financial calculator buddy broome presentation

1 COPYRIGHT 2018 PAUL DO CAMPO

Financial Calculator Buddy Broome Presentation

Andy Teasley: [00:00:32.26] [Inaudible] ... Welcome Buddy Broome to the stage. He is going to

teach you what that box in your pocket is really good for because if you can't run a

financial calculator, you have no idea how you really did so. Please give a Buddy warm

welcome.

Buddy Broome: [00:00:47.29] Thank you. Thank you very much. Thank you, Andy. I appreciate it.

Welcome. It was wonderful to see all of you. I'm so grateful to, to get the opportunity to

speak to all of you today. My name is Buddy Broome. I'm an attorney practicing attorney

and real estate investor. I'm a real estate investing is sort of my side hustle, so I still do a

nine to five and we've been buying... my wife and I've been buying rental properties.

We're from Los Angeles, and that we've been managing for the last six years or so and, or

seven years. And started off... Well, let me, uh, I first heard of creative financing from

my dad when I was a kid. I remember my dad told me this story of how when he started

off he didn't have any money, so he wanted to buy a property and he couldn't, he didn't

have the cash to do it. So, we asked the gentleman that was selling him whether he would

take payments and my dad didn't know anything in terms of creative finance or seller

financing or anything like that and said "Hey, would you take payments?" And the guy

said "Yes." And I told my dad, that's the dumbest thing I've ever heard. Why would the

guy accept that that makes absolutely no sense? And, and my dad just sort of like, I don't

know, we always joke about my dad, he's just, he's just like, oh, I don't know, I don't

know, just sort of whatever. And he goes, I, you know, I just, I just asked him, it was just

such a simple answer. So, I just asked him, and he said "Yes." And then he thought about

it a little bit more and he said the truth is… well, I asked him, and he was like, well, now

I think about it. He said, well, the guy knew me, knew my reputation around town, knew

who I was as a person. So, he figured he'd get paid back and it was right, you got paid

back.

So, everybody won. And so that taught me three very important lessons right from the

get-go that I didn't really internalize until later, later in life. That one, you can do this

stuff with no money. So, you can do it if you don't have money in your pocket. I'm not

saying it's easy, it's going to take work, it's going to take digging, it's going to take

knowledge and education, applying that. But it's still absolutely possible. Two is ask for

what you want because you might just get it. So, don't be afraid to ask. I mean, we've

talked about Jimmy Napier and things like that. Jimmy's always saying, ask, ask, ask, just

ask for what you want, and you might just get it. And three, your reputation matters. So,

if you have a good reputation, people will give you stuff. If you have a bad reputation,

people won't give you stuff, so that reputation will follow you around. So, I think it's

really important to make sure to cultivate a good, honest reputation where you're a person

that people say "Hey, that person does what he says and says what he does, and I can

trust them." And that makes a big, big difference. From that time in my life, I, uh, went

on, went to a college back east, the University of Pennsylvania and then graduated, came

out here for law school and graduated from University of San Diego for law school and

started off as an attorney. And pretty much had forgotten everything my parents had ever

taught me. And one day my wife was, uh, came across the book Rich Dad, Poor Dad by


accident. And she said "Oh, you got to read this book. It's really good. It talks about

investing in how to do it." I said "No, you're wrong. Like, that's not the way it happens.

The way it happens is you go and get a good job like I got, and you work for 40 years and

you put away your 401k and you ride off into the sunset." That's the way everything else

is just a pipe dream. It's just nonsense. [Laughter] And so of course then when she was

around one day, the, the book, after she was done reading it - Rich Dad, Poor Dad - it was

just lying there on the counter. I picked it up and 48 hours later my life had completely

changed. I was like, I got to learn about how this investing thing works. This is amazing.

So, I just started reading everything. I go, go into clubs and talking to people and

eventually my wife and I made the plunge in... we closed our first deal in August of 2008.

And why is that significant? Right? Because we were on the verge of being real estate

millionaire, I was so sure. And then right afterwards, the next month, find out Lehman

brothers folds up. And so literally the same property we just bought, we could see was on

the market for 60% of what we purchase for it two months before. So that was not a good

feeling. And not only that, it was negative cashflow. So, it was a very, very painful

experience. And, um, it taught me a very important lesson that cashflow matters above all

else. Appreciation will not wash away our sins. If you purchase incorrectly and you don't

have good cash flow, you're in trouble. But if you purchase even at a bad price, if you

have cashflow, you can make it. Um, and so from there we started, I said, well, I still got

to figure this thing out and just by dumb luck there was a group that was just starting up

at the time called FIBI, For Investors by Investors, which now is rather big. Um, and we

got one of the founders is a gentleman named Ellis San Jose. And I said "Ellis"...met him

and it was in this divey bar in El Segundo, it was like 20 guys there. It was just like very

grimy. It was great. And, and I said "Ellis, you know, I hear about people talking about

investing. We did this investing... It stinks. What did we do wrong?" And he said "Okay,

I'll start mentoring you." So, he started mentoring us, teaching them about...getting in

front of sellers directly, so on and so forth. And then he directed us... He said "Listen,

these two guys were coming to town this weekend. You got to see him. It's Gary Johnson

and Clyde Wilson." Who here knows those two gentlemen? Okay. So, if you didn't raise

your hand, I strongly encourage you to get to know Gary Johnson and Clyde Wilson.

They're coming out here to Orange County in a Labor Day weekend. Best class ever.

[00:06:31.09] So I took that class and that is where I first learned how to use this

financial calculator. And so, and we also learned about seller financing, which we're

going to talk extensively about during, during my presentation. And so, from there we

um, took, took it, started putting out offers, making offers, and we got properties and

we're like, oh we can do this, we can do this. We're getting on the verge of making this

deal. And [then] I'd talk to Clyde or Gary and they'd be like, no, no, no, don't, that's not a

good deal, kid. And so, so disheartening because you're like putting all this work and

you're like, I want to do it, I want to do it. And they're like, no, no, no, this is not...pass.

So, you keep passing, keep passing. And then finally we got a, a got a call and I think it

was December of 2010 and it was right before, it was like 10 days before Christmas. And

they called us up, said, listen, when we want to sell, we want to carry, but you got to

close before New Year's because if not we're not going to do the deal. So, we went, drove

out to their home about two-hour drive, pet their dog, hung out with them for literally 10

hours, 12 hours over two days. And finally, after all the time, we're able to close a deal


and we purchased the property for $250,000 over market price. So now half your saying

"What an idiot, why did I come to the seminar? The everybody knows the way you buy

real estate, as you buy low, you sell high." This guy is saying he buys high, like what? A

knucklehead. And so, but in return for doing that, what we were able to get was at least at

the time when we wanted to buy, didn't have very much cash and couldn't get bank

financing. So those were the two things because at the time there's so many deals, but I

had no access to it. It was just all this candy that I could buy, but I had no ability to eat it.

So, in return for that deal what we got was less than 5% down. So very low down. And

also, the seller carried the mortgage for us for 50 years fully amortized. So, from day one,

our net worth dropped by $250,000 the second we signed escrow. But our cash flow

increased, so it was a tradeoff that we had to give. We had to give that price to get the

terms and the terms are more important and I'll show you... We're going to go through an

example of how that plays out, so since then we've just been building the snowball,

buying properties in similar manners, managing them, renting them out, so on and so

forth. And so here I am today. And I just started teaching a class... teaching this class

"Calculate your way to financial freedom" about two years ago where I show people how

to use this financial calculator because without this device we never would have closed

that deal or understood what it meant... what we got. Like the value of 50-year financing.

We never would have understood how to structure a deal like that and so it is absolutely

essential to know how to use this because if you do not know how to use this, you're just

guessing. This ultimately is a, I would say a magic eight ball. It tells you the truth and so

because so many times you're investing, we hear others [say] "Oh great investment

property", you see the listing on MLS is a great investment. You're going to cash flowing

like crazy, it's awesome. And then I'll sit down and say, "How is this a great investment?"

Well, the answer always goes it's by schools, it's this, it's that, those are sometimes are

indicators, but those aren't the numbers. You really have to boil everything down, get the

numbers and see, hey, is this a good investment or not? And this device will tell you the

truth. Yes, it isn't a good investment or no, keep looking. Does that make sense? Alright,

cool.

So, let's get started. Without much further ado. Um, so I teach this class. This class I

teach is an all-day class, so what I've done is really tried to boil stuff down into three

hours. So, I'm going to do my best to do that. And um, you know, we'll just keep on

moving along and see what we can do. But up here on this screen is the financial

calculator. This is an exact replica of this. Does everybody have this on their phone right

now? Okay, all right, cool. So, this one we primarily work on our... We'll get into it. Let's

just turn to page four of your manuals for day two.

All right. The very top basic functions of the calculator, we're going to do is first way

we're going to break this up. Like I said, this is a very abbreviated version of my class.

We're just going to go talk about how to just do basic functions in the calculator and then

we're going to go into a seller financing example to show how you structure deals like the

one I talked about earlier. Page four, top of the page. Formal education will make you a

living self, education will make you a fortune. That is absolutely true. And I think all of

you understand that just by the fact that you spent your weekend out here. I'm listening to

people like me and, Andy and Gerald and the wonderful people that have come out here,


um, money often costs too much by Ralph Waldo Emerson. I, when I hear this quote, I

think of two things. One is money often costs too much. Well there's the one side where

people spend too much time focusing on money instead of focusing on their family or life

or enjoying their life, but at the same time, money often cost too much because we don't

take the time to study it. When I came over here, I drove over here and um, I was talking

to a lady this morning and she's, she was a teacher and she said “Oh, well, you know, all

these people are my age in my age group, in my teaching job, are getting ready to retire,

but they don't feel confident they can actually retire." And she said, "You know, they've

never studied, they don't know anything about finances." And so that's really when I think

about this and all of you were showing that you understand the importance of it. It's really

important to understand the importance of money and the laws of money, the laws of

finance so that you can go and make educated decisions on your own and you don't have

to go to some big building and rely on a guy who takes a commission, who wears a tie, to

tell you "Yeah, you can retire." You can do that on your own and it's not that hard. Okay.

Alright.

So now we're on page four, how to answer questions with the calculator. It's going to be a

three-step process we’re going to go through. One is going to be one is a cashflow

diagram. You'll see on every page, there's a line. Let me see if I get over. [Pause]

[00:13:29.27] All right, let's see if I'm all right. Good. I'm not the most technically

inclined person here. So, whenever this stuff comes up I'm like, oh no, I got to do this

stuff. This is the cashflow diary and we're going to fill out and I'll show you how to do

that just shortly. So, this three-step process, we go here, fill out the cashflow diagram, we

go here, put in the numbers, and then finally we've entered the numbers into the

calculator, which is right here. And then once we enter in the numbers, we have to know

for these numbers. We're going to be working primarily on these four numbers up here,

these four numbers, um, once you know four you'll be able to enter the fifth. So, it goes

from left to right, we have N, which is number of months. The default is a number of

months.

IYR is interest rate per year, so that's the interest rate that's being charged on the money.

PV is present value. That's a one-time event that happens today. It happens today only.

So, for example, if you've got a mortgage, the present value will be the size of that

mortgage. PMT are payments, those are monthly payments that occur. So, if you have a

mortgage, what are the monthly payments did you make? FV is future value. That's a

one-time event that happens someday out in the future. Okay? And so, once you know,

you have to know four of these numbers, once you know four, the calculator does the

work in solves for the fifth. So that is where we are. Let's get this party started.

So, I'm going to do the first problem for you. Turn to page five please. There we go.

Alright, so we're just going to solve for N, solve for the number of months. Page five...

Alice is starting her retirement account today. She contributes $300 a year and she's able

to earn 9% on her money and wants to have a $50,000 in her account before she retires.

How long will it be till she reaches her goal? Okay. Does everybody understand? This is

basic retirement planning right here. We're just trying to figure out, hey, what's the

timeframe before she can reach her goal? So, the way that we fit, we start this answer. I'm


going to do the first one by the way. So, you get an idea then from there on out, I think

it's... I'm going to have you guys do the work. One, because I just don't want to do work,

it's really early right now and second because I think that when, when you hear

something, you forget it, you see something, you remember when you do something, you

understand it. So I think the most that you can get out of this class, I'm not going to sit

here and you know, grade what you write down or the work you do, but you'll get the

most out of this exercise, these next three hours, if you're actually following along and

doing the work with it rather than just sort of sitting here listening to me talk. Okay? And

besides, you'd probably get bored with listening to me talk.

