The Millionare Cycle - How the Rich Stay Rich - Creative finance Live

All right, and like that, we are live. Hello and welcome back, YouTube and Instagram. Good to see everyone. Today we're going to be talking about the Millionaire Cycle. This is the Creative Finance Masterclass. Very, very simple, but this is how the people doing creative finance are making more money than literally everyone else. This is a very, very, very simple method.. And I'm going to share exactly with some illustrations in today's live, exactly how you make millions of dollars using creative finance and how you essentially just create your own liability that is smaller than your asset. Use your assets to pay off your liabilities. This is a model that gets you debt-free and adds a whole bunch to your asset column. So we're going to be talking surprisingly some Accounting 101 for those who think that's super boring. Well, you are wrong. This is how you get super rich. There's only a couple things that you do in real estate to get really rich. You write great deals, which we're going to show you how to do right now, and you're going to, um, be a great manager of assets. Today is not about asset management though. This is about the acquisition strategy, how we're going to structure things to absolutely maximize what we can do. So as we go, as always, we start with a structured lesson, then we're going to dive into the chat both on Instagram here and on YouTube over here. So I'm looking forward to this. I have illustrations, I have examples, and, um, this is going to be a good one. So as everyone starts to hop into the chat, please start asking your questions and we will go from there. So here is creative finance in a nutshell, the simplest I can explain it. I got some props. Okay, so creative finance— when you are financing something, you are borrowing money, you are creating what's called a liability. Liabilities cost you money every month. Assets gain you money every month. So for those trying to get financial freedom, you're trying to add as much as you possibly can to the asset column of your personal balance sheet. That is how the game is played. Now, if you're starting your own business, you can actually take an idea without a liability and just create an asset in real estate, which is one of the most consistent forms of income and appreciation and tax shelter. This is somewhere that you should be investing. You can actually create your own liability, which is creative finance, to buy an asset that is larger than said liability. Meaning liability has income going down. If your asset brings in more income than your liability, and you can create that liability— you create a liability, you buy an asset, create a liability, you buy an asset, kind of build a liability asset, continue on that cycle. That is the cycle of creative finance millionaires. How ever. What you end up finding out is that's how most people end up going bankrupt. They play the game forever, they re-roll and they re-roll and they re-roll and they re-roll, and they're worth millions and millions of dollars, and then they lose it all on one deal where something goes wrong. And we see this happen again and again and again. So how do you avoid that trap? I'm going to illustrate this really quick because what we're going to do is show how you actually get a debt-free portfolio by using debt to buy assets. If that sounds confusing, it's about to be really simple. So I have a note card here and I have a couple of, funny enough, bricks of silver. It's just a good prop that I had that was the right size. So we're going to go this way. So I'm going to write something here. It is a note. So on this note, we're going to say this is a note and this note cost $3,000. So we now have a $3,000 note. This is what I negotiated. Now, what is the note for? Is to buy an asset. We'll say it's this asset right here. This is a brick of silver. So we have said asset, we bought it with this note. Now we're going to call this piece of real estate. I'm just trying to get something I can hold in my hand because it was a little bit heavy. To try to hold our apartment buildings. So note asset. On this asset, we're gonna say that after our expenses, this asset cash flows $5,000 per month. Boom. We'll use that math for each of these. $5,000, $5,000. We created our liability. We bought our asset. We have a net $2,000 of cash flow. Now, if you're like me, $2,000 of cash flow is likely not going to solve all of your problems. That is not enough to live on. So what do we do? We create another note and stack another asset, and we create another note and we stack yet another asset, and we keep stacking and stacking until we hit our goal. So in this case, let's say our goal is $10,000 a month. So we grab our 5 assets. Each of these cash flowing $2,000 because of the liability that we created, which is awesome. Now we're cash flowing $10,000 a month, $120,000 a year with our stack of assets. Where people go wrong in creative finance and in real estate in general is they never stop stacking. They build more assets than they need. If your goal Say financial freedom for you costs that $10,000 a month. Once you get there, you can stop buying. If you keep levering and you keep buying, at some point something is going to come up that wipes