14
As we know, the markets work in cycles, and we’ve
been rising out of the real estate mess that was
created back in ’06. The reality is that we are all
going to see adjustments in the markets in the next
few years. The one thing that seems to be able to
weather the storm is the cash flow model, when
done correctly.
A lot of investors want to sell their properties off
the “cap rate” of their property, which makes
sense on a commercial property but is ridiculous
on a single family home. Investors trying to create
opportunities where there weren’t any created this
strategy. They figured if they could create a cash
flow property at 18% and sell it at 12% they could
make the spread.
This makes sense on commercial properties where
they are valued like this. However, Single Family
Home (SFH) aren’t. So when you sell someone a
SFH at a cap rate and they pay $70,000 because
of the rent that was coming in, the major issue is that
SFH’s aren’t appraised with a CAP rate in mind.
Your property that valued out at $70,000 because
of the cash flow only really appraises for $50,000.
If the tenant leaves any time prior to the strategy
evening out then the owner is actually under water,
and can’t get the value back out of the home. Tis
could bankrupt an investor. “They” could have had
great intentions, but,
“When you over value a property,
you Jeopardize the buyers position
and no longer have a win/win.”
Another significant issue with this philosophy is that
these properties that are 18-20% are based on “C”
class
About two years ago, I ran into Jeremy Roll of Roll
Investment Group, a passive cash flow investor who
is currently invested in over 50 opportunities. He’s
the co-founder of For Investors By Investors (FIBI).
He said something I’ll never forget, “I invest in the
Operator.
The Operator is more important than the actual
property or opportunity itself, with that being the
next most important thing to consider. The Operator
is my number one focus every time I make a passive
investment.”
This was significant for me. I was always looking
to create and build my portfolio, but I was only
focused on the path, strategy, or deal. What Jeremy
said opened my eyes to focusing on the results by a
SPECIFIC person, not just the idea.
With that said, it completely changed the way I
moved forward. I was now searching for not only
the result I wanted but also WHO could deliver on
that consistently. neighborhoods, which consistently
have issues. This means your 12 cap just became
a 3 cap because you had three evictions and two
rent turns.
When you have to keep doing mini rehabs every
time someone moves out of your property, the profit
margin disappears fast and you can LOSE MONEY.