THE BEST STRATEGY To Win in Real Estate?!

Yeah, side benefit is you get a lot of credit card points from renovating houses.

That, that you do. Hello YouTube and welcome back. I'm Christian Osgood and joined again by Sole. Today we're going to be talking about flipping, buy and hold, who has the better strategy, why has Sole made changes. All your questions are going to be answered here. First, Sole, welcome back to the channel.

Excited to be here.

Super excited to have you. So in our last episode, we talked a little bit about the changes in your strategy. So you've done a lot of buy and hold and the BRRRR strategy is working really well. Again, let's recap really quick. Why is the BRRRR strategy more difficult this year than it was the prior few years that you've been investing?

I got spoiled. And when I started investing in real estate, interest rates were like 3.5%. And I thought that's just what interest rates always were in real estate. And then it's only gone up from there. So now we're at like, I don't know, 7, 7.5% interest rates. What is, I guess, critical in the BRRRR method is actually refinancing. So we buy properties with other people's money, we renovate with other people's money, which means that we have to force equity and refinance in order to pay those people back. But now we're refinancing at 7% or 7.5% interest rates, which really crushes cash flow. I think it's still copying. Okay, I'll just go ahead. And the critical part about the BRRRR process is you actually have to refinance those properties in order to pay those private lenders back. And so where we could refinance in the past at 3.5% and still have really healthy cash flow numbers, now we're refinancing at 7 or 7.5% and cash flow is really minimized.

Yep. And that's, that's really where people are starting to get stuck. That BRRRR method, that has always been a flaw with it. Cody and I have talked about that a lot on our channel. Why we don't rely on the BRRRR method is because those interest rates are not guaranteed to be super low for all time. So you've run into that. What is your solution been now that you are not BRRRRing everything? You're still coming in 100% financing, I assume. Um, so what is the solution in today's market for you?

So I think there are two solutions for people. One is you just adjust your buy box and just understand that cash flow is going to be lower right now. And in the future, rent's going to go up, your property values are going to go up, and interest rates are likely at some point going to go down. So you can always refinance again. So I think that's one option. We've done that with some of our properties. The other option is that through the BRRRR process, you're actually forcing a lot of equity. You're pushing that value up by doing renovations, and then you're and then by flipping it, you can actually like flipping and selling it to an end buyer instead of refinancing it. You can access a lot of that equity. So that's kind of the workaround that we've been doing. There are some properties that we've just accepted that, okay, we're going to refinance into these really high interest rates and we're going to have compressed cash flow for now. But in some of these other properties where we've built $40,000, $50,000, $60,000 of equity, why don't we just flip them to access that and then reposition that into other properties.

And that makes some sense to me. The, the 3 metrics that you have to monitor at all times are: how is my equity? Because your equity is going to grow over time, right, as you hold. That's really where net worth is built in real estate. Then you have your cash flow, which is how you stay alive in the meantime and service your debts. And then you have the actual liquidity. And when the market changes like this, the liquidity piece is really hard. Even if you have fantastic equity, you can't touch it on a refi when rates skyrocket, you have to either sell or you have to just hold and wait for your cash flow to regenerate, right? One thing that we have focused on really, really hard as we're buying is the creative finance. So what we've found is the workaround for us has been, okay, well, if interest rates are the problem, let's give people their price and just use an interest rate that does work. So we're still doing a lot of stuff at 4.25%, 4% interest only. Doing a deal right now at 5% interest only where the deals are going to cash flow very well because the terms are custom. I'm curious on your deals because you're investing in Augusta, Georgia. Have you utilized any creative finance on these yet, or are these all still primarily hard money acquisitions?

Okay. Yes, we have used creative finance before. So we bought— actually bought an office building with like 8 private offices in there using creative finance. This was at the time when rates were still, again, like 7 and 7.5%. I think we got like 4.5%, if I remember correctly. And so it does still work in every market, but not every seller is open to creative financing. And that's where, you know, you have multiple tools in your tool belt and you can negotiate different deals. So the people, we always, you know, ask them if they're interested in seller financing. But for the people who really want their cash and to run or to use it to move to a new place, that's where we're kind of using this flipping strategy.

