Where Are The Capital Accumulation Threads/Discussions?

Question

Last week I attended the CCIM 101 training offered in Austin.  The course was really much better than I expected for it to be and it brought back memories of grad school and discussions of capital accumulation.  It has been a while since BP had knock down, drag-out threads about IRR, MIRR, ROE, cash on cash, etc. and their relative importance in deciding how to allocate capital.

Capital accumulation is largely missing from discussions on BP.  Any sense of why?  Is it because people are trying to free themselves from jobs through small cash flow properties in Class D areas?  We have the cash flow versus depreciation debate frequently, but I don't ever see a discussion of loan amortization and principal accumulation over time or analyzing investment decisions with limited cash.  Leverage and the ability to control larger assets also produces the ability to amortize larger loans over time.

Any thoughts?

Steve Vaughan · Answer

Now that I see what you are saying @Bryan Hancock - I get what you are saying:)

Just reading the title of your thread from the list, guess what I thought this was?  A new person trying to save up for their first little investment house.  Trying to save a few grand and start. That's the way the forums roll most of the time.

The high level stuff is tougher to find here.  Jason makes a good point with his exercise metaphor.  Most want to just drop some weight.  Capital allocation discussions are akin to the finer points of sets and reps for one muscle group.  BP has become (or was designed to be?)  a broad-based newbie helper - the Dave Ramsey of finance.  Basic, basic.  Stop using CCs.  Stop having a car payment.  Stop being stupid. Tell your money what to do.

I enjoy following the grad level finance discussions you, Will, Serge, Ben, Bob B (used to could), Jay, etc used to have.  I'll chime in if I can, but for the most part I am just a spectator at that level mostly by choice. 10x was never my goal, so being content doesn't inspire the passion for 'knock-down drag out return metric discussions :)  But I'll cheer you on if you get one going, Bryan!

Bryan Hancock · Answer

Not sure I agree @David Dachtera.

Almost everyone on BP is looking to gain financial independence.  It seems like a far more probable proposition by controlling more in assets and allowing capital to accumulate over some extended period of time than it does operating tens or hundreds of thin cash flow deals and optimizing IRRs and such.  IRR or MIRR are fine for making decent judgments on relative investments (yes, I know those measures have issues), but they're lousy at measuring how big your pile of wealth is at the end of the holding period.

Buy large assets, control the capital accumulation for an extended period, exchange, repeat.  This is a rather simple procedure for gathering more capital over a modest horizon and later converting it to cash to index and live the lifestyle desired.

Note that this procedure works fine for SFRs or simpler investments too.  It really doesn't have to be applied with commercial projects.

Dennis H. · Answer

Been lurking for a week.

Maybe because there aren't more LP/GP discussions on here? I see a lot of people looking to do things by themselves and not as a GP with a well-capitalized partner or group of silent investors acting as a LP.

IRR, a time measured rate of return metric (XIRR for those of us in the commercial real estate private equity world), becomes very important for these capital structures. I don't think I've seen any discussions on promotes here either. If anyone is a GP, they should be negotiating a healthy promote for all of their deals.

Equity Multiples can work hand in hand with IRR this way. As a GP, you put in a much lower % of money; however, you can receive a lot more at the end of the day than your original pro rata share of the capital stack leading to greater capital accumulation. Do this enough times, and you can start investing as a sole investor.

Jason V. · Answer

I think it's pretty simple: as a couple of well known and frequent posters (and extremely successful investors) are fond of saying - BP is a site for beginners. When you start to look at the entire picture of investing in real estate (let alone the IRR v. MIRR argument) people say "it's too complicated, I can't do it" and walk away. Heck, if you even understand why IRR matters, you're probably in the top of the ranks here.

But there's nothing wrong with that! And the fact of it is, REI doesn't need to be complicated. Once you get over the initial hump, it's actually dead-simple, and you can make a lot of money in both the short and long runs using very simple strategies.

It's kind of like arguing over exercise, anyone who exercises without hurting themselves (probably not that difficult) is going to be much better off than someone who doesn't exercise. Only gym-rats like arguing about sets, reps, tapers, form, etc.

Sebastien Hitier · Answer

interesting point of view:

what asset type and size do you think currently offers the best return?

I suppose it would depend whether you look at the market pre-2006 where the developer was making all the money, or 2011 where foreclosure meant many SFH prices were up fr grabs.

Since we talk about capital accumulation, how do you think the average cap rates (and 15%-85% quantile) for large asset compare to similar class SFH?

David Dachtera · Answer

@Bryan Hancock,

The folks to whom that means the most are not likely to found among the denizens of BP. The folks you seek are too busy focusing on business to be sifting through posts like these.

There is likely another forum which would be more appropriate for you. I don't happen to know what that would be. Possibly LinkedIn which is more career oriented, though most folks there are job seekers, not business owners.

Maybe more of a financially-oriented forum ...

Linda Weygant · Answer

I think the issue here is that many (most?) folks don't believe they control their investments.  I don't mean like they are completely running around with their hair on fire, but most people are happy to find a deal that cash flows or otherwise meets a goal.  One goal - maybe not all their goals, but hitting one or even two is really great.

Being able to target investment choices is a pipe dream for many right now - even those who are further along in their investment career than others.  Having the luxury of walking away from a deal that doesn't check all the boxes is a situation most people are not in.

Jeff Filali · Answer

@Bryan Hancock  I believe most people don't want to think about capital accumulation because it goes against their current approach focused on cash flow.

Mike Landry · Answer

good thoughts. I would like to get into multi family's but it just doesn't make sense. I can pretty easily find a property and be all in at 70-80% arv. While it only truly cash flow $200/ month (500 after piti), my irr at 1 year to 5 years is very high from the equity. When I look at multis (non repositioning) I think the irr is a joke. 5-8 caps, 2-3% a year increase to noi? Good luck with that in the current market going forward. What studies have these syndications done to determine future rent increase. Lol none. Remember, past performance is not indicative of future performance. Irr is just a guess, wish, and a hope.

That being said I would much rather have a larger loan amortizing than a smaller one assuming they cash flow the same and I had the same amount of capital invested.

Where Are The Capital Accumulation Threads/Discussions?

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