Summary: Pay a 30-year mortgage in 5 to 8 years by paying back your mortgage with simple interest instead of amortized interest.
I recently discussed this in my Forbes article here.
Is this something new?
We all know it’s a sellers’ market, with the lack of deals out there and the majority of the Simple Passive Cashflow Podcast listeners looking for something to invest their cash in. Good times, if you ask me. This strategy is nothing new but now the strategies that are, “trending,” like bell bottoms, tights, and neon colors but forgotten. One of these old plays from the playbook is called the Mortgage Equity Arbitrage Strategy also known as, the Australian Banking system.
First off, let’s talk about good debt versus bad debt. Obviously, an 18% interest rate paid on something like a credit card is bad debt. But taking a 4% HELOC (Home Equity Line of Credit) or loan from your life insurance policy can be good debt. Especially, if you are putting the loan proceeds into AHP at 12%, a MFH Syndication at 20%, a Turnkey rental at 30%+, or another higher risk syndication at 35%+. Just don’t buy jet skis or other doodads with the money… I don’t know why it’s always jet skis as the example. Maybe something to do with the fact that it is a mini-boat, and boats are known as the worse purchase known to man.
What you do with the liquidity from the debt is what really matters. Traditionally, it has been good to go into debt for a college education paying 4-8%… unless you are getting a glass blowing degree… or maybe a psychology degree so you can trick yourself into thinking college was worth it… or Asian studies degree because you are going to have to get used to ramen noodles in your adult life… or a Communications degree to be able to spin your financial reality. Ok I admit, I had a pretty depressing college experience…
I would say this is a bad report because it’s not Prescriptive. It is very important to have a chat with your inspector so they know it’s not going to be a warm and fuzzy home to live in but a rental property. They will need to avoid citing nitpicky things because the seller is likely another investor and more sophisticated than a regular homeowner and will call BS at your repair requests.
This is where an hour of coaching will go a long way to maximize what you get at the negotiation table.
Let me know and I can get you my repeat UPW discount by signing up here. And can share our Hui pre-trip briefing video so you are properly prepared for the trip.
We are forming a mini group mastermind like the last one in Sonoma.
I attended it in 2016 and again in LA in 2019 and it was the inspiration behind my story in my book.
I’m normally not an excitable person (there is a lot of jumping around and dancing – which I’m not too big of a fan) but this UPW event the real deal!
I suggest bringing an accountability buddy or significant other. The worse thing is to come back to normal life without someone speaking the same “language” around you.
I see these motivational events as “baths” which you need to take from time to time. Even if you are someone who is internally motivated, this will take you to another level.
You will leave this event changed – as silly as it sounds “things will never be the same”
This event will be held in a smaller venue (12,000 people) which I was really excited about when I was planning this because it is a lot better environment than the normal sports arena setting where everyone is captive in their rows.
You get to walk on burning coals!
Learn more about the event here – note the LA event is not yet listed
Details are still being formed but we will likely get upgraded one or two levels if we come in as a large group.
I am also arranging for a Monday decompression meeting to connect with other investors who attended from the Hui.
This event is more for personal development than investing. But it is certainly investing in yourself! After all… getting the passive cashflow is Simple but what you do after is the hard part.
I don’t personally guarantee investments because of course there is always a risk but I WILL guarantee your ROI if you come to this event! Call me and I will share my experience.
After going in 2016, I made these goals in 2017. Some of which happened so of which I overshot.
2019 Takeaways:
Less urgency with more systems
Barriers- peers around to do the same things,
What needs to shift what actions… Deciding how to do this
Why will you live in a beautiful state everyday no matter why?
Life is too short It is a slippery slope backwards In the end a beautiful state is what we are after anyway not money, house, job or relationships. I have control over this… Potential => Actions => results => belief/concerns
Flavors of reaction:
Three things that cause suffering the fear of 1) loss 2) less 3) never have something
Suffering => appreciation => joy
You will make more money if you are in a better state.
