Turn your Rental Property Problems into Cashflow Problems

Hey, YouTube, it's Cody and Christian, and we are back for our very final rule that we follow, that we've been sharing our principles for a while, and this is number 35. You got to learn how to convert your problems into cash flow problems. Now, what the heck does that mean?

Well, converting problems into cash flow problems simply means that if you don't have a whole bundle of cash, you spread it out over time. You want to make sure that you have enough income to cover expenses. Sometimes you will come up to either a big capital expenditure If you have a partner that you want to buy out, whatever the big expense is, if you could turn it into a cash flow problem, you can make it so the real estate buys the real estate. Something we say all the time on this channel. Maybe we don't go in depth enough on that often enough. So this video, we're going to do that, give you some very specific examples of how you take a legitimate problem and some problems that we've run into and how you extend those into cash flow problems that your real estate does in fact pay them off.

Now, the real acknowledgment here is that cash flow problems are always better than upfront problems. If you had to come up with $200,000 tomorrow, maybe you can, maybe you can't. But if I could come up with $200,000 tomorrow, I'd rather just pay a couple of thousand bucks a month for an extended period of time and then use the $200,000 to go buy other stuff that can produce more income for the long term. The goal here is to look into the future and say, what do we want to have? And if I spend everything today versus creating a cash flow problem that I can pay for over the long term, am I going to be happier in the future? And for us, we want to keep expanding. If we expended everything we had upfront, we'd run out of money very quickly. That's what most people encounter in the real estate space, because you can't buy everything. You run out of money all of a sudden, or if you have a debt come due, you got to write a big check. If you're out of money, this is where Christian was at with his two duplexes. You couldn't keep expanding. If he found a way to, instead of having to write huge checks, pay monthly payments on those, he could keep expanding indefinitely as long as his cash flow could match the expenses.

And that's why I always buy cash flowing deals. You go for day one cash flow, preferably with some really great upside so that your cash flow gets stronger and stronger. Where people get stuck is when you buy properties at break even or worse, you buy deals that actually cost you money every month, even if it's just a little bit. The problem is if you have a deal that negative cash flows $1 or more, but you have that limit of there's no positive cash flow, there is absolutely no way to turn a major problem into a cash flow problem. You can't cash flow it with that negative cash flow. That's why that day one cash flow is so important. For example, you buy a property, 3 weeks later there's a problem with the roof. It didn't come up in inspection. You weren't expecting it that quick. You were gonna try to budget for it throughout the year and it happened to you right now.

Even if a tree falls on it and it costs you $40,000, you may say, well, insurance will pay for it. Well, you got to pay the contractor and the insurance isn't gonna pay out for a while. So you got to pay the bill to get it fixed, otherwise your tenants leave. Now you're just losing money.

So how do you actually do this? Like practical application, like the first thing that I would ask is you talk to the contractor, you know, can we do this in payments? Is there a way to just installment payment this? What is the minimum that I can put down right now and how do we work this?

So we've done that before. Yeah, we've done that before where we need to extend payments. We've done it on multiple different assets and then we can knock it out over time. In real estate, it's not like just clicking a button. You do have to fix the problems, but it doesn't happen overnight. So when you're working with people and you build these relationships, if you can extend, it's like free credit. If you can just extend because you have a relationship, the amount of time that it takes to pay them back. Well, now you're just working together to figure out, okay, I have this $40,000 bill. How do I pay this over maybe a year in that case so that it's much more affordable for you and you don't lose it? Because it's one thing to buy real estate, it's another thing not to lose it. If you can extend your obligations for long periods of time, it helps you out on the back end. Yeah.

Now, what would we do in the situation of we just bought a building and we bought it right? So it's cash flowing. We have that major roof expense. Contractor says, no, I need 50% upfront and I'm going to get 50, the other 50 at completion. You can't make it a cash flow problem through the contractor. How would you handle that?

Well, if you have cash flow, the nice thing is you can borrow against cash flow. And so I would try and find a way to borrow the money from someone else and then pay them back over time. You can do this as a second mortgage. You can do this as a 0%, 18-month promo credit card. There's so many ways to get money, but it's really hard to do it if you don't have cash flow, which is why we built all our other principles first and this followed the latter half. But if you can turn upfront problems into long-term problems, especially with real estate, which is a long-term game, it's much easier to not lose your real estate. Yeah.

