All Forum Posts by: Vincent Polisi

Stephen:

Just a heads up so you don't get blindsided, Fannie & Freddie recently reduced the maximum number from 10 to 4.

Mike, I couldn't agree with you more. Thank you for validating my point.

So there is no misunderstanding, your commentary on the infinite return of 100% financing and a $1 cash flow versus a less leveraged structure generating a $30k per month cash flow is exactly on point. It is also the exact reason that an Internal Rate of Return calculation needs to be run when comparing two or more investment opportunities. What you illustrated was the formula for Internal Rate of Return which is the true annual rate of earnings on an investment which equates the value of cash returns (cash flows) with cash invested. In other words, it evaluates return using present value of cash invested, cash flows and future value of cash invested (at takeout). It is the one calculation that actually analyzes accounts for the benefit of cash flows which so many of the posts on this thread vehemently defend.

While certainly wise, buying at a discount is not the only way to generate a positive cash flow. And this was my original point in the original post.

There are multiple methods of generating positive cash flow.

1. Put money down to the point that the property cash flows (any property can cash flow using this method)

2. To your point, buy at a deep enough discount so that your debt service is lower and you can afford to rent at market or below market rates and still cash flow

3. Charge more in rent than your debt service regardless of whether the property was purchased at a discount or not.

As I previously indicated, I structure deals completely differently and command a premium in "rent" payments that equate to a true triple net lease where all debt service, maintenance, repairs, etc., plus cash flow is paid for by the tenant. These deals are well above current market rental rates due to the structure we use. The deal I just put together for that Investor has him cash flowing $730 per month out of the gate on $153,600 in debt service and he will realize an additional gain of $48k upon takeout within 12-24 months on a residential deal. The way we do this is by NOT competing with the rental market. We can't because rental rates are well below actual debt service depending on market in Atlanta and property type. We have created our own market that enables us to charge well above market rental rates and that allows us to cash flow out of the gate with as little as 10% down.

The point here is to hopefully help illustrate that you don't have to let your "competition" set your rental rate, which is what typically happens in a rental environment. You can create your own blue ocean with no competition and set your own rental rate that allows you to cash flow.

Part of the reason our structure is so profitable is because we are combining your method of buying at a deep discount with a structure that enables us to charge significantly above current rental rates.

The key difference may be that you may be buying an individual property with the intent to hold it for 30+ years and these are 24 month flips where cash flow is a greater priority than principal reduction.

In any event, properly structured, cash flow is king!

