Stop Investing in Real Estate for Cash Flow - Do This Instead | Office Hours
Stop investing in real estate for cash flow. It might be the very thing keeping you stuck.
“Passive income” sounds great. Who doesn’t want mailbox money? But if you are early in your investing journey, chasing 8 to 10 percent cash on cash returns could actually be slowing your growth instead of accelerating it.
What you need first is not cash flow.
It is equity.
In this video, I break down why appreciation, specifically forced appreciation, is the real wealth building engine in commercial real estate:
Why a 10K per year cash flowing deal can trap you for a decade
How increasing NOI can instantly create six figures in equity
A real example where 200K turned into more than 1M through rezoning
How to use a 1031 exchange to multiply your buying power
You will see the math behind both strategies, the risks to watch for, and how to think like an investor who is building long term wealth, not just short term income.
If you want to stop playing small and start scaling strategically, this one will change how you look at your next deal.
Let’s get to work,
Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com
Key Takeaways:
Cash flow alone will not scale you quickly.
A 10 percent cash on cash return sounds strong, but earning 10K per year on 100K of equity can trap you in slow growth. It can take years just to stack enough capital for the next deal.
Equity growth is the real accelerator.
Forced appreciation, increasing NOI through better leases, operations, or repositioning, can create six figures in value almost overnight. Small income increases can dramatically change valuation.
Commercial property is valued on income, not emotion.
If you raise NOI by 10K and the market cap rate is 5 percent, you just created 200K in value. That is the power of understanding how properties are priced.
Value creation beats passive investing early on.
The most successful investors focus on creating value first. They put in the work, increase equity, then transition into more passive assets later.
1031 exchanges multiply momentum.
Instead of paying taxes on gains, rolling equity into larger deals compounds growth. This is how small deals turn into meaningful portfolios.
Cash flow becomes powerful after equity is built.
Once you have scaled your equity base, even a modest return generates significant monthly income. That is when cash flow truly changes your lifestyle.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
Tyler Cauble 0:00
This episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www.crecentral.com to learn more. Welcome back to the commercial real estate investor podcast. We have been gone for the past couple of weeks because of the crazy ice storm that happened here in Nashville. I'll catch you guys up on that and what we've been up to. But today I want you all to know I'm gonna be diving into why investing for cash flow is probably keeping you poor and probably why you're not finding deals. We're gonna break it down on the whiteboard today, and I've got a sample deal as well that I did a couple of years ago that we'll be taking a look at, because you can actually make far more money in commercial real estate, substantially more if you are not investing for cash flow. And I know that may be controversial, but I don't think that you should actually invest for cash flow until you have a $5 Million Dollar Portfolio, $10 million Portfolio, you shouldn't be focused on getting to 10k a month first. You should be focused on building equity first. So we'll dive into that today. We are live with Office Hours. This is where we go live every tuesday, except for, obviously, the past couple of Tuesdays, at 8:30am Central Standard Time, live from the cobble group studios where I answer your questions on commercial real estate. I get reached out to via email, via Instagram all the time. You guys wanting to get feedback on deals that you're working on, ask me questions about how to break into the commercial real estate industry, how to raise capital from investors, where to find investors, all of that kind of stuff. And this is where I will do all of that. I will answer all of those questions, drop them in the live chat today's question of the day, which I think is very appropriate for the conversation, that we're gonna be having cash flow or appreciation, which is more important to you. All right, let's catch you guys up on the past couple of weeks, what we've got going on, where we have been. So the ice storm hit Nashville, and it ended up being substantially worse than most people thought it was going to be. Didn't even really get national coverage, which I think is very interesting. Many of the major events, especially weather events that happen in Nashville, that happen in Tennessee, tend to not get a lot of coverage nationwide. Maybe Tennessee is just not big enough of a deal on that scale, a couple 100,000 people were without power, pretty much overnight. So it was, it was a Sunday morning, at 5:30am we lost our power. They had told us the week before, we were probably going to be getting 18 to 20 inches of snow, which, as a commercial real estate investor, you know, especially in the South. There it was at least five days of prep trying to make sure that our properties weren't going to get absolutely destroyed by ice and snow. Well, the night before, it changed from, you know, 10 to 12 inches of snow to, you know, an inch to an inch and a half of ice. And the ice is substantially worse than snow. I could deal with snow, but the ice, there was so much ice that it I think we had like three quarters of an inch to an inch around some of our tree branches outside. It weighed the trees down so heavily that they started splitting and falling on power lines. And you know, there's only about 700,000 give or take, people that live in Davidson County, and a couple 100,000 without power. I ended up not having power at my house for 10 days, which is crazy to think about, like 10 days in the modern United States of America, and I didn't