Unless you’ve been keeping residence under a rock someplace, you’ve by now listened to the BiggerPockets Podcast 108, which features entrepreneur and real estate mogul Grant Cardone. The show was one of the best for sure – almost as good as mine. Grant is the master of his universe. A lot of folks should be motivated by this podcast.
However, if you listen between the lines — and you don’t have to dig too dip — Grant doesn’t not have too much love for the no money down (NMD) approach to investing. He makes this point of view known elsewhere as well. In fact, Grant and those who agree with his point of view don’t see NMD as investing at all.
Since you absolutely can’t argue with Grant’s success, and he obviously must be taken very seriously, where does this leave Ben Leybovich, Brandon Turner, and 95% of the people on the BiggerPockets Forums and this blog? ‘Cause I hate to break it to Grant (like he cares), but most people have neither the kind of money to facilitate his style of investing nor the capacity to form businesses that can throw off this capital.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Why NMD is Not Investing According to Grant
Simple — the way he sees it, investing is defined as protecting and increasing equity, buying power, and magnitude of cash flow. In simpler terms, he thinks that an investor puts equity into the deal in order to convert the face value of it, as well as the cash flow that collateralizes it, from earned to passive. He and others believe that an investment of capital is the defining characteristic of “investment.”
I am not going to argue this point of view – his is the most bulletproof model. Liquidity is the mother of safety in many ways, and relative to this, a business has much more potential to generate meaningful cash flow than does real estate. Grant’s formula is one that many successful investors have used:
- Start a business.
- Grow it so it throws off a lot of cash.
- Take this cash, which happens to be rather highly taxed, and buy income-producing real property with it, which converts the face value of cash flow into a much lower-taxed real estate variety. And as Grant acknowledges, this cash flow is less but more stable, meaning that the equity it collateralizes is safer.
Brilliant — and text-book effective. No argument at all!
But is This the Only Way?
How many out of 1,000 people who achieve some level of financial success via real estate do it Grant’s way? Perhaps one in a thousand?
Sure, if you want to shoot for the stars, then look for way to model yourself after Grant. Follow the three steps outlined above.
But I promise you, if you are starting out with nothing and want to retire with some element of dignity and cash flow that is a 100 multiple of that which your neighbors receive on their SSI checks, you don’t have to be one out of 1,000; you don’t have to be Grant Cardone. This is precisely what makes RE so good – you don’t have to be a genius! You just need to know a few things, and NMD by the way is quite helpful to most of us…
Take Me for Example
While my friends Brandon Turner, Serge Shukhat, and Brian Burke will definitely tell you that I am a genius — especially if you put a gun to their head — I’m definitely not. I started out my college years intending to make money as a violinist, but this plan was interrupted when I was diagnosed with MS. My plan B… well, there was no plan B. There also was no income to speak of, considering I was making paychecks teaching kids at a preparatory department in a nearby college.
I came into college with credits in advanced physics and calculus, and UC counsellors asked me why I bothered with music. I could be making so much more money going for a different degree. But I love music and was taught by my parents that if I do what I love, the money will come. Besides, I was better than the average Joe on the fiddle. So in spite of low income potential, I went for it. But as I mentioned, even that prospect of low income was taken off the table following my diagnosis.
I am not a betting man; I like guaranteed returns, which is why I buy apartments. But if I were a betting man, I’d bet that 75% of you reading this are in somewhat of a similar situation.
Well, here’s the thing. If you listen to Grant, you have no business investing in real estate. Why? Because the only way you can do it is NMD, and according to him, you’d be stupid to do it. According to Grant, you should either have the brains and the balls to create a business to facilitate investment in real estate, or go work for someone.
I started out with nothing. I had a spouse who believed in me and a capacity to think and learn, but that’s about it.
I’ve built a portfolio of small to midsize multifamily units, which has allowed me not to work for a living. I am not rich (working on that), but I am not poor either. I have become an expert at creative finance and no money down because this was my only option.
Today, as I write this, my partners and I are negotiating on a 90-unit. Maybe it’ll work out, in which case we’ll syndicate it, and maybe it won’t — that’s beside the point. Here are a few things to note:
- I had to work up to a point where a deal like this is even within the realm of possibilities. This wasn’t possible 4 years ago. It takes intellectual worth, you know what I’m saying?
Guess what? It was the NMD deals that facilitated the learning.
- I have partners without whom I could not do this kind of a deal at this point. I need back-up. Both of these guys have more money and units than I do today (though this is not going to last). Both of them, I’d like to believe, take me seriously. Why? Because I’ve done a lot of things, and I’ve learned enough to not do even more things. They could be lying to me, but they tell me that I’m pretty smart.
Guess what? I got “pretty smart” by doing nothing down deals.
- I’ve been using OPM for 8 years now, and if this deal comes through, I’ll be floating a PPM of $1,000,000+; I will raise $1M from investors who agree with my partners in thinking that I’m not stupid.
Guess what? I got here by doing nothing down deals.
Newbies, Listen Up!
There is an important distinction I want you to wrap your heads around, and it is this:
Nothing down is not the final destination. I don’t plan to retire carrying too much debt, and neither should you. However, NMD has been a stepping stone. For me, NMD has been the facilitator of critical mass in terms of both cash flow, balance sheet, and intellectual worth — and it absolutely can be for you as well!
I am going to turn 40 in March. I have a portfolio (all bought with nothing down) that has allowed me to do vastly better financially than any music student I went to college with. It has allowed me not to work a job and instead to focus on learning RE. It has bought a margin of financial safety for my family, which is better than many (I’d say most) of my friends, even those earning high incomes!
I get richer when I sleep, and it’s a nice feeling to know that my car payment is being made by my tenants. I love seeing my balance sheet going up by thousands of dollars every month. Amortization is a wonderful thing indeed!
Even if I don’t make a dime of cash flow from any of the properties I currently own (as if), and if I never do another thing in RE, I am going to retire multimillionaire. Do I want to do it with the property I currently hold? No, probably not; I’ll trade up. But in concept, I am OK. My family is OK, and while I want more (and I’ll have more), I am OK.
That’s a lot better than a violinist is supposed to be able to do.
All of it was teed up by having the audacity to not listen Grant Cardone and go for it in the only way that I could: no money down.
I am not a genius, and I am not special. If I can do it, you can do it. Appreciate and admire Grant Cardone. Listen to every last thing he has to say. But take him with a grain of salt as it relates to NMD. Done right, no money down works!
Investors: What do you think? Is no money down truly “investing?” Is it a feasible way to build wealth?
Leave a comment below!