Two things that I did to start investing to go bigger – 1) started something that could be better and connect with others and build a platform to have larger impact. I made small changes and found models and copied and got around the right people and slowly built 2) started paying to learn
So you are in!
Preparing for your first Unleashed the Power Within Seminar:
1) Come with an open mind.
2) Make a list of a few limiting beliefs. Everyone has these. Some common examples are I am not achieving what I want because… (I’m to young, too old, never went to college, a woman, I’m brown, I did not come from money). These are the things that subconsciously hold us back.
3) Prepare to tackle your biggest, hairy, huge goals.
4) Tony will bring it. He drops the F-bomb a lot. Mostly for shock value as again it is entirely on purpose. Note: he gives free tickets to some troubled kids and he tries to speak to a lot of the kids in the first few minutes who likely have never have heard him before.
5) Prepare to dance your ass off. Even if you can’t dance/hate to dance/have no legs… You will still want to dance. Get in that “puppy pit”. For goodness sake… Live like you don’t give a fuck. Get comfortable with being uncomfortable. Dance because if only it is you trying to do something different.
6) Joseph McClellan will speak on day two and day four. He is a good speaker too. This is not a 5k seminar so you do not get four days of Tony… Its a fraction of that.
7) Be prepared to show up early and go long. Like 8 am to 2 am long. Stay as close to the convention as possible it will be crazy leaving when everyone else does. Don’t try to skip out. If you are getting tired you are letting circumstances control you instead of your leading your state! It is often in the moments when you are close to your limits that the biggest breakthroughs happen, so don’t sell yourself short.
8) Firewalking is real. I thought it was a party trick when I did it and did NOT get into state. You can do it and you will remember it for the rest of your life. This will be trumped by day 3 transformation evening showcase.
9) Taking your spouse or buddy? It’s good that you will be on the same page when you get back to real life but consider not sitting together for part or all of the seminar. There is a lot of value to connecting with others there and getting outside of your normal conventions. Don’t be afraid to talk to some people. Volunteers, there are a wealth of information about what’s coming next and what to do. You can be your true self when you don’t know the other person as they don’t know you or have any expectations of who you “should” be. Here is what the staff told me “It is highly suggested, but not mandatory, for family members, friends and colleagues to not sit with each other. We find it that you end up “playing full out” with strangers than with people you know.
10) I would take notes and more importantly brainstorm action items and implantation plans.
11) Drink the kool-aide. Be all in. Dance, scream, visualize. Show up on time and stay till the end. Get your money’s worth. Do it! It’s worth it.
12) Tony is on another level in terms of hypnosis that makes NLP obsolete. Go with it.
13) Try to sit in the aisle so you can mix and mingle. This makes it easier to run out for a quick bathroom break. You will have to be in there a little earlier like 30 minutes scheduled to start. Also, try and find the bathroom that no one uses for quicker usage. don’t wash your hands it’s faster… Jk.
14) Read/listen to any of his books or audio program
15) Check out what is on YouTube e.g. his TED Talk
15) Watch I Am Not Your Guru on Netflix
16) Six Human Needs and Triad are the core of his work you can learn more in his TED Talk or on his website
17) If you’re not in the right state, not getting it, not feeling right etc. ask any of the leaders and trainers for help, they are amazing resources and have been through it so many times before so have seen, heard and experienced it all before.
18) Subscribe to UPW Facebook group for the event
19) On day two make a list of things you will Stop doing
20) You may not want to commute to and from the event as the event starts early in the morning and end late night. The first night may end after 12 midnight.
What to bring to the Seminar
1) A heavy jacket or even blanker – Tony keeps the room extremely cold on purpose. It’s all part of his magic. Embrace it.
2) You will be jumping for hours. No heels or dress shoes. The only type of shoes you should be wearing are tennis/keds/flats/basketball shoes. Most people will wear causal or gym type attire.
3) Don’t just bring snacks. Bring meals. I’m talking fruit, nuts, hummus, veggies, crackers, granola bars, etc. If you don’t, prepare to race 10,000 other people to be in front of the food line. Post-mates/Uber eats can be a good healthy option. If you are so compelled fast for the four days – and start the literal cellular autophagy – as you will learn the pain is all in your mind!