have a generator. I had to wait a few days before my my driveway thawed, because it's, I've got a long, steep driveway before we could get out to Bowling Green, Kentucky, an hour away, to find a generator. So that was, it was quite an adventure, and Nashville has has fully thought out now. But, you know, going without power for a while, obviously, I wasn't able to come in and do the live streams. Fortunately, all of our buildings were fine. The The thing about ice and ice storms that's interesting is, you know, when it when it first happens, you get a lot of you get some roof damage, and some of it's permanent. Some of it's actually not. It's really interesting, but you won't know what that damage is until everything starts melting. So it actually kind of takes a while after the damage is done. Fortunately, we didn't have any plumbing issues on any of our properties, which was which was very fortunate, because it got down to, like four degrees sustained for a few days. We do have a fair amount of roof leaks. You know, when you've got these rubber membrane roofs, like we. Have. And the same thing happens on shingle roofs. In the residential world. You get these ice dams that build up, and then when it starts melting, it starts going into or over around, you know, whatever seams you have on that roof. And so, I mean, even in my studio right here, we had to take out a portion of the ceiling because our roof leaked a floor above. So I actually have a tenant above me in this building. It leaked so much through their space that it came down into mine, which is crazy, because we have concrete floors, right? So you think about how saturated the floor had to be in order for it to make it there. Let's see. What else do we have going on? The hotel salt Ranch is finally opening in March. I'm really excited to announce that we've started our big PR campaign. The property is 98% complete. We still have some furniture that we've got to finish. We still have some light fixtures and things like that, but we have gotten the signs installed. Everything is ready to roll. We've gotten the property listed. We're getting ready for the soft opening. I can't wait to get this out there. It's going to be a lot of fun, having the pool, having people come and stay, you know, we're going to start having, we have two in person CRA accelerator mastermind events this year, both here in Nashville, and we're going to be putting everybody up at Salt Ranch, you know, at the hotel, so that everybody can stay and hang together and, you know, I can tell them more about the the investment, which will be fun. It'll be great having everybody back, because I've had the members tour the property before, back when it was not complete. So being able to come in see it in the state that it was in, compared to actually being able to stay and get the service and eat food and drink and hang out by the pool. It's going to be a really fun experience. So really excited to be getting that out there. If you guys are ever visiting Nashville, please check out salt ranch. We're eight minutes from downtown. It's a cool, locally owned boutique hotel, and I'm very proud of it. I think we've done a great job with it. Also, I have been telling you all about our commercial real estate education platform for quite some time now. It's been probably six months since we started talking about it. It is a lot of work. It has been a lot more work than I thought it would be. But of course, makes sense, right? I told you all I wanted to create the first collegiate style education platform online for commercial real estate that will be affordable. I mean, that's the biggest thing. When I first started working on this, I was like, Let's do $500 per course, right? And keep in mind, one course would be, you know, roughly six to eight classes long. And I think that we've settled on $250 per course or less. But these will still be, you know, hours of education. They're fully interactive. It's really, really impressive what the team has been able to build. I mean, we've had all hands on deck focused on this for quite some time. Investor, 101, is now complete. We're putting the final touches on it. We're working on some of the imagery stuff like that, just going through and doing the final edits, and we will be releasing that for testing here pretty soon. So if you are on my email list, if you are in my newsletter, you will be able to get first access to investor 101, that is, it's a it's a beginner's commercial real estate course, taking you through, you know, commercial versus residential real estate, the different types of commercial real estate, the benefits of each investment strategies, stakeholders, you know how to build your team. It's going to be really neat. And we're going to give that away for free, because we just need to get it tested. So tested now. We've already submitted as well for continued education credits. So if you have a real estate license, all of our course material, and we're going to be launching dozens, if not hundreds, of courses in you know, in the next I'd say, 12 to 18 months, you will be able to get credit for your real estate license, for taking these which will be really, really neat, because, you know, as as a real estate license holder myself, I never really had the opportunity to actually take commercial real estate classes for continued education credit. Of course, there was CCIM. And I love CCIM. I took all four classes. The problem is, once you take CCIM, 101, through 104, you kind of that's the majority of the classes that you can take there to get the credit. And after that, you know, really, I mean, what I've had to do for the past few years is take residential real estate courses, which is obviously not helpful whatsoever. I don't need to know anything about residential property management, but I have to get my my credits. So really looking forward to getting that out into the world. We've been working on it for quite some time, and I. So you know, that's another benefit that all of our accelerator members will have.
