Why Cash Flow Isn't Enough: The Real Wealth Builders in Real Estate | Ep 46

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both properties and residences so that, or residents so that together we can build wealth while improving housing. I'm James and this is my wife, Jessi.

Jessi: Hey, I, we're talking about cash. Well, cashflow. Yes. It made me think of not necessarily cashflow, but I just love talking to our kids about money. Really? Yeah. Cause it's just, their concept of money is always growing and like morphing a little bit. Yeah,

James: I know where you're going with this. Yeah.

Jessi: I don't know if you're, I don't know, but like we went to the vet today and Eleanor's like asking questions about like, Oh, you like, you have to pay them and how much is that?

And she's kind of. Like trying to wrap her head around amounts. And so she has like known factors that she like bases things off of. But I, I, there's, you know, nothing like novel or anything. It was just super interesting. I remember

James: you were talking to me the other day about how you went shopping with her and she saw the grocery bill and she was like, how much is food?

And you're like, right,

Jessi: right. She did have that realization. And she was like, Wait a second. So, okay. Like she, she had to like take a step back and like, so you spend that much, like every time you go. And I was like, well, not necessarily if I go, if I go do a smaller trip, you know, it's not, this was a big trip.

This was one of our like in betweens while I'm getting everything, you know, the toilet paper I'm stocking up on stuff, but

James: you don't have to, for the record, you don't have to, right. You don't have to, well, Well, so there's a, there was a strike going on and people were starting to stock up on toilet paper again.

Whichever one was like, it's all made domestically. You don't need to stock up. But anyways,

Jessi: anyways, that's beside the point. So, so yeah, she had this realization and was like trying to internalize like, okay, if, if you spend that much and you go shopping, how many times like, How much is that a month? You know, she, she kind of totaled up in her head.

I do the same thing. Right? Mine's at the

James: gas pump. But yeah, how much

Jessi: do I spend on gas? Right? And then, and then, you know, I, I kind of logically asked that next question of like, if you, if it costs that much, you know, to get these things that you need. Where do you get it from? And how much do you,

James: you

Jessi: know, make and how much would you need to make?

You know? And so she was kind of like, yeah, okay, well, obviously you'd need to make more than what you pay on groceries. And I was like, yeah, cause we pay for other stuff too, huh? And she was like, yeah. Like she was just beside herself that you would have to make more than that in income. So

James: I know that's good.

Jessi: Low is important. Yes, it

James: is important, but it's not the only thing. And that's what I want to talk about tonight. I think when we first got started, like that was all that we cared about. Right. Remember the big spreadsheet stuff and you were like, what is that number after the mortgage is paid, that's what I care about.

And I even, I

Jessi: even had you make, I was like, I don't really care about the specifics. Like. Just make me a color coded spreadsheet. And once you crunch all these numbers, if this little box is green, I know it's, it's a yes for me. If it's red, no.

James: Which did work out pretty well for us, obviously. But, I think the more I've learned about it, the more experience I've gotten, the more sophisticated I've become, the more I've realized that's not the only metric.

And so that's what I want to talk about tonight. And we're trying this new format again. Where you're going to ask questions that kind of lead the way. I'm going to attempt to answer them and which by attempt I mean use my notes that I'm Your pre answers. Thinking this through. Just a way to try to guide the conversation.

Makes sense. So, yeah. So let's roll. I want to talk about cash flow and why it's not the bee's knees.

Jessi: All right, I will probably learn something tonight. I know, because you are still all like,

James: cash flows, legit.

Jessi: Yep, I'm like, oh, why would you wait if you could just get money now? But I understand. Okay, I'm willing to learn.

James: Okay.

Jessi: So a lot of people think that high cash flow is the gold standards for real estate success. Why might this be misleading?

James: Yeah because that it's just one metric for the success of Of a property and the returns that you get from it. Yes, you do get cashflow, but you also get appreciation. You do get tax benefits, you get debt pay down.