So, we're going to start right here. Alice is starting her retirement account today. She

contributes $300 a month, uh, able to earn 9%. So, you see this box here? This box is

where we enter the interest rate. So, we know that she is an interest rate of 9%. That's

what she can earn. This line here represents time, present to future. And so, what we do is

we say, okay, what's the timeframe that she's looking for? We don't know. That's what

we're trying to figure out how long it's going to take Alice to get from where she is now

to her retirement, her retirement goal of $500,000. So, the way that we show time on this

is we just do this, mark this bracket, and we're going to put a question mark right here.

Then we say okay, she can make monthly payments of how... what she's starting off with

today is nothing. She's got no money in her account. So, we're just going to show that by

just putting a zero right here just to show that she's got nothing to start off with. Then she

can make monthly payments of $300 a month. So, the way that we show that on this

cashflow diagram, is to have little down arrows going, it should be 300, but that'll be a

lot. So, we just show all these little down arrows. And the reason that they are down is

because money leaving her pocket, she's investing it. So, as she's investing in, she's losing

access to it, so because the money is earning interest, she no longer has the ability to use

that same money to go buy groceries or pay rent or anything like that. So, these were all

down arrows right here. And then future value. We know that she wants to get $500,000

in the future. So, we're just going to show one up arrow, $500,000. Alright. And I

apologize in advance for my handwriting is not the best, but... I'll do the best I can here.

So, once we have this information... Oh just put a 300 here, once we have this

information then we just go down and look at the cashflow diagram right here. So, we

started here on the left. We have an end, which is number of months. That's what we're

solving for. We see right here, we don't know what that is. So, we're just going to put a

question mark here. Interest rate right here. We know that's 9%. That's what she wants to

earn. So, we're just going to put a 9 right here.

Present value, present value, she's starting off with nothing today. So, her value today,

the, excuse me, the value of the present value is zero. So, zero is what we put in for

present value. PMTs are payments. It's $300. Remember it's because the arrows are

pointing down, it's $300 a negative. So, we've got to put this $300, negative 300. And

then future value. We know that when she retired she wants to have $500,000 in her

retirement account. So, we're up to 500,000 there and that will be positive. So now that

we have this information entered into our cashflow diagram, we'd go to the calculator and

we'd just go left to right and enter that information. So, N we don't know. So, we'll just go

in. And by the way you can put it in any order you want. I think it's much easier if you

put it in left to right because that way it's easier to remember it. Yeah, I didn't forget this.


So. N we don't know. That's what we're solving for. So, we're just going to skip to

interest rate. Interest rate we knew was 9. Now we got to present value, present value.

She's got nothing today, so just put zero in present value. And so, I entered the number

first and then I hit the button, it hit PV and once they hit that it's then stored up there and

you can see whatever stored on the app, is great. You can't do this on the, on the physical

calculator, but on the app, you can see whatever stored in there already. And PMT. We

have 300 negative right there. Now 300 negative has been stored in here. Future value.

She wants $500,000 in the future there. And now once we have those for all we have to

do is press N and it will tell us the fifth. Yeah, hold on.

Audience: [00:20:37.04] [Inaudible]

Buddy Broome: [00:20:40.19] Yeah... Um, what we can do is... The entire calculator is going to be...

Everything is going to be functioning of these five buttons here. That's it. So, everything

is there. The only things, like there'll be other things that'll come up, but that's really the

only numbers you have to worry about. The only buttons that you have to worry about

are these five top things up here. Here are the numbers to enter. So you enter the numbers

and that's pretty much it. We're going to keep it very simple, like pretty...


Buddy Broome: [00:21:15.29] Okay. Well, we'll get to that. We're going to be... [Background noise]

[Inaudible] Sorry about that. Yeah, I apologize. Everybody who's got a question, make

sure, since we're being recorded, we just want to make sure that everything is getting

recorded. So, if there's a microphone there. So, we're going to get to clearing the screen

and everything like that. So right now, first of all, everybody gets this number? Okay?

Okay. Don't worry if you didn't get it. We're going to keep repeating this over and over

and over again, so you get to keep practicing this. Um, but here what we can do is just

clear the screen. Let's say. Let's say everything has gone, gone to pot. You've,

everything's ruined. If you just want to clear the initial functions, just the numbers out, hit

this orange button and hit the C button right underneath. So, hit orange and then C.

Alright? What's that? [Background Noise] That's how you clear just the numbers. It

doesn't clear like the mode or anything like that. If you want to make it so that it goes

back to factory default because sometimes you do things where you will change the

number of payments per month because right now the factory default is 12 payments per

month. If you do that, the way that you get it back to factory default, so just completely

ruined the machine, everything's, everything's terrible. You don't know what to do. You

do what's called a three-finger salute. So, you press the Help button first and you've got to

hold it on there. So, you got hold the Help button, the End button, and the FV button. So,

we go here, helped it did, and then it says restart calculator. Reset, there. So that's if

everything has gone, has gone kerflooey. But don't worry. I've seen a lot of mistakes. I've

made a lot of mistakes. My calculators never blown up yet, so it will not kill you. You,

these things are meant to make mistakes on.

So now let's turn to the next page. Turn to page eight please. Okay. So, Lorraine, this one

now we're going to solve for interest rate. So, the first one we solve for how long? The

time frame. Now we're going to solve for interest rate. So, we're trying to figure out what


the interest rate is. Lorraine lends Michael $1,000. Michael agrees to pay Lorraine back a

lump sum of $1,100 in 12 months. What is the interest rate on this loan? Okay, first of all,

let's just hear from the crowd. Lends $1,000 and gets $1,100 in 12 months. What's the

interest rate? Was it? 10%? Right? Alright. So, let's just do it anyway. We'll go through

the, the, the, the exercise to begin with.

So now I need help from the crowd here. So, and um, I guess I'll repeat it to make sure it

gets on the uh, on the, on the recording. What is the timeframe that we're looking at here?

12. So did show that. Put a bracket and it put a 12 there. What is the interest rate? It's 10,

we know, but we're solving for that, right? Okay. So, so what we put in, we'll put a

question mark right up there. So that's a. We don't know what it is even though it's 10%

right. Present value is how much? $1,000. Now is that thousand dollars positive? Let's

say it's from um, from Lorraine's perspective, is that positive or negative? Negative. It's

negative because she's losing access to it. She's giving the money to Michael. And he's,

he gets the access to it. So, she loses the access in return, she gets the interest back on it.

So, we show $1,000 negative, we show a down arrow. We put negative $1,000. Now

what are the payments here? Payment payments are zero. There’re no payments being

made throughout the throughout the 12 months. So, the way that we show zero payments,

we show ticks like this, just to show time passing. And then we have future value. What

is the future value from Lorraine's perspective? 1,100 positive or negative? Positive. So,

we show that with an up arrow. 1,100. Okay, so now from here we got this information.

Now we got to put it in here. So, we go N is 12. That's a number of months. So, I'm going

to put 12 in here. Interest rate, we don't know, we see the box, even though we know it's

10, we don't know. Present value 1,000 negative. And put 1,000 negative. Payments... we

show that there's no payments being made or received so we're just going to put zero

here. Future value is 1100. We see this 1100 right here. So, put it right here. Okay, so

now that we're doing that, now we're just going to go over to the calculator. Now I'm just

going to enter in the numbers from left to right. N we know is 12... What's that?

Audience: [00:27:19.23] How did you clear?

Buddy Broome: [00:27:20.21] Oh, to clear. To clear the calculator. What? I got these microphones on me.

Okay. Hit the orange shift button and the C button right underneath. Okay. And that will

clear the whole thing out. So, the last thing you had will be gone, but you can keep, you

can keep... the numbers stay stored into the calculator from, from thing to thing. So that's

what makes the tool really powerful is you can play a lot of what if games, you don't have

to repeat it, you don't have to enter all the information. So, say you have a loan of $1,000

out there and you want to see what the payments are at five percent, six percent, seven

percent, you can just keep changing that, that interest rate and the rest of the numbers will

say stored in there. But if you want to clear the whole thing out so that you get nothing up

here, just hit the Shift and C. And if everything has gone wrong, remember the three

fingered salute. So, we got Help... Yes?


Buddy Broome: [00:28:33.28] Correct. Correct. So, so that is the cool thing about the app as opposed to


the phone. When I have this guy, this is the real calculator. I don't know what stored in

these numbers but watch. So, we, we know the 12 is the end. So, we put 12, now I know I

can just look back at my calendar and say, okay, 12 is in the N, I don't have to guess, I

don't have to remember what I put in there, it's already up there. So, this is a really, really

huge advantage of this app that I really like. It allows you to play that what if game and

know what all the other variables are in that, in that situation. Um, okay. So, we're going

again left to right, N is 12, right here it's entered 12 months. Interest rate, we don't know

what that is. That's what we're solving for. So, we're going to skip it. PV. PV is present

value from Lorraine's perspective, it's $1,000 negative. So, we've a 1,000 negative. PMT

are the payments. That's nothing. There’re no payments being made so we're just going to

simply hit zero in payments and FV is future value. Lorraine will get back $1,100 right

there. So, $1,100. Now... Okay. So, what's the interest rate? What'd you guys get?

[Background noise] [Inaudible]

No, no, no, no, no, no. You guys are wrong. So, does everybody see that? So, let's see.

There's no way. My calculator is definitely right. So why is that? We all knew at the

beginning this was going to be 10%, right? Lending out 1,000, getting $1,100 back. Why

is it 9.57? [Inaudible] Who was that? It's a compounding. So, if you're compounding,

what if, if compound is happening once, once a year, then it will be 10%. But because

compound is happening more frequently, is 12, The factory default for the calculator is

12 times per month. Oh, should be 12, 12 times per year. So that means because the more

compounding there is, the less hard the money has to work. Okay. I'm going to repeat

that. The more compounding there, is the less hard the money has to work. So, if the

money is only compounding one time, this interest rate has to be higher, has to be 10% in

order to get $1,100. And so, but since it's compounding 12 times per year, it's feeding on

itself 12 times. The interest rate doesn't have to be so high. It can come down to 9.57 and

still get the same net result.

So, I just think that's a really important concept that all terms, and compounding is one

that sort of just glossed over, you really, really, when you're doing deals, you want to be

conscious of how many... every, every deal, every term of the deal you want to be very

conscious of. So, compounding is definitely a huge, huge term that can play a big impact

on your deals and your returns you get. We have any questions? And by the way, if

people right now, if anybody's heads exploding because typically my class is like the first

hour is the worst and then by then, by the end of it, they're answering the questions faster

than I am. So, don't get discouraged if you're like, I don't understand anything he's saying

right now. Okay. Questions?

Audience: [00:32:23.25] [Inaudible] Alright. Hi, I'm having a problem entering my present value. I

put in a thousand present value, um, and it puts in negative 988.

Buddy Broome: [00:32:43.17] Good. That's a very good question. So, everybody heard… the question

was she's entering a thousand and it's not coming out correctly. What... here is the issue.

Did you have to make sure it's a negative? So, when you do it, you have to hit... If I put it

in a thousand positive, it's going to come up with an error, but I have to hit $1,000 and

then you'll see right over here above the blue shift button, there's a plus minus toggle.


You had to make sure that you hit that plus minus toggle to make that number of

negative.

Audience: [00:33:23.25] Oh

Buddy Broome: [00:33:26.03] No don't hit the minus button. So, there we go. Problem solved. So, once

we hit you hit the plus you hit it in the number, hit the plus minus button and then you get

negative 1000.

Yeah. Yes?


Buddy Broome: [00:33:54.29] Yeah go to factory default. It should...


Buddy Broome: [00:34:02.19] Oh Man, I'm not a tech guy. I don't know [Inaudible] I mean it should be

the same thing but that's annoying and I've had that happen and typically when I factory

reset it, it goes back. [Inaudible] What's that?

Help, Help, N, and FV. [Inaudible]

Thank God we have people who understand technology here. So, you hit the orange

button and the decimal point right here. And if you see underneath the decimal point

there's a comma and a decimal point. And that'll switch back and forth between those two

views.

Okay? But to be honest, even if you have it, it's still the same. It's just kind of annoying to

look at. Okay. Do we have any other questions right now?


Buddy Broome: [00:35:30.10] If you get a mortgage, it's compounding 12 times per year. [Inaudible] I

don't know if it's the default, I think. I think that's the point. Like it always depends.

