$0 Cash Flow Now for $60,000 Cash Flow Later?

Question

Hello BP Community!

My question for you is would you take $0 annual cash flow now for $60,000 annual cash flow in 20 years(progresses $10,000 annually every 3 to 5 years with refinancing)?

I am 22 years old and currently own 4 units in a small town with a strong, diverse, and consistent economy. I live in one of the units and rent the other 3 to cover all expenses on the property so I live for free.

I also have a job that pays very well for our area and allows me to not be dependent on my cash flow from my properties, although I would in the future, ideally not to distant future. I can fix anything, know my numbers, and have a support network to back me up if/when I run into something significant.

The Deal

I have been analyzing a deal for the past 2 months and working with the owners and a number of investors to try and close. Needless to say my investors don't want to give up as much equity as I would like to get given I don't have cash to bring to the table.

After conversations with a local bank president and the owners I have been given the option to purchase the property with roughly 18% down payment seller financed and the remaining 82% financed through the bank. The terms on the seller financed portion has a 3 year balloon but the bank has agreed to roll that into their loan automatically in 3 years to ensure I don't get stuck not being able to pay back the owners.

The property has 16 two bed units all with porches/decks on a small lake(duck pond) in the center of town. Its arguable the best location for a property of this size and the second best quality units in the area. There is an opportunity for 10% rent appreciation.

As the numbers currently stand accounting for all expenses with, vacancy,  a strong maintenance, capx, and property management I would be left with $0 after taxes for the first 3 years until I refinance. Fully paid off this property will confidently provide $60,000 in annual income.

Of course if there is less maintenance expense(or I do a lot of it) and I can be savy about pushing off some of the capx projects I would have the opportunity to make $3000 plus I would also be making the property management fee in my budget of roughly $6500. If something goes very wrong then I am left taking money out of my own pocket to keep the building afloat.

I do have all the numbers and financial statements on the property over the past 3 years and have padded them but its a big risk to be 100% leverage without significant opportunity for rent appreciation.

Please give me your thoughts and personal philosophy. I have my own but wanted to get the BP spin on your ideas.

Joel Owens · Answer

Joel Floreck,

There might be little to no money from the sponsor but they will have to answer and provide timely reports to the investors.

So no money down or little money down is just one component.

2 things would be:

1. Demands on your time. If you had no money in but added up all the time this  property took in 20 years to create 60,000 in possible cash flow would it be worth it??

How much time are you losing with opportunity cost?

2. Giving a personal guarantee saddles you with debt. Even if you put no money in now you have time into a project that is barely producing PLUS when you find another much better opportunity to invest in now you are saddled with that other debt on your personal balance sheet.

It's better to wait for the right deals than to become a part of a mediocre or bad deal.

Stephen Nicholson · Answer

first two answers were complete opposites! Should tell you all you need to know about making your decision....it is a risk that MAY pay off big in future, it all comes down to your own risk tolerance.

Joel Owens · Answer

Nope you make money going in and the rest is icing.

20 years is 2 decades of time.

I am 40 now and 20 seems a lifetime ago. So much has happened between now and then.

Your obligating yourself to a JOB with all the return if it ever happens on the back end. The time value of money dictates money is worth more today then it is tomorrow.

60,000 in annual cash flow in 20 years will be almost nothing due to inflation and the money being worth less.

Don't talk yourself into doing a bad deal. If this was no recourse and you could experiment and walk away if it took up too much of your time or was a money loser that is one thing. The bank will want your first born with guarantees and work you into the grave to protect their money.

Larry Turowski · Answer

I think I misread your post.  Somehow I got it in my head that it was $60K cash flow in 3 years.  I guess then my biggest question would be could you sell it if you needed without taking a hit?  If not, I'd pass.  Wait until you have adequate money saved for a good down payment.  The only other way I would likely still take it is if you could get non-recourse loans, which it doesn't sound like you can at this point.  Non-recourse basically means your only collateral is the property itself.

Joel Florek · Answer

@Larry T.

Your comment was very different from the others. Do you mind me asking what your current portfolio or investing looks like as well as expanding on why it would me smart to only accept equity growth rather then equity and cashflow growth right out of the gate?

Joel Florek · Answer

@Clifton Bernardin

My only response to you on that statement is I have watched a lot of investors only want the home run deals and they are still waiting. Of course I would capitalize on the home run deal but I think of a property like this as a dividend play. It wont be my get rich quick scheme but it will pay a constant dividend that will build $30K in wealth each year scaling to $60k in annual wealth creation in the future. Sure I don't get dollars in my pocket today but I get equity that equates to big dollars tomorrow.

Joel Florek · Answer

@Joel Owens

You have very good points, all which I have considered and why I poised the question.

I am not sure I understand your points on reports to the investors. The financing situation would not require me to provide any reports other then those at the end of each year to complete my taxes. This is the owner doing a seller financed deal for the down payment and the bank taking on the rest.

Another clarification is on risk. I am only required to have $50k put against the loan. That being said there is no additional personal guarantee being required of me to close. I do have a personal guarantee on my 4 plex which has $100k in debt so there is the potential for $150k in total risk in my portfolio if I proceeded with this deal. Yes this is a big number and there are always ways banks could go for more but I am not required to put a personal guarantee on this new property.

On to the Job response.

At first, yes it is absolutely signing a contract for a job that may pay me $500 to $800 a month if it goes well, but to be conservative I could be left with $0. The property is set up with contractors and onsite management that helps reduce the workload but likely at least 5 to 10 hours a week is what I would estimate. This is something I need to consider seriously.

The opportunity

I can flip houses and know that I will be able to find opportunities to create chunks of capital through other deals as the years continue. Having 20 units highly leveraged would provide me a place to immediately invest the chunks of capital earned from house flipping or other types of buy and sell deals. I wouldn't have to be searching for any other major deals for a while, just the small deals I can move fast and make $10k to $30k on. It essentially acts as an investment account that returns 5% every time I put in it. Now 5% is a negligible return for most investors but given the property is already working its a great dividend play on any money I make and a more reliable dividend play then stocks or bonds.

The Rub

I have watched friends, friends of friends, and my parents work to find the home runs that make huge dividends for them. There are not a lot of them so sometimes they go years without an opportunity trying to balance the 9 to 5 and investing. For larger 10+ unit properties it can take even longer to find the home run play that makes the big returns people want. Why not catch my big fish, keep it alive on a stringer until I have enough ice in my ice box to toss it in the boat take it home to cut up to reap my benefits?

If you didn't follow that analogy an investor who I have spent a lot of time with recently has done a great job doing new construction flips and other real estate deals over his lifetime and has built himself a sizable cash pile. However, he is now in a position where he has the cash, but not the deal to invest it in and get the $50k or $60k annual return he needs to retire.

This option would give me the property, and then let me pay it down monthly as well as in chunks when I make some great deals.

Clifton Bernardin · Answer

I agree with Joel. Don't waste your time on bad deals but rather wait and capitalize off the right one. 10 alright deals with risk equates to one great deal with no risk. So please weigh your options.

Larry Turowski · Answer

@Joel Florek Absolutely!  IF you absolutely know what you are getting into and are absolutely sure of all your numbers.  You are putting none of you own money into the deal!

$0 Cash Flow Now for $60,000 Cash Flow Later?

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