All Forum Posts by: Spencer Cornelia

Why do people consistently refer to lending laws changing as a sign that real estate won't be affected?

We've created a bubble in the BP community that has this echo chamber thought that because of these new lending laws that real estate investors won't lose like they did in 2008...

But what happens if your tenants lose their jobs?  They can't pay you.

What happens if lending constricts and you can't refi any of your loans?  Well, I hope you don't have 2+ hard money loans outstanding while you're flipping.

What happens if your buyers can't access a loan in order to buy your properties?  Well I hope you weren't planning on selling and I hope you have a huge spread for a price drop.

What happens if the next recession is something none of us are seeing right now but causes a huge bubble pop to people renting?  There goes your tenants.  There goes your monthly cash flow due to price drops because no one can afford your rental prices.

I'm not someone you should listen to regarding economics, but real estate will be affected by a recession no matter what. There will be people who lose their shirt just like in 2008. There COULD be people doing the BRRRR method who will have "infinite returns" but because of low reserves COULD lose everything. It COULD happen. Volume flippers may not be able to sell their homes forcing them to declare bankruptcy. It COULD happen.

No one knows for sure when it will happen or how it will look, but the #1 factor WE SHOULD ALL BE TALKING ABOUT is our end user's ability to rent, purchase, acquire a loan.  That will determine our ability to succeed in a downward market.

@Renee Yarbrough I truly think that one can only learn when they have something to lose and/or have something at risk.

In the moment, learning experiences suck.  I'm going through that now.  Over the past 4 months, I've lost probably $40k-$60k of equity in properties because of two unfortunate breaks.  And this is my first year in the game so I'm not in position to eat this drop without feeling it.  But I can tell you that I'm in a significantly better position today than I was 12 months ago.

Spend enough time on these corners of the web and you'll think you aren't $H1T unless you have 100 units in your first 5 years.  But keep in mind that most people who sign up for BP won't get past 3 or 4 units.  Why??

Because this game is really hard...

You made a mistake.  You paid for a learning lesson.  But I bet you won't make that same mistake again.  Maybe this will open up your eyes to creative financing and how (maybe?) you could have applied it in this scenario so that you won't have to deal with traditional lending again.

Someone very wise once said that the quality of a person's life is represented by the quality of the problems they are solving...

Persevere through the difficult beginner's stage and the problems you'll be solving will be much better than this one :)

@Matt Lenzi like every conversation revolving around real estate investing strategies, there is a lot of nuance.

If you had money to invest in 2012, which one do you think would have made you more money?
A) A 14% cash return 8 unit in Toledo, OH
b) A break-even cash return on a 4 unit in San Diego, CA

When you're first beginning, you see option B as no bueno and option A as no brainer.  Spend enough time on BP and you'll see that cash flow is king.  But in some scenarios, there is more to the argument than just numbers on a spreadsheet.

If you have the ability to live in a 4plex in California and break even from the other 3 units (plus having a roommate in 4th unit), then over time, the purchase price doesn't matter.  Why?  Because historically speaking, the appreciation seen in California real estate will trump any cash flow numbers from secondary markets.

BUT....

You shouldn't invest solely on appreciation.

So what do you do...

This property being a "deal" depends entirely on your financial situation and your goals within this game.  If you can house hack this 4plex and bring your Cali living expenses to $0, the purchase price doesn't matter.  If you don't care about the down payment money and really believe in your market over the long term, then the purchase price, cash on cash return, etc doesn't matter.  Looking back, do you really think a 5% return vs 7% return really matters if you could have bought a 4plex in San Diego, CA and held it for 20 years?

The point is...

Whether this property is a deal or not is completely predicated on your situation and the opportunity cost of the money you will be putting down on this property.

@Nicholas Morgan Have you considered selling the property?

The BRRRR method is all the fad for beginners. The idea of infinite return is tempting and seems bullet-proof.

But there needs to be caution when buying a deal with such low cash flow.

If one tenant doesn't pay rent and goes thru the eviction process, the lost rent and cost of eviction could cost you multiple YEARS of profit.  Jay Hinrichs' words of caution ring very true here.  He has seen what happens when deals with minimal cash flow are purchased.

If you lose your main income source for whatever reason, you're one unfortunate break away from losing this property too.

The last thing we as a community should ever do is deter others from buying deals, but be very cautious with the mania behind the BRRR method. The big ugly monster that has the potential of really impacting us is lurking around the corner....

@Account Closed I'd love for you to add some numbers and details.  I'm very curious about deals like this and how you plan on managing it for the next 5+ years.

I personally prefer counting every individual stream since it doesn't matter to me where the check is coming from.

I currently have a w2 income, 6 roommates, so my monthly streams are 7.  But over the year, I will add in a couple more from flips and sales commission.

This is all just a fun conversation to have.  I don't view any way of counting streams as better than the other.

@Eric Ippolito There will always be deals available.  People will always need a place to live.  This will be my first recession, whether it's in 8 months or 24, but I'll mention my theory on how to navigate one.  Obviously take this with a grain of salt.

What I've learned about recessions from those who have survived:
- people lose their jobs and struggle to make rent/mortgage payments

- people lose their homes due to inability to pay

- lending constricts

- buyers have a difficulty qualifying for loans or finding lending due to the constriction

So what should we do....

Sit on the sidelines and don't invest :)

or....

What I'm going to look for is the ability to buy properties that need rehab and the previous owner will sell to me on terms (seller carry, lease purchase, or lease option).  I will use cash for the rehab.  I will only buy under this criteria: ability to buy on terms and not have to worry about hard money, and can only perform rehab using cash.

Another strategy will be buying properties on terms and selling them as a rent-to-own (lease option) to buyers that can't find lending.  You basically become the 2020 version of the middle man.

Option 1: 21 year old signs up for Bigger Pockets, house hacks, networks with successful real estate investors, learns how to best allocate his money, after 5 years doubles his income through smart investments, by 31 is financially free from the shackles of employment for the rest of his life.

Option 2: 21 year old signs up for Bigger Pockets, decides to get married and not invest because he believes in "happy wife, happy life", resents her because his money is spent on unnecessary square footage in the perfect home, multiple cars, and vacations, and he doesn't satisfy his urge to invest.

Which one is best FOR YOU?  This is your life.  Happy D'Andre, happy life.  The choice is yours.

@Anthony Barbato I understand the desire to have all expenses covered by purchasing a 4plex, but you're only putting down 3.5% on arguably the hottest asset class in real estate in one of the top 2-3 most desirable real estate markets.  Even if you are slightly below break even, and have to come out of pocket some each month, you will be adding a lot of equity from loan paydown and in appreciation over the next 5 years.

Given the housing shortage in that market and the likelihood of 100% occupancy, I think you're getting a steal for bringing such a low amount to the table to then make a significant return.

@Brandon Sturgill having $1mm in equity in properties absolutely makes you a millionaire.

I told Gary to make this into a 10 part series to share all the details but he's too busy to write long form articles.  He's a good friend of mine and completely legit.  He's the best in the business at finding deals and negotiating which is how he's able to build a bunch of equity by buying at massive discounts.