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The Lessons
Category: Blog
Is Now a Good Time to Invest?
https://youtu.be/xOXUo3KoZ4c
I am curious on your positions now, given the uncertainty of future economic conditions, I am feeling like, know when to hold them is a smart idea for a few months. What are your thoughts? So I used to think this back in 2012 and then 2015. And then 2016 and then 2018 and 19 as I was buying properties that cashflow, as we said on the last slide, you only buy properties that are positive cashflow and can pay professionals to run it for you.
If you don’t have enough money for vacancy repairs, cap, ex professional property managers and the occasional oops. You should have bought the property. You’re not cashflow positive in the true sense of the word, just because you’re renting a property out for $2,000 and your mortgage is 1500. Doesn’t mean you’re cash flowing 500 bucks.
That is absolutely wrong. In fact, in that kind of situation, probably negative cashflow when you’re accounting for real repairs, expenses, maintenance cap, ex vacancy, and property management. So if the way I see it, like most people don’t invest like this, right? They don’t invest for cashflow, which don’t found this me.
But when you’re investing for cashflow, I don’t see any reason why the economy is going up and down. I mean, you’re just kind of dollar cost averaging. You’re just picking up more and more assets that make money on a monthly basis. Most cashflow investors are pretty immune to the economy and after going through a pandemic and seeing my collections.
Pretty much across 3,500 units stay above 90% where breakeven point is in the low fifties and sixties. I mean, I’m pretty confident that this workforce housing investing for cashflow is the way to do it a lot better than investing in something silly, like Airbnb short-term rentals or something like commercial storefronts, where the restaurants go out of business.
I think we’ve seen the strength of workforce housing. People need a place to live.
How to Set the Reversion (Exit) Cap Rate
https://youtu.be/yyxcm3F0u4I
0:00
Then the reversing cap rate that we’re using is 6.25, using a 6.25. But what are assets trading here with low fives,
0:10
yeah, five, and even under five, depending on where it is,
0:13
we’ll get into that in a bit.
0:21
Going back to the reversing cap rate, we’re using a 6.25, or version cap rate. I’ve kind of got to this a lot of times, but it’s still good worth repeating, took me a long time to find a grasp this concept. But this number that we plug in here at 6.25, is one of the biggest factors in coming up with all these projections. this number right here is the assumption of what kind of market we’re going to sell in, say, five years. So now, we want to assume that, you know, when you’re being conservative, you want to assume that you’re selling in a worst market. So we’re going to expand the version cap rate higher. So 6.25, is what we’re using. And that is how we you know, we put in 6.25 like how we are that’s how we’re getting the projected onto 2% return in five years. Now the question is like, well, what did you guys are less conservative or don’t expand your version Capri as much? Well, if we went to five and a half percent reversion cap rate, you know, we’ll be we would be putting this deal out at onto 58% return in five years, which would look awesome. But no, we like to over promise under develop under deliver. Poppy raised a lot of money and fill up this deal really quickly. But
1:41
yeah, no, that’s a that’s a good education point for people who, you know, if they are looking at other deals by other operators, you know, that’s a common that’s a that’s an easy change to make that really makes the returns go one way or the other, as you can see here. So if you if you ever see something that looks too good to be true in that range, you know, may dig a little deeper and ask what their assume reversion cap rate is that they’re using for the deal.
2:10
Right, and you know, the 6.25 con, I kind of go back and forth several days deciding on this number plus or minus a quarter point to have a point where we’re about what we’re going to use. If this this is again, a more of a Class B type of asset in a good area, a minus area. So that’s why you 6.25 but say it was more of a class C 1960s 1970s build, we probably would have used what like a 6.5% reversion cap. So you can’t just you can’t just compare the reversion cap rates for two deals, because the assets might be different, the locations might be different. The geographic locations might be different. I think we’ve used like for Huntsville, we’ve use 6.25
2:57
Also give us 6.25 to six and a half. And even on some of our earlier deals, we use seven but we use a little bit too conservative.
3:06
But the thought there was you know, Houston is a little bit more major market. You know if you compare that with your cap rates out in like Los Angeles or San Francisco, which is in the twos and threes, that’s kind of where we come up with some educated guesses and you know, if there were if the cap rates stay the same Tibet it is today at 5.25. You know, that means this deals looking like it’s gonna be 180% return in five years. But let’s keep expectations low because life is hard enough.
