Don't Make This Mistake When Starting! Don't lose your real estate!

That is the magic formula. Long-term cash flowing fixed rate debt.

It's really fun to buy real estate. It's even more fun not to lose your real estate. Today we're talking about how to not lose money when getting started.

Hey, I'm Christian. This is Cody. And welcome back to Multifamily Strategy. If you have not yet, please hit the like and subscribe button so you get more of this content. Do it. Here we go.

We're talking about not losing your money. Well, if you want to lose your money, buy cash flow negative deals, buy for appreciation, be one of the people that lost all their stuff in 2008. Terrible place to be. If you want to make sure you don't lose your money when getting started, I know I couldn't afford to lose my money. I had $3,000, could not lose that. I could lose it pretty quick, but I didn't want to. I have to buy cash flowing assets with long-term fixed rate debt. You have to control your variables. If you don't do this, you're rolling the dice and we don't want to roll the dice. We're not gamblers. We don't like casinos. We like to buy cash-flowing assets with long-term fixed-rate debt.

If anyone has a pen, if you're a note-taker, just write that down. That is the magic formula. Long-term cash-flowing fixed-rate debt. Super simple. Now, you can also avoid that by just writing a check in cash, but we're going to go off the assumption that you don't have the money to buy all the real estate that you want to buy.

But if you do, call us.

Yes, if you do call us, we'll help you buy that. However, for those of us who have to lever our way to financial freedom, that is the magic formula and it's not that complicated. The piece that most people miss is the cash flowing piece. They bank on appreciation and get there. Now we're in a time where a lot of people did that because we've just gone on a supercycle. Yeah, there was an 11, 11.5 year supercycle where the market just went up And so a lot of people, especially the younger group, have only ever experienced a market that goes up and up and up. And so every year you look back and you're like, oh my goodness, had I bought this property last year, I would have made all this money. Well, that's not always the case. We had unusual conditions coming out of 2008 and a whole bunch of stimulus, and a bulk of it was artificial. Oh yeah, but we propped it up and we— it's a government-scripted supercycle. That is over, at least for right now. And we may go into another golden era, but there's going to be some pain because turns out if you extend a cycle artificially, there is a price to pay at some point. We're paying that now. So you especially in this point of time cannot bank on appreciation. You're going to get cash flow. Properties still go up over time on average. So what do we do? We get paid to wait.

That's it. It's so simple. Whether the market goes up, great, we'll make a lot of appreciation. That's why we bought a lot of assets. But whether it goes up, down, sideways, whatever it does, as long as we have predictable cash flow in great markets, we're not buying somewhere where there's one employer where if they leave, you make no more money anymore. If your cash flow goes away, well, that's a bad place to be. But we're buying in great areas— Grant County, Moses Lake, Quincy, Ephrata, Data center towns, lots of employers, lots of growth. Planet Fitness just came in, which is really nice to see, but lots of employers. It's really stable and growing. We have cash flow and we bought cash flow despite the market going up. We knew it was going to go up. Everybody knew it was going up. We could see that by all the money that they were pulling into the money supply. Christian said that to me when we first met before we recorded our first video. He's like, I need to buy more real estate. And that's why I want to get to 30 units, because they're printing a ton of money. And all the property owners are going to make tons of money. All the money ends up going to the owners. So you need to make sure that you're buying assets that have long-term fixed rate debt, that cash flow regardless of cycle. If you know it's going to go up, you know it's going to go down, you know it's going to go sideways. If you have cash flow, you can weather it all. Yep.

And that's how we really got started. For me, I started right at the back end of 2020 buying multifamily. I bought some small single-family things before that, but it was basically a condo that I house hacked when I got started investing. The part that pushed me over the edge was the COVID relief programs where we're printing trillions of dollars. It's a lot of money that weren't in the economy. And I was like, okay, where does this filter to? The business owners who still are allowed to operate their businesses, such as multifamily and the landlords. Like, it's going to flow that direction. We're going to put extra money in the economy and it's going to end up somewhere. Where is it going to land? And we looked at the past and went, okay, this is where the money's going. How do we get it? I don't know when that money or how long that would've taken to end up in the hands of landlords. I know that's where it ends up. I didn't have enough knowledge on past cycles to go, well, geez, if I invest everything right now, I'm gonna be rich in 6 months, in 2 years, in 5 years. So how do we know for a fact we still have the real estate when that money hits. And the answer to that was obvious— cash flow. If we get paid to wait, we're good to go. The math for this is super easy. How do we figure out how much we're going to cash flow? Cody, I'll let you do this as the math guy.

