2 Steps to Analyze any Property - Creative Finance 101

Hello YouTube, it's Cody and Christian and we are back this week to discuss our 2 rules for buying absolutely any deal. If you're getting into the creative space or even the conventional space, they're the only 2 questions we care about. If you're worried about the IRR, the DSCR, any acronym, all those are fantastic, they have a place, and that is the alphabet. When we're buying real estate, there's only 2 things that we look at. So once you've chosen your location and you know where you want to buy, which is extremely important, what are the only two things that really matter after that, Cody?

Number one, how do we buy it? The IRR does not matter if you can't figure out how to buy it. And it comes down to deal, debt, and equity. That's it. You just have to answer, okay, how do I buy the real estate? The management's not the most important piece. The tax benefits are not the most important piece. If you're watching this video and you don't own any real estate, you don't have a tax problem— well, you may— But you have a real estate problem, and your problem is you don't own anything. So once you find something, how do you buy it? Find a deal. Well, now what? You need money. It doesn't have to be your money, but it can come in the form of, well, really two things: debt, a loan, or equity as a form of a partner or earned income if you have earned income. And that's it. You just have to solve, how do I arrange my debt pieces so so that I can go buy said real estate? And that's question number 1.

Yep, if you can answer those. Now, when you're actually finding the deal, putting together the deal, a big part of how do you buy the deal, how do you actually control it, is the relationship, especially in the creative end. If you're using seller financing, contract for deed, or any of the creative strategies that involve the seller in the transaction, you gotta know what they actually want. Banks are gonna be pretty straightforward. Banks need to get a return on their assets. They're usually— all of their rules are online and an easy conversation. If you're getting creative, all you have to do is make sure you identify what does the other party want. Is it the price? Is it a certain interest rate? Do they want to pass a note on to their children?

Maybe they're not ready to sell yet. Maybe they've got another 7 years on their amortization till it gets paid off and they want to seller finance it to you, but they can't. You do a 7-year lease option and you execute the zero-down seller finance option at the end of the lease when the loan is fully amortized and paid off. You just got to figure out how do you arrange your pieces, and then you answer that question. You move on to question number 2. You fix your real estate problem, what's next?

Well, the next problem is how do we never lose it?

So, not many people do that one, right?

No, and we'll share a bunch of different ways that you can lose it and how you in fact keep it forever, or at least never have to sell it. So in the first question we address, okay, now we got control of this property. It is my property, I am on title, I own it.

Congratulations. Yes. Wow.

Now we have some new sets of problems. How do we not lose it? Well, one way that properties get lost is people over-leverage. Cody, with over-leverage, what does that look like?

Okay, so it's not a debt amount. If you could owe $100 million, $1 billion, $10 billion and not be over-leveraged. But what it does come down to is debt service. If you cannot service your debt, meaning you can't comfortably pay your debt and then some with margin, you're probably in trouble. And if all of your notes are due tomorrow, you're probably also in trouble. So long-term fixed-rate debt that cash flows, where you have debt service in excess of your debt cost with margin, and then long-term balloons, if any balloon, meaning that it's not due in 3 years, it's due maybe 10, 20, 30 years, or it'll just pay itself off like a traditional home loan. That's why we love the seller finance space. You write all the rules. So you've got to make sure that by not overleveraging, you have margin, meaning cash flow, and you don't have any balloons that are about to pop.

And now a keyword that you said was long-term fixed rate debt. If you know me at all, I hate variables. When you're investing or running a business, there are a ton of variables and a ton of unknowns. You can't control everything that's happening. Drives me crazy. Don't add extra variables. That's a huge one. Fixed rate debt means I know that if my income is right here and I can set these rents and I have a margin where my rent is significantly higher than my expenses, I can continue to pay my expenses. If you have variable debt where that debt changes throughout there and you can't control that, well, now there's unknowns. What if interest rates go crazy? Do you still cash flow? Do you cash flow if interest rates go up to 8, 9%? Could happen.

The answer for us is yes, absolutely.

However, we've locked in our interest rates so they won't change. So if interest rates climb to 9, that expensive 6% or 5% debt we took on in the past is now extremely cheap debt. We know where the property works and we lock in those terms.

That's what matters. How do you buy it? How do you never lose it? It is just that simple. You don't need to focus on any other questions right now. Does management matter? Yes, but there's a time for that. And most people put the cart before the horse and they say, okay, I need to figure out all my management systems, I need to figure out the LLC. That stuff doesn't matter right now because right now, if you don't own any real estate, or maybe you own a duplex, or maybe you own a fourplex, great job, but that's probably not what you wanted to build because if you already built what you wanted, you wouldn't be watching this video. So keep it that simple. How do you buy it? And how you never lose it.