There's just a whole bunch of stuff. And some of the cool things about some like appreciation is that it can come compound over time, right? A 2 percent growth every single year can really turn into something big over time. And so it's just

Jessi: depending on what type of property you're, you know,

James: Yeah.

Jessi: Buy, you know, if it's a buy and hold, yes, that makes a lot of sense. Having said that, like. It's a flip, not necessarily.

James: I would not intentionally walk into an investment that's losing money. That's not fun if you gotta feed this thing every single month. Sure. But.

Jessi: Unless you had an exit plan.

James: Sure. Yeah, I guess.

Jessi: You know, it's like, well, imagine that you have this C class property.

James: Okay.

Jessi: And, yeah, it is losing money right now.

James: Oh, okay. Yeah. But,

Jessi: you can do these repairs and you know, based on comps around the area, you can sell it for X amount of dollars. Yeah, I back.

James: Yeah, you know, you're right. I guess I was thinking about people who I've talked to who, they buy a place, they're losing money and they go, Yeah, but it's okay, it's for retirement.

Jessi: Yeah, no, I wouldn't do that. Like,

James: 30 years from now, it'll be okay. I'm

Jessi: like, what? But yes,

James: I agree. If you're like, yes, we bought a place and we're going to fix it up and eventually get rents so that when it's stabilized, pre stabilization, yeah, all bets are off. But post stabilization, I'm like, nah, you should be making money.

It's not the only thing you care about, but you should be making money. Yeah, it should, it should

Jessi: be

James: profitable.

Jessi: Can you think about other factors that contribute to successful real estate investment? Beyond cashflow. You alluded to appreciation, tax benefits, like dive into a couple of those.

How, how did they work though?

James: So there's primary, there's two primary types of way that you build wealth in real estate. Okay. First one. It's cash flow. It's money you take out from it. And then you have the second one, which is the equity, the appreciation side of things. And it's the value of the asset going up. Right? So it's the asset itself and then the cash coming off of the asset.

And so those are like the The two ways and and early on we hyper focused just on the cash flow We got some appreciation and in some cases we got really like we're like, oh, this is nice Yeah, and then we rolled some of those into the warehouses

Jessi: And

James: I think that was at least my first peek at like, huh?

All right, this appreciation thing is like this is cool. And So I just think that's like two and I'm getting even more so now where it's like, oh I'll look at an investment and like, for example, we're flipping this house right now where we bought it. The debt on it's awesome. We're going to fix it up. In theory, we could refinance it and then rent it out.

But I'm doing the math on it and I'm like, well, I mean, okay, I make like a hundred bucks a month. Cool. Or I could profit. I don't know. I'll pick a low number, five grand, right? Like that's a lot of months. That's, that's a. What is it, almost five year hold period, a little over four years? Yeah. Like, ah, I might take the cash today.

Yeah. And instead of instead of the, the rental income, potentially, right? And so I just think that's the like, so that's the other thing. And, and it's good to have both, right? The problem with my flip is that once I do it and I sell it, the assets gone, returns are over. Now I got to go do something. The nice part about the cashflow is in theory, like, yeah, you can just manage it and it just kind of keeps going.

And then every once in a while you got to spin a plate and fix it up and make a little bit better.

Jessi: Yeah. So, I mean, that's kind of the next question was like, why would you focus on equity versus, you know, immediate cash flow and and what you're hitting on is like There's different life scenarios where one might make more sense than the other, you know, like you were saying if you if you sell Yeah, okay, you get this chunk of cash, but now you got to do something else with it.

Yeah, ideally so it's not just sitting there Yeah but if you You know, are ready to retire and you just want the cash or something like that. Great. Or if you want to live off of that little bit each month, like you, you know, it depends, it depends on

James: what your needs are. Yeah. I think about what we, what we did, which was, again, we primarily a couple of duplexes, that kind of stuff.

And we were buying with the intention for long term hold for cashflow. Again, I don't want to complain too loud. Cause it worked pretty well for us. I wasn't able to quit my job after 12 years. I think in retrospect, I would have done it slightly differently. I think I would have, you know, especially that first couple, I was like, we didn't need the cashflow.