4) Notebook
Post-event:
1) Give yourself a couple of extra days after the event to catch up on sleep, decompress, review your notes, absorb and process what you learned and make a plan for how you will integrate changes in your life. You will be tempted to plan to rush back into “life” straight afterward but to allow yourself to recover and to successfully integrate your learnings you need to give yourself a little time. There will be some discussion on this on the fourth day.
2) Stay tuned… I will plan an event Monday morning or Sunday evening.
Outside food and beverages are not permitted in the LACC Center with the exception of sealed bottled water and sealed light snacks. Light snacks include single-serving items that would be consumed by one person. For example, granola bars, protein bars, bags of chips, crackers, beef jerky or whole fruit, etc. Empty refillable water bottles are permitted and can be refilled on the main concourse at LACC Center’s drinking fountains. Coolers and grocery bags are not permitted in the LACC Center.
MHN 11-1-2018 – Student Housing Costs Compared – How affordable is purpose-built off-campus housing? – [All this data means nothing if there is a student bubble coming – think about it on a granular level… it makes no sense of a family that makes 90K a year to send their kid to a public college that costs $40K+ a year to get some random degree]
MFE 2-6-19 – 2018’s Record Deal Volume Suggests Positive Trajectory for 2019 – “driven in large part by increased interest in the student housing sector, which accounted for 17% of all deal activity in the third quarter, compared with a consistent 4% over the past 13 years” – [I don’t like student housing as I am seeing an education bubble with all the lending. It’s crazy how dorms get renovated every few years]
I don’t personally like these accounts for my own investing even though the future gains and withdrawals are tax-free because you can’t use the best Fannie Mae or Freddie Mac loan products when investing in your IRA.
Unless you are using a QRP (Qualified Retirement Plan).
With syndications using leverage (as most good deals do) you will be likely opening yourself up to UDFI etc taxes.
In the end, I want the freedom to enjoy the money now and not have to wait till I am 60 something.
SimplePassiveCashflow.com/133va
David from Military to Millionaire
Currently still enlisted in Army and spent some time as a recruiter
Don’t blow you money on a nice car
VA Loan – 0% down home loan for a primary residence with no private mortgage insurance (PMI)
You can buy up to a 4 unit
Move and buy at each difference duty station
Generally, 410K loan is the max with exceptions for high price areas like Hawaii
Relocation benefits
Do you stay enlisted in the military
Don’t underestimate the tax-sheltered allowances and perks
I currently have a verbal agreement to put together a long-term joint venture.
I’m engaged and in the due-diligence period with multiple extensions.
Traditionally a down payment for such a transaction is a ring. Hopefully, if you have not gone through this experience before, you will learn about procuring this rare commodity. If not, I hope you find it entertaining.
For those who haven’t caught on yet – I’m talking about diamonds.
I think everyone knows that you get ripped off at a retail brick and mortar jeweler… even Fred Meyer Jewelers because you have to pay for all the overhead and compete with unsophisticated buyers. Plus I don’t like all the sleazy sales tactics and it is a huge time-sucking experience.
In the back of my head, I know the diamond market has to be rigged sort of like the sunglasses world where all the brands are owned by Luxottica and there is price rigging involved.
Now some people say they can haggle for a better price in person, but that takes time. Also, I am in the “first stage” of learning: I don’t know what I don’t know.
I turned my attention to the top 3 sites using Google and Reddit forums.
1) Blue Nile
2) James Allen
3) Rare Caret
I was happy with getting approximate “market value” on the website. I trusted the overall grading system in an online store.
What I really like about these websites is that they allow you to sort hundreds of diamonds in online spreadsheet form with a sort feature based on different attributes.
This might be review but the big four C’s are Carat-weight, Colour, Clarity, and Cut. Unfortunately, you cannot buy the 5th C – Confidence.
(Not to be confused with the three C’s of evaluating people into your network: Character, Competence, Commitment.)
