All Forum Posts by: Austin Fowler

I think part of the problem with looking at one specific property is, how do we treat the down payment? Is it borrowed, or is it cash? If it's treated as borrowed at 8%, then the property doesn't cash flow.

This goes back to my question of whether we look at your portfolio of SFRs in the aggregate or not.

Fractional reserve banking is the business model I use, and has been around for over 350 years. In this model, the business owner effectively has an infinite time loan at 8% per annum. All that matters then is that you have the capacity as an investor to make money grow faster than this. Properly run, this money is never due, you simply need to constantly prove to your clients that you are investing responsibly.

It doesn't actually matter whether you look at a single property or many properties, the business simply becomes lower risk and smoother the more properties you have. Investors have a claim on your global net worth. You grow your net worth through a combination of cash flow, debt paydown, and capital growth. So long as the aggregate of this growth is greater than your obligation to your clients, you are running the business responsibly.

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Quote from @Matthew Failor:

@Austin Fowler very creative. I don't see how the property in question cash flows even taking out the numbers questioned above.

I like how you essentially are a case study on how a bank works and people's first thought is fraud and jail time. Note, life insurance companies do the same thing. Do you think they have 1 to 1 reserves on every policy? No! You might say what about the re-insurance companies? Neither do they! Just ask an actuary.

Thanks Matthew!

Ok, let's look at the property in question once more. This time in gratuitous detail. Note that REI Nation put $67k into this property, and the list of new items in the home is long, including a new furnace and AC. There is no deferred maintenance, in stark contrast to properties I've bought on the market.

Purchase price: $225k

Purchase appraisal: $225k

Total investor funds allocated to secure property, this includes all of the appraisal, title, escrow, legal, etc, etc fees: $61,436.60. This is the amount of money that I need to make grow at a rate above 10%, since a 20% reserve means 0.25 of $61,436.60 = $15,359.15 is kept in reserve and a 25% increase in funds means the need for a 25% increase in the return required on the growing part, so 1.25 * 8% = 10%. If this doesn't make sense, message me.

Monthly rent: $1765

Management: 8% = $141.20

Let's go super conservative on vacancy and maintenance and say that on average we miss out on two months of rent a year to cover these, so 16.6% of rent = $292.99

Taxes and insurance: $369.12

Ignoring the mortgage, that leaves a net operating income of $961.69. Again, if I've lost anyone, please message me.

Interest on mortgage: $395.68

Principal paydown: $304.45

Cashflow after all expenses: $261.56

This is positive cashflow in my mind no matter how you wish to cut it.

The elephant in the room that perhaps I didn't go into enough detail is the fact that when you buy a property that appraises at purchase price, all of the fees of acquisition will mean that your net worth goes down, a substantial negative return if nothing compensates for it. In the case of my family, my wife is a real estate professional, and we get to claim accelerated depreciation, which means in the first year of purchase, approximately one third of the purchase price of the house becomes a deduction against my substantial W-2 income. Given my high tax bracket this means that approximately one third of this deduction becomes cash that comes back to me from the IRS, or to summarize, whenever I buy a house, the IRS will send me approximately 10% of the value of the house in the form of a cash return the following year. This more than compensates for the loss of net worth associated with the fees of buying a house, but to keep things simple, I will ignore this very substantial bonus and just call it break even and call the $61,436.60 the equity in the property. If you want to discuss accelerated depreciation in more detail, please message me.

Let's now calculate the return on money invested.

Conservative return just from cashflow after all expenses: $261.56 * 12 / $61,436.60 = 5.11%

Conservative return including debt paydown: ($261.56+$304.45) * 12 / $61,436.60 = 11.06%

Now let's assume just 2% annual growth of the property over the long haul. Maybe it will go down in value next year, maybe it will stay down for a long time, but over the long haul you can expect inflation to push up the value by at least this long term. That would add an average of a further $4,500.00 to my net worth each year.

So in total you have: [($261.56+$304.45) * 12 + $4,500] / $61,436.60 = 18.38%

This is a growth in my net worth. This growth outpaces the growth of my debt obligation to clients. This is all I need to run an orderly business. I have purchased an asset with 100% finance, that cash flows, and pays down its debt to zero one day.

Yes, there are additional details. There may be some refinancing along the way, there may be some 1031 exchange along the way, but hopefully everyone can clearly see that this is very possible to do even making extremely conservative assumptions on the performance of the asset.

If you don't agree with any of the above, then please message me. I am very happy to take you through it all step-by-step. I am very happy to listen to your opposing points of view. There is rarely a conversation where I don't learn something myself regardless of your level of experience high or low or your style of investing. I like people in general and love talking real estate. Let's connect!