And what is all the money going to be for? Because Cody and I, like, our whole thing is how you buy it, how you never lose it. So like, we don't do a lot of flipping. I have had an LLC where we let someone buy into for liquidity. So I guess we sold a fraction of one property to get liquid. So it's not that we never sell anything. I don't want to discount that. But you're pulling the money out of the projects, you're not holding them. So the equity growth is is capped, it's done, you're cashing out. What is the money for moving forward in your business? Are you going to be placing that into a new property? Is that going to be for a larger deal? Is it going into a different venture? What is that cash for?

So a couple of things. Again, as always, always the answer, but we're finishing some big renovations. So one thing that the money is going toward is a 10-unit that has a bit of a blown budget. And so it's really helpful to get a little bit of cash infusion from these flips to put them toward the rest of this renovation just to get it across the finish line. The other thing we're doing is a lot of people hate on flipping because it's an active income. It's just you're on the treadmill all the time. You have to keep buying, you have to keep selling to make your money. But if you actually buy in order to reposition that capital into more rentals, then you are actually positioning more active income into passive income. So that's the other reason is we're going to actually buy more rental properties with this money. It's just giving us more cash to work with.

Fantastic. And that's the correct way to do it. Speaking of the 10-unit building with a blown budget, tell us a little bit about that. How blown is a blown budget?

Um, so I think we have a bad starting point, right? So the real— so when we originally bought this 10-unit building, I was only maybe like 6 or 8 months into investing and I had a contractor walk through and I don't really think that that person knew what he was talking about. So the original budget was a very unreasonable budget. And so I think it was like $150,000. $500,000 originally. Um, and now we're probably close to like, you know, between $500,000 and $600,000 at the end of the day. Thankfully we have, you know, a lot of these active income sources, flipping properties. We have a bunch of other streams of income that we've been able to put into this property. Um, but that, it is a probably the hardest deal that we've ever done. Um, the one thing that I will say is we bought it at a really good time in the market where that specific area has just gone up in value over time. So I know we talked a little bit about what is the benefit of buy and hold rentals. We blew that budget huge, like crazy, but we bought it in an area that was only going up and those rents have only gone up and those cap rates have only gone down. And so for us, it's like, yes, we made a huge mistake, but over time, over 3, over 10 years, over 20 years, those mistakes get forgiven and you can still make money on the building.

And that is one of the best things about real estate is time will bail you out, especially on the market cycle that we were in. You bought it at a time where you got what, a full 2 years of upswing there?

Yes.

Yeah.

Crazy. Bought it in early, early 2021. And so we bought at a good time at a good price. And so even with the, with the blown budget, like, we'll still be completely fine.

And that's fantastic. And those are the better assets to hold if you're buying a lot of— because you're doing the flips are mostly single family, right?

Single families. Yeah.

Oh, there you go. Uh, if you're taking the money from single family and that is a way to extract your capital and put it into multifamily, I can get behind that. Like multifamily, it just makes more money. It's easier to hold a larger thing. You have different financing options. That makes all the sense in the world to me. Pull the money out of single family where you've found an opportunity in your market, and then buy your buy and hold on larger commercial assets, which is a fantastic strategy.

Yeah, so that's, that's kind of the reasoning behind flipping. I used to be, again, like kind of against flipping, but I think if you can have a strategic use of the funds and a specific reason and the right team to actually flip those properties, a lot of people, especially when they're investing out of state, they don't have the right team. They, they're just, you know, hoping that they can try out a contractor and it works well. But we have like a very— one of my partners actually has a construction firm out there. And so it's been really effective. We can basically like cookie cutter cutter these properties and just pump them out one after another. So I would say if you're going to flip too, it's not necessarily a beginner strategy, but also if you're going to do it, make sure that you have the right team.

And with all these systems, how many of these do you anticipate doing this year?

Uh, we're actively flipping 10, so we do about 10 at a time. So maybe like 15 or so.