If you would like to know more than the 80% of people, take 10 minutes to read this article to determine the quality & value of diamonds, via the famous 5cs of diamond grading.
Now, in my humble opinion … real talk here… the most important factor is size. So Carat Weight is numerouno. Most people cannot tell you the difference between the other three attributes; they only see how big the freaking thing is.
For those who know a thing or two about diamonds, Cut is the second most important thing. Cut is the sparkle-factor, how much the diamond shines based on the angles of the Cut. I went and got the top grade Cut because that is a big wow-factor (second to of course how big it is).
The other two attributes, Colour and Clarity, I frankly don’t really care. Some people could actually like a little color or whatever that clarity thing is. So I set my search criteria to have all the levels in those two categories. One exception is that I just did not put the worst-grade Colour and Clarity in my selection. This for no good reason other than not wanting to have the worst one (as vain as it sounds). Call me dumb, but I feel embarrassed when I order the cheapest wine on the menu…I always go for the second cheapest.
Rare Caret seemed to have the best selection of diamonds, but their ring selection seemed to be lacking. So after a side by side comparison of Blue Nile and James Allen, I found James Allen to be ~5K cheaper for the same diamond.
At the end of the day, I knew what my budget was so I was just trying to get the best bang for my buck. In other words, the money was allocated and this is how I mentally process non-income producing assets.
Unfortunately, I was not able to use Mr. Rebates – a go to for getting a few percent points of cashflow by going through a simple shopping portal. Nor was I able to find many coupon codes using RetailMeNot.com or navigating their email digital marketing campaign. Most sophisticated marking emails are laced with smart links to kick out a discount coupon based on what links you click in the email and if you do not buy right away to get you off the fence as a buyer.
You can spend a fortune on Carat-weight, Colour, Clarity, and Cut…but the most important 5th “C” of all, Confidence.
A lot of my high net worth single friends (who by the way get a lot of dates) don’t see the value of getting married in this modern era (other than if you would like to have kids). I definitely understand that perspective to some extent. This makes buying an archaic stone that may or may not have been a blood diamond just another thought to complicate things.
But as a recovering cheapo – simplepassivecashflow.com/cheapo – I understand that money is not evil and can buy a variety of things including freedom, time, and happiness. This purchase is a perfect example of that.
The way I see it, marriage is a lot like playing with leverage. It is a little more risk than going it alone, but the reward (if done right) is disproportionately greater (per the Shape Ratio’s risk-adjusted return).
My first plan was to make the big reveal in a new Honda CRV. Note – at this moment I’m over the whole Mercedes, Tesla, wealth-based off of the car I drive. Instead, I am striving to achieve the financial freedom level I am looking for.
I even had my VA scrape a lot of Honda contacts to do my normal email blasts to put multiple dealers against each other. By the way, I lease cars because I did the math and it makes more sense for sophisticated investors who get higher than average returns.
I got the car but scrapped the idea because my buddy mentioned… “dude – you don’t want to propose at a car dealership.”
Takeaway here is that everyone has a blindspot and its good to have people around you to bring up counterpoints.
Thanks for following Simple Passive Cashflow. Onward and upward.
“A lot of the funds are shots in the dark with the only certainty that you get tax savings on the front end. Don’t let taxes be the cause to going into bad deals”
I did some research on this new Opportunity Fund Zone tax benefits. Below are some notes and ideas. Updated 12/3/18
I’ll be hard at work tracking down Opportunity Fund Zone deals in 2019 since I will be selling four more of my Turnkey rentals.
Note: I’m not a CPA or attorney just putting it out there to help inspire some ideas.
An Opportunity zone (OZ) is a tax-favored investment for people with capital gains.
6-pages in the tax document in the new 2017 Tax Cuts and Jobs Act
Goal to encourage long-term investments in low-income communities across the US.
Every major city has some OZ.
Most of Detroit is an OZ plus large portions of Baltimore.
Allows investors to sell their appreciated assets and invest their realized capital gains into one or more designated OZ.