You and I both had good jobs. Right. And I think I would have rather have said, you know what, instead of getting the cashflow, let's find things that, that need work. Let's go through the stabilization process and then let's roll those into bigger things. And. And actually kind of cause that can compound quickly.

And then at that 10 to 12 year mark, like, okay, I think we're at a point on this next one. Once we stabilize it, we're just going to hold on to it. And the cashflow would have been greater had that happened because the, the value of the asset would have been so much bigger to begin with, because we just, we were just sitting on buckets of equity instead of rolling it into new things.

I think it was, again, it was a mistake. It was not a mistake. It was an unoptimized pathway that we ended up taking.

Jessi: Yeah,

James: and so I think that's something that I would do differently.

Jessi: Yeah,

James: and now after the fact I am I'm finding places and I joke. I'm like, I want the places the banks don't want

Jessi: yeah,

James: and finding ones that are fixed wrappers fixing them up and then taking that equity and then rolling it into other deals and Snowballing that and eventually I'll get to a point where I go.

Alright, I'm gonna take some of that equity off the off the Off that rollercoaster, you know, off the, off the compounding track and I'm going to park it into a longterm thing, get the cashflow and go cool. But I'm just, so I'm doing a little backwards. We probably should have, but whatever.

Jessi: But I mean, you have the opportunity also to educate people who are just starting out as well.

James: I would also make the argument like there were some times where interest rates were crazy low. Yeah. It was a lot like, ah, I shouldn't pass up on this opportunity. It's never going to get any better. Yeah. But I don't know. It's hard. So anyways. That's my, yeah.

Jessi: Okay. So let's talk a little bit about tax advantages, tax

James: advantages,

Jessi: write offs.

How do those come into play when evaluating properties, overall profitability?

James: Yeah. So you and I used to debate about this all the time, right? Because depreciation is this phantom expense. It's not phantom, but it's this expense that you get to take that when you sell, you get to pay back. Yay. But essentially whatever positive cashflow you might have on the property, It, whatever.

You just had this big negative Mm-Hmm. . And what you and I to talk about all the time, I was like, well, you have this property here that the cash flows break even. We don't make anything. But because of depreciation we get a whole lot back on our taxes. Mm-Hmm. . And so it was like, instead of us getting the cash flow every single month, we would just get a really big check one time a year.

Jessi: Mm-Hmm. .

James: And, and you were just like, adamantly, no, we're not doing that. And I was like, ah, come on. It's big good deal if we did that . And then ultimately we found. deals that did cashflow and we still got the depreciation. It was like, all right, cool. It's like a double win. But that's how that plays into it.

It's just this expense that, that play. And so it's, it's another way of it's technically not cashflow, but it presents itself like that when you're doing your taxes. Which is nice.

Jessi: Yeah. You get cash, but then if you sell the property back, guess you gotta

James: pay all that back. So, you know.

Jessi: Yeah.

James: Choose wisely.

That's what, that's where the 10 31 comes in. 'cause you, you defer all those gains. Mm-Hmm. , which is nice.

Jessi: You don't, yeah. You don't have to pay it. Yeah. Right. Then, and, and how about write offs?

James: Yeah, write offs those are the same things. Oh, it's just

Jessi: expenses that you have. You can put that against.

James: Yeah. Yeah. So like when we first got started, I guess technically still to this day, there's some percentage of our home. That's part of the business. Part of our driving that we do for the business is all write offs. My phone and my computer. Cause I use them all for my business of those are all write offs.

And so those are things that again, they don't, Oh, I'm how about this one for a huge one? We technically, because of things like depreciation and all these write offs, it lowers our taxable income. And so according to the old government, we don't make a lot of money. Interestingly when we, when I first quit, I wasn't working, you weren't working, we qualified for food stamps and just cause on paper, that's what it looked like.

And it was because of all these things. Now the write offs like they're real, like those expenses actually happened, but it was like we did, I didn't have a personal, personal phone expense and have a personal car expense because it was all business stuff. And. And, and, and because, and appreciation and because all that, yeah, like we technically was like, we decided not to cause like we don't need it.