Oh, that's epic. Okay. So you're going to get 50, you're doing more than one a month.

Yeah, we, we were buying like 2 to 3 a month.

Wow. Okay, so that's phenomenal. Is this a strategy that you will continue to use even if rates come back down? If BRRRR becomes available again the way that it was, would you continue to flip and do this strategy? Are you going to opt to hold more of these?

I think if the system works, it's a really powerful way to generate capital right now. It has just become a system and it only gets, I guess, gets more systematized, it gets a little bit easier as you go along. A lot of people try to buy real estate with no money. I find it's a little bit easier to buy real estate with money. And so you have to have some sort of like active income coming from somewhere to buy more real estate. And I think this is a really logical way to generate huge sums of cash to just reposition into more buy-and-hold assets. So the answer is probably. It's hard to predict where you're going to be in 2 or 3 years, but if things continue like this and we know the market really well, we have a good stream of inventory, we have the right construction partners, I don't see why not unless something changes in terms of like focus, like we choose to focus on something else.

Okay, well that makes sense to me. You have to come up with capital somewhere, and that is something that a lot of people forget is that You're borrowing money. You do have to actually earn money to pay your debts. That is a part of real estate that a lot of people forget, especially watching our channel where we buy all this stuff with zero money. You do in fact have to cash flow it and you have to meet your balloons. And so if you are actively taking your cash and wisely redeploying it, I'm all about it. Last question I have. These are short-term capital gains. That's a different tax bracket than the long-term holds. Are you, how are you managing that? Are you doing like cost segregations on your larger buildings to offset or? Yep. Have you thought through that?

Yeah. So cost segs mostly, I would say that it kind of forces you to buy more real estate. You just like your tax, your CPA is just going to be like, you have to buy $3 or $4 million of real estate right now in order to offset your capital gains or any income that comes in. So that's primarily been the way, just bonus depreciation. It's crazy. You can pay almost no taxes by using that strategy.

You can pay almost no taxes with the cost segs if you manage that correctly. And that's a great problem to have, right? When your accountant calls you and goes, hey, bad news, you have to buy $4 more million of real estate, buy a $5 million building. It's like, okay, great. It forces you to grow. That is— Cody and I have to manage that all the time with our incomes, and we have various businesses. To offset that as a real estate professional. When you earn money, that is part of the math of how much real estate do I need to buy to mitigate my tax liability. That's awesome. You've planned it all out. That's exactly how we play the game. That's a good way to get liquidity, in my opinion. If you have the smaller single-family stuff and you have a system, use that to roll into the larger multifamily, run all the tax benefits that you have out of a cost segregation on the larger buildings, and away you go. Awesome strategy, Sully. Thank you so much for sharing.

Yeah, side benefit is you get a lot of credit card points from renovating houses.

That you do. We have some crazy credit card points on a couple of our, our 12-plexes where we've had to pull multiple cards to get through renovation.

Yeah, it's sweet. You just— you can buy first-class flights, you can get resorts, all through your credit card points. Yeah, building wealth.

Yes, it is a good way to do it. How do people reach you, by the way? If someone wants to reach out to you directly, how does someone connect with you?

Yeah, Instagram's the best place, so it's lattes.and.lisas.

Perfect. And are you still working on your YouTube channel?

Um, we're taking a quick break, but we will probably revisit it soon.

Okay, well, if you guys haven't checked it out, the episodes that you—

there's still videos. Yeah, you can check out the videos.

Perfect. Okay, that's the same on YouTube, right?

Lattes. Lattes. Lattes.and.lisas. You go to my website, lattesandlisas.com.

There's just a lot of Lattes and Lisas, and you'll be able to find it.

Fantastic.

Well, thank you for joining. Next week we're gonna be talking about some of the events and the actual, uh, networking that we're doing to help connect investors. Cody and I are working on a couple of projects. So he's working on a huge project. Very excited to share some of that because that's ways that people can find, network, join communities, and really start getting some traction. If you're struggling on getting traction in deals, definitely check out next week's episode.