The Holy Grail of Real Estate
The holy grail of real estate investing is to purchase a property that is 100% debt-financed, cash flows, and can be updated and refinanced with a cash-out refinance. A deal like this allows you to make money, tax free, through infinite return. How? 1.) You own a cash-flowing asset that pays you every month 2.) You essentially create money out of thin air when you do a cash-out refinance.
I learned this from the best-selling author Robert Kiyosaki, who wrote Rich Dad Poor Dad. In one example, he explained how he purchased a condo for $18,000 on in Maui, Hawaii. At the time, he didn’t have any money. But he didn’t give up. He put 10% ($1,800) on a credit card for the down payment. People thought he was crazy! If he was already broke, why would he want to go in debt? Well, this property cash flowed only $25 a month, and it taught him an important lesson. He said it taught him that lazy people say they cannot afford something, but rich people find a way to make it happen. Learn more here.
When I first heard this story, I couldn’t help but think it sounded like a bunch of fluff. Most of Robert Kiyosaki’s teachings seem that way at first. I said to myself, “He got lucky,” and “Why would you ever want so much debt?” and “Credit cards are bad”. But now, after investing in real estate for six years, I GET IT. The right debt is good debt, and a 100% debt-financed, cash flowing property is the holy grail of real estate.
Interested in how we got started? Check out this post: Chicago Triplex.
Fast forward to the fall of 2020, when my wife and I purchased a duplex in Charleston, SC. We purchased it with owner-occupied financing at 5% down, with the agreement to live in the property for at least one year. Similarly to the Chicago triplex example, we are currently living in one unit (house hacking), renting the other unit via Airbnb, and having our mortgage covered by our tenants.
While saving money for our next investment, the property next door became available: A duplex, listed for $550,000. It appeared to be in disrepair and had really low rents, each unit rented at ~$1300/mo. With current rents at about $3,000/mo. for a 3 bed 1 bath property, we saw potential.
There are so many different opportunities. We could rent both units to year-long MUSC graduate students (~3,300 a month), do month-to-month rentals with traveling nurses (~$4,500/mo.), or possibly Airbnb (due to very strict Charleston laws, this option is a lot trickier and will take working with an attorney BUT, we’re hoping this option works due to the below back-of-a-napkin math).
Unit 1 (3 bed, 1 bath)
~$320/night at 80% occupancy
($320 * 365 days * .8) / 12 months = $7,786
Unit 2 - same
Airbnb = ~ $15,572/mo.
We were so excited about the possibilities, but since we had just purchased a home with owner-occupied financing, we knew that 1.) we would still have another 9 months to fulfil in our current property before we could purchase another property for 5% and 2.) that meant we would need to put down 25%, and because of all of the renovations we just completed, we didn’t have the cash.
After running the napkin math, I was hooked. But how in the world were we going to come up with $137,500 for a 25% down payment? That is a LOT of freaking money, and the building probably needs close to $200,000 worth of work. At this point, most people would say it’s not possible, but I knew we had to make this deal happen.
I ordered a few books: The Book on Investing in Real Estate with NO (and low) Money Down, and Raising Private Capital: Building Your Real Estate Empire Using Other People’s Money.
In these books, I learned about stock loans. I had a decent amount of money in the stock market, however I did not want to sell the stocks because I have so much conviction in the companies in which I am invested. So after doing some research on stock loans, I came across the Pledged Asset Line from Charles Schwab. Essentially, they will hold your stocks as collateral and lend you money at a very reasonable interest rate (1.75% - 4.5%). With this new knowledge, we put an offer on the house and contacted Schwab to open the line of credit.
We are officially under contract for a potential grand slam deal with none of our own liquid capital. The best part is, after we put money into the property and make renovations, it will have been over a year since we purchased our current property with owner-occupied financing, and we will be able to refinance, close at 15% down (remember, we originally put 25% down), and pull a good deal of money out to pay back the stock loan.
Now Robert’s teachings don’t seem so fluffy to me anymore. This is the holy grail of real estate deals.
Here is another in-depth example of an infinite return deal with Ken McElroy:
