Ways to Cashflow at a High Interest rate…and ways you shouldn’t!

what's going on everybody let us know that you can hear us um anyways we are leaving on our road trip today that's why we're coming to you a little bit earlier than normal um we have a almost a six hour drive today yeah absolutely so perfect chai says we can hear that's awesome great thanks for joining us a little bit earlier awesome okay well today we're going to be talking about you know people have been really trying to cash flow these high interest rates and it's been really difficult and some people are doing things that we don't think is a good idea in order to try to cash flow but there are ways that you can cash flow and think about cash flowing in these high interest rates environments um but before we get into the main topic we are going to go over our Twitter question of the week if Jerry can pull that up and Sarah we're on early because we're leaving today we're hitting our road trip our van trip down to McCall Idaho um so can you ask if you could pick any city and state in America to buy property in where would you pick it and um Holmes said the Greater Boston area in Massachusetts so we're not too familiar with that area South Carolina's on there too yep yep yep yeah yeah I uh it's funny like if you're a East coaster you know you kind of focus Sarah if you're a West coaster you're kind of focused there exactly James says Frisco Texas where's that where's Frisco at it's uh just north of Dallas a little bit okay and then response three is Ryan says Tennessee or Texas Nashville yeah yeah well Nashville got blown up it's booming there so Nashville's uh I think Nashville's cooked a little bit right now but I could be wrong it's getting pretty unaffordable yep all right let's quickly just jump into the topic for today we're going to be talking about high interest rates environments um well first before we get into that do you want to chat about the FED how they hiked rates this this week well we all know the FED increased rates so by a quarter point they're going to do it again so they say so I think I think the one thing that everyone needs to wrap their head around is actually they're not going to cut rates this year I think that's probably the biggest thing for everyone to recognize is they've been very clear in the first you know if if you just go back to a month ago they are going to raise rates potentially up to a half a point they already won a quarter so so just to get if they did cut rates they would just get back to where they were a month ago if they cut rates but everybody thinks that they're going to continue to raise rates and that's what um you know people on the Federal Open Market Committee have said so so I think you guys need to all brace yourselves for six and seven percent interest rates and some people are even predicting eight uh I actually think they're gonna keep because the inflation has come down significantly at least the reported inflation so so I think that you just need to wrap your head around wherever the rates are now you have to figure out how to make it work for the next 18 months that's the bottom line because if they continue to go up a little bit obviously financing costs are going to go up and cash flow is going to go down if you have variable debt or construction debt or whatever it might be so just know that whatever it is that you got about an 18-month run here and while the FED continues to control inflation and one of the problems that the feds or two two problems defense still has the first one is shelter costs so as you guys know because this is a real estate Channel real estate is not crashing in fact many of you would say here my Market's doing great it's going up okay that's inflationary so your wish is inflationary so that's not what the FED wants when rents are going up that's inflationary that's not what the FED wants so shelter is actually a real problem still as part of that CPI the other thing is wage growth and you guys probably know wages are not going down however I do think that potentially they could I think remember we talked about this before where the FED might be trying to grow unemployment if you can believe that so we'll see where wages go but right now wages are inflationary so so keep your keep your eye on what's inflationary wages and shelter costs right now are inflationary very very cool yep and so for those of you that are um just tuning in thanks for joining we're coming early from the road because we are um leaving today for McCall Idaho so and that's a good transition into our topic for today which is with these high interest rates and we're gonna they're gonna be around for a while they're gonna be around for at least a couple years um you need to know how to cash flow your properties and a lot of you are saying here that you know you're thinking about just selling and maybe buying something else that cash flow is better but the truth is is if you're in a low rate right now it's very hard to find cash flowing properties especially now that the rates are at I think 7.25 would be the best rate you could get on a single family currently so I just think that that's probably not a good idea in this current environment unless you found some kind of really good deal so you need to really understand how to maximize um the situation so if you're enjoying the content please hit the like button it really helps us out helps us promote the show and let's dive in so I wanted to start with things that people shouldn't do right now because I think it's very tempting when you're trying to cash flow to um you know do certain things