Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses. --- Compound Interest is the concept of earning interest on interest. Albert Einstein called Compound Interest the "8th Wonder of the World". It is yet another fundamental concept that basically lays the foundation for all investments and financial instruments. Essentially, the difference between simple interest and compound interest is whether or not earned interest is capitalized, or reinvested and added to the original investment amount. Simple interest is not added to the original principal, So the amount of interest earned each period does not change throughout the life of the investment. Conversely, the concept of compounding interest means that each time we earn interest, those earnings are added to the principal. So that in future periods, we are earning interest not only on our principal, but we earn interest on our interest, too. And that is the fundamental concept of compounding interest, is that we earn interest on interest. COMPOUNDING INTERVALS Important to note is that we always express interest in what we call "nominal" terms, which is, we express interest in its annual interest rate. - 12% "per year". We don't always earn interest just once per year. So we might have a nominal rate of 12%, but we could have compounding just at one time at the end of each year, we could have in interest paid evenly every month so in the case of the 12% interest rate we would make 1% of interest per month, or even daily. There are really are no limits to how you can slice and dice that, except that the interest should be paid in regular intervals. Now of course, in the real estate world, and the vast majority of investments, we see monthly compounding, and going forward, we will primarily focus on compounding interest with monthly intervals; however, for this example, I want to show you how it works in each way. So if we have monthly compounding, and instead of getting paid interest once per year, we're getting 1/12 of our interest every month, that means throughout the year we are earning more interest along the way and the curve is a little bit steeper. In the case of monthly compounding, at the end of the first year we would have $1127 instead of $1120 because we're getting paid interest more often, and therefore earning interest on our interest earlier and more often. At the end of the second year, we would have $1270, and at the end of the third year we would have $1431. If we had all the interest up that we earned over that year, we would have earned $431. So you can see, with monthly compounding, we get a little bit more interest on our interest than we do with annual. Monthly compounding we would earn $4307, and with annual compounding we would earn $4049. So, as you can see, the more frequently you compound your interest, the more you earn. The effect of varying compounding intervals is what creates the difference between the ‘Nominal Rate’ and the ‘Effective Rate’, also known as the difference between the APR and the APY. APR stands for "Annual Percentage Rate." That's nominal rate that is quoted. But as you can see all of these earn 12%, but based on the compounding, they have different yields. That is the "Annual Percentage Yield”. If we go back and we look at the true yield, or true interest rate earned, also known as the "effective annual rate", we will see that the more often we compound, the higher the effective yield goes. When you have annual compounding your interest rate is always equal to the nominal rate. Your effective yield or annual percentage yield is the nominal rate because interest is being paid once per year. But doing the math on the other two we'll see $431 being a 12.6% annual yield, and with daily compounding it's 12.75%. So note how our quoted rate is 12% but the effective rate is 3/4 of a point higher. Now the same applies in a loan, so if you have, say, a 12% interest rate quoted on a loan on which you are the borrower and it's monthly compounding, your actual effective rate is 12.6%. So just to recap, we rarely see simple interest in the investment world. It's usually compound interest, and certainly in real estate, almost everything, including mortgage loans and rents, are usually done on a monthly basis. And so real estate loans typically use monthly compounding. The other thing that's important to take away from this is that the "nominal rate", or the named rate, also known as the APR is typically different than the "effective annual rate" or the Annual Percentage Yield. Those two things are different and the more that you understand how that impacts the interest rate the more effectively you can calculate your returns on investment. #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses and Continuing Education (CE). --- Frequently, my students will ask me about risk, or how risky a particular investment is, and also how to evaluate risk. And it can be a tricky one to understand, but the basic concept is risk is the amount of variation in results that you might get if you had invested in a similar investment many, many different times, would you get the exact same performance and the exact same desired return every time? Or would it be wildly variable? The more variable your potential results are, the more risk you're undertaking. Let's take a look at that graphically. The first thing is what we like to call the Band of Investments, and over here, if you have what is considered risk-free, or very low risk, such as treasury bills or other guaranteed investments, these are going to be considered low risk. And on the other end, you have high risk. In today's world, probably cryptocurrencies, junk-bonds, those would be the high risk types of investments, where you don't really know what's going to happen. And somewhere in the middle, we have real estate. Now let's take a look at how risk looks like when it's quantified. Imagine this graph represents your target results. In other words, zero would mean no variation from what you expected. It didn't perform more positively or more negatively than you expected. You got exactly the return that you wanted. Imagine you're investing in treasury bills. There's going to be no variation whatsoever. If you invested in t-bills a hundred times, you would see no variation in your results. Now, let's look at the other end on a higher risk investment. A higher risk investment, if you invested in that same thing multiple times, depending on when, or how, how much, what time of the market you were getting into that investment, you may see extremely positive results, you may see results kind of around what you expected. You could end up seeing highly negative results. The point is that risk means a greater standard deviation in your potential results. The lower the standard deviation, or if there's no standard deviation, that would be risk-free. If there is wide standard deviation in your potential results, that would be high risk. Risk comes with a premium. So anytime that you are looking at an investment, and you are taking on more risk, then you should be taking on more reward. That's why you will see target returns for things like treasury bills, which have virtually no risk, will be very low. They won't have a premium attached to them, but real estate, maybe lower-rated investments, or other investments, they're going to be more risky, and therefore, investors are going to demand that they get a premium reward for taking on more risk. This concept holds true throughout the world, it's not just related to t-bills, or real estate, or others, but it works for stocks, or development projects. Just know that risk and reward are correlated, and the higher the risk, the higher the return that an investor is going to require. #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses. --- APR is short for Annual Percentage Rate. (It is also known as the nominal rate, or the stated rate, of interest being charged on a loan or other financing.) APR is simply the quoted interest rate, and it is stated in annual terms such as 6% per year. The APR does not account for compounding intervals, discount points, or fees charged on a loan, and therefore doesn’t typically reflect that actual true cost of borrowing. APY is short for Annual Percentage Yield (sometimes referred to as the Effective Rate.) This represents the total yield to the lender and states the true total cost of funds after accounting for compounding, points, and fees. The APY reflects the true interest rate or cost of borrowing on a loan.