Tyler Cauble 10:06
For being a member, you will get access to all of these courses, dozens, if not hundreds, of them, for free, right at no cost. I am looking over here on my iPad because I'm going to be doing a little whiteboarding for you guys here in a minute, and for whatever reason, it has decided to log me out of the account that I was trying to use. Let's see. Anyways, I'm gonna have to enter my passcode. All right, this is fun. Okay, let's get to some of y'all's comments here while I am waiting on that to load, all right, I had asked question of the day, what is more important to you? Cash flow or appreciation? Atlanta guy is saying, first cash flow, then appreciation. Cherry. What's going on? Cherry is jumping in, saying cash flow to begin, then appreciation cash flow is needed to turn more deals. Let's see. G is saying, Good morning, Tyler. I have, I have clients who are new businesses but are having a hard time getting funding. Even with SBA, most SBA winners have a minimum of 300k and they don't need anything close to that. G, what I would say is, if they need less than $300,000 I wouldn't even go. I wouldn't even bother with the SBA route. It is. It is way too intense of a process. It's too involved, and honestly, it's just, it's not gonna be worth it. I would just go to a local bank or a credit union and and put the financials in front of them and make the request from there. That is what I would do. All right, let's see here, Kevin, what's going on? Man, he's saying, Hey, Tyler, Happy New Year. Kevin here from Barbados. Good to see you again. Kevin. We I don't know if you guys remember, but in 30 deals, 30 days, Kevin jumped in. He presented a deal to us from Barbados, which I have never underwritten a deal from another country. So that was a fun experience for me. I'm really glad that I was able to get to do that guys. I'm sorry. I don't know what's going on, but my iPad is not letting me log into good notes. It seems like something is going on, maybe with their server, or something like that. So hopefully that will fix itself here in a minute, keep saying I'm offline, which could be true. My ever since the ice storm, our Wi Fi has been a little weird. I mean, fortunately, with the live streaming, I went and did all sorts of backups and, like, hard lines so that I won't get, you know, cut out in the middle of a live stream, which, if you guys remember from the early days, like 234, years ago, when we first started live streaming and talking about commercial real estate on YouTube with you guys, we would have some episodes where it would just, you know, Hey, Internet goes out, and not a lot that I could really do. Jerry saying, Can I wait to see the finished salt ranch. Yes, Jerry, can't wait for you to see it, especially since you saw it when it was like 80 75% complete, it's gonna be really cool. You have the same me too. Feels like we've been speaking about salt ranch for years. Yes, we have. It has literally been four years, which is way too long to be talking about a project. And you know, we're going to do a very in depth video about it at some point, so that you guys see why it took four years, right? And also, one thing that I will say, the reason that the deal still works is because of how we structure it on the front end, right? I mean, if we had taken out a whole bunch of debt to do that deal. Then it took four years. We would have lost a ton of money. It would have been a very bad deal, but I knew going into it, hey, let's be relatively conservative with this. Let's approach it from a standpoint of, let's just not take on any debt. So we actually paid all cash for the land. What took us 18 months to get permits from the city of Nashville? Absolutely miserable experience. Wouldn't wish it upon my enemies, but that's what happened. It just took us 18 months now, a pretty substantial portion of that. And of course, you guys will have a whole autopsy on what it was like putting together this hotel. I mean, we're working on the video now. I think it's gonna be 45 or 60 minutes long. It's gonna be basically a documentary on pulling this whole thing together. And, you know, dealing with the city, some of the stuff that they were were trying to force us to do ended up being proven to be unconstitutional in the state of Tennessee. So, you know, for example, making developers do sidewalks. Well, we wanted to do sidewalks. I actually thought that it would make the property look better to have these sidewalks. Well, when we went to do the sidewalks, it. Or actually even before, when we were planning on tearing up some asphalt on the site, stormwater ended up telling us, Hey, since you're disturbing 10,000 square feet of soil, you're gonna have to completely re engineer this site for stormwater retention, which added like $150,000 minimum. And so we looked at that, and I was like, Well, hold on, I'm removing asphalt, which is an impermeable surface, right? The water runs off of it and goes wherever. I'm replacing it with permeable pavers and grass. So we will be absorbing more water right off the bat. And because I'm doing that, you're going to make me re engineer the site. Yeah, that's, that's how the code works, and that's how we're going to enforce it. Okay, so if I don't disturb 10,000 square feet of soil, if I don't rip up this