Hack to become RICH from investing in Real Estate!

Hello YouTube, it's Christian and Cody. We are back for our 34th out of 35 rules of real estate. Man, we're almost done, which is a bummer because I haven't come up with an idea for the next series between our, uh, the series between series.

All right, well anyways, today we're talking about don't spend your principal. Now what's that actually mean? Because when you're going out, you're making your investments, if you get your wins, you get some cash, do you go blow it on a Ferrari? Yes.

No.

Oh, you blew the one rule today. Don't spend your principal. If you actually go out, you work hard, you earn a little bit of money, or you sell some stock and you get some cash. That's not when you go out and you buy the Lamborghini, you buy the nice house. What we do is we take the principal that we work very hard to go get, even if it's less conventional way. You spent years working really hard to go get a little bit of money. We take that money, we put it into assets that pay us, and then all the dividends from the assets, if there's any left over after doing renovations, then we can take that. Then we can go buy a super house. Then we can go buy the Ferrari or the Lamborghini. Well, we're not going to buy any of those cars because we don't like those brands. But anyways, that's when you can go splurge. Most people get that backwards. They go buy the nice stuff first, or they get, you know, working really hard. They go earn maybe $400 grand a year working at CoStar. And then they, they spend half of it on taxes, they spend the other half on a really nice car, and the last little bit just to skimp by and put a little bit into investments. That's completely backwards.

Yeah. Whenever we have earned income— and people get weird about this, especially on our channel, because we share a lot about zero-down techniques— and so people will try to form a strategy of like, well, I'm just never going to put any money down, even if they got $35,000 in the bank.

It's like, that's 3.5% down on a million-dollar asset.

You can buy a lot of real estate. You can't be weird about money. And when you have money, it needs to be invested. What we've worked really hard on is increasing our actual production capacity. So this is from, uh, Seven Habits of Highly Successful People. Yes, you have production, which is the actual cash. This is what comes out.

Yep, you get money out.

And then you have production capacity, your principal, that production The bulk of it is spent on increasing your production capacity. And that is what we did, especially when you're starting. You don't have passive income, which is your capacity to produce income. You need units. If you're playing this game, you need rental units and tenants paying you every single month to increase the global cash flow. In the beginning of the game, you can't touch the principal at all.

Yeah, we just keep on rolling. We're re-rolling and re-rolling and re-rolling. Christian still lives in his fixer-upper house. It is much nicer than when he got started because he's taken some of the dividends and reinvested into the asset being his house. However, it's not like he's balling out in some mega mansion. We haven't bought yachts, we haven't bought cars. We're not flexing, flying private. In the beginning, we're rerolling everything, and in a couple of years it won't matter. But because we rerolled, we took all the principal. In the beginning, it was very little money. As we started earning more money and started making more money from the real estate, we started rerolling bigger and bigger and bigger. That's how we did this whole thing in 12 months. That's how we scaled faster than most people do, because most people will get a little win and then they go celebrate. Instead, we take all the principal, keep re-rolling that, and we only celebrate when the dividends, when the cash flows are enough to go splurge.

Now, practical application for this. Here's how I did it wrong. Here's how I corrected it, and this is how we do it now. So my first investment property ever was a house-hacked condo. I don't talk about it all the time on the channel. We focus more on the multifamily we bought, but that was the first thing I ever bought. I needed somewhere to live. I bought a 2-bed, 2-bath so that I could rent to a roommate. I even did this for my first year of marriage. We kept the roommate. That worked really well. When we moved out, I bought a house down the street. I did not sell the condo at that point, and that was huge. I did not pull any principal out. I used earned income to buy another property.

Good for you.

I then rented that to a tenant for 6 months, decided I hated self-managing a condo. It was— we had everything that can go wrong did go wrong.

The issue wasn't self-managing, it was just the fact that he owned a condo.

Yes. Well, it was A little bit of both.

It was self-managing. Bad asset class.

Yeah, I don't recommend condos. That being said, here's what I did wrong. I sold the condo and then I upgraded the bathrooms in my house. And to be fair, in my tiny house, my bathrooms are baller. I have really cool bathrooms.

Yeah, they're nicer than anything else in your house.

They are.

I'll just hang out in the bathroom.

Yeah, but no, we really went out and we— I had very hideous bathrooms. I took the principal and I invested in my house. Now the problem is I was then illiquid. I did not go out and buy new real estate. In fact, it was 2 years before I did. How did I correct this though?

It did increase the value of my house significantly, a lot, like a 6-figure value add.

Yes, for a, for a $45,000 bathroom, it was a good return on investment. However, you can't touch that principal until you get additional debt.

I turned it into a HELOC, a home equity line of credit, $100,000 with no documentation.

Yep, just pulled it out, and that is actually the money that I put into our 38-plex that got us started. It slowed me down. There were 2 years where I did not have the capital that I needed to invest. Now granted, you can use other people's capital, there's all sorts of zero-down things. It's not that I couldn't have moved forward. I couldn't move forward with my own capital, and having capital really, really helps.

Now I look at it a little different because I've never had a high-paying job. Christian, at his prime, was making around $200-ish a year working at CoStar. Maybe a little more, maybe a little less, but right in there. And like, that's a lot of money. When I was getting started, I had this real estate agent job and I made okay money, but I never had a six-figure year, not even close. And so I didn't have any principal. So anytime I got a little bit of money, I had to reroll it. Because I had to scale to something worth owning. It's not worth just keeping something that spits out $800 a month. How do we scale this? And so I roll everything over, grow the equity, grow the cash flow, and keep on re-rolling and re-rolling. And now we're in a place where we can stop. We won't stop because we have bigger goals than where we're at, but we're going to re-roll all the principal. And now the cash flows are big enough to where if we want to buy the McLaren, we can do it. If Christian wanted to upgrade the house, he could do it. We're going to keep rolling and keep growing and paying down the mortgages though, because we're willing to be a little bit of a delayed gratification more approach than just splurging now. But we built it the way we did so that we can if we want to.

Yeah, realistically, if we played this out, if I bought the super house, which I technically could pull off, I could, I could have a house right now. My house is awesome. I love the little house, but it's 1,300 square feet. My laundry room is in my garage.

It is enough for your 3 pets?

It is enough for my 3 pets, myself, and my wife. That being said, it's not luxury. Like, I have some cool stuff. I have a good barbecue setup. I ordered a hot tub. Like, that for me is luxury, but we're not pushing what we can do. I have a Tesla that I had to repossess because someone defaulted on a loan and they traded me their car for the bad debt. Yeah, I didn't buy the car. They just I got it traded and I'm selling my other car so that we can get a company truck. Like, I'm not spending a lot of money. And what that's allowed us to do, because we didn't buy the fancy stuff, we're able to grow a lot faster. I'm actually spending a lot of the cash flows on new employees right now, which is buying back our time.

Yeah. And because we built it the way we did, because we followed this principle of not blowing principle, if other principle. We're able to decide if we want to buy back time, we're able to buy the nice things, but we're disciplined to where we want to go. We're not going to do those things yet, but the cash flow can do it without actually having to borrow against our real estate or sell said real estate.

What I see a lot of people do is early in their career, they get the first or second duplex and they go, this is my dream car duplex, I'm going to spend The money I make here, I'm going to pull money out, I'm going to buy that dream car, I'm going to buy that huge truck, I'm going to buy the Lamborghini.

And then let the tenants pay it back.

Yeah, which you can do.

You can do whatever you want, you don't need to get permission.

But you're going to go way, way slower because you're not going to have the money to add the systems, you're not going to have the stability, and if you spend all that money and find out, oh no, I had a huge capital expenditure, you risk losing it.

Yeah, then you have to sell the car. And it's one thing to buy it, but just like real estate, how do you buy it? How do you never lose it? If you buy the car and then you lose it, it's not all that cool.

So there's really two steps to this. You don't spend the principal, and then when you're investing it, you follow the golden rule of investing and you don't lose money. You buy on the principles of how do I buy it, how to never lose it. When you place the principal, you protect that principal. You don't let it go down, you let it grow, you let it expand. And like you said, you live off the dividends.

Now, is it ever risk-free? No. However, if you can keep increasing your cash flow, you got the right insurance coverages, and you have long-term fixed rate debt or no debt, if you can pay that stuff off, which is what we're working on right now, it does help solidify what you got.

It is the second most secure rule to investing. Like your most valuable—

For us, it's like our, at least for us. Yeah.

Like your first and most important rule of investing is you buy the cash flowing asset. Like you don't buy negative cash flow assets.

Yeah. If you buy negative cash flow, it's easy to go broke.

The second most important way to not lose it is you don't spend that principal balance. You don't roll that money down. You keep letting it grow. If you really want to expand, keep that money alive. Don't lose the principal because your equities will go up and down over time.

It happens. We're seeing that a lot right now.

You don't want to pull out the equity. And then have the asset just devalue and be like, oh no, I'm underwater on an asset. You just got paid to be underwater. But it's not the way to play the game. You keep the money deployed, you take the cash flow, and you can do whatever you want with the cash flow when you're constantly focused on—

as long as you don't have upcoming debt.

Yeah. And that's, that's about it. Like, don't—

yeah, it's so simple.

Your excess cash flow is what you get to live on. And if you don't have the life you want to live yet or you don't have the— the cash flow doesn't make the nut for you, well then you go out and get more cash flow.

Now you can do whatever you want. If you want to go splurge on the car, you want to buy the yacht, you could do whatever you want. You can go buy the seaplane. Just know that this is how we did it, and this is how we were able to scale from nothing together to $20 million of real estate together in a year. So it is possible to do. It is difficult to do, but these are the principles that we follow. And if you you haven't seen our other principal videos, you should check those out.

Yep, we're on 34, so next week will be our last video of this series.

These are the ones we follow, and we put them out here so that you can hold us to it in case we ever violate it again, like Christian violated it on his bathroom.

Yes. Now, if you have any ideas of what we should do, we are gonna have Sole Cayetano come on the show here, probably gonna air late January on Mondays, and we're gonna go over out-of-state investing. I'm gonna have you two do an Investing When You're Young. She's 24, and the two of you guys are—

She got me beat by a year.

Yeah, they're incredible investors. She's doing the whole out-of-state thing. I really want to focus on other investors, so we're going to do a series with her. However, there's going to be a few weeks in between. We're still going to do Monday videos. If you have suggestions of what you would like to see us cover, we have 14 days to figure it out. So post your ideas in the comments below, and we will see you guys on the last episode next Monday. Next Monday.