It’s time for Ask The Guys … the episode where you ask, and we answer!
We’re tackling timely topics … like how to manage property and portfolios during the coronavirus pandemic … and more!
Remember … we aren’t tax advisors or legal professionals. We give ideas and information … NOT advice.
In this episode of The Real Estate Guys™ show, hear from:
- Your doctor of discussion and host, Robert Helms
- His nurse of knowledge and co-host, Russell Gray
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Using your mortgage as a tool
Our first question comes from Suzanne in Sonora, California.
She says, “Hey guys, I’m 56 years old. I have a duplex valued around $270K with $210K of equity. I read Rich Dad, Poor Dad, and I’ve used equity lines in the past to buy other properties, but I’m at a knowledge impasse.”
Suzanne says her problem has to do with mortgage payments. If she takes out more equity lines to buy more properties, eventually all her profits are spent on making loan payments.
Is she doing something wrong?
Well, Suzanne, you’re really not doing anything wrong.
A mortgage is a tool. But like any tool, it has to be used for the right job, and it has to be used correctly.
The obvious risk here is that you take equity out of a property and then you finance it using short-term financing … and then you make a long-term investment.
So, a basic rule of thumb is … don’t borrow short to invest or lend long unless you are a bank. Otherwise, you can end up with a cash flow problem.
The other thing to keep in mind is the state of the market. When you’re playing this game at the top of a market, when the cap rates are very low, the cash flows on new properties are very low.
The danger you run is that if the economy takes a downturn … like we are experiencing right now … rents go down, and you end up with negative cash flow and negative equity.
So, the idea is that when you pull equity out, you want to lock in long-term, permanent financing.
The other secret to doing this is what we call arbitrage … purchasing a reliable stream of cash flow that will take care of making the payments and providing you a positive net result.
If all your payments are being used to make equity payments, then you probably haven’t made the smartest investment with the equity you extracted.
The real key here is to borrow long and invest shorter. Focus on the quality and durability of the income and the recourse.
Multifamily or industrial warehouses?
John in Fargo, North Dakota, wants to know if we had the opportunity to invest in syndicated deals in the upper Midwest, the Dakotas, or Minnesota in new construction multifamily or new construction industrial warehouses … which would we lean toward?
Well, we’re not going to give you advice on what to do … we don’t give advice. But it is a fair question.
New construction multifamily is a bread and butter product where there are great loans available and an absolute need that rarely goes away.
New construction industrial warehouses are places that store stuff we need.
Here are a few things to look at as you make your decision.
First of all, the market is going to matter a ton … so what is the current supply? What’s the current demand? What trends are happening that are going to influence the market?
For example, if a trend is that more loans are available at lower prices, then that means people that were multifamily tenants might become buyers.
On the other hand, if you see that certain businesses are withering and certain businesses are thriving under something like COVID-19, does that mean there will be more or less demand for warehouses?
All things being equal, some of the safest investments are in housing because people need a roof over their head.
And like any syndication deal … the team is a big factor. Make sure the people you are partnering with know what they are doing.
What to do with laid-off tenants
John in Helena, Montana, says, “Due to recent events, I have a couple of laid-off tenants who have done the right thing and reached out to say they will struggle making rent. Do you have any creative ideas to keep me from being the last bill paid?”
Creativity is really part of the big picture here.
All tenants have decisions to make every day about where they put their money … and most tenants aren’t sitting on months and months of savings.
The average tenant probably has less than a few weeks of savings.
We’ve had several multi unit buildings over the years, and we always had a tenant who was our boots on the ground and eyes on the street.
We’d say, “If you’ll do some things like just pay attention and be available and take the trash to the curb, we’ll lower your rent by a couple hundred bucks.”
It’s not free rent like an apartment manager … but it’s a nice discount.
So, if you have someone who can’t pay you in dollars … you don’t want to forgo the rent … but you can practice some forbearance.
Find other ways for them to contribute to your investment. Try cutting rent to a third for now and they can owe the rest later.
You absolutely want to have an open dialogue … especially with people who were proactive and came to you with an open dialogue.
This is a great opportunity to build your brand … to build a reputation as the kind of landlord people want to rent from.
You also have to think of the other side of the equation, because you have your own mortgage payments and taxes to take care of. Disrupted rents affect you too.
Be very aware of what your options are with your specific lender in terms of any relief YOU might get.
Remember, everybody is going through this. There seems to be an unprecedented level of community cooperation. Be proactive with your lender and other people you’re going to need to pay.
It’s also smart to talk to your attorney so that whatever arrangement you come to with your tenant can be binding.
More Ask The Guys
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