It took me years and years for me to get it. I mean banks are happy to lend on real estate. Why not just use em? However, after tons of deals, it finally sunk in. Unless I plan to keep a property forever, just don't put a bank loan on it. If the asset's benefits are so good, and the obligations are so low, then borrow from the bank, and set off to the side. OK, I admit it. My name is Jason, and I'm a bank borroweracholic. We own some property that we thought were in the "Goldilocks Zone" and they have bank loans. I chose to give up my ability to be flexible with a percentage of my portfolio that was "just right". In return, we have safe cash flow that pays the bills.
What about the rest of the deals? Here is what I think:
When you close a deal using a bank, it seriously retards your ability to use your equity. You are basically allowing the bank to hold 20% or more of your equity hostage just to get the loan. It's your equity. Soon you may be calling JG Wentworth...."It's my equity, and I want to use it now!" Don't you want to keep doing deals to increase your net worth, cash flow, depreciation, appreciation, and other benefits? Use of that equity, that is now stagnant behind that bank loan, could have helped get the future deals done. If you choose to leverage, why not use another formula that doesn't hinder your ability to grow?
Math is real. Yall heard of compound interest? Earning interest on your interest is compounding. The frequency of the compounding is the powerful part. The shorter the time between the compounding, the faster the numbers grow. As real estate investors, we do deals that create equity all the time. Most of us created it and then do nothing. What if you go ahead and get that equity into the next deal quickly? It starts to compound your equity. Banks make is harder for me to be able to compound my equity.
Here is deal we did this year: One of our tenant buyers unexpectedly paid us off. The property had a private loan on it. Since we didn't have a bank loan, we asked our lender to move to another house. So now we left the closing with all cash and bought another house that rents for more than the previous house. The new house is where we now secure the same private lender. Since I had a private lender that would "move", I was a cash buyer on the next deal. I compounded my equity and increased the benefits(this time cash flow).
What are some of your favorite ways to compound your equity?
------What are some of your favorite ways to compound your equity?
OK, I am working on one. What about....making your equity more easily trad-able by "flipping the equity's position"? My goal is to trade my equity for another's equity that will give me more benefits and/or lower my obligations. More cash flow...less risk. More upside....less management. And so on..... There are many reasons an investor would trade. This is just a couple of them.
Take a look at the Pyramid Of Value below. The higher on the pyramid, it's more likely that a seller will accept for his/her equity. An example would be: a seller is more likely to accept cash than land in exchange for the equity. The lower on the pyramid, the equity is less desirable. Got it?
So what's a formula that would "flip my equity's position"? The position I am referring to is where my equity is held by the asset. If it's a free and clear property, then my equity is in first position. If I have a mortgage/deed of trust, then my equity is in 2nd position.
I own a duplex worth 90k that owe 30k. My equity is 60k. So, my equity is in 2nd position. Also, on the pyramid of value we are in the purple. How can a get my equity(60K) into something that will increase my benefits and/or lower my obligations and go up on the pyramid?
Seller finance duplex for 30k down(it pays off my loan) and take a 1st mortgage for 60K. (I just countered a buyer on this few minutes ago...come on Troy) If this closes, where will my equity be? It'll will be in 1st position in the form of a note..that's safer. Oh, and now I am up higher on my pyramid of value in "Paper". I will have my equity held by something that I can trade more easily.
If this deal goes under contract, and you were me, what kind of offers would you start making with your paper?????
Oh, and here is a better question: Can I 1031 this transaction?
Yes, you can 1031 the paper if you set that up prior to the contract with a QI.
But even better your 1st is now leverageable. You can borrow against it where you could not with the equity in 2nd or its very hard to. You can use this as a down payment or option consideration and gain massive leverage. You could even keep the payments and give a note against your note that only has a single balloon payment for option consideration. So now you have cash flow and huge leverage for upside. Notes and options are the most versatile parts of real estate because they are both contracts that can be whatever you and the other party agree to and both can be secured by Trust Deeds or Mortgages.