We were last discussing with Ben about how he got started in real estate investing. He gave us some insight on how one should start investing in RE. You have to start by defining your goals: immediate and end goals, to build a clear plan. In this part of the interview, he discusses important wealth building strategies on real estate.
In this interview learn:
- Wealth Building and Wealth Preservation with Real Estate
- Pitfalls newcomers in RE investing make
- Future Market trends
- Why Airbnb may not be the future of hospitality
- What you need to know prior to investing in RE
What is the general strategy with RE investments? Do you focus on rehab to bring up rental rates and hold for a few years prior to selling?
Yes, you can think of it as a slow flip scenario.
Basically whether it is a C-class or B-class, value needs to be added to the property. It’s a function of needing a significant value add component, so that the intrinsic value of the property fixed up is higher than the purchase cost and cost of rehab.
That spread is absolutely necessary in order to drive your return on investment and in order to build your wealth.
The class of the property doesn’t matter. It is what it is. If you buy a D-class and make it into a C-class, you get a bump in price. If you turn a C-class into a B-class, you get a significant bump. There are certain specifics involved with jumping from classes. I probably wouldn’t go with D-class though. You really have to know what you’re doing in D or you’ll get yourself in trouble.
Basically the Golden Rule is: you buy a C-class, reposition it and sell it as a B-class. That’s what everybody wants. But it’s competitive and hard to get there.
But this doesn’t apply to single family homes. This is for multi-units.
So with someone with greater cash saved, is rolling it into an A or B class a good way to save and hold their money?
Yes. In the previous example, it’s for generating wealth. This strategy is for preserving wealth.
If you are 41 yrs old, you’re probably not ready to preserve wealth. You’re in the mode of generating wealth.
If you are ready, you can’t just buy a repositioned property without any value add component.
Early on we need to create wealth.
But if you have so much money that you’re ready to retire from it all. You’re comfortable with your balance sheet and income statement, then sure. Roll it all into a great A class property.
Buy a new property, hold it for a few years. Sell it and then you roll it into a new property.
But this is a different kind of game all together.
Any pitfalls you’ve approached early in your RE career or common mistakes you see newbies make?
This is one I described. I landed on this by default because doctors told me I wouldn’t be able to work.
But many investors want to get away from their jobs. They don’t want to work for a boss and they want freedom.
So the common mistake made, is that everybody is very focused on cash flow. They get caught up on numbers. The numbers look good on paper because the property is cheap. So you end up buying cash flow without any regard to the actual value of the property on the resale or refinance.
What you find out is that if it’s cheap, it’s likely cheap for a reason. The marketplace decided it’s not worth any more than that.
While it seems like there is good cash flow. The marketplace sets the value.
The marketplace sets the Rules of the Game. The marketplace are your tenants. With the low cost of the property, you can’t increase rent and it’s difficult to keep steady tenants.
In the long run, you end up with a property that doesn’t appreciate and is difficult to consistently cash flow. Sometimes you’re better off paying more for quality, even though the numbers don’t look as good on the paper.
So the mistake I see everybody make, is that they do the calculations on paper. The proforma shows great cash flow, the entry point for the property is so low that it’s tempting. They think the cash flow is going to be great.
As they go 2, 3, 5 years down the line. They realize the amount of effort it takes to keep it occupied and fixed up, not only eats into their time but eats up their cash flow.
At the end of the day, it’s not an appreciating asset since the marketplace has made it’s decision. So you’re getting a very subjective cash flow with no balance sheet gains. You’re losing on both sides of the spectrum.
That’s the danger of what happens when you focus strictly on cash flow without regard to the balance sheet. Without regard to the net worth bump that you’re supposed to receive on exit. That’s where you really make your money.
Everybody is so focused on cash flow, they miss the bigger picture.
True wealth is made on exit, not from cash flow.
Cash flow is nice. You get an extra $6,000 a year. But selling it a few years down the road and getting a check for $100,000 is even better. You can now redeploy that money and do it all over again.
That is the Key.Don't focus on cash flow, you'll miss the bigger picture. True wealth is made on exitClick To Tweet
That extra $6,000 cash flow means very little without that chip for $100,000.