asphalt, you guys won't make me re engineer the site. Well, you know, we can't make you. We'd prefer if you went ahead and fixed everything, but you know, we can't, we can't make you. Okay, well, fine, then we will not be, we will not be disturbing 10,000 square feet of soil. So I ended up redesigning the plans so that we didn't have to do that. Well, then the Nashville Department of Transportation comes back and they say to us, Hey, we would like for you to go ahead and build the sidewalks. And we said, okay, that's fine. We had that in the budget. We were planning on doing that anyway. We'll go ahead and build the sidewalks. Well, guess what? Building sidewalks, which the city was requiring us to do, then triggered the fact that we were disturbing more than 10,000 square feet of soil on the site. So after we ended up, after we had to resubmit with the sidewalks in place, the stormwater team came back and said, Oh, you're disturbing 10,000 square feet of soil now you have to completely re engineer the site. And I, you know, look, I'm a man of principle. If you're going to make me do something, build sidewalks for the public good, and then, because of that, I'm now going to have to spend hundreds of 1000s of dollars on my site. I'm not going to do that. And so we argued with him about it, which ended up being a very good thing. It delayed the project, obviously, but we saved hundreds of 1000s of dollars because by the time the city had decided I'm trying to I'm trying to do a personal hotspot on my phone so I can still do this for you guys, for whatever reason, my Wi Fi is just not coming back on by the time that, you know, we had been going back and forth for months with the city, you know, arguing this. I mean, I'd even got my attorney involved. I mean, we were contemplating suing the city over because it was so ridiculous. It was a court case had been taken to the Supreme Court of Tennessee, and it was deemed unconstitutional for the government to force a private developer to build sidewalks. And so, you know, we kind of were able to give them the finger and walk away. Absolutely ridiculous, though, that you have to do that, right? And so, you know, it's just an unfortunate part of being a developer. Sometimes you have to put up with a lot of BS. And you know, there's, there's nothing that you can really do about it, you know, because even even our attorney at the time was like, you know, look, you guys can pay me to sue them. We can do this, that and the other. We can really go into it. The problem is, you're suing the city, so even if you win, you lose. You know, we had that conversation last night on the accelerator, mastermind call, because one of our, one of our members, is dealing with issues with, you know, his city. And, okay, I've got it working. He's dealing with issues with his city. And, you know, it's like, well, yeah, I mean, they're, they're totally in the wrong, like, the city is basically telling you that, that you have to follow the rules and they don't, which is not true. But, I mean, what are you gonna do if you sue? You're gonna win, but you're gonna make a lot of enemies. And, you know, those are the people that you need to be on your side when you're going for permits. It's, it's really a pretty big catch 22 that a lot of people don't think about. Okay, all right, let's, let's get to this. Because like I said when we first started, I think that cash flow investing, for cash flow is actually keeping you poor as an investor. I think it's actually not the right approach. And maybe one day we'll do a more in depth video on this, but let me share this. So let's say, do you have $100,000 all right? And I don't care where it comes from, maybe it can be from, you know, an investor. Maybe it's, it's something, you know, some money that you've inherited, whatever doesn't matter. You've got 100 grand, right? If you're investing for cash flow, you're going to be investing for what. It a 10% cash on cash return. Like, that's generally pretty good to get a 10% cash on cash,
Tyler Cauble 20:09
cash on cash return. And so if you get that, you're now making $10,000 a year. And that's it. All right? That's great, right? Like, don't get me wrong. I mean, that's, that's $800 a month. That really starts to add up. However, the problem is, if you're wanting to get to a point where that cash flow is actually paying for the next deal, you got to wait until you get $100,000 so now you're waiting 10 years, assuming that you're still getting 10k a year, you could have to replace a roof at some point, right, 10 years before next property. All right? And that's that's kind of a long time if you're planning on just using cash flow to pay for the next deal. All right now, here's the alternative method. This is how I invest in commercial real estate. This is how I went from in 2019 owning zero properties to owning I have $75 million in assets today. And we actually skipped about a year and a half of buying nothing because the market was so wild, and interest rates and construction costs and everything, nothing made sense. All right, it's because we did this strategy. So let's take that same $100,000
Tyler Cauble 21:36