EVEN STOCKS! Non-like kind assets are OK!
After your selling your appreciated asset you have 180-days.
The longer you hold the more benefit you get (up to 10 years).
1) Defer your original capital gain tax obligations until 2026 or until you sell your OZ investment.
2) Discount of 10% or 15% on the taxable amount of your original gains. If you hold more than 5 years your original cap gains decrease 10%
3) If you hold 10 years or more. You will pay NO capital gains tax on any appreciation.
You can self-certify so you do not need an intermediary like in 1031 exchanges.
No investment minimum.
There are some items that get a little unclear… where you should really consult your CPA.
Check out the IRS opportunity comes frequently asked questions page and additional resources below.
Resources to Google: community development financial institutions fund, CDFI Fund map.
Note: Spending $100 dollars to save $20 dollars is not a wise idea. Just like buying a rental next to Grandma’s house because of your travel there. A lot of specifics are still being played out but something intriguing to augment an already good investment.
Other ideas: Look at the OZ map and try to find the smaller slivers of OZ. This is called “buying on the line” whereas areas improve on the edge of development you greatly benefit.
I would ask your CPA if they know about these opportunity fund zones. If they don’t you might need a new CPA. If you are a current Hui Deal Pipeline Club member I would be more than happy to refer you to some people and then you can see if you work well together.
There is a lot of rumors floating around how this tax will be implemented later this year. One of these rumors suggests that we might not qualify for the Opportunity Zone Fund. See second to the last page of the attached where they state that we have to do improvements that is the same as the basis in order to qualify.
Here are some other notes that a buddy of mine took:
Temporary tax deferral on reinvested capital gain until 12/31/2026 (from stocks/sale of a business/real estate partnerships/direct real estate sale)
Elimination of a portion of the reinvested capital gain over the term of the investment.
10% if invested for 5 years
15% if invested for 7 years
Permanent exclusion (100%) of gain on appreciation in excess of initial capital gain investment if held for 10 years.
This means if you have sold an asset whether it be real estate, stocks/bonds, partnership interest, cryptocurrency or a business, you can reinvest that capital gain within 180 days and defer taxes, reduce those taxes by 15% after 7 years of holding and eliminate any capital gains created on the new asset after 10 years.
Post-tax Internal Rate of Return (IRR) increases by a staggering 50% when you invest in a Qualified Opportunity Zone Fund!
This is different from a 1031 exchange which only allows you to exchange like-kind investments and also requires an intermediary (this program does not need an intermediary).
It’s worth noting that the intent of this tax incentive is to help spur development and economic activity in “distressed communities”. So this really is an opportunity to do good and do well.
Definitions:
Qualified Opportunity Zone Business – A trade or business. Substantially all of its tangible property (whether owned or leased) is Qualified Opportunity Zone Business Property AND At least 50 percent of its gross income must be from the active conduct of a trade or business in an Opportunity Zone, A substantial portion of its intangible property must be used in the active conduct of its business in an Opportunity Zone, No more than 5 percent of the average unadjusted basis of its assets may consist of “non-qualified financial property,” Cannot be a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or any store the principal business of which is the sale of alcoholic beverages for consumption off-premises
Qualified Opportunity Zone Business Property – A tangible property used in a trade of business if: It is acquired by purchase (as defined in Section 179(d)(2) related party rules, but using a 20% related party test instead of 50%) after December 31, 2017; The original use in the Qualified Opportunity Zone commences with the Qualified Opportunity Zone Business OR The Qualified Opportunity Zone Business substantially improves the property; and During substantially all of the holding period for such property, substantially all of the use of such property is in an Opportunity Zone.
