Christian Osgood and Cody explain how real estate investors can capture both cash flow and appreciation by locking in fixed-rate debt, focusing on multifamily properties with five or more units, and using creative financing like seller-financed deals at 5-10% down. Small rent increases on larger portfolios generate outsized gains in property value.
Chapters
If you do that every time, every single deal you close, you now make more money every single month. That is a way to keep a business alive and never, ever lose your business. Welcome back to our channel. I'm Christian. This is Cody. Today we're going to talk about cash flow versus appreciation. And here we go.
Well, some people like to buy in the Midwest. They'll buy in a place called Gary, Indiana, and they're going to be super stoked about their 20%, 30%, 40% cash on cash returns. And there's other people who are diehard Seattle fans and they're going to lose money every year with negative cash flow. However, it's going to go up and their hope is going to appreciate more than the money that they're putting into the property. Now, both of those can be phenomenal. However, we have a better idea. What if you buy based on cash flow for equity growth? You buy based on positive cash flow for appreciation. So we don't like to compromise. We're young and we don't want to choose either or. We want the best of both worlds. And so how the heck do we do that?
Well, the first thing, let's start with the cash flow side. So cash flow is addition, it's monthly income, and appreciation is multiplication. That's, that's really how you make a lot of money and make your money multiply is in the appreciation thing. But our rule, how do you own it? How do you never lose it? Well, you live or die by the cash flow of the property. So that's the first thing that we're going to focus on. How do we buy on cash flow? That's very easy. You have income and you have expenses, and the income must always be higher than your expenses.
Wow. Imagine that.
I know we keep this super simple on this channel for a reason, because real estate is actually not that complicated. The big thing that you do to maintain this cash flow is you want long-term fixed rate cash flowing debt. You want to eliminate variables so that, you know, day one it makes money and in 5 years it's going to keep making money and I'm not going to lose the property. If you've stabilized it now, every single deal that you buy, if you don't violate this principle, cash flowing, long-term, fixed rate debt. If you do that every time, every single deal you close, you now make more money every single month. That is a way to keep a business alive and never ever lose your business. So that's stage 1. Let's talk appreciation. How do we optimize for appreciation and what does it do for us?
Well, to do that, you got to buy the right type of assets because if you raise rent, yeah, you may get more cash flow, but your value doesn't go up if you're just buying a house. So we buy a very specific type of real estate, which is commercial residential multifamily. We're talking 5+ units because those are valued based on the income they produce, not just the rental income, but this thing called net operating income, or for short, NOI. Now, your net operating income is just your top line revenue less your operating expenses. This is not a mortgage. Debt is an option. And you can look around. There's a lot of people that own a lot of stuff in cash, so you're never going to include debt in this figure, but you're going to have this thing called NOI. Any time you can boost that, your value is going to go up. Now, why would that happen? Because another investor, if they wanted to buy your place, they could pay more and get the same return you did because it makes more money. So the more income it makes, the more it's worth. And the bigger it is, the lower return people are usually willing to get because it's more stable. If you have 100 units, it's more stable than a duplex. Why? Because if someone leaves your Bremerton duplex, It hurts.
I think that's happened before. My first tenant ever, actually, 2 months in, passed away. This is my first building right after I became an investor. I was like, I did the thing. 50% vacant almost instantly.
That hurts. Yeah. 38-plex. It still hurts when we have a couple of people leave, but it's not as bad as our duplexes.
No, not at all. And so when you have a little bit of turnover, you're doing a great job managing the property. It doesn't hurt as bad when you don't go from cash flow, not cash flow, cash flow, not cash flow. 2 people leaving on the 38. It still makes positive cash flow every month. And that's really what you're targeting. Bigger buildings have stability.