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Quote from @V.G Jason:

Quote from @Austin Fowler:

Quote from @V.G Jason:

Quote from @Austin Fowler:

Quote from @V.G Jason:

What's the language for the investors? Do they have a minimum period for hold, or a time period they must withdraw ahead of time(like if they want to be paid end of Q1, they must state that by end of Q4). When's the exit period? You're literally just a run on from being wiped. Yes banks can do that, but they also got FDIC insurance behind that'll get involved and a lot more. You have houses you'd have to liquidate.

Are your investors aware you're reserving 20% of total funds, have they seen the balance sheet?

With house prices dropping & rates increasing, I'm quite confident if they'd get a look they may hit the withdraw button. Now hopefully you don't have anything capex wise happen too especially in this Panhandle area with weather coming in. Otherwise, your investors will wipe your 20% reserves out and you'll be force to liquidate the houses to get proceeds over. Your strategy has a lot of holes in it, you're basically leveraged 80% on illiquid assets that are coming down as rates are going up, and hoping you can see it through it with nobody asking for money basically? If you do, you'll do well. I don't think significantly well to bare this risk, but that's your call.

As for the language for investors, below is the 1-page summary of the 61-page PPM. No minimum hold time. If you want to put money in one day and take it out the next, that's fine by me. A single day of interest is cheap to pay and I'm happy to build relationships with clients simple by providing good service. No specific exit period. This is a savings account service. Yes, my investors are aware I run a fractional reserve investment bank that is ultimately personally guaranteed only by my worldwide assets. But these assets are substantial and sufficient to provide a meaningful level of safety. To be very clear, I can afford to cash out (through cash, credit, and stocks) all of my investors without selling a single house.

As for rates, all of my mortgages are 30-year fixed. The inflationary environment we live is has so far put upward pressure on rents. And yes, I share much more than my balance sheet with investors. W-2s, tax returns, the lot. My net worth is multiples my total debt obligation to clients, I run my business conservatively.

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Account Terms and Conditions

Maximum balance: $1.5M

The borrower agrees to provide a bank account service to the lender paying 8% per annum, with interest calculated and credited daily at midnight PST via balance(t+1) = balance(t) * (1.08)^(1/365). The account shall operate according to the following terms and conditions. Some of these conditions can lead to the account switching to a penalty interest rate of 25% per annum.

1) The funds in the account are secured with full recourse to the worldwide assets of the borrower, no matter how indirect the ownership structure is, no exceptions.

2) Deposits and withdrawals can only be made electronically to ensure unambiguous dates of transactions and secure transfers.

3) The lender can initiate a deposit by performing an electronic transfer to the borrower's account.

4) The date of deposit will be the date of receipt of funds listed on the borrower's bank statement.

5) If the received deposit would take the lender's account balance over the maximum balance, this deposit shall be returned in full within 7 days during which no interest will accrue on these funds. Failure to do so will result in the lender's account switching to the penalty interest rate and the deposit posting to the lender's account 7 days after receipt until the excess deposit is returned.

6) The lender can initiate a withdrawal at any time by sending an email requesting funds. Interest shall continue to accrue until these funds are sent. The funds must be sent within 7 days of the email requesting withdrawal. Failure to do so will result in the lender's account switching to the penalty interest rate until the funds are sent.

7) Transactions, interest, and current balance shall be provided via an online portal.

8) There shall be no fees or transaction limits associated with the account.

9) The borrower has the right to close the account at any time by sending all owed funds.

10) Even in the event of death or incapacitation of the borrower, this contract gives the lender full recourse to the borrower's estate, even after transfer to other beneficiaries of the estate, without exception or limitation.

so this is one they can exit. why would you say differently?

My experience of how an investor uses the accounts that they don't close the account. That's what I mean by not exiting. Investors use the account as they would use any other savings account. The balance fluctuates, and the average of all the fluctuations across all of the clients equals a constant from my end.

You offer a savings account for investors, that isn't backed 1:1. You're definition of 1:1 is lines of credit, personal income, personal equities, and personal home equity. Go talk to a lawyer, you need to re-arrange this asap.

This has all been set up through a securities lawyer. I have a Reg D 506c. Happy to send you a PPM.

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Quote from @Jeremy H.:

Quote from @Austin Fowler:

I don't understand how you have any substantial equity in houses that are financed 100% or even 75% - there's no way to get access to this money other than sell, you can't refi and take anything out either because there is no equity there. You've been doing this with SFH for 2 years - likely everything you bought in from mid 2021 onward will sell for less today than it would have then. That was literally the peak of prices.

So you back your clients investments with your personal assets?

The thing is you are still relatively small - if this got much bigger it could get out of hand really quick. One swing in the economy OR over 20% of people want their money out and you would be getting screwed. I hope these investors don't know each other or speak to each other - if there is any kind of cohesiveness between them it can be a real problem for you.

