3 Principles For Investing In Real Estate

 Long-term matters is one, it helps you from a cash flow perspective. Now to be clear, you are going to pay more interest over the course of the loan, absolutely. But to go a little anti-Dave Ramsey here, it bumps your cash flow up, and then that cash can go be leveraged into other assets to continue allowing you to grow your real estate portfolio. This is Better Well with Caleb Williams. All right, everybody. Welcome back to the Better Well edition with Matt for Ice Cream with Investors. I'm sure I'll get better at the intro, but I'm really excited about this series because your podcast is all about making real estate. Easy, simple, taking complicated things and making it really simple so that we can understand and potentially invest in strategies using real estate investing. I don't know if I butcher that or not, but what I wanted to do is I wanted you to break down the three rules to investing in real estate because we could talk about a lot of different strategies, Matt. But if we don't have a framework, we don't have a framework, then it doesn't matter. And so I want this to be like the OG episode and really listen to this. And then if you're interested in other strategies, you can go, but hopefully we're using the framework that we're laying out here. Yeah, so I think you said it right. This is a framework. This isn't all the rules. This doesn't guarantee success. It doesn't apply for everything. This is just a framework for how I view real estate investing. And it's a way to kind of shortfall or avoid any kind of shortfalls that you may come from getting into speculation and things like that. So I wish I could take credit for these three rules. These are Joe Fairless rules that he came up with. And he's big time in the space and really does a good job of education and things like that. The first rule though is buy for cash flow. And so we chatted about this before. But really, if you're investing in something because you think it's going to appreciate, that is nothing more than gambling in my opinion. And if you're going to do that and bet just for appreciation, I think there are other avenues where you can maybe get a better return, aka dogecoin, right? It's 24, 100% in 2021. Like that is much better bet on appreciation than real estate is going to be. However, what dogecoin, gold, Bitcoin, any kind of small startup that doesn't produce a profit yet doesn't offer is cash flow. So as long as we buy real estate that produces cash flow, then we can take downturns in the market. We can take that cash flow and invest it in other real estate assets and things like that. So we'll go through a whole series of teaching you how to run the numbers and how to figure out cash flow and things like that. But in basic terms, its income minus six fences equals cash flow. And you want to always make sure that you're buying for cash flow. And the reason I love this idea of cash flow is it helps your bottom line today and can increase your cash flow and you can reinvest that. And in the future, it's one of those things that retirement planning 101 people are focused on I believe all the wrong metrics. You should be focused on whatever you're doing. All your efforts should translate into a future cash flow stream. And I could not agree more. A lot of people get focused on the shiny objects in real estate. But at the end of the day, what you're saying is rule number one is in is buy for cash flow. And if if you stay true to that, you're going to make less mistakes. That's right. And if you do make a mistake, you have a buffer to kind of protect yourself. I have this theory also out there that everything living needs to be in motion or it starts to decay or die. And a simple way to think about this is like a river. If I think about a river, I think spring water, fresh cold things are living in it, fishes, all that kind of stuff versus a pond. When I think about a pond, I don't want to swim in a pond. I think algae, I think dead things and all that kind of stuff. Your money is the same way. So if you're just building a nest egg or you're betting on something just growing from an appreciation standpoint, then it'll get shipped away by inflation. There's other risks to it and things like that. So really, again, just ensure if you're buying real estate, buy for the cash flow and let the appreciation be the upside bonus. All right. Rule number two. So rule number two is secure long term low leverage finance. So first, I'll start with a back half of that statement, which is low leverage finance. I typically think about low leverage anywhere between 70 and 80%. If you're starting to get up there in that 90 for 5% leverage or we're starting to see now real estate loans like in 2008 that are 110% leverage and construction cost built into the leverage and things like that. I'm not saying you can't win that way. I'm just saying you're you're putting yourself in a risky position. So I like to know that if I put a down payment on a house or I buy it right, meaning I buy it under market value and that there's that buffer in there that that low leverage allows me to withstand some some downturns in the market cycle starting to get spun up there. Yeah. So one of the things that was actually really interesting is when I was working at the bank, community bank, before I got started in my career, I was talking to the president of the bank and I was thinking about doing some real estate investing and I knew enough to be dangerous about all like the terms and all that. And he's the guy said something really wise to me. He said Caleb, I always run deals and if it doesn't make sense for like a 15 term, like I I wanted a 20 year term, but he's like running at 15. And if it doesn't if it doesn't work at 15, then just know that a lot of things need to happen well and a lot of areas could go wrong. If you're trying to like make a deal happen just because you're trying to fit it into the term. I think majority of people that are into real estate and do it well understand the power of leverage. I think, yeah, even and we've talked about this like even Dave Ramsey who's like anti leverage. He got he did something as as relates to terms that hurt him in the long run. And so we just have to be like I think we have to understand that. And so when you use leverage, make sure that you can use it wisely. And I think the second part of that is understanding the terms. And if you have all of all the terms and leverage has to be like perfect for this deal to work, that might be telling you that the deal is not as valuable as you think it is. Yeah. And the front after that statement is long term. So long term in the residential space is 30 years. If you can extend it further, that would be great. And the commercial space like you were saying it's usually around 20 years. I typically run my