| by Kenneth Chase | 2 comments

The Three Immutable Laws Of Real Estate Investing | Apartment Syndictaion Tips

One, buy for cash
flow, not appreciation. Two, put long-term
debt on properties. And three, have
adequate cash reserves. [MUSIC PLAYING] Hi, welcome everyone to
another Best Ever short video. I’m joined by Joe
Fairless again, who just got done with his morning run. And Joe, I wanted to ask
what you kind of covered in a previous video
about Robert Kiyosaki when he said the whole thing
about there’s an apartment bubble. Which if you’re watching, it’s
on our YouTube channel as well as our social media platforms– YouTube.com/bestevershow,
social media platforms show up at the end of this video. And you had three
principles for how you look to buy real
estate that made you not concerned about
an apartment bubble that may or may not be on the way. What were those
three principles? I call them the “three immutable
laws of real estate investing.” And as far as a bubble
may or may not happen or we may or may not
be in one, I just don’t try to predict
what’s going to happen. I try to– or I don’t try
to, I do set up my business so that we mitigate
risk as much as possible when a correction
does take place because it will take place. I just don’t know when. Nobody knows when. The three immutable laws of
real estate investing– one is buy for cash flow,
not appreciation. And by the way, these
three were based on the thousands of interviews
I’ve done on my podcast. And it’s based on
listening to what people say whenever they
describe how they lost whatever they lost in 2008. And I just listen to
that and then seeing that there’s some themes. So one is buy for cash
flow, not appreciation. That’s different than forcing
appreciation, which we do. And when you force
appreciation and you renovate the interiors or you renovate
something or you do something that adds value and you
increase the rent, which increases the
value, or you maybe optimize expenses, et cetera. But if you just buy for
appreciation meaning that you buy and you hope that
the market continues to go up and you’re not cash
flowing, well, then you’re setting yourself up for failure. So one, buy for cash
flow, not appreciation. Two is put long-term
debt on properties. For example, in 2008 if
your loan became due, well, that’s a very
inopportune time where you don’t have a loan
and you have to get financing. Because there was no financing. Or the financing was
astronomically high relatively speaking– interest rates. So the cash flow– it didn’t cash flow and
you lost the property. Therefore, if you put
long-term financing, or debt on the property, then
you’ll be able to ride out the storm assuming that you
have a cash flowing property and you didn’t buy
it for appreciation. Now on our projects, if we
have a fixed loan, then great. But if we have a
floating interest rate, well, there’s some risk
associated with that. Therefore, we buy a cap on that
floating interest rate so that the interest rate cannot
go past a certain level. You can do that? You can do that. Huh. Yep. So when we enter
into our projects, we know exactly what
the worst case scenario is on the interest rate hike. And we can run and we do
run a sensitivity analysis prior to the deal getting into
contract so that we know, OK, worst case scenario we
get a floating rate. Here’s the cap. Here’s what it would go
up to interest rate-wise, and here’s what it
would look like. Here’s what the project
would look like. And then lastly when you buy
for cash flow– number one. Number two, you have long-term
debt on the property. Lastly, number three– if you
have adequate cash reserves, then if something were to take
place that is unexpected like four or five boilers
go out at once, or a snowstorm comes and
freezes the pipes, pipes burst, et cetera– Hurricane. Hurricane. Sure, you have insurance,
but what about the money to float the property while
your insurance company fulfills their duties? Or what if the insurance company
does not fulfill their duties and they say, well,
you’re not covered and then you have to
take them to court? And then you have to
spend money not only on renovating the property,
but also legal fees to fight the insurance
company for a policy. And by the way, that’s not
a hypothetical scenario. That is a scenario
that has happened with an investor I know. His name is George Newbury. He’s got the book Burn Zones. I highly recommend it. I’d say that’s mandatory reading
for any apartment investor. I’ve picked it up. I haven’t read it yet. It’s great. If you pick that up or
when you buy that book, if you don’t read
the whole thing, then just read the
chapters about that story where he had over 4,000
units and he lost them all. Now, he did other things
that were mistakes. He connected each of
those properties together, and he had personal guarantees
across each of them. So when one defaulted,
