Business Management

The Kind of Money Problems You WANT to Have

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
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“I’ve Got Money Problems”

Such was the title of a post in the BiggerPockets Forums from a few weeks ago.  I contributed to the post, but I think that this conversation is worthy of wider exposure because it goes to the core of our Vision and Perspective relative to the business of Real Estate Investing. With the author's consent I will explore the answer I provided in the forum to a greater extent in this article.

The following question was posted
(I edited it very lightly):

"I purchased a house for 57k 13 months ago. I put around $25k into it (labor and materials) and rented it out for $1,275. The house was appraised 2 weeks ago at 125k. I am trying to get as much cash out of it as possible and found a lender that can do 70% cash out refinance on a rental property. Net cash out would be around 80k.

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There is nothing available for under 80k these days. Properties that are available cash flow very little at around $1,100/mont rent.  So:

1.       Do I cash out and put the money into the stock market?

2.       Do I pay down my other 6-7 mortgages that have balances between 35k-122k and APR of between 4-5.875%?

3.       Do I wait for the winter and hope that the prices will drop (unlikely). “


We invest in income-producing real estate for one of three reasons (and preferably all three):

  1. To create passive Stable Cash Flow
  2. To protect the buying power of our wealth by hedging inflation
  3. To create additional wealth buy outpacing inflation

With this in mind, the following statement is one of the most important truisms in all of investing:

In order to achieve our objectives, we must control the Largest Investment Base possible!

1.       Stable Passive Cash Flow

While it is a bit counter-intuitive, buy controlling the largest asset base possible we are effectively diversifying our income buy creating multiple income streams.  The old adage of Don’t put all your eggs in one basket applies here.

While a lot of people perceive it as risky to own 10 units, because there are 10 furnaces, 10 sets of plumbing, 10 sets of windows, etc., I believe that being in control of 10 revenue streams is better than one any day of the week!  What do you think?

2.  Protect the buying power of our wealth by hedging inflation

Inflation is the act of inflating or expanding something.  In terms of currency, inflation occurs when through the government’s monetary policy, currency is added into circulation – this is called monetary inflation.  When people talk about the government printing money, this is what they mean.

In simple terms, our economy can be explained as units of currency chasing units of goods and services.  If the number of units of currency in circulation increases (monetary inflation) while the amount of goods and services available for purchase stays the same, all of those goods and services become more expensive, causing what is known as price inflation.  Thus, monetary inflation always leads to price inflation, which is the reason why currency is a metric of relative value.  It is why a loaf of bread, a steak, a pound of Colby cheese, and a pound of sugar cost so much less 30 years ago than they do today.

I am not an economist, but I believe that in the United  States we have had average price inflation in the range of 3% for the past 80 years, please correct me if I am wrong on this.  In fact, one of the stated responsibilities of the FED is to put forth monetary policy which accommodates stable growth in the economy, and something in the range of 3% is considered optimal.

Translation – we will have inflation until and unless our entire economic and monetary systems collapse…

What Does This Mean?

This means several things:

  1. You need to earn at least as much interest on your money as current inflation level and cost of earning this interest combined to break even. If you put 10k in the bank at 3% interest, you will earn $300 in the first year. Thus, you will have $10,300 to spend. However, if price inflation is 3% then the same stuff that cost you 10k last years is now going to set you back $10,300. Therefore, having earned the interest you really haven't gained any buying power. What's worse is that having earned the interest you will have to pay taxes on the gain before you can spend the money. This means that effectively you must earn about 4.5% of interest just to break even – Ouch!
  2. This also means that in order to win at this game you do not need to be a genius generating 30% returns year after year – this would be nice, but it’s not necessary.  All you have to do is beat inflation and cost of doing business by 2 or 3 percentage points over 15 or 20 years!  Sounds easy?  While for us full-time sophisticated investors it certainly is easy, for most retail people it is a trick…
  3. Question: Suppose your investments generate 20% total return over the course of 10 years.  In this case, would you rather control      $100,000 investment base, or $1,000,000?

Answer: 20% of 100k would yield a total return of $20,000 / 20% of $1,000,000 would yield $200,000

What’s better?

Coming Back to the Original Question

My suggestion on the forum was to stop looking at SFR that he could purchase for cash, and leverage the available after refinance $80,000 into acquisition of a multiplex. All things being equal, at 70% LTV (Loan to Value) it would be possible to finance about $185,000 and purchase a building for $265,000. In my neck of the woods this easily buys 6 units. However, even 4 units would be sufficient to make the strategy work!

Having financed the down-payment out of the SFR and financed the rest against the new acquisition, the deal becomes 100% financed.  The multiplex, if bought correctly, will most certainly throw off much more cash flow than a SFR ever could; it would diversify the portfolio with multiple revenue streams; and it would give the owner control (with 100% OPM) of a much larger asset base, which is a great thing – especially now when we are staring at very significant probability of inflation…

Now – the MLS may not be the best place to look for a deal like this, but let’s leave that for another day 🙂

What would you do if you had $80,000 to burn?

Photo: 401(K) 2012

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the
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    Sharon Hiebing
    Replied almost 7 years ago
    I don’t think I’ve ever seen anyone explain monetary policy and how it relates to inflation so clearly before. I’ve always found it difficult to understand – not anymore! This is a great article! I’m in the throes of educating myself on MF investing thanks to your podcast and recent articles, and I do believe there’s never been a better time to do so. Thanks, Ben!
    Ben Leybovich
    Replied almost 7 years ago
    Hey Sharon – thanks so much! I hate it when folks make things more difficult than things need to be. I am glad you can relate to my view of things. I do feel that I possess a little bit of a gift in my capacity to break things down in ways the folks can understand – this is why I create CFFU! You could not get me to buy a SFR if you had a gun to my head – well, may be I went too far. I bought one about 4 years back; paid more than I knew it to be worth – best decision of my career thus far… Thank you so much for reading and your comment. Please check out my website – lot’s of useful stuff there 🙂
    Ryan T
    Replied almost 7 years ago
    Ben, I really appreciate your insights on these blog posts, the forums, and when you were on the podcast. You bring up interesting points and always makes me think about things in a different light. Ryan
    Ben Leybovich
    Replied almost 7 years ago
    Thank you so much Ryan! Perspective is the key: “The only thing worse than being blind, is having sight but no vision” ` Helen Keller
    Ben Leybovich
    Replied almost 7 years ago
    Thank you so much Ryan! Perspective is the key: “The only thing worse than being blind, is having sight but no vision” ` Helen Keller Reply Report comment
    Mark Ferguson
    Replied almost 7 years ago
    Great article Ben! If I had 80k I would continue to wait for the right single family deals like I am doing right now. 🙂 I put 20% down and get better cash flow of SFRs than I do multi families in my area. I know other areas you get better cash flow with multis then SFRs.
    Ben Leybovich
    Replied almost 7 years ago
    Hahaha Mark – why am I not surprised. Oh, I know why – I’ve read your blog lol I trust that you are not surprised at my perspective either, cause you’ve read mine 🙂 Thanks so much for reading an commenting Mark!
    Jeff Brown
    Replied almost 7 years ago
    Hey Ben — Good stuff, as we’ve come to expect. Question: If my net worth is X dollars, and I use a small fraction of those dollars as down payment and closing costs on a new property acquisition, is it really 100% financed? Did I not reduce my net worth by the same amount I would have by using cash for the down/closing? I’d say one of the ‘qualifications’ of 100% financing is that it cost the investor none of his net worth to make happen. Make sense?
    Ben Leybovich
    Replied almost 7 years ago
    Jeff – thanks for your comment! I have a couple of thoughts relative to your post. First of all, your Net Worth is not x – it’s xxx. C’mon man – we got to be believable here 🙂 Now, a conventional 25% on a 200k property is 50k. To someone with a Net Worth of 250k this constitutes somewhat more than a small percentage. Even with a 500k Net worth, which is quite uncommon in America today, 50k down is 10%. These are not insignificant numbers. For someone without understanding of what we do, throwing cash around this way is likely the best of bad options. However, investing is not about buying Cash Flow – it is about creating Cash Flow! 100% financing is no just for those who do not have money, but also for those who know that they do not need money…having it becomes irrelevant. There are content people in this world, and there are marketing people. It’s when working together that they can find success. Similarly, there are people who create deals, and there are those who finance deals – we need each other and when properly structured, both win… I agree – it is not necessary to reduce your Net Worth in order to buy RE. In fact, I only buy if it instantly increases both my Cash Flow position and my Net Worth Jeff. If I bridge 20k of equity over here on this property, it’s only because I am using it to buy 60k of equity! Thanks so much for your comment – I hope I answered the question. 401k or IRA are not any different than cash in my book. By investing those fu
    Robyn Richardson
    Replied almost 7 years ago
    So if it’s better to control more units, do I hang onto the SFR that has extremely high tenant turnover because it’s in a semi war zone (and is never left clean and undamaged)? It’s starting to wear me out, and I wish I’d never bought it, but selling it would mean coming to the closing table with cash.
    Ben Leybovich
    Replied almost 7 years ago
    Robyn, We want to control many unit for the purpose of diversifying the income. Parallel to this, we need to control a vast investment base for the purpose of growing wealth – this may or may not be represented with many units. As to your situation, it’s a personal call – but it sounds like you should have never bought this house. My sanity (and yours) can not be measured with dollars and cents. The type of management that houses like this require – I wouldn’t do it if you paid me. Perhaps, it is worth to take a los to get out of the thing – your call… Thanks so much for reading and commenting Robyn!
    Tom Stimson
    Replied almost 7 years ago
    You explained monetary policy in a very great manner. I love the points in this article. This will surely help me, specially that I’m new to this field. Thanks Ben.
    Ben Leybovich
    Replied almost 7 years ago
    You are so welcome Tom! I am glad you found my thinking on the subject useful… Thank you so much for reading and posting!
    Ben Leybovich
    Replied almost 7 years ago
    You are so welcome Tom! I am glad you found my thinking on the subject useful… Thank you so much for reading and posting!
    george p.
    Replied almost 7 years ago
    we talked about this, but the multi’s here do not make financial sense. – they are over $250k+. – they do not appreciate at all – you can only flip them to another investor – you can sell them for a set amount (cap rate) which is based on rents. you wait for the rents to go up and the price of the unit goes up – the demand is LOW, LOW, LOW but the cash flow if ran properly is very good.
    Ben Leybovich
    Replied almost 7 years ago
    Hey George, Well – it was worth a discussion 🙂 Thanks so much 🙂 !