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses. --- Why Do Investors Use Leverage to Increase Returns and Build Greater Wealth? Leverage is the concept of using other people's money. Specifically, in real estate, leverage means using bank debt, thereby reducing the amount of capital or equity that the investor needs to come up with in order to do the acquisition. In this lesson, I'm going to show you three different examples of investing in the same $1,000,000 asset at an 8% cap rate - one with no leverage, one with 50% leverage, and one with 75% leverage, to highlight the impact on the investors returns. A good way to demonstrate this is to think of the cash that is generated by the property, in this case the $80,000 of NOI, as going into a bucket, and with the investor using no leverage, they get to keep all of the cash in the bucket. In this case, they invested $1,000,000 and are getting a cash return of $80,000 each year, for an 8% cash on cash return. So when we think about leverage, think about it as partnering with the bank, but at a lower cost. In this case, with the 50% leverage the investor is effectively partnering with the lender, but the lenders cost of funds is lower. The debt service on a $500,000 loan at 4.5% percent amortized over 30 years would be $30,000 per year. The $30,000 debt service divided by the $500,000 outlay in the form of a loan that the bank made equals a 6% cash return, or the lenders loan constant. Well, if the lenders portion is only $30,000 out of the $80,000, and then the remainder goes to the investor in the form of net cash flow. The investor keeps 50,000 of the 80,000. And since they invested 500,000 of their own cash, that yields a 10% cash on cash return. Now let's see what happens at 75% leverage. In this last example at 75% leverage, the lender is putting up $750,000 of the capital in the form of debt, and the investor puts up $250,000 in cash. At that same rate in terms 4.5% amortized over 30 years, the debt service on that $750,000 is $45,000 per year. Once again, that $45,000divided by the $750,000 is a 6% cash return to the lender, the lenders loan constant. That leaves $35,000 in the form of net cash flow left over for the investor. The investor only puts up, in this case, $250,000 of their own cash $35,000 divided by a $250,000 investment is a 14% cash-on-cash return. In this case, the investor is only putting up 1/4 of the amount of capital and they're making a significantly higher return on that capital. This is called positive leverage. And effectively, positive leverage occurs when the cap rate is greater than the loan constant. Now the loan constant can change, as you've seen in other lessons, depending on the interest rate and the amortization. But whenever you have a spread between the cap rate and the loan constant, where the cap rate is higher, it's typically optimal to increase leverage in order to increase the investors cash on cash return. #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses and Continuing Education (CE). --- Loan to Value (LTV) is a metric used by most lenders and the market to indicate on a percentage basis how much leverage or debt a property has on it relative to its total value. So here's the formula. It's pretty simple. Loan amount divided by the property value. Or in the case of an acquisition, it would just be the loan amount divided by the purchase price. FORMULAS: 1. LTV = Loan Amount / Value 2. CLTV = Total Amount of All Loans / Value Here's an example. Imagine you have a property with a value of $1 million and you're getting a loan for, say, 600,000. That would indicate that the loan divided by the property value is an LTV of 60%. Most lenders use LTV as a limit as to how much they will lend against a property when either buying or refinancing. So in investment real estate, typically we see maximum LTVs in the 70 to 80% range, which means that the total amount of the loan relative to the value cannot exceed 70, 75, 80% depending on what that lender's particular limit is. In addition to LTV that we calculate, there's also another term that's related to it called CLTV, which is the cumulative or combined loan to value. An example there would be taking this previous situation, imagine we have a $600,000 first mortgage and then another second mortgage for, say, $150,000. That would be a 15% LTV and the total combined CLTV would be 75%. $750,000 divided by $1 million, cumulative combined LTV of 75%. So LTV is very commonly used throughout the industry. It's important to note that lenders always have a max LTV that they will allow for leverage or debt to be placed on a property. So understanding that prior to acquisition can be very important. See also: Promissory Notes Adjustable Rate Mortgage #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses and Continuing Education (CE). --- Debt service coverage ratio determines the maximum loan payment based on a property's income, thereby also determining the maximum loan amount. DSCR FORMULAS: 1. Debt Service Coverage Ratio = NOI / Debt Service 2. Maximum Annual Debt Service = NOI / DSCR Example: $100,000 NOI / 1.25 DSCR = $80,000 Max Debt Service Debt Service Coverage Ratio - DSCR is an underwriting term used by lenders that effectively sets a minimum for the amount of net operating income available to cover the debt service. The ratio is often set right around 1.25, sometimes it's 1.2, sometimes it is 1.3, depends on the