and you know you're kind of pressured by the bank in different places did you disappear on me I had to go get some coffee oh so anyway so the first thing that people shouldn't do is interest only loans so can uh can can you touch base on that yeah I think that yeah obviously guys this is one of the risks and this is where a lot of people are in trouble right now is they have these interests only loans that are actually adjusting based on what the FED is doing so if you're if whatever it is that you have whether it's a a line of credit or a HELOC or um you know maybe your commercial building or it doesn't really matter if it's variable um then you are exposed to of course whatever the FED does and I think what you want at this point heading into this next Market is you want certainty you want certainty of you know that debt cost that's the biggest issue so just be very careful heading into this next environment because we don't know how far the vet is going to go and you want you what you want is you want to fix straight loan that cash flows and then you can always refinance um if rates go down but what you're trying to do is hedge if rates go up exactly and then also you know with an interest-only loan you aren't able to refinance if your value goes down and that's for any kind of loan so if the value of your property happens to be less than you bought it for you're losing your ability to refinance so then you're stuck in this adjustable rate loan where if that would happen to you on a 30-year fixed at least you would be in a fixed price so that's precisely what's happening to the syndicators right now is that they in many cases the properties that they bought two years ago three years ago even one year ago actually cash flowed and you know based on whatever the debt costs were at the time and a lot of those syndicators what they got were floating rate loans and they thought that they could increase the net operating income or increase the value that way and of course refinance into what would be a fixed rate so that is kind of the model the model is get your short-term Bridge debt or interest only if uh and and then and then fix the property or uh value add the property and then what you do is you put a fixed rate loan on that's the model so what what's what's happened is the first step has been successful and for most people in other words we're seeing a rent growth we're seeing nry increase and all that kind of stuff but now because the debt costs are up there's no Cash out refinance like Danielle said and therefore if you're trying to sell it which is certainly another option now the buyers are taking a look at their cash flow and so they're not going to offer you the price that you thought because their cash flows last so what they're doing is prices are adjusting and cap rates are actually going up for commercial and this is precisely the problem for most multi-family syndicators most Office Buildings most retail anybody who has any kind of interest rate maturity or refinancing or anything that the you know is the bank is calling the loan or asking you for more Reserves there are no options you have to actually fund the difference so the Cash out refinance is not on the table right now for most people and that's actually um because most people had a capital gains strategy and that's actually the real problem most people believed that real estate always goes up well it doesn't and as you guys can see right now this is just one of the levers that is creating the the values to actually go down even though the assets are performing probably like many of the business plans that were presented yep and so mistake number two in this is very similar to what we just touched on but it's getting that adjustable mortgage so you know not just interest only but also adjustable um I think people are on a lot of pressure from their real estate agents and their mortgage brokers and their Bankers to do adjustable loans because they're such a low interest rate and the the theme is rates are going to go down in the next you know six or 12 months and we just refinance so that's the mistake I get it like if you're a mortgage officer like we we know some that are super optimistic and that's fine but you can't predict that rates are going to go down and I think a lot of that's kind of where everybody is right now it's like all rates are going down so I'm just going to kind of going to do this adjustable rate well again these adjustable rates float and you um they're unpredictable so you can't and they're these loan officers that you know I I don't blame them they're they're just trying to do business but there's no way that they can predict where rates are headed and and you as the buyer or the principal you need to just do a fixed rate that even though adjustables may or may not be a better option for you today in other words a lot of times what happens is a the more risky alone is going to require could require more down and um and you know don't forget there's somebody on the other side of that loan so you have to um you have to hedge your risks and the risks right now are of course the FED we keep coming back to the same issue exactly and you know um Alex also said you also can't predict that home values are not going to go down with your which your mortgage broker doesn't talk about and labosi said mortgage officers love selling adjusted rates yeah well like you gotta think about it guys like you know I the real Realtors and mortgage officers they make their money on doing deals they get commissions and that's okay that's how the business is and so when rates are going up