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see the beauty about real estate
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is you learn to use debt to get rich
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if you're going to be rich you have to
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learn to use
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debt it's called other people's money
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the six words that are basics of
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financial education financial
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intelligence
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income expense asset liability and the
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two other words are cash flow
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so when you look at the average person
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they have a job
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money comes in here they pay for their
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house
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and the money goes to a bank through a
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mortgage
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so it's not an asset because the cash is
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flying flowing out
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so it's a liability so the definition of
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liability
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does it take money from your pocket and
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for an
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asset does it put money in your pocket
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so when i have a rental property here
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it puts money in my pocket so if i live
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in a house it's a liability
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because even i have no debt on it i
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still have taxes depreciation repairs
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and upkeep insurance and all this
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when i rent a property i've done a good
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job buying it and structuring it
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every month it sends me money so i
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started
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off when i was 25 i had a little
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one bedroom condo and it put 25 bucks in
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my pocket
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it was a start so this was good debt
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you say this the debt also went out and
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paid
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but it also put 25 dollars in my pocket
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so net net i was making money from my
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little house so today my wife and i own
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six thousand
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five hundred of them and every month
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six thousand five hundred houses
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put money in my pocket my my people who
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live in them love paying all this
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because they have a place to live but
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all of this comes from debt
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so we don't oh we have a 100 percent
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finance here
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it's all debt so this is good debt
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and what makes a good debt is the two
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most important words
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cash flow noi means net operating
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income so if you really think about it
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it's just income minus expenses
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that's all it is and so it's important
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to know
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where you are financially so a banker is
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going to look at your income
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after expenses so that's a great way to
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say it yeah it's really it's really
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quite
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simple so let's say look keep the
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numbers simple you have a thousand
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dollars income
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and you have five hundred dollars
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inexpensive this is a prop
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yep so you have a 500 noi or net
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operating income
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so why is that important well
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the banker looks at that number because
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that's the number that they see
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to be able to pay back any debt you
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might want right this is where this
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comes in right
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correct so so they're going to look here
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and they're going to say okay this
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person has 500
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in noi therefore we can give them a loan
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say up to say 350 250
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or something like that so they're not
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going to give you a loan for the whole
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amount because
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they don't want you know that you to be
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that tight except what they're going to
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do is they're going to look at the noi
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and say how much can we loan you so when
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kenny
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calls me says i have this property
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it's a horrible condition there's no
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income there's expenses all over the
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place you get excited right
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a lot of people get hung up here because
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they don't have a financial statement
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any way to go to a banker let's say but
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sometimes a banker will look at the
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property itself
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so they'll say this has a bad noi on it
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why would we give you money
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you know what i mean and then so that's
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when the financial education comes in
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and you say well
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this is what i plan to do with it
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correct what kenny is saying we've had
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i'm keeping the numbers simple he's had
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income
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of zero yeah and this is a thousand
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yeah so you'd have a negative and a y
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and the banker goes tell me why i can't
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lend on that
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right right because there's there's it's
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a higher risk
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of being able to be paid back the noi or
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the net operating income
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determines the value so um
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you what you back into it a another
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vehicle called the capitalization radar
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cap rate
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so it's actually we're getting a little
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technical but
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typically the cap rate or capitalization
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rate
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uh divided into the noi determines the
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price
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so that's generally how that works but
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in the case that we were talking about
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the the value of the building with no
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tenant in it
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is way low it's way low and there's
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really no income
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so it's basically whatever
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you know the structure is so i've seen
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lots of situations where a vacant
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building somebody might have spent
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five ten million dollars on a building
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that's completely vacant
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you know vacant warehouses vacant
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whatever's right sometimes you see them
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get converted into clubs or whatever
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well there's value there somebody spent
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a lot of money on it well one time
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somebody owns it too it could be a bank
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it could be whatever
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so taking that and creating value
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sticking a restaurant in it a gym in it
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a club in it it doesn't really matter
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who's in it
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what does because you want them to pay
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you but but
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you know now you're creating the income
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and then that's how you create value so
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in that example let's say let's say you
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buy a building for a million bucks you
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know on a on a block
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um with a tenant in it it could be worth
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three four five million
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so what if it's if it's a tenant in it
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the value is
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yeah right because now then what you do
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is you put all that together and then
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you can actually sell it
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got it and so even if the noi is
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negative
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if you create a plan that creates value
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for the property and shows the increase
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that you're going to give the property's
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value the bank will give you the loan
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oftentimes yeah and yeah not always but
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there are there are ways to do it so in
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that particular case
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you might get a loan from somebody like
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robert and say hey you know i need a
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million bucks
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and this is my plan and then once you
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get a tenant in it then you go back to
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the bank
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and you say hey give me a loan and
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and then they give you a loan and you
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pay robert back so the thing that
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kenny's always looking for
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is after we stabilize
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can't tell me because look in five years
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i'm going to get this from
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1 000 to 10 000.
