How you can profit from a Big Mortgage

117 Replies

In light of all the recent threads about COVID-19, worrying about tenants not being able to pay rent, legislation that seems to screw over landlords month after month, and ethical dilemmas about where it is our obligation as landlords (or God's children) to cover the bills of tenants because of (fill in the blank)

Cash flow is for poor investors or investors that are poor (Apologize in advance to the BP / GRE / Turnkey advertisers)

Let me introduce to you a concept that is not often talk about, and probably frowned upon over the last 11 year bull market:

Big A** Mortgage (BAM)

Things most investors foolishly ignore..

  1. - Historic rent growth
  2. - Historic appreciation rate.
  3. - NOI per square foot
  4. - Operating expenses per sf
  5. - Capex per sf

Cash flow is for poor investors or investors that are poor.

If you need or hoped for cash flow to pay your cable bill then you probably should not be investing in real estate. The only reason I'm not cash flowing is because of a BAM that I am paying down because I am in a high appreciation market vs. a market where the only reason I may get cash flow is because the prices are so cheap because sellers are trying to unload unprofitable properties, this is by design.

So-called cash flow gets eaten up by CapEx and by pesky critters like the coronavirus. EVERY. SINGLE. TIME. I know that "cash flow" has been shoved down our throats because it makes money for advertisers and those companies selling it.

Its time to wake up and start thinking like the big boys (family offices, hedge funds, and billionaires). They are buying 3.5 caps in NY, London, HK, LA, and SF.. FOR A REASON. That reason is not the dream of cash flow.

So, to summarize your long winded whining, Cash Flow is a bad reason/way to invest because:

1 - You have chosen a market to invest in, that has poor cash flow
2 - Nobody can successfully cash flow because you can't do it in your market of choice.

I'm unclear as to why cash flow is a bad thing. And the benefit of a B.A.M is what again? So one can pay a lot of interest to someone else? Not following this line of thinking. Guess I'm doing it all wrong as my properties cash flow and I don't have any B.A.M.s

Originally posted by @Joe Villeneuve :

So, to summarize your long winded whining, Cash Flow is a bad reason/way to invest because:

1 - You have chosen a market to invest in, that has poor cash flow
2 - Nobody can successfully cash flow because you can't do it in your market of choice.

 I am actually cash flowing AND profiting in Hawaii specifically because rental income growth goes hand in hand with appreciation.  I would STILL profit even if my rentals were unoccupied. You cannot say the same thing.

The reason I can cover missed rent payments is because I focus on profitable markets, not to be confused with "cash flow" markets on paper.

Landlords are freaking out all over this forum due to the anticipation of 1-2 missed rent payments.  But they purchased fantastic assets in cash flow markets with dreams of cash flow right. Why are these landlords getting so nervous, I thought "cash flow" would help them in times of trouble?

The chickens are now coming home to roost. We will see which investors understand the difference between cash flow and profit.

Originally posted by @John Teachout :

I'm unclear as to why cash flow is a bad thing. And the benefit of a B.A.M is what again? So one can pay a lot of interest to someone else? Not following this line of thinking. Guess I'm doing it all wrong as my properties cash flow and I don't have any B.A.M.s

 Do you think Bob Bowling who payed $300K for an asset with $80K downpayment, now who cash out refinanced $750,000 at 4% ($1M valuation) is worried about a tenant not paying rent for 3 months?

Paid off properties is also a viable strategy. I would prefer no mortgage to a person with a 60% LTV mortgage, because there is too much equity and the bank can foreclose in a time of trouble.

A person with a 90% LTV mortgage, the bank has no incentive to foreclose. They (the bank) are taking all the risk and would lose money if they foreclosed.

Hey Andrey,

I can't help but notice you've taken one approach to real estate investing and decided that's the end-all-be-all of successful portfolios. Forced appreciation. While that may work in certain states, you need to also understand your appreciation strategy takes the BIGGEST hit when markets collapse. Renters will always rent, but sellers will only sell when they're:

1.) Forced into a corner

2.) Have a sizable equity to cash in on.

When the next recession hits, you'll be forced to sit on worthless properties until markets recover. House prices in CA just reached 2008 numbers last year in 2019. If you invested here, you'd be stuck for over a decade before you even had an opportunity to break even.

You've also, by the context of this post, trashed the core investment strategies of Blackstone, NRZ, Fundrise and countless other REITs who undoubtedly would run circles around 95% of the members on this forum. 