that certainly means for both of those industries that they're making less and so they're going to do whatever they have to do to sell whatever they have to sell so you just need to know uh is that you know do you do you believe it or not and I personally don't believe that rates are going to go down this year for sure and uh if they do go down they're going to go down a little bit the first thing they're going to do is pause after you know they're going to raise rates again that Court according to them in August and then they're going to pause we'd be very lucky to see a rate reduction in 2023 and it's possible that we see rate reductions in 2024 but I do want to caution you one thing remember what happened when rates were low inflation so when rates go down people start buying things again and that is precisely what the FED is concerned about so I think you should probably just brace for whatever these rates are and for the next 18 months and you've got to figure it out and what's going to happen is the sellers are going to have to adjust their expectations yeah and and also um you know people you know rely on their mortgage brokers and Realtors but back in 2008 you know they were saying the same thing right like it's gonna be fine you can just sell you can just you know Rate rates weren't really high then but they were basically saying this is a great deal you just buy it sell it later do an interest-only loan no problem so those aren't the people sales people are never the people you want to get advice from you just want to utilize them for what you need them for to sell you something but the homework and the due diligence is on you here's the greatest thing just take a look at the comments you know there's a number of reporters that you know digest the the FED minutes and and what some of the different people on the committee are saying and you know there's even what it's called Dot Plot that's d-o-t-p-l-o-t take a look at Dot Plot so Dot Plot is a indicator for of what each chairperson on the committee is going to do in the next meeting so they have what's called a Dot Plot and you can actually see the what you know because obviously when you get a committee of that size I think there's 18 of them um you you know you're going to have people that think that race should be cut you're going to have people that think rates need to go up and you're going to have people that think that it should be paused that's the kind of the whole point of a committee but just focus there just do your research there and and this whole time guys the last year year and a half all the stuff I've been doing on my Friday videos and all that stuff it I read the feds minutes I see where their head is and and and we're making all our decisions in our company based on what the FED is saying you can make a serious Mistake by not doing that little bit of research and listening to just a realtor or a mortgage broker and I'm not saying you shouldn't listened to them but I think you should go and educate it as to what is really going on yeah and then I see all these articles you know oh rates will be back down to five percent by the end of the year and you know Sarah brought up a good point you know when they do start to lower it will be very slow well there's no question again there think about how long it's been since they raised rates it it was 11 times all at quarter half I guess early on it was three quarters but they're not going to lower rates buy three quarters of a percent you know the first thing they're going to do is pause and I would guess that they're probably going to keep the paws and watch all the inflation numbers and watch for wage growth even though I saw somebody in there in the comments here said that wages are not growing that hasn't been my experience but it's it's definitely um as an employer of uh we got almost 300 people we've found that it's pretty competitive out there and what's really happening is there's a lot of people that the that aren't participating anymore in the workforce so um but it's possible that you're seeing something different anyway so those are the things you got to watch and I believe that um you know maybe next year we're going to see some quarter points reductions but that what does that even really mean what is it gets raised from seven and a half to seven or eight to seven and a half or you know or maybe you're in the high sixes again like that really isn't going to move the needle very much when a lot of these products were at three four percent uh before so you know it's gonna be it's gonna be a long time before they get to those numbers again if they even do and and don't forget guys almost if you look at the Historical averages that's where we are right now so the people who you know just got into real estate in the last 10 years you know they've been super spoiled with these low rates and when when you enter at low rates that's your expectation but the truth is is that's not historical well seven is really not that high seven is not that high the issue is the seller that's the real issue the price went up on the actual real estate and when that can happen when there's low debt that's why prices go up people can afford to pay more because their payments are less now rates are up interest costs are up and so the big disconnect is actually the price of the real estate itself it's already corrected and it's continuing to correct on the commercial side what hasn't happened is we haven't seen it on the residential side you have a few comments here so and he said that the FED does not meet in August so I think they might meet in September