Creative finance live

Okay, I think we are live. Well, happy Wednesday, welcome back. Every Wednesday we go live and answer your questions live. Today I'm going to start with some, uh, questions we got in the comment section, and as folks start getting in, if you want to drop your comments into the live chat, then we'll start taking it from there. Now the first question that we've got for the week is, instead of saving your profits for maintenance with the goal of paying the debt in one shot, why don't you use every little bit and pay extra every month? Well, the reason we don't pay extra on the debt every single month is if you pay your million-dollar loan down to $100,000 and something happens and you lose the property, you've got all the equity tied up and less liquidity in the bank to help pay for things that come up, because things happen in real estate and in life. Our philosophy is keep the risk on the lender until the final moment. If you pay them down extra, they have less risk than when they lent you the original dollar amount. So we want to hold that note for the life of the loan until we can whack it at one point, meaning we can write a check. So when maintenance comes up, we can write a check. We just start stacking as much capital as possible in the bank account. And if you— let's say you buy a duplex in the Midwest, it's $100,000, you owe $80,000. You wait until you have $80,000 in the bank account and you're in the debt hammer phase, and then you can just write a check and pay it off in full. That way you keep as much liquidity to fend off scenarios as they come up. And when you're ready to get rid of the leverage and rid of the risk that comes associated with debt, you can get rid of it with, uh, just one stroke of a pen, writing one check. Another question we got And this is actually, um, very current. We've got the Robin Hood Village Resort Asset Management Boot Camp this weekend. Someone asked, where's that gonna be? That's going to be at the Robin Hood. So we are talking about asset management. It's one thing to buy real estate, it's another thing to never lose it. But the folks who do best in real estate are the ones who can manage their properties best. If you'd like to check that out, robinhoodvillageresort.com, check out the events section. That is this weekend. Another question we've got from the chat: how do you fund renovations? Well, with, uh, money. Unfortunately, you have to pay for things with money. If you have no money and you're getting started and you follow the principles that we talk about, you build everything off of positive cash flow. If you're buying a 10-plex, you cash flow $100 a unit day one with upside, you've got $1,000 a month to throw renovations. So, uh, if you're buying your first deal, maybe you buy local, maybe you're doing a lot of the renovations and you're using that money to buy materials. That's what I did when I was getting started. Unfortunately, when you're getting started, you have the least amount of money, the least amount of experience, and the least amount of connections to help you get things done cheaper. And you're only going to get your cost down as you grow in your business, but by that time you have more money, so it doesn't matter as much. You pay for things with money. Where does the money come from? It can either be cash you've got saved up. It could be cash flow from your job. It could be cash flow from the rental, or it could be debt. And those are really the main sources of how we fund our renovations. Today, we fund things out of cash flow. Money comes in from all of our businesses, all the real estate on a monthly basis. We throw that at the problems, get the problems fixed, and our goal is to have those problems not come up again for 5 to 10 years plus. Now from the, uh, comment section, JF Lobo says, hello, I have a question. By the way, I love your content. Awesome, glad you're here, and make sure to put that in the chat. Now from Tamir, hey Cody, what are you doing in case property owners don't have K-1s? Well, if they have it in an LLC and partnership, they're going to have that, they're going to have that K-1. Document, I'm assuming you're referring to the tax document. If you own that and you're owning it with partnerships, you got to get the K-1 for, to just file your taxes in general. So they should absolutely have that. Not every owner reports all their books and all their income properly, and so they try and avoid the IRS and taxes. And in that case, you're taking more of a calculated gamble saying, well, I don't know for a fact fact that I can verify that it's got this amount of income or expenses. So then you just go off of, okay, what's the trailing few months? Can they provide bank statements, uh, if they can't give you actual tax returns? From Emmanuel, hey, I was wondering if you have any recommendations on banks to manage your real estate finances. We're in Washington, we work with Umpqua, and I'm looking at some other banks because we own some different states now. Christian owns in Texas, I also own in Indiana and should own some stuff here in Tennessee in not too long. But we bank with Umpqua in Washington State. And just note that it is not their job to manage your finances, it's yours, but they do hold our money. Tamir says missed us. Well, I appreciate that, Tamir. All right, from Buildy Bunch, can you go over a few fictitious deals, maybe a random property on LoopNet. Yeah, we could absolutely do that. Uh, that said, I won't be able to share my screen the way that this is set up for this live. We could do that next week. But, uh, if you want a real example, um, I bought a property over in Moses Lake, and I'll give you some numbers on it. It was 12 units back in June of 2020, bought it for $680,000. They originally wanted $600,000. They then said, hey, I actually