Everybody I know loves LEVERAGE when it comes to real estate.

It’s a beautiful and scary tool, kicking appreciation, depreciation, and cashflow into overdrive.

It amplifies everything. You can make a lot of money really fast and go broke in months.

Here’s how it works👇👇👇
Let’s say you’re buying a $1MM asset at a 7 cap. Meaning it generates $70k in net operating income (before debt service)

You put $300k down and borrow the rest ($700k) from a local bank.
At a 4% interest rate on a 20 yr amortization schedule you’re paying about $25k in interest and $25k in principle a year.

That’s 20k in cashflow on your $300k cash investment. A 6.6% CoC return.

You need better debt terms to buy 7 cap deals nowadays. But let’s continue.
It’s powerful because of appreciation and depreciation.

You only paid for 30% of the asset but you get to enjoy these two things on what the bank paid for too, or 100% of the asset.

Let’s say you straight line depreciate this thing over 39 yrs.

2.5% of total cost per year.
Depreciation isnt a real expense that comes out of your checking account.

It’s a form of tax deferment and is written off as an expense on your taxes. It lowers your tax liability.
2.5% on your $300k wouldn’t be much. $7.5k.

But you get to depreciate that $700k the bank paid for as well. That’s the cheat code.

2.5% on the $1MM is $25k.

That’s 8.3% of your initial cash investment. And you get to write this off every year for 39 years.
But there’s more. Not every part of the building you buy is depreciated on a 39 yr schedule.

The windows, doors, HVAC, curbs, landscaping, etc is on a 7 year or 15 year schedule.

So you pay a firm to do a cost segregation for you and assign values to all of these things.
There’s this little loophole in the tax code to encemtivize buying and holding assets.

Bonus depreciation.

It comes and goes based on political administration but it’s here now.

It allows you to write off everything under a 15 yr life in year one. The first year you own it!
In a lot of cases you can get 30%+ of the total price (bank plus your cash) assigned to this shorter lifespan and thus depreciated the first year.

30% of $1MM is $300k.

But $300k is 100% of YOUR $300k investment.

Leverage AMPLIFIES your deductions.
So while this asset generates $45k ($70k in NOI minus $25k in interest expense) in taxable income, you claim $300k in depreciation to offset this.

If you’re a real estate professional (which is a tax treatment) this can offset your active income from other W2 work.
If you take all of your taxable income and buy new assets under this structure every year, you can get pretty close to paying nothing in taxes.

The taxes do catch up when you sell the asset with something called recapture. Unless you do a like-kind (1031 exchange) purchase.
So the leverage allows you to achieve favorable tax treatment.

What about appreciation? The fact that your asset gets more valuable every year.

Let’s be safe and assume 3% appreciation. On our $1MM property that’s $30k a year. At the end of year one it’s worth $1,030,000.
30k is 10% of your original $300k investment.

The $700k bank note doesn’t grow, it shrinks as you pay it, and the bank doesn’t get the upside from your asset they helped you pay for getting more valuable.

They paid for 70% but YOU get 100% of the appreciation.
The value of your $300k APPRECIATES by 10% every year because it happens to the banks cash too.

This is powerful and compounds over time.

If you can improve operations you can enjoy higher levels of appreciation.
Let’s say you increase NOI by $20k the first year. From $70k to $90k.

You might achieve 20% appreciation THAT YEAR.

But it’s 20% on the entire purchase price of $1MM. Not just your $300k you put down in cash.
So you could enjoy $200k in appreciation on your $300k investment. Or 66% gain in one year.

Leverage amplifies your gains in a major way. A couple big scores and you can double and triple or even 5x your money.
Now let’s talk about the danger here. This all works against you just as easy as it works for you.

It AMPLIFIES your losses.

If the value drops by 20% your equity drops by 66%.

If you’re operating income drops by $20k your cash on cash return is suddenly negative.
And since you’re levered up it takes smaller and smaller percentages to have BIG impacts on you.

NOI is generally 50% of revenue. But expenses rarely drop, if ever.

So if your revenue was $140k to generate that $70k in NOI, let’s think about what could happen to that.
If your sales drop by a modest 15%. Like say a pandemic made some folks unable to pay you rent.

That’s $21k of revenue gone. Expenses stay at $70k. Your NOI goes from $70k to $49k.

Your revenue only went down 15% but your NOI just dropped 30%.
And there’s more. Your debt service is still $50k a year. Prior to the drop your cashflow was $20k a year.

Now it’s -$1k. You’re suddenly loosing money. All it took was a 15% drop in revenue for all of your cashflow to go away.

Your cash on cash went negative.
What happens to appreciation in an event like that?

The facility was valued at a 7 cap. Meaning divide NOI by .07 to get your value.

Your NOI is now $49k. $49k / .07 = $700k.

Your property just became 30% less valuable. What about your equity?

That $300k you put down?
It vanished. You have no equity.

