Creative Finance VS Creative Equity

Today is going to be an awesome episode. I'm going to share the single most valuable tool in my tool belt. This is more powerful than creative finance. This is called creative equity. And with it, you can buy literally any deal creatively financed, conventionally financed. You can go right to the bank and you still don't need the experience, the money, the credit checks, any of it. You can close any single deal. I've used this on all but one deal of my last 30 deals over the last 5 years. Hello and welcome back to the channel. My name is Christian Osgood, your channel host. I work for the CoStar Group selling to banks, property managers, owners, and the like for 5 years going over real estate data acquisition strategies before finally taking the jump and buying rentals myself. I have over 400 units today, soon to be over 600 units. I did this primarily through creative finance, but more importantly, creative equity. I'm going to show you how these structures work and why it's so simple. This is why when I look at a deal, there is no such thing as a good deal or a bad deal. There's just What do we need to make this deal work? And I'll show you how to use this. And when you understand this, if you can apply this, you can buy deals. And when I say equity, I mean ownership of properties. You can still buy the properties in a way where you own them yourself with or without creative finance. How do you do it? Well, let's get started. First of all, you have to understand the equity square. Now you have two pieces of math that you need to know how to do. First of all, when you analyze a deal, what is the day one cash flow and what is the deal worth today? We need to know this. This is our day 1 column. So right here we have day 1 cash flow. Let's say it's $1,000 a month, but when we stabilize this property, we're going to be closer to $5,000 a month of cash flow on our hypothetical million-dollar deal. Now, better than this on the equity side, day 1, we're buying it for $1 million, but let's say based on its current numbers, it's really only worth $900,000. So we We do have positive cash flow on one side, but we're overpaying a little bit for the cash flow that we have. Fully stabilized when we're done with our project, we're going to increase the income or decrease the expenses. We're going to bring it to a place where we're going to get a valuation of, let's say for our example, $2 million. A very simple deal, super simple to do. Anyone can replicate. I've seen this happen on many, many deals. We've doubled the value on multiple properties, including the first deal that I ever did. So now we have this map here. Well, $1,000 of cash flow isn't a whole lot of cash flow. And so if I'm going to buy this thing with or without creative finance, if this is our day one, I don't have a lot of cash flow to bring on either additional debt or additional investors. That would be a really hard deal to do. However, we're doubling the value. So we have our square here. Yes, we have more cash flow as we go. However, I'd like to reinvest that in the property. I also at some point would like to pay myself. So maybe we can distribute a little bit as we go. So let's say we'll do a low amount of cash flow. In this case, we'll call it 2%. We'll do a very small preferred return of 2%, which means the first 2% will go to my prospective investors. Well, wait, Christian, you said you may not need to have investors or you can own properties without them. Hold on, I promise we'll get there. So back to our deal. The first 2% of cash flow goes to investors. Now we'll agree that any cash flow that we decide to pay ourselves above that, we'll split, we'll call it 50/50 between myself and and the investors. That way I get some cash flow, they get some cash flow, and they get a little extra consideration for the fact that they brought in the initial capital. Now at this point, I'm in this deal $0. We'll say we have 2 investors who brought our required 20% down. So $200,000, 2 people both bought it at $100,000. They're making a measly 2%, but they're getting a little bit of that day 1 cash flow. Now let's go to the other side of the equation, the equity. Well, there's not a whole lot there day 1. There's really not a whole lot to give. However, We're going to more than double the value, going from $500,000 to a $2 million valuation. So we're buying at a million. They brought $200,000 in. We're going to have over a million dollars of equity parked in this deal. This is a deal where it is very simple to double their money. Let's call this a 4-year project. I'm going to put an option in the actual operating agreement that I have an option to purchase this property. From them all of the equity for double what they put in. I'm an investor, I put in $100,000, I get a measly little bit of cash flow, but around year 4, Christian's going to go ahead and do a cash-out refinance. Christian will get paid, I will double my money. I have done no work other than I wrote a check and I attended a few meetings, made critical decisions. I was an active member of the LLC, however, I didn't do that much. Christian handled the day-to-day operations. As the investor, as long as you are in the driver's seat and you're driving the deal forward, you have active partners, you can go ahead and put an option agreement to buy them out at a future date at a fixed price. So this means while I sacrifice this much cash flow, I sacrificed a chunk of the future value and the real estate bought the real estate. And that is the answer every single time for creative equity. You need to come up with a path where your real estate can buy the real estate. So what if we didn't win on price? What if we had a deal where we bought it for $1 million, maybe it'll be worth $1.2 million at the end of our project. There's not enough to pull out a whole bunch of money and pay back our investors. Well, you're going to pay them out of cash flow. So now you have to have a deal that has more cash flow upfront. Now, if you have a deal that has very low cash flow and no upside, guess what? You haven't found a deal yet. That's a terrible deal. Don't