Don't leverage real estate you are not willing to lose - rule #20

Hello YouTube and welcome back. We are in my backyard at my house because it makes sense for today's rule of real estate. We're on rule number 20: don't leverage something you can't afford to lose. I'm joined today by Caleb and Chuck. They are back.

They actually came down to visit us at the Robin Hood Resort, their new seller finance project.

Absolutely fantastic. Thank you guys for coming down, by the way. How was that, Chuck?

Fantastic.

Good. Water's fun. Kayaks, seals. If you haven't made it down yet, you guys are more than invited. Uh, just reach out to us in the chat or message me on Instagram @ChristianOsgood. So for our rule of real estate, I thought this would be fun to bring them along for. Don't leverage something you can't afford to lose. It's too often I see all over the internet or on Dave Ramsey or wherever, you see people talk about, well, I had this business idea and I invested everything in it, and then I leveraged my house and my car and my family, and I lost everything and everyone hates me. That's not where you want to be. You have to decide what are your goals. Always start with the goal and the end in mind. So when we set our objectives, I know what I want as passive income. I know the type of lifestyle I want to live, but most importantly for me, I want to provide an excellent life for my wife and my family. I have that house over there. However, for me personally, my financial freedom is more important to me than this this house right here. And while I'm having fun building this deck back here and we're sitting here in my favorite spot in my backyard, if it came down to it, this house is not the goal. Financial freedom for me is the goal. So when I got started, my third deal, first deal with Cody, we bought a 38-plex. My buy-in for that was a HELOC against this house. Now, if you're living in your dream house today, especially if you have kids, leveraging your house to buy real estate may not be the play if you're already where you want to be. So Caleb, for you, you're in a little different spot than me, right? You don't have your own house.

Nope.

What are you buying right now with Chuck?

We're buying a seller-financed 10-plex in McAllen, Texas.

When does that close?

Any day now.

Awesome. Their escrow officer decided they wanted to go on vacation, and apparently that's the only escrow officer in town. So they are, uh, they are ready to go. That deal is funded. Everyone's ready to sign. Any other steps to that, or is it just do the signatures, you own the deal?

Dude, signatures, you own the deal.

Done deal, dude. Phenomenal. These guys are 19, by the way. So when you're leveraging, um, you're leveraging— where's the money coming from right now for this deal?

Oh, we're raising it all.

Okay, raising it all. Partners. Okay. Is it friends and family, people you've met? How's that— how's that coming together?

Okay.

Yeah. On the asset, obviously you do a great job underwriting. You always start with a clear path to returning everyone's return on capital. What is the plan on this deal to get your partners cashed out? Yeah.

So on this one, there's another acre and a quarter behind the property itself. We're going to sell that off and cash out our investors within 6 months.

That is perfect. So you have a clear plan of what you're doing, a clear business idea, and you've done the math for how everyone's return's going. You've done everything you can do. This This rule assumes everything goes wrong. If everything went wrong, somehow you lost the deal, you lost money, you'll make your investors whole in the future, you never borrow money and don't pay it back. Goodness, we see a lot of that in this industry. That is not what you do. But as far as can you afford to lose this asset, if the whole deal fell apart, you lost the money, the whole thing crumbled, the 10-plex is gone. Where does that leave you guys today compared to where you were? Same spot.

We're in the same spot.

It was everything.

We're in the same spot. We don't have anything to play with. Yeah.

If you're younger and you're starting this with absolutely nothing, you're 19, you're trying to move out of your parents' house, you found the right deal and you have the right mentors— that's really important. If you're, if you're really young getting into this, make sure that you're surrounded by people who know what they're doing. But if you're putting together the best deals you can, your risk tolerance will be higher because you guys have virtually nothing to lose.

Absolutely nothing. That's why it's a great time to start.