you out, and that is almost without fail. So create a finance, create your liability, buy an asset that is larger than your liability. Here is the masterclass here. If you have a job or if you have any other means of income, you can take 100% of that cash flow, your $10,000 a month, and start paying off those notes. Whatever debt you've stacked on your portfolio, your stack of notes, you pay them off one at a time. You use debt to buy assets that make more than the debt until you have enough income to start eliminating the debt. And now we get into the Dave Ramsey strategy, the debt snowball. With one edit, you want to pay off all your debts in full. You leave all the risk on the lender, keep them levered until you have enough cash to pay off the note in full. Then you write the check, done, move on, rinse and repeat. That is the millionaire cycle. That is what the best creative finance people do. Cody and I interviewed people all over the country. We run a mentorship group on multifamilystrategy.com where we actually just have people all over the country doing the same strategy in markets everywhere— East Coast, West Coast, north, south, center of the country, any market this works in, you can go start creating your own liability, buying assets, stacking your asset column until it's large enough to eliminate your liability column completely. Cody and I are in the middle of this right now. We actually bought more assets than we needed. So I'm going to say we needed 3. If we needed 3 of the asset column, we bought 5. We have more than we need. We are looking at which ones do we sell to actually build the business we need. We'll use this to pay off some of those notes, we'll eliminate even more debt, and we'll be able to speed up this cycle. So there's multiple ways to play the game, but ultimately you pay off your debt with money. And if you can create your own liability and your assets all cash flow, that cash flow is something that you can allocate towards eliminating your debt. Now this is not get rich quick at all. You can build that $10,000 passive income, you can build that very quick. You could become a millionaire easily in your first couple years of investing. Cody and my first deal together made a million dollars for each of us. You can absolutely do that. If you want to pay off all the debt and you want to make your business indestructible, it's going to take time building that cash flow hammer to start whacking your debt with. That's going to take years of budgeting, rent increases, optimizing the portfolio. We talk on this YouTube channel about— we talk actually very often about the 4 stages of business. Build is where you're buying these, build phase. Stabilize is where you're optimizing that revenue for the portfolio that you have. If you really want to start hammering the debt, you optimize the portfolio, you spend money improving the assets, doing new roofs, new siding, putting in mini splits, whatever it is to optimize the income. And once the income's optimized, you go ahead and pay off the debt in full. Might sound crazy because of what a lot of people see online is, hey, lever, lever, lever, lever, pull money, buy stuff, that's not taxed. All these things you see online, don't worry about all that noise. What we have found is the best players Consistently all around the country, every market, the people who hold the most real estate, who have the least stress, have little to no debt. They have a ton of assets and they use some amount of creativity to move those assets into their balance sheet. Buy assets with a smaller liability than the asset. Use that cash flow to pay off the debt. Little triangle, you know, asset to liability, income to pay off— or sorry, let me try that again. Liability to buy the asset, asset to bank the income, income pays off the liability. That's your whole triangle there. Millionaire cycle. Super easy. That's what our entire strategy is based on. Now, that is the lesson for today. I want to share some of the, uh, well, I want to go through some of the questions. So if anyone have questions on this specific strategy or things you've seen online on this, this is the time to ask. I'm watching both on Instagram and here on YouTube. Um, those on Instagram, YouTube channel is way easier for me to read, so if you want to hop over to Cody and Christian Osgood Multifamily Strategy on YouTube, you'll make my life that much easier. All right, looking through for questions right now, and we'll see if we have any on Instagram, which we usually have a few less. Not too much over there, so I'm going to hop into our chat here. Can you break down your optimized tax structuring? You mentioned in previous live using some numbers. Yes, let's use a real-life deal for some of this. So perfect scenario for tax structure, 12-plex, Ephrata, Washington. This is a deal that Cody and I bought last year. The partner, our equity partner, has 50% of the equity of the LLC, and this is a long-term partner. It's actually someone who we don't want to buy out. We have very few of these. Usually you buy out your partners. So we have 3 people: Cody, me, and our capital partner. They provide 100% of the money. However, half of that money goes towards their equity in the deal. They own half the deal, so half the down payment they put