Doug Fath and Jeff Greco discuss the buy and hold strategy to create infinite wealth in their latest video. Click the video below to watch now.
| Doug Fath: | Hey, I’m Doug Fath with Legacy Capital.
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| Jeff Greco: | Jeff Greco, also with Legacy Capital. And today we’re going to be talking about the infinite wealth triangle. And it sounds a lot more sophisticated than it is, but it’s super beneficial and helpful.
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| And really the context for today’s video is that as we get to know our clients or really get to know our prospective clients, we spend a considerable amount of time understanding what their goals are, what they really want their business to produce for them. One, to add value to them, to help them get clear on what their goals are. And two, really understand if there’s a way for us to add enough value to each other for a reason that we should be doing business now or at some point in the future.
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| And so specifically what Doug’s going to dive into for the infinite wealth triangle, sometimes we get clients who come to us who say “My goal in the next X amount of months is I want to have a certain amount of rental properties.” And so as an example someone will come to us and say “I want to have 20 rental units within the next couple of years, two years.”
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| And so what Doug and I, once we’re clear on what their goals are, it’s on us to reverse engineer how we can help them achieve that. So sometimes clients have a certain amount of money, sometimes clients have a certain amount of free and clear properties. And so it’s really on us to see how we could help them achieve their goals, not only getting them started, but also helping them think about what potential challenges they’re going to have at each stage, ass they get closer and closer to their goal.
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| Doug Fath: | Exactly. And so if we use the example of someone that wants to acquire 20 units over the next one or two years, the other piece is how much cash do they have at their disposal to acquire those 20 units? And we’ve had a couple of examples with clients where they’ve come to us with, let’s say the number is $50,000 that they have, and they want to go out and buy 20 units. Well, if the game plan were to be … you’ve got to put 10 or 20% down that stays in the deal every time you buy a property, $50,00 probably is not going to be enough money to acquire those 20 units.
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| And so one of the ways that you can take that $50,000, or whatever the number is, to hit that, and acquire those 20 units, or whatever the number may be for yourself, is the infinite wealth triangle here. And really what this allows you to do when you execute it is it allows you to take that initial amount of capital that you have, and continue to reinvest that to acquire assets.
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| And the only way you’re able to do that is if you’re able to hit on all three pieces here in the triangle. So in order to do that the first thing is, and this is a buy and hold strategy, so not only do you need to be able to acquire the property, renovate the property and put a tenant in there, there needs to be certain metrics that have to happen in order to hit that.
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| And so the first thing is that if you’re buying and holding, you obviously want to make sure that that property’s producing positive cash flow for you. Where the rent comes in, you pay all your expenses, you pay the principle on your mortgage, and you’re still left with some positive number each month. So this has got to be a positive number for you in order for this to work.
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| The other piece is you need to have equity in the deal, and when I say equity I’m not talking about your $50,000, I’m talking about the total amount of cost that you’re putting into the deal. You need to be picking it up at a discount. And so oftentimes you need to have equity of at least 25%, or said another way, if you have 25% equity, you should be able to get 75% loan to value from a bank.
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| And if you’re able to have positive cash flow, with 25% equity, you now then can get a 75% loan to value with a permanent lender, and cashout. So it’s important to have all three of these things because, again, if you start with $50,000 to acquire the property, renovate the property, maybe even come to us and we give you some money to acquire and renovate it, your 50 grand is stuck in that deal.
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| But, once you get a tenant in there, it’s making positive cash flow, you’ve got at least 25% equity, you then can go to the bank and refinance, pay off our loan, recoup your $50,000 or however much money you put in, and you now own an asset that’s making you money every month. You’ve got 25% equity still in the deal, so your net worth has just increased. And now you have that $50,000 of initial capital available to you to go out and repeat the process again.
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| Jeff Greco: | Right, so a simple example using simple numbers for this 25% equity and 75% loan to value is if the property’s going to be worth $100,000, how od you be all in, or a refinance loan for $75,000 to be able to take out some money, make sure you’re finding a good deal. And obviously you can multiply that number to do larger deals, but at a high level, that’s where the 25% equity comes in.
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| Doug Fath: | Yeah. And a common thing too that comes up with a lot of new clients when they come to us that either are aware of this strategy or want to implement this strategy, part of their concern is … it’s called the seasoning period from a bank. So a lot of banks oftentimes may have a seasoning period which says from when you purchase the property, they want to wait at least 12 months, or 6 months, before they’ll allow you to essentially cash out. Where they will allow you to refinance based off of the new after repair value.
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| And the reality of it is while most banks they do have a seasoning period, there are a lot of local banks that we have relationships with that we’ve done business with, that we refer clients too, that don’t have a seasoning period. That as long as, again, you’ve got cash flow, you have equity in the deal, they will allow you to refinance and cash out based off of that appraised value as soon as you’re able to. There is no seasoning period.
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| And this becomes important for you as an investor, because you want to turn your money, going back to that initial $50,000, you want to turn that money as fast as you can. And if a permanent lender is going to require you to wait a year, that 50 grand is still tied up in that asset, whereas if you can refinance in three months, in six months, you now can go out and buy two more deals, or three more deals with that money.
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