Epic Real Estate Investing - Cash AND Cash Flow! Have Your Cake and Eat It, too! | Episode 212

Episode Date: July 4, 2016

Last week we discussed why Matt believes that we are shifting from an “up” market into a “down” market.  Today he is discussing a creative investment strategy to use during this transition that is a winner in all types of markets.  This strategy allows you to bring in wholesale-like cash while keeping cash flow in your portfolio – all with very little money out of your own pocket.  Listen in to learn more! ------- The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? E.ducation P.roperties I.ncome C.oaching Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Yeah, what's that? Welcome to Epic Real Estate Investing, the place where I show people how to escape the rat race using real estate. Just got to shift your focus from making piles of money to making streams of money. Change that one thing just one time, and you are on your way to financial freedom. It is not the most exciting path, but it is the fastest. And once you get there, life then becomes exciting.

And speaking of exciting, happy 4th of July, by the way. And this week, if you happen to be in the Maryland area on Thursday, that would be July 7th. I'll be making an appearance and speaking at the Hub City Ria. Specifically, that's in Hagerstown, Hagerstown, Maryland. And I'm going to be teaching people how to find deeply discounted properties in today's market. So for more information, go to hubcityria.com. HubCityria.com. They've got all the information right there on their home page.

All righty. So last week, I shared with you my views on the shifting market, this market that we're currently in and things to watch for as you move forward in your business. And if you missed it, it's episode 211. This is 212. So it was just last week's episode, one episode before this one. You can just go back there and listen to the details. I kind of went into detail there.

and I don't want to do that all over again. So just in a nutshell, the market as a whole has been on a rise for a while. We've been appreciating. It's been growing and improving home value-wise, property value-wise. We're just about 80 to 85% bounced back to the median since the crash of 2007. And people, the media, they're going to interpret this in different ways. For example, the market is great. Jump on in.

Or the market is about to crash and be bad. So get out. And I come from the mindset that there's no such thing as a good or a bad market. Not when it comes to real estate. No, there's just an up market and there's a down market. And regardless of which one you're in, you can make money. And it doesn't matter which one you're in, you can make a lot of money. You just have to adjust your strategy a little bit.

So the basic strategy that wins in every market is buy and hold, though. That wins in every market. As long as you're investing for cash flow. So you're purchasing a property and you're making sure that, the rent that comes in from the property is paying you more than what it pays or what it costs you to hold on to the property. So it's paying for the maintenance. It's paying for the vacancy factor.

It's paying for taxes. It's paying for insurance. It's paying for any debt that you have on the property. As long as you get enough rent coming in each month to pay all of those expenses that are associated with the property, that income or excuse me, cash flow investing, buy and hold investing will win in any market. all right so it so it just doesn't matter what the market does whether with regard to home values if they go up or go down it doesn't matter you're not going to sell anyway so who cares you're just

collecting that cash flow month in a month out now the one key thing to watch for with buy and hold investing would be the job market the employment rate in that specific area so you know that as they say real estate is local so are the employment rates those are local as well so for people to rent your property what do they need they need jobs right and And the good news about this is it typically doesn't happen overnight. Like you can't just get like the crash of 2007. It was just like, I remember. I was a real estate agent at the time.

Was I? No, I was just finished. But that's why it was. I had loans on the property at the time. This is how I knew this. I had loans in process. And there was people that I knew that had like 30 loans on their desk. And they came in the office one day.

It had 30 loans on their desk yesterday. coming to the office today and 28 of them have been canceled. That's like getting kicked upside the head and being blasted overnight. The good news about income investing and buy and hold investing is that it typically, you don't get smacked over the head overnight like that. I mean, I guess the exception would be if you're investing in a market where the job market is based on one employer, one industry, that can happen. So if you're investing in a market where the job market is diversified amongst

industries and employers within those industries, you'll almost always see it coming. You'll almost have enough warning to like, okay, should I take action? Maybe I should, maybe I shouldn't. You'll have some time to decide. You know, some markets like the Texas market that are, you know, heavily dependent on one industry like oil. That's had a really big impact on the last 12 months in Texas. Or a couple decades back in Southern California where certain areas were heavily dependent