Typically, if you're going to have monthly payments it's going to be compounding 12

times per year, if you go get a 360 or a 30-year mortgage, with monthly payments, is

going to be compounding 12 times per year. [Inaudible] Yeah, exactly. Yeah. This deal is

like a handshake deal between two people. So that's what I'm saying, it's important that...

because sort of the purpose I think of this class, and you'll see a lot of the people that, that

deal with this, is a lot of people that are going be teaching this weekend is our goal is to

not deal with banks. I mean ultimately you would be able to do deals where do you don't

have to rely on going into a bank and signing, signing the dotted line on a mortgage.

You're looking… seller financing is really… the amazing thing that, that really allows

people to go and buy property and do well. And so, when you do that, you can negotiate

any terms you want. I mean, you can make it works. I'm saying, Hey, I'm making

quarterly payments. If I make quarter, if I negotiate with the person, I'm going to do


quarterly payments it's compounding quarterly, you know, or, or however you want it,

however you want to break it up. Make sense?

All right, so go onto the next page. Now Lorraine and Michael are changing the terms.

Lorraine and Michael agree that Michael will pay Lorraine back $91 per month for the

next 12 months rather than one lump sum of $1,100 at the end of the year. What is the

interest on the loan? What's the timeframe we're looking at again? Twelve. What is the

interest rate? What are we putting the interest rate? Question mark, that's what we're

solving right now. Present value. What is that? What's the loan that's being made today,

from Lorraine's perspective? It's minus $1,000. She's lending out $1,000, so she's losing

access to that $1,000. The present value is 1000 and we show that it's a negative with a

down arrow. Just put 1000 here. What are the payments in this situation? $91 per month.

So, the way that we show that, you show up arrow, it's a series of up arrows and we'll just

put 91 right here. Now what is the future value of this deal? We got $1,100, we got zero.

It's zero because at the end of that 91-month payment, think about it. You get a 30-year

mortgage at the end of that mortgage, once you've made your last payment, it's done,

balance is done. So that means there's no balloon payment, there's nothing special you got

to do. That's it. So, it's zero in this situation. So just put mark that with a zero right there.

Now we go down the line, we're trying to figure out the N, the number of months. So, we

got 12 months right here, put 12 right there. Interest rate, question mark. So, we put a

question mark right here in there. Present value we know is $1,000 right here, $1,000

negative. So, I'm just going to write negative, 1000 negative. Payments, $91 per month.

Future value, zero. So now that we have those numbers in there, so now we just go to the

calculator, enter those numbers in. So, since people were asking about this before, we

have all these numbers entered in here, I can just go and reenter the numbers without

clearing. It doesn't matter if I just want to say okay, I'm just going to keep... add a new

number here. There I can do that. Or I can press shift and C and then I'll erase the whole

thing. So, what we'll do is here we'll just hit shift C and now I'm cleared out. For N, what

do I put into N? 12. Interest rate? Was it? We don't know. That's what we're solving for.

We're trying to figure out what the interest rate is. So, we're just going to skip it. What's

the present value?

Alright. Just a quick question before we get the answer. What is $91 per month times 12?

How much does that come out too? [Inaudible] How much? All right. $1,092. If you take

$91 per month times 12 is $1,092. So, what was the last... How much was Lorraine

getting from Michael before? In the deal before was $1,100, right? This time she's getting

a $1,092. So, she's getting $8 less than she did before. So, remember that. Just keep that

in mind. What are the payments she's receiving here? $91 per month and putting 91 there.

Future value is how much? Zero. Interest rate? 16.5%.

What was the last interest rate sheet she got? What was it? 9.57%. But remember in the

last example she made $8 more. She got $1,100 total. This one over the year she's only

getting $1,092. Does anybody else find that weird? She's almost getting double her

interest rate even though she's getting less money over the same period of time. So why is

that? More money up front...

Can you get him a microphone?



Buddy Broome: [00:42:27.25] Correct. So, she's getting her money back faster. This example is

something that people gloss over a lot, but as investors, you guys have to understand this

back in front, this is time value of money. This is time value of money to the core

because in this situation she is getting $91 per month. In the last situation she's getting

$1,100 in one lump sum, but she's got to wait 12 months to get it. So, in this situation,

she's getting the $91 per month right away. So, she, she lends her money in January and

in February she's getting $91, march she's getting $91, in June she's getting… excuse me,

April, she's getting $91. What time value of money ultimately means is the faster you get

back money the better because then you have the ability to reinvest that money again to

get that working. And so that's what the calculator says. The calculator sees that she's

getting that $91 back faster. And so, since she's getting the $91, it's assuming that she's

kicking that $91 out the door and earning interest on that $91 again, and then the next

month the $91 she gets, it assumes she kicks it out the door again and she's earning

interest on that $91 as well until the 12 months are up. Does everybody understand that

concept? That is a super, super important concept that if you forget everything I say

today, just remember that. All right? Any questions?

So, to sum that I would say sometimes the velocity of money is more important than the

size of the money. A lot of times that's the truth. So, the velocity of money is more

important than the size of the money.

Okay. Turn to page 12. Anybody that was here listening to Gerald speak last night on

notes? This is notes. And just to sort of sum up, again, if you, if you're going to be buying

notes, or selling notes or doing Lonnie Deals or anything like that, you really have to

understand the financial calculator because if not you're going into an ax fight without an

ax. So really in this example, really sums it up, I think.

Okay. Denise is being offered a cash flow stream of $200 a month for the next 20 years.

Denise wants her money to work at 8%, how much would she be willing to pay for that

cash flow stream today? Okay, so how do I write this out? What's the timeframe that I'm

looking at? 20 years. How many months is 20 years? 240. What is the interest rate?

[Pause] For some reason this is not registering. So, it's 8%. So, put 8% up in this box up

here. Finally, not tricked by an inanimate object yet today. So, I'm very excited. Uh, so

we put 8% up here. What is the present value? We don't know. We don't know what the

present value is. Will the present value be positive or negative? Negative. Why will it be

negative? Because she has to put the money out. We're trying to figure out how much she

would pay; how much Denise would pay in cash money today to get the right... to get a

cash flow stream of $200 per month for the next 20 years. So, we're going to put a down

arrow and a question mark. Now we put a down arrow with a question mark. What are

the payments? $200 a month. Are they positive or negative? Positive. Because that's what

she's going to get. Denise is giving up cash today to get the right to get a cash flow

stream. So, this is buying a note. It's exactly what Gerald was talking about yesterday

where you buy a cash flow stream, you buy the right to receive that cash in the future.


Alright? So, the way we do it, we have a bunch of up arrows, 200, and what is the future

value? Zero.

[00:47:58.27] So I apologize. I don't know why this is so delayed, oh there we go. And so

now that we have that, now we go and enter this information into the calculator table. So,

the calculator table, we got 240 is the timeframe. So, we're just going to put 240 into the

N. And then interest rate. What is the interest rate? 8. So we just see 8 up here. We're

going to put 8 down here. We have the present value. What is the present value here?

[Inaudible] Question mark. We don't know. We don't know what the present value is.

That is what we are trying to solve because this is exactly that situation where Gerald gets

presented a note of whatever it is, $200 a month for the next 20, 20 years. He's trying to

figure out how much he's going to pay cash money today if he wants his money to work

at 8%. So, we're going to put a question mark right here. And now... man this thing is

delayed... and now payments... payments are how much? 200. And now future value,

what is that?

I apologize. Hold on one sec. Let me see if I can get this thing figured out because it's just

super slow.

All right. Future value is zero. And so now that we entered that information, now we're

just going to go and enter the information up here into the calculator, so we can just go

left to right. What's the timeframe again? 240. And by the way if you make a mistake or

you put putting the wrong number, just hit this back arrow and that'll just erase it. So, I

just put in and it just brings it back to zero. So, put 240 into the N. Interest rate, what is

the interest rate? 8. What's the present value? We don't know. We're going to solve that.

So, we're just going to skip it. We're just going to leave a thousand in there for the time

being. But we're just going to skip it. What are the payments? 200. What's the future

value? Zero. So now that we have those four, all we have to do is solve for present value.

Did everybody get this number?

Okay. How would the lay person, if the lay person was presented a cash flow stream of

$200 a month for the next 20 years, how would that person value that cash flow stream?

[Inaudible] Well, what do you think? How would the person who is just basic four

function math, if someone comes up to you on the street and says, listen, I got a payment

stream of $200 a month, I'm receiving $200 a month for the next 20, for the next 240

months. How much is that worth today in today's dollars? What do you think the lay

person would do?


Buddy Broome: [00:51:33.04] Okay, can you get the microphone up to him? No problem.


Buddy Broome: [00:51:44.18] So did everybody understand that? Typically, when people look at that,

they say "Oh, you just add all the numbers together and that's a total value of that note."

All right. What is the major, major, major flaw with that rationale [Inaudible] Alright,


don't understand the time value of money. That was the answer. So, the time value of

money means that a payment today, a dollar today is more valuable than a dollar

tomorrow and is much more valuable than a dollar 20 years from now. So, you cannot go

and simply add $200 per month together and treat the, the, the $200 per month this

month, the same as a $200 that you're going to receive in 20 years because they are

completely different $200. They have nothing to do with it. And if you don't believe me,

I'll, I'll make you an offer. Who here, who here in the room will be willing to lend me a

thousand dollars today and I promise, and I'll give you collateral, I'll pay you back a

thousand dollars in 50 years. [Laughter]

Everybody laughs at that right? There's got to be somebody please. Anyway, so why is

that? Because that thousand dollars today is much more valuable than a thousand dollars

in 50 years. And the reason it's more valuable is because I can take that thousand dollars

and invest it and earn interest on that thousand dollars. I give you back the thousand

dollars in 30 years and 50 years, I kept all that interest so that means you get none of that

interest that I'm going to get to keep because you rented me your thousand dollars. Okay?

So that's really the thing to understand is, this time value of money when you're looking

at cashflow streams, every month is different. The month from January to February, those

are totally different dollar values. So, you must understand that concept to really... when

you're, when you're looking at investing in notes... is if you're not, like I said, it's, it's

going to be... You're not going to get the maximum deal that you're able to get. And

sometimes you might actually get, get beat up a little bit. Are there any follow up

questions from that?

Alright, cool. Turn to the next page. Edward finds a mortgage note that does not have any

monthly payments. But instead, has one balloon payment of $100,000 in 15 years.

Edward wants any money that he invested to earn interest at a rate of 12 percent. How

much is Edward willing to pay to get a 12 percent return? Alright, once again, $100,000

in 15 years. What's the lay person say that that note is worth today? $100,000. The

average person, if you guys went out in the hotel lobby, and started asking, I got

$100,000 due 15 years. How much is that worth today? They'd say $100,000 because

they just, there's no other, there's no other number they come up with. That's it. So that's

what it says. So, we're going to find out what it, what it is today. So, we're going to go,

what's the timeframe we're dealing with here? 180 months. Fifteen years. 180 months. So,

I'm going to put 180 here. What's the interest rate? 12, put 12 up here. What's the present

value? We don't know. That's what we're trying to figure out how much Edward will pay

to get that money. So, what do we know it is? Is it positive or negative? Negative. We

know it's going to be negative because he's going to lose access to that cash during that

timeframe. So just put a question mark there. What's the payments? Zero payments. So,

we're just going to mark off payments with time just with ticks just to fill up the time.

What's the future value? 100,000. So, in 15 years he's going to get one lump sum

payment of 100,000.

Okay? So now that we've got that, we're just going to go down the line and enter this in.

N is 180. What do I put into the interest rate? 12. Present value. What do I put? I put

nothing. So, I'm just going to skip it. I'll put a question mark. Payments? What do I put?

Zero. Future value? 100,000. Alright, so now that we've got that, go to the calculator and


I just cleared out just for simplicity here. So now I'll go left to right, to clear shift C and

then we have, we'll go left to right, I'll put 180 into the N. What do I put in the interest

rate? 12. What do I put in present value? Skip it. I just skip it. I'll leave it blank. What do

I put in payments? Zero. What do I put in future value? 100,000.

Yup. Alright. So, who would have thought this? Who would have thought if I said "Hey,

I'll give you $100,000 in 15 years" that would, if you're looking to get your money to

work at 12 percent interest, you got to buy that lump sum payment at $16,000 today.

Alright. Like I said, if you went out to the, to the person out in the lobby and said "Hey,

what do you think about this? You've got $100,000 coming to you, I'll give you a

$16,000." How many people would believe that that's the number? Not very many. So,

it's really, really important to understand the calculator and how time value of money

works because that $100,000 in 15 years is actually worth $16,000 today day if you want

your money to work at 12 percent interest. Got that? All right, cool.