This is a paper thing, but we did qualify for the healthcare. gov insurance subsidy piece. And that's another weird, like. And it was like, it was a lot of money. And, and we were like, all right, this is a huge advantage of getting all these write offs and the depreciation would qualify for the cheaper insurance piece.

And again, is that a casual thing? No, not really, but it's, I mean, it is still

Jessi: affects your, your bottom line. And yeah, yeah, yeah, yeah.

James: So that's like, those are some of those weird, interesting things that played into it. I mean, I thought hard about like, how, how awesome would it be to do food

Jessi: Oh my word.

Oh, dude. No, I I stuff like that I'm, just like no like you're it feels like you're taking advantage of the Dude, I'm playing the game.

James: That's all.

Jessi: Yeah. Which I'm like, Hmm. Hmm. I think that's what I don't like about it. No. You're playing this game. I,

James: I would argue you're just against it because there's a social stigma against it and it implies something else and that's not our situation.

And, but I'm like. I

Jessi: wouldn't feel bad about it. Like, if we qualified for it, I'd use

James: it. Well, what's the difference between using, this is fine, I'm fine to debate this. What's the difference between using like food stamps and taking a healthcare subsidy? Yeah. Aren't those one in the same? In both situations, they're based on having a low income.

Jessi: Well, I guess you're right. With the food stamps, it felt more like we were taking someone's spot. Whereas with insurance, it didn't, but maybe we were. Yeah. I don't know how that works. I don't know how that works.

James: If there's a, I don't think there's

Jessi: a limit. Is there a

James: bucket of funds and then once it's up, you're done?

Or is it, if you qualify, you qualify. That's

Jessi: what I felt like for food stamps. I thought it was like, there's an amount that they put towards it. Like they have to say no to some people.

James: Or they divide it by everybody and call it good. I don't know. It

Jessi: is an interesting question. And I don't know. I was just making assumptions though.

Like for the insurance. I was like, they just paid all out

James: and getting free food. And we just made assumptions.

Jessi: Come on. That's all right.

James: That's right. It's okay. We didn't need it.

Jessi: There's, but that's,

James: but those are some of the benefits, right? Of that. Those are different parts of the deal that are worth paying attention to.

Beyond just the cashflow because they are real benefits, but, and the ones that we just talked about don't show up on a regular P and L because they happen all after taxes all after the fact.

Jessi: And

James: so that's where, again, again, in a perfect world, like, yeah, you want it all. Like find a deal that has a really good cashflow.

That's. After it's stabilized, right? And, and yeah, it's good. And ideally one that you don't get there by you can, you can force cashflow by just doing a bigger down payment as well. Ideally you don't have to do that, but but yeah so all these other ones, I mean, this is

Jessi: kind of like a tangent a little bit, but I think one of the reasons why I also push back is, is because it, it gets complicated and I'm like, I don't fully understand all the ins and outs of what I'm counting for write offs, or how depreciation works exactly, and when am I gonna have to pay that back, and how do I calculate amounts.

And so it just, there's this level of complication that I'm just like, I don't want to make a mistake. Yeah. Like what, what would you say? To someone who's like, who's trying to process that and is like, I just don't, I just don't want to deal with that. Yeah. I'd rather just look at the easy numbers.

James: Well, there is the option of just passively investing in something else and let the sponsor worry about all those things.

Mm hmm. There's that. I think there generally is, if you're gonna go actively, Like, yeah, you got to take the time to learn it all. Like that's, that's part of it. You know, that's, that's part of the education piece. Understanding how it all works, not just waving your hands in the air and saying, whatever,

Jessi: were you just Marian analyst?

James: Yeah. That, that is also who is looking at the entire spreadsheet. Not just the green, not just

Jessi: the green box,

James: the green box, but recognizing the green box has to be there.

Jessi: I feel like I won big.