Dealing with Natural Disasters – Multi-family Real Estate
https://youtu.be/RYlKILsj2Js
0:02
On question seven here, investor asks, you know, these Gulf states are always getting hit with storms. I think we were just reminded about that. A couple few weeks ago, we’ve actually got some properties in Biloxi. Kyle and I are in some projects not with each other. So we have bring a wide range of responses to this question. And we let you talk about garden place to let you take that one. But, sure, as far as like insurance goes, you know, this is why it’s nice to not be a little landlord, what’s your little State Farm Allstate Insurance, right, we have big kid insurance here, for commercial assets were insured for the loss rents. And when we have a claim, we hire a claims person to fight on our behalf. And they get compensated based on how much the claim is.
So a lot of times, I’ve actually had like two fires, and we’re full building has burned down twice. And the initial settlement that they gave us was like a third of what we actually ended up with, which goes the show why these claims adjuster guys are just totally worth it. And on a bigger project like this, we have the scales and the means to, you know, the working capital or pay them to get them going to fight or claim for us to get everything that we’re worth. I feel like, yeah, there’s administrative headache, for sure, we may have to pull some money out of our reserve capital.
But at the end of the day, most times and not like, come out ahead. I’ve gotten like a brand new roof, put on a apartment building one time, which I thought was totally unfair, but hey, I’m gonna take it, I’m gonna take that I got a brand new building built on that one, we negotiated just a lump sum payment to go build something entirely new. I think the only problem is like, it just takes a while. Maybe Carl, you can talk about the garden, place the treat and submit to just kind of work. Yeah.
1:59
Well,
2:00
Unfortunately, you’re working with these big insurance companies. But at the end of the day, you’re also still working with people in human error can still creep in every now and then, which is what happened to us at garden place. So it, you know, we had a big tree that fell. Fortunately, nobody was hurt. There were some high winds in the area, and the tree just fell down. And this is Huntsville. So it’s not like near the Gulf or anything else, you know, they might have, you know, some tornadoes every now and then. But it’s definitely not in Tornado Alley, like in Dallas, or Oklahoma or Kansas or something like that.
But anyways, it took this was almost a year ago, now we are we are about to finally took 11 units offline, we are finally wrapping up the last four units, but it took forever because the insurance company, just something so simple. They were sending the check. The first the first check, which is where we pay the contractor deposit, they were sending it to the wrong address. So how it was a never changed on their part, I don’t know. But they sent the check three different times over the course of like, you know, three months. And we were just at a loss. But But I do you know, I live here in the Gulf states. Hurricanes is just something that we deal with. You know, it’s not any different than if you’re in California, excuse me, California, and you have to deal with with wildfires. Or if you’re in, you know, Tornado Alley, like I just mentioned, you know, there’s a ton of obviously great assets in the Dallas area. Dallas sees tornadoes on, you know, annual basis, you know, every now and then there’s at least two or three big tornado storms that come through the Dallas area, you know, between the spring and the summer, it’s not uncommon there. And same thing with Oklahoma and Kansas.
So you know, and then a way up north, you’ve got these crazy blizzards and everything else that can just, you know, take a toll on your property itself, just from the the bitter winters that they have up north. So, you know, it’s like anything else, we each area of the country has their own natural disaster.
So you just make sure you have the right insurance that is going to cover you like Lane said we have lost rents, which means that for every month, that goes by that, you know, in our case, those 11 units are offline, we’re actually getting paid by the insurance company, the average of those rents, you know, the average for like, I think it was like the last six or nine months, whatever the average rent was for that specific unit. That’s the amount that they give us. So we’re covered there. So yes, it’s never a good situation. I would say to have to file a claim, especially on you know, when you’re talking about fires, I mean, because, you know, at the end of day we are talking about displacing people and having the final alternative housing for them. And then a lot of cases when we have a fire or down units in general. So, you know, we’re certainly sensitive to that.
But to not, you know, we don’t want to downplay it by any means. But from an investor perspective and a risk profile, we’re covered. And we’re going to take the right amount of insurance out there, you know, I think people often forget that our our number one biggest investor on every single deal is our lender. Our lender is going to have certain parameters and certain guidelines and certain requirements from an insurance perspective that they’re going to require us to do. And Fannie and Freddie is notorious for that. And just having you know, additional coverages and things like that, that, you know, a normal traditional insurance agent is going to say, hey, look, you know, yes, you can take that type of coverage. It’s, it’s cost more, it’s just more of conservative, you know, it’s I’ve had multiple insurance brokers tell me that type of make those type of comments. So you know, they’re gonna require us, so we’re going to be fully covered there.
6:09
Yeah. And, and all that debacle is happening, we’re collecting loss rents. And the beauty of that is like, now these assets aren’t decaying on us. They’re not incurring expenses. We’re not having property management of these on top of that, and there’s a bit of a nice little Delta in there that we come out ahead.