now we're investing for forced appreciation. All right, I don't care about the cash flow. Cash flow is great. It certainly helps. And we don't want it to we don't want to have to pay into the deal. All right, we still want to be making money on it, but let's say that we invest for forced appreciation. I don't even look at the cash on cash. That doesn't even actually really matter to me. I mean, yes, you're still going to get some cash on cash. Yes, you still want to make sure at least breaks even. Most of my deals actually end up making about four or five or 6% cash on cash annually. All right. But here's the thing, if I'm able to come in and, let's say I'm getting that same, you know, I invest at a 10% cap rate, all right, so I'm still getting, well, let's say a 10% cash on cash. In this case, let's just say that we're buying a $500,000 property, all right. And let's just, yeah, let's just say the NOI is, you know, 25k a year. We got a portion of that going to debt service. And, you know, we'll, we'll not get into the specifics of how this is really, really done, but that's what a 5% cap rate, if we've got an noi of 25k so that's not even that great, all right, that's pretty low in terms of a cap rate. But bear with me. We're going to work through this. It's a 5% cap rate. Now let's say we take that 25k No, I let's say there was a vacancy, right? Maybe it's a three tenant building. There's one vacancy, and we're able to get this noi up just by filling the vacancy. Let's say that we don't spend any money fixing the property up, because typically you don't necessarily have to, maybe paint and carpet stuff like that, but let's just assume you don't have to spend anything. This is strictly signing a brand new lease. All right, you're just signing a brand new lease. Let's say that you're able to get that noi up to 35k All right, so an additional 10k a year, not a huge amount of money, all right, but now you're at a 35k noi, here's what's wild at that same 5% cap rate. We're talking about a valuation now on this property of $700,000 you've just made $200,000 by signing one lease. Right now you could say, Okay, well, when I sell it, I'm gonna have to pay 7% in fees. Blah, blah, blah, okay, well, let's, let's multiply it by 93% $651,000 you All right, so that's $151,000 in profit, right there. Now, remember this last deal, same, same amount of cash invested is making you about 10k a year. All right. So if I was going to sit there and say, Okay, well, I want to make 150 grand on this first deal I'm waiting 15 years on the second deal run. You know, maybe I'm investing for cash flow. Maybe I'm not. I can make this in one year, $150,000 in one year by just signing a lease, by just. Increasing the net operating income. Now there's multiple different ways for you to do like this is called forced appreciation. There's so many different ways for you to actually do this. It doesn't have to be signing a new lease, right? It could just be you institute a better system and process for collecting rent. You decrease the amount of your economic vacancy on a property, and now you increase your noi, and now the property is worth more. Or you say, Hey, I actually don't like the fact that, you know, the tenants can turn the AC up to 80 degrees in the winter and 50 degrees in the summer. I'm going to make sure that it doesn't go below 67 and it doesn't go above 72 right? Things like that will decrease your electric bill. All right, so now you're not spending nearly as much on, you know, on those types of things. Now, if you've got a triple net lease, maybe it doesn't matter, but a big thing that you'd want to be focusing on there, and this is where I think a lot of investors actually don't think thoroughly through this. If you have a triple net lease, yes, the tenants are paying those expenses. You are not but if you can decrease the expenses that the tenants are having to pay, that therefore increases the amount of base rent that they can pay you, because they're looking at it on a full monthly basis, right? If I'm able to take my triple net expenses from $5 a foot down to $4 a foot, I could now keep rents the same and raise my base rent $1 that means I'm now netting more profit as the landlord, which is a pretty great way to go about it. All right, so we've just made $150,000 now you, if you do a 1031 exchange, right now, we've got $250,000 right? Because we started with 100 we now just made 100 so let's say we take our 250k and we do a 1031, exchange into, you know, let's say a deal that's a 7% cap rate, and we're able to, you know, multiply this by four, right? So we're buying a million dollar property at a 7% cap rate, which is bringing us 70k a year. All right, now we'd have to get into debt service and all that kind of stuff, but 70k is substantially higher than 10k a year, right? Even if we went and just leveraged it times two, right? You bought a $500,000 property, same value property, but now you have $250,000 of equity in it, and a 7% cap rate now your your NOI is 35,000 a year, all right. So again, I know Tyler. How do we take into account debt service, this, that and the other? You can run all of that math at home. All right, and that's one thing that we're kind of leaving out of all scenarios at the moment that's substantially better. All right. Now I'm going to walk you guys through an actual deal that I did, where I did this, all right? And because of it, like the strategy that I like to deploy here, it's