It sounds as if you're just investing in real estate during one of the longest bull markets in the history of the US. You literally couldn't lose for the past decade, invest in something and you win. 

Regardless, I hope we all pull through this pandemic. Very few of us are going to be sleeping easy for the next few months.

I think rent growth and appreciation are extremely important factors to consider, but the historic number is not the whole story. If you're only looking at the historic rates, you'll miss the biggest pops in both numbers. I spent most of my career working for REITs and other institutional investors. We looked at a lot more than just the historic numbers to choose where to invest. I'm sure you didn't literally mean just the historic rate though.

The "big boys" are also not just ignoring cash flow. They just have a much lower cost of capital than others, so are able to cash flow at lower cap rates than the average investor. When working with institutional clients, there was only one time that I was involved in a negative cash flow deal. Just because you would not cash flow at a 3.5 cap in the markets you mentioned, doesn't mean that they don't.

I somewhat agree with your point, but think of it a little differently. I like to look at total returns, and also look at cash flow over my expected holding period. Many investors are just looking at their year 1 cash flow, but if you're looking at your average cash flow over your holding period (with your expected rent growth), you will make much different decisions. Areas with lower initial cash flow, but stronger rent growth suddenly make a lot more sense. Many investors are planning to replace their W2 income at some point in the future. This is often achieved by buying in areas with higher rent growth, instead of higher year 1 income. The only real exception, is when you're trying to achieve this very quickly (I think there are other problems for most people there though).

In general, year 1 cash flow is your protection from an immediate downturn. Unless real estate is a very small portion of your portfolio, you can't sustain long term negative cash flows. Having some level of positive cash flow day 1, protects you from short term downturns. However, if you look at long term rent numbers, you don't need very much cash flow to be relatively safe in a downturn. Strong markets very rarely see real declines in rental rates, and even when they do, a 10% decrease is close to the highest you'll see, barring catastrophe. The current situation shines a spotlight on the problem with looking at historic rates of anything though. It will be interesting to see if we see something drastically worse than past events. I'm not expecting it, but I'm no expert.

Originally posted by @Andrey Y. :

In light of all the recent threads about COVID-19, worrying about tenants not being able to pay rent, legislation that seems to screw over landlords month after month, and ethical dilemmas about where it is our obligation as landlords (or God's children) to cover the bills of tenants because of (fill in the blank)

Cash flow is for poor investors or investors that are poor (Apologize in advance to the BP / GRE / Turnkey advertisers)

Let me introduce to you a concept that is not often talk about, and probably frowned upon over the last 11 year bull market:

Big A** Mortgage (BAM)

Things most investors foolishly ignore..

  1. - Historic rent growth
  2. - Historic appreciation rate.
  3. - NOI per square foot
  4. - Operating expenses per sf
  5. - Capex per sf

Cash flow is for poor investors or investors that are poor.

If you need or hoped for cash flow to pay your cable bill then you probably should not be investing in real estate. The only reason I'm not cash flowing is because of a BAM that I am paying down because I am in a high appreciation market vs. a market where the only reason I may get cash flow is because the prices are so cheap because sellers are trying to unload unprofitable properties, this is by design.

So-called cash flow gets eaten up by CapEx and by pesky critters like the coronavirus. EVERY. SINGLE. TIME. I know that "cash flow" has been shoved down our throats because it makes money for advertisers and those companies selling it.

Its time to wake up and start thinking like the big boys (family offices, hedge funds, and billionaires). They are buying 3.5 caps in NY, London, HK, LA, and SF.. FOR A REASON. That reason is not the dream of cash flow.

 How's the weather there on Cloud 9?

I really don't understand why some people feel the need to come on here and taunt fellow landlords.

Your entire post makes no sense whatsoever because the landlords that are concerned about their otherwise well qualified tenants would be anyway, regardless of the size of their mortgage.

And what the heck does my capex have to do with my cash flow, slick?
And then when called on it (thank you @Joe Villeneuve ) you immediately backtrack and say "oh no, I cash flow!

I continue to count myself very fortunate to have my buildings. I am very fortunate to bring a 3rd salary into the household (and the largest). I could not imagine keeping and managing my buildings if I was not being paid handsomely.

To my fellow landlords who are stressing out right now- I am keeping you in my thoughts! I hope everything breaks your way. [Personal attacks removed by moderators]

Originally posted by @John Teachout :

I'm unclear as to why cash flow is a bad thing. And the benefit of a B.A.M is what again? So one can pay a lot of interest to someone else? Not following this line of thinking. Guess I'm doing it all wrong as my properties cash flow and I don't have any B.A.M.s

Don't listen to this guy. He's high on something. 