that could be yeah um Mr Wright is asking with the election year coming the printing press will be coming back on do you think that'll have any effect on rates well that's a really good question the I think that if that does happen you know we can't predict that's going to be more inflation so the you know if you take a look at the money supply and the money that went out to people during a pandemic and I I you know in the form of in the PPP and the eidl and of course the stemi money and all that stuff that's actually what's created some of these inflationary issues so depends on how much and where you know so it's hard to know but and of course we don't even know if that will happen it's very probable that the administration doesn't matter if it's red or blue is going to do whatever the people need or want prior to the election and then um TG had a good question they're asking would you still buy single family and just put more of a down payment or would you simply not buy it this time so that's a great question so here's my concern both Daniel and I are concerned about holding too much cash even though we need reserves and cash so you got a little bit of a double-edged sword where you want to have dry powder for any kind of potential you know call it the leveraging or any issues or any any any any defaults on real estate you want to be able to act quickly on the other side of that you want to get into something that cash flows because you know that's so that's what we do so we we kind of keep a balance I always like to have cash but I always don't want to have too much cash because I'd rather have it in a piece of real estate that's hedged with inflation than seeing in a bank account however you know right now the the the the one month T bills are somewhere in the five percent range and and you can you should be able to get Bank interest at you know at least four or more four and a quarter is what I've been seeing so those aren't bad returns either by just having cash in the bank so it's going to be interesting but I think the the answer to the question is if if it cash flows it's like Danielle just did a deal what two months ago and it cash flows so you know she bought an affordable home in Scottsdale that cash flows and um so and she got financing and I think your rate was pretty high yeah it was 6.9 6.9 so but at cash flows and so she she didn't want to sit on cash so she made the choice there and it at cash flow so but and I did have to put 20 down for it to cash flow so good question yeah and I think too I think of just once rates do go down home prices probably depending on the state of economy the economy will go up so that has something to me you have to consider um you know you read that article um stating that you know because of inflation home prices are going to go up over the next 10 years well I think that's if you just take a look I always tell everybody you know what was the price of the home you grew up in I think that's an interesting thing to think about because you know inflation does grow pricing you know does grow value and so what we're looking at right now is if you guys are a lot of these people if you're just buying a home to live in I think that's a little bit different than if you're a black rock or some of these big companies or you know on the commercial side where you're actually looking for a cash flow return you know I think a lot of people are concerned about whether or not there's going to be capital gains or not because it's possible that people are just going to sit on these low interest loans I would if I like we own a home in Scottsdale I think my rate is under three and you know I'm just gonna you know the trade out to the exact same home is significantly more on the mortgage and I built the home and I have uh not very much debt on it like six or seven hundred maybe eight hundred thousand dollars is all on on this home that I've owned for 15 years so anyway uh it's a it's a nominal payment at such a low rate I'd rather I'd rather have that um than um have it in the bank at least at the time you know um you know obviously you can borrow for free when when inflation's higher than the cost of your mortgage you're in a good position now um the third let's get to the third thing that people shouldn't be doing so you should not be doing short and mid-term rentals or furnished rentals so let's clarify you if it works as an Airbnb that's great we love Airbnb but don't buy it if it only works as a short and Midterm rental and it doesn't cash flow as a long-term rental right uh that's the thing like we're starting to see not in every area but airbnbs are not as hot as they once were and so what hap what's happening and we know a number of people that have are trying to rent these long term because their Airbnb occupancy as an example or VRBO they're they're just not cash flowing like they thought so they're having to go back to a long-term renter and they they just aren't happening you know they don't cash flow especially now because if they're on an adjustable they're in big trouble and if they're fixed in many cases even with airbnbs they don't cash flow I I have a friend that was up here last week that is trying to buy a home that wasn't Airbnb for 1.5 million in Scottsdale and the the opportunity came to him because the person who bought that hole is having a problem with the occupancy and of course the you know the rents don't cover the expenses so they're they're they're coming out of pocket and they can't rent it long term for what they needed so that's the big problem you put yourself in a in a poor situation where there's