on the aerospace industry. That had a huge impact on areas like Long Beach and Lakewood. or Detroit, you know, you got the auto industry. You get the picture. The point I want you to get here is if you're investing in income property where there is more than one source of jobs, one source of employment for your tenants, it's pretty tough to get caught with your pants down when the market shift. But if you're investing like with fix and flips and you're holding a bunch of inventory while

you're fixing them all up and you're hoping to sell them for top dollar because the market is really good and strong, there, yeah, the risk is much. much higher there. All right. So in our office, what we're doing is we're just continuing to buy and hold. Nothing has really changed there. That's not changing. But we are finding that the deeper discounted purchases to be a little fewer and further between.

And that means the wholesaling and the quick flipping of properties, the margins in those types of transactions, those are getting pinched a bit. So we're shifting our strategy here to keep those chunky profits coming in right alongside the cash flow profits that we're producing. And last week, I promised to share with you how. how we're doing that. Now, as you know, I'm a big fan of the three-option letter of intent. And if you'd like to get a copy plus the calculator that we used to create it, you can go to epicl-o-i.com. Epic-L-O-I.com. Anyway, when our initial low-ball all-cash offer is rejected by a seller, because we still make those low-ball all-cash offers, we're still trying to get a massive equity position. That's our primary objective when we're buying a property. But when that's rejected, we'll go ahead and we just follow up with a three-option letter.

intent and we'll give them a couple more options where you know our offer price is a little bit closer to their asking price so if we're going to get closer to their asking price they're going to have to be a little bit more flexible with the terms and initially their terms being cash now we're going to say can we make payments on the property so anyway we follow up with that three option letter of intent and I think for most people the logic is there they get it they understand it oh cool seller financing I don't have to get a bank loan I don't have to use any of my own money or very little of my own money and the seller's going to carry it back for me. You know, people get that logic.

But from what I'm gathering, most investors really don't push for these offers to get accepted. And I think it's because, you know, they really want to wholesale that property. A lot of people just want to wholesale a property and make that quick paycheck. And I understand that. And typically options two and three, they're going to require some type of down payment, which most people don't want to come up with or can't come up with. or if they start getting a bunch of seller-financed offers accepted, they don't know where they're going to get all of that money for all of those down payments.

So they're thinking, wow, it's going to be really difficult to scale. I just want to flip some more property. I need to make some more cash, more cash. I can't have all this money going out for down payment. So as slick as the three-optional letter of intent sounds on the surface, it loses a little bit of its allure for investors when it comes to the practical application and scaling within your business. For example, one of the more popular questions I receive when we're talking about

the three option letter of intent is how do you wholesale a seller finance deal? You know, if they take that interest only payment option or that principal only payment option, you know, how do you wholesale that? You know, if the seller accepts one of your more creative options that involves the seller to carry back a loan for you, how do you get out of it and make some money the same way you would if they accepted your all cash offer? So that comes to me a lot. So I'm going to give you a couple of real world options that we're employing more and more

right now in our office as it helps keep the wholesale type money rolling in while still building our cash flow and ultimately requiring very little out-of-pocket money as well. So first, when you get a seller financed offer accepted, within that note, when you get that note between you and the seller of them carrying the, and that note defines the terms of how the seller is going to carry back, it's going to say, what's the purchase price, what's the down payment, what's the interest rate, and when is the note totally? do. When is the balance due? So all that, all that information is going to be in the note. Now, within that note, there's lots of other clauses that regulate the whole, the, the, the,

structure between you and the seller. Make sure, though, in that note, you have an assumption clause, an assumption clause. And also an assumption clause that doesn't require the seller's approval for another buyer to assume the loan. So what this clause allows you to do is, it allows you to sell the property without having to pay the loan off, without having to pay the loan in full prior to the sale or the transfer of the property. So it could look like this. After you've purchased a property under seller finance terms, you could turn around the next day and post an ad, cash flowing property for sale, seller financing in place, no banks

involved, $10,000 moves in, or $10,000 and take over the payments. And when you find a buyer, you're now out of the deal with that $10,000 down payment that you're asking for. You got that in your pocket. The new buyer moves in. and continues to make the payments to the seller. They assume the loan. They assume the terms and the responsibility of that loan.