down covers their buy-in. We borrow the other half from them for our part. So we have a loan— one loan to Christian, one loan to Cody. From the capital partner that we then put into the deal. Now, the reason this optimizes for tax is because you actually cannot claim more write-offs on your tax than your cost basis in the deal, which sounds like a lot of words, but in a very, very simple, uh, very, very simple illustration, if you borrowed the money first and you put it in the deal, that is money that you have invested in the deal. I have a loan to me personally. I took that money that is now mine personally and put it into this deal. So since we have put— Cody and I put half the money into the deal, we ran what's called a cost segregation study, essentially taking the depreciation on the asset and accelerating it for more bonus depreciation. Those tax benefits are now useful to Cody and I because it's going to be about $100,000 of additional write-off against our active income. Now, we did this on a bunch of other buildings, but what we learned in our first year is when you have a capital partner who brings all the capital,, but it's all based on the buyout instead of loaning any money to us. We had a couple of deals where we bought them zero down, but we have no cost basis, so we didn't get to claim all of the tax benefits. So the best tax strategy that I have found on creative finance, if you are doing $0 out of your own pocket, is find a deal where you can have an equity partner who has equity and lends you the money for your equity. The other thing that you're going to love is the IRS looks at that structure and they love it because it makes sense. Okay, this person's running the deal, they borrowed money, they put that money in the deal, the other person brought their own capital, everyone's capital accounts match their benefits. That gets the IRS seal of approval. Uh, let's see here, if I understood correctly, let's say, um PP is a $1 million owner, is willing to sell or finance 70%. You brought a limited partner, and it's not an LP, they're, they're a general partner. These are LLCs, so we're not creating a syndication. Um, so in this case, we'd bring a general partner for the other 30% who then loans you $150K and invests $150K as equity. That is exactly how that would work if there's $300,000 down they would bring $150K to the table for their equity. They would lend Cody and I $150K. We would all be general partners on the LLC, and we would all share in the tax benefits in proportion to our, our, uh, equity in the property. So if I'm 25, Cody's 25, and they're 50, I get 25% of those benefits. And I'm entitled to those because my capital account is equal to everyone else's. It's very clean and simple. Also from VixLight, typically what sort of terms do you offer the LP? Well, again, they're GPs, they're just partners. Uh, what terms do you offer? 10% pref and 1.5 buyout in 5 years. Um, do you typically align it with the seller financing terms? Uh, for balloons, yes, that is typically what we do. So we will actually align with the, uh, let's say, say we're going to refinance in year 5. We got a 5-year balloon on seller financing. Any buyout for a partner, I'm going to align that with the buyout. Now, if it's an equity partner, what I want to do— and if they're staying on the deal, there's no multiple to their money. They just— we want to get their original capital back to them. So at refinance, I want to pay off my note. In this example, million-dollar purchase, uh, $300 down. So I want to pay off my $150 and I want to get their $150 back to them. That way all the partners have $0 of their own left in the deal. It's a perfect burr, and, uh, we've pulled all the money out. With all the money out, we just have an asset, um, and all the capital is back in our account. We can go buy something new with it. So pretty simple strategy there, uh, generally speaking. Uh, if we borrow as debt, 8%, 10%, pretty common. Um, if we have a buyout in the future, uh, if we're giving them 8% interest buyout, yeah, usually 1.5, maybe a double on their money if it's a really good deal. Uh, but completely depends on the opportunity and how you want to raise the debt and equity. That'll depend more on the deal than anything. All right, um, from Tyrell Cashflow King here on Instagram, uh, do you usually pitch— how do you usually pitch your equity partner? This is great. So it's a relationship game. So the same way that we go out and meet owners, we just interview people on like, how did you build your business? Find the people who have already done what you want to do. We're meeting people all the time. Our equity partners are either oftentimes other owners in our market Or our equity partners are going to be people that we've met along the way. We've met them at meetups, uh, they've reached out via social media and we got coffee. But it's going to be people who I have a personal relationship with. When you map your own goals, you want to map the other person's goals as well. So we talk a lot on this channel and in our course about the circle drill, where you map out, okay, um, what are the— essentially it's just a little map of What are the pieces that map my story? What is my goal? Why? How are we getting there? What's the significance? Let's find a