James: Yeah. But yeah. And I mean, I get it. If something's got good cash flow, chances are all the other stuff falls into place as well.

Yeah. Outside of the appreciation piece like that, that part is big. Because again, like you were just talking about, right? When we bought places, the, your requirement was it has to be cash flow positive day one. Day one.

Jessi: Yeah.

James: Right. Which made it hard. Whereas now I'm more like, how about just within that first year?

And, and because now I can buy a place that doesn't make sense, but after I stabilize it and put in some time and effort, it will cashflow. And then I could either. Refinance it or sell it and get the funds out that I put into it or not. Whatever, depending on how it was financed. And and yeah, I've, so that's the kind of where I'm like, no, I'm going to push back a little bit more now.

I also have a track record and, and you know, Oh, if Jane says he's going to do this, it's going to happen. And that I think is a change from when we first got started. Yeah. You didn't have that level of belief yet.

Jessi: Yeah. Which I feel like that. What I was going to say earlier is if you're working with a sponsor and you want to passively invest, there is a level of trust there.

And it's like, yeah, totally. We've built that trust over time and now I, of course, yeah, I'm like, oh, absolutely. I get that, yeah, maybe it's not going to cash flow day one, but, You have this plan for how to get it to a spot where it makes sense.

James: And it

Jessi: is a good deal.

James: Right. When I say we're going to fix it up and we're going to rent it for this much, you go, Oh, I know he's going to, because I have experience finding tenants and screening them and, and like, and knowing what the market is, And like, yeah, you can trust all that.

Of course, when we first got started, I was like,

Jessi: I was not good at it, but now I am. There was a big difference too, of when we were going to live in the properties we were fixing up,

James: which we're not

Jessi: doing anymore.

James: It was like, you know, I think it was a couple other

Jessi: factors.

James: Yeah. It was after the second one, you were like, never again.

Jessi: Well,

James: and I, I got, I got half a one with this house. Living in a construction zone. Yeah. This

Jessi: house, this house is good. Okay. So talk, let's talk about market cycles. Did you already talk about that?

James: I don't remember.

Jessi: Explain the importance of market cycles and appreciation when considering a long term real estate investment.

James: Yeah, so this comes back to this like understanding appreciation piece of it. And not only, yeah, understanding appreciation and just how market cycles can affect rents and rent growth in particular.

Jessi: And by market cycle, what do you mean?

James: So sometimes like, so we just finished a huge run in property prices, values going up.

And, and now the question is like, okay, are they stabilized or are they going to go down? Remember 2008, nine, 10 other direction. So you just want to understand where you are in these things, right? Like right now, again, we're top of the market to buy a place and say, Oh yeah, look at all this growth that happened the last three years.

I'm buying with that in mind. I don't know if I would make that assumption. Yeah, no or rents. They grew huge like yeah I would not make that assumption. Yeah,

Jessi: cuz it's probably not gonna yeah, but

James: understanding that and also when you're on the low end Realize I'm like, ah, man values are just like stagnant.

I'm doing well, but like, okay, maybe honestly now's the time to buy now our strategy As we find fixed rubbers, places that value our deals, and we negotiate well, and so we even get that at a discount. And so we build in a whole lot of contingencies so that I almost don't care about what the market, if the market cycle goes down or is flat, I still win.

Yeah. If it ends up going up, I'm like, dude, home run.

Jessi: Yeah.

James: And so, so that's how I try to structure it. Those are harder to find.

Jessi: Yeah.

James: And not everyone can do them. And

Jessi: they're, they take a different type of expertise. I like

James: for the, for the properties that the banks don't like, you know? Yes. Different type of expertise.

Jessi: I do like, like when you do tours of different properties, you bring home a video that you're super excited about. And it's like, Oh, what's going to be on this video? I know,

James: and I'm just starting to to share those with others because I'm like, ah, people do love watching this. So I'm going to,

Jessi: it's kind of fun.

James: I'll share them.