properties through just a 15 year just to see what that would look like as well. But the reason why long term matters is one, it helps you from a cash flow perspective. Now to be clear, you are going to pay more interest over the course of the loan. Absolutely. But to go a little anti Dave Ramsey here, it bumps your cash flow up. And then that cash can go be leveraged into other assets to continue allowing you to grow your real estate portfolio. Can I just share something that gives us perspective? So the same bank that I got the other wisdom, the owner of the bank pretty much said Caleb, the best tool for building wealth is a 30 year mortgage. He says, I cannot believe banks do this. And as a result, their small community bank sold the note because they couldn't hold on to that risk for 30 years. Think about it. Somebody is saying, I am going to give you money and have you get to pay it back and with all inflation, all these things like with less valuable dollars in the future. And oh, by the way, in most cases, we're seeing we're seeing notes for under 4%. So I've seen them under 3%. You think about that. That's insane. That's super valuable because people can then go and create value in home prices, have in the past increased more than even the percent that were the mortgage. So it's just it's really interesting. And it's I think it's really valuable if you can understand not only leverage, but terms. Yep. Absolutely. All right. So what's real number three? The last one is no different than your personal finance situation. Keep cash for a rainy day. It's not a matter of if something will break in the home or the real estate property or whatever. It's a matter of when and a couple of situations I would throw out you is in 2020. I had two different instances happen to me. One, I had an HVAC break on one of my property that needed to be replaced. And HVACs aren't cheap, right? So that one cost me about 5400 bucks. So it's not the end of the world, but it wasn't a great situation. And that's why when we go through running the numbers, I'll show you how you can kind of set aside money for those types of situations. And then the last one right after that is I had minor water damage because a tenant had a faucet leak and things like that. So keeping cash for a rainy day allows you for people not paying their rents, any capex issues or any issues or repairs or things that come up. And it's just a general rule of thumb, just like in your personal finance, to have a short term buffer of cash to whether you threw some of those difficult times. It's interesting because in business, I have the same advice. It's like, yes, does how much how much value does having money sitting liquid that might not be earning you great rate return? Like that part of investors slash entrepreneurs, like kind of inside, they're like, ah, I don't like that. But at the end of the day, what I would say is because of that, you can then do business the right way. And then you're not set behind or you're not having to do a fire sale because something unexpected happened. And now you have no money to cover that. So it's one of those things. It's wisdom. And it will, it's that foundation that will help you build a consistent wealth. Because if not, it's your role in the dice. And that's, it's ultimately a insurance at a minor scale. I mean, we, we ensure our properties because we don't want something to happen to wipe our whole wealth out. And so, um, yeah, I love it. I, in that last one, I generally use about a three to four month buffer there. And that's paying the mortgages and taxes and insurance. I don't keep like property managers and vacancy things like that in that cash buffer. And then once my cash gets a little bit higher than that, that's when I say, okay, now I've got a little bit of extra cash to play with. How do I go make the next deal happen? So, um, I agree with you. There's, there's a part of me that's like, you need to always continue to spend your money, like continue to, um, move it in motion. But having a three to four month buffer gets you through times where the government says you can't evict people and things like that. So, so rule number one is buy for cash flow. That's right. Rule number two is understand leverage and terms of working with debt. Is that, is that fair? Yeah. You want to secure as long of a term as you can at low leverage. Um, so basically don't take 100% leverage. And then number three is, uh, keep cash for rainy day and I love it. Anything that you want to add to this idea of framework as relates to real estate investing. Um, no, that, that first one is the most important one though, because I get questions all the time because, you know, where I live in Nashville, the national market's just booming right now. We have a housing shortage in Nashville. Uh, there's a neighborhood near where a friend that I friend of mine that lives. Um, there's a neighborhood near a friend of mine who's building 25 houses. Um, they're going to have them on, um, ready to move in in March. There are 25 hundred people on the wait list. Oh my goodness. To get a lot there. So a lot of people right now are saying, should I buy a lot and just flip it and things like that? And I believe if you have that risk tolerance, I'm not saying you can't make money at it. But I'm trying to prevent downside and buying for cash flow is the number one thing you should think about in real estate. And, and it also helps you knock it into the hype of certain things because you can see house prices potentially skyrocket. But as a result, you might be able to highlight, Hey, this is I'm just getting on the hype train at the end of the day. I wouldn't be able to make this up. I didn't sell the house. And so again, we're getting in the weeds. The cash flow is the metric, uh, as a real estate, that trumps almost every other metric out there and everything else is important. But at the end of the day, cash flow is the metric that you should be focused on. Um, I want to give your show a plug ice cream with investors. If you're, uh, love listening to podcasts, you might be listening to this one on my show, uh, head on over to ice cream with investors, and subscribe to Matt's, Matt's show. And he's bringing on incredible gas. He's breaking down concepts that we have in this series. And if you want, if you're, you're at all thinking about real estate being a part of your, of your investments or if you want to do real estate more of a full time, you'll gain a lot of value from Matt's show. Anything that you want to add to that. That's it. I would appreciate anybody liking subscribing and, uh, tuning in. All right. Go out and live an intentional day. Thank you so much for listening to the Better World Podcast. It would mean the world to me if you could hit subscribe, leave a review, and share this with the people that you know and love.