relatable point. Pretty simple little drill that you can do. You want to map out that same drill for each and every equity partner. So since I know what their goal is, I know what happens when they reach their goal, I know the significance behind it. I can call them and say, hey, Last time we talked, you mentioned you were trying to do X and Y. I found the deal that I think gets you here, and this is why. And I can show them the opportunity and explain to them in terms of their deal. Let's say they're trying to get to $10,000 a month. This deal is going to cash flow $3,000 a month to you. There's a little bit of value add, so you are also going to get a little bit of, you know, a bump to your equity. You'll have more equity in real estate. But really what this does is this will knock out about a third of your entire goal if we do this deal together. Here's what the actual opportunity looks like. And I'll show them pictures of the building, I'll talk about what the project's going to be. And that is really how we pitch an equity partner. I think a lot of people focus on pitch decks and email marketing and, hey, I'm going to put together this slide presentation. We never do that. It is a coffee meeting and it is a very simple, hey, I heard your goals. I'm going to recap their goals, I'm going to talk about the deal and what the deal does, and then I'm going to just tie them together and say when we do whatever the deal was, when we've finished this project, this is where this leaves you in the terms of your goal. And we usually get a yes on that subject deal that we used. They are real estate professionals. They wanted to start doing deals that were larger, so it made sense to run a cost segregation study. We found a 12-plex that was perfect for that. That was an easy call. Hey, you were looking for bigger buildings, you wanted to get into larger spaces. I found the building, I found the deal. This hits your goal on a cash flow statement or a cash flow basis. But most importantly, this is going to be the right deal for you to cost seg. That's going to give you the tax benefits that you were working on. And that's how I pitched that. That's how it came together. And I apologize, I'm a little stuffed up today. I'm, I'm getting over a cold. From Vicks Life, assuming this is all documented in the LLC agreement, but how do you treat cash flow between you versus the general investor? As distributions, built-up reserves, how do you pay yourselves? All my LLCs are actually set up the same way. We reinvest all the cash back into growing the LLC, period. That's either improving the, the buildings, that is expanding the portfolio. So it may be do a cash-out refi and go buy a new building in that LLC, uh, it could be paying off debt in that LLC. But all of my LLCs follow the same principle as our master portfolio. Which is build, stabilize, optimize, pay off the debt. That is what we're doing on every single one. Now occasionally we'll do a deal where someone goes, hey, can we do a little distribution? And that's where the partners get together and we look at the accounts and we say, hey, do we want to pay ourselves something out of this LLC? That is rare. I've only had one or two LLCs that I've ever, I've ever actually taken any money out of. Typically we live on one refi a year. There'll be some event that Cody and I do for maybe $135,000 each where we'll, we'll refi a building and we'll go ahead and, uh, take that cash, pay ourselves, and then that will be our liquidity event for the year. $130,000 is more than enough for me to live on. The rest of the money, all the cash flow, all of the income streams, all of it goes into expansion. What we're starting to do is more stabilization. Last year we put a million plus dollars into renovation in our portfolio. Uh, which got us optimized over 2024. You'll see us doing a lot of activities around debt hammer. We're going to pick up some big value-add projects. We're going to sell a little bit of our real estate that has higher equity positions in it to start paying down debt. And our goal is to end somewhere around 100 to 150 unit portfolio that has very little debt on it. We want to get sub-50% loan to value on the entire portfolio. Right now we're sitting around 65%. From Instagram, what was your first deal like in terms of financing and partnering? So first deal I ever did was a duplex that was by myself that was conventionally financed, 5% down. That was a little house hack duplex. Uh, second deal was a duplex that was hard money, that was a heavy renovation project, and they financed 101% of the purchase price. Then I went in and financed the renovation. Those are my first two deals. Our first partner deal and first one where we started getting a little bit bigger, that first deal was our 38-plex. That was a $2 million purchase, seller financed. They wanted 15% down. So that was $300,000 down to buy $2 million of real estate. We went ahead and raised that in four phone calls. So we had three, we ended up with three investors. Each brought in $100,000. And in the first 11 months, we bought them all out. And refinance the building. That was a 5-year project with 5-year term, uh, but we ended up getting bank debt, pulling another $300,000 out in addition to buying out the partners, and rolled that back