Turn to page 15. Okay. Do we have any hard money lenders in the crowd here? We have

somebody. All right, we got, we got one back. Are there people that deal with hard

money lenders? I'm sure in this crowd. So. Alright. So, we've got Mark is a hard money

lender. He lends a $150,000 with interest only payments for the next six months at 12

percent interest. How much are the monthly payments that Mark receives every month?

Alright. So how do we, how do we do this here? What's the timeframe I'm looking at?

Six. What's the interest rate? 12. What's present value? Minus $150,000. What are the

payments? We don't know. So, so we're looking at it from, from Mark's perspective, we'll

just put arrows here showing that he's receiving payments. What's feature value?

$150,000 because it's an interest only loan. He's giving out his principle. $150,000, he's is

getting the full $150,000 back at the end of the term of the loan. So. So there's no

amortization. That means there's no pay down to principal during the term of this loan.

Whatever he lends is what he receives back. Okay?

So, I'm just going to go down the line. Six. I'm going to put that into the N. Interest rate.

Put that in 12. Present value is negative 150,000. Payments. What are the payments?

That's what we're solving for. So, we're just going to put a question mark. What's the

future value? $150,000. All right, so we got that. So now I'm going to go left to right and

just enter the information here. Uh, N, what I put into N? Six. What's the interest rate?

What do I put in? 12. Present value? $150,000 negative. Payments, I'm going to skip.

Future value, what do I put? $150,000. Now that I know these four, I can solve for the

fifth.1500.

So that means if you're getting a hard money loan or you're doing a hard money interest

only loan or any interest only loan, the principal and the future value will be equal. The

present value and future value will be equal. This is literally the epitome of renting

money. It's the exact same as renting money because you're getting.... This is your rent.

You're literally paying $1,500 in rent just to have the use of that $150,000. All right, now

here's a question. What happens if we make this loan longer? Let's say we make it a six

month... Let's say let's make it a 24-month loan, 24 months, a long loan. How does that

affect the monthly payments? Doesn't do anything to the monthly payment. So, this is,

and this is a big difference, we're going to talk a little bit later about amortizing loans.


When you have an amortizing loan, which means at the end of the loan is going to be

zero. You're paying down in interest in principle throughout the wet... When you stretch

that, the, that loan or make it shorter, it's going to affect the monthly payments. But for

interest only loan, there was no effect on monthly payments, uh, regardless of length. So,

this could be for a thousand years and the monthly payments will still be $1,500. That'll

be not the case if you're doing a fully amortized loan.

Alright. So, let's get to the fun stuff. Turn to page 18 please. So, we've got a couple of

quotes written, talking about seller financing here and investing and a quote here at the

top from Warren Buffet "I never attempt to make money in the stock market. I borrow on

the assumption that they could close the market the next day and not reopen it for 10

years." I think that quote is awesome, and I think that quote is directly related to if you're

investing in real estate. What would be the equivalent of that? How would you look at

that? Appreciation? Correct. So, most people like during the crash, myself included, we

looked at the property and said, I don't care about cash flow because the market's going

up. I'm going to sell it and become a millionaire right away. That's it. When if you look at

this property, I think that if you're going to buy a rental property, you should never look

at it saying the market is going up, I'm just going to get in there, I'll hold it for a year and

I'm going to sell it. And you might, you might be able to do it, but you always have to

look at it is what happens if the market doesn't do what I hope it does. If the market

crashes, can I hold onto this property? And if you buy a property that has a break even or

positive cashflow, you don't even care what the market does because you can hold onto

that property because your tenant is making the payments for that property. There's no

financial, additional financial stress and for you in that situation. So that's what I think

when I think of that quote is directly applicable to rental properties. You had to buy a

property that the tenant can make the payments, make the payments, make all the repairs

their money from that, that rental income will take care of everything for you. But if you,

if you go in and saying "Hey, I'm buying and I'm just going to, hold it for a year", that

market, you don't know what's going to happen with that market in the year. So, you have

to look at that situation as can I hold onto this thing for 10 years and not sweat it?

Um, and then we have a quote from the late and great Yogi Bear "A nickel ain't worth a

dime anymore." If anybody understood time value of money. It was Yogi bear.

[Laughter]

Okay, page 18. Charlie is a gardener. Charlie is a gardener and notices a fourplex in a

neighborhood where he works with a For Rent sign out front, calls that number on the

For-Rent sign and gets in touch with the owner. The owner is Sally. Sally tells Charlie

that the property is vacant. Charlie asked more questions and he learns to the property is a

fourplex where each unit rents for $1,250 a month or since it's a fourplex $5,000 total in

gross rents. Assuming that the property is expense ratio of 50 percent, 50 percent of the

gross rents goes taxes, insurance, repairs, utilities, vacancies, etc. What is the monthly net

income of the fourplex?

What's that answer? 2,500. Okay. And I think this really important, if you're new to

investing, you'll see this a lot. This one I see a lot on the MLS where they'll say, you've

got to buy this property and it rents for $1,400 and your mortgage is going to be $1,200.


You're going to be cash loan $200 a month. It's going to be awesome. That is not the

case. You have expenses. Those properties have expenses right out the gate. So even if

that property, that means that that property is free and clear, you bought a free and clear,

you're probably only going to net about $2,500 per month even though the gross rent is

$5,000. You pay taxes, you got to pay insurance, you got to pay repairs, you've got to pay

for evictions, you got to pay for craziness that happens at your property, like a, I don't

even want to get into it, but, but, but, but believe me, we've had, I've had some really,

really good stories and these gray hairs did not come here by, by accident. They came

here from the stories of managing properties. And so, you have to make sure that you

have, um, you have adequate cashflow to cover all those expenses plus the mortgage.

Okay? So that's another lesson. If you're looking to buy your first property, make sure

that your account [for] a good expense ratio going into it. And I think 50 percent,

especially for multifamily is a pretty good ratio. Single families, maybe you can go a

little bit less because you're going to have a little bit less turnover and a little bit less wear

and tear, but I think it's important to go and sit down and look at each property

individually and figure it out. Fifty percent is a good, you know, original litmus test and

then you can get, dig a little bit deeper into the expense of the property because you have

to account for those expenses.

Next page. Charlie inquires as to whether Sally would ever be interested in selling the

fourplex. She says she is, but she was hesitant in the past because she does not want to

have to pay capital gains tax and Sally purchased the property 40 years ago and it's fully

depreciated. Assume for this example, that tax basis is $50,000. Additionally, Sally has

younger children and she wants to leave them an inheritance and believes that the

monthly cash flow from the rental property for her kids is safer than a lump sum of cash.

And she's afraid that her kids might spend a lump sum of cash too fast.

[01:09:05.29] Um, I just recently read a wall street journal article that said "of

inheritances, 70 percent are blown by the kids. Ninety percent are completely blown by

the grandchildren." So that means it's the old saying was a shirt sleeves to shirt sleeves in

three generations, by the time, if you have a million dollars, nine out of 10 people and

you're giving that to your kids, nine out of 10 will be gone by the time the grandkids, by

the time the grandkids pass away that million dollars, it won't be bigger and be gone. So

that's a real situation. That's something that you do encounter with people that have rental

property and they're looking to carryback mortgages. As a result, Charlie and Sally

discuss Charlie buying the property and Sally carrying back a seller finance note that will

be secure to the property. By carrying back a mortgage, Sally is able to defer capital gains

tax and leave her kids a monthly income stream rather than a lump sum of money.

Charlie and Sally agree that Charlie will buy the property for $550,000. If the property

were on the MLS, it will be sold for $450,000. All right? So, he's buying it for $100,000

over market price. Charlie will give Sally a down payment for $25,000 and Sally will

carry the balance of $525,000 at four percent for 40 years or 480 months fully amortize.

All right? So, does everybody understand what's going on right now? Anybody not

understand the situation?


Alright, what are Charlie's monthly payments to Sally? How do we calculate this? What's

the timeframe we're looking at? 480 months. What's the interest rate? Four percent. She's

going to carry the mortgage at four percent. So that means when, anybody who's new to

this, carrying back a mortgage means that she is in essence going to be taking payments

for her equity. So she becomes, instead of Wells Fargo coming in and putting a mortgage

on the property, she's going to be the one that has, she's going to be Wells Fargo, in

essence, she's going to have a note and deed of trust and know it's going to be made out

to her and she's going to have a deed of trust. So that means if Charlie defaults, she's

going to be able to foreclose and take the property back and resell to somebody else. But

her position will be... she's going to sell it and she's going to take the exact position as

Wells Fargo or any other mortgage lender. She's going to be in that position and she's no

longer going to own it. She's going to be the lien holder.

So, what is the present value of this from Charlie's perspective? What is it? [Inaudible]

No. 525. We're looking at the mortgage note. So, the mortgage note is 525. And from

Charlie's perspective, is that positive or negative? He owes that 525. We got negative...

going once, going twice. Positive. Positive. Yes. So, it's an important way to look at debt.

Typically, when people, when we do cash flow diagrams will say "Oh, it's a debt that I

owe. So, it's negative." The truth is its positive because you've received the benefit of that

cash. So, if you have a $10,000 credit card, yeah, you're going to look at it as a negative,

but in truth on the cashflow diagram is going to be a positive. You're making payments

on it, but you've received the benefit of that cash already. Okay. So, Charlie is getting the

benefit of the cash because now he's getting title to that property. He's going to be the

owner of that property because he's getting the benefit of $525,000 cash. So, I put this

with an up arrow. I'll put 525.

Okay. All right and so what are the monthly payments? We don't know. That's what we're

solving for so we're just going to put from Charlie's perspective, we'll just put a bunch of

down arrows here and we don't know. That's a question mark. And what do we put at

future value? Zero. Why do I put zero? [Inaudible] Because it's a fully amortized loan.

That means every payment is making payments towards the principal and interest. So, by

the time the 40 years passes, it's done. There's no more interest. No more payments to be

made. No balance. Charlie owns it. Free and clear.

All right, so now I'm just going to go down the line. Solving, put N is 480 months.

Interest rate is four percent, so I'll put that right here. Present value is 525,000. Payments.

We don't know. That's a question mark. So, we'll just put this right here. And future value

is zero, so it's fully amortizing. Alright, so now we have that. We're just going to enter,

go down the line. We got N is 480. What do I put in the interest rate? 4. What I put into

present value? Do I put that as positive or negative? Positive. Because Charlie's receiving

the benefit of that 525,000. Payments. What do I put? Blank. I just skipped payments

because that's what we're solving for. Future value? Zero, it's fully amortizing. So, we got

that, hit payments. Tada. $2,194.18. So, this is the principle and interest that Charlie will

have to pay every month to Sally on her seller finance note that she's carrying for him.

We got a question? Right here.



Buddy Broome: [01:15:17.19] Of course. Yeah. You have to know the point of view, correct. Correct. So

right now, we're looking at Charlie's point of view because it's negative. If we did this

with Sally's point of view, it's a good question because you've got to know the point of

view. If we do this from Sally's perspective, this would just be a complete, just opposite.

It'd be 525,000 negative and she will be receiving $2,194.18. So, the numbers would be

the same, just the plus and negative would be different. That'd be the only difference.

Okay? Question?


Buddy Broome: [01:16:00.23] We're getting into it. Right now, we're just taking these baby steps. So right

now we're just taking... We just want to figure out what the monthly payments are on the

mortgage. We're going to get to what the down payment was. Really, with regards to just

this part, the only difference is he bought it for $550,000. So, we just knocked that

$25,000 off the note. So, the note is now only $525,000.

Alright. So, assuming a 50 percent expense ratio, how much does Charlie net in his

pocket after paying expenses and the mortgage per month? [Inaudible] Okay, that's right.

So, it's $305.82. It's just simple four function math. So, we say $5,000, that's the gross

rent minus expenses, we're assuming 50 percent expense ratio, $2,500 minus the monthly

payments are $2,194.18. Tada. So that is the amount of cash that Charlie will get in his

pocket every month. $305.82.

Yes. We've got a question. [Inaudible] What'd you get? What'd you get on the payment?

[Inaudible] Maybe clear out the calculator. Do the three-finger salute. And, and just start

it from the top. That might be it. There might be something that got reprogrammed in

there incorrectly. Yeah.

So that's a good question. If there's an issue and you're like, something is absolutely

going wrong. Just three finger salute. And just start fresh. Question?


Buddy Broome: [01:18:47.00] That's a good question. And I think... Who here knows Jimmy Napier?