And you're out of it. You put $10,000 in your pocket and you're out. Now, if that just sounded way too easy and you can't find a buyer, call me, because I'll take that deal if it cash flows all day every day. All right? I'll take that deal. Because here's what I'm most likely going to do with it. This is why I can say I will probably take that deal almost every single time.

I mean, certainly I have to go through the numbers and it has to meet my minimum deal standards and everything. But I can typically make a deal out of that if those terms are in place. So here's most likely what I'm going to do with it, particularly in this market that we're talking about, in today's market. And this is something you should consider doing yourself before calling me to sell it to me. So rather than just selling it and collecting $10,000, why not collect $10,000 and then holding onto it for some cash flow as well? You see, you can get the best of both worlds this way. And in a market, when you have a lot of excited people coming in, we talked about a lot of new people coming in, a lot of people taking on their education because we got it.

It's all in our Facebook feeds. A new guru every single day seems to pop up there and the infomercials are booming and the AM radio commercials are booming for the new seminar that's coming to town. So a lot of people come to the market. Both investors are coming in and resident owners alike because they're hearing that the market's appreciating, oh, so now I guess it's time to buy because the market's on its way up. You know, the market is hot, right? everybody wants in.

And in a market like that, it's tougher to buy low. When everyone's excited about it, everyone knows it's appreciating. It's really tough to buy low. But it's easier to sell high. See, the market goes up and down. And that low price you buy at and the high price you sell at, that goes up and down with the market. So what felt like a low purchase, you know, six months ago, that might be impossible right now in your market. but the high price that seemed impossible six months ago might be really easy right now got me so uh let me

let me give me an example let's say you purchased a house for a hundred thousand dollars okay we'll just use nice round numbers 100,000 dollars you buy the property for it's fair market values 120 so you still bought it at a discount is not a huge one right not it's not a smoking deal but it's a decent purchase you got a 20 grand of equity in there so you buy you buy it for 100 grand it's fair market values is 120. You originally offered 80,000 all cash because you wanted to be able to wholesale it for a quick profit, right? But the seller balked at that offer, but they did accept that $100,000 seller financed offer. So you put $5,000 down. So you put $5,000 down. You got a 5% interest-only payment structure, and you got a balloon payment due in 10 years. Those are the terms. Five percent down,

five percent interest-only payments, and the balance due in 10 years. Now, instead of selling the deal, like selling that deal to me for 10 grand and letting me assume the payments or any buyer for that matter try this you sell it and offer seller financing yourself you being the seller now you offer seller financing on top of the seller financing you have from the previous seller so you purchased it for a hundred thousand bucks you put five grand down and you got a five percent interest only payment right and the balloon payment doing 10 years now market the property at fair market value remember market values, 120, or maybe even a little bit higher. You could push that number a little bit higher because we're in this hot appreciating market,

right? So let's go for 125,000 bucks. Ask for 10% down at 9% interest-only payments and a 10-year balloon. So what if you've done here, right? You're marketing the property for 125, and we can do that because the market is appreciating. You're asking only for 10% down, so that's going to make it easier as well, so people don't have to go out and get a bank loan. So your buyer pool just opened up extremely. And then you got 9% interest-only payments and a 10-year balloon.

So what's happened here? Well, in scenario one, all you did was sell the property and collect $10,000. And you netted $5,000 because you put $5,000 down. Then you sold the deal for $10,000, and they assumed the loan. So you're out, right? You're out, and you put $5,000 in your pocket. So that's kind of like your traditional wholesale deal. Now, in the second scenario that I just described, you collected 10%, you asked for 10% down,

and that was 10% of 125,000. So you got $12,500. Right out of the gate, you got $12,500. You put $7,500 in your pocket because you put $5,000 down, right? Right? Cool. So you netted $2,500 more than you did in scenario one already. So you've already made $2,500 more than you did by just selling it outright.