into the building. And it looks to me, outside of, uh, Outside of a few questions, we're pretty much, uh, we're pretty much there. So we may end up with a short live today. We did actually go live yesterday as a bonus live, so it is possible that today is shorter. But, uh, post all your questions here and we will, uh, we'll continue on. Uh, Vic says thanks for hosting these lives, experience is invaluable. Yeah, I mean, if your GP doesn't have the real estate professional status, can you claim 100% of the accelerated depreciation despite owning 30% of the LLC? Uh, you can do special allocations, but it must make economic sense, and you have to be able to justify it to the IRS. Generally speaking, no. I apologize, runny nose, I am sick. But, um, let's see here. Uh, we have done deals where we've actually given the capital partner 100% of the depreciation, and they were a real estate professional. You have to be able to justify why you are doing that and why it makes sense on the specific deal. In the case of the deal that we did, it was a 50% business purchase, 50% real estate purchase. We allocated the real estate cost seg to them. They provide all the money. We ran the operations. I can explain that to the IRS. We are operating the business. They funded everything. We have no cash in this deal. We get the income from the actual business operations of our resort. The other investor gets 100% of the tax benefits, and that's how we run those. From Growing Homes, what does the equity partner, um, uh, buyout payout to the investors? Oh, oh, it's gonna totally depend on your deal. 100% negotiable. That's why I love creative finance. Uh, if we're looking for just basic, like, where are the goalposts that I like to set, if we don't share any cash flow, if we get 100% of the cash flow throughout the deal and it's an equity partner, I'll buy them out typically 2 to 1 in 5 years, which means if you put in $100,000 and we didn't share any cash flow throughout the deal, I will buy you out at $200,000 at the end of 5 years. That is pretty common. Um, if we are doing 100% debt, it's gonna be 8 to 10%, and then you kind of blend it in the middle if, uh, if you're doing a mix of debt and equity. If I'm paying someone 6% of the cash flow throughout the deal, um, their buyout's probably going to look a little closer to 1.5 to 5 in 5 years. It totally depends on your deal and how you structured it. I got a question here on the Instagram side. Do we host meetups in Washington? Heck yes, we do, and we have a really exciting one, uh, January 19th, 20th, 21st, Robin Hood Village Resort, our seller-financed resort. We are hosting our next event. It's going to be on creative finance and asset management. We're basically talking about all the things that make people millionaires in real estate. How do you put together the deals like we just talked about here? And then we're going to go a deep dive on both short-term and long-term rentals. What do you do on the asset management side to stabilize and optimize a building to make sure that you actually make the money on the project? We're going to talk about budgeting for renos. We're going to talk about basic operations. Hiring the right team, uh, that's gonna be a really fun event, and my catering for that is ridiculous. So, um, if you have not booked a ticket yet, go to robinhoodvillageresort.com, go to the current events page, and that is the current event on that page. It should bring you right there. Uh, we still have— I think we still have 5 or 6 cabins left. So that is a fantastic event people should absolutely attend. Oh, let's see, I got a question here. What do you think about Charlotte, North Carolina market? That's my market. Charlotte, North Carolina is awesome. And the fun thing with creative finance is it works everywhere. We own in downtown Seattle where people said you can't do this. You can buy buildings anywhere, any market, but you hit the main metric. More people are moving to Charlotte, North Carolina by a lot than are leaving. If you're providing housing, putting roofs over people's heads, and there's more and more people moving there and people love living there, just basic supply and demand, that market looks really, really good. Now, you've seen a lot of appreciation over the last few years. I think you'll continue to see a lot of appreciation over there. North Carolina in general is just a great state to invest in and fairly landlord-friendly. All right, jumping back into the YouTube chat. Hands full again, hit the like button for Christian Osgood. Oh yeah, that's right. Yeah, I see several of you in here and only 4 likes. Let's, uh, everyone drop a thumbs up here. Let's get this video boosted so we get more questions in here. I appreciate that. If you're on your phone, you can in fact, uh, X out of the chat, hit the like button, and then rejoin the chat piece. Uh, okay, from PS Fields Real Estate: How would you structure a seller finance deal when the property is already performing or very close to its full potential? Well, in that case, you're just looking off the day one cash flow. If you don't have a lot of upside on a deal, which is totally fine, you just have to be able to win on the price and get terms that work for your deal. On that one, you're going to be looking for the longest