All Forum Posts by: Joe Villeneuve

@Joe Villeneuve - ah I see, basically you are optimizing for ROE - return on equity. Makes sense. You could also hold it and refinance to avoid selling and access the equity gains.

Not the same. A refi only moves part of the equity forward and usually produces a higher mortgage payment because the principal is larger, so the cash flow goes down too

Brother Joe…..

I take the time and try to read your post as much as possible. :-)

I follow your logic… I think.
So a person will leave some of their equity in a property if they do a refi. It seems to me that a person would lose part of their equity on a sale as well. I’ve had some refinances that went through where the appraiser appraised the property for way more than what it would’ve actually sold for on the open market. So in a case like that a refinance would have worked better than simply a forced sale IMO. 🧐🤔🤓

Timing has a lot to do with it. I've always sold for more than I could have gotten out with a refi. Don't forget the other problem with a refi...the higher mortgage payment, generating a lower cash flow.

Aren't there taxes to be paid on a sale, which you don't have on a tax deductible refinance;-)

Closing costs come out of the paydown.

0 Votes

Milwaukee, Wisconsin

Quote from @Scott Trench:

Quote from @Joe Villeneuve:

The appreciation is applied to the property value. Whether you buy all cash, refinance, or buy with a mortgage, it's the same PV,...which means it's the same appreciation.

Agreed - my analysis incorporates this.

If you want to build wealth and maximize IRR, lever up.

If you want to enjoy the ski slopes on Tuesday afternoon, pay it off.

Math says the exact opposite.

0 Votes

Milwaukee, Wisconsin

The appreciation is applied to the property value. Whether you buy all cash, refinance, or buy with a mortgage, it's the same PV,...which means it's the same appreciation.

0 Votes

Milwaukee, Wisconsin

I deal with a number of CA investors that take this same approach. Take your flip profits in CA, and buy with those profits for CF in the Midwest. This is very common, and highly successful.

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Los Angeles County, California

Quote from @Scott Trench:

Quote from @Joe Villeneuve:

The CF mistake REI make is they think you can accumulate CF properties starting from the beginning. You can't, and you shouldn't. Even if you could (and you can) find a lot of PCF deals out there, how do you buy them? It's not like you have an unlimited source of DP's available to you, and buying all cash is foolish. If you think you are accomplishing something just because an all cash deal is PCF, it's an illusion. All you are doing is playing catch up to your cost,...you cost being the cash you put into every deal. That's your cost. The more you put in, the more you have to recover before the PCF is actually a profit. That's one of the big reasons to leverage. You can spread your cash out, and each property then accumulates CF to recover the same cash you might have used on one all cash deal.

Buying for accumulating equity is also an illusion. The equity is actually what you are paying for the property. It's a form of cash that is locked up and useless to you. Those that say it has value, I'll give you all of my sports trophies I've accumulated over the years. I'll even through in my daughter's. They are both the same value.

The power of the equity is the PV it buys. When you initially buy a property, ad 20% DP, you are buying a property that's worth 5 times what you are paying for it. As the equity grows, it's diluting the power of that equity since it grows on a 1 to 1 ratio to the PV growth. Remember, that equity started out as a 5 to 1 ratio.

Here's my take on the roles of CF and equity, and why I say you must have both:

Role of CF - To accumulate within a property to equal the cash you put into it. As long as you have PCF, this really means you have a clear property since the tenant is paying for the rest.

Role of Equity - To grow from appreciation to a point where the growth is equal to the original equity, thus doubling it.

When both things occur (order doesn't matter), I sell.

Banking only on either CF or equity is a loss. You have to have both, and to say you can't just means you are looking in the wrong markets, and/or using the wrong strategies.

Why is buying all cash foolish? I think that, right now, it offers excellent risk adjusted returns.

Thinking you are ahead with all cash deals are an illusion. It's bad, very bad, math.
If you buy a property with all cash for $200k, and that allows you to have PCF of $1000/month, that means it will take you 200 months before you break even. That's illogical.
Thinking that you can focus on the equity as an offset is even less logical, and worse math. The DP is the initial equity you buy. Added equity comes from appreciation, which has nothing to do with how much cash you have in, or how much equity you start out with. Added equity is gained from appreciation, which is based on the property value, which starts out the same, and increases at the same rate, whether you ny all cash or no cash.