basically where we're very actively involved in an investment. We have to come in, we have to put the elbow grease in the sweat equity to build it up, then we sell it, and I do a 1031, exchange into something far more passive that way, then I'm getting my cash flow, all right, so I'm creating substantially more equity first, so that I can get a higher cash like, even if I'm getting the same cash on cash return, it is now on higher equity, all right, and then I'm putting it into something more passive. Kevin is saying, but will the bank appraise the same 5% cap rate on exit. I mean, they should, if you're if it's getting an appraisal at a 5% cap rate going in, as long as you don't sign, you know, a horrific credit tenant, there's no reason, especially if you still have all those other leases in place, that you shouldn't be able to get the same 5% right now, obviously, if something's going to appraise for a 5% cap rate, it's a pretty you've got a pretty solid credit tenant, right? But let's say you buy something at a 7% cap rate, chances are pretty good. Unless the market has tanked or interest rates or whatever, you're still going to be at about a 7% on the exit. I always assume the same exit cap rate as I do entrance. Right? If we're buying something at a 7% I'm probably going to be selling it at a 7% be selling it at a 7% now I know that there's a good chance if I buy something at 7% I improve the property. I get better tenants. I get better leases in place. We get better operations going. Somebody might pay me a six and a half percent cap rate for that property and a higher value, right? Because that cash flow is more secure for them, right? And they're willing to pay for that. So that's kind of how I approach them, All right, let's look at this real quick. This is 2122 point investor. I mean, you can look this up if you want. Is a property that I did here in East Nashville. Well, I guess it's just north it's North Nashville. It's west of East Nashville. So. And we bought it for $618,000 about 1.58 acres. All right now this is the original listing on our website. This was before interest rates spiked. So we actually had it under contract. We listed it for 2.1 million. We had it under contract for 2.1 million, and then interest rates spiked, and they ended up dropping it. So the property was 1.58 acres. We took it, we put in all the sweat equity on the front end, right? Keep in mind, we bought it for $618,000 my partner and I put $100,000 each in so 200k in equity. All right. We took it through a rezoning from 11 units to 63 units. All right, so here's some of the renderings that we had put together on it. Now, obviously, if you take something from 11 units to 63 units, it's going to be far more valuable. All right, this took us about a year and a half to do. I mean, really last I mean, it took us probably two years to actually get it sold, but it took us probably nine months to get it fully rezoned. All right, we went from 11 to 63. Units increased the value to about 2.1 million again, with the interest rate spiking. Sure, you know, we weren't able to get that. It did sell, though, for 1.575 All right, so you subtract our purchase price out of there, we basically made a million dollars on this deal. All right, you know, minus, you know, 7% for commissions and closing costs and all that kind of stuff. All right, but remember, we had $200,000 into it originally. Okay, so we're walking away with a pretty substantial chunk of equity. If I had taken that $200,000
Tyler Cauble 31:36
and we bought a million dollar property at a 7% cap rate, we wouldn't have been making a lot of money. We wouldn't have been making a lot of making a lot of cash flow, right? It would have been an okay deal. That's the problem with starting to invest for cash flow. There's really just not a lot that you can do, especially if you're just getting started, right? So go out and create the value. That's what we did here. So we took our 1.6 million, because we had to do a 1031 exchange, right? So that we didn't have to pay taxes on it. Did a 1031 exchange, took our money and and we also, you have to replace the debt also, right? So 1.6 million we invested into a 350 unit self storage facility that we built. All right? Now, here's the thing you know, this is, this is the way if you're if you're watching on YouTube or if you're listening on the podcast, you're not able to see the layout. But 350 units is just outside of Chattanooga, this self storage facility. This isn't even based on my projections. This is based on the management company that we hired to run it. This self storage facility will net around 25 to 30k a month, by the time that it is fully operational and stabilized, 25 to 30k a month, that means that my partner and I will net cash flow more in a single year than our initial investment into commercial real estate. That is how people actually start making money in this in this game, in this industry. They're not people that are successful at commercial real estate. Are not investing for cash flow until they're ready to hang up their hat. I don't have a single single tenant net lease deal in my portfolio. I don't have a Starbucks. It'll be great one day to have one, but I don't need a five and a half percent cash on cash return, right? Or a five and a half percent