raise capital for it. That's all you have to do. So if you have to work the deal first, Yeah, figure those pieces out. Get a deal that's actually a deal. Either you have future upside or you win on price. Those are pretty much what you do. You win on price, you win on terms, or you have a path to get the property worth a lot more. We call those value-add projects. We can pay them out of cash flow, we can pay them out of equity. But this little box that we drew, you can slide anywhere within there for how you want to pay out your investors. It's equity heavy, skew towards that side, pay them a multiple on their money. If it's heavy on cash flow and lower on the future multiple, then pay them more cash flow in the form of a preferred return, but always leave for yourself an exit. And guess what? The multiple's lower, the more cash flow you give, and the cash flow's lower, the higher the multiple you give. If you want a general rule of thumb for where those goalposts are, at a minimum, you pretty much need to double their money every 5 years if you're 100% You're sharing no cash flow within 5 years. I must at least double your money. That's the minimum people tend to accept. If you're doing no multiple, so I can buy you out for exactly what you put in in 5 years, your cash flow is going to have to be likely 9 to 12%, depending on the investor. It has to be attractive enough where that recurring income must be stable. They're backed by real estate and you have the option to buy them out at face value. You're basically at that point treating equity like debt. There's another advantage that you get from doing these structures. If you're not bankable today, if you don't have the net worth for the loan, the experience for the loan, the credit for the loan, the money to put down, you get to borrow all of these from the team you build. Now remember, in our example, I had two investors with $100,000. Well, both of those investors in my hypothetical example have more experience than I do. When the bank says, who's buying this? I'm going to be managing day-to-day operations. My name's Christian. I have no money today and I don't have a whole lot of experience other than at this point I'd worked for the CoStar Group for a bit. So I write the best resume I can. Hey, I've been around this industry for a while. I'm trying my best to break in. What I've done is put together the team and the board of advisors for my LLC. Now, is this a crazy company? No, this is 3 people coming in buying a piece of real estate, but Investor A will say that they have 5 rental properties and they're partnered on 2 other opportunities. They have a 56-unit portfolio and a net worth of about $2 million. They're with me on the loan as a partner. The other investor is an even bigger player. He has a multi-hundred-unit portfolio, years and years of experience, basically a perfect credit score. We get to use the branding of the entire team to qualify for the loan. If I'm a bank, I'm looking at this and being like, okay, well, the young guy with the low credit, or no credit. So I'm looking at this, hey, the young guy with no credit, no experience, and basically no money, not too inspired other than I really like his energy. I like his vision. I hope he does really well. We'd love to invest in him, but we just don't have the fundamentals. Now there's the rest of this team who are also co-signing on this loan. Investor number 2, we like him a lot, but investor number 3, we love this guy. We want to put money into this investment. The box is checked. Bank now places the loan, and now guess what's happened? Your net worth has gone up. Your income has gone up. Your experience has gone up. You've taken the next step towards being the next big investor, and you've bought yourself time to continue to build your portfolio, build your financials, so that when that year 5 comes out or that year 4, when you want to buy them out, you are now bankable. You do a cash-out refinance, magically you have the liquidity. You've had years of experience managing this exact property, and you've had 4 years if you had credit issues to fix said credit issues. When you are finally bankable, you pull the cash out of the property, The real estate buys the real estate. Now, I have done this on countless transactions. Well, that's not true. It was about 30 transactions, 31 exactly today. So maybe not countless, provided you can count to 31. This strategy has allowed me to close infinite deals, many with creative finance, but the order always has to be deal first. You create an opportunity where you get everything you want— cash flow, long-term fixed rate debt. The seller gets everything that they wanted, whether that was price, terms, special clauses, you name it. Lastly, you work the equity, but the equity can make the deal. So when I underwrite a deal, I'm not just looking at the price of the property. I'm not looking to say, hey, there's no deal here. I'm looking, okay, what's the opportunity and how do we get there? What debt products are available? Look at it like a little dropdown box. Click that little dropdown. Okay, on this one we can do bank financing, private cat. Okay, DSCR, direct to Fannie Mae. We have all sorts of options. Pick the one that makes the most sense. Whatever money has to come, simply choose the money and the team that makes the most sense for the deal. If you find a way to compensate them either out of cash flow or the future value of the property, you can close any piece of real estate. Now you own the building. All of your credentials go up. Congratulations. You've done creative equity, which turns out is even easier and more powerful than creative finance. Hope this helps. You want to join a community of people who are using all three of these, the creative deals, the debt, and the creative equity. Join the free school community. Link is below. Completely free. Thousands of people around the country are networking, talking about deals, even using the same calculator, the same AI tools, all of it for free here in the school community. Click the link below. I will see you there. Like and subscribe. We'll see you on the next episode.