What does the acronym CORE stand for? Why is it SO important to know your CORE as an investor? I’ll cover that in this episode.
My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out.
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So what does the acronym C O R E stand for and why is it so important to know your core as an investor? I'll cover that in this video. Welcome to Real Estate Investing with Kenny Wolf, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name's Kenny Wolfe, and I've been a real estate syndicator and investor for over 11 years now. And in this time I built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out Core. So what is it? Core is an acronym I created to track our cash flow on remaining equity for investors looking to create multiple passive income streams. The core acronym is huge. This mostly applies to real estate investors as we're able to leverage against our assets.
So when we buy a property and create value through improving the service or upgrade the physical building attributes or both, we're able to do a refinance on that asset. When we refinance the property, we're able to take out cash out of that property. The cash we pull out of an asset lowers the amount of initial investment that we have in the property with our own money. Core looks at what you initially invested in an investment, how much return of capital you've had, and then what cash flow over your remaining initial equity that asset is producing. So let's check out on an example. So say we buy a 200 unit multi-family property for 20 million, along with our investors. We put 25% down or 5 million, which covers our equity portion needed to acquire the asset and also fund our portion of the upgrades on the property. So say we upgrade 100 unit interiors and we're getting $150 a month rental premium on those units.
That means we've created roughly $180,000 more of net operating income each year. Divide that by a 5.5% cap rate, and we've created $3.27 million worth of value. Also, say during that time, we were able to push rents on the classic units and additional $50 a month that adds an additional $60,000 of net operating income per year. And again, using the 5.5% cap rate, we create an additional value of 1.09 million. Add those up and we get a total value gain of 4.36 million. That value gain is 87.2% gain on our initial equity. So what we can do next is go to our lender and do a cash out refinance and pull out some of that value gain. We typically get about 75% of our value gain on refinance proceeds, or in this case, we should be able to get about 3.2 million of an of our initial equity out of the property.
That's 65% of our initial equity out of the investment. So an investor of ours that invested in this example property with an initial investment of 100 k now only has $35,000 of their initial of equity in the property. They still own their percentage of the asset just with the majority of their money out of the deal. That's having your cake and eating it too. Now Cora takes it one step further. That property was cash flowing 8% annually to investors initially, and then we created an additional $240,000 of cash flow every single year. That added an additional 4.8% annualized cash flow to investors. So total cash flow of 12.8% per year on their initial investment, which is not bad, but we have some equity trapped in the property that is being lazy. We gotta wake it up and keep it moving. So we go to our lenders and let them know what great work we did on the property to drive up the value of the asset.
We do the refinance on that asset and pull out 65% of our initial equity on the property. Now our mortgage balance went up due to the refinance, so our monthly mortgage payment went up as well. So let's assume that the additional 3.2 million of loan that we have on the property now added an additional mortgage payment. Created an annual and increased annual cash outlay of $208,488. Before the increased rents on site, we were cash flowing 8% or 400 K a year. We did the upgrades on the interiors and pushed rents on all units that created another 240 K of cash flow. So now before the refinance, we are cash flowing $640,000 a year at the property. You take out the higher mortgage payment and now we are cash flowing 431 K a year at the property. You take that amount over our remaining initial equity in the asset and we get a core of 24.65%.
That is a fantastic number right there. So why is core so important? When we do these cash out refinances on our assets where we add a massive value, it's a home run for our investors. Our investors have the majority of their initial investment back to them in a tax-free manner. Their remaining equity is earning a very high core return. If you can have your investments making double digit cash flows, then you are on your way to creating awesome wealth. Not only that, but our investors are able to reinvest those refinance proceeds in a tax-free manner. So piece together multiple investments like this, and not only will your wealth really take off, but you'll also create some pretty amazing passive income streams at high annual cash flow yields. And just like it's written in the Richest Man in Babylon, you always want your investment dollars hard at work for you.
With the remaining initial equity invested in the property, it should also continue to create future value for you as you pay down the higher mortgage balance. And as rental rates continue to climb over the long term, that'll push the value of the property continually up. You could continue to do the cash out refinance strategy on the same building as well. So here at Wolf Investments, we have done that on a few properties. One of those we have owned for almost 12 years now, and we've done a refinance on that asset twice. We have over 500% of our investors money back to them, and we still own the asset. That's not only continuing to cash flow, but it's gaining value big time over these past 12 years, calculating your core on your investments. Our key when investing in real estate, you want as much of your initial investment out of the asset and still retain your ownership position in the property. So watch your core and you are on your way to creating massive wealth and big multiple passive cash flow streams. This has been real estate investing with Kenny Wolf. Thanks so much for listening.