cap rate. I would much rather come out and put the elbow grease in today, create the value 4x my capital, and then take that and go buy something that's more passive, and then restart that clock, right? So, I mean, my partner and I could have pulled our initial, you know, $200,000 out of this if we wanted to, and we still can. I mean, by the time it's done, we'll be able to refinance this, put more debt on it, probably pull that cash out and go do another one, right? Because, I mean, 30k a month is insane. So that is, that is what I want you all to be thinking about as you are going out there and getting into, you know, buying your first deal, buying your second deal, third, fourth, whatever it is, because cash flow is great. It really is. But you just saw an actual example of a deal. Is you guys can, I mean, you guys can go look that up if you want to, where we created more equity than we would have in years of actually owning that other property or even developing the deal ourselves. And, you know, that's, that's not a one off thing. I mean, I did the same thing with another building in Chattanooga where we were initially. We bought it in an opportunity zone. We're gonna have it for 10 years. Bought it for 1.8 million, ended up selling it for 4.6 million in about 18 months, because we got an offer. And I looked at it and I told my partners. I was like, Guys, this is. Seven Years of cash flow that we can go ahead and take off the table today, we should do this. And every 100% unanimous agreement, obviously, you can take seven years of cash flow today, you should do it. I had a conversation with another commercial real estate investor. He was like, yeah. I mean, if we could take five years of cash flow off the table, you know, we would do it. You know, what's your threshold? I said, Dude, if you can take three years of cash flow off the table today, you should do it. Why wait three years? If you can have that money today, you can go invest it again today in something else, and get that money rolling faster and snowballing faster. That's how this game really, really starts to get momentum for you, and that's how you can start building wealth. So hopefully that was helpful. Diving into that, you know, today on in terms of cash flow versus appreciation, I'll do a video that's far more in depth on it as well, to really show you guys how you can go out and find those types of deals. Because they're pretty common. It's not hard to go out and find a deal that needs some value add. There's always going to be an old building that needs to be renovated. And you know, you put a new tenant in it, and now you've got cash flow. Kevin is saying, found a deal in the capital here, planning a deal structure where I establish a holding company to acquire 60% of the deal and leave 40% in with the owner. This is an alternative to seller financing, as the cash flows won't be strong enough to service to debtors. What do you think about this approach, and what should I look out for? If anything? Yeah, Kevin, I mean, look, it's, it's a standard joint venture, right? You know, we do JVs like that all the time, where we'll come in with the property owner, they contribute the property as equity into a deal. And, you know, it depends on what the whole deal shakes out to be, but basically, we have the Property Appraised, or we agree upon the price, and then that will be their contribution, right? So let's say the property is worth 2 million. We're going to invest, you know, enough money to where the total project cost is gonna be 4 million. Well, they get 50% right, especially if we don't have to bring too much data or something to the table, right? Because their ownership of that will make it substantially easier. The way that we structure that is, at the end upon a sale, they get their $2 million first, and then it's a 5050, split of all the profits, right? So, I mean, that's typically how I structure. The thing that you're going to want to watch out for, though, is to make sure that they don't have any debt on the property. If they have debt, then they either won't be able to do this, or they will have to bring cash to closing to pay off their current mortgage before you can place any more debt or anything like that on the property. If you're not bringing any debt and they currently have debt, then you will likely have to either restructure that loan or get a completely new loan, right? So that's that's what you should be keeping in mind as you're going about doing that. Guys. Hope you enjoyed the conversation today of cash flow versus appreciation. Let me know in the comments if it's helpful for you guys, for me to be walking through scenarios like this, whiteboarding it out. I know it's a little bit different from how we've traditionally done office hours, but I wanted to shake things up a bit. So if that's helpful, let me know in the comments. You know, I read every single one. So if you guys ever have questions, comments, anything like that, please drop them in there. Scott is saying, This is great tower. It's what I've been trying to explain to people for a while. This is a great way to explain it, absolutely well, hopefully, hopefully you guys enjoyed it. Appreciate you guys. Happy Tuesday. We'll see you next week. This
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