Cash Flow is a great goal...if your analysis and decision making (choosing markets and properties) is solid.  Accepting low CF, just because it's CF, is just as foolish as increasing your DP in order to CF higher due to the lower loan payment.  Thinking that way is a result of a lack of understanding of basic math.  It's a result of focusing on the answer...instead of the formula itself.

It's also a complete lack of understanding of the difference between Total Cost and Actual Cost...and why the Actual Cost is the only one that matters.

The way to profit from a big a** mortgage is to be the mortgagee.

Most recent one written = 400k, 6%, 30 yrs = 2500pm.   $2500pm sounds suspiciously like 10 Midwest rental houses.

Get on the other side of the payment.

Originally posted by @Steve Vaughan :

The way to profit from a big a** mortgage is to be the mortgagee. 

Most recent one written = 400k, 6%, 30 yrs = 2500pm.  Get on the other side of the payment.

As correct as this statement is, I'll take it a step further and say that you could make bigger money on either side of a non-collateralized loan...such as one with 15% simple interest (IO Pmts only). The lender gets a huge income from the higher interest rate, and the borrower can easily end up with "free" (that's not a type) money.

Originally posted by @Joe Villeneuve :
Originally posted by @Steve Vaughan:

The way to profit from a big a** mortgage is to be the mortgagee. 

Most recent one written = 400k, 6%, 30 yrs = 2500pm.  Get on the other side of the payment.

 As correct as this statement is, I'll take it a step further and say that you could make bigger money on either side of a non-collateralized loan...such as one with 15% simple interest (IO Pmts only).  The lender gets a huge income from the higher interest rate, and the borrower can easily end up with "free" (that's not a type) money.

I hear you, Joe.

My specific example also saved me $22k in closing costs and having to bother with a 1031.

But let me ask you, how does one reduce risk as a non-collateralized lender?  

Originally posted by @Steve Vaughan :

The way to profit from a big a** mortgage is to be the mortgagee. 

Most recent one written = 400k, 6%, 30 yrs = 2500pm.   $2500pm sounds suspiciously like 10 Midwest rental houses.

Get on the other side of the payment.

6%.  Geez. We just got a commercial loan for 3.9% last week. 6% is high. I'm guess you will be the proud owner of some property in a year or two due to a failed mortgage. 

Originally posted by @Calvin T.:
Originally posted by @Steve Vaughan:

The way to profit from a big a** mortgage is to be the mortgagee. 

I'm offering no appraisal requirement or lenders insurance ($7000), no origination, doc prep, underwriting fees ($6000) a 30 yr term with no 5yr calls.  And I won't even ask him to submit his financials to me every year.

But you're right.  All loans are fixed forever below 4% and I am screwing him over.  Hopefully the committee that has the right to call your loan in 5 years won't. 

 

Originally posted by @Steve Vaughan :
Originally posted by @Calvin T.:
Originally posted by @Steve Vaughan:

The way to profit from a big a** mortgage is to be the mortgagee. 

I'm offering no appraisal requirement or lenders insurance ($7000), no origination, doc prep, underwriting fees ($6000) a 30 yr term with no 5yr calls.  And I won't even ask him to submit his financials to me every year.

But you're right.  All loans are fixed forever below 4% and I am screwing him over.  Hopefully the committee that has the right to call your loan in 5 years won't. 

He must have really bad credit. Your fees and your rates are beyond screwing. Must be a real wiz you loaned money too. 

 

Originally posted by @Andrey Y. :

In light of all the recent threads about COVID-19, worrying about tenants not being able to pay rent, legislation that seems to screw over landlords month after month, and ethical dilemmas about where it is our obligation as landlords (or God's children) to cover the bills of tenants because of (fill in the blank)

Cash flow is for poor investors or investors that are poor (Apologize in advance to the BP / GRE / Turnkey advertisers)

Let me introduce to you a concept that is not often talk about, and probably frowned upon over the last 11 year bull market:

Big A** Mortgage (BAM)

Things most investors foolishly ignore..

  1. - Historic rent growth
  2. - Historic appreciation rate.
  3. - NOI per square foot
  4. - Operating expenses per sf
  5. - Capex per sf

Cash flow is for poor investors or investors that are poor.

If you need or hoped for cash flow to pay your cable bill then you probably should not be investing in real estate. The only reason I'm not cash flowing is because of a BAM that I am paying down because I am in a high appreciation market vs. a market where the only reason I may get cash flow is because the prices are so cheap because sellers are trying to unload unprofitable properties, this is by design.

