"The things that happen to those who wait are those left by those who came first."
Reduce the risks of real estate investment with a system
So, start by getting there … make sure you are prepared with a plan based on a well thought out and complete system. What is a complete system? He who is autonomous and reproducible. It starts with where you are now and ends with … well, it really should never end because it has to be repeatable. This, while being autonomous, allows this perfect system to work successfully forever.
System planning begins with the end, though … with the exit strategy, and echoes where you are now … the beginning. The most familiar description of this process is reverse engineering. It works. Its success is due to the fact that its use of resources is incredibly effective. Focusing on a pre-determined target eliminates the waste you find when you have a good idea, develop a product or service that you like and you believe others will want, but you discover that you were wrong and that you have wasted a lot of resources. time and money … yours and those of others.
This is especially true with investment in real estate. Real estate investing should not be risky. You read correctly. How many times have you heard other people say how risky it is to invest in real estate and all the reasons that explain these risks, you should not pursue it. What they miss, and that is what makes it risky … for them … it&39;s knowledge. Their box is too small. I will explain this last sentence a little later.
One of the most important elements of real estate investing, in fact any investment, is risk control. If you do not control the risks in your system, you will take a lot of unnecessary risks. So, check the risk.
The first risk control should be to address the risk of financing the purchase and rehabilitation of the asset or note. The obvious risk here is the ability to repay the debt … the debt service … and the risk of losing the asset for which you are using the financing.
Regarding the last element, the risk of losing ownership, our feeling is to obtain financing / financing that is not directly related to the asset itself. This means that you will be looking for financing that would be defined as an "associated debt" as opposed to a "terminable debt". The difference is should, or will be, obvious. If you are in default on the associated debt, the property is not jeopardized. In addition, another significant benefit of the associated debt is that you do not have to repay it immediately … as you would if you were using a lien debt. We call this type of funding the use of "species-like substances". The advantage of this type of financing is a major factor contributing to both the reproducibility and the autonomous attributes of the perfect system. We will discuss it a little later.
In the first case, being able to make debt service payments involves a little creativity based on the structure and terms of the actual funding source. The fact that our funding source is not based on long-term debt makes this problem much easier to solve. One of the best ways to remedy this problem is to place a portion of the initial funds in a cash reserve. This cash reserve is specially created to pay the debt service over a given period. The duration of the period covered (reserved) depends on the investor and his schedule. The purpose of this reserve is to "buy time from the investor" to develop the system so that it can take care of monthly payments while developing the vehicles. ;investment.
Let me explain. Let&39;s say we bought a property, rehabilitated and reversed. If we used a lien debt, when we would sell the property, we had to repay the debt first, as shown in the following example.
We bought a house for $ 35,000 and spent another $ 15,000 for the rehabilitation of this property. We sold the property for $ 75,000 for a profit of $ 25,000. The first thing we need to do is repay the $ 35,000 debt … in fact, it would be a $ 50,000 debt since the $ 15,000 was also covered by the loan / financing. That would leave us the benefit of $ 15,000 to do as we please. This is a very good way to make money by investing in real estate.
One of the problems with this example, and this is a very common example of investment / real estate financing, is not only that we have to pay off the debt right away, but that we need to aim for new funding for the next transaction. .. and all we need to show for this (in this example) is a profit of $ 25,000.
What you need to do is speed up the timeline for profit. To do this, you just need to disconnect the funding from the asset. Use the associated debt. It&39;s as simple as that. The power that this gives us as real estate investors is vast. The impact on the overall system is huge.
Here I would like to comment on a comment made by a very clever guy … Albert Einstein. When asked what, in his opinion, was the greatest invention of the 20th century, he replied: "Compound interest, those who understand it earn money with those who do not understand it". Composing, or exponential expansion is a very powerful thing … almost as if she had a life of her own. How powerful can it be? Well, if you take a penny, a small lean penny, and you double each day the next day and add to the previous day … as in the first day it&39;s a penny, the second day you add 2 cents, the third day you add 4 cents, the 4th day you add 8 cents and so on, what do you think you would end up with after 30 days? The answer comes later. Think about it now though. The answer may shock you.
LTV is another problem with this type of financing. Few preferred sources of debt will give you 100% of the funds you need to buy and rehabilitate the property, unless the value of that property is much greater than the amount of funds you request. This ratio is called LTV or Loan to Value. If you can get a loan / value ratio (the ARV / NPV ratio / number of repairs after repair and including funds for rehabilitation) can reach 80%, tell me where. It is quite common that ARVs / LTVs reach only 70-75%, with hard money being even lower. This would mean that you would need to have a lot of potential equity in the property after rehabilitation, or need another source of funds … like money. Again, this is not a great way to finance your turnarounds … although this is the norm.
The ability to use the funds more than once, but to pay them only once, is an application of the same exponential expansion as that applied to real estate investing. It means that your system is repeatable. That&39;s how it works.
Let&39;s take the same house from Example 1. Let&39;s also say that the source of funding we used was a form of debt associated with the place of debt that could be subject to retention rights that we used in the 1. As we do not need to pay off the debt right away, we can use it again … on the next deal. We do not need to get a new loan, we do not have to pay again for the use of the funds we acquired with the initial loan, and the funds from this loan generate a new set of profits on this next house flip. Then we continue to repeat these steps again and again.
