Why focus on Cashflow rather than Loans!

Focus on Cashflow

Why Focus on Cashflow and not on Brick and Mortar?

It’s a very good question and one of the first we get. Most people don’t understand the nuts and bolts of a Mortgage so here is my attempt to explain and answer the question.

When you borrow money from the bank, they want to protect themselves. They approach the issue of protection the way that banks have done for a thousand years.

1. They look to have a physical asset that they can take and resell if the loan goes bad.
2. They make sure that any income from the underlying property can also be taken.
3. They look for corporate or personal guarantees for the loan amount.

Now as someone who has had to deal with bad loans, let’s talk about what happens in real life.

1. Foreclosing on a property can take years. And while you are in the process you have to reserve money from your balance sheet against the bad loan. Most lenders sell bad loans at steep discounts because it’s just not worth the effort. Most borrowers default because of issues that are not connected to the property. So the underlying rental income from the property is still there.
2. The underlying rental stream is the basis for the value of the property and provides the funds to pay back debt. So it’s the most stable part of the project. When a bank lends money they put a lien against the rental income. When a loan goes bad the owners typically declare bankruptcy and the rental stream gets listed down as an asset that is now involved in the bankruptcy. The lender must enforce its lien and make a claim on that asset. That involves lawyers and courts and takes time. And you may not be successful.
3. In all of my years, I have never seen a lender who borrows more than $10 MM get an individual or a company to write a check out of their own funds to clear up a loan. They spend $15,000 on an attorney who goes into court and stalls for time.

How we do it better.

1. We purchase 20 years of rental income right up front. Our investors own it. So the property owner cannot put into bankruptcy or try and redirect it somewhere else. It ours. If you want it back you can repurchase it. Otherwise, for the duration of our agreement, as an owner, you have no rights to it.
2. We fund more money upfront. A lender will only fund a portion of the value of the property. And they have other requirements that limit the amount that they will fund, like debt service coverage ratios. We purchase the future rental income, with all of its increases and vacancies. We have a model which we run to determine what the most likely case is for rental income over the next 20 years. We take into account the possibilities that people won’t pay, or that the unit may be renovated, or that renters will pay more because rents go up, and so do expenses so we account for that. When we are done with our model we calculate a reasonable return for the investor, anywhere from 5% to 7% and we use it to make an offer. Our offers are typically about 35% more than you would get on a conventional loan.
3. Our platform allows investors to get the benefit of one of the most stable investment classes, a class that had a minimum buy-in of $1MM, in $100 increments. Currently, only 155,000 investors are involved in a $7 Trillion dollar market. They all have big balance sheets. Do you know where they get the money they invest? From millions of individual investors. They make billions of dollars by keeping individual investors away from the real estate finance market. So when you put your money into a bank, you are really lending the bank money, it’s actually listed down as a liability on their balance sheet. They pay you 2% and purchase mortgages with your money. Those mortgages yield 5% so they earn 3% every time. That is banking. We are going direct.
4. Because we do each rental stream independently and create $100 pieces, investors can diversify risk better. I can buy 25 pieces of rental streams from buildings in dozen of markets, in any currency so that I don’t have to worry about one market changing. Investors can diversify their risk.

You are going to earn between 7% & 9% on your investment. This means if you invest $100, After 10 years you will have $200. Which isn’t so bad.

Why Invest

This is not the lottery or some risky investment. What you are investing in is a middle-income or higher individual who needs a place to live.

That individual is typically hard-working and has a history of paying their bills. They are saving to buy a house, or maybe to start a family, or maybe they are downsizing and want a nice place for their family to visit.

The owners of the building are also interested in keeping their buildings clean and updated because someday they are going to sell the building.

You are going to earn between 7% & 9% on your investment. This means if you invest $100, After 10 years you will have $200. Which isn’t so bad.