And the debt's not obscenely high. It's something that you guys can recover from and make your investors whole. You guys can figure your way out of that. It happens. So first thing you do is you make sure you know how you're going to pay back your investors. Second, if everything went wrong, am I playing with pieces that I can afford to lose? I'm going to assume most people watching this video don't want to lose their house. I'm a little bit different. For me, this is just, this is really fun. I love my house. I have no intention of losing it, but if all the pieces didn't come together, it's okay. Now, practical application for my goal. When I went out, I wanna provide the best life I can for my wife, and I wanted to retire her from her job. I hit that goal, but to do that, I needed to buy enough real estate with enough passive income to retire her and let me do what I'm doing full-time. Now, Cody and I worked together and we did this in 6 months, but we started with the 38-plex. Now, day 1, that property was really hard. It only brought in $6,000, the debt service was $7,000. We say all the time, buy on cash flow. This is the only deal we bought where we didn't follow that rule. However, we negotiated for a little lower monthly payments. They actually scale all the way up to $10,000 a month, so we had a timeline that we had to improve the property. I used a $100,000 HELOC on this building behind us, my primary residence, to buy into that deal and start construction. What we did over the next 9 months is take the income from $6,000 a month I think it was actually a little less than that. Up to last month, they brought in $28,000. Now on a $10,000 mortgage, that property by itself pays for this house and covers the mortgage on my duplex. Everything that I own personally in just my own name without an LLC is now covered. I retired my wife on the next 2 deals where we picked up a 7-plex and a 6-plex, both cash flow more than $1,000 a month. Fantastic deals. We put together stuff. If we lost all of it at this point, it would be pretty hard to rebuild, but I was willing to risk all that to get to where we're at. Now when you get to where you're at, you actually reach your goal, that's the next phase. Now I have stuff I'm not willing to lose because the financial freedom was what I was after, and the financial freedom for my family. Is what I was after. From the beginning, I want to provide for my family. We've answered that. There may be a car alarm going off in the distance, but we don't edit, so if that's coming through, deal with it. This content's great and we're already in. When I set up what I wanted to do for our financial freedom, we actually reached it here. Now, Cody and I are restructuring. Cody's hitting his goal. He has a clear path to retiring his mother, which is why he started. Now we start playing a little bit of defense. We're gonna start rolling down the debt. We're gonna be leveraging a little bit differently. I'm not gonna pull more money against this property because now I have my house and the income. So we're gonna let the debt start rolling down. We'll acquire new properties on new debt, but the original debt that got us to where we're at, we're actually gonna start paying that off and rolling it all the way down. The image I like to share here is a stepping stone. We leverage our way up to reach our goal in gross income. Then if you pay off all that debt, now you just own it. It's very hard to lose a property that you don't owe on. You can still not pay your taxes.

That's one way to do it, but you're not going to do that.

You're going to— it's very hard to lose a property when you don't have debt. So what you do is you build it and then you solidify it. You pay it all the way off and now it has support. You can step on that to go to the next level. You set a new set of goals. And on a solid foundation of debt-free real estate, you push up and you can re-leverage and pick up more stuff. You get more and more conservative as you play because I reached my original goal and if I stop right now, I could be done. We started with a 38-plex leveraged with this house. The one other thing I'm gonna share is I would not leverage this house to buy a duplex because if I lost my house to get 2 units, doesn't make sense. Doesn't make any sense. That's not worth it. You have to play big enough. The upside has to justify the risk. $100,000 against this to buy a $2 million asset that can set me free for life, I will do that. If you're leveraging up and you're like, hey, you know, I want to buy an Airbnb property, income's variable, but I really think Airbnb is not going to change any of their rules. And we're gonna be fine. What happens if all of a sudden your city says, hey, no more short-term rentals here?

Well, you're not gonna be in a very good spot, are you?

How do you own it? How do you never lose it? If you lost your house because you bought a duplex or a single-family and Airbnb'd it, that sucks. That's not how you want to play the game. So if you're doing this, buy big enough, and only leverage pieces that you are willing to lose. Never use other people's money that you don't have a plan and a commitment to pay back, and you will do just fine at this game. If you violate this rule, that is how you alienate all your friends and family. You fail to provide for your family. All the horror stories that you hear about real estate online of how people lost everything is because they were playing with pieces they weren't prepared for, that they weren't willing to lose, and they lost them. So this is an important principle. It's a simple one. Follow it, you'll do fine. If you want to learn more, we have all these rules on themultifamilystrategy.com. We have a quick and easy course there if you want to streamline your learning. But other than that, thank you for watching and being one of the 27% who are still watching at this point. Like, subscribe, share with a friend, and I will see you guys on Wednesday for Creative Finance Live.