Plus, you're now receiving 9% payments on $112,500, and you're making 5% payments on $100,000. See? So you're receiving 9% payments on 112,500, and you're making 5% payments on $100,000. What does that look like? Well, the 9% payments are $843.75 a month. The 5% payments on the $1,000,000,000,000,000.

that 100 grand is $416.67 a month. So that gives you a $427 and $8 spread there of cash flow, positive cash flow. And guess what? You've got no property management in this scenario either. So you received $7,500 for your pocket. So that's what you netted. And then you got $4.27 of monthly cash flow. So now we ask the question between scenario one and scenario two, why make $5,000 in a day when you can make $76,240 over the 10 year period? $5,000 today or $76,000 over the next 10 years? By the way, that would be $7,500 today and then the rest. So that would be what, like $69,000 over the next 10 years. Much better deal, right? That's 14 less deals that you're going to have to find over the next 10 years by structuring your deal this way. Now let's say if you just did that twice,

that's 28 less deals you'd have to do over that 10 year period. Okay, let's look at it this way. Let's say your goal to do one deal a month over the next 10 years. That's your goal. I'm going to do one deal a month over the next 10 years and then you're going to call it quits and you're going to retire. That's your plan, which is a very, very doable goal, by the way, very doable. By taking advantage of the current market conditions and structuring 12 deals like this over the next 12 months. So I was just say, I'm still going to do one deal a month, but I'm going to do them in this fashion. I'm going to do at least one deal a month like the one I just described.

You could achieve the same retirement in one year. So 10 years wholesaling for $5,000 each or one year doing it the way that I just described. So basically wrapping a loan around your seller. financing is what you would call that. So you could achieve the same retirement in one year that would otherwise take you 10 years of wholesaling those seller finance deals. So like any other strategy, this isn't going to fit every deal. All right.

So it's not going to fit every single scenario, but it's another tool in your toolbox to seriously consider, especially when you factor how much faster you'd be moving towards your financial freedom. You see, you'd be getting cash today, actually even more cash today than you would by just straight wholesaling it, and you get cash tomorrow for the long foreseeable future. So don't shy away from those seller finance deals. Don't do that because you don't know how to wholesale them and or think you may lack the down payment funds to do this with any sort of volume. You know, this particular strategy, it can work in every market. But as the market is appreciating, and more and more people are going to try to get into the market,

and that's investors and resident owners alike. As more and more people are trying to get into the market, it becomes easier to sell at the higher price. So you might be sacrificing a little bit on your initial purchases, but you're going to be making it up in volume by getting a little bit more creative on how you actually sell. and with all the demand that's coming into the market. And that's going to be even easier to do because you're offering seller financing on top of your seller financing.

Got it? So just another thing to look at, and that's how we've kind of shifted our market, or our strategy here. And even with our offers, like our typical, our basic dirty math is we'll take fair market value, and then we'll take 70% of that.

We'll subtract the repairs and subtract our profit. So we've gone to fair market value and now we've adjusted our dirty math formula to 80%. So we take 80% of fair market value and we still subtract our repairs and we still subtract our desired profit. But we know that in this type of market, it's more competitive. Sellers are getting more offers from multiple sources. So we need to be a little bit more competitive with that purchase. But in this type of market, we know we can make it up on the sales side.

and that's exactly what we're doing. All righty. So hopefully you got that. If you got any questions, go ahead and send them to Matt at Epic Real Estate.com because there's a lot that I covered there.

Send your questions to Matt at EpicRealestate.com and I'll answer them next week on the podcast. That's it for today though. If you happen to be in the Maryland area this Thursday, come out and see me at the HubCity Ria. And I'm going to be teaching you how to find more deeply discounted properties

in today's market. For more information, go to HAPE, Hubpa, hubcityria.com. Sorry about that. I was going to say happy 4th of July and I was going to say HubCityria.com at the same time. So go to HubCityria.com for more information

and you have a very happy 4th of July. To your success, I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening.

We'll see you next time here at Epic Real Estate Investing with Matt Terrio. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.