How the Repo Market Led to Printing Billions of Dollars
https://youtu.be/XE947Ea1DOQ
0:00
So I dug into what the repo market is. And just to keep it super, super simple, it’s basically a pawn shop for banks. So imagine a pawn shop, you’re short on cash, and you’re like, Okay, what do I have, I got a watch, and you go down to the pawn shop, and you basically sell it to the pawn shop operator, but you have the ability to redeem it in a certain period of time and they charge you interest for the use of the money but presumably, whatever you are Hawking your asset for is important enough that the premium you have to pay to get access to that is there and of course, the the rate that you pay is, you know, kind of based on the risk.
So anyway, so banks are showing up in the repo market, and they’re bringing in their treasuries and they’re Hawking them they don’t want to sell their treasuries or they don’t want to be divested of who have the right to get them back it basically saying the banking system is low on cash that’s what activity in the repo market is and just like maybe you’re not proud to tell all your friends Hey, I had to Hawk my watch right the banking system they’re not like proud that they had to go Hawk their treasuries to raise cash. It’s an indication of dollar shortage in the system and the Fed accommodated that by printing a lot of dollars.
Suspended losses (last resort to lower ordinary income without REP)
The order in which suspended losses are deducted is:
1. To first offset depreciation recapture and gain from the activity that was sold.
2. If the suspended losses are in excess of the total gain, the remaining suspended losses will then offset ordinary income.
3. If the suspended losses do not offset 100% of the gain from the activity that was sold, you may use suspended losses from other rental activities to offset the remainder of the gain from sale.
This is detailed in IRC Sec. 469(g)(1)(A). And if you want to have a wild Wednesday night, here’s an article that explains it in-depth:
For more tax info check out our tax page.
New X1 Credit Card – Should You Get It?
https://youtu.be/5wn0CJRc4OE
0:00
What’s up guys, I’m on to do a quick pre review of this new credit card, I found the x one credit card, which the reason why it’s kind of exciting is because it’s made out of steel. And it gives us 4% cashback or points, which is pretty high for your general credit card. Normally the highest for just a general category is about 2%. Of course, there’s a lot of them out there that it will give you five or 4%. But that’s only on one category. I kind of like to simplify my life. And when I spend money on like my car insurance or large purchases that don’t really fit a grocery category, or like Office of my category, I want to be using these general cards. But yeah, let me show you this screen here. And we will walk through it.
So here’s the website, it’s at x1creditcard.com And it’s gonna check out the link below. But right now they’re doing it as a waitlist right now. So this thing hasn’t been launched. As you can see, it’s 17 grams of sheer stainless steel, what else could you want, if there was a annual fee, I wouldn’t be looking at this, you know, I try to stay away from any annual fees on anything, it’s To me, it’s just not worth it. It was even $1 20 bucks. But yeah, it’s your annual fee, it’s worth a shot, we’ve seen that there’s some higher limits here. I think the cool thing is like they’re, I mean, it’s pretty much as offering higher rewards 4%. And they’re doing this based on a word of mouth. And, to me, that’s how they’re able to insert paying out referrals, or all these affiliate commissions, which is very common in the credit card industry, they’re able to give it back to the customers and it comes in a cool box. But kind of did a quick, cursory review over this. And, you know, gonna be a roll out some high notes here. So it’s not released yet. And the nice thing is there’s no foreign transaction fees.
But to kind of go over the pros here, you know, virtual card numbers. So you can those guys can like to sign you up your stripe accounts or the subscription services. Or you can give them the big middle finger and you can change the virtual number at will based on probably an app or online for those you guys who are stuck in those gym memberships. I don’t know if it’s part of your subscription. But you know, it’s a way to fight back against that. Supposedly, there’s some hot, flexible, higher credit limits with this. And I don’t know how much more higher but see how that comes through. No annual fees, like I said, no foreign transaction fees, which is a big thing, then, of course the Forex risk rewards and to get that forex level Did you need to be able to refer a buddy to get that. If not, it goes down to three extra words, which I think is still pretty decent for general credit card you to be able to get that you need to hit $15,000 A spend per year for a lot of us in a simple passive cash flow nation that’s really not that far from us, fortunately, and if you don’t hit the $15,000 threshold, you hit you get to two X on air rewards there.