want more for it, $680,000. Now if that sounds like a great deal for Washington State, it was a good deal, but it was really rough. There's a lot of things that I had to overcome. The day one rent roll was about $7,300 a month. The seller payment was $3,300, basically $3,300 a month. Um, I had utility bills, taxes, insurance, which were another couple thousand bucks a month. And so I was paying about $5,300, $5,500. I had a hard money payment of $1,250 a month, and then I still had cash flow above and beyond that with upside. Bought that deal. It was a 10-year fixed rate seller finance note, and my goal with the property was put roofs on it. So what I had to do is get stable books to where I could refinance the property, put a pitch roof on it. And I still own that 12-plex to this day. It's worth about $1,350,000, $1,400,000. I have an appraisal for $1,400,000, but rates are up, so it doesn't help. But there are deals like that all over the United States. The name of the game on those types of deals is make sure that if you want to buy it, you have long-term fixed rate debt. With cash flow on margin. And that deal, while I was a little bit overpaying for what it was, I had cash flow and I had a 10-year note, which means I wasn't gonna have to worry about it in 1, 2, 3 years. If I could refinance it, which I did, then I would. But if I got in a pinch, something happened, economy went down, which did a little bit with the rates going way up, then I wouldn't have to refinance. So it alleviated the pressure. If you're doing a random deal, whether it's on LoopNet or not, because one of the best deals we ever did was on LoopNet for a very long time. If you're doing those types of deals, just make sure you have that positive cash flow and margin. And the metric you're going to want to look at is your debt coverage ratio. And what that basically means in simple terms is you've got NOI, which is the cash flow you have before debt. It's after all your operating expenses, but it's before your mortgage. And you want to see how much excess is that number above your mortgage cost. So if you've got a net operating income of $10,000 a month and you've got a, a mortgage of $5,000 a month, you have a 2x debt coverage ratio. You want to make sure you have at least 1.5. So for every $10,000 in mortgage, you've got $15k in NOI. All right, so from Buildy Bunch, sounds like that deal was a break-even deal. But you gained equity, correct? No, it actually did cash flow a bit. And, um, when I, when I used all those numbers, I was also including management costs, but I did self-manage for the first year. So I basically bought myself a job for like $1,000 a month and change. Today, uh, that rent roll is closer to $11,000 a month, and it still has some upside, but I basically borrowed my way into a job And to your point, had a plan to build the equity to grow the asset. Candace says, hey Cody, hey, hope you're doing well. From JF Lobo, so I've had a love-hate relationship with real estate for years. I've worked with Felipe and others, but it always comes down to not having capital or credit or way to get a loan. That's the beautiful part about owner contracts, seller financing. It comes down to your relationship, your ability to communicate where you're coming from, where you're going, and what changes for you when you get there. And that, at the end of the day, is the circle drill simplified. If you can just communicate with people that have what you want, what you're trying to accomplish, and what changes for you when you get there, they don't care about the credit as much. That I've never been asked for my credit score to get a seller finance note done. It doesn't come down to that. It comes down to do you have the trust, do you have the relationship? And that comes from effective communication. Of what you want and not over-talking. From MN Trucking, hi, what is your minimum cash-on-cash return you're looking for for a long-term hold? I don't care about cash-on-cash return. There's a lot of people that do. The reason I don't, especially if we're on the topic of long-term hold, is if you have something that pays for itself and puts extra cash into the bank, whether it's a 20% return or a 5% return, I'd rather have a 5% return on $20 million than a 10% return on, you know, maybe just $1 million. So the return is not what's important. It's what's the actual cash flow and then what's the margin between the debt cost on an ongoing basis and the net operating income. That debt coverage ratio is significantly more important. And as long as you have debt, you'll have risk. So again, the minimum we want is a 1.5 debt coverage. Every $10,000 a month in mortgages, $15K a month in NOI, which would mean a $5,000 a month cash flow. That's the, the margin we're comfortable with as a minimum. Some assets are much higher than that. Some assets take a year to get there, but that should be the goal. And do not care about the cash-on-cash return. I just care about not losing the real estate, and that comes down to the margins you have on your real estate. Hey, haven't purchased anything yet. How are you analyzing population growth as well as projecting growth when purchasing? I look at worldpopulationgrowth.com. I think that's the exact link, but if you just look up, uh, the city that you're looking at investing in or the town, put in population and put in the year, it usually has a trend. It can show you which way it's going. It's either going up or it's going down. They usually don't just stay completely stagnant. Some, some areas do. But you should be able to tell from that graph alone what the population is doing. Now, if it's going up, then we look into, okay, who are the main employers? Are there multiple employers? If it's a small town, if there's not, then I'm less likely to buy there. JF Lobo, I know