Substantial Improvement Test: Property is treated as “substantially improved” if, during any 30-month period beginning after the acquisition of the property, additions to basis of the property exceed an amount equal to the adjusted basis of the property at the beginning of such period. Land excluded
Between 2010 and 2017, population growth averaged 5.5% for the US as a whole. Delaware boasted the highest growth rate, 15.3%, over these years. A state with a relatively small population, however, needs fewer new residents to achieve such a high growth rate. The double-digit rates recorded by Texas (up 12.6%) and Florida (up 11.6%), both high-population states, are therefore that much more impressive. There were three states that posted population decline between 2010 and 2017: West Virginia (down 2.0%), Vermont (down 0.3%), and Illinois (down 0.2%). – ITR – 19.02.28
Since I feel we are in the 9th inning of an 11 inning ball game, I decided to pass on a recent Class-A apartment deal in a secondary market.
Here is my thought process…
First off, Robert Kiyosaki has a saying: “There are three sides to a coin.”
People like to argue that it is either a good time to buy or a bad time to buy. For example, they say that “MFH” is overheated or commercial is getting killed by Amazon and e-commerce. I think these are mental justifications by tire-kickers who are scared to act. I mean really how many of these people are under the accredited status (not sophisticated) or not obtained their “Simple Passive Cashflow number.”
Sophisticated investors still trying to grow live on the edge of the “coin.” They buy deals out of the reach of amateurs due to the amateurs’ lack of network/knowledge. These opportunities are undervalued, with undermarket rents, with value-add opportunity. Sophisticated investors are patient; they don’t stray from standards that force them to get crushed in a market correction. (Cashflow from other investments makes this possible.) They invest following the macro- and micro- trends and don’t gamble on gimmicks such as guessing where Amazon’s next HQ is going or where the hurricanes just drowned a market.
The trouble is that an unsophisticated investor or an outsider (in terms of having a poor network) is figuring out which of these deals transcends the two sides of coin and is on the edge. Stating the obvious (though often ignored by many)… starting out as an investor is going to be slim-pickin’s due to the lack of network. But you have to push through this rough part. You are not able to decode the noise until after a few deals or having someone mentor you.
With that out of the way let’s continue…
Real estate is one of the best risk-adjusted investments out there. In private placements or syndications, we are able to crowd-invest in larger & more stable assets while maintaining control with operators who are aligned in our best interests. By going into a project properly capitalized with adequate capital expenditure, budget, and cash reserves, you are able to remain steadfast through softness in the market where rents stagnate and vacancy decreases.
(If you are starting out you should start with turnkey rentals even though they are much more volatile)
Pause there. In troubled times what happens?
People lose their jobs and there is a bit of shuffling.
Yea, people need housing, but there will be some vacancy as some people will lose their jobs and be displaced elsewhere.
Following this train of thought…
In a recession, the high end or class A will be hurt the most. It is Class A workers who fulfill much of he discretionary services. We are already seeing softness in rent by rent decreases in class A of the high-end markets such as Seattle and San Francisco.
For example a once $1,700 one bedroom is now $1,625.
Most deals model for 1-5% in annual rent increases or escalators. Other than the Cap Rate to Reversion Cap Rate truck, this is the second most manipulated assumption in investment modeling.
In this unfortunate but natural event, the A-Class renters will fall to class B housing. Some homeowners will even lose their jobs creating foreclosed investments for smaller investors in the single-family home scale.
What’s happens to the B and C class renters?
It is likely that they will also lose their jobs at higher or lower rates, but that is up to debate. In the same fashion as the A-Class renters, the Class B/C renters will downgrade to make ends meet.
I imagine this similar to a game of musical chairs (where the chairs are getting crappier and crappier). Or it looks a lot like the natural housing shuffle in the summer near colleges with people moving in and out. The landlord/investor is likely to see increased vacancy.
Multifamily occupancy varies from 85-95% in stabilized buildings. Some markets are hotter and some are colder. It is important to use the correct assumptions depending on the markets. For example, Dallas typically sees 92% occupancy while Oklahoma City sees 89%.
One of the reasons we love multifamily is because of the decline of the middle class and the need for more scalable workforce housing. [And those millennials can’t save] The population is increasing too.
[I like to use this image cause I make fun of millennials… this is the millennial version… cause they can’t seem to afford (or want) to own anything]
When I travel to Asia (which I see as a more mature society, for better or worse) there is a much larger wealth gap than in the USA. People are living in cramped apartments or very rare single-family homes. And they are driving a Mercedes on barely enough money to share a family moped. This is the trend that the USA is following.
As with many things, you need to look past the headlines and the general data. Instead of analyzing a whole asset class, as the media likes to do, let’s break down vacancy in terms of classes.
Here are some typical vacancy rates (notice the spread).
Class C 4.5%
Class B 5.0%
Class A 5.5%
Why? Because there is just more demand for the lower class properties cause there is more demand than supply.
Many times the business plan is the be the “best in class.” For example, businesses want to be the best mobile home park or best high end remodel because you attract the richest customers in that niche.
I like to monitor the number of new units coming online because that is your downward pressure. It is rare that new builds are for Class C or Class B.
The micro-unit trend is an attempt to build for Class C and B tenants due to the need. But often the numbers don’t make sense when you have purchased the same building materials and mobilized the same crews to build a Class B asset as opposed to a class A asset.
Let’s go through that Armageddon example again.
Class A will have to drop rents severely and see great vacancy.
Class B and C will see vacancy come up too as people are losing their jobs but should see some absorption from ex-A Class tenants.
Mom and dad will also see some absorption as deadbeat son or daughter move back home.
Shows like Friends and How I Met Your Mother will go on for another decade.
Note: one can argue that class A+ will not be affected at all which I believe is true. That’s why we are trying to invest right to enter that untouchable status.
I remember when I sat through the same economic presentation at work from 2010-2014. The sentiment at the time was that it was going to be an extremely slow recovery. It makes sense that the length between the 2008 recession and now is very long which is why I mentioned an 11-inning ball game.
This is why I took a set back from some pretty Class A deals because I asked myself the following questions:
1) What will happen to the rents if IT should happen?
2) Is the modeled 90% vacancy rate going to get blown up?
Class B and C apartments in strong submarkets will perform best over the long term. If you ensure the loan term is long enough so you don’t get hurt then you should Outlast the bumpy ride ahead.
Beware of the self-destructive behavior of not investing. You know what I mean… are you someone who self-sabotages?
Understand the micro and proceed if the numbers make sense.
I have to admit Class C and B assets are boring but work especially in a seller’s market because 1) they cashflow and 2) have a forced appreciation value-add component to give you levers to pull in tough times.
Again going back to Mr. Kiyosaki’s three-sided coin quote, investors go through three stages.
Stage 1: Go into MFH… Duh (I did well at single-family rentals let me try apartments)
Stage 2: Be a contrarian investor so go into other asset classes most decent investors are afraid or don’t even know about
Stage 3: Do special projects such as Affordable house taking advantage of tax credits or specialized operators (ie take abandoned big-box space like movie theaters and convert to the latest consumer needs)
Experienced investors who were in the downturn in 2008 say its interesting that the sentiment in 2006 was exuberance that it was going to keep going up. Now in 2018 the sentiment is fear… This is a good thing.
Remember that in this market we still have:
Historically low-interest rates
Historically high rent increases (not 8% anymore but still 2-4%)
Historically low vacancies
Things to monitor if you really need to geek out on numbers:
2 and 10 yield t curve. When that crosses you have just-a matter do time. Because its a measure of fear.
Automation and AI – huge shifts in jobs. People need to work but technology has been increasing since the beginning of time.
Wage growth
Bankers prospective: how deals are getting funded and by who (institutional or dumb capital)
There is a saying out there that real estate is location specific. However, when I invest in more stable asset classes its a National market based on the economy both USA and international. When you invest in a micro-economic fix and flips then its location specific. When you invest in commercial assets it’s with more stable tenants and based on the aforementioned larger economy.