Now, the other side of a bigger building, why we love our 12-plexes or 30-plexes, like the bigger stuff, and we're still very small players, but if we have rent bumps go up just $50 on a 40-unit versus on a duplex, the amount of net operating income that actually gets added to the asset, like our value goes way up. And so if we put $100,000 into a deal, We raise around $100, we may double, triple, quadruple our money depending on the asset size. And that's really ideal for us because we're getting paid to wait for that to happen. And we just have to trust that the government's going to keep doing their thing and print more money. That's the one thing I trust them to do.
But yeah, they have, they've proven they're willing to do that. So it's one of the great multipliers of money is your debt's actually getting devalued because the dollars that you owe are worth less. And if all your variables are fixed, you owe a fixed amount on a fixed interest rate, you're golden. It's fantastic.
Yeah. Inflation's not like this thing that's going to make you super wealthy in comparison to everyone else, other than the fact that it devalues the debt that you have. Everything isn't just worth more, but the debt piece stays the same. So it's just worth less in comparison to everything that you bought. And that's how the really wealthy people get really wealthy. But now let's talk about appreciation, because some people do have a pitch for that.
Yeah. So the appreciation thing, cash flow aside, you do typically make the most appreciation over a long period of time because markets go up and they go down, they go up, they go down. But generally speaking, development does not quite pace with the population growth and inflation is going to outpace pretty much everything. So if you can just hold the property and not lose it, it will over time always go up in value over a long period of time. That's just a fact. If you stack the deck in a high appreciation area, even if you have less cash flow, you do tend to make money, especially in this last cycle where 2008 to about a year ago, you could throw a dollar in pretty much any market and it just would have gone up regardless of your cash flow position. If you could hold the property, you made money. Congratulations. However, that's not true in every cycle. You do have to afford to hold it, which is why we have to bring in cash flow. One of my favorite parts of appreciation though, especially in the creative finance space, you're multiplying money. If you can get a low-down deal, let's say seller financed 5, 10% down.
Let's say you put 10% down on a million-dollar building. I put 40% down.
Yep. If the building goes up, let's say, well, you put in $400,000. So easy math. Let's say it goes up $400,000 in value.
I doubled my money. But you turned your $100,000 to $500,000.
I 5x'd my money. Same deal, different down payments. As long as you can cash flow on that $100,000 down, your cash-on-cash return is going to be much, much higher and your multiplication of money is much easier. I've seen this across multiple strategies, even syndicators who are crowdsourcing. When you blend in things like creative financing, you can get low-down situations where the deal cash flows, your ability to multiply for basic math, let's just say, is it easier to multiply $5 or $50? Like, I'll take the lower down on any given asset. And that is exactly what we're trying to do. Let's multiply money. And it's easier if you have less money in the deal to multiply in the first place.
But if you borrow more money, you cash flow less. So how do we fix that?
Well, if you can borrow cheaper than the property yields, you make a spread on every dollar you borrow. So you're incentivized to borrow more.
Hence creative finance.
Yep. Set your interest rate where it works. You could do this traditionally with banks when interest rates were 3%. It was not hard to buy a deal that yields 5% and borrow at 3%. Today, where interest rates, like last I looked at them, were about 6.5%, 6.75% interest, a lot of deals aren't going to work. That deal that yields 5%, you're going to lose money on every dollar you borrow. It's not going to work. Creative finance, you can talk to that owner, say, hey, look, I can get your price. I can probably even pay a little bit more, but the interest rate is going to have to be closer to 4— I will say, you know, 4 or 5% if you're interest only or amortized, but it has to be notably lower so the payments make sense.
To sum all this up, you just have to solve for a couple of things. You have to figure out how do I buy it, how do I never lose it? And this is all just a function of long-term fixed rate debt and cash flow. And buy based on cash flow, always for equity growth. And if you don't compromise, you'll be able to repeat exactly what we did. Less than 2 years, we went to well over 100 units, well into the multiple 6 figures a year in annual cash flow, and we did it all without any of our own money. So if you'd like to repeat that, keep following along on this channel, hit the subscribe button, and we'll see you next time.