only one option yeah absolutely absolutely so I think that it's important like we said we love Airbnb I know we have Jorge on right now and he's the Airbnb Master but just be very cautious I think you know people are so desperate to buy homes right now at these higher prices that they're saying well even though I can only get you know 3 000 long term I could get you know seven or eight thousand on Airbnb short term and just the problem with that is is that the market softens or you know you you don't have it booked as much as you think you're going to have you can't reverse it into a short or a long-term rental because it's not going to work and also then you have to um try to sell it and that's what we're seeing a lot right now uh is people trying to sell their airbnbs that they that aren't working out because for whatever reason in the wrong area a saturated Market whatever it is and they're having to cut prices and sell it for Less so just be very cautious about doing that we like like the long-term we like basing the cash flow off the long-term rentals by the way we're a huge fan of Airbnb yeah we are you know Daniel actually has one right so this is not a you know that we just believe that you do need Plan B Plan B is if air if something happens with Airbnb you should be able to rent it long term and it's still cash flow not as much so the issue should be it should cash flow long term and it should really cash flow with Airbnb that's the model yep so now let's jump into we talked about you know what not to do in order to cash flow more so what are some things that people can do that can cash flow more if they're trying to be creative because it's all about creative financing right now or getting creative on the rentals so one thing that people can do and your sister does this is rent rooms out individually versus running the whole house yeah my sister's killed it in this area she she bought a uh I'm I grew up in Everett Washington and she she she bought a beautiful Victorian home I think had six bedrooms and just absolutely gorgeous house and what she found was there's a lot of business Travelers that didn't want to live in hotels that were doing contract work or whatever it was and she found this little niche and what they want is just their own bedroom to be able to put all their stuff in they can lock it and share the common areas you know if they're there you know cook something in the kitchen and most of them actually don't really even use the kitchen and all that stuff but they just want a place they can drop their stuff and so she's she's gotten a lot more money by by renting them by the room and it is a little more complicated so there are some some things she had to do with the lease and the shared space and getting a cleaner like once every couple weeks yep all that kind of stuff but it's it really jacked her Revenue um by doing that you know as opposed to just renting it let's say that six bedroom house to a family she was able to get you know I think it was like 700 800 a month for this one room um you know times six so she was able to really Jack it you know as a as opposed to just trying to get that kind of rent from one person absolutely and I think too this is a better plan for a larger home versus if you just have like a two bedroom rental I don't know if this makes sense but if you start having you know a 4 five bedroom rental the biggest thing that she said is parking right there has to be parking for everybody whether a parking lot or they can park on the street but you know not everybody can do that so that's just something you have to consider um second way to cash flow a property can be either seller financing or subject to and our good friend Pace morby does this um basically it's assuming these mortgages at a lower rate yeah you're going to want to look into this just go over to Pace m-o-r-b-y Pace morby take a look at his channel he's killing it on this subject too he's the best that I know uh in this Arena and essentially it's exactly what Daniel said you're stepping at you know the asset right now are these if you have a low interest mortgage that's an asset so you know but there's a lot of scenarios where people will sell their home subject to and so it is complicated there are some things that you have to consider but it's definitely an option and strategy I think to the subject to you know it's you're looking for somebody with a low rate that has no equity so that's why they wouldn't just go sell right uh Mr Wright saying what about security when running rooms are you liable for crimes of one room versus another so that stuff is in the lease but I I can't imagine you would be any more liable than renting to anybody so there's credit and criminal background checks that are on and you know it's it's it's just basically like renting anything you're just renting it renting the room with a shared common space it'd be no different than um you know a dorm or you know a student housing project where you have you know three or four kids and which happens in a two three bedroom unit um you know so the issues usually are not security there are usually parking but as a landlord you can certainly protect yourself by running criminal credit and sex offender checks on all of your occupants that's what we do it doesn't matter it's by the room but we do that in any way on on every single resident in our company if you're enjoying the video make sure to hit the like button we love that it really helps us out the third thing that you should look into doing is buying a multi-unit property so a lot of the you know tax burdens and different things