So here are the cons hot one. And I was kind of looking at this wasn’t really seen as like cash back it was more seen as like points. And I’m always like a little wary of points because points kind of go through like a Pachinko machine, kind of a set where you get these points, you got to get these gift cards and the gift cards are are kind of a pain to deal with. But we’ll see they say you know, just looking at the website here, we gain points that brands you love, you can use points to pay off your stuff. So it seems like it’s not going to be too difficult to use those points. And I think the biggest issue with this card is this is this card even going to happen there was a card earlier that was called the zero card that I think they finally stuck a fork in it earlier this year. And that is didn’t get enough traction. My understanding and they I don’t know zero card was the car but there was another card that those of you guys have seen them the documentary where they had the the fire festival that never happened. That guy also another one of his scam projects was one of these kind of cool credit cards. It was more of like a black, super high end credit card. And this cards more made for everybody.
But you know, in conclusion, I’m going to try it out. I’ll put the link in the webpage so you guys can help me get it quicker. That’s how you guys if I can get it, how it’s going. But you know, it may be not much better than my 2% double cash, Citi double cash card which I think everybody should have. I also do the Swiss Army Knife method where I have multiple cards that give me four to 5% in specific categories like I have an American Express blue for groceries at 6%. I have like another American Express simply cash I don’t think they have that card anymore. I think it’s something else these days but that gives me 5% of that office. And I have another one that you know gives me higher executive saver card or something gives me three or 4% at restaurants. The Costco wants pretty good too. I think now it’d be 3% at restaurants there and then travel through percent travel, but I’m going to give it a try.
And if you guys are into this type of stuff, maybe not the best return on your time but I find it very fun. Also trial tradeline hacking where you can put an authorized users onto your credit card I mean, I made about 10 grand in 2019 I’ll probably make just as much in 2020 go to simplepassivecashflow.com/tradelines. To learn more about that we have the full e course there. And if you guys want to learn more about this go to info page I have built on this card at simplepassivecashflow.com/x1card that’s /x1card you guys try this out. Let me know i’ll be posting into on that website. If I actually get the card and start playing around with it.
Should You Buy or Rent?
https://youtu.be/dHWnZuVhPUI
Should we pay off rental properties first before primary residence, ultimately, where should the debt be? So overall, I don’t really believe in owning and primary residence, unless you have too much money. You don’t know what to do with it. I’m a believer of renting. I wrote a big article on this. It’s simple, passive cashflow.com/home.
I mean, do the math for yourself guys? Actually, I have a calculator for this. It’s at that URL symbol pass the cashflow.com/home, but it’s this big calculator I created where you’re able to put, you know, what is your rents? What is your mortgage payments? And then it kind of compares the equity build up.
And then what would happen if you would’ve just done something simple, like buy some rental properties, how much the equity would grow and it kind of compares the two scenarios. And whenever you’re trying to figure what should I do? I would recommend just putting it on a spreadsheet and figuring out what the math says first.
So whether you pay off the rental properties or the primary residence, it really doesn’t matter from like a numbers perspective because. Once you buy a property, it just goes in your portfolio anyways, the way I see it. But from a liability standpoint, I would rather encumber my rental properties with debt first because that’s the higher liability, but you know, here’s the problem.
This is why you don’t really want to. Pay off your debt, because especially if you own your primary residence and you want to outright every litigator out there knows exactly what, where you stand with your debt. There’s like things I subscribe to that I can kind of pinpoint how much equity everybody has in their house.
I mean, that information is out there for the taking. And when you pay off your primary residence, I mean, you’re a sitting duck for all this liability. Of course, there’s other things that you can do that we talk about our masterminds, like your vocable trusts and doing that some homestead stuff. But I think you’re going about this, the wrong way of like, well, what should I pay off?
What you want to be doing is. You want to be looking at your return on equity? There’s my handy-dandy chart that I show a lot of people, but you know, when you first had that rental, you’re making a lot of money, maybe 30% on your rentals, but as the appreciation happened and you paid down your mortgage and maybe you paid additional payment, don’t do that.
Because your return on equity is going down. And most people like after they own it, a decade or two, they’re making like single digits in terms of return on equity. I have a calculator on this@simplepassivecashflow.com slash R O E. I’ll put it into the Facebook group here too. So you guys can download that.
That’s the name of the game as investors return on equity case in point here, I mean, I’m living in this house. That my landlord owns outright. They are getting almost like one or 2% return on equity. I mean, heck for that much pain in the butt worrying, if I’m going to move out or not, they probably better be off in a saving spot and making I’ll be double what they are now.
It makes no sense to me, but Hey, I’ll rent from people like that and I’ll be on the winning side of it.