Knows of Jimmy Napier? Okay. Jimmy Napier, I definitely recommend any material that

he puts out. His big thing is ask. Just ask. I mean you got to figure out... if we've met with

sellers, we just asked them questions. I write a blog. I write pretty regularly, like weekly

or biweekly blog and one of my last blog things about three weeks ago, I put... A show

that I used to like as a kid a lot was this show The Joy of Painting by Bob Ross. Anybody

watched that as a kid? And so, I would love it. It was this guy Bob Ross. He had this very

soft friendly voice and he would start off with this blank canvas and he'd write, and he

searched for all this stuff and you'd be like, what is he doing? And by the end of the thing

he would have this amazing landscape and so I said "Well, what we're doing as investors

is we had to figure out... we have to paint the picture." When you go talk to most people,

they're saying, what's the price? What's the price? Give me the price and that's. That is so


far down on the priority questions I believe. You had to figure out why does that person

want to sell? What is their problem that you're trying to fix? We're not just here to give

them cash. Peter Fortunato was a guy who talks about a lot about this and he's says our

job as investors is to get them... They're selling because there are point A. They think that

if they sell, they'll get to point B. They want to get to point B. So, you got to figure out a

way to get there.

And so typically when people sell, they're just saying, okay, this is just going to be an all

cash deal and that's the only way they know to get there. And a lot of times it doesn't

even fix the problem. And I'm going to show you why in this situation, an all-cash deal

would be disastrous for this person because, and part of it we're going through and the

questions were saying, listen, we have to... With the latest situation, she has tax

consequences. It's going to be heavy, heavy tax hit, which we're going to get into. She has

kids that she's concerned, hey, I don't want to leave them an inheritance. We talked about

inheritance getting blown. She wants to make sure that the money stays around, that it's

cashflow for the kids so they don't go and waste it on jet skis and rottweilers. Even

though I loved rottweilers, but you can get too many. I'm going to be trouble. So, I think

that that's the question is, is ask, ask, ask, figure out their problem and figure out a way to

solve it. And like I said, Bob Ross, you want to figure out for your pretty little cloud or a

friendly little bush or something.

Yep Question?


Buddy Broome: [01:21:34.24] Correct. That's a good point there. You can just figure out what you

ultimately want in net cash flow at the end of the day and say, okay, this is where I'm

working at it. I mean, I think the most important thing, 305 is awesome. I think the most

important thing for this whole equation, another thing, if you're going to, forget

everything I say. And just remember one thing, this can't be negative. This number has to

be positive [Laughter]. If this number is negative, you’re going to be... You might make

it, you might be okay, and you might be able to sell it and so on and so forth, but it's

going to be painful. You might experience more pain and have more problems than you

like. So, you can go in and say, listen, this is the number I'm going for. And I think that

having that expense ratio understanding, okay, where's my break-even number? You

know if you went in there, I don't think Charlie would be that bummed to get a fourplex

for $25,000 ... does break even cash flow. So, you just say okay, I'm going to start at

$2,500 is my number. I can't. My payments can't go above that. If they do, there's going

to be trouble. Does that help? Any other questions? Bueller? Bueller? Right.

Thank god. somebody laughed. I love this. I'm like, throw out this material. I'm like, it's

gold. And everyone's like nah it's not that good.


Buddy Broome: [01:23:16.19] You can do it any way you want. I mean [Inaudible] [Crosstalk] you could


say, listen, you can negotiate however you want. And say, listen, let's just have it. We're

going to have the note's going to be sleeping.


Buddy Broome: [01:23:33.18] Yeah. No, no, no, no. So, what I'm saying is you can do it however you

want and just say, listen, we're just going to have the note. It's going to be sleeping and

doesn't start kicking in until six months from now.


Buddy Broome: [01:23:53.23] You lose six months. Yeah. So, what's your initial? That's an uneven cash

flow and I do not... We'll talk a little bit, but I don't want to start getting into that now

because it's early in the morning, what are we 10:30 and I don't want to see anybody's

head to explode at this early in the morning. It would be an uneven cash flow and the

function on this calculator is really good at being able to calculate that much better than

anything else, but it'll be an uneven cash flow.


Buddy Broome: [01:24:35.21] That's sort of going into the initial 50 percent expense ratio. Space rent is

going to be different. I mean, there's ultimately, I imagine you're going to do a Lonnie

Deal and sell it so you're not going to be holding it. [Inaudible] Oh for a mobile home?

Yeah, I mean like I said, I think 50 percent is like a good starting point, but you got to sit

down and really do the numbers and owning mobile homes, I mean like your expense

ratio is going to be high. So, you go expense ratio is probably 50 percent, it’s going to be

over 50 percent including space rent. So, you got to add the space right in there. And the

mobile homes, mobile homes are terrible for as a rental because like your expense ratio is

going to be high because they just, they don't hold together that well. [Inaudible]

[Crosstalk] With an HOA.


Buddy Broome: [01:25:30.25] I mean like everything that you got to look at, like I said, 50 percent is a

good starting point. Maybe like it depends on how big the HOA is. Like what do they

take care of, you know? So I think that I would say 50 percent start there and then if it

doesn't even pay, if it passes the litmus test, then get into the real numbers going down

the road, you know, and say okay, let's, let's down and really do what are the real ratios

here and everything like that and what's the HOA. So. Yeah. But you do have to account

for. That's a good question.


Buddy Broome: [01:26:23.27] I say for sure. I mean even off market stuff... I mean I don't know, am I

crazy? Like I see a lot like I go talk to people and they want.... I'm dealing with a guy

right now who's got a property is probably worth like one, one, two. He's convinced it's

two and a half. [Inaudible] No they're not crazy. They value it at what they value it at. So,


who the heck knows what, what the value is? I mean who's to say it's whatever they want

it to be. I mean like that deal I told you about that was we bought for $250,000 over

market. The initial price that they wanted was $150,000 over that, so it was $400,000

over market and we gave it. Our initial offer was that. Our initial offer was $400,000 over

market. Eventually they brought it down because they saw that the numbers weren't

going to work for it at that higher price for what they wanted. But I mean, yeah, of

course, like, you know, and I've also had it where the guy says I'll give it to you for

$100,000 under market, which is great. Like I take them too. But I mean there are plenty

of times when there'll be the person... Yeah as long as the numbers pencil out.

That's a good point by Annie. I remember when I was in eighth grade, my English

teacher had this little sign up front of her room that said the only stupid question is the

one that's not asked. And so, I was like, all right, I'm going for it. And she got really

angry with me because she would always say my questions were really stupid, but it was

the only teacher I ever had that ever said that. And she was an ironically enough, the only

teacher that ever had that was stupid question. Someone that thought as. And so, um, so

yeah. But the truth is the question you have is definitely not stupid because I've probably

asked it before or someone else in the room is thinking the same thing. So, trying to find

a balance of answering questions and not keep getting by having anybody get lost at the

same time and get through the material because there is a lot of material we're going

through.

Anything major from the last part that you want to get cleared up before we get moving?

Yes. [Pause] Clear buttons. These clear buttons are like the epitome of... driving us hay

wall. So, we hit the shift C. That'll clear out all the numbers, shift and C. And then if you

just want to clear up that number that you're dealing, just do C a lot. And if you're just

writing the number, just hit the back arrow and that'll sort of, that's like a delete button

just to go back space. Yes?


Buddy Broome: [01:28:58.21] It happens. That happens, it's a good point. This happens I think only on

tablets or iPad. I won't happen. You, you can't get it on your phone. I mean you can get

the, the cashflow diagram but it won't happen. What? Samsung? Oh right. Weird. Yeah. I

don't know why. [Inaudible] What's that? This button. Let me see. [Background Noise]

[Crosstalk]

Okay, there we go. So right here. Shows that I know. So yeah. So, thank you. Thank

goodness we have people that actually understand technology here. So that should do it.

So, everybody sees up here, we got a cash flow diagram that sort of spells out what we

did on whatever's written down here is going to come up here. So, you can see the

physical movement of the money. To find it you got to hit these three buttons, the three

lines, the three lines right here. And then down here, cashflow diagram.

Audience: [01:30:22.07] [Inaudible] [Crosstalk]

Buddy Broome: [01:30:47.05] Oh, okay. So that'll make a pdf. So that'll make a pdf of the cashflow


diagram. It shows up on there? Okay. So. And you hit the CFJ cashflows you're saying?

[Inaudible] What's that? [Inaudible] That's a pdf. Yeah. Okay. So, the share button allows

you to see a pdf that you can email to somebody else pull up and it shows the full

amortization schedule on a deal.

Alright, we're on page 20 still. This is sort of gets into what we're talking about a little bit

earlier. What is Charlie's cash ROI? ROI is return on investment with the $25,000 that he

invested over the 40 years. Right? Everybody. So that's what we're trying to figure out

because really, I think that when you look at investing for all the things we talk about, all

the numbers we talk about, blah blah, blah. There's three questions I think the investing

really sums up to. How much money is coming out of my pocket? How much money is

coming back into my pocket? And how fast is it coming back in my pocket? Those are

really like everything can be boiled down I believe into those three questions and then I

think there's a fourth question which is what happens if everything goes wrong? If

everything goes, how bad will I be hurt? So, I think that those or you know, if you're

going to do an investment, that's really what it's summing up to. And so, the cash on cash

ROI, the cash on cash, return on investment really answers those questions is hey, how

much is Charlie coming out of pocket? How much is coming back and how fast is it

coming back to him? So that's what we're trying to solve here.

So, we know it's over forty years. What is the timeframe that we are looking at here?

Forty years. It's how many months? 480. So we're just going to put this bracket here 480.

What's the interest rate? We don't know. That's what we're solving for the ROI, the return

on investment. We're solving to figure that out we need to know the interest rate. The

interest rate tells us what his return on investment is. So, ROI is another word for interest

rate. What is the present value? 25,000 positive or negative? Negative. Because the

money is coming out of Charlie's pocket. He's having to cut a check for $25,000 to get

the right to get this property. What are the monthly payments? What was it? No, no

payments. What's Charlie... $305.82. It's not the 2194. We don't care what his cash on

cash return is. So, we're saying Charlie's putting down a down payment of $25,000, he's

getting back $305.82. So that's really what matters when you're figuring the ROI is how

much is coming out, how much is coming back. All right, so the monthly payments he's

receiving back are $305.82. And what's the future value? Zero. Because at the end he gets

nothing once... at the end of 40 years, there's no major payout he's getting, he's still going

to be able to collect rent, knock on wood after 40 years. But we're just saying, hey, in this

timeframe we're trying to figure out what his cash on cash return is. So, we got to have a

finite start and end. So just put a zero here. Alright, so now what do I put into the end?

480. Interest rate? Question mark, we do not know. Present value? $25,000 negative.

Payments? $305.82. Future value? Zero.

All right, so now I'm just going to go down the line and enter those numbers in. So, I'm

going to enter 480, press N. Hit 25,000 negative. I hit the plus minus toggle, negative.

Net present value. And I put $305.82. That's his monthly payments he's receiving. Now

I'm going to hit payments. Future value is zero because there's no major payout at the

end. And then once we know these four, we simply hit interest rate. 14.64 percent. Does

everybody understand right now what is happening here with this is that Charlie has

bought a property that if you said to the to the, like I said, the lay person, I said "Listen, I


got a deal for you. The property's worth on the MLS is $450,000, but I'll sell it to you for

$550,000." Most people would say "Is that a good deal or bad deal?" Bad. It's terrible.

Like you're a knucklehead. So, but in this deal, Charlie, even though his net worth is

dropped, the market literally in essence crashed for Charlie the second he closed escrow.

His net worth dropped $100,000 because he owns an asset on the MLS, he could sell for

450,000 and he bought it for 550,000. So, this is the debt that he owes his network drop

by 100,000 right there. Okay? But his cash on cash return... Who here would be happy

with the 14 percent cash on cash return in a rental property. Right? That's pretty good. So,

his cash on cash return is 14 percent, which is pretty good even though his, his net worth

dropped. So, it's important to just keep those concepts separate, that the price, the net

worth, all these things are different, different measures and cash on cash I think is, is

probably the most important thing. That's really what you got to look at first and then go

to everything else. Any questions? Alright.

Okay. turn to the next page. Now here, here we get into the fun part. So, page 21. Alright.

So now here comes the fun part. After the sale... Well here's a question. Is anybody here

sitting, just show of hands, anybody wondered why Sally would do such a preposterous

deal? Why would she do this when she could just get cashed out? Aaron? Oh, you got a

question? [Laughter]


Buddy Broome: [01:38:24.20] When you go and talk to the average person though about seller financing,

everybody's like, hey cash just cash me out. Like just give me the money. That's all I

want. Right? And so most people, when they see that, they think, oh, it seller financing is

not as good a deal with that person. [What] Aaron says, is exactly right. You have to

know that, like we talked about earlier with Bob Ross, you have the note, you're painting

the picture. So, you got to know the whole situation. Here's, she has kids, she doesn't

want to leave him a lump of cash, she's got tax issues, got a whole bunch of stuff. So,

we're going to show how the situation would play out if she just sold it straight up for

cash and then you guys can decide, hey, which one's better for her in the end.