It also means that due to the repeated use of the same funds, the actual cost per use (per property) of these funds is reduced for each reuse. The only other problem is the debt service on these funds, but that&39;s where the cash reserve comes in. The cash reserve saves you time to develop your system. This money reserve is what makes this system standalone. Now, it only remains to develop the system to the point of controlling it automatically.
This is not where it ends, however. All you have done up to now is to configure the system. You must always apply it. You should always have a plan of what to do with your profits from each flip in order to maintain it and reach your ultimate goals. Everyone has their own goals in real estate investing. The specific goals are what you need to do with the profits. The mechanisms to which you apply these benefits are called "exit strategies". Exit strategies are what helps you achieve those goals. As always, my ultimate goal was cash flow. "Cash is King" is a common phrase. The key is to keep it coming. To this end, I am the overall investment strategy of "Flip to Hold," which means that I return properties / notes to generate profits that I use to buy cash flow properties. I only buy "conservation properties" with money (I can hand it back later to get my money out … but that &39;s for another discussion). So, let&39;s expand this system and put it on steroids so to speak. Let&39;s go back to Example 2 and remember that after the turnaround, we have $ 75,000 to use as we see fit in our overall system. It is here that the pleasure begins. You thought we were having fun? Hold on. It&39;s getting better. From the product of Example 2, we can use (reuse) upfront funds of $ 50,000 for purchase / rehabilitation to buy / rehabilitate another home. We take the $ 25,000 and (no, do not spend it, respect the discipline and you&39;ll be very grateful for doing it) cancel it. You can place it in an investment that you can access quickly, without penalty if you wish. If you can do it, why not miss this opportunity?
When you return this next house, the one you bought / re-vested with the reuse of the original funds of Example 2, you must have an additional profit of $ 25,000 … to add to the profit "in the bank" previous to the original home of the example. 2. You have now added $ 50,000 to use. Again, discipline is needed here to stay with the system. I bet you are looking at that $ 50,000 and you say to yourself, "now I can buy a house with cash at the checkout" … and you would be wrong. Well, you can do what you want … it&39;s your money, but it would not follow the system. The system says, "to buy another house you will return to make profits … just like for the house you returned from in example 2". You would now have two houses to go back to make a profit, both using the same (but paid for once) money generating profits and reusing the principle (buy / detox money) over and over again. . Each reuse of these funds will generate another benefit.
Now, the pleasure really begins. Investing in real estate should be fun … no? If you have risk controls in place, this may be the case. Do not forget that our cash reserve still carries debt service payments for us as we expand our system … and we are not done yet. How do you ask? Let&39;s take stock of where we are at this point:
1. We have debt, an associated debt, which is repaid by our cash reserve.
2. We used money as the stuff of our financing to buy / rehabilitate homes to the point of having two repeatable turn-around lines to generate profits, when each house is returned, reusing the funds again and again for purchase / rehabilitation), they will continuously generate new profits.
What to do next? Let&39;s expand our breadth of repeatable repeatable homes. This means that when we return these two houses, the profits will buy us / rehabilitate another line of reproducible returnable homes … so we will have three. Return these three houses, and then there were four. I say four because now your money supply needs to be funded again to give you more time to expand your range of homes. The individual investor decides on the size of the additional rows of reproducible returned homes. Do not take more than you can handle. This too is part of risk control. D & 39; AGREEMENT. For example, suppose we have four rows of houses to flip together, allowing us to expand our repeatable house set as our team can only manage four houses at a time. It&39;s very good. That&39;s all you need to do in most cases. Here&39;s why. Using this system, you will have four basic uses for your flipping profits. With four houses to return at a time, it gives you one for each … if that&39;s what you want. Here are your four options:
1. Add money to your money pool. Keep an eye on the reserve. This is the guardian of your system. If it&39;s dry, you may have problems. In addition, it is important to mention that the funds you use in your money reserve should pay off the debt … not just the minimum payment until someone calls to get the payment "now" … like a balloon. In other words, do not just make interest payments. It&39;s just stupid … sorry for the franchise, but … The amount you place at the origin, and add to the cash reserve, should be based on what you need have to buy you the time needed to develop the system. Think about it very carefully.
2. yes It is now time to start pocketing profits.
3. Buy / rehabilitate another home to expand your breadth of repeatable flip houses.
4. Use these funds to start buying your cash houses. You see, these funds will continue to be generated each time you return to the designated home. That&39;s why I said, when creating your house in Example 2, that you had to be disciplined and not use these funds for profit or to buy the cash-house. If you had it, these funds would have generated only a single cash flow. Waiting until now will generate what could be an unlimited number of cash flow houses … from the same funds. Timing is everything. It was not the right moment, now.
Just keep repeating the system as you see fit. Think of this as the gift that continues to give. As you can see, it is amazing to be able to combine the power of exponential expansion, discipline, the perfect system, and privilege-free funds.
$ 10,609,878.59 … that&39;s the answer to the question "What is the interest of compound capital?", If you take a dime, and you double the daily double and add to the previous day. .. as on the first day it&39;s a penny, the second day you add 2 cents, the third day you add 4 cents, the fourth day you add 8 cents and so on, what do you think would you meet after 30 days? Impressed?