1 Vote

Milwaukee, Wisconsin

Quote from @Joe S.:

Quote from @Joe Villeneuve:

Quote from @Marcus Auerbach:

@Joe Villeneuve - ah I see, basically you are optimizing for ROE - return on equity. Makes sense. You could also hold it and refinance to avoid selling and access the equity gains.

Not the same. A refi only moves part of the equity forward and usually produces a higher mortgage payment because the principal is larger, so the cash flow goes down too

Brother Joe…..

I take the time and try to read your post as much as possible. :-)

1 Vote

Milwaukee, Wisconsin

Quote from @Marcus Auerbach:

@Joe Villeneuve - ah I see, basically you are optimizing for ROE - return on equity. Makes sense. You could also hold it and refinance to avoid selling and access the equity gains.

Not the same. A refi only moves part of the equity forward and usually produces a higher mortgage payment because the principal is larger, so the cash flow goes down too

1 Vote

Milwaukee, Wisconsin

Quote from @V.G Jason:

Quote from @Joe Villeneuve:

Quote from @V.G Jason:

Quote from @Travis Biziorek:

Quote from @V.G Jason:

Quote from @Travis Biziorek:

Love to see it as I've been pounding the table on Detroit for a long time now.

@vgj makes a good point... yes, it's from a small base, but you quickly lose the plot.

When I started aggressively buying in 2019 the median home price in Detroit was $40,000... it's now $95,000.

That's massive, and it doesn't matter if it's a small base or not as long as you're putting the same amount of capital to work you'd invest in another market.

Second, what are people going to say 5 years from now when the median price of a Detroit home is $200,000?

But... BUT... it's from such a small base! Who cares? It's about rate of return and it's been hard to beat Detroit over the last 10 years. I imagine that's not going to change over the next 10.

But you're welcome to keep betting against it. I won't be.

In bold, that's exactly what I mean. The absolute value is 55k.

Go show me the other large metros 2019 median house price versus today. Check the absolute value. I'll give an example Nashville was $300k, now $425k. That's $125k.

If it's $95k going to $200k in 10 years, it means Nashville is $425k going to $700k. Check the absolute value differential.

I'm not saying Detroit isn't going to go higher, or suggesting I am betting on it. Go read my post again, I just said the message in the OP actually tells me a different story-- those larger metros performance is superior. If we changed the metric to absolute value, not percentage, not sure Detroit is even on that list. Whereas those are likely on the list if it's absolute value OR percentage. Now, that's impressive and that's the real story here.

FWIW, I'm not betting the dollar is stronger only weaker just a matter of how. So I expect (general) appreciation everywhere, Detroit included.

You're thinking in nominal returns when you should be focused on ROI.

If you had put $1,000,000 in Nashville in 2019 and $1,000,000 in Detroit in 2019 you'd have $1,400,000 in Nashville and nearly $2,400,000 in Detroit.

I know which of those I'm taking, but I understand some people prefer worse returns.

A million dollar of value adds in Nashville versus Detroit is no question to which is superior, did you factor that in to your equation?

Also, I think when you're evaluating returns, you're associating no risk.

In 2019, $1mil is 25 houses in Detroit. 3.3 houses in Nashville right?

That's 3-4 tenants, 3-4 sets of capex, 3-4 sets of reserves versus 25, do you agree?

Tell me which is riskier. Then go give me risk adjusted returns, not blanket biasedness assuming every dollar in RE extrapolates like that. Infact, I can find a ton of your posts where you mention the risks of investing in Detroit. ****, the OP has that in his disclaimer at the beginning.

The right answer to your question is at the house level, not just at the capital invested level. That's more appropriate.

Quality over quantity. I'd take 4 houses over 25 **** houses. Pretty confident, we've been through this quality over quantity argument on this board a lot, but incase you weren't privy to it maybe you should understand why and the exposure risk of quantity.

Don't get me started on the value add process.

Fewer houses are more risk since the impact of each house has a greater impact on the whole. More houses has more work, but that doesn't mean more risk.

The concentration risk is there, that's true. I disagree about more work, I believe there's inherently more risk too.

Risk is not just a function of what can happen, but will happen. As soon as you get more houses, the can & will exponentially go up. And as the sample size duration increases, so does the chances.

@Travis Biziorek: agreed, and i'd say most risk really is not quantifiable. That's a different story though.

I understand thinking the more houses you have, the more opportunities there are for risk, but each property has less individual risk since what's at risk is spread out more. If you had 10 houses vs. 5 houses, it means each house in the 10 house option would have half as much at risk as the 5 house option.

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Detroit, Michigan