Buddy Broome: [01:39:12.04] Correct. That's a very good point. So that's what we're going to talk about

right here is the capital gains tax. I'm an attorney so I always have to get the disclaimer.

I'm definitely not a tax expert by far, far from it. So, I'm not a CPA or anything like that.

So please, like before relying on any of this stuff, we're going to talk about some taxes

and it's just like a basic rudimentary thing just so you can get like an idea of what's going

on, but you definitely have to get like the full thing. I mean, I think it's advisable to sit

with your tax professional to get the full numbers here. So, after the sale, Sally's neighbor

tells Sally that it was not a wise financial decision to sell to Charlie and carry back a 40-

year mortgage, right? We always get that person who's got no skin in the game, who

comes in is like, ah, what a mistake this was. Oh my gosh, I can't believe you did this.

Why didn't you talk to me? I would have taken care of this thing for you. Sally's neighbor

informs Sally that she could have listed her property and gotten all the cash in one lump

sum, right? Cash is king, right? Rather than having to wait for payments over the next 40


years. Sally listed the property with an agent, sold it for $450,000. Remember, that's the

MLS market price cash at closing, how much would she have netted from the sale? For

this example, assume the 15 percent capital gains, 10 percent state capital gains and we're

going to say six percent commission as well. Okay. So, we've got all this stuff that's got

to go off the top before the deal happens.

So, let's figure this out. So now it's just going to be four function math. Mind you, there's

also depreciation recapture, which is an added thing. We're not going to get into it just to

keep it simple numbers. So, like I said, don't rely on this. This sort of will give you a

broad understanding, but I think the number's actually will be, if you really got into the

nitty gritty bits are not counting the ACA payment at 3.8 percent. None of those

payments, no depreciation recapture. This is just straight capital gains we're doing. So, it

would be worse, it would be higher taxes for her if we considered all those factors. So,

like I said, talk to a professional on this. So, what would be the price if she sold it

450,000. She sold in the MLS, she gets $450,000, then she's got to pay 6 percent in

realtor commissions. Right? So, what's the six percent realtor commissions?

$27,000. So, we're just going to subtract 27,000 here, tada. So now she's got $423,000.

All right? So, $423,000 is what she's netted after commissions. So, most people look at

this when you're dealing with sellers, they say, why would I sell to you? Blah blah. Like

if I just sell it, I'm going to make... they think that that's what they're going to net in their

pocket. Is that true? Absolutely not. They will not see that $423,000 in their pocket for

most situations, especially in this situation, especially when you start considering if

there's a tax situation so that she, in this situation she will not see that money in her

pocket. So, we’ve got the $423,000. What is 15 percent of that? [Pause] So we have

$423,000. [Background noise] [Crosstalk] That's right. We got the tax basis. So, what is

the tax basis? We talked about that earlier. $50,000. So that means everything is over

$50,000 will be taxed. Okay. So, everything, if she sold the property for $50,000 and

netted $50,000 in her pocket she'd have to pay no tax in that situation, no capital gains.

But in this situation... everything above that she has to pay an extra capital gain on.

Okay. So, in this situation we know the floor is $50,000. She's netted $423,000 from the

sale. So, you've got $423,000, minus the floor, $50,000 the basis. So that's $373,000 is

her gain.

So, this we're just trying to figure out what is her gain going to be? How much of this

going to get taxed? So, this is what she is now netted in her pocket according to the

government based on the situation we drew up. All right? This is going to be, her capital

gains will be $373,000. Now we have to figure out what the 15 percent federal and 10

percent state will be of $373,000. Does everybody understand where we are? I don't want

to lose anybody here.


Buddy Broome: [01:45:08.21] Remember we started off... she got $450,000. Alright that was her sales

price. The commissions were six percent. So that was $27,000. Six percent commissions.

All right, so we have 27,000 and now we have to figure out... and that equals $423,000.

Alright. So that's where she is right now. Remember? And so, we're trying to figure.


Okay, how much in taxes is she going to have to pay on that $423,000? Alright, well we

knew that the basis is $50,000.

Audience: [01:45:51.10] What's the basis mean?

Buddy Broome: [01:45:53.00] The basis means the floor. The floor is where the government will look at

and say listen, anything above that amount is going to be considered a capital gain. And

so, in this situation, let's just keep it simple. Let's say she bought it 40 years ago for

$50,000. Alright she bought it for $50,000. Like I said, it's a very simplistic, we're not

considering depreciation or anything. She bought it at $50,000, so anything above

$50,000 is considered her gains. So, we're going to say $50,000 is the basis. That's the

floor. Anything above 50 is what her gains are going to be. And so, we got $423,000 and

so to figure out the basis... Excuse me to figure out the gains I subtract $50,000 from the

$423,000, which equals $373,000.


Buddy Broome: [01:46:56.09] No, no. This is all like a case by case scenario. You've got to like to sit

down and actually... like there's no way I'm going to know what her basis is really. I

mean because you can't even figure it out because you've got to look at, okay, what's the

depreciation? You've got to sit down with a CPA to really figure it out. I'm just trying to

make like a very rudimentary thing just for the class. And so, $373,000 is what her gain

is. So now, you have to take this $373,000 and we say there's 15 percent federal capital

gain, 10 percent state. So, what's 373 times 15 percent. What's that? $55,950. That year

she's going to have to pay, of that 423,000, she's got to pay $55,950 to the government.

Now let's say $373,000 times 10 percent. What's that? $37,300. So that means she's got to

pay this much. You just got to pay this much in addition to the commissions. Okay. So

now let's just go back. So, remember these numbers. $55,950, $37,300. Start it from the

top, we've got $450,000 was the sale price. She sold it. She paid commissions of $27,000

to the realtor. Then she pays $55,950 to the federal government. Then in this situation she

pays $37,300 to the state. Giving her a grand total of $329,750.

So, when she listed that property, she listed on the MLS, the number that she sees is

$450,000. This is what she actually ends up in her bank account. All right? Because she's

got to pay [the] realtor. She's got to pay taxes on it. So, she ends up with $329,750. So,

um, so that's what she ends up with. So, does everybody understand where we are right

now? Everybody with me, right? Any questions?

All right. So, she's got $329,000 to work with. So now Sally's neighbor, the meddlesome

neighbor says "Hey, listen, I got a friend who's a stockbroker and you could have

reinvested the money made a better return than four percent, the four percent that you're

getting from Charlie's terrible. I remember four percent. I can, I can. I got my friend, he'll

take care of you." In fact, the stockbroker says now getting returns of up to six percent.

The seller had listed it with a neighbor and sold the property on the MLS. How much

would she get in monthly payments if she invested in net proceeds of the sale at six

percent over the next 40 years? How do we draw this out here? What's the timeframe

we're looking at? 480 months. What's the interest rate? Oh, wait. And we got a question.



Buddy Broome: [01:51:04.15] Yeah, that's a good question. The $373,000 and I apologize, I'm trying to

like make it as simple as possible, but it's rather not. Not my strong suit I guess, but. So,

the $373,000, that's the gain. That's just the gain. We had to add that $50,000 basis on

there because that's what she brings in into her pocket at the end of the day. So, we're just

using that $373,000 to figure out the capital gains. Once we know it, we can get it out of

the way. We don't even worry about it. Understand? Okay. Are there any more questions

on that?

So now what we're saying is she's going to have net in her pocket, $329,000. So, the

neighbor said "Hey, you could have done much better than four percent. As a matter of

fact, you could have gotten six percent." All right, so we're going to figure out. Okay,

let's see if he's right. Let's see. Let's see what happens if you do six percent. So, we say

480 is a timeframe. What's the interest rate? Six. What's the present value? Negative

$329,750? And payments. What are those? [Background noise] The question is, the

question was why was that negative? Why is 329 negative? Because she's investing and

she's earning interest on that money. She loses access to that money. She can't use that

$329,000 to buy groceries or pay for a car, pay for gas. While it's earning interest, she

loses access to that money. So, it's got to be treated as a negative because it's out of her

pocket. So, what are the payments for her? It's unknown, but we know they're positive

because they're coming to her. What's future value? We don't know... well I take that

back. In this situation we can make it zero. You can make an interest only, it doesn't

matter, but we'll do it at zero right now just for argument's sake.

And so now we'll just go down the line, we'll put 480 into the N. What do I put in the into

the box? Six. What's the present value? Negative $329,000. Payments? Question mark.

And future value will be zero. Question.


Buddy Broome: [01:53:58.22] We can do $327,950. We'll do it first in zero and then we'll do it at

$327,950. [Pause] So that's a good question. So we want to see... he was just collecting

interest it should be less [Inaudible] be able to get that lump sum at the end of the

timeframe. So, let's just say 480... Going to enter six into the interest rate. Present value is

$329,750 negative. Payments? We don't know. Future value will be zero. So now we

know these four we just solve for the fifth. $1,814. How much is she getting with Charlie

again? $2,194. Now granted with Charlie, she will have to pay capital gains tax. She's got

to pay it. But here's, here's the thing, and this ties into what we've been talking about

earlier. She only pays it on the tax on the principal that she realizes. So, as we've seen the

amortization schedules... How does an amortization schedule play out? Do you pay

mostly on an amortized loan, do you pay mostly principal in the beginning or do you pay

interest in the beginning? Interest, mostly all interest. Very, very little principle. So, in

that situation she's going to be paying capital gains just on the small amount of principal

that she's receiving each month. So, she's in essence deferring... she will have to pay that


full, you know, say $90,000 in capital gains and she has to pay, but she's going to defer it

over 40 years and most of it is going to be back loaded.

So, in the first situation she's got to pay up $80,000 right out the get go. Or let me put it

this way, would you rather pay $80,000 today? Cash money? Or would you rather pay,

let's say since she's getting a higher purchase price, $90,000 in capital gains or $100,000

spread out over 40 years with most payments coming at the end spread out. Right? Why?

Time value of money. So, her payments that she's got to make up the day are much

smaller compared to what the other one she's got to pay that cash money right now it's

gone and not only that, the money that she's got to give, pay the government in capital

gains that's deferred. She earns interest on that money before she gives it. So, she's

earning interest on that money. Then she pays it. The other one, she's got to pay that

money upfront and she gets no interest out of that money. Does that make sense? That's a

really, really important situations. When you talk to sellers, you want to be able to

understand that. And most importantly when you're dealing with seller financing, because

most people don't understand it. They look, and they get really freaked out and they think

it's some sort of scam or so on and so forth. When you're dealing with somebody, you

have to understand that it's in their best interest to do this. It’s good for them. Like you're

not over here, you know, ripping anybody off. You are getting... You're giving them a

good deal. All right? So, it's really important that they understand this all right? And that

you understand you're giving you a good deal to these people.

Let's say it's interest only. You see what happened? What's that? What's that? Okay.

Yeah, sorry. For some reason a little bit slower than normal. So, $1,648.74. So, the

payments dropped by $200 almost from what it would been. And so, remember, she's like

living off this money here. If she's got bills to pay, she can't just drop them. She's got to

make sure that she's got enough money to pay those bills.

\All right, so now let's be real here. Turn to the next page, page 22. So, what are her

monthly payments? If the best interest rate that she can find is 2.5 percent interest in the

CD, that's going to be the more likely situation. Her getting the 6 percent is not nearly as

likely. It's more likely going to be the 2.5 percent. All right? So, let's just say we'll just

change it in. We'll put in 2.5 percent interest rate. Here are the monthly payments now.

[Pause] That's for interest only. So, if we fully amortize it, it's $1,087.44, How much is

she getting from, what’s his name, from Charlie? What's that? $2,194. So, this is double

her best-case scenario. She's at 2.5 percent interest. Her best-case scenario is making a

thousand dollars a month. All right? That's the best.

Now let's say the CD is paying 1 percent. So, she was making $2,194, now it's down to

$833. Alright. Does anybody have any questions? Okay, go.