it was a domino effect. We don’t do that. They’re all isolated. But he did have to go to court
with an insurance company. He eventually won the lawsuit– like, $30 million or something. But it cost $50 for all
the repairs and things because the apartment community
just needed a lot of work. Lost it all. Had to start over. So having adequate
cash reserves– and you can’t really prepare
for that scenario other than– well, actually, you can. Have insurance number one. But number two, have each
of the properties isolated versus a domino effect. So those are the three. One, buy for cash
flow, not appreciation. Two, put long-term
debt on properties. And three, have
adequate cash reserves. If you do that– nothing’s bulletproof, but you
certainly are mitigating risk. And if you ask any investor
who lost significant stuff in the last downturn,
listen to why they lost it. Oh, the values went down. Well, if the values went
down, why does that really matter if your cash flowing? Who cares? Hold on to it. Oh, well– yeah, they
weren’t cash flowing. Bingo. There you go. There’s a real reason. So I have some
follow up questions. It’s not going to go
and order of your three because they’re still fresh
in my mind the opposite way. You will conservatively figure
out the highest interest rate worst case scenario. Do you also say, OK well,
if that happened and rents go down, do you do that? Yeah, yeah. We do many variables. We look at what would
be an exit– what would happen if the
exit cap rate were xyz, and we’d run a scenario there. What would happen if
rents, premiums, or really it’s the overall income that’s
collected is a certain amount– what would happen if interest
rates do a certain thing. When interest rates
go up, though, it’s likely that rents are going to
be similar to what they’re at, at least because it’s going
to be tough to get financing for a house. So that’s going to
increase demand. On the existing units. And if interest rates
are high, there’s probably not as much new
supply coming on the market because they’re not getting
favorable financing. All right, so
there’s a trade-off. But on the flip-side
or on the downside, if interest rates go up, when
we go to sell our property we’re not going to have
as big of a buyers pool, or that buyers pool
won’t be able to pay as much because lending
will be more expensive. Therefore, we won’t be able
to exit at as high of a price as we would if interest
rates were lower. So all sorts of trade-offs. It’s virtually impossible to go
through every single scenario. But ultimately, those
are the three things that we want to keep in mind
and approach accordingly. OK. And the second one is having
long-term debt in place. What do you consider
a long-term debt? It depends on the
project business plan. If the project’s business
plan is three years, then have at least five years. If the project’s business
plan is five years and you have five
years, well then you should do something
after year 2 or in year 3 with the existing debt to
either refinance out, or sell, or put a supplemental loan in
place, or– actually, not sell. Either refinance out into
a longer loan or sell. Because if you wait until it’s
five-year play with a five-year loan– if you wait until year
4 to figure it out, boy, you’re at the mercy of
whatever the market’s at, at that point in time. And that’s a risk. That’s a big risk. Yeah, definitely. Lastly, do you
consider the way you named it or any of these
in any order of importance? Or are they all
equally important? I’d say number– well– I was thinking maybe
the cash flows. Yeah, one and two
stand out slightly more than number three. So number one was buy for
cash flow, not appreciation. Number two is have
long-term debt. And number three is have
adequate cash reserves. And by the way, the
amount of cash reserves varies depending on the
project, depending on size. Perhaps, talk to your
property management partner and ask them, hey, what is
a good amount that we should have in reserves for
this type of product in this type of market. But number one and number two
stand out as slightly more important. Because with number three
I feel like if you’re resourceful enough, you
can get access to cash. But number one and
number two– if you bought a property
that’s not cash flowing, you’re in trouble. If you buy a property
where the loan becomes due and it’s 2008 all
over again, good luck. Well, thank you for sharing
your “three immutable laws of real estate investing.” You got it. Got it? OK. And everyone watching–
thank you for watching. For more tips you can
sign up for the newsletter we send out every week at


Sean Johnston

Jun 6, 2018, 12:54 am Reply

Thank you for the three tips. buying caps was new to me it makes alot of sence in some situation"s it could be a lifesaver. a new way to figure some underwriting .really appreciated that.thank you both again

Quan Luu

Jun 6, 2018, 3:41 am Reply

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