How affordable is rent really? – “During the same span, median effective rent nationally has risen by about 26%. That rent appreciation pushed the median monthly rent nationally to around $1,220 per unit to end 2018. With the US median household income being just over $62,000, this rent accounts for 24% of monthly income. Using the typical benchmark of monthly rent being 30% of monthly household income for affordability, a margin remains for renters.” – [If you stick to using 2% and under rent growths and stay away from Tier I or Primary markets you should be fine] – ALN 19.02.24
A lot of people point to the Yield-Curve as a big indicator. In the end, I do believe that real estate will go down because of consumer instability. But if you have stocks you should sell those before even thinking of lumping it into cashflow type rental real estate.
“The guy not investing right now and hoarding cash (with net worth of under $1M… because if you can live off your cashflow then cool you can do what you want) is just afraid and lacks deal flow. Its like the person who complains that there is nothing to do during the weekend in LA (insert city with a vibrant scene) when in actuality they don’t have any friends (lack dealflow)… and by the no one likes (has a bad attitude and that person who makes excuses”
Doomsday theory: Everyone talks about national debt but we are far far behind debt to GDP ratio that of Japan. When Japan hits the wall lookout. Her is my theory… watch out post-Japan Olympics when they have to let loose the belt (after a holiday period of excess calories). Leading up to a period where Japan has to save face while they are in the Olympic spotlight (and I’m not being racist cause I am Japanese and it is a thing). I don’t have the latest data but Japan is at around 250% where the USA is at 100%.
Household debt KPIs: student debt, car loans, housing debt. Which is why I like these assets that are used by the poor and middle class! #RenterForever
Lane’s theory: I’d rather be in deals that cashflow today that do better in a recession like Class C and B assets. Say it cashflows a 8%.
The guy who is stilling on the sidelines with the “hoarding cash” mindset will lose because they will make 0%.
I, on the other hand, might dip from 8% cashflow to 4% cashflow. On paper, I might be in a market with compressed cap rates but hopefully, I have forced appreciation potential if I really needed to sell – the counter move is to get 8-12 year debt to effectively bridge you to the next side of the market cycle. In the meantime you cashflow 4% which is 4% more than the “hoarding cash guy”.
In addition, remember back in the 2008 crash. 2009-2012 people did not know if that was the bottom and it was so hard to close deals in that Phase IV (see below). “Hoarding cash guy” in 2009-2012 and the few years after the next recession will likely be in the same clueless situations.
Wouldn’t you like to be in solid Class C and B assets that continued to cashflow?!? 4% x 4 years is still 16% ahead!
Now if you are “hoarding cash guy” with no deal flow then I get it. Saving cash is the best thing to do for the guy with no deal flow or does not know how to run the numbers. I guess everything does suck.
[Investors are chasing for decreasing yield these days] – REI.com – 19.03.4
[Sophisticated Investors know interest rates and caps go up and down together and their money is made in the delta between the two] – REI.com – 19.03.4
Of course, all the Pro-Apartment publications will say this: Get Ready: Recession-Proofing An Apartment Portfolio – National Apartment Association 19.03.7
To join our Hui Deal Pipeline Club and stick with the group join below:
A pretty impressive event. Its where 2000 financial bloggers, you-tubers, and podcasts this year gathered around all this money.
In 2006, I started reading financial blogs. Sole of my favorite was getrichslowly, Wallet Hacks, and of course mr money mustache. FinCon started in 2011 with just a couple hundred people.
Real estate investing is a minority. 95% of people are debt adverse and about the 4% rule. Buying cash so so debt. Living small is selfish? Make 150k a year and retire when you are 35…
The Millionaire Next Door book is not the type of lifestyle I would like to live.
I am cool with how it is enough to be happy and content.
Other Findings:
New investment account that incorporates mobile interfaces and suto-AI. Mint app has click to invest and banking apps have click to refi. It’s a little dangerous.
A cool 5% instant liquidity online savings bank that invests in inventory loans. Let me know and I can connect you with that as I try to do more due diligence on my own.
Liberty health share – religious-based health insurance
Side gigs – consistent theme from high performing growth mindset W2 employees who are not getting fulfillment at their bureaucratic day jobs.
Interviews to follow in video…
Please share this with friends because if you don’t soon you won’t have any friends to have mid-day lunch with when you not doing anything