Jessi: I mean, and, and. You, you have the experience now to look at a property and you see the value in, I mean, I look at the property and I go, that is a dump. And you're like, yeah, I know. It's great. You know, but yeah, you can, you can see that potential. Okay. How does debt pay down factor into the success of real estate investment?

James: Yeah, debt pay down is kind of an interesting one. So, in general, you're probably going to have debt on it, and you're going to make payments, and some of it goes to principal, some of it goes to interest. What's cool about paying off debt is, it's like, it's guaranteed building wealth. Now, depending on your interest rate, The percent return may not be great, but it's there.

And there are a lot of people where like, I think about our situation, right? We've got good size portfolio. If we did nothing else and we're like, let's just focus on paying off the debts and get rid of the mortgage, dude, our cashflow would be unreal. You know, I, well, I mean, I, we're paying a little North 15 grand and right now a month towards mortgages, dude, could you imagine?

That's crazy. Which. Yeah, no, that's almost all of them. That's separate from insurance and taxes. No, all of them are separate. So like, that's just a big deal. Yeah. And that's a huge number. Yeah. Yeah. That's excluding our primary as well. So all that to say, like, I think there are a lot of. There are a lot of millionaires, a lot of people who just by saying, I'm not going to worry about the cashflow, whatever extra cashflow I get, I'm going to pay off my debt because they're looking for that longer term.

All of a sudden when that's paid off, boom, it's going to jump huge and, and it's guaranteed. That's what's cool about it. Now, should you be doing that? I don't know, but kind of depends on what your rate is.

Jessi: That's what I was going to say. It depends on where you are in life and

James: the rest of your portfolio.

I don't, but yeah. You could, and again, it's a guaranteed return, which is kind of nice. It

Jessi: seems like to me that that, that is a good end game strategy.

James: Does that

Jessi: sound weird? Yeah,

James: I hear what you're saying. I

Jessi: mean, it's like, if you're, you've accumulated some properties, you're managing them and it's like, okay, I want to slow things down.

I'm not going to buy new things. Yeah. I'm going to put any profits towards my mortgages so that my cashflow goes up. And then over time you're living off that cashflow.

James: Yeah. One of the big strategies that I've heard was. Say all presumes you got a good job and you can afford to buy but like if you buy a place either every year or every other year like and just single family homes, right and Every other year seems plausible if you got a good job and you're living below your your means.

Yeah, like okay in 20 years life working time ago. You'll have 10 of these things. What you then do is you find your lowest five performing, sell them, and then take the proceeds from those sales and. Pay off as much of the mortgages of the other ones as you can. And, and maybe it's like you focus on one and then whatever's left over, you keep kind of rolling through different buckets and, and like, and what's cool about that is managing 10 properties is kind of a lot managing five is very doable and, and that's where like, yeah, and you could just self manage them if you wanted to, or heck, you could even have a property manager or whatever, but your cashflow goes up dramatically.

Right. And for less work,

Jessi: like

James: that's kind of a win. That's the cool part about paying off debt.

Jessi: Like consumer debt snowball. Hmm. Yeah. It's like, okay, I'm gonna just like any profit that I get, I'm gonna pay that off and then the payment I was making to that, I'm just gonna pay that off. And yeah, because, because I

James: mean, cause there's different strategies, right? Let's say again, you got a job, you got some money, or let's just say your investments are throwing off cash.

You kind of, there's, there's three, there's probably more, but there's like three choices. One, you can use it, go do fun stuff, live life, right? Just put it towards your daily expenses. Just whatever, you know, whatever, sure. You could do that. You could save it. And then go and invest in something else eventually, or you could say, Nope, I'm going to use that to pay down my debt.

Now what's interesting about that is the one where you just like you just spend on your life. Your future return on that money is now zero. It's gone. If you pay off the debt, that's that like guaranteed, whatever interest rate it was. You just got that return, which is cool. Or this is where a lot of people tend to fall.

They go, if I save it, maybe put it into a index fund and then in the time being, and then invested in something else I can earn above and beyond that 6%. I can earn 10, 12, 15 percent on my money. And that will actually like be more. Now there's a timing piece, right? Like if it. It takes you five years to buy your next place, eh, you're probably better off to pay off the debt.