Well, you take your income and you subtract your expenses, then you have this thing called net operating income, and then you subtract your debt. And if you have a positive number there, congratulations, you're making positive cash flow. Now, the problem is people overcomplicate it. They throw out all these numbers and then they dilute what they're really making. We keep it really simple. And in addition to that, what we did right versus what most people did during the COVID boom of all the money coming in is all the people that live in rentals, myself included. I live in rentals, but everybody that lives in a rental, they spent the COVID relief that they got. I didn't get a COVID check. I got one in the very beginning, but everybody spent their money.

One more than I got.

Yeah, well, you made more money than me. But yeah, so most people spent their money and they typically ended up spending it on rent. And so all that money goes to landlord and then a lot of the landlords spent it on fancy cars and they got to buy all their toys.

Oops.

We spent all the money on upgrading the buildings because we knew it wasn't going to last forever. It can't. It's not sustainable. So now we just have nicer buildings, which increased that top line income. So now income less the same amount of expenses. Less the same amount of debt was more cash flow. No matter what happens in an economy, if you can just focus on how do I improve my cash flow with long-term stability on the expenses and the debt, you're going to make a ton more money and have a lot more security throughout the process.

Now, a fun thing about applying this principle. Now, if you were just investing for appreciation, there's people who make a ton of money and there's people who get killed doing that financially.

Killed doing that.

When you are building this empire, if you build it on cash flow, you can afford to buy infinite deals. And the basic math here, I'm going to do a ridiculous situation.

This is the way that we learned it from Gary. Yeah.

If you have a property, say you're buying properties, you make an extra $2,000 a month and you buy deals that lose $4,000 or we'll say $500 a month. Super easy math. Each of your deals lose $500 a month in total cash flow. But they're going to appreciate over time.

It's great.

Yeah, you'll make money on them, but you have to pay it away.

Free money.

Yep. How many deals can you afford if you have $2,000 left over, but they each lose $500 day one?

I know this one.

Yeah. 4. You can afford to buy 4 deals. Now, if something goes wrong, all of a sudden you're in trouble. But assumed status quo, nothing changes. You can afford a maximum of 4 deals.

Get your 4 condos.

Now assume that you find deals where each deal cash flows $1. It just makes $1 more than your total expenses. Cody, mathematically, how many deals can we afford to buy?

More than 4.

You can buy infinite.

Do you want 4 deals or more than 4 deals? Do the math.

And that's really it. You don't want to limit what you can buy. If every time you purchase a property, it makes you more money, your income just goes up and you can go ahead and buy the next deal.

And over the long term, your debt gets paid off and then you have more money.

Now, before the comment section lights up, we are not advocating for buying deals with a $1 profit margin.

Don't do it.

You're going to need more in reserve. You want to make more money than a buck because something will happen unanticipated. So you want to have better metrics around that. But just for the sake of mathematical illustration, You are limited if you lose money, you are unlimited if you make money. Any positive income is better than negative income. And it's that simple. And it's a world of difference. 4 versus infinity is a massive— it's an infinite difference. Yeah.

4 versus more than 4.

Yeah.

I'll choose more than 4 any time.

Yeah. And that is the simple math that it takes to go, okay, do I want to buy for appreciation?

Sure.

We love buying for appreciation. However, we buy based on cash flow. You can do both. And is better than or. Yep.

Our saying before we wrap it up is buy based on cash flow for equity growth. And if you do that, you will scale faster than everybody else in the space, period. That's it for today. Make sure to click the like button, hit subscribe, and we'll see you next time.