By Darcy Marler
“Hello. My name is Darcy and I am a real estate addict.”
I love to buy real estate. My wife says I’ve never seen a building I didn’t like. I love to look for deals. I love to do the quick analysis to see if something is going to work for me. I love to calculate the cash flow and cash-on-cash returns. I love to negotiate the terms and conditions with the seller. I love to come up with a plan and a JV partner to buy the property with me. I love all of that stuff. In short, I love the hunt.
All of my life, whenever I have had money to invest, I would make sure all of my money was working for me. I thought money not invested was being wasted. For example, as a teenager with a few hundred dollars I would invest in term deposits. The minute it came due I would be down at the bank reinvesting it. As I grew older and I started doing flips, the minute I sold a property and collected my money I would be on the hunt for the next property.
So I used to buy, buy, buy. Unfortunately, that often left my finances in a precarious position as all of my cash was always fully invested. Invariably, I would have cash flow issues and be left wondering if I would be able to buy groceries. I was the poster boy for asset rich and cash poor.
To break out of that cycle I decided to a) work less with my own money and more with JV partners and b) stage my purchases better. For example, in 2012 my wife and I were able to buy nine properties – all with our own money. Then, normally, we would have bought more properties in 2013 too, but this time something strange happened.
I went cold turkey (something very new for me) and didn’t buy a single property in 2013. Instead, my wife and I used that year to normalize the properties that we bought in 2012. We renovated the suites that were in bad shape, kicked out the bad tenants we inherited (legally of course), increased rents accordingly, filled empty suites, cut operational costs, found new forms of revenue, and refinanced several properties.
By the end of 2013, a surprising thing happened (at least it was surprising to me); we were in the best financial shape of our lives after normalizing these buildings. Our cash flow was higher than ever. Our cash-on-cash return across our entire portfolio was higher than ever. Our cash reserves were higher than ever and our loan-to-value percentage (the amount of our total mortgages versus the value of all of our buildings) was lower than ever across our entire portfolio (around only 58%). In short, we made money by NOT buying real estate.
In addition, this activity caught the attention of some new joint venture partners. As a result, in 2014, we went on another buying spree and bought six new buildings, but this time these were all bought with joint venture money. This helped keep our financial house in order. Following the pattern, 2015 was another year of normalization.
By purchasing at a slower pace and using JV partners more frequently, I am nowhere near as stressed as I had been nor am I flirting with cash flow Armageddon all of the time. I have learned to stage my purchases and work in plateaus. Now my wife and I will buy new properties, let that level off in a plateau, and then when we are in control, we buy more properties again. The financial benefits of this new approach have been noticeable as well.
Timing the Exit of Your Properties
When you buy real estate 100% with your own resources the monthly cash flow is 100% yours as well. When you buy a property with a Joint Venture partner traditionally (as the real estate expert) you won’t see any return from that property for five years or so until you sell or refinance. The first option is great for cash flow while the other allows a long-term return with no money invested.
Just like you can stage the purchases of your properties, you can also time their sales. What if you time the exit of your various joint venture assets so that you create an annuity and get paid something every year? What if you could treat real estate like term deposits?
Term deposits (TD) at your bank typically have terms (the length of time that you hold the investment) of one, two and three years; the longer the term the better the return. Buyers, usually retirees, will often split their available investment money into different groups and buy one term deposit of each term.
For example, they may start out by buying a one year term, a two year term and a three year term. At the end of year one, they will take the principal from the one year TD that has come due and buy a new three year term deposit. Then, when the original two year TD comes due in year two, they will buy another new three year term TD. This process repeats itself; every year one of the TDs comes due and a new three year term is purchased so that within a short period of time the investor has nothing but three year TD’s with one coming due each year. In this way the investor can maximize the return and ensure interest money is coming in each year.
Spend the first few years of your real estate investing career buying long-term rental properties with JV partners. Then after a few years, you can stop buying and just sell a building each year earning a nice retirement annuity. Those properties you bought with your own resources will create cash flow in the interim.
Joint ventures are great for long-term profits to the real estate expert who doesn’t have to put any money of his/her own in. However, they don’t typically help with your cash flow in the short term. For that reason, I tend to use my own money to buy properties that have exceptional cash-on-cash return with large positive cash flows. In this way, you get the best of both worlds. It is your own cash that will make you positive cash flow in the short-term while you wait for the JV deals to payout some time down the road.
Merging Flips into This Strategy
Just because your main focus may be on long-term rentals there is no reason not to mix in a flip or two along the way. For example, with the six purchases I made in 2014 (see above) I intend to convert one apartment building into condos. Another of the buildings was boarded up due to fire damage and will be brought back on line as a rental. A third building had unbelievably low rents but not a lot of physical things to fix up. Those rents will be adjusted. The final three buildings were close to 20% vacant and were in really bad shape. They need to be renovated and the quality of the tenants brought up while at the same time increasing the rents and filling the buildings.
We will sell the condominium conversion to bring in some short-term profit, while the other buildings will be refinanced and kept as long-term rentals with very good cash flow and cash-on-cash returns. Sometimes opportunities present themselves and a particular property might make more sense as a flip than as a long-term hold. Never be scared to take profit.
Timing is important in most investments but you can especially use it to your advantage with real estate. Learn to purchase your properties at a pace that makes sense for you and your situation – both your financial reality as well as your experience level. When you have your last purchase under control then go ahead with your next one. Buying too many properties at once can lead to financial headaches and a lot of lost sleep.
Similarly, you can use time to your advantage on the way out too. Long-term rentals that you own 100%, kept for cash flow, with a few joint ventures sprinkled in and sold occasionally, can give you a nice mix of short and long-term returns. This is also an effective use of your own cash reserves as you are buying when you can and using joint venture money when you are low on funds. This can definitely be the best of both worlds.
Darcy Marler has been a full time real estate investor for the past 15 years with experience in various strategies. In that time he has owned over 75 properties worth $37M. He currently buys apartment buildings in distress, renovates them and keeps them as rentals. Check out his books and blog at www.sabanabooks.com