So-called cash flow gets eaten up by CapEx and by pesky critters like the coronavirus. EVERY. SINGLE. TIME. I know that "cash flow" has been shoved down our throats because it makes money for advertisers and those companies selling it.

Its time to wake up and start thinking like the big boys (family offices, hedge funds, and billionaires). They are buying 3.5 caps in NY, London, HK, LA, and SF.. FOR A REASON. That reason is not the dream of cash flow.

What are 3.5 caps?  The cities you listed are outliers -they are the most expensive places to rent because people will live in anything there, even $3,000 / month shoe boxes. When demand is infinite you can deal with existential philosophy and sell snake oil over and over again.
That is not the case in 95% of the RE market.  

Originally posted by @Andrey Y. :

 I am actually cash flowing AND profiting in Hawaii specifically because rental income growth goes hand in hand with appreciation.  I would STILL profit even if my rentals were unoccupied. You cannot say the same thing.

The reason I can cover missed rent payments is because I focus on profitable markets, not to be confused with "cash flow" markets on paper.


What the hell are you talking about? You can cash flow without rental income? At what price point, what mortgage did you take out and how much interest are you paying on it? Simple math is all I ask for.  

Originally posted by @Joe Villeneuve :

Cash Flow is a great goal...if your analysis and decision making (choosing markets and properties) is solid.  Accepting low CF, just because it's CF, is just as foolish as increasing your DP in order to CF higher due to the lower loan payment.  Thinking that way is a result of a lack of understanding of basic math.  It's a result of focusing on the answer...instead of the formula itself.

It's also a complete lack of understanding of the difference between Total Cost and Actual Cost...and why the Actual Cost is the only one that matters.

Cash flow is a great goal. Totally agree there. How do you think CapEx is paid for. By your cash flow!

My markets have  great cash flow over time because of the high rent growth. Real estate is not a one year investment.

You ("cash flow investors") are speculating that your tenant is going to come up with the rent EACH and EVERY month so you can get your cash faux.

I can be the worst landlord ever but I still end up with a property worth double my purchase price in 10 years. An investor who spent their entire time on BP and podcasts ingesting thousands of hours of CASH FLOW advertising, their property (midwest home worth $75K now that was worth $50K in 1988), inflation adjusted is worth the same.

Appreciation and rent growth is the key.

Originally posted by @Calvin T.:
He must have really bad credit. Your fees and your rates are beyond screwing. Must be a real wiz you loaned money too. 

The whiz is apparently  the one I'm discussing this with LOL

I said I didn't charge those things. They are what he would have paid going through a lender.  

Sounds like you got 30 yr fixed, no fees, no appraisal, no lenders insurance? Also no originaion fee, doc prep, underwriting or closing fees and a 3.9% rate? 

OR was it a more typical commercial loan with a few to several grand in fees, a 5yr call and 20yr term?  Your real rate is closer to 5 and you have call risk.  Whiz. LOL

 

Originally posted by @John Collins :
Originally posted by @Andrey Y.:

 I am actually cash flowing AND profiting in Hawaii specifically because rental income growth goes hand in hand with appreciation.  I would STILL profit even if my rentals were unoccupied. You cannot say the same thing.

The reason I can cover missed rent payments is because I focus on profitable markets, not to be confused with "cash flow" markets on paper.

What the hell are you talking about? You can cash flow without rental income? At what price point, what mortgage did you take out and how much interest are you paying on it? Simple math is all I ask for.  

 Very simple example. An investor owns a $800K home in a city in California. They earn $60K per year appreciation over the long term (which is $5K per month), which the Turnkey operators will tell you you should accept a $250 per month "cash flow", more than half of which will go to fixing up your boiler, or roof down the line, while the property value doesn't even keep up with inflation.

Do you think @Minh Le @Matt R. @Jay Hinrichs @Amit M. (investors who invest for PROFIT) are worried about their tenant not making the April and May mortgage payments? Because all of the people I see worried on all the threads popping up, are not invested in profitable markets. They are invested for "cash flow" because that is what they have been hearing and reading about for the last 10 years.

This is intended to teach, so we can all learn from something like this. At the end of the day, we are all trying to become better investors. Leave the advertising to those who are trying to sell you something. 

Originally posted by @Steve Vaughan :
Originally posted by @Calvin T.:
He must have really bad credit. Your fees and your rates are beyond screwing. Must be a real wiz you loaned money too. 