creative finance is the way, but what is the most foolproof way to do it? I know you are a person, or are the person for answering this question since You had 30 rentals before I even knew what creative finance was. Okay, so the seller finance route, there's a lot of deals that are even listed on the market today with seller financing. The way you make your deals cash flow, though, it's about deal, debt, equity. It's not deal, then seller finance, then equity. It's just deal, debt, equity. You find the deal and there's two types of money. You find the debt and the equity. The debt is the cheapest part. And the way you make your deals work on any deal— that this is just the math and there's no other way around it. You've got a true cost of capital expressed as a percentage, which is your loan factor rate. It's your annual principal and interest payments divided by the loan amount. If that number is lower than your cap rate, which is your dividends expressed as a percentage, you will make money on every borrowed dollar. That is how you win in this game. That is the, the foolproof way to do the math is you've got a cap rate, which is your dividend expressed as a percentage. You buy a million dollar property with $80,000 NOI, that's 8 cap, 8% rate of return when you pay cash. You're paying cash for every deal you buy. So no matter what loan product you put on that, the true cost of capital has to be less than 8% or you will lose money. And that, that's the math. So it doesn't mean 8% interest. It means the principal and the interest times 12 months divided by the loan amount. That has to be less than 8. Otherwise you're going to be losing money every time you borrow money. All right. From Emmanuel, when it comes to the second and third meeting with an owner, is it mainly a matter of giving them updates on advice we may have taken from them? You could absolutely do that. You could let them know what you're working on. Somebody that helped me get started, he was the first person to ever sell me a property in Moses Lake, said, Cody, you're going to get a handful of older rentals and then you're going to want to trade up because there's a lot of problems with older properties. And so he got to his 40 rentals and he started development, made a bunch of money in that, kept building and building, and stopped using loans to build, built in cash. And now he's in a really good spot with a lot of new rentals. And he did that when he had 40 rentals. I bought up to about 200 older rentals, and now I'm feeling the same exact thing. I'm tired of the problems with the old stuff, so I either have to replace all the plumbing, electrical, roof, everything to make it new, or I shift all this stuff into the newer stuff. But when you're meeting up with these owners, let them know what you're working on. When I met up with that owner recently, I let them know I'm trying to get into some new stuff, and they offered to seller finance some new stuff to me. I just let them know what is relevant in my universe and ask them what's going on in theirs. Patrick, let's see. When you are building relationships with owners in a certain market, do you then just build those relationships and wait for the possibility of them telling you about deals? No, it's about being strategic. You don't want to just blow a bunch of time on anything. So if you're meeting up with these individuals, The, the circle drill is really something that you should map out. It's where you're coming from, where you're going, what changes for you when you get there, which is your significance. It's what people— that's why people gravitate towards helping other folks out rather than certain people, because they resonate with what changes for them when they actually get ahead in life. And so at the end of your meeting, if you meet up with them for the first or second time, you could ask them, because you're mapping out their circle drill in the meantime, what they recommend you do to, to get to a similar business that they've built, if that's what your goal is. What would you recommend I do for next steps? And some of them will say, well, you should chat with this person, or you should chat with this bank, or they may say, well, what if you bought one of my properties? And that's happened to me multiple times. What and where are you buying in Tennessee? Well, I might be buying just north of Nashville, a place called Clarksville, because that's where I'm living right now for the next little bit. But actively looking at properties here. From Manuel: would you invest in a market with a large population but the growth rate is showing as flat on World Population Review? I would. I actually bought in a place in Indiana that's got a very large population, but it's going down slightly, you know, a couple hundred people a year, but it's just insignificant to the amount of people that are in the area. So, um, that is more of a midterm hold project until I can shift into something else, but it made a lot of sense, uh, just the deal itself. Do you know of anyone in the mentorship that is from Mississippi? Not off the top of my head. However, I know that there's people buying in Mississippi. I just, I don't know if anybody is from Mississippi. So I could, I can ask about that. We've got a couple forums set up for everybody in the mentorship. All right, let's see if we have any other questions. Also, if anybody else has questions, make sure to put them in the live chat. So we will go to your question stop. And if we don't get any more questions, then we can call it a day. Okay, well, with that said, I hope everybody has a phenomenal rest of their week. And if you have any other questions in the meantime, put them in the chat after this ends. If you wouldn't mind hitting the like button, that would be phenomenal. All right, I will see everybody next week.