But if you are genuinely able to do something every year, every other year, like, nah, you should keep rolling. Like, that's what you should do. Yeah.

Jessi: What are some examples? Of deals where low cash flow didn't necessarily mean the investment was unsuccessful I feel like you've hinted at a couple of these already.

James: Well, I think there's Anytime you can do like a okay I was gonna say like anytime you do like a low down payment that could be one where your cash flow is low But it's still a successful investment because when you're calculating your return on investment It's money out or money you get from it divided by money you put into it, right?

And so if you can lower that denominator All of a sudden Even if the cashflow is not great, the number looks huge. So I think about like our very first duplex was one where there was a, it was a program going on when we got like 9, 000 cash back for buying it. And so it dramatically lowered how much money we put into it, which is very cool.

And we had pretty good cash flow, but as a result, our return on investment was like 52%. It was unreal! And we were just like, Oh, cool. But it was less of a factor of us making bank, and more of a factor of, yeah, we just didn't put a lot into it. And so I think that's one where, technically, yeah, cash flow's low.

But, like, you can do that over and over and over and over and over again. And and I, I have been more pursuing those types of creative types of deals so I can put less money into it because it lets it it just, the returns get astronomical really quick, which is cool. Yeah. So I think that's a, that's a, that's a pretty like, that's a situation where cashflow doesn't look great, but who cares?

No, from an absolute standpoint.

Jessi: Yeah. I probably another example example of that is what you were talking about finding like a garbage property that's not gonna cash flow day one, but you're gonna flip it and

James: Yeah,

Jessi: it will

James: yeah, or it never does right in that particular case like

Jessi: right Yeah, it never does because you're not holding it and renting it.

You're selling it making your profit there.

James: Yep

Jessi: Why is it risky to only focus on cash flow when building a real estate portfolio?

James: Yeah, I think the big thing is It just blinds you to other opportunities. There probably were deals early on that we should have bought, but interesting because there was opportunity to improve it and make the asset worth more.

Yeah. And we just didn't, we didn't even consider it. And so I think that was, that's probably the biggest risk of all. Again, works out. Okay. But I think we grew slower as a result of it. Yeah. That's probably my, that's probably the biggest risk

Jessi: quote. Like, Vision is 2020 in hindsight. Isn't that a quote?

Isn't that a thing? It's like a saying.

James: Hindsight is 2020. I know that. Is that

Jessi: it? I think that's it.

James: Yeah.

Jessi: Hindsight is 2020.

James: Well,

Jessi: you see things clearly when you look back at them. It's

James: hindsight is 2020.

Jessi: Got it.

James: Yeah.

Jessi: There you go. I got it. I did.

James: Vision is 2020 in hindsight.

Jessi: Guess

James: that technically works.

Jessi: We're recording late. Okay. Fair enough. Fair enough. No, yeah, it's, you know, Had we known, we would have done it differently, but.

James: Yeah, it's for learning.

Jessi: It's all right. Can creative financing or other strategies sometimes lead to more successful investments, even if cash flow isn't high?

James: Yes.

Jessi: That is a yes or no question. Give me an example of creative cash flow, or creative financing, or using other strategies. To make a deal good or valuable.

James: Yeah. I think it comes back to all those same examples, right? If you are going to go down a creative or low down payment pathway, there has to be some sort of value add component to it for the deal to make sense.

And that usually means upfront, there's going to be really low cashflow. That's, and you got to be okay with

Jessi: that. I don't know what the relation, there's probably some economic relationship Thing of how they all work together. Like if one is low, then the other is high. And here's how they adjust when you move them around.

And yeah, well, it's just

James: the chances of someone just giving away a property are super low,

Jessi: right?

James: I mean, it happens, but super low. And so if you're going to do some sort of creative thing, it just usually means you're going to pay a little bit more as well. Like let's say they're nice. If you can walk in with cash, you often get a discount, but you know, it's cash.