The whiz is apparently  the one I'm discussing this with LOL

I said I didn't charge those things. They are what he would have paid going through a lender.  

Sounds like you got 30 yr fixed, no fees, no appraisal, no lenders insurance? Also no originaion fee, doc prep, underwriting or closing fees and a 3.9% rate? 

OR was it a more typical commercial loan with a few to several grand in fees, a 5yr call and 20yr term?  Your real rate is closer to 5 and you have call risk.  Whiz. LOL

I miss read as part was in the quote so I did not see that part. Our bank doesn't charge fees outside of the appraisal. 25 year term, not callable. No need to be a wiseguy.

Originally posted by @Andrey Y. :
Originally posted by @John Collins:
Originally posted by @Andrey Y.:

 I am actually cash flowing AND profiting in Hawaii specifically because rental income growth goes hand in hand with appreciation.  I would STILL profit even if my rentals were unoccupied. You cannot say the same thing.

The reason I can cover missed rent payments is because I focus on profitable markets, not to be confused with "cash flow" markets on paper.

What the hell are you talking about? You can cash flow without rental income? At what price point, what mortgage did you take out and how much interest are you paying on it? Simple math is all I ask for.  

 Very simple example. An investor owns a $800K home in a city in California. They earn $60K per year appreciation over the long term (which is $5K per month), which the Turnkey operators will tell you you should accept a $250 per month "cash flow", more than half of which will go to fixing up your boiler, or roof down the line, while the property value doesn't even keep up with inflation.

Do you think @Minh Le @Matt R. @Jay Hinrichs @Amit M. (investors who invest for PROFIT) are worried about their tenant not making the April and May mortgage payments? Because all of the people I see worried on all the threads popping up, are not invested in profitable markets. They are invested for "cash flow" because that is what they have been hearing and reading about for the last 10 years.

This is intended to teach, so we can all learn from something like this. At the end of the day, we are all trying to become better investors. Leave the advertising to those who are trying to sell you something. 

Lol, yes... if everyone had Kushmer and Trump's parents we could all play that game but the majority of people need to stay afloat while being landlords. Specifically while starting out, which is people on BP. They don't all cruise out to a cushy 500k a year job at a law firm between collecting rent checks.

You can't talk big before you have the means to do so. 

The $60k/yr appreciation is flat out incorrect. Capital gains taxes, erosion of the property ,depreciation and a cap all cut into it. I have followed homes in Van Nuys, Burbank, Studio City (well, much more expensive there) in that price range and followed them over the past 13...14 years. They've hit a ceiling and will succumb to sprawl as well as new builds after a certain point.

You can have artifically inflated markets like 2011-2019 but really, there is a cap and it's not infinite. No one is earning 60k/yr in appreciation on a 800k house in a neighborhood like Burbank with no tenants. 

Originally posted by @Steve Vaughan :
Originally posted by @Joe Villeneuve:
Originally posted by @Steve Vaughan:

The way to profit from a big a** mortgage is to be the mortgagee. 

Most recent one written = 400k, 6%, 30 yrs = 2500pm.  Get on the other side of the payment.

 As correct as this statement is, I'll take it a step further and say that you could make bigger money on either side of a non-collateralized loan...such as one with 15% simple interest (IO Pmts only).  The lender gets a huge income from the higher interest rate, and the borrower can easily end up with "free" (that's not a type) money.

I hear you, Joe.

My specific example also saved me $22k in closing costs and having to bother with a 1031.

But let me ask you, how does one reduce risk as a non-collateralized lender?  

 Excellent question (I tee'd that one up nicely...didn't I).  Easy. Collateralization is an illusion as far as risk control. It's actually a penalty for both sides. I use an escrow account that handles the flow of money from both directions.  This makes the risk control proactive,...and real.   Here's an example: 
Step #1: Cash for Loan is placed in Escrow Account, with instructions that the funds are to be released when the means (REI) for payment of the loan is acquired. The funds are released as follows:
          A - Funds for the DP on the REI is sent directly to closing
          B - Balance of the funds are sent to the Borrower after closing
Step #2:  REI is purchased.
Step #3: NOI (CF) from REI goes through the same Escrow Account, with instructions for its release as follows:
         A - Funds (CF) used to pay Original Loan
         B - Funds used to pay Debt Service on REI (Step #2)
         C - Remaining funds are released to Borrower
Step #4:  Remaining funds from Step #2:B is free money, and are used over and over again.

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