Rob:
This is the BiggerPocketS show, episode 67-

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

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

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

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

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

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

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

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

Dave:
You are good at it.

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

Dave:
I like that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rob:
Oh, I see. So basically, what you’re saying is there are the tangibles of every deal, things that are very objective. That’s like, “What’s the property price? What’s the rehab price? What’s the interest rate?” But then there’s also the intangibles, like what you’re talking about, which is the value of your money over time. Money’s going to be less valuable in seven months than it is today. You really have to consider the impact of your money just sitting in a bank account for that amount of ti