Yes to backing clients with everything. Please note that a fractional reserve becomes safer as you get more clients and each individual client is a smaller fraction of the reserve. Even at my scale the reserve has never run dry in 20 years and that's with O(100) clients. Note the contract specifies what happens if the reserve runs dry, it's not the end of the world. Clients get more interest until the business can be recapitalized. This can all be done openly and in an orderly manner.

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Quote from @Jeremy H.:

Quote from @Austin Fowler:

So you back your clients investments with your personal assets?

I've been doing this a long time. Not every property I ever bought was bought with 100% finance. I make sure I have a solid equity buffer before raising capital and buying more assets. Regarding current values, I'd prefer to argue that with data. My experience with property tax assessments says these properties have gone up significantly since time of purchase. I have the cash flow to hold on to them indefinitely, so only really need growth over the very long-term. I'm getting an appraisal done at the end of the month and will update this thread with that data. Opinions, are great, and I appreciate yours, but where data can be obtained that should dominate the discussion.

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Quote from @V.G Jason:

Quote from @Austin Fowler:

Quote from @V.G Jason:

Quote from @Austin Fowler:

Quote from @V.G Jason:

Quote from @Austin Fowler:

Quote from @Nicholas L.:

@Austin Fowler

thanks for the explanation, I was confused as applied to single properties, but I think what you're saying is that you take money from investors and invest it in a portfolio of SFHs. you don't say "i need $X for a down payment for house A, and i'll pay you back strictly out of the cash flow of house A." instead, you invest the aggregated funds. is that accurate?

and you said most investors don't want a monthly payment - so when do they exit? say, 5 years - and they get their principal back plus the interest?

That's correct, investor funds are pooled and used buy a portfolio of assets. A Stairway 8% savings account isn't an investment that you exit. It's where you put cash that is not currently committed to a better deal. People use it as such. Maybe someone builds up their balance to $50k-$100k then makes a significant drawdown to purchase an asset. Maybe someone uses it as a place to store funds set aside for a rainy day. It's a tool. And a tool that comes with total access to all of the details of all the assets that back the fund, education on how to acquire similar assets, and all the infrastructure and legals to enable you to build a similar pool of clients and raise capital for yourself.

If you are interested in learning more, or leveraging the infrastructure I have built, please message me.

What? It's not an investment that you exit? It's for a rainy day fund or a significant draw down to buy an asset--that's an exit, no?

If your investors all wanted their money back today, what's stopping them?

Nothing stops all investors withdrawing all their money at once. I have sufficient cash, credit, and liquid stocks to satisfy such an event without selling a single house. Fractional reserve banking has existed for over 350 years. It's a sound business model I didn't invent.

You're not a bank. Fractional reserve banking doesn't apply for you. I think that's what you're missing here.

How much of the investors initial capital covers the 33 houses you bought?

Fractional reserve banking is a mathematical technique, any business can make use of it. Currently I have a total client balance of $1.2M. The equity in my 33 SFR rentals as calculated using the appraisals obtained at time of purchase is $1.87M. It will have grown substantially since time of purchase. I have $150k cash in bank, $350k unused credit, and $800k in liquid stocks. Plus another $300k equity in my primary home, and all the usual incidentals such as cars etc. that are all collectively used to secure client funds. Not to mention I have a $625k W-2. Trust me, I run my business very conservatively. In comparison to my income and assets, the business is at a test stage. I have done my market research, bought 15 REI Nation properties, 12 SDIRA wealth properties, and 6 properties directly through a real estate agent. While I'm happy with the performance of the 33 properties overall, the REI Nation properties of the best performers and where I will focus expansion future.

That wouldn't hold in court. Good luck saying I was using fractional reserves, therefore, I was short liquidity when my investors wanted all their money back & thanks for understanding why you're not kept whole.

I bolded the $150k in bank, I assume the bank for your investors that you're paying back to not personal bank. I bolded the $1.2m, this is where it's all off. You need to keep these investments private, too.

I don't care about $800k liquid stocks--that's personal. $350k in unused credit--that's still a loan. You'd be loaning to pay off a loan? $300k equity in primary home--that's personal. $625k in W2---that's personal.

You're comingling your investor funds and your personal funds. This is an issue, too. You're basically stating I'll keep my investors whole on the 1.2mil by extracting from my personal account, I'm not sure if you fully understand the law here. I'd delete this posts and clean up the act.

As mentioned many times, this has all gone through a securities lawyer, so the legality is not in question. It is important you understand that when you borrow money my way you back it with everything you've got. You don't get to separate out an entity and say only that entity is liable to repay. If you did, you could let that entity go bankrupt and potentially hurt investors without being on the hook yourself.

The terms and conditions are on this thread. Investors know where they stand if there is a liquidity issue, they get paid more interest until the issue is resolved. In 20 years of operation I've never need to activate the penalty interest clause. Feel free to DM me if you'd like to delve deeper.