Devon's clippings · Clipped: Tue-24-Jan-2023 · Original: twitter.com/sweatystartup/status/1617577676327223329
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A guy reached out and asked me for help on a storage deal. He had $150k of liquid (or near liquid) net worth and wanted to use an SBA loan to buy a property worth $1-1.5 million. Here is my response:
Are you from a wealthy family? Could you raise $500k - $1 million if you got desperate from your parents? Do you have wealthy friends who could invest and capitalize the deal so you can put almost none of your own cash in?
If the answer is no... You don't have enough cash to get in the self storage business. You have no business buying a $1-1.5 million of self storage with 10% or less down. That is how you go broke. Forget real estate and focus on making more money some other way.
If you do have the wealthy people around you... Syndicate the deal like this: $1m purchase price $200k in closing costs / capex / reserves $5-600k loan $6-700k cash (20-50k of your own cash) Then operate it for a fee and get a chunk of the upside.
I see too many people go wrong by putting too much of their own cash in and being left with no money to bail them out. The only way to lose in the real estate business is to run out of cash. If you do, it is GAME OVER. Never tie it all up. Keep a significant reserve.
Too much leverage is another way to increase risk and lose big if revenue drops, rates go up or a recession hits and values plummet. Don't get 70%+ LTV unless you're sure you can increase revenue and net operating income.
To buy a $1 million property you're gonna spend $30k to close. And you need $20k in the checking account to start. And you need $50+k to fix broken stuff. Another $50k in reserve in case something bad happens. Going back to investors asking for more $ sucks.
When it comes time to pay off your 90% LTV loan what will you do if you haven't made the property more valuable? Most banks will only loan 60-70% of value. Maybe you don't know what you're doing? Maybe your revenue drops. You're bankrupt.
You hear the saying: "Real estate investors are cash poor and asset rich." The gamblers are. The responsible investors always have a cash reserve. We have almost $10m of liquidity protecting our self storage holdings.
We can sleep at night. We can bail a property out that struggles. We can afford a loss or a disaster or a new roof. We aren't gonna go back to our investors to request more capital if an issue comes up.
And most importantly: We can pounce on new opportunities. We can put slugs of our own cash into the best deals. We can get bank loans when other, less liquid, buyers can't if things get tough.
Okay Nick, I'm listening. But I don't have millions sitting around. What do I do? Forget real estate for now. Most real estate investors with ultra-high net worths started elsewhere. A family biz. Their own biz. Family wealth from a business somewhere down the line.
Lesson: Real estate is a great way to grow wealth you already have. It IS NOT the best way to create it without taking massive risk. Go start a business. Make a few million bucks. Then get in the real estate game.
This sucks to hear and it isn't sexy. If you want to keep dreaming go ahead and follow the other influencers who tell you how to do deals with no money down, etc. Go get an SBA loan. This post won't get very many impressions because people don't want to accept the truth.
I'm sending out a "risk assessment" method to my email newsletter TOMORROW. Make sure you're subscribed and you'll get the email: