Why getting into real estate primarily for cash flow is wrong - and even dangerous

Why getting into real estate primarily for cash flow is wrong - and even dangerous

Investor 路 Milwaukee - Mequon, WI 路 Member since 2010 路 5k+ posts 路 7k+ votes

Hear me out.

Over the last years, more and more of the BP discussions circle around cash flow. As LTR was getting harder 2018-2020 STR became the new thing everyone started chasing. Until that started getting difficult. So now what?

The idea aspiring investors get mesmerized with is basically to start in real estate and somehow build a portfolio out of thin air. And gurus are happy to feed that dream. Basically, they suggest to buy a property with very little money, collect the cashflow, then refinance to pull money out of the property, buy more real estate for more cash flow and quit the W2 they hate.

The first flaw is that a lot of the books written before 2020 will tell you to analyze more deals until you find one that cashflows. The problem is that the market landscape has fundamentally shifted. Back then looking at more deals would eventually get you a "quality" deal, today it will get you a deal in the hood. And as you can read here on BP this is probably the number one recipe for financial failure. Best case, you learn a lot, survive financially and trade up. You certainly won't achieve any significant wealth in that asset class. The second flaw is the idea that you can refinance your way to wealth - that has always been very risky even with low interest rates.

It is called in-vesting for a reason. You are putting money in. Let me explain.

The goal of real estate investing is to allocate your capital in a low-risk investment that grows your net worth predictably over long periods of time - think at least decades if not longer! The superpower of real estate investing is equity growth: the asset appreciates, while inflation and loan payments erode the underlying debt until you own the asset free and clear and can leverage it again. When you run numbers in a BP calculator you can see quickly that equity gains DWARF cash flow. So, for anyone who wants to go into real estate primarily for cash flow, they have not yet understood the concept! 

Don't get me wrong:  cash flow is still an important factor, it keeps the lights on, it pays for repairs and upgrades. And eventually, it helps you buy more real estate (until when you start milking your portfolio to cover your living expenses).

If cash flow is what you want, buy a business. 

A business has an inverted financial profile: it is literally designed for cash flow. That's the main objective. And not just $200 per month per door (which has been the long-standing average, at least here in Milwaukee) Yes, you can also create equity with a business, if you are growing it to a size where it becomes a sellable asset, you replace yourself, hire a manager and a team of workers. But ask anyone who ever sold a business: it is not easy!! That's why many businesses just close instead of being sold.

Real estate investing provides a lot more creative angles than the stock market, but on a conceptual level, nobody would seriously attempt to replace their W2 income in a few years by investing a few thousand dollars in the stock market. In a way, STR is a hybrid because while real estate is part of it, you are really running a one-room hotel.

So if you are an aspiring real estate investor, the first question you should ask is where do I have a consistent source of free cash that I can use to invest? That can be excess income from your W2 job, or it can be a business you run on the side. Then you can take that cash and buy quality real estate, accumulate the cash flow and grow your portfolio-wide before you grow it deep - meaning paying off loans. 

The day you start siphoning cash flow out of your real estate portfolio, you are stifling future growth. So you will have to decide if your portfolio has grown enough to support your goals and dreams at that point. Otherwise, keep pushing!

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Joe VilleneuvePro Member
Plymouth, MI 路 Member since 2013 路 13k+ posts 路 19k+ votes
1y

The CF mistake REI make is they think you can accumulate CF properties starting from the beginning. You can't, and you shouldn't. Even if you could (and you can) find a lot of PCF deals out there, how do you buy them? It's not like you have an unlimited source of DP's available to you, and buying all cash is foolish. If you think you are accomplishing something just because an all cash deal is PCF, it's an illusion. All you are doing is playing catch up to your cost,...you cost being the cash you put into every deal. That's your cost. The more you put in, the more you have to recover before the PCF is actually a profit. That's one of the big reasons to leverage. You can spread your cash out, and each property then accumulates CF to recover the same cash you might have used on one all cash deal.

Buying for accumulating equity is also an illusion.  The equity is actually what you are paying for the property.  It's a form of cash that is locked up and useless to you.  Those that say it has value, I'll give you all of my sports trophies I've accumulated over the years.  I'll even through in my daughter's.  They are both the same value.

The power of the equity is the PV it buys.  When you initially buy a property, ad 20% DP, you are buying a property that's worth 5 times what you are paying for it.  As the equity grows, it's diluting the power of that equity since it grows on a 1 to 1 ratio to the PV growth.  Remember, that equity started out as a 5 to 1 ratio.

Here's my take on the roles of CF and equity, and why I say you must have both:

Role of CF - To accumulate within a property to equal the cash you put into it. As long as you have PCF, this really means you have a clear property since the tenant is paying for the rest.

Role of Equity - To grow from appreciation to a point where the growth is equal to the original equity, thus doubling it.

When both things occur (order doesn't matter), I sell.

Banking only on either CF or equity is a loss.  You have to have both, and to say you can't just means you are looking in the wrong markets, and/or using the wrong strategies.

See this reply in the discussion

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  • Scott JohnsonBusiness Member
    Specialist 路 Greenville, NC 路 Member since 2019 路 673 posts 路 408 votes
    1y

    I may have missed this in someone's response above, but there is one thing I am not seeing that is extremely important and most of the time gets overlooked.

    Cash Flow and Appreciation are TAXED. 

    Cash Out Refinancing (Loan Paydown) is TAX FREE

    Depreciation OFFSETS CASHFLOW to make it tax free if Depreciation is higher than your annual cash flow.

    Best way to maximize depreciation? Condominimums and Townhomes. Little to no land and all improvement. This means the cost is fully depreciable. They just so happen to also have HOA Dues which help to keep cashflow lower.

    Just find a property you can do a 10-20 year loan on. Pays down faster. More tax free money.

  • Joe VilleneuvePro Member
    Plymouth, MI 路 Member since 2013 路 13k+ posts 路 19k+ votes
    1y
    Quote from @Jill F.:

    I have found that I too am also in a place in 3-7 years where I would meet the @Joe Villeneuve criteria to sell. It took me a while but I do finally understand why that makes sense. But I have questions I'm hoping you'll entertain.

    I have a group of properties that I've held for five years and my low interest rate is resetting this month and I'm planning to do a cash out refi prior to a sale for a couple of reasons:

    1) Its easier to get a deal under contract if you don't have to make it contingent on a sale or if you don't want to risk paying capital gains on the sale if you can't find something suitable to buy. In this case I've found a 20 unit to buy and I wont be able to do the deal if I try to sell first.

    2) I want to invest in a new company with different ownership with part of the money from the refi/sale property and if I sell straight out I can't do that without paying capital gains. So I am planning to take out as much as I can with a refi and then I'll sell in 9-12 months when the new property is stable to get out the remaining equity.  The plan is to trade my appreciated, nicely renovated one bedroom properties up to newer (still value add) two bedrooms in a better neighborhood with higher rent potential (in the original company)

    3) Because we renovate well, the appreciated, renovated properties that I have to sell are going to have lower maintenance costs than anything that I can buy so a split refi/sale with two purchases buys me time to stabilize in renovated in chunks.

    Do you think this is a reasonable thing to do in this case or do you think this is a bad idea (and why)? Also, where do you find these 20% DP loans? I always ask and sometimes the banks say yes but usually the small banks that will lend to us want to do 25% down with 20 year amortization. I've looked into the Freddie/Fannie multi-fam financing but with a 20 unit deal I'm just on the boder of qualifying on loan size and cash reserves.

    Right now I've held my longest tenure properties for 8 years and I'd like to sell but I really would like to first have something else to buy plus I still have two years with more favorable interest rates than I can get right now. Do you recommend selling and just risking the capital gain tax if I can't find something good to buy?

    One of the biggest problems most REI have, is a lack of a plan.  Each of the deals you make are steps along that plan.  The plan isn't based on specific properties, but movement of your cash (liquid and frozen, as in equity).  The deals are how you execute that movement.
    What you have described above is pretty close to what I just laid out.  You are starting with your cash, and applying options of how to move it.  The decision of which of the options to use will depend on the specific circumstances at the time you move that cash.  This means you need to be proactive in setting up those options.
    If you would like to go into greater detail, feel free to PM me.  It's hard to go into that detail in this format without writing a novel.
  • Real Estate Broker 路 Minneapolis, MN 路 Member since 2011 路 5k+ posts 路 6k+ votes
    1y
    Quote from @Scott Johnson:

    I may have missed this in someone's response above, but there is one thing I am not seeing that is extremely important and most of the time gets overlooked.

    Cash Flow and Appreciation are TAXED. 

    Cash Out Refinancing (Loan Paydown) is TAX FREE

    Depreciation OFFSETS CASHFLOW to make it tax free if Depreciation is higher than your annual cash flow.

    Best way to maximize depreciation? Condominimums and Townhomes. Little to no land and all improvement. This means the cost is fully depreciable. They just so happen to also have HOA Dues which help to keep cashflow lower.

    Just find a property you can do a 10-20 year loan on. Pays down faster. More tax free money.


    This is not accurate and lends a false narrative/concept of things. 

    Depreciation is NOT "FREE": Depreciation expense taken by a real estate investor is recaptured when the property is sold. Depreciation recapture is taxed at an investor's ordinary income tax rate, up to a maximum of 25%.

    Appreciation is taxed, BUT Uncle Sam will allow you to KEEP that tax $ owned as long as you use it to do other Real Estate Investing that meets there guidelines (1031). 

    Name any other tax, ANY, that the Federal Gov. allows you to skip paying as long as your using it to make $ with it. ???? 

    That alone, that right there, Uncle Sam allowing you to make $ with there $, that's HUGE. 

    • Scott JohnsonBusiness Member
      Specialist 路 Greenville, NC 路 Member since 2019 路 673 posts 路 408 votes
      1y

      @James Hamling there's no false narrative, only the omission of 1031's role. 

      You narrative requires one critical factor. Selling the property. I'd one didn't, then they simply needed to eventually perform God's will to make all gains completely tax freed. Die 馃し馃徎 

  • Scott JohnsonBusiness Member
    Specialist 路 Greenville, NC 路 Member since 2019 路 673 posts 路 408 votes
    1y

    Buy >> Exchange >> Due. The ideal formula for tax free wealth growth... I'm making that video!

  • Investor 路 Milwaukee - Mequon, WI 路 Member since 2010 路 5k+ posts 路 7k+ votes
    1y

    These are all different moves you make on the REI chess board. But before you can worry about taxes and 1031 exchanges, you need money. REI is pay to play.

    A lot of new investors think that they can build a portfolio (aka the "plan" @Joe Villeneuve mentioned) by leveraging their first deal. It's not about one deal, it's about a pipeline and frquency. After you invested all your liquid capital, now what?

    The reason I started this post was to discuss ways how to generate the cash that you need to keep in-vesting beyond property one. I was hoping to hear some ideas on what everyone is doing, other than working a W2 and eating ramen.