industry, the market, the market timing, and the product type. Debt Service Coverage Ratio tells us how much extra cushion we need to have in our net operating income over the debt service or the annual loan payments. In this case, a 1.25 debt service coverage ratio means that the NOI needs to be 125%, or 1.25 times the amount of the annual loan payments. Debt service coverage ratio sets a limit on how much risk the lender's going to take in terms of what they loan compared to the cash flow on the property. They don't want to put borrowers in a position where they have barely enough net income to cover the debt service or, even worse, not enough net income, so the debt service coverage ratio builds in the amount of cushion that they want. Lenders can adjust this for competitive reasons, or market reasons, but it typically is about .25 over the debt service amount. Let's take a look at an example. Imagine a property has $100,000 of net operating income. If we look at our formula, if 1.25 is our minimum ratio, that means that 1.25 equals 100,000 divided by X, would make X = 80,000. This makes $80,000 our maximum annual debt service. We take that number, we divide it by 12, and we know that our maximum monthly loan payment is going to be $6667. Understanding this, if the debt service coverage ratio dictates what our maximum loan payment can be then one thing that we need to recognize that our debt service amount that is allowed by the lender is capped at $6667. If interest rates go up the payment cannot go up beyond that, so if interest rates rise then the loan amount would have to go down in order for us to stay within the minimum required debt for service coverage ratio. Let's look at the numbers behind that. If we've already determined that our debt service coverage ratio is a minimum of 1.25, and we have $100,000 in net income then we know that X, which in this case would be $80,000, is our maximum debt service per year, or $6667 per month. Let me show you how this would be calculated in the face of changing interest rates, or perhaps a shorter amortization period. I'm going to lay this out the way we would lay it out in a financial calculator. If you haven't taken that lesson yet just check out our other videos on financial calculators, and calculating debt service, present value, et cetera. Let's imagine we're punching this into our financial calculator. In this example, I'm going to use a 30 year fixed loan with monthly payments at 6% fully amortizing. Here's what we've determined, we've determined that our maximum loan payment each month can only be $6667. If we have a 6% interest rate, and we're doing a 30 year, or 360 month, amortization we get a $1,112,000 maximum potential low. Typically, if our net operating income is fixed then our maximum loan payment is also fixed. If interest rates, in this case, should go up to 7% still amortized over 30 years, and knowing that our payment can't go up this would bring our maximum loan amount to $1 million. Similarly, if we still had a 7% interest rate, but our amortization was shortened to, say, 25 years, or 300 months, and our payments still capped at $6667 then our loan amount would be reduced even further to $943,000. Debt service coverage ratio, again, tells us what the percentage of the net operating income over the annual debt service needs to be. As we can see, annual debt service can be affected by both interest rates, and amortization. Most importantly, what we need to remember here is debt service coverage ratio lets us know how much extra net operating income we have over our loan payments. #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses and Continuing Education (CE). --- Cash on cash return is a real estate term related to cap rates, but accounts for leverage when determining an investor's actual return on investment. Cash on cash return takes into account the fact that investors typically use part down payment and part loan in order to buy a piece of real estate. So, cash on cash return really tells us the return on investment to the investor after accounting for leverage. Let's take a look at the formulas, and then we'll work through it and see how it's related. 1. Cash-on-Cash Return = Net Cash Flow / Down Payment 2. Net Cash Flow = Net Operating Income - Debt Service 3. Down Payment = Purchase Price - Loan Amount Cash on cash return, often expressed as C over C, is simply our net cash flow after debt service divided by the down payment. We arrive at this formula by extrapolating it from another formula. So let's take a look at it. It's actually our net operating income minus our debt service, over our value, or purchase price, minus our loan amount. Imagine here we have $80,000 of net operating income and we have $45,000 in annual debt service. That gives us $35,000 of net cash flow. If our purchase price was a million and we leveraged 750,000 of that, then our down payment would be 250,000. So our net cash flow divided by our down payment would equal approximately 14%. #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance

Subscribe or check out our full courses at http://evergreen.courses for more content and in-depth Finance & Real Estate training, including FREE mini-courses. --- This video explains the concepts of principal and interest, and discusses how they are calculated in the repayment of a loan. #evergreencapital #realestateinvesting #realestatetraining #realestatementoring #realestatefinance