the expenses that are getting higher multi-unit properties can be easier to cash flow like a duplex Triplex you know four Plex well what what you're doing is you're spreading risk so if you have a six or eight unit and you have one vacancy or two vacancies you still have income coming in and you know obviously they need the cash flow and all that but you you know when you have one you one property and it somebody moves out then now you have no income so the the whole the whole idea here is to diversify your your risk by diversifying your income yep time is to self-manage so self-managing is going to save you money so if that if you know that's how I had to do you know I self-manage all my properties anyways but this last one I bought would not have cash flowed if I was not self-managing it because it's a lot tighter than other ones that I have um cash flow before yeah and and by the way this is you know not for the weary right like self-management is not easy you know we're talking about there's a fair amount of communication with your tenant um you obviously have all the accounting you have the the issue of uh the movements the move outs but you know management of of an asset can be you know in the low hundreds to in the thousands just depends on the size and you know if you can handle it uh it it is a way to cut an expense yeah absolutely and the last way and Jerry sorry I switched this on you is to base your price on the your your monthly payment or the interest rate so I think what people are afraid to do is they're afraid to offer people less than what the home is listed for significantly less sometimes but you know in these times especially if a home has been sitting for more than 30 days you know you might be surprised people might take you up on your offer yeah yeah again this is just goes back to you make your money when you buy period you know and and that's it's always going to be the case so if you buy right and hold you're going to be fine especially if you cash flow you just this is just a um a period of time guys you know and I've been doing this for 20 almost 30 years now and you know sometimes we have times like this and you just gotta have cash and it's got to hold through it um and and and not not jump around with all this noise going on so I I do believe prices are going to continue to go down I do because interest rates do affect pricing and you know we do have a supply issue on the home ownership side but keep in mind if home prices go up that's inflationary if rents go up that's inflationary so that's not what the FED wants so just keep that in mind as you you know you want low rates and high prices that's not what the FED wants so just keep that in mind so Richie's asking would it be fair to say that your plan with a new property is to refinance in the future and Richie yeah that is the plan so basically you know but the good part is since it is Cash flowing even though very minimally I can float the next year to three however long it is before rates start to come back down without being in any kind of bind but yeah the cash flow on the property it's not great you know what I mean but it's it's enough to just keep it afloat right yep yeah this is all these are long-term holds guys I I think what what happens a lot of times and the toughest thing to do is everybody wants to scoop that Equity that they have and they want to do it again and they want the market to go up and they want to scoop all the equity as the market goes up that's not what's happening now Equity is going down especially in commercial and rates are going up so it's just the opposite of what you just went through and just a lot of people are freaking out because they haven't been through it before that's all yep um so we're gonna go to students if you want to become an inner circle member member um Steve and Jerry are going to put the link on the screen um and uh with their Inner Circle you get monthly happy hours lunch with an expert and obviously you can ask 10 questions and he gets back to all of them whether it is by um email or on the show all right so our first question comes from John John is saying hi Ken as much as I hate to I found myself in a position where I may have to sell our four Plex it cash flows but I'll spare you the details my question is about seller financing which may be a potential scenario that would be helpful I'm familiar with the base books but I've never done it based on the current market would it be fair for both sides in regards to the numbers if the rates are currently around seven what number percent should I use and what kind of percentage down payment is fair okay so great question a couple things first of all um you have to take a look at your tax situation so that's also something that you need to to um weigh in on so before we do anything ever the first thing I do is I call Eric and say we're going to sell this property what's our tax consequence so you have to think about that as well and then um to the seller itself if you are going to do seller financing um you know I'm sorry to the buyer you obviously have to be below market so you know you're going to want to make it better for that person if they don't have great credit which is possible then you probably can do something a little bit higher so a lot of it's going to have to do with the credit of the buyer and their ability to be able to you know pay that so if you're doing seller financing you are now the bank and um what I would do is I would do no less than probably 20 percent um that that's just me some people might be more comfortable with but I I want the seller or the