Now, another example that I want to give for practical application is Say you're going to buy out a partner. Cody and I do a lot of— we talk about debt and equity. Sometimes a deal doesn't have a ton of cash flow up front, so you bring on an equity partner who can wait for payments as the property gets improved. Now, you still buy cash flowing deals, but sometimes that cash flow is smaller than you want day one. We get to the point where we increase the income. How do we actually handle the partnership buyout and make a— say we have a buyout coming up in 3 years. If we want to buy them out now, how do we turn that into a cash flow problem?

Yeah, so we've done it a couple of different ways. You can just write a check. If you got a bunch of money and you want to get rid of partners, write a check. You can pay off debt with money. You can pay off people with money.

What?

However, if you don't have money, which is what happens to real estate investors, you can typically run out of cash really quickly, is you can write a note. They can seller finance their ownership to you. So we've done that before where we end up writing a promissory note in exchange for their ownership in the asset. And that, for us, gives us ownership of the deal, 100% seller financed, because now the owner, which is our partner, financed their ownership to us, and we get to make payments to them over time, which the real estate then covers.

And there's simple rules to do this, and conveniently, we recorded the last 3 or 4 of the rules in our last videos in the series. One of the main ones is, just like buying a deal, it has to cash flow. So all you have to do to take the equity piece and solve that problem to make it a cash flow problem is you need to get your asset performing where the cash flow is greater than the new debt.

Yep. Just because it made sense day one, if you add new debt, it can break your model. You want to do a stress test on your portfolio, increase the leverage 20% and see how it does. If you add debt, meaning if you add new financing to that asset increases your debt payments, all of a sudden you could be underwater. So while it's good to have your good team and good to have cash-flowing assets, you can make it go negative really quickly. So you have to be careful how you structure it, make sure you run the math, because even if you could buy and it made sense day one, you could ruin it later by adding too much debt. It's really important not to over-leverage.

Real-world example, we actually had someone, a deal that had 3 equity partners. One of them—

I'm not doing that again.

No, no, no, no. The less partners you have, the better.

Oh, the simpler. Yes.

We had one person who decided it was the wrong deal for them. It was a 5-year note and what was it, 6 months in?

5 months in? We were 6 months into a 5-year partnership.

And they go, oh, I need my money back. It's like, well, that's not exactly how partnerships work. You don't just get to pull money out. It's not an ATM. That being said, we made the decision we want to help them out. Yep, we are going to make it happen, cash them out. Now we had 2 other partners. We made the decision as well. It would be nice if we're going to buy someone out right now.

Let's buy everybody out.

Yeah, let's execute everyone. The problem is we only had cash to buy that first person out. So we spent our money on them. That's option A, right? We use money to pay off our debts. And eventually you do have to do that till your debts— you will have to actually earn or generate the money somehow to pay them off. However, we extended time on the other ones and said, hey, We don't have the cash right now. The property has improved to where we can fix your payments. Instead of just getting a percentage of cash flow based on your ownership, we can give you stable income because the property now has enough monthly cash flow to fund that. So we wrote 2 notes to cash out 2 partners.

Just like that, I mean, we got 100% of that deal ourselves and the real estate by about the real estate. Now talk about the biggest problem you could cash flow your way out of. If you want to be worth $10 million, your problem is you're not. You might be, but you're probably not if you're watching this. So if your goal is to be worth $10 million, borrow $10 million. Now you got a cash flow problem. You cash flow problemed your way to a $10 million net worth. If you're buying $10 million real estate, you can't just deliberately overpay. But if you want to be worth $10 million, borrow $10 million on cash flowing real estate and let your tenants pay it off over time. That's the way to play the game. So if you talk about like our super big cash flow problem that is upfront an equity problem, you don't have $10 million equity, borrow it and let someone else pay it off. That's how you can convert it into a cash flow problem. And that's how we're going to get rich.

Now, if you haven't liked or subscribed yet, please do. I know we're at the end of the series. So if you just absolutely loved this series, I apologize. These are the 35 rules that we stick to. Maybe one day we'll add some more, but this is the series. What we have coming next. Over the next few weeks, we're going to be delivering content. I have a few interviews that we've already recorded that we're going to put on there. Cody and I are going to just keep posting videos for fun day. Starting January, I believe it's going to be about mid-month, Sole Cayetano is going to join us for a multi-week series. She is 24 years old. She has 30 units all out of state in Cincinnati and Augusta. We're very, very excited to introduce her on the channel. We actually had an interview with her just a little while back. We're going to be talking out-of-state investing, investing when you're young, creative finance, a whole bunch of great topics from great young people in the space. Favorite thing about her, like Cody, she shows what you can do at a young age regardless of your experience, regardless of where you're at, regardless of where you're located. Very excited for that series. Stay tuned. That's coming in January. Stick with us in the meantime.