  • Joe VilleneuvePro Member
    Plymouth, MI 路 Member since 2013 路 13k+ posts 路 19k+ votes
    1y
    Quote from @Marcus Auerbach:

    These are all different moves you make on the REI chess board. But before you can worry about taxes and 1031 exchanges, you need money. REI is pay to play.

    A lot of new investors think that they can build a portfolio (aka the "plan" @Joe Villeneuve mentioned) by leveraging their first deal. It's not about one deal, it's about a pipeline and frquency. After you invested all your liquid capital, now what?

    The reason I started this post was to discuss ways how to generate the cash that you need to keep in-vesting beyond property one. I was hoping to hear some ideas on what everyone is doing, other than working a W2 and eating ramen.

    My "plan" isn't leveraging one deal.  The "first" deal leveraged helps fund the rest in sequence as you access the CF and equity from it and move forward.
  • Nicholas L.Pro Member
    Flipper/Rehabber 路 Pittsburgh 路 Member since 2018 路 6k+ posts 路 5k+ votes
    1y

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.

  • Joe VilleneuvePro Member
    Plymouth, MI 路 Member since 2013 路 13k+ posts 路 19k+ votes
    1y
    Quote from @Nicholas L.:

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.

    Not sure how a successful combo of seller financing and BRRRR would work.
  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    1y
    Quote from @Scott Johnson:

    I may have missed this in someone's response above, but there is one thing I am not seeing that is extremely important and most of the time gets overlooked.

    Cash Flow and Appreciation are TAXED. 

    Cash Out Refinancing (Loan Paydown) is TAX FREE

    Depreciation OFFSETS CASHFLOW to make it tax free if Depreciation is higher than your annual cash flow.

    Best way to maximize depreciation? Condominimums and Townhomes. Little to no land and all improvement. This means the cost is fully depreciable. They just so happen to also have HOA Dues which help to keep cashflow lower.

    Just find a property you can do a 10-20 year loan on. Pays down faster. More tax free money.


    if you refi above basis you cant write off that interest above basis.. unless they changed that rule .  there is no tax free there is tax defferred the only TAX FREE is when you sell your primary and get  the 250 to 500k tax free..  Or U die and your heirs get stepped up basis.
    Or you can do a Charitable remainder trust which will give you some tax free. Normally a play for pretty wealthy folks.. or Generation skipping trusts.. etc etc.. But for most of the BP vanilla landlord buy and hold.. deprecation needs to be paid back for defferred via 1031 and kick the can down the road. 
    • Scott JohnsonBusiness Member
      Specialist 路 Greenville, NC 路 Member since 2019 路 673 posts 路 408 votes
      1y

      @Jay Hinrichs Interesting. So the goal would be just to refi at your original basis each time. 

      Do you remember what irs publication that's in? Want to study up on that. But yes. Doe and your heirs get it stepped up.

  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    1y
    Quote from @Marcus Auerbach:

    These are all different moves you make on the REI chess board. But before you can worry about taxes and 1031 exchanges, you need money. REI is pay to play.

    A lot of new investors think that they can build a portfolio (aka the "plan" @Joe Villeneuve mentioned) by leveraging their first deal. It's not about one deal, it's about a pipeline and frquency. After you invested all your liquid capital, now what?

    The reason I started this post was to discuss ways how to generate the cash that you need to keep in-vesting beyond property one. I was hoping to hear some ideas on what everyone is doing, other than working a W2 and eating ramen.


    Marcus as it relates to RE how to keep going other than w2 I can think of a few.

    1. Licensed Broker/agent earn commissions as you work in the industry. 
    2. Buy low sell high with frequency. 
    3. flipper for investment property owners or home owners.. 
    4. ground up construction. 
    5. entitlement work on land and flip
    6. entitlement work and do horizontal and sell lots to builders and homeowners.
    7.  Mineral rights  trade them buy them sell them.
    8. Timber deeds /  buy land log ( in the old days timber paid for the land then sell land I did this for years). Menasha there in upper WI I used to sell Export logs to them.
    9. PML  U are seeing this a ton on BP right now were those that live or work in states were investors loans are not regulated folks just advertise themselves as a lender and they basically whitepaper or broker deals to the actual lenders. this only takes marketing money and the gift of gab.

    So a few off the top of my head.
  • Investor 路 Malakoff, TX 路 Member since 2017 路 2k+ posts 路 2k+ votes
    1y

    To grow a portfolio quickly would be by doing some form of value add.

  • Jay HinrichsBusiness Member
    Real Estate Consultant 路 Summerlin, NV 路 Member since 2014 路 45k+ posts 路 66k+ votes
    1y
    Quote from @Scott Johnson:

    @Jay Hinrichs Interesting. So the goal would be just to refi at your original basis each time. 

    Do you remember what irs publication that's in? Want to study up on that. But yes. Doe and your heirs get it stepped up.


    U can refi above basis you just cant write off the interest on the portion of the loan that is above your basis.. check with your CPA .. I dont refi I only payoff so it does not apply to me my real estate is paid for I dont like debt.  And yes kids inherit at stepped up basis I think we all know that one. 
  • V.G JasonPro Member
    Investor 路 Member since 2022 路 3k+ posts 路 3k+ votes
    1y
    Quote from @James Hamling:

    Uh-oh @Marcus Auerbach, pulling out the Charlie Monger and economics. 

    It get's me how almost everyone, still, says things in the frame works of why did things get so much more expensive..... 

    If you point out it didn't, the dollar got worth less.... deer in headlights, blank stares and a "huh". 

    USD has lost 74% of it's value since only 1980. 

    Bonkers....... 

    For those who don't follow what this all means. It means a $100k purchase, like a home, in 1980 is exactly equal to a $368,615.38 purchase today.     They are the exact same.

    So everyone thinking that people "made so much $" from there 2019 property buy vs today. Nope, probably haven't made a dime. Call it a dollar devaluation adjusted savings account. 


     This would be the proper argument for explaining why you should not invest in RE for primarily, but really only, cash flow.

    It's a store of value against the dollar, and utility for the people. 

    And it extrapolates the dollar today versus the dollar tomorrow through (ideally) a FRM against scarcity via demand(through location). 

  • Investor 路 Milwaukee - Mequon, WI 路 Member since 2010 路 5k+ posts 路 7k+ votes
    1y
    Quote from @Joe Villeneuve:
    Quote from @Marcus Auerbach:

    These are all different moves you make on the REI chess board. But before you can worry about taxes and 1031 exchanges, you need money. REI is pay to play.

    A lot of new investors think that they can build a portfolio (aka the "plan" @Joe Villeneuve mentioned) by leveraging their first deal. It's not about one deal, it's about a pipeline and frquency. After you invested all your liquid capital, now what?

    The reason I started this post was to discuss ways how to generate the cash that you need to keep in-vesting beyond property one. I was hoping to hear some ideas on what everyone is doing, other than working a W2 and eating ramen.

    My "plan" isn't leveraging one deal.  The "first" deal leveraged helps fund the rest in sequence as you access the CF and equity from it and move forward.

    No, of course not. I was underlining what you said.

  • Investor 路 Milwaukee - Mequon, WI 路 Member since 2010 路 5k+ posts 路 7k+ votes
    1y
    Quote from @Nicholas L.:

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.


    You are ahead of me, I have never done a seller-financed deal. I just saw new data from ATTOM that 39% of homes in the US are free and clear. So the opportunity here is huge! A seller can make a lot more money, even if it's only over 5 years. But you need a seller who understands, trusts you enough and has a long view to see the advantage. I think that's perfect for quality properties that need little work. And once they have carried the note for a few years, you can offer to buy them out for a discount. Like: hey I got 100k in cash from another deal, I know I still owe you 127,456, but would you take 100k cash now?  

    A good BRRRRR purchase is often characterized by people who "just want out". I think that psychologically does not line up with seller financing. They want cold hard cash quickly and just walk away.

    If you have a business that generates cash every month, you don't rely on cashflow to pay back your down payment. That allows you to focus on higher value deals, which are leaning more on equity, less on cash flow anyway.

  • Real Estate Agent 路 Chicago, IL 路 Member since 2017 路 2k+ posts 路 2k+ votes
    1y

    You can refinace your way to wealth it just won't be as quick as pre-covid days where properties cashflowed at 100 LTV. Now you can cash out every 5-8 years assuming your in a market with growing rents to support the future cashouts. I have done two cash out refis, one of which was last year. It's a great way to scale if don't have a high income to save up and buy more each year.

    The cashflow definitely comes more in year 3+ but I still would never suggest clients buy something negative, atleast needs be mildly positive in year 1. I have a north side chicago 4 unit that now is rented $7000 with only a $2950 mortgage. I did a cashout on it in 2021. Rents gone up 7-10% or so a year, it compounds fast. When I bought was like $600s a unit and market was around $1100 a unit. You can map out the likely 3+ year cashflow by using an Excel DCF model that shows expected growth rates of rents, taxes, etc. and spits out your future cashflow numbers. 

  • Real Estate Broker 路 Minneapolis, MN 路 Member since 2011 路 5k+ posts 路 6k+ votes
    1y
    Quote from @V.G Jason:
    Quote from @James Hamling:

    Uh-oh @Marcus Auerbach, pulling out the Charlie Monger and economics. 

    It get's me how almost everyone, still, says things in the frame works of why did things get so much more expensive..... 

    If you point out it didn't, the dollar got worth less.... deer in headlights, blank stares and a "huh". 

    USD has lost 74% of it's value since only 1980. 

    Bonkers....... 

    For those who don't follow what this all means. It means a $100k purchase, like a home, in 1980 is exactly equal to a $368,615.38 purchase today.     They are the exact same.

    So everyone thinking that people "made so much $" from there 2019 property buy vs today. Nope, probably haven't made a dime. Call it a dollar devaluation adjusted savings account. 


     This would be the proper argument for explaining why you should not invest in RE for primarily, but really only, cash flow.

    It's a store of value against the dollar, and utility for the people. 

    And it extrapolates the dollar today versus the dollar tomorrow through (ideally) a FRM against scarcity via demand(through location). 


    The problem is education, or the lack there of. 

    Look around, near to all talk about appreciation in terms of "making $". I never hear anyone talking in terms of having retained there purchasing power. 

    Value-add MAKES $, tenant sponsored debt paydown MAKES $, appreciation is almost always NOT "making $", it's retention of purchasing power, a hedge against inflation. 

    People hear this term, hedge against inflation, but as we've seen last few years it seems near to none actually comprehend it's meaning. 

    And the cash-flow-only crowd.... If your taking $ today, via rolling back or accruing maintenance/ cap-X your NOT "making $", you're borrowing against future expenses. 

    This is why, for me, I look for what I call "The Holly Trinity": 

    - Solid metrics for stable, longevity of "tenant sponsored servicing". 

    - Value add opportunity

    - Solid metrics for stability and longevity in above market appreciation (ie forced appreciation). 

    It might sound impossible but I assure it is not. For example, purchasing phase I developments in planned city developments that have great traction and desire for livability. Acquiring with unfinished basements, in SFH heavy residential areas.

    Now I will say I am rather niched down in this, focusing on divorce driven tenants. Why? If you want recession proof, divorce is king. 

  • Nicholas L.Pro Member
    Flipper/Rehabber 路 Pittsburgh 路 Member since 2018 路 6k+ posts 路 5k+ votes
    1y

    @Marcus Auerbach

    yes, all accurate - i think a huge amount of inventory is available that has seller finance potential, but it's still a big adjustment as most folks are used to getting that big check at closing. and yes, i'd have to sit down with the person to make sure their goals were aligned - it's the start of a relationship as you implied.  it can be a win-win where they (1) don't need the cash for anything else and (2) you can offer more, or even significantly more, than an investor / wholesaler who'd need to purchase it at a distressed price.

    @Joe Villeneuve

    haven't done one yet but it would work like this.  find a paid off property that needs a very light rehab but where the seller basically wants retail for it and won't accept a 'distressed' price.  buy it on seller financing and (not recommending this to anyone else) put the rehab budget on a 0% credit card.  refinance and pay the seller off in 2-4 years.

  • Joe VilleneuvePro Member
    Plymouth, MI 路 Member since 2013 路 13k+ posts 路 19k+ votes
    1y
    Quote from @Nicholas L.:

    @Joe Villeneuve

    haven't done one yet but it would work like this.  find a paid off property that needs a very light rehab but where the seller basically wants retail for it and won't accept a 'distressed' price.  buy it on seller financing and (not recommending this to anyone else) put the rehab budget on a 0% credit card.  refinance and pay the seller off in 2-4 years.

    I have done this.  The keys are for it to be completely paid off by the seller, and to have very light rehab (if any).
  • Real Estate Broker 路 Minneapolis, MN 路 Member since 2011 路 5k+ posts 路 6k+ votes
    1y
    Quote from @Nicholas L.:

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.


    I wonder if your maybe trying to come into them a bit too lean, or not communicating it in the right way, so seller is getting a feeling your just being a vulture vs a partner. 

    I do a fair # of these, seller financing. 

    I wouldn't say I necessarily do any as Brrrr because there isn't that flexibility to refinance at will so I'd call them more-so value add than Brrrr but end of day, yes they do work out like a Brrr just with determined date for such. 

    My general template is 20% down. 

    I view the whole thing just like purchasing any existing business, so yes there is cash-flow day 1. That's a necessary component. 

    If the property has value-add items, I calculate that in. Both what the resulting end product will be AND the capitol investment required. 

    I do a workup as-is, and I do one with the end result reducing down payment by the capitol investment to get it there. 

    Yes, I share my numbers with seller. If you want credibility that's how you get it, transparency. And people are accepting of the fact that your a 4-profit and not a charity, that we can't get into something at a loss or net-0. 

    Most I work with on this are either retiring out, and just want to be free of any/all of the operational requirements and what-if's of Landlording. Or their are a flailing/failing Landlord. Burnt out and exhausted from it all. 

    In both the solution is similar, we get them out of it all, and they have an as close as it can be "sure thing" monthly payment coming in rain or shine, tenancy or vacancy, they are OUT of all those headache facets. 

    I also lend a 3rd option, a cash-out option. 

    It's a simple explanation that if I have to go to the bank on it, via rates what they are etc this is what's left for them. BUT if they are ok "being the bank" I can give them more if they can lend me a rate that allows room for me to pay more. 

    Sharing all the #'s, it's obvious that I am being truthful, that it all comes out the same for me so what I am really doing is showing how it can be more or less to there advantage. 

    And here is a key thing, early into it for discovery conversation I ask "If I buy this, let's say at $____, and I pull up a brinks truck at closing handing you bags of cash for it, do you have any use or plans for where you'd put that $ now?" 

    When it's a "oh, I don't know" or any form to that, it's a potential seller financed deal. And you'd be amazed how many fit into that box. A LOT of people don't have that planned out. Which means a savings account of some fashion. That's an easy one, I just ask if there bank is giving them 1% or 2% for interest. Most laugh and say oh heck no not that much. SO I ask would they be open to be giving them 3X or 4X MORE on there savings, AND I wouldn't ask them to take my word for it because I am willing to securitize it 100% against an asset. 

    85%+ of my C4D sellers were never even considering a C4D sale before, and after this conversation and answering there questions, well obviously that's how it came together. 

    In a time of Real Estate where >80% are sitting on sub 4/5 rates, and such a giant % are free-n-clear this should be the strategy of popularity. It's literally the majority who fit into viability for this. 

    And even those who intend to do a 1031 but have no prospects for that exit buy, ok, we can do C4D and expand there window to identify by years. 

    The common theme here is win-win scenarios. And if that's where your head is at in it, win-win, I like to think it comes through and sellers gain confidence and trust because your not just trying to sell-em on something, your pressing for a mutual win which draws them in to do the same, come to the middle ground, working together vs adversarial. 

  • Joe S.Pro Member
    Investor 路 San Antonio 路 Member since 2020 路 3k+ posts 路 3k+ votes
    1y
    Quote from @James Hamling:
    Quote from @Nicholas L.:

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.


    I wonder if your maybe trying to come into them a bit too lean, or not communicating it in the right way, so seller is getting a feeling your just being a vulture vs a partner. 

    I do a fair # of these, seller financing. 

    I wouldn't say I necessarily do any as Brrrr because there isn't that flexibility to refinance at will so I'd call them more-so value add than Brrrr but end of day, yes they do work out like a Brrr just with determined date for such. 

    My general template is 20% down. 

    I view the whole thing just like purchasing any existing business, so yes there is cash-flow day 1. That's a necessary component. 

    If the property has value-add items, I calculate that in. Both what the resulting end product will be AND the capitol investment required. 

    I do a workup as-is, and I do one with the end result reducing down payment by the capitol investment to get it there. 

    Yes, I share my numbers with seller. If you want credibility that's how you get it, transparency. And people are accepting of the fact that your a 4-profit and not a charity, that we can't get into something at a loss or net-0. 

    Most I work with on this are either retiring out, and just want to be free of any/all of the operational requirements and what-if's of Landlording. Or their are a flailing/failing Landlord. Burnt out and exhausted from it all. 

    In both the solution is similar, we get them out of it all, and they have an as close as it can be "sure thing" monthly payment coming in rain or shine, tenancy or vacancy, they are OUT of all those headache facets. 

    I also lend a 3rd option, a cash-out option. 

    It's a simple explanation that if I have to go to the bank on it, via rates what they are etc this is what's left for them. BUT if they are ok "being the bank" I can give them more if they can lend me a rate that allows room for me to pay more. 

    Sharing all the #'s, it's obvious that I am being truthful, that it all comes out the same for me so what I am really doing is showing how it can be more or less to there advantage. 

    And here is a key thing, early into it for discovery conversation I ask "If I buy this, let's say at $____, and I pull up a brinks truck at closing handing you bags of cash for it, do you have any use or plans for where you'd put that $ now?" 

    When it's a "oh, I don't know" or any form to that, it's a potential seller financed deal. And you'd be amazed how many fit into that box. A LOT of people don't have that planned out. Which means a savings account of some fashion. That's an easy one, I just ask if there bank is giving them 1% or 2% for interest. Most laugh and say oh heck no not that much. SO I ask would they be open to be giving them 3X or 4X MORE on there savings, AND I wouldn't ask them to take my word for it because I am willing to securitize it 100% against an asset. 

    85%+ of my C4D sellers were never even considering a C4D sale before, and after this conversation and answering there questions, well obviously that's how it came together. 

    In a time of Real Estate where >80% are sitting on sub 4/5 rates, and such a giant % are free-n-clear this should be the strategy of popularity. It's literally the majority who fit into viability for this. 

    And even those who intend to do a 1031 but have no prospects for that exit buy, ok, we can do C4D and expand there window to identify by years. 

    The common theme here is win-win scenarios. And if that's where your head is at in it, win-win, I like to think it comes through and sellers gain confidence and trust because your not just trying to sell-em on something, your pressing for a mutual win which draws them in to do the same, come to the middle ground, working together vs adversarial. 

    James sounds like you鈥檙e doing good on getting sellers to carry paper for you.:)

    Whereas you鈥檙e the one leading them to some degree to the end result, is there a reason there is a contract for deed instead of you going straight for a deed with mortgage / deed to trust?

  • Real Estate Broker 路 Minneapolis, MN 路 Member since 2011 路 5k+ posts 路 6k+ votes
    1y
    Quote from @Joe S.:
    Quote from @James Hamling:
    Quote from @Nicholas L.:

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.


    I wonder if your maybe trying to come into them a bit too lean, or not communicating it in the right way, so seller is getting a feeling your just being a vulture vs a partner. 

    I do a fair # of these, seller financing. 

    I wouldn't say I necessarily do any as Brrrr because there isn't that flexibility to refinance at will so I'd call them more-so value add than Brrrr but end of day, yes they do work out like a Brrr just with determined date for such. 

    My general template is 20% down. 

    I view the whole thing just like purchasing any existing business, so yes there is cash-flow day 1. That's a necessary component. 

    If the property has value-add items, I calculate that in. Both what the resulting end product will be AND the capitol investment required. 

    I do a workup as-is, and I do one with the end result reducing down payment by the capitol investment to get it there. 

    Yes, I share my numbers with seller. If you want credibility that's how you get it, transparency. And people are accepting of the fact that your a 4-profit and not a charity, that we can't get into something at a loss or net-0. 

    Most I work with on this are either retiring out, and just want to be free of any/all of the operational requirements and what-if's of Landlording. Or their are a flailing/failing Landlord. Burnt out and exhausted from it all. 

    In both the solution is similar, we get them out of it all, and they have an as close as it can be "sure thing" monthly payment coming in rain or shine, tenancy or vacancy, they are OUT of all those headache facets. 

    I also lend a 3rd option, a cash-out option. 

    It's a simple explanation that if I have to go to the bank on it, via rates what they are etc this is what's left for them. BUT if they are ok "being the bank" I can give them more if they can lend me a rate that allows room for me to pay more. 

    Sharing all the #'s, it's obvious that I am being truthful, that it all comes out the same for me so what I am really doing is showing how it can be more or less to there advantage. 

    And here is a key thing, early into it for discovery conversation I ask "If I buy this, let's say at $____, and I pull up a brinks truck at closing handing you bags of cash for it, do you have any use or plans for where you'd put that $ now?" 

    When it's a "oh, I don't know" or any form to that, it's a potential seller financed deal. And you'd be amazed how many fit into that box. A LOT of people don't have that planned out. Which means a savings account of some fashion. That's an easy one, I just ask if there bank is giving them 1% or 2% for interest. Most laugh and say oh heck no not that much. SO I ask would they be open to be giving them 3X or 4X MORE on there savings, AND I wouldn't ask them to take my word for it because I am willing to securitize it 100% against an asset. 

    85%+ of my C4D sellers were never even considering a C4D sale before, and after this conversation and answering there questions, well obviously that's how it came together. 

    In a time of Real Estate where >80% are sitting on sub 4/5 rates, and such a giant % are free-n-clear this should be the strategy of popularity. It's literally the majority who fit into viability for this. 