Audience: [02:01:29.18] So whenever we're trying to compare [Inaudible]

Buddy Broome: [02:01:37.15] Most of the time the person knows, or can you can sort of sit there and say,

okay, what did you sell it for? Say the person bought it 40 years ago for $50,000 bucks,

the basis is going to be around that. It's going to be a little bit less because they

depreciated it, so they got paid the depreciation recapture - that’s going to be $50,000,


$40,000 somewhere in that ballpark. So, you can sit there and do like a ballpark number

with them, you know, but it's always, hey, if they want to go talk to their CPA, like I

think that's a good advice. Say hey, listen, sit down with your CPA because the CPA...

they meet you on the street, they don't necessarily know you or trust you. Their CPA

they're going to trust. And so yeah, go talk to your CPA, see what the numbers are and

um, and go from there.

Any other questions?

So, we've got a lot of meddlesome neighbors here. Page 23. After the purchase of the

property, Charlie's neighbor informs Charlie that he was foolish to purchase the property

from Sally at a price above the market. Right? He bought it $150,000 over market price.

The neighbor tells Charlie that he has seen almost identical properties with the same

gross rent and same expenses for sale for $450,000. To purchase one of these properties

all Charlie would need is to put 25 percent down, $112,500, and get a bank mortgage at

four and a half percent of 30 years. What would Charlie's monthly payments to the bank

be in that scenario? Everybody understand where we are?

What's the timeframe here? 360, a 30-year mortgage. What's the interest rate? Four and a

half. What's the present value? He's buying for $450,000 so we've got to subtract

$112,000 the down payment. So, it's $337,500. Is that positive or negative for him?

Positive because even though got to carry a loan, he's got the advantage and is getting the

money. Payments? Are they positive or negative? Negative because they are coming out

of his pocket every month. What's the future value? Zero. Now what are we entering?

We'll just go down the line in the box. 360 into the N. Interest rate is how much? 4.5.

Present value? $337,500. Payments? We don't know. Future value is zero. Now I'm

stuck... Does anybody know how to get out of this? [Laughter] What's that? [Inaudible]

One, two, three.

Oh no, no, no. Now, now my thing is just slow. Like that's not what's on my, on my

screen. Hold on. Yeah. But how do I get out? The guy who is teaching the financial

calculator class does not know how to get rid of that screen, but. All right. So, I have no

idea what that screen is. I've never used that screen in my life. So, I don't know. We're

stuck.

We'll just enter the numbers into here. What do we enter into the N? 360. Ah, there we

go. All right, now we're talking. Interest rate? 4.5. Present value? [Inaudible] Payments

we're going to skip. Future value? Zero. $1,710.06. So how much does he net in his

pocket at the end of every month? Charlie? Go to the next page.

So, if he decided to go and do that deal where he buys it traditionally, puts $112,000

down and get a mortgage for whatever, uh, the remaining balance of four and a half

percent for 30 years, traditional loan. How much is he going to net in his pocket at the

end of the day? How do we figure that out? So, we take the gross rent, remember 5,000

minus 50 percent expenses, so minus $2,500. Minus what? $1,710.06. So, 5,000 minus...

$789.94.


Audience: [02:08:35.26] Do it again?

Buddy Broome: [02:08:37.04] So we've got 5,000 gross rent, minus expenses of 2,500, minus 1,710.94,

which is the new mortgage payment on his property. Oh, my bad. My apologies. Okay, so

$789.94 is what nets in his pocket. All right. Does everybody understand? We're going to

look at this from like 30,000 feet. We're just looking at, hey, what is he going to have?

He does the traditional route. What's he going to have in his pocket at the end of every

month? If he goes a traditional route, he's going to have a higher amount. Remember the

other deal, he would have less. He'd have $305 in his pocket every month. This one's

almost doubled, this went up by $400 a month is what he'd get into his pocket. But how,

what's the, what's the problem here? Why can't we just say, oh, this is a better deal

because he's got more cash flow. He had to come out with way more money. So, he had

to come out with $112,500 minus, as compared to $25,000. Right? And so which one is

way easier to come up with? $25,000. It's much easier to come up with. Then on top of

that, we're trying to figure out, hey, what's his return on investment here? Return on

investment if he came up with $25,000 was 14 percent return. So, we're trying to get

everything to an apples to apples comparison because everything's off. We got different

down payments, we have different monthly payments. So, we're trying to figure, okay,

what's the interest rate for the two?

So, let's figure out the interest rate. What is his cash on cash return over the next 30

years? So, we're going to put 360 here. What's the interest rate? Question mark. What's

the present value? [Inaudible] What's the payments? [Pause] $789. And what's the future

value? Zero. Alright, so now we'll just go down the line. We got 360 N, interest rate, put

a question mark there. Present value is negative $112,500 because that's what he put it

brought out of pocket. So, we're trying to figure out what's his return on investment on

$112,500. And now $789.84. And future value is how much? Zero. Right?

So now we'll just go down the line. We'll put 360 to the N. Interest rate we are going to

skip because that's what we're solving for. Present value is $112,500. Payments, $789.84.

Future value. So now we've entered four. 7.54 is the interest rate. About half right? So,

7.54 is the interest rate. So, it's half of what the other one was. What's the problem of

making this straight up comparison? How long do we compare the other? How long was

the other loan? Forty years. So, this is only 30 years. So now he's going to get, he's going

to get the ability of 10 years of free cashflow. We won't have any mortgage. So, a lot of

times you'll hear that when people say, "Oh well it's going to be great because I want to

pay that mortgage so fast, I'm just going to get all this cash flow is going to be awesome."

Right?

So, I was talking during the break. In my class I do this example where I spell out how to

compare a 15 versus 30-year mortgage and the argument you always hear is like, oh well

you pay so much less than interest and you pay off the mortgage a lot faster. And I would

say that that's the problem. You pay off the mortgage a lot faster so as a result your

returns go down and you lose a lot of cash flow because you're paying that cash faster

today than you would otherwise.



Buddy Broome: [02:13:56.00] ... if he owns it free and clear. Yeah. So, you're right, like if he sold it, you

know, just say he sold it and the property didn't depreciate, that would be what he has.

But we're saying cash flow. We're assuming that after 30 years it's just going to keep,

keep receiving rents and not sell it. Like he owns it on paper. So, but what we're talking

about, hey, what's actual cash money coming in and going out. Does that make sense?

So now, the problem is we have the figure for 40 years. What question? Question. Yes?


Buddy Broome: [02:14:46.24] For sure [Crosstalk]. I mean definitely but I mean like even closing costs

are, what it's going to be like, what a thousand, 2000. I mean it's not going to affect the

total outcome, you know, that much. You know if I got to come up with $20,000 in

closing costs, there's going to be a bigger deal. Most likely to be a couple thousand tops.

So, I might factor it in, I might not. I don't think it makes like a big enough difference one

way or the other, but you can do it. Whatever you prefer. But this one is just for

simplicity sake. [Inaudible] Yeah, absolutely. Well, here’s the thing, in my class, my all-

day class, I do a rehab example because seller financing works for flips too. So, you have

to figure out, okay, how does that work? How do you work as a work with hard money?

How do you figure out your ROI if you're doing cash? If the seller's carrying back a

mortgage and a flip, like how do you figure out your ROI in all those situations. So yeah,

so it's the same. Same with the flip,

Okay. So now remember what I said was, we're trying to make this apples to apples in the

40-year mortgages, the life of the loan is 40 years. So, in this situation, and you're saying,

well, he's going to get the property paid off so he's going to get 10 years of free cash

flow. So how do we factor that in? So, this is what makes this calculator so awesome. I

actually made the app [Inaudible] awesome as opposed to the regular calculator. If you

just go and hit CFJ that will give you this thing which is an uneven cash flow diagram.

Alright, I know I promised I wasn't going to talk about this because I didn't want heads to

explode, but we're going to do it anyway. So, this will show... In the beginning let's just

say, 112,500 negative. That's the initial down payment. So that's the initial payment that

he has to come out of pocket. Then we know the amount that he's going to make. Was it

seven? What's the amount again? [Inaudible] He's got to make that amount for 360

months. Okay. He's going to make that amount for 360 months and then he's going to

make how much... We're assuming just rents aren't going to increase. I know that's not

realistic, but we're trying to just make it simple here.

So, you'll see up here there's a plus sign right here and that'll give you the extra rows. All

right, so now that we have that, I put 2,500 because remember he's got, this is very

simplistic, 5,000 gross rent minus $2,500 in expenses equals $2,500 because he won't

have any mortgage at this point. I understand that in 30 years his rent's going to be higher

things like that, but we're just trying to keep this very, very basic. Yeah?



Buddy Broome: [02:18:03.29] What we put in this number here? What number do we put in this spot?

And so, I explained why we put it in there. We put 2,500 in there for that reason. Okay.

So, we got, then we got 120 is the N is the number of times. So, so to get a big, big

picture here, the amount is 112,500. That's the initial down payment. He makes cash

money every month, $789.94 for 360 months. All right. Then once that's paid off, once

the mortgage is completely paid off, he makes $2,500 for 120 months. And so now once

we want to solve that, all we have to do is hit this button right here. IRR, and that will tell

us what the return is. There's an IRR in the bottom corner right here. [Crosstalk] Let me

see what the phone is [Crosstalk] Oh yeah, it's up on the button on the top. On the top

right when you hit... Sorry if nobody can see this. The top right. There's these three dots

you're going to hit. And then IRR, share, pdf view, cashflow diagram or delete, reorder

cashflows will come up and then simply hit the IRR and that'll tell you. [Crosstalk] What

did you put? Did you put 112,500 negative in the first part?

Audience: [02:20:25.08] Is there a reason why you chose 120 there under number of times?

Buddy Broome: [02:20:29.23] Yeah because in the other example remember it was a 40-year mortgage.

So, we're trying to compare apples to apples here. So, this example, the mortgage only

lasts for 30 years, so we're saying okay, he's still going to get 2500 once he pays off the

mortgage because the argument a lot of people will say is I want a shorter mortgage

because at the end of this time period I'm going to have free cash flow and it's going to be

great.

Audience: [02:20:51.18] Take it out to 40 years to balance it out?

Buddy Broome: [02:20:53.10] Take it out to 40 years to balance it out. Anybody still having technical

difficulty with this? [Background noise] [Crosstalk] And for the iPad I think it's different

too. The bigger picture that we're looking at here is even after he pays off the mortgage,

he's got the 10 years of free cash flow. His cash on cash return on investment is 8.9

percent. So, 8.93 percent. And his other example remember, over 40 years, his return on

investment was 14 percent. Okay. So, I think it's really, really the point is once again,

time value of money. Time value of money does not care that in 30 years you're going to

have a property paid off and you're going to have $2,500 a month for 120 months. Does

not care, does not value this cashflow stream very high because you got to wait 30 years

to get there, so it's just not that valuable. You're looking at what is it worth today? That's

really what everything comes down to is what's time value of money? Say time value of

money likes that other example, the 40-year mortgage because you're paying less money

up front even though you're getting less, and you've got to pay a mortgage the whole 40

years... you're able to recoup your initial capital faster and you're going to get interest on

that money faster than in than in this situation. It's going to take you much longer to

recoup your initial investment and then the extra interest is just not that relevant because

you're going to have to wait a longer time to earn interest on this money.

Okay. Any questions?



Buddy Broome: [02:23:21.06] Correct. Correct. That's exactly right. So, it will go up in reality, but you

have... if you're going to account for that $2,500 going to be higher. You got to do it for

everything, all the monthly payments because we had to go back to the prior example and

make sure okay, we got to increment the rent up because that's going to go up too. These

payments are going to be higher and you got to do it literally like every, you know, every

12 months or so. It's going to keep going up, understand? Okay. So, have I lost

everybody yet? Good. Does anybody have any questions? Anything that's not clear yet?

Yeah?


Buddy Broome: [02:24:11.07] I can. I can show this. So, well first of all you can see it on here, but I'll

draw it out too. So, you see right here is $112,000 negative. Then we go 360 payments of

789. Then we go 120 payments of $2,500 until the end.


Buddy Broome: [02:24:34.10] What's that?

Audience: [02:24:37.04] Something wrong on page 25? [Inaudible]

[Background noise] [Crosstalk]

Buddy Broome: [02:25:22.06] Correct. Yes. So, we just use the CFJ function and that directs, that just

tells you, hey, enter these numbers. This app is so much better than the... I mean if I was

showing you how to do uneven cash flow on this, I would have taken like the full three

hours. It's brutal. So, this is much better.

Okay. So now turn to page 26. So, what's the problem a lot of people have when you're

buying property, right? Not enough cash. So even though Charlie's got a deal here, it's

only $25,000... You might not have the $25,000, right? I mean it's easy to sit here. Yeah.

Some people got $25,000 and some people would say I don't even have $25,000 put

together to make that deal happen. I could see a good deal, but I can't. I don't have the

$25,000 to put as a down payment. How do you get around that?

