it needs a carpet shampooed. And this one over here, it needs a refrigerator and stove. And this one needs cleaning.

And we're like, no, no. How many are 100 percent done where you don't have to do anything to them she goes oh well well none of them are ready 16 employees you can't get one apartment ready to rent. This is your federal government. But he went bankrupt, the doctor, and then the bank wasn't even bringing in enough money to make, because the banks borrow money too to lend you, they couldn't make their payments, they lost, they went out of business. It's community federal in St.

Louis. So, number one priority, get the apartment ready to rent. If an apartment comes vacant June 1st, the goal is to have somebody moving in July 1st. You spend a week or two getting it ready, and then you move them in July 1st. Now if you want to do some heavy remodeling, like you want to take the apartment down, that's fine, but why don't you do that in January when it's harder to rent an apartment anyway from Thanksgiving to end of February's bad rental time because people don't want to move.

That's when you take the apartment out for a month, but you better be over there every day doing something to get that done. My father, when my brother and I would work on our apartments, we'd first go in business. He'd swing by and he'd say, how many are, he'd ask us, I'm humble, just give me one apartment to rent. The 44 family we bought had nine vacant when we bought it. He'd come by and say, just get one apartment ready to rent.

So that's what we did. We just focused on one apartment because with a bunch of vacancies, you can get sidetracked. You're doing this and this one, this over here. We just stayed in one, got it done, worked our way down. The 204 units, believe it or not, my brother and I went through every unit and we made a sheet of paper on each unit, what it needed to get ready to rent and then we put okay these are the easy ones these are the hard ones these are in between so when we buy it we're gonna start with these and we're gonna work our way to the hardest ones.

Alright so you buy a place get units ready to rent. Financing units, page 38. You know what banks look for when you go in for a loan. One of the most important things they look at is cash in bank. When they lend you money, it's about trust.

How have you been doing with the money that you've been making on that complex or even your regular salary? I'll give you an example. My cousin owns 80 units. He worked for us for a while and he owed 3.6 million on the 80 units. He'd owned them for 12, 13 years, but his loan was up.

He had the bank appraised it for 5.2 million. He had 1.6 million in equity And nobody would give him a loan, no banks. He went to four different banks, nobody would give him a loan. Does anybody wanna know why? He was high risk, the bank said.

With 1.6 million in equity, he's high risk. Why is he high risk? He had $8, 000 in the bank with 12 vacancies that he had no money to fix up. He needed the 8, 000 for operating capital. Nobody would lend him any money.

He almost got foreclosed on. With 1.6 million in equity, my brother stepped in and helped him get a loan. The bank told him, for 80 units, you've got $8, 000 in the bank, you should have $300, 000 sitting in the bank as operating capital. Because the banks told him, guess what, you're no good with money. His problem was his wife did not like the apartments.

And she said it was a waste of time. So he was always pulling money out of there to pay for trips, to pay for his two sons hockey, whatever. And he'd always say, see, hon, this is apartment money I'm paying for this, and guess what? He almost lost the whole thing. This is why we say, Wait for the second marshmallow, let your account build up so you have the right amount of operating capital.

They want to see what your personal account looks like too, because it's all about trust. Does this person know how to handle money or do they got the spending sickness and they just waste it and they don't know what happened to it. Because the bank has a board that has to approve it, they have to know they're going to get paid back. They don't want a bad loan on their books. Nobody wanted to give him a loan because they thought they're going to have to go through the whole process of foreclosing on him in a couple months.

With $8, 000 in the bank he couldn't even, he had a couple units that needed new furnace and air conditioners, he said I can't even put those in. So how you, your personal assets are very, very important to the bank. Do you have a recommended rule of thumb on operating costs? What you should keep? You mean Operating capital?

Yeah, well, if you're operating cost, yeah, your capital. I would think if you had a duplex or four family, maybe you always have $20, 000 in the bank. This bigger complex, he needed more money because of roofs and bigger parking lots. They told him he needed $300, 000. Believe it or not, he got a new loan And they set it up as interest only and after, this has been probably five years ago, but he did get his operating capital up to $300, 000.

Thank you. Thank you.