buyer to be committed I want them to be committed financially and also the risk of default if they do default on that first uh which is what you're carrying you know you're going to have to step in again so there's a lot to this you need to make sure that you find the a good attorney that can help you navigate you know how to do this and make sure that the whole the whole issue is on the the buyer default and then what condition is the property going to be should you have or have to foreclose or take it back that's the whole issue you know most people don't have to worry about that with a bank because the bank has a system to be able to to handle that just you know how do you default how do you what are the notices what if you have to step back in it's just like repoing a car essentially you know but now you're carrying the note so but I would do 20 if they're uh just to summarize if if they don't have great credit I would charge them a little bit higher and and then um you know make sure you do make sure you're you really are thorough and good luck yep and also also renting to what kind of definition are these renters taking care of your four Plex are they destroying it is he putting in you know criminals and Felons and people with poor credit that are going to not be able to pay their lease so there's there's some stipulations you might want to put in there as well so Hector for the inner circle is asking hi guys I have the opportunity to sell the only 11 unit complex I own is a single member and I can use the funds to pay off my home I'd be left with three other partnership Ventures that cash flow about six thousand a month do you think it's worth selling a property to pay off my primary residence or am I being too quick to want to sell I think you're being too quick can you go back to the question please um so first of all a lot of it I can't see it sorry um first of all the big issue is [Music] um what is the interest rate on your home primary so if you have let's say under five I would not do it so it's just like me I guys I can obviously pay off a mortgage on my house but because it's under three I just keep it so you have to take a look at your loan right now is an asset and that's that you know and the person that would be buying that of course they're gonna have to solve to the current rate so you're going to get less on your 11 unit if they have to go out and get new financing so that's actually what's happening with these multi-units is they're bringing being repriced so I would venture to guess that that 11 unit complex is probably 30 percent less in value today than it was a year year and a half ago only because of the debt so you know I I would just hold if I were you and you know that's of course if you have under five percent on your primary and who I don't even know what you have with your 11 unit on a fixed rate plus also the the tax burden of that is going to be high tax burden as well so I'd be careful with that one good question though yeah absolutely our next question comes from Chad Helio is structured with my property to hold to be held in llc's those LLCs that own the property are then held by the parent LLC when collecting rent from my property manager who should be paid the LLC that owns the property or the parent LLC the LLC that owns the property so yeah you always pay the one that owns the property so you can have multiple structures inside we have we do this all the time but you know you want to make sure that whatever the check has written to the the property owner not the parent because the parent of course probably owns and is in multiple Partnerships and that's not what you want yep absolutely you want them all separate keep everything good question Florian is asking she's a new he or she is a new limited partner and a multi-family syndication in Phoenix with a variable rate mortgage they're having trouble meeting the capital call if they default on the property and it goes back to the bank what happens to my initial investment so um that's a great question so here's the thing if it defaults and the bank takes it over then there you they're going to size up what that asset is worth that's the biggest issue so we can't tell what's going on with your investment until we actually know what the value of the property is going to be when it actually goes back to the bank using your scenario if you which I think you said if we default the property goes back to the bank so once the bank owns it they're going to do evaluation and then they have to take a look at the price of that property at the time based on the loan and of course anything else that they might have so more than likely the the the very first thing that goes away is the lp equity so if I'm guessing but I don't know you you could be in a scenario where the the the value is high yet they just can't make the payments and then of course you know you still have equity in there because the bank is they're going to always solve to the the loan that's in default that's the first piece and they're not going to take the profits above that so those will be allocated based on whatever's in your operating agreement so basically if the if the properties were three and the low the two and the big for three dollars will be split depending on your percentages to all the LPS not necessarily it's going to be depending on the operating agreement yeah so it's possible so what we're seeing now is there there are sometimes people are getting hard money loans to try to keep these properties so that might be in front of the lp money there's you know but what's to your point the first thing