    And even those who intend to do a 1031 but have no prospects for that exit buy, ok, we can do C4D and expand there window to identify by years. 

    The common theme here is win-win scenarios. And if that's where your head is at in it, win-win, I like to think it comes through and sellers gain confidence and trust because your not just trying to sell-em on something, your pressing for a mutual win which draws them in to do the same, come to the middle ground, working together vs adversarial. 

    James sounds like you鈥檙e doing good on getting sellers to carry paper for you.:)

    Whereas you鈥檙e the one leading them to some degree to the end result, is there a reason there is a contract for deed instead of you going straight for a deed with mortgage / deed to trust?


    My origin story is from Operational side of things. My formal disciplines are Manu. Engineering, Sociology, Psychology and Business Management with emphasis in macro Economics. 

    Yeah, Jimmy's a "nerd", lol. 

    So I gravitate toward things that are well understood, proven, time tested, tie up all details in a nice neat little package, and eliminate as many variables as possible. 

    Contract For Deed is very time tested. In the 80's they were the go-to transactional method. 

    Finance institutions long well received them. 

    When I look at the various "jazzy" transaction methods out there I simply don't see a logical reasoning for doing, say Sub2.

    In C4D we have significant volumes of case-law clarifying and substantiating things. 

    We have significant clarity for all sides. 

    I have never known or had a single one done legally where any financial institute called a DOS for such, not 1 ever.

    It's just very simple, clear, long established and industry accepted, and has significant knowns for how any enforcement or default type actions are handled. 

    All of this lends a lot for sense of safety and security for sellers. When they call there attorney and ask on C4D because it's new info to them, I get many call backs saying "oh yeah, talked to the attorney and they said yup, this is a very normal thing and been around many years, just like you said james, were good to go". 

    I find most sellers want simple, simple-simple. 

    We use all standard Purchase Agreement paperwork and just have a seller financing addendum, which details down to the last detail every everything. 

    Again, simple. 

    I find most sellers "get-it" when we start getting into these details of things and they connect it as they are the bank, in their mind, and there relationship is understood in those terms as to what there relationship is/was with there financing. 

    When we start adding in the other things, it's far more foreign, because they never bought like that. C4D looks and works a whole lot like how they themselves experienced, it's just a shift of chairs in it all. 

    I have simply never found a reasoning for doing a different transactional method. Simply put, just never had to, these 2 transactional tools have well covered 100% of situations. 

    Ok I take that back, I did once do "a" deal via purchase option but that was on raw land for development so that was very much a different thing. Purchased from 1 developer and sold to another. 

    In C4D the mortgage remains untouched. The deed does not convey BUT buyer is fully secured in there position with the recorded closing of the C4D. I've had nothing but a-ok happy finance institutes on these. 

    The other methods, I've always seen blind-spots, points of friction, grey areas, conflict potentials. I don't like that, I don't like problems, real or potential ones. 

  • Real Estate Broker 路 Minneapolis, MN 路 Member since 2011 路 5k+ posts 路 6k+ votes
    1y
    Quote from @Joe S.:
    Quote from @James Hamling:
    Quote from @Nicholas L.:

    @Marcus Auerbach

    in order to minimize my initial outlay of cash I'm trying to do a seller financed BRRRR. haven't been able to get one yet. i've purchased on seller finance, I've done a few BRRRRs, and now trying to combine them. i have made a few offers, and haven't gotten a workable deal yet. i'm willing to be patient.

    it's not a cash flow strategy in that it doesn't yield any cash flow.  but it doesn't require me to make giant down payments that as @Joe Villeneuve is always rightly pointing out take decades to be paid back with that $37 a month that you net.


    I wonder if your maybe trying to come into them a bit too lean, or not communicating it in the right way, so seller is getting a feeling your just being a vulture vs a partner. 

    I do a fair # of these, seller financing. 

    I wouldn't say I necessarily do any as Brrrr because there isn't that flexibility to refinance at will so I'd call them more-so value add than Brrrr but end of day, yes they do work out like a Brrr just with determined date for such. 

    My general template is 20% down. 

    I view the whole thing just like purchasing any existing business, so yes there is cash-flow day 1. That's a necessary component. 

    If the property has value-add items, I calculate that in. Both what the resulting end product will be AND the capitol investment required. 

    I do a workup as-is, and I do one with the end result reducing down payment by the capitol investment to get it there. 

    Yes, I share my numbers with seller. If you want credibility that's how you get it, transparency. And people are accepting of the fact that your a 4-profit and not a charity, that we can't get into something at a loss or net-0. 

    Most I work with on this are either retiring out, and just want to be free of any/all of the operational requirements and what-if's of Landlording. Or their are a flailing/failing Landlord. Burnt out and exhausted from it all. 

    In both the solution is similar, we get them out of it all, and they have an as close as it can be "sure thing" monthly payment coming in rain or shine, tenancy or vacancy, they are OUT of all those headache facets. 

    I also lend a 3rd option, a cash-out option. 

    It's a simple explanation that if I have to go to the bank on it, via rates what they are etc this is what's left for them. BUT if they are ok "being the bank" I can give them more if they can lend me a rate that allows room for me to pay more. 

    Sharing all the #'s, it's obvious that I am being truthful, that it all comes out the same for me so what I am really doing is showing how it can be more or less to there advantage. 

    And here is a key thing, early into it for discovery conversation I ask "If I buy this, let's say at $____, and I pull up a brinks truck at closing handing you bags of cash for it, do you have any use or plans for where you'd put that $ now?" 

