In other words, buying for apprecia- tion might be great during an expan- sion, but because no one can consis- tently predict if the ball will land on red or black, buying for appreciation is comparable to gambling. The ideal approach is to buy for cash flow. Cash flow is the profit generated by a multifamily invest- ment after all expenses are paid. Simply put, buying for cash flow means that the investment will gen- erate a monthly profit from day one. The success of the deal is less based on market-driven appreciation and more on how the investment is cur- rently performing. When you buy based on cash flow, fluctuations in rental rates will still impact the value of your investment. However, since the property is gen- erating a profit from the onset, you have a built-in buffer. At the mini- mum, you can cover your expenses and not be forced to sell. 2. SECURE DEBT FOR DOUBLE THE LENGTH OFYOUR BUSINESS PLAN Because the value of an invest- ment is always subject to fluctua - tions in the market, you must also secure long-term debt. Imagine your business plan is to perform upgrades on 100 percent of your units over a 24-month period with a goal of increased revenue. You secure a three-year bridge loan with the intent to refinance into a con - ventional mortgage once the reno- vations are completed. If everything goes according to plan, that’s great. Now, imagine a global pandemic breaks out during year two and you are unable to achieve your desired rent increase? Once the bridge loan’s term ends you will likely need to bring cash to the table for closing
costs. What’s worse is that you may not be able to secure a refinance at all. Now, you’re facing foreclosure. To avoid these scenarios, it is recommended to always secure debt for a term that is at least twice the length of the business plan. In other words, if you expect renovations to take 24-months, secure debt with a loan term that is at least four years long. This, like buying for cash flow, will provide an extra safety net. 3. MAINTAINADEQUATE CASH RESERVES The final principle is to create a sufficient reserve budget. Cur - rently, conventional lenders are requiring higher reserve budgets. On some loan products, this could mean upwards of 18 months of principal and interest. Keep in mind, requirements of this amount are in response to COVID-19. Even when lenders are not requir- ing large cash reserves, you must voluntarily elect to place funds in an account as a safeguard. This will pro- tect you against fluctuations in the market and cover other unexpected events over the course of the busi- ness plan’s execution. This includes an upfront fund at closing and a por- tion of the revenue each month. A cash reserve is the final safe - guard in the event of a major reces- sion and negative cash flow. It will allow you to cover the debt service and expenses and avoid a situation where you’ll be forced to sell.
THIS SYSTEMWORKS I have faithfully adhered to these tenets since I began raising capital to buy multifamily real estate in the form of apartment communities in 2015. By practicing these principles, my company was able to add just under $300M in assets in 2020, despite the pandemic. This past year has increased our portfolio to over $1B in assets under our management. Regardless of how long the pan- demic lasts or the legislation passed by the government, if you stick to these three principles—buy for cash flow, secure long-term debt, and set aside adequate cash reserves, your portfolio will not only survive, but thrive throughout your real estate investing career.
Joe Fairless is the Co-founder of Ashcroft Capital which has over $1B in assets under management. Joe created
the podcast, Best Real Estate Investing Advice Ever Show, which is the longest-running daily real estate podcast in the world and generates over 500,000 monthly downloads. He is also a proud Member of the Texas Tech Alumni Advisor Board for the College of Media and Communication, as well as being recognized as Outstanding Alumni at Texas Tech University, where he is a former Adjunct Professor. He is currently a Junior Achievement Board Member and Volunteer for the Cincinnati chapter and has been recognized by the Junior Achievement’s Free Enterprise Society. Joe volunteers at Crossroads Hospice and was recognized as Multifamily Investor of the Year by Think Realty Magazine.
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