You say the market dictates prices, what do you see now for Market trends? Do you see prices falling or rising for multifamily units?
Well you have the retiring baby boomer generation. You have the 20-30 year olds. One is downsizing their living space and the trend for the younger crowd is to stay in apartments.
I don’t see prices falling. They are high and going to stay high. They are not going to fall for awhile.
Specifically not in locations where there are positive population trends, positive income growth, and positive job market growth.
We are in a healthy, strong market.
I also see a lot of people chasing money yield.
People are now wondering if they can trust the paper market, so there is large number of people diversifying their funds into Real Estate. They are willing to pay a premium for that yield. Because the bonds that are supposed to be safe, are now in negative territory.
So what are you supposed to do if you have money to invest? You’re going to look into real estate. Unfortunately that drives up prices. So far the increases in rental rates have propped that up as well.
You have to wonder when rent as a function of take home pay is going to be out of whack. But so far, I haven’t seen, except for some places in California which are cracking, in most places it isn’t a factor yet.
The spreads are very thin. You have to be very careful with the underwriting. You have to be very precise and know what you’re doing.
Having said that, it’s damned if you do or damned if you don’t.
If you don’t buy real estate now, what else are you going to be in?
But if you do buy now, the spreads are thin.
You gotta be careful.
Thoughts on AirBnB to rent out property?
I think there are problems with AirBnB.
Don’t think that it is going anywhere. At the government level, running a hospitality service out of your single family, condo, or apartment has become a big problem.
Legally, things have not been worked out. There are people are running into trouble with their municipalities. It is not even legal to rent out your space in an apartment complex.
However, a lot of people are making money on AirBnB. But I don’t know where this is going to shake out.
Obviously the hotel industry doesn’t like it. I read an article last week where New Jersey is passing out laws being against AirBnB type of hospitality businesses. There is a lot going against it.
But I have no idea how it’s going to go in the future.
Is there anything else we didn’t cover that you would like to add? Last words of wisdom for those interested in RE investing?
I am a bit perplexed and have always been on Real Estate.
Some people love it, the process of rehabbing, the cash flow, etc. They get really excited on doing deals.
But that’s just not me. I don’t know why, but I don’t love Real Estate.
But I do however, respect it a lot.
Real Estate works. RE is the only place I know of where you can get in without having a lot or any of your own money and you can make something happen.
But I have to caution people, dabbling in RE is a bad idea.
There are too many moving parts and dynamics going on at the same time. If you’re going to do it. You have to approach it very professionally. You have study it and learn it properly. Learn your marketplace.
Buying real estate is easy. But buying it correctly is difficult.
Yes, it definitely works. Yes, it’s the best opportunity under the sun.
It allows access to regular people without a lot of money or connections.
A lot of wealth in real estate is built for regular people by regular people. This makes it difficult to argue against RE.
But at the same time, it’s risky. You really have to study and learn it. You have to be risk tolerant.
But the Payoffs are great.
Finally how can people find out more about you and your work?
I have a website justaskbenwhy.com
There is a lot of stuff on there. I am also on biggerpockets.com a lot.
It’s not like I try to hide from people, but you do have to look for me.
With real estate, I can’t emphasize this enough, it really works.
But it can be painful and you have to do it correctly and be consistent. That’s what it comes down to.
I have been and still help a lot of people with RE and their education.
I look forward to meeting new people and helping them with their real estate endeavors.
Got a Question for Ben? Just Ask below.
Ben Leybovich Short Bio
Ben is real estate professional. He is an investor and syndicator of multi-family residential income-producing property. He is an expert in creative finance and works extensively with private as well as institutional capital. His specialties are in real estate investment, passive cash flow enhancement, tax, general business, real estate sales, real estate education, training, and motivation.
In addition to being a full-time investor, he is also a licensed Realtor in the State of Ohio with Yocum Realty in Lima. He is also a trained classical violinist at the University of Cincinnati College-Conservatory of Music.
Ben is a constant learner and always improving. He loves to teach as much as he likes to learn. He has helped many people get started in real estate. He has developed an educational program called Cash Flow Freedom University in conjunction with a cash flow analysis software, CFFU Cash Flow Analyzer.