    When it's a "oh, I don't know" or any form to that, it's a potential seller financed deal. And you'd be amazed how many fit into that box. A LOT of people don't have that planned out. Which means a savings account of some fashion. That's an easy one, I just ask if there bank is giving them 1% or 2% for interest. Most laugh and say oh heck no not that much. SO I ask would they be open to be giving them 3X or 4X MORE on there savings, AND I wouldn't ask them to take my word for it because I am willing to securitize it 100% against an asset. 

    85%+ of my C4D sellers were never even considering a C4D sale before, and after this conversation and answering there questions, well obviously that's how it came together. 

    In a time of Real Estate where >80% are sitting on sub 4/5 rates, and such a giant % are free-n-clear this should be the strategy of popularity. It's literally the majority who fit into viability for this. 

    And even those who intend to do a 1031 but have no prospects for that exit buy, ok, we can do C4D and expand there window to identify by years. 

    The common theme here is win-win scenarios. And if that's where your head is at in it, win-win, I like to think it comes through and sellers gain confidence and trust because your not just trying to sell-em on something, your pressing for a mutual win which draws them in to do the same, come to the middle ground, working together vs adversarial. 

    James sounds like you鈥檙e doing good on getting sellers to carry paper for you.:)

    Whereas you鈥檙e the one leading them to some degree to the end result, is there a reason there is a contract for deed instead of you going straight for a deed with mortgage / deed to trust?

    If asking why I (myself and my clients) are buying on C4D vs conventional financing (yes, we are also doing that) it's because it's more profitable. 

    Most commonly we are getting rates in the 4-5% region. We can't achieve that anywhere else. 

    And this interest rate spread, say between 4.5 and 7.5, is of such impact that at 4.5 we can afford to over-pay on purchase price a bit vs market price AND we still come out ahead with significantly lower monthly servicing payments than we would have had a 7.5 and a lower price. 

    It's a math game. 

    Now keep in mind the way Joe V. and I see the math of investing. 

    With that lower monthly payment we have a larger "cash-flow", making our time to recoup Capitol Investment shorter. 

    So we can see the property shift to infinite returns in say 36mnths vs 72. That is a very big difference. 

    Now keep in mind, we "over-paid" by some people standard. But did we? Did we "over-pay"? when we are sooner with all our investment capitol back? 

    Or is it more accurate to say we bought down our interest rate at one heck of an amazing deal? 

    How much would your conventional lender charge you to buy-down your rate too 4.5%? 

    How much would it cost to even get that rate bought down to 4.5% for just first 3yrs? 

    So that's how we really see it, the math game. Were not "over-paying", were getting a seriously discounted rate buy-down. 

    And with that rate buy-down, increasing our "cash-flow" on a quality asset to cut down our time to claw-back and getting to that beautiful land called Infinite Returns. 

  • Henry ClarkPro Member
    Developer 路 Member since 2020 路 4k+ posts 路 4k+ votes
    1y
    Quote from @Marcus Auerbach:

    These are all different moves you make on the REI chess board. But before you can worry about taxes and 1031 exchanges, you need money. REI is pay to play.

    A lot of new investors think that they can build a portfolio (aka the "plan" @Joe Villeneuve mentioned) by leveraging their first deal. It's not about one deal, it's about a pipeline and frquency. After you invested all your liquid capital, now what?

    The reason I started this post was to discuss ways how to generate the cash that you need to keep in-vesting beyond property one. I was hoping to hear some ideas on what everyone is doing, other than working a W2 and eating ramen.

    OP to respond to this post versus your original.  

    Basically how to keep scaling.
    1.  If you wait on cash flow then you鈥檙e waiting a long time to do your next deal.

    2.  Flip properties.  We do self storage and country subdivisions where we sale the lots.  You have to have a method to develop a cash snowball. Versus buy and hold.  In housing- buy 2/1 and ADU into a 3/2 and sale.  Buy house with say 5 acres and subdivide land and sale.   Value add- ugliest property in a great neighborhood fix flip.  Get both the value add but also the great neighborhood premium.  Texas offlist property tax sales.  

    3.  If your doing buy hold then your ADU or development initial value add needs to enough at  say 65% collateralization to have a downpayment on the next property.  

    Our Country subdivision lot sales we expect a minimum 100% COC return on a cash only deal or 200% if financed, but a lot riskier.   Over a 3 to 5 year window.


    Our self storage developments we expect a 400% COC return in 2 years.

    Both of the above REI create more than enough equity to collateralize our next deals at 25% down. Using a 65% collateralization with our lender.

    Summary-  evaluate your scaling strategies.  You might have 2 strategies.   Cash snowball and a buy hold.  

    At our Belize place we started feeding out hogs for my guys.  They cost $130 BZD or $65USD at 25 pounds.  If we butchered at 220 pounds it would be cheaper to just buy the pork at the market.  Since we have to overcome the original cost of the piglet.  So we take ours up to 350 pounds.  Point is change your strategy to meet your objectives.  

    Talk about some happy families. Normally just rice, beans and tortillas.  Sometimes chicken.  Now every Friday they take home frozen packages.  

  • Real Estate Agent 路 Chicago, IL 路 Member since 2017 路 2k+ posts 路 2k+ votes
    1y

    I agree 100% with @Stuart Udis these turnkey operators and what I would call un-ethical sales people are pushing cashflow numbers that aren't real. I have so many clients who send me their numbers and either unrealistic numbers for rough area properties or its using these large expense ratios that are accurate on a 100k house but not on a 600k multiunit. The % expenses needs to be adjusted in analysis! It goes down as the property price goes up and as the tenant quality goes up. Likewise on a cheap rough area property you need to increase your % for cap/ex, etc. I own both types and the class A way outperforms even though day 1 on paper it looks worse numbers. 

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