Things that you can’t learn in college
Things that you can’t learn in college:
- Schools teach concepts but it does not really help you learn personal branding, networking, and creativeness as trends change. They teach you what happen in the past which may not help you in the future
- They don’t teach you to be a good speaker you absorb material
- You don’t get the repetitions to get better. You take one test (a pretty bad indicator of mastery)
- Colleges teach you processes and rules which does not help you develop your creativeness or much critical thinking. If you are not creative (how do you know if you are not put in that position) then yea I guess you can be a worker bee. Maybe there would be more leaders if the school system would be more focused on it.
- Tests require read, studying, and answer… by the real world requires you to test, test, test and fail fail fail.
What is an Accredited Investor?
https://youtu.be/JffG2-GfQlA
What is an accredited investor? 
Quick Video
- To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income with your spouse) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years.
- Net worth exceeding $1 million, either individually or jointly with their spouse. Note – this is often the harder one to achieve as we find high incomes are not uncommon.
- An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million.
- Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor. However, an organization cannot be formed with the sole purpose of purchasing specific securities.
- In 2016, the U.S. Congress modified the definition of an accredited investor to include registered brokers and investment advisors. This continues to open up with new changes – If a person can demonstrate sufficient education or job experience showing their professional knowledge.
https://youtu.be/z5WHIa5FFng
Pondering how a person can be called an Accredited Investor? Do you need to be one to get access to private investment opportunites?
What do Accredited Investors Invest in?
Join our Private Investor Club
What qualifies as an accredited investor?
An accredited investor is an individual who has the institutional knowledge, experience, net worth, and/or financial sophistication to evaluate an investment opportunity.
Defined by the United States Securities & Exchange Commission as someone who makes a minimum of $200,000 ($300,000 if filing jointly) or has a net worth of $1 million dollars excluding personal residence – although one could easily do a cash out refinance or HELOC to get the equity out of the primary residence in order to put you over the $1M threshold if needed.
Importance of being an Accredited investor
The significance of being an accredited investor is that you can invest in things that those with less money, cannot which are mainly deals such as Reg D 506C offerings which are mass marketed and therefore can only allow Accredited investors.
Alternatives to having accredited investor status
If you are not Accredited don’t worry! Most deals out there are done through private networks and not mass marketed – these Reg D 506B offerings are accessible to “sophisticated investors” which has a much more nebulous definition but essentially says you know what you are doing even if you don’t have that much money.
In Reg D 506B offerings which require you to have a pre-existing relationship with the sponsor, you have the ability to invest if you can qualify as “a sophisticated person investor” which has a more ambiguous definition but essentially says you know what you are doing even if you don’t have that much money.
These laws were put in place long ago to “protect” the average person (non-Accredited investors) from predatory activity. The irony of this all is that there is no protection for the average Joe, or pension funds for that matter, against investing in a wildly bloated stock market at record valuations and being mislead by a commission based financial planner. Every major trader out there knows we are in a bubble but there is no protection for individuals dumping money into their retirement accounts to buy mutual funds. It’s an archaic system which makes little sense and I have always felt that it was the little guy (non-Accredited investor) that need access to good private alternative assets the most!
Certainly, there has been some recognition of this fact. The 2012 JOBS act made it easier for Main Street America to participate in “alternative” investments via crowdfunding and made it easier for sponsors to advertise previously unknown opportunities. However, we have a long way to go because it is not practical for a syndicator to raise private capital with current crowdfunding laws because the maximum that can be pooled together is very small.
I am not a fan of crowdfunding websites. When I invest personally, I need to know the lead syndicator personally. None of this “we met at a local event and he pitched me his deal”. If a guy does not have a list of solid investors they must lack the track record. Also I did a podcast with Amy Wan a syndication attorney talking a lot about this topic.
How do I get qualified as an Accredited investor?
For Reg D 506C offerings where third party verification is required… the steps involved with qualifying include a bank statement from a financial institution that has been approved as a bank, a mortgage (with a qualified purchaser), joint net worth or income of more than $200,000 to qualify as an accredited investor, or a non-bank financial information, including the net worth of $1M not including equity in your primary residence. (Because your home is not considered a good investment in our community)
Tax Hacks for Accredited Investors
Types of investments an accredited investor can make
Now that you’re an accredited investor, you started asking yourself “what type of investments should you get into to increase your net worth by getting away from retail investments?”
The golden rule is to work with investment firms that have a proven track record.
Potential SEC changes
Some rule changes rumor to pushing the threshold for Accredited investor status to $5 million or more of net worth. Or creating a new level of investors such as Accredited investor plus.
Go ahead and start your journey towards becoming an accredited investor.
Tax Tips and Best Practices
https://youtu.be/aqPWoki-MP8https://youtu.be/FTj-nJEGi-4https://www.youtube.com/watch?v=zCW-MbPxJxMhttps://youtu.be/umCsNG8sLNc