Steve, you made some nice comments that were very complimentary. Thank you. The only purpose of this thread is to illustrate that cash flow is king when properly structured. With all due respect to the forum who believes that a 24% Cash on Cash Return is "stellar", this week I put together a deal for one of our Investors with a 22.81% annual Cash on Cash Return. This doesn't account for the actual Cash on Cash Return over 24 months of over 200%, the ROI of over 200% or the IRR exceeding 60%. This deal is merely one in our stable of available deals that are all structured this way or better. Please forgive the naivete, but as you can tell by the avitar that I have been blessed with, I am a newbie to posting. Joshua Dorkin has already raised Holy Hell with me about shameless self promotion when I inquired about hosting a BiggerPockets Blog. I don't know what the rules are about a forum posting, but allow me to say this, please DO NOT contact me about deals. Instead, allow me to illustrate that survival in the real estate market is about one thing and one thing only, solving people's problems. If you can properly solve the "problems" of the Investor, Seller and Tenant, you can achieve phenomenal results. The challenge is that Investors, Realtors, Mortgage Brokers/Loan Officers, Sellers, Buyers, etc., tend to conform to a very stringent line of thinking surrounding the way they have always done it that illustrates that they have blinders on. When you stop thinking about what you want and how and how you have always done it and start thinking about how to solve everyone else's problems, phenomenal returns appear. 20%+ annual cash on cash returns are easy, when problems are solved. The key to this is what is called a "Blue Ocean Strategy". (great book for those who haven't read it). You can either compete in the red ocean with everyone else trying to cut your throat, or create your own new blue ocean where you have no competition. Competing in the "rental" market is a sure fire way to incredible frustration. As an example, rental rates in Atlanta are 25%-50% of actual debt service. There is a gorgeous $1.6 Million Dollar home advertised for $3500 per month. Is there equity? How can they afford this? Or, is it about defraying expense to survive? This isn't the only one.
If you want to survive and thrive in this (or any) market, you MUST figure out a way to solve people's problems. Investors don't just want equity, as this thread indicates, they want a cash on cash return and an overall ROI, yet how many deals are they actually presented that represent this? Not many. Typically, it is just a deal with "equity". Buyer's want what they perceive to be a good deal, but what is the definition of a good deal? A low price? Only if you are an Investor. Buyer's tend to use emotion. Realtors want more buyers, but what are they doing to attract them? The same things they have always done? Or have they figured out that the "buyers" in this market are FHA buyers and qualified Investors? Everyone is scrambling for FHA buyers, but NO ONE is scrambling to solve the "problems" of Investors. What are the problems that can be solved for Investors? As this thread illustrates, a deal with CASH FLOW, cash on cash return, ROI, IRR and the oft forgotten exit strategy.
Is there a way to solve the problems of Realtors and Mortgage Brokers/Loan Officers? You better believe it, but not using the conventional boilerplate find'em, list'em, sell'em strategy. The market is dynamic. Succesful Realtor and Mortgage Brokers/Loan Officers need to understand that properly structured, their "rejects" are golden. 74% of the market no longer qualifies for conventional mortgage financing. That means that virtually 100% of the market is focused on the 26% that can qualify (the red ocean). That means that 74% of the market needs a solution, a problem solved. Is anyone trying to sove this problem? Therein lies the gold.

Allow me to reiterate that cash flow IS king, with proper liquid reserves on a properly structured deal. I have just seen too many examples with professional real estate Investors who put so much money into a deal to get it to cash flow that the deal ended up not making sense, but it "cash flowed". I have seen Investors buy $130k residential homes, put $80k down and feel like it was a great deal because they were able to cash flow $100 a month. Likewise, I have seen professional Investors pass up on solid deals because they didn't cash flow. At the end of the day, cash flow is king because without it, you can get destroyed quickly. Likewise, liquid reserves are also paramount in the event of a disruption to the cash flow. In my friend's example previously cited (a professional Investor for more than 30 years and until recently, liquid multimillionaire), it was too much cash buried in too many deals (though they cash flowed) combined with a rapidly changing lending environment making it virtually impossible to refinance and cost overruns on improvements depleting available reserves that finally woke him up to the requisite balance required between cash flow, liquid reserves and the carrot of appreciation. Regarding his $30k per month in cash flow, you have to keep in mind that everything is relative. While undoubtedly that is a great deal of cash, it is all about perspective. 20 years ago Donald Trump was making $47 million dollar quarterly interest payments which to him, was normal, though most people can't fathom it.

The one thing that I believe is missing in this thread is the fact that any and every property can cash flow despite what the price of real estate is and despite what the current rental rates are. I have seen Investors make this mistake time and time again because of the necessity and mental fixation on cash flow. How does this work? Simple, you put more money (cash) down. With enough cash down, the property will always cash flow. Does that make it a solid investment because it cash flows? Absolutely not! What isn't being accounted for is the opportunity cost on the money being invested to put a property in a cash flowing position. This requires a simple Internal Rate of Return calculation based on each investment opportunity. Example, I have a friend who put down $1.5 million in cash with a leveraged balance of another $2.2 million on a "cash flowing" property. True, with that amount down, it cash flowed $30k per month. The challenge came when necessary repairs drained his remaining liquidity and he was forced to survive on the $30k per month. He is now wishing that he didn't have his nest egg buried in this "cash flowing" opportunity and is looking to cash out. Anyone who has been in business for a day knows that illiquidity can kill you and a few mishaps can easily drain the $30k or kill it permanently.
While I certainly agree for the average and professional Investor that cash flow is king, it is the cost of the cash flow that must be calculated to ensure that the investment opportunity is truly an opportunity to profit and not an opportunity to lose everything.