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[Applause]
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and on top of that we're going to reduce
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the expenses
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back to 500. noi goes
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up the value goes up the debt goes up to
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let's say 10
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000. so i have a friend for example he
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actually bought a building in a town up
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in idaho where
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i have a vacation house for about a
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million bucks and it was sitting it was
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an old
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elks building a beautiful building
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downtown but it had been vacant for a
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long time
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he bought it and he put
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like 30 offices in there small offices
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you know
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1500 to 2000 feet each and
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grew the the revenue right so everybody
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pays
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so they so the income went up yeah you
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know what i mean yeah
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so he broke it up and and and then
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leased it up
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and his you know so he has his expenses
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but now he's got 30 people paying rent
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as opposed to just you know one big
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vacant building
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he turned it into a pretty cool
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workspace you know
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for everybody but the what and then
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kenny's
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in his third book you know the advanced
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guide to real estate
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his job is to get this up keep this
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stable
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then he goes back to the banker and says
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look we've got all these tenants monies
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going up
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and so we now want 12 000
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yeah because he's improved income
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kept expenses low buildings more
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valuable
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yeah the key there is the the bank's
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always looking at your noi
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to pay back their loan so the the more
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you can grow that
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the more loan you can get and so
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essentially the renters are paying
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your debt of course okay yeah
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essentially so
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if that building i was referring to goes
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to 50
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vacant now he's in trouble but if you
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can keep it full so now you're getting
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into management but regardless of that
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that's how you do it you there's
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opportunities like this
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everywhere and i know another thing that
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you always mention in all your books in
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the abcs of real estate investing
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is that property management is very
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important
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poor property management equals poor
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profits right
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and so i wanted you to kind of explain
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the importance of the property
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management
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well essentially all property management
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is is taking care of
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the property in every way so taking care
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of the people that might be inside of
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this building
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you know for the various things that
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come up from day to day
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collecting the rent and paying all the
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expenses that's really all it is
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and so the property manager's job is to
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make sure the place is clean
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and and that things are getting rented
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and all those things and so the owner of
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the building
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would hire a company like that or they
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can do it themselves and
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and basically keep the place full so
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in our world you know we have a property
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management company that we have about
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300 employees
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all we do is focus on this these these
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two
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things how do we keep our expenses low
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and keep our
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our income high because we're always
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trying to grow our noise so our noi
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you know we have a budget for let's say
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2017 or 2018 or 2019
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the goal is to grow that in a why each
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year and kenneth does such things as
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the way he grew the income he put
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washing machines
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right yeah in the united states and so
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when we put washing machines in the
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building
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this went up right yeah so uh
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in my apartment houses um we would buy
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apartment houses that had
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washer and dryer hookups but no machines
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and so the people would walk down to the
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laundromat or whatever
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and it was a bit of an inconvenience for
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the people and all that so
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i said well let's just buy for 650
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dollars we can buy a washer and dryer
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set and stick them in all there
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and we did that and so i probably bought
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uh three or four thousand
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sets of washers and dryers um for a lot
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of our properties
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00:11:06,320 --> 00:11:08,160
and so now all of a sudden we can charge
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75 or 100 more in rent
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and this goes up yeah this doesn't go up
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as much
310
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it's a win-win because they have to go
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spend some money anyway
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to go do their laundry now they can do
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it here
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and for me if i can pay back those
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washers and dryers in one year
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because it's only 650 for a set and if i
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can get 75 dollars
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more then all of a sudden i've got 900
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to almost a thousand dollars more in
320
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rent
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so i'm actually it's a it's what i call
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a one-year payback
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on so kenny does he borrows the money
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here yeah
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to put washing machines in here
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again the tenant pays it all off and the
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washing machine stays
328
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right yeah and i think that's a
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brilliant idea because i know that both
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of you have created incentives for the
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renters
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so for example if they stayed for a year
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you would do certain renovations like
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including the washing machine
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and so every year there was another
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incentive which not only
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increased the property's value but also
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the renters paying for it essentially
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and the banker was happy
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yeah what would you guys respond to the
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critics who say
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that real estate is a slow lane approach
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to getting rich
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that's fine with me i i can't think of
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another
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i mean i think i think it's really super
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simple wow
348
00:12:25,519 --> 00:12:28,639
real estate is very slow and very dumb
349
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every month we got cash flow yeah you
350
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know it's
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i like that i like you know we're not
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banking on something going up we're cr
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this is called
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creating value we're not parking our
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money in something and hoping it goes up
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that this is very strategic
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perfect so everybody's got their point
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of view most people want to get rich
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quick
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that's why they never get rich yeah this
361
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is not bad
362
00:12:50,399 --> 00:12:53,120
yeah this this is financial education
363
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this is smart
364
00:12:54,399 --> 00:12:55,920
this is having your banker be your
365
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partner yeah and these are long-term
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assets by the way these are these are
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this is like
368
00:13:01,519 --> 00:13:03,200
this is a business this is like managing
369
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a business we would not sell these
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so unlike the stock market or something
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you know we're not trying to time things
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we're trying to generate cash flow here
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and then move to the next one okay so
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can i give you one last thing
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because those guys always upset me so
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what kenny does he increases this
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fixes this and then when this
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00:13:26,800 --> 00:13:29,839
goes up he gives my money back
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00:13:29,839 --> 00:13:32,639
so i might give kenny a million dollars
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00:13:32,639 --> 00:13:35,040
for five years let's say
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he increases this decreases this the
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bank says oh yeah noi is up
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so he puts all this money in there i get
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my million dollars
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00:13:43,920 --> 00:13:47,199
back i still own the property
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i still have the cash flow going in so
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all you guys want to get rich quick
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it's called an infinite return right
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yeah and it's tax-free
390
00:13:56,800 --> 00:13:59,120
it's tax-free the reason it's tax-free
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00:13:59,120 --> 00:14:00,800
is because
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when we use debt to pay back
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00:14:04,000 --> 00:14:07,519
debt it's debt so it's owed
394
00:14:07,519 --> 00:14:10,079
so when robert gets his money back it's
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actually tax-free
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yeah let me say i lent kenny this is
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pretty common numbers
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i'll end up 1 million he fixes all this
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00:14:18,240 --> 00:14:21,519
the bank gives him 3 million
400
00:14:21,519 --> 00:14:24,320
i get my million dollars back right and
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that is tax free
26115
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