So practical application here, we bought a 7-plex. The way the deal was presented was a fantastic deal for a lot of buyers. First, you start with the players. They found us from our YouTube channel. It was actually one of my— the fathers of one of my childhood friends, so we knew each other. There was an existing relationship so we can communicate what each party needed. They wanted to unload the property and wanted their son to be a part of that deal. Unfortunately, his son hadn't managed real estate before and lived out of state. So okay, there's the first problem that we need to solve in how do you buy it. The next piece is they wanted more down than we had. They wanted, I believe it was $250,000 down. We were able to put together probably about $50,000, so that wasn't gonna work. Most people will look at those deals and go, oh, there's no way we can do this, it's not gonna come together. We came up with a very simple proposal. Okay, put your son on the deal. We're absolutely happy to work with him on that. Granted, he still has to pay his portion of the down payment, but that down payment also needs to be lower. We asked for 4.5% down. There wasn't a lot of cash flow day one. No. Rents were low. Huge upside on the property. Wouldn't have been right for us because it was early in the game. We didn't have cash flow to cover. So what do we do? He wrote the interest at 3%.

So now all of a sudden our payment's $3,625 a month with an $8,000 income. Not really good at math, but there's a little bit of a margin there.

And we've solved for what both parties needed. We needed time to increase the rents, we needed a lower down payment. There's one more piece. They still really wanted more down. We didn't have the money. The way we solved that is at the end of every single year there's an additional principal payment. Just, we hit the end of the month, December, we owe I believe it's just an extra $20,000 a year. Not hugely expensive, and it's covered out of the cash flow for the property. So the property solves the down payment problem for us over time.

Real estate buys the real estate. That's the best way to play it.

That's the best way to do it. So that is how we answered question 1: how do we buy it? Now, in this property, we have a 5-year note. Is that long-term debt? It's medium-term debt. So in the long run, we've solved for We're a little less than a year in, so we have 4 years to maneuver, but what's the next play for how do we never lose it?

Well, the main thing is to make sure that we have cash flow and equity, because if we've got a lot of equity, if we're at 50% loan to value or 60% loan to value, it's really easy to get a new loan. The other thing that we look at today, which is a little different than we did way back when, is we can pay off any of our notes before they're due, and that's strictly out of cash flow. Now it's hard to do that in the beginning. It's the reason that we had to scale to the size that we did. But a million dollar loan today, we could pay that off in 4 years. That's how we quantify this stuff. And so yes, we want to make sure that we have a 60% loan to value. That's why our average real estate portfolio is at 60% or below. We have some deals that are like 65, but our bigger deals are below 50% today. So we keep a really low loan-to-value so it's easier to get loans. And some of these loans, like the 38-plex, we could service at 12% I/O. I mean, we could take it to hard money. So we're just making sure that if we get in a pinch on our balloons, that we can either extend those with the sellers, we can put it into, if we had to, hard money, or we could just pay it off.

And that's something that we do very actively. We're working on that. A bunch of our notes are still in their first year. A lot of them are 5, 10, some of them 15.

Well, we're in our first year of partnership.

Exactly. So everything that we've done, we're in year 1. We're already working on some refinance structures on several deals where we have a 4-year runway. Where you get pinched on this is where you get— you're like, oh, I have a 5-year note. So in year 4, you start shopping it and you find out, oh, the economy is not in a great place for a bank to lend. You can figure out a refi with someone in a 4-year period. If you get down to your end of year 1, it might not come together. We've had it happen where a bank said yes, yes, yes, yes, yes, and on the day we were supposed to sign Bad news, guys, you're scaling too quickly. We don't like it. It happens. Don't rely on banks. Don't put yourself— again, it's variables. Eliminate as many variables as you can. Control everything you can. How you buy it, for us in this case, was seller financed with custom terms. How do you never lose it? We're going to pay down the debt, maybe refinance it. More likely we write a check for it.

Yeah, and be transparent with all the parties involved. Turns out if you build walls to hide stuff walls can converge and make a corner, and then you're stuck in a corner. If you're just transparent, there's no walls, there's no corner to get put in. So, but keep it that simple. How do you buy it? How do you never lose it? That's it for today's video. So like, comment, subscribe if you haven't already. And if you're the 27% who's still watching this, we appreciate you.