So, page 26, Charlie contemplates the idea of having a partner on the deal to front the

down payment of $25,000. Charlie contacts Michael who has been looking for a place to

invest his money but does not have the time to find deals or manage properties. Charlie

asked Michael if he would be interested in partnering on the deal. Michael says that he

would be, and they discuss the idea of Michael fronting the down payment of $25,000. In

that situation, Charlie would take care of all the management and they would split the

cashflow and any appreciation 50 50. If the two do this partnership, what would it be

Michaels cash on cash return on investment? What would it be Charlie's cash on cash

return on investment?


So first let's figure out Michael's cash on cash return. [Pause] What's the timeframe if

we're looking for Michael first? What's the timeframe... Oh, we had a question real

quick?


Buddy Broome: [02:27:46.07] Don’t even worry about loans at this point right now. We've already done

all the work with loans. All we're looking at is what's the money is coming into his

pocket. How much? What's that?


Buddy Broome: [02:28:00.03] No, no. I know. I know. So, we're going to the original deal, what's in the

actual deal. The deal that Michael did, he actually did a deal with 480. The other one was

a hypothetical. So, I apologize for not being clear on that. So, we're on the 480 a month

deal. What's the net cash flow? How much did Michael make on that? $305.82. So,

what's 50 percent of that? What's that divided by two? $152.91. All right, so we're trying

to figure out. Charlie will get $152.91 and his partner Michael get $152.91. So, we're

going to do this thing. It's going to be over 40 years. The interest rate... We're trying to

figure out from Michael, he's the outside investor. Michael just doesn't want to deal with

toilets. Doesn't want to do any of this stuff. He's got a good job and wants I get involved

in investing but doesn't have the time or energy to deal with this stuff. So, 480 is the

month, were trying to figure out what his return on investment is. Just put a question

mark. What is the present value? How much is Michael fronting in this deal? How much

is he putting into the deal? $25,000, right? How much is he getting in payments?

$152.91. And what's the future value? Zero. There's no big payout at the end. Alright, so

now we'll just go down the line. Enter the numbers in... 480 into the N. [Inaudible]

question mark. The interest rate... present value is how much? $25,000 negative.

Payments are how much? [Inaudible] What's the future value is? Zero. All right?

Okay, so we'll just go down the line. We'll put 480 into N, interest rate we're going to

skip, present value is $25,000. Payment is what? [Inaudible] 6.86%. So, it's not bad a deal

like in this situation, what's Charlie's return on investment? Infinite. Why is it infinite?

He's got no money in the deal. So now all of a sudden Charlie [got] this deal, got no

money into it. And the guy Michael is getting a good deal, he doesn't have to deal with,

like I said, he doesn't have time to go deal with toilets or deal with tenants. All of a

sudden, he's saying, okay, I want to get involved in investing. This is an easy way to do

it. I just got the$ 25,000, I'll front the money but I'm not doing any work. I'm doing

nothing. I'm strictly a money person and I get half the deal. Charlie puts a no money,

does all the work. So, they split it 50 50. And mind you, this can be done any way you

want.

I've done deals with like this with nothing down. You can do it as well with borrowing if

you get the deal good enough. You say "Yeah. How about you lend me the $25,000 down

and I'll pay you five percent, six percent, seven percent or whatever it is" and you can just

make those payments and you just make that from the net cashflow. And so there you've

got literally a property with nothing down that... Well. Here's the question, does anybody


find these deals to be risky? For anybody? For the buyer? What's the risk? What is it? I

mean like on a scale of one to 10, like you find it risky, what do you find? Okay.


Buddy Broome: [02:32:24.09] So that's a good point. Like you can't sit there, your job is to make this

property performs. You have got to make sure that that tenant is in there right away and

that tenant is performing. So that is definitely like part of the equation. Who here has

taken, who is it, David Tilney's got a class, a really good class, on property management

and Mike [Cantu] have a class. So, I would definitely look those classes up if property

management is the issue because you have to account for that. Yes?


Buddy Broome: [02:32:57.15] Well, partnerships, I was saying backing up before partnership disputes,

let's say Michael did the deal... Charlie, did the deal on his own [and] he fronted his own

$25,000. Do you look at that deal as being a terribly risky deal? No. He doesn't have a lot

of money in it so it's not... And I mean if everything goes wrong, you know, he gives the

property back. That's if everything goes wrong. So yeah, the partnership disputes, that's

another, another issue altogether. So, our goal in these deals... there's sort of an idea

going around the world or country or if you have an investment that returns more than

two percent, it's automatically risky. Oh my gosh, it's four percent. There's got to be

something risky about that one. And if you tell somebody who doesn't know anything

about investing, you got to deal that returns up to seven percent return, most people

would say that is either risky, are illegal, like it's one of the two. And in this deal, I mean

in my view, this is not like ivory tower. Deals that I've done followed this formula, like

these are like very close to deals that I've done, and I have friends who had done deals

like this as well. So, this is not hypothetical land where I'm like, oh, this would be really

great, you guys should try this. This is real stuff. So, these are real numbers I've taken

from my deals. And I'm saying like these deals, when I look at it that, that risk, he's

getting a 14 percent return cash on cash, which is a good deal. It's still not a terribly, it's

still, it's a good deal where he's got a lot of upside and if everything goes wrong, he gets

no appreciation at the end of 40 years, he just gets a free and clear property. That's the

worst. And the best part is he did not pay for it. His tenant, he structured so his tenant

paid for it. That's really important when you're doing these deals, you cannot get negative

cash flowing properties where you're hemorrhaging cash. You have to make it so that

your tenant makes those payments for you. Any other questions?


Buddy Broome: [02:35:35.18] Correct. So, we're just looking at, it's just strictly a money. Like, I mean

he's got to invest his time. He's got to put in sweat equity into the deal. But, but he doesn't

have any cash. He's got time. He'll trade that off. The other guy's got cash but doesn't

have, doesn't have time. So, they just got a flip flop on that. So, he does have to invest

something and any deal, I think everyone has to bring something to the table. You're

bringing money or you're bringing expertise, you're bringing, you're bringing the time,

the ability to do the work. Something has to be done and it can't just be, hey, I just want


to be part of the deal. What are you bringing? I don’t know. Yeah. I'm here. Like you got

to bring something. Everybody's got to bring something to the table to get paid.


Buddy Broome: [02:36:40.20] So what's the question? You're saying that the down payments are riskiest

money in this deal? Well it's the only money in this deal.


Buddy Broome: [02:36:56.10] For Charlie this is the safest deal period. But at the same time now he's

dealing with a partner, you know, sort of what was said earlier. Hey, what happens if they

have a partner dispute, one guy went to sell, one guy wants to keep, you know, [or] they

just don't get along or what have you. Sometimes too many chefs in the kitchen can, can

cause trouble. But strictly a financial standpoint, the deal, if someone else fronts the

down payment, literally Charlie's got a zero risk. I mean almost pretty close. But I mean

there's management or things like that. But yeah, that's the safest deal for Charlie,

correct? Yes?


Buddy Broome: [02:37:45.28] Correct. So, there are ways to get around doing the dispute... to anticipate

future problems. And another way that Charlie can do it, as he says, listen, I'm going to

just borrow the $25,000 and I'll pay this person, whoever I borrowed from $305 a month

for the next 10 years or whatever it is, work out a deal. Figure out what that person, the

private investor wants, which I've been able to do, and it works out. It's a good deal. So, I

think that that's another way to just sort of reverse engineer the deal to make it work.

Everybody clear as mud? Alright.

So next page is page 27. Charlie ultimately decided to do the deal alone without Michael.

Five years, 60 months, have passed since the original deal with Sally. What is the balance

loan on Sally? Okay, I'm just going to do this real quick just so we can get through it

because we're running short on time. And this one I just want to show a good concept to

you. Remember the original loan was 480 months. 4% interest. It was $525,000... Oh 4.5,

excuse me... 4 percent. So, we have $2,194 is the monthly payments. If you just want to

figure out what.... we want to figure out, hey, what's the balance going to be after five,

five years, 10 years, 15 years. You can do it one way. One easy way to do it. They say,

okay, we're at 480 months. What's 60 months had passed? We got five years from now,

60 months will pass, so put 420 into the N and then I just hit present value again. It's

$495,000. So, we just figured out, okay, that's what the balance is of this loan after five

years.

Page 28. At the five-year mark Sally wants to buy a new car, however she hates the idea

of taking out a car loan and she does not want to have any consumer debt and she does

not want a car loan on her credit report. So, she approaches Charlie and asked if he'd be

interested in advanced payments on the money that he owes her. He says that he would

be interested in and asked how much she would need. She says that she spoke with her


accountant about the tax consequences if Charlie advanced her $22,000, she'd be able to

purchase a new car. Charlie and Sally eventually agree that if Charlie advances 85% of

what he owes for the entire year, that Sally will credit him for the entire year of

payments. How much is Charlie advancing? Does everybody understand what's going on

here? Charlie is saying "Hey, I'm going to pay you a lump of cash in January and give me

a little bit of a discount on the total. I'll pay the full amount that I owe you, but a little bit

of a discount so that way you can go buy your car, Sally. And I'll get a little discount on

the payments."

So, what is the total amount that Charlie owes for the year? What's the monthly

payments? $94 times 12. So that's what he owes. $26,000 is if you lumped all those 12

payments together, it be $26,000. So, he says "Hey, how about instead of me paying you

$26,000, you give me a breather, take 15 percent off, I'll front you the cash that you

need." So, you say okay. Times 8.5. So, he's going to pay her $22,380 and he'll get credit

for the whole year. Everybody understand what's going on here? He pays her a lump sum

of cash up front [and] gets a little bit of a discount. She then gets the money that she

needs to go buy a car or what have you. And he gets, he doesn't have to make a payment

for the rest of the year because of this.

So, what is Charlie's return on investment? Let's say he's got the cash. What's his return

on investment for funding this cash? So just going to put it straight to the calculator, to

the cashflow diagram. Put 12 into the N. Interest rate we don't know what that is. Present

value is 22... 380.64 negative. The monthly payments he does not have... This is very

important here. Now he does not have to pay $2,194.18 so that's the benefit that he is

receiving. He is paying $22,380.64, and in return he does not have to make a monthly

payment of $2,194.18. Now I've done that. So, anyone that owes seller finance notes, this

is really, really important.

Who thinks that this is a good return on investment? It's better than a CD I think.

[Crosstalk] All right, so now let's say Charlie doesn't have...Yeah. Real quick.


Buddy Broome: [02:43:56.17] No, because remember he's getting a benefit. We have to look at it and we

go over this in my class a lot more. He's getting the benefit of not having to pay this

$2,194.18 now. He's getting credit. He's getting credited $2,194.18 every month now

because he paid this $23,000 up front. Alright, so now last thing. So now let's assume he

doesn't have the $22,380.64 to pay it? So, what does he do? He sees that a good deal, so

he goes and borrows it at 6%. What's his monthly payment now become? I know we're

rushing through this, but sorry, I just wanted to jam this one out. He borrows now the

$22,380 because he doesn't have that cash. He sees his deal. He borrows it at 6% interest

from a third-party borrower, a third-party lender. Now his monthly payments to that

lender have dropped [and] are becoming $1,926.22. What was his original payment?

$2,194, right? Just by this little deal that everybody got a benefit out of [it]. Sally got a

deal, she got her cash up front to buy the car and didn't have to take out a loan. The

lender gets to lend out his money at 6% and [Charlie] gets a deal by getting to drop his


payments by $250 or so a month. So that's the important thing is we're putting together

deals that work for work for everybody here.

In closing on the last page, page 31. We have a quick reference guide that you can look at

to figure out how to operate the calculator. Page 32. [Inaudible] Okay, I'll keep that in

mind. Thank you. And on page 32 I have a list of seminars and books that I find helpful.

And then finally this is my class, the all-day class. It's all the stuff we went over plus

other stuff and I saw it on my website for like $159. But here for this weekend I'll sell it

for $119. So, if you want it, you know, just come up and talk to me about it. And that is

it. Oh, one last thing. You can contact me on page 33. I'm going to send everybody an

email, if you attended the class, you get to a comprehensive guide to evaluating rental

properties, the introduction to seller finance book that I wrote. So, you get that for free in

your email over the next couple of days. And if you want to email me

https://www.buddybroome.com/ or you can visit my webpage at

https://www.buddybroome.com/ or to just read my blog. And I have a Facebook page,

Buddy Broome Invest, and follow me at twitter Buddy Broome. That's it. Thank you, you

very much for your time.

[End of Recorded Material]

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