that will happen is the bank will pay off that 2 million then whatever's recorded or or amended inside of the operating agreement will be paid next and then after that typically is your LP Equity so you just gotta there's a waterfall on every single asset and it should be clear inside of the operating agreement so you could ask your general partner about the waterfall and of course the first thing in the waterfall is the debt and the second thing could be more debt or it could be some kind of a loan and then after that is typically the um the equity absolutely yeah yeah those are you know those are real situations and people are finding themselves in right now and that's why you know getting that fixed rate debt is so important currently well and just having cash to be able to you know pay the loan and um that that's that's it even if it is variable you know like like on a construction deal you have to have that cash yep um our next question from Peter from the inner the integral he said hi Ken my brother and I purchased a 12 11 apartments in one convenience store in August 2021 we have a 3.35 year arm so adjustable rate mortgage that is coming due in August of 2026. um by August 2026 we'll be profiting over 22 000 Monthly our goal is to do a Cash out refinance and continue investing aside from increasing the noi what else should we be doing to best position ourselves by August 2026. oh great question uh really good question first of all congratulations that sounds like a heck of a great asset to be able to do 22 Grand monthly um the the one thing that when you get into the the the maturity date uh what was the date August of 2026. if I were you I you know this is what we would do so when you're going to um A lender to do a to a refinance or even potentially a sale hopefully you're not selling this because it sounds like a heck of an asset make sure that you get all your leases current at the highest prices possible so what you're going to want to do is you're going to want to try to um to to to get these leases renegotiated if you can even on the convenience store get them to Market rents by the first quarter of 2026 and then you really really want to dial in on your expenses and you probably want to hold off on a capital cost or renovation costs or anything that's in cash flow in 2026 because what you want is you want to show the very best no why that you can and you're probably going to start the refinance process at least in May or June would be my guess because it can take months to get appraisals and all that kind of stuff so the 2026 numbers need to be super clean and clean meaning that the rents need to be maximized and the expenses need to be minimized because the bank is going to be using or the lender whoever it is they're going to be using the 2026 and trailing numbers that's that's the most important thing this Market will see bigger price Corrections because it's a bubble Market than let's say maybe the Midwest or somewhere that didn't go up quite as much so I think a lot of this is going to have to do or is going to do with migration so the one thing that's kind of holding some of these markets higher are people moving there so it's just simple math you you have a lot of people moving to a location and not that much Supply so I think that that's probably the bigger question is you know is yeah at some point pricing um can affect migration and so you know right now Phoenix is pretty reasonable in my opinion still so I would imagine that they're going to have slow steady growth and um but it's possible you know obviously the new rates uh people go there that they're actually being forced to rent probably in a lot of cases but um you imagine you think about because by the way we live there so you know when people come from gosh you know New York or Washington or California they look at Phoenix as a bargain then you know you imagine so the perspective of from there from their perspective where they're maybe in a two million dollar home and they buy a million dollar home in Phoenix it's comparable you know they're they they see it as a bargain still so that's I think the the bigger issue and obviously interest rates are going to be a problem I I still believe going forward but if if it's a primary residence and not a cash flowing deal I think that Phoenix is still going to continue to grow yep well thank you all for joining us today we've decided we're going to be making Vlogs from the road so be sure to check those out this was a George gammond's idea he's like Kenny you got a vlog so we're gonna Ken and I are trapped in a van together we're gonna we're gonna Vlog uh make sure you follow us on social that should be fun you know this morning by the way I said oh we done packing the van she's like well I've got my blender I've got my juicer I've got my cuddler what tea kettle see I got my tea kettle I've got my food so we're still packing the van this is me being a minimalist oh yeah I said I said you're gonna struggle to be in a minimum that starts you oh so anyway all right we'll see you guys next week see you guys bye please

Channel: Ken McElroy

Views: 23,772

Keywords: Landlord Insurance, Insurance Tips, Protect Your Investment, Property Insurance, Total Loss Prevention, Homeowners Insurance, Rental Property Tips, Umbrella Insurance, Loss Of Rents Coverage, Renters Insurance, Landlord Advice, Property Investing, Insurance Insights, Risk Management, Tenant Protection, Property Management, Rental Income Security, Real Estate Investing, Insured Landlord, Insurance Matters

Id: A9ov3YngbIs

Length: 54min 43sec (3283 seconds)

Published: Mon Jul 31 2023