Jessi: Yeah.

James: And so Yeah, so I just think that's like, that's just something to keep in mind if you're ever going down the creative route. You can do it, but it's probably not going to make sense as a buy and hold because your cash flow is going to be super low.

Jessi: What is the most creative deal you have put together?

It's not on the list as far as like creative financing. I

James: mean, our apartment building was pretty high up there. That one was pretty sweet. It was a 11 unit place. We ended up getting three quarters of it funded by a bank. The other quarter of it funded by the seller. And then No, I paid the 3, 000 closing costs.

And then I ended up taking out a personal line of credit to do all the repairs. And then once all that was done and it was stabilized, we refinanced, pulled out enough cash to go buy another five unit place. That, that was like, I mean, that was like a home run out of the park deal. Yeah. More recently, bought a single family home.

Guy was in foreclosure. And what we ended up doing with that one was there were two loans. Both loans were being called due. So we raised the funds. From other investors to pay off the arrears on the first mortgage and then fully pay off the second mortgage. And then we took the first mortgage subject to him still holding it.

And so we bought it with that mortgage in place. Plus we had our other investors on top of it. And one of our investors was the ultimate buyer as well. So all incentives were aligned. That was pretty creative. And then. Our most recent one, we bought it from a seller, they own it free and clear and we give them a couple options.

We're like, Hey, we'll buy it for cash for this, but if you want to be creative, we'll do this other one. And they chose the creative option. And so we bought it for 25 grand down, 160, 000 total, and then they took a note for the rest.

Jessi: Whoa.

James: No payments or anything until we're done fixing it up. And then. Huh.

And so we raised the 25 grand from people and then we budgeted 95, 000 to do all the repairs. So we raised 120 grand for it again, and we just got notes from people. And so that's another one where we actually have three mortgages on that property. And but

Jessi: you're going to sell it and then pay it all off.

James: Pay it back. I said, yeah.

Jessi: All right. That's creative. Yeah. Last question. What. Advice would you give to my 20 something year old self who was only obsessed with finding high cashflow properties, but missing out on other aspects.

James: When I've got you, I think, you know, it's funny. We actually, we see this in the game cashflow where it's this game by Robert Kiyosaki, where you're like, you're going around a board and you fill out financial statements, which I think is awesome.

But you're like, that's a game. And, and in this game you can buy rentals. And you combine for cash and you get cash flow and then every once in a while someone comes along and will buy that property from you and you know from the game, right? Like what gets you out? Right? It's not that. Oh, I bought a place and I just kept buying and kept buying and kept buying.

It's, Eventually some buyer comes along, offers you a lot more money for it. And all of a sudden you have this stack of cash and then you play the Monopoly game. You go from the couple of greenhouses to the red hotel and you then go do a big deal,

Jessi: get a bigger property. And then

James: it's at that big deal where the cashflow starts to matter.

And yeah, you're collecting cashflow all along the way, but ultimately to quote win the game, it's all about trading up to something bigger. And so. I think talking to you and yourself, I'd be like, yeah, cashflow is important. Ideally, you're not feeding this thing every single month, but breakeven might be okay if you have line of sight to increasing the value of this thing and then selling it.

I think I would have talked a lot more about that.

Jessi: Yeah. I think had, had you given me like, like you were saying, a concrete, Line of sight with, with like clear examples of like, okay, here I'm like, gimme, I'm gonna like lay out on the whiteboard. Which we had like a full wallboard. Yeah, we had a wall, massive white whiteboard.

James: I'm gonna lay, I wanted up for my birthday. And you're like, this is the dumbest thing ever. And I was like, I don't care. Trust me. I'm like, and now you're like, love. We still have it. I use it all the time.

Jessi: I think I use the inside one way more than you. I know, I

James: ended up buying a second one. You have your own.

Because you guys stole that one.

Jessi: Okay. That's like a tangent. I think had you whiteboarded out both of the scenarios for me and been like, okay, here, like, here's what it looks like. If you get high cashflow properties, you know, let's, let's zