How we are paying off all our debts - Multifamily Strategy is live!

Live.

Ah, there we go. We're live. So we had a scheduled post, but it says it doesn't want to create the stream. So I don't know why that is. So I apologize.

It lied to us.

Yeah. So for all waiting in the other one, I apologize. I hope you find us here. That being said, it's the middle of the workday. As always, we're at the pickleball court ready to rock.

That's all we do, right? Yeah.

That's all we do. Um, in addition to pay off our debts, which is the topic for today. So as everyone enters the chat, we will, uh, we will start talking about that and then we will share more. As we go. So, um, first off, how we're paying off our debts. Well, there's really only 4 ways to do that. Um, I had a question yesterday on what do we do when the balloons come due. Well, you have 4 options. You can 1, sell, which we do not like. 2, you can refinance. 3, you can restructure with the existing lender. Or 4, uh, you can just pay off, write a check. Yeah, write a check. Pay off the debt and be done with it, which is our preference. But you can't always pay off every debt with cash unless you start with a lot of cash.

I know I didn't. Yep.

So how we've done actually a lot of ours is we've opted for the restructure. Now, the restructure, unless you put an option to extend in your agreement, is not your main plan because they don't have to say yes to your restructure.

However, nothing's enforceable.

Exactly. However, for a lot of ours, especially the seller finance stuff, When we get closer to the balloon becoming due, we usually just give a call and we say, hey, we've enjoyed our debt product and working with you. Would you prefer for us to pay you off, which we can, or would you like to extend the note under either the same terms or slightly altered terms? Typically, that's been what we've done on properties as we near the end of any term. We give them a call or restructure and keep the existing lender. That is the preference. However, in other cases, we've refinanced way prior to the balloon. We've done that several times with commercial banks. That's why you do math on the front end and back end. And our next few projects, we're going to start paying off our debts one at a time until we are debt-free in the next 9 years.

Yeah, 2040. Wait, no, that was bad math.

When I'm 40 though.

Yep, that's what I was thinking of.

Yes. Cody was born right before 2000, so his birthday always matches the year pretty much exactly. So that is the main 4, the big 4 on how you do it. Now, if you can't do any of those things, you're in a position where you have to sell. We don't want to sell.

So one way that we're getting around that is we are going to go flip some apartments over east where we don't want to own and sell the assets we don't care to own long-term and take the cash and pay off all of our debt here. That is one viable option. It is an option. You have to sell something. It doesn't have to be the properties. That you own today. So we're going to go buy some stuff that we can do our value add on, fix the books, fix the management, sell it to someone else, and take all the capital and pay off our debts.

Now, a major mistake that people make during this, and this happens all the time, is people focus so hard on the income thing. They build a business based on becoming an agent, wholesaling, flipping, but they do the, hey, I'm going to earn the money so I can buy the properties with my own money. Everything that we do is structured on you buy the assets that you want and then you figure out your pieces. Now you have a plan for each of them and it has to fall underneath the sell, refinance, restructure, or write a check. However, you have an exit strategy for each of them and you start buying assets. We built the portfolio we wanted to first in build phase. We stabilized it. We're in the process of optimizing it, which is either renovating the last few units or on a few properties building on our vacant land. But as we're getting everything to highest and best use, Now we look at how do we destroy the debt? We pay it off. Now we can start looking at what projects do we want to sell, flip, do something with active income so we can pay off the debt. But we have debt to pay off. Buy the real estate that you want to own. That should be your focus at all times. Don't become a wholesaler or a flipper or a broker just to get the money to do these deals. Figure out the deal, figure out the debt, figure out the equity.

And on that note, someone, uh, asked in the chat What does the loan process look like to refinance? Well, it's not fun at all, especially on your first deal. They're going to want to see bank statements, cash flow statements, it's called the T12, trailing 12 months of income and expenses. They want to see the lease agreements, the insurance policy, your cash position, your global cash flow, which is going to be encompassed in what's called the PFS, personal financial statement, which will also have an SREO, which is your schedule of real estate owned. One of them is going to map out all your assets, all your liabilities. That's your PFS. Your Schedule of Real Estate is the assets and liabilities related to your real estate portfolio. But you give them all those documents and then they'll approve you or deny you for your loan. And they can absolutely deny you on a refinance. So your second question.

Yes, which happened to us the first time we tried to do it on the 38. And had they done— and they actually denied us after they approved us.

Yeah, we got approved, we went to sign, and then they didn't provide docs to sign. Our mortgage would have been about $7,000 a month.

And what is it today?

It's like $13,000, $14,774 bucks.

Yeah, so they will only pay twice as much as we would have. That's $7,000-ish a month cash flow that we just don't get to enjoy, which would have been put mostly back into the building. I mean, it's like that, that affects a lot of stuff.

And we would have had a significantly lower interest rate. We would have had an interest-only loan for the life of the loan.

And that was a 10-year product, right?

It was a 10-year product. So significantly better deal. Now, we ended up going through someone else. We pulled a little bit more money out to renovate the building. We wouldn't have gotten to renovate the building as quickly, but we would have done it out of cash flow instead of out of debt.

Which, if you can borrow less money, is always the preference. It's much easier to pay off debt if you have less debt, just realistically. And if you have more cash flow, it's easier to hammer the debt. So there's multiple reasons why that would have been the preferred debt product. The main one being the interest rate was so much lower. The reason that the bank gave us, and this is something to know for those who are doing your first refinance, we had so many seller finance notes. Their actual reason was underwriting approved us, someone higher up in the bank did not like the fact that we had as many seller finance notes as we did and we didn't have any bank notes. This is very much like getting your first job when they're like, hey, entry-level position, 3 years of experience required. It's like, how the heck do I get my first job with no experience? It kind of is like that. First loan, they wanted to see that we already had loans before we got a first loan. That makes it really hard. Once we got that, floodgates were open on anything we wanted to refi, and we got a bunch of refinances done. Yes, we did. So something to know. Now, as always, um, everyone feel free to ask as many questions as you want in the chat. We'll go till the questions end, so we'll give you guys some time to do that since most people just appeared. In the meantime, drop a like so more people hop into this, and we will keep rolling. Oh, REI Stoners, by the way, happy you made it live. Uh, one of the fantastic people who've had a chance to meet in person, so, um, hope you are doing well. From Atticus: Do all private money loans have balloon payments? Uh, how do principal and interest payments work in private money lending?

Same way as they would with bank loan. There's principal and interest loans, which are called amortized loans, and then you've got interest-only loans. But It's the same exact way. Your balloon is just when it's due. So if you've got a 30-year amortization, just like a home loan, but a 10-year balloon, you're going to pay off that loan just like you would a house. However, in 10 years, you're going to have to refinance, restructure, or pay it off. And you could pay it off through a sale, but the balloon is a sharp point in the note where you have to write a check for the remainder of the amount. So if you haven't paid it all the way off, now you have to. Now, what most people, when they're getting started, fear is that they're gonna have to write a million-dollar check on these seller-financed loans because they have a balloon in 10 years or 20 years or 5 years. You have to write a check, but it doesn't have to be your money. It can be bank money. It could be a refinance. You can restructure it with them to extend, but a balloon is a hard and fast— you have to pay it off, whatever you owe.

Now, the easy math on this is you're going to figure out what you believe the building is going to be worth at the end of your balloon. You're going to do that very conservatively, so you're going to assume you don't quite get rents to where you want. Your cap rate they're using as your valuation is going to be a little higher than you want it to be. Low cap rate means higher value. So you go conservative numbers, and I like to use 70%. Let's assume that the bank will give us a loan for 70% loan-to-value. At that point, that has to be enough to pay off all your debt. Otherwise, you have to find additional money, and that could have to be your own money. If you do not hit your goal, it doesn't mean you can't get any loan. It just means you may have to pay your loan down a little bit to refinance it out of seller-financed debt. So if you're buying something, let's say 10% down seller-financed, you have to have a plan for a bank to value it high enough so that at the end of your balloon, the 70% loan of your new value will be enough to cover the 90% loan that you took in the beginning.

And a real-time example of that, we bought a place for $1 million about a month and a half ago, and renting it out as apartments, it's worth about $2.2, $2.3 million. We're gonna get a loan for probably 60% on that, but that's still significantly more than we bought it for. We did a 3-year seller finance note on that. We're going to be able to pay off the seller note and get our down payment back.

Those are the ways to look at these, and that's something that we did on our 38-plex before we financed it. Like, yes, we did not get the terms we wanted. It was not nearly as good as it would have been had we pulled it off a little bit faster. That being said, we pulled hundreds of thousands of dollars out of the property, which were reinvested in the property, which let us refinance again and pull out more hundreds of thousands of dollars to renovate again, which is enough to finish our project, which was the main thing. So we took it and we pulled about $600,000 out of the property total through our two loans. All right, owners, uh, just let us know, doing well and listed the duplex for rent. Renovations took longer than expected. Thanks for inspiring.

That never happens.

All renovation— I've never seen an exception to this. Renovations usually take about 3 times as long as you expect. That is, um, I mean, even when I'm experienced, it still takes us twice as long as I want, uh, more than half the time. Things just take more time. That is true of every single person who starts in this business. Everything always takes longer. So, um, happy that it's not just us, and very glad that you get that up for rent. Congratulations, that's a big deal. Uh, let's see here. Javier, is cold calling the best way to find seller finance owners?

Well, you do have to reach out to these people, so if it's cold call, I mean, that's not the best way. Warm call would better than a cold call, but it's not gonna be a warm call till you call them the first time. So yeah, you need to reach these people. Now, you're not going to call them up and just say, hey, I'd like to buy your property. That's not the way to do it. You reach out to try and grab coffee with them, grab lunch, just meet, learn how they got to where they're at. And to this day, I still reach out to owners that have sold me properties that don't own anything else because I built a relationship with them. And we still chat, they give me advice, and they help me out Sometimes they finance down payments. There's lots of ways to play the game, but reaching out just to try and buy it from them is not the way. But cold call is an absolutely phenomenal way to get into the door.

Now, when you're doing these cold calls, the main thing to remember is that you're not actually hunting for seller finance owners. For the back half of your question there, you're just reaching out to owners. You want to connect with the people who are playing the game in your space. You're going to learn so much more from them than you will anyone else because they've already done what you want to do. Our best lawyers, contractors, all of it came through people who recommend stuff. Builders, they come from people who've already set up the best systems and you get to learn from their systems. It'll help move you forward. So you get a lot of advantages to meeting owners. And when they know your pieces, they may know that you don't have a ton of money to get started. That's fine. The deals that come to you by communicating clearly what your goals are and what your starting position is, are going to be deals that would work for you, which tend to be in our case seller financed. We're not actually hunting for a seller finance deal. That's just what appears when we talk to people about, hey, we have no money, but we're trying to build this. From Atticus, how do or how much do taxes usually increase after you purchase the property? It's going to depend very much on where you're at. You can actually go to Zillow, go to the tax information, and you can actually click the last tax assessment. It'll actually show you the multiplier they use, which is actually a really good metric. For multifamily, for what you'll see it go up. In Washington State, it's about 1% of the total purchase price is what you'll expect taxes to go to. If you're somewhere like the state of Texas, 1.7 to 1.8% of the purchase price is going to be the new taxes. So very much depends on your state, county, all of those things. But, um, you can usually find it just by figuring out what percentage of sold comps, even on something like Zillow for houses, are they using for a multiple?

Daryl asked if we could sing a song.

The answer is no, we cannot. I'm unable to sing.

Impossible is—

yeah, not, uh, no-go. If I had my guitar with me, I can play music. Cannot sing. Don't know why. The, uh, the skills do not transfer from hands to vocal cords. From Samuel, uh, when raising the down payment as debt, how much do you structure that debt payment until you can cash them out with a refinance?

Well, that's going to be an interest— that's going to be an interest-only debt product, and typically it's going to be a 2 to 3 year deal, which is going to give you enough time to go in, get the valuation up, or earn the money somewhere else or borrow the money somewhere else to cash them out. You can keep borrowing Debt to pay other debts off, but it has to be long-term fixed rate, and you have to have positive cash flow because you can keep borrowing if you kick the can down the road long enough. As long as you have positive cash flow in excess of everything, eventually it'll pay it off. But it's in your best interest to figure out how to actually get an equity cash out. Get, um, whether you go flip a property somewhere where you don't want to buy, or you go earn money somewhere else, how do you get enough cash in to eventually pay that thing off so you don't have to keep kicking the can down the road? Yep.

And with that kicking the can down the road, that's like a refinance, right? It's very similar in concept. You have one debt product, you reach the end of it, you get a new debt product. If you don't have excess cash flow, what tends to happen is you need to borrow more and more money to cash the people out. And I've seen a lot of businesses do this. I've seen a lot of real estate owners do this, where you've borrowed $100,000 to start, and then you borrowed $25,000 for renovation. Then a balloon came due and you had to borrow at a higher interest rate, so now your payments went up. To recapitalize that later, you borrow an extra $50,000, and suddenly you've stacked up so much debt that the debt crushes you. So you do have to be very careful to monitor how much equity do I have in this portfolio, where's the money coming from, and do I have actual cash flow at the end of paying all debts so that I can pay them down at some point. There is a point in your career where you want to pay off all the debt and go debt-free. Make sure that you are keeping that in mind. You're not going to borrow just to borrow forever because a lot of people do that. Those are the people who lose their portfolios.

And we don't like those people. Don't lose your portfolio.

Yeah, I was trying to think of, you know, sometimes it happens to good people too, but we don't like it when that happens to anyone. Um, now that is it for questions and that is it for our time. If you guys have more questions, join the next live. Otherwise, you guys can reach out to us, um, or just check us out on multifamilystrategy.com, watch our videos on this channel, and If anyone has suggestions of what we want to make a video on, we are writing that part of our series right now. So feel free to drop that in the chat. Thank you guys for joining, and we'll talk to you on the next episode.