All Forum Posts by: Alain Perez-Majul

 Agreed! Not only that, but when thinking about inflation and debt, you should also consider time value of money and the powerful benefits of leverage. If you lock in a loan and you're paying, say $400 in debt service a month for 15, 20, 30 years, it is essentially cheaper money in the future given inflation. Yet another benefit!

(Oh man, don't get me started on DR lol!)

@Marc Rose

Yup, totally get what you're saying. And I don't think anyone would argue the recourse-ness/non-recourse-ness of the of loan. But it seems that it's simply coming down to how risk gets looked at. I think it's a great discussion, so I would ask:

Why do you see it as "riskier" to you? If you put more down, let's say you take a 60% LTV loan as opposed to an 80% one, why are you at less risk? Because your monthly cash flow is larger (thus favorable) given less monthly debt service responsibility, and thus you see it as a safer monthly cushion?

 I guess I would say I would challenge this, for many of the reasons stated by everyone contributing to the thread so far. And the fascinating thing to me about this topic is that I wouldn't say you're necessarily wrong, while many could make a good case that you are- again, no right or wrong, no one way to skin the cat.

Isn't cash flow what you really want at the end of the day? Simply owning an asset doesn't pay for my lifestyle and give me the freedom most people get into this business looking to achieve. If one could learn to properly manage leverage and risk given their subjective tolerances and preferences as an investors (which again, will vary from person to person), what does it matter that you "own" it? I mean, shoot, take AirBnB arbitrage (for those of you unfamiliar with the concept, it's the idea of renting out a property from a landlord, and then AirBnB'ing that property for much larger spreads above your monthly lease responsibility to that landlord/owner). Would I care if I was renting out properties from someone else and I myself cash flowing $1MM a year? Maybe I wouldn't, maybe I would, depending on my risk tolerance. But it'd be tough to argue that you wouldn't be sitting comfortable at $1MM of yearly cash flow while not owning anything. The point I'm making here is that your argument of the importance of ownership and lack of debt, could be argued, doesn't hold ground. I personally am not in real estate for the sake of just owning real estate- I simply want to use it to buy my time back.

For those reading this comment, and interested, the book "The Wealthy Code" does a good job at covering a lot of this stuff (perhaps at an elementary level for many experienced investors, but as someone still on the journey of educating myself in matter of real estate financing and how to really think about debt, risk, volatility, etc, it was eye opening for me).

The author at one point talks about equity like this, and I found it beneficial (quoting here):

Do you think this is a good investment?

• You pick pick the monthly payments you make
• If you pay less than the amount you pick, you could lose all the previous payments made
• Each payment makes the money you have paid less safe
• Money is not liquid; nor is it safe
• The money earns zero percent return!

Is this a good investment?

Most people are already "invested" in this. It's their house! Equity in a house is a bad investment. It sits there and odes nothing for the homeowner.

 @Joe Villeneuve touched on it in a his post a few back in his "3 parts to risk," and I mentioned it to some degree in my post you responded to. The equity you have in a property is YOUR risk, given that in the scenario you were to lose that asset, it is that equity you would lose. A bank will prefer to lend, let's say, at 65% LTV over 95% because if they end up having to take that property back, they're essentially taking back an asset at 0.65 cents on the dollar (mind you, the topic of a bank wanting to take a property back is a different one, given that banks do not like doing so- it's a pain for them, and they're not in the business of having to manage real estate). So essentially, the more equity YOU have in a property, the more YOU have to lose, the more YOU have at risk. Precisely why it was easy for people to walk away from their ridiculous loans back in '08-'09... they had no risk, nothing to lose, and that risk shifted to the lender.

Again, I admit ignorance to some degree, and while there may be more than one way to interpret that quote, I look at it from the perspective I mentioned above. Let's say you owe $100k to the bank on a $1MM asset (the difference being your equity, of course) and you lose that asset, you're the one on the hook and it's your loss. Now if you owe $1MM on that $1MM asset and you lose it, sucks for the lender...

Again, my interpretation, and if anyone smarter than me or with a different perspective would like to weigh in, that'd be great. 

Related to this concept is losing a property due to unpaid property taxes and the relationship of possible equity in that property and taxes owed. I'm sure it's happened many times over (and will continue to happen) that someone owes pennies in taxes relative to the value of the subjective property and the state takes it back over a tiny amount of unpaid property taxes.

 That's fair. I clearly made assumptions in regards to the structure of your deals. Also, I see you're essentially in Detroit ("Local."). I hear things are actually pretty hot up there, contrary to stereotype. Likely a good place to cash flow, much like Indy.

Vague, though, so you hooked me. Might have to bother you later and pick your brain hahaha

 Actually, it's really the other way around. Well calculated debt is not your risk- it's the lenders. Your EQUITY is your risk. The more levered you are, the riskier position the bank is in, not you (of course, I'm not saying here that you should leverage the most you possibly can). But I understand what you're getting at. 

I've always liked the quote:

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

Agree with your 3rd point and really love the LOC idea. I'm doing that right now with a rental but not for "Oh s***" moments, but to have liquidity available for the coming year to buy more. On that note, do you know if lenders do commercial LOC's with RE as collateral that are longer than a year? (personal residence helocs differing here...)

Also, that roof idea is solid! Appreciate the nugget!

@Joe Villeneuve wait, perhaps I spoke too soon. Were you including debt pay down, write-offs, and appreciation in the monthly cash flow calculation?

 Joe, where are you finding properties that cash flow $500 a door? These must be in markets where the rents are decently high to even allow it to be a remote possibility. But even then, those markets then typically also have high price points, which will significantly affect your cash flow in the event there's debt thrown in the deal. The only other way I can think of is buying a home run from the get-go (ie significantly under market value) where debt service (plus additional expenses to factor) to monthly rent allows that to pencil out. 

Typical Indy example (class B property, late 90's, 00's vinyl village):

PP:    $120,000

Rent:    $1,200

Taxes (assuming same assessed value):   $200/month

Loan: $96k (80% LTV) @ 4%, 30 years.... PI of $458/month

PM (10%):    $120/month

Vacancy/maintenance (15%?):    $180/month

We're looking at $960 going out a month, or cash flow of $240 (with the assumption the above numbers are fair, which, other than vacancy and maintenance, one can't argue the rest- and I might've been aggressive on the commercial 30 year interest) - all of this in Indy, a city renown for good cash flow given its cheap real estate. 

How are you hitting $400-$500 minimum cash flow per unit (if indeed you turn deals away if they don't meet this cash flow)??