If you don’t have the cash to weather the storm you are selling at a discount and you’re out. Broke.
It’s all about management and operations. That’s the risk factor of RE.

If you can’t keep expenses in line and hold on to or raise revenue you’re toast. That means more customers. Customers who pay on time.
Real estate is cyclical. You can’t predict appreciation. It may run 10% a year for 10 yrs (Boston) and everybody makes great money.

It’s hard to go wrong. The tailwinds are behind you.

But when times get tough the good managers survive and the poor ones go under.
The folks who are over-levered and cash poor get crushed.

Focus on your management. Keep cash reserves. Don’t be afraid to take some chips off the table by delevering when times are too good.

Be careful.

There are more bankruptcies in RE than there are billionaires.
If you’re into this type of thing here are a few folks to follow:


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More from @sweatystartup

19 Oct

You can be profitable from day one. I was. Bootstrapping is the way.

Everybody thinks entrepreneurship is super risky.

I think it’s more risky being an at-will employee.

Would you rather have a few hundred customers or one boss deciding your fate?
When I started I was going to school 20 hrs a week, studying another 10, D1 Track & Field another 30 AND I had just met my wife and was building a relationship with her.

You can make time for anything if it’s important enough to you.

You don’t need to quit your job.
And I had very little money and my parents didn’t invest a dollar in my company.

We were RESOURCEFUL and found a way to get started by trading our time for money.

Nobody is willing to do that part because it isn’t fun and it isn’t described in the entrepreneurship books.
Read 4 tweets
19 Oct
Entrepreneurship culture in America is all messed up and it’s a shame.

TechCrunch. Product Hunt. Shark Tank.

It’s all about new ideas. Changing the world. Innovation. 0 to 1. Blue ocean. Venture capital and exits and scalability.

You ask the average american who a real entrepreneur is they’ll say Jobs, Musk or Zuck.

We read their books and idolize them and hang on their every word.

So the brightest among us think they need a moat. A new idea. Something revolutionary.

Were setting them up for FAILURE.
I took an entrepreneurship course at Cornell in 2011. 24 kids with new ideas. Big plans. Pitch decks looking for series As.

I was #25 with a regular old-fashioned business.

When professors asked me what my differentiator was I didn’t have an answer.
Read 16 tweets
15 Oct
I strongly believe there’s one thing all entrepreneurs MUST understand:


CPAs are humans and most take the path of least resistance and make mistakes.

Understand it so you can hire the right one, ask the right questions and help develop your own strategy.
A simple ex:

Everybody told us to lease or buy personal cars through the biz. Write off all of it.

Instead we bought cheap cars, paid for our own gas, and wrote of MILEAGE.

Our cost per mile was $.25. We wrote off $.55.

Huge advantage when you drive 30k miles a yr.
Buy this book. Read it. Take notes. Read it again.

I read it when I was 20. Has saved me tens of thousands since then.

Read 4 tweets
7 Oct
A rant.

Everyone looks at service businesses, let’s use a plumber as an example, and wants to help them generate leads.

“Nick plumbers suck at marketing! I can solve that problem! I can help them bring customers in the door!”

News flash:
Plumbers don’t have a customer problem. They have all the customers they could ever want.

They don’t need more leads!

What we need is more plumbers and landscapers and washers and cleaners and fixers!
Everybody wants to sit back on their computer and make money by doing something easy.

They want a scalable model. They want to work from anywhere. They want to take 1% of transaction to link two parties together.

This is ultra competitive. Low odds. Tough.
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6 Oct
Early in my career I held a lot tight to my chest - worried about others stealing my strategies.

Now I share as much as possible. Try to add value everywhere. Often without expectation or pay.

Since that shift my net worth and network have both exploded.

Not a coincidence.
Example #1.

I upset my partner by doing a mentoring session with a college kid who was starting up a direct competitor to Storage Squad.

3 weeks later he called me and tipped me off on a school contract he was pursuing but wasn’t big enough to take down.
He made the intro, we pitched the school, secured the contract, it’s now an extremely profitable branch.

Example #2.

About 2 yrs ago I was cold calling competitors in my area (self storage now) seeing if they wanted to sell.

I spoke to one owner and it turned into a..
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28 Sep
How to get rich without getting lucky:

Find a way to make $100 an hour doing something simple IN YOUR TOWN.

Do it until you have $10k+ in the bank and you’re too busy to sell new customers.

Hire employee for $25 / hr to do what you do so you can sell new customers.

Be willing to work and sweat and even maybe scrub toilets for 3-6 months.

Look at the market unemotionally. It’s not about you and what you love doing.

Don’t try to reinvent the wheel. Look at competition as a sign there is money to be made.
Compete with folks who run their business like its 1985 with secretaries, yellow pages, and cash.

Wrap in technology. Never take cash. Outsource accounting and get software for all other admin.

Turn quotes in 10 mins or less without site visits.

Book in 30 secs or less.
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