term debt product possible because you're not looking to refi generally if you're not pulling out new money. So if we're looking at the refinance, you're going to want to see a longer balloon, ideally 10 to 15 years, 30 years if you can. But you'll want a really long-term balloon on whatever debt you get on a mostly stabilized property because you don't have a lot of other reasons to refinance other than your debt expires. Uh, from Vicks, if you have a great tenant and are renting at market or above market rent, would you still implement an annual rent increase for them? Um, actually yes, but very small, and I'm talking like $20. What I found a lot of people get in trouble with is they don't raise rent and they don't raise rent, they don't raise rent, and then they finally do some sort of rental increase as the market increases and the tenant absolutely flips out or they leave they get used to, hey, rent's the same every year. You want to just basically train your tenants, hey, while I live here, every year there's going to be some change to the rent. Rent goes up over time, uh, but I've just found that's the best practice. It can be super nominal, it just has to be some change. I don't care if it's $5 more. All right. So right here is the point where we'll do a last call for questions. I'm going to rehash our main topic for today, the Millionaire Cycle, for those who have joined throughout the video. I want to make sure that we cover this. Ask your questions. Once we clear the next round of questions, we will go ahead and call it a day for the live, and I will go sleep off this cold. So thanks for bearing with me. Um, essentially, creative finance in a nutshell: you create your own liabilities. That is it. So I used this example earlier. I'm happy to do this again. So that's what we'll do. But you create a note. Grab my props here. You create a note. There's your note there. $3,000 per month liabilities are negative cash flow. So we create negative $3,000 a month. Why would we do that? Because we're buying something that makes $5,000 a month. We'll call it an apartment building represented by this brick. So right here, I use $3,000 a month negative to buy $5,000 a month positive. I have $2,000 net. Awesome. $2,000 doesn't change my life, though. My goal is $10,000 a month. So we stack 4 more said bricks until we hit $10,000 a month in cash flow against our pile of notes. Well, now we're making $10,000 a month. And as rents increases go up over time and as we start to optimize our portfolio, what we're going to find is that that $10,000 a month keeps going up and up and up. Now, liabilities suck. We don't want debt, generally speaking. However, we can't outpace the US economy for inflation. It is almost impossible to save your way to financial freedom unless you have a ludicrously high-paying job. And even then, It's really hard. We're basically creating smaller liabilities than our assets, adding to our asset column until our income is high enough to where we're going to pay off all of that debt with the income that we just created. You can actually use debt to create assets that are so large they pay off the debt, and now you have a debt-free portfolio. And that $10,000 a month cash flow has paid off all 5 of your $3,000 notes, which means In this example, you don't have $10,000 of cash flow. You now have $25,000 a month of cash flow because you've just eliminated $15,000 of debt. But wait, it gets better. Rents go up over time. So by the time you've paid this off, you're probably closer to $30,000, $35,000 per month cash flow in this example. That is how the real estate game is played. That is why we pay off our debts. And it feels good to owe less money and have no impending balloon. Life is pretty sweet when you have a high equity position giving you a great return consistently every month. Okay, final questions and we will wrap up for the day. What's generally your hit rate when reaching out to larger landlords, uh, from getting them to pick up the phone, scheduling a coffee chat? It's about 50% as far as getting all the way to the coffee meeting. Not everyone answers the phone and it takes a few calls, but generally speaking, if we're trying to reach someone, that's all we do. We, I pick up the phone, I call, they don't answer. I'll call again later in the day. I'll leave a voicemail. The voicemail's always the same. We're not going to call about a specific property in a voicemail. So we're going to just say, hey, this is Christian Osgood calling about your property on 123 Main Street. Actually, I'm sorry, don't say the property. This is, this is sick brain talking. What do you— hey, this Christian had a quick question for you. If you can call me back, here's my number. And then I leave my number and then I hang up the phone. Voicemail's like 15 seconds long, super easy to listen to, and it's the messenger mystery that works almost every single time. That is the last question we have for today's live. I will see you guys next Wednesday unless I get inspired to just watch another live. I think I'm going to do more of these more often. And Cody will be back next week, so you'll see more of him. Um, then yeah, next time you see me, I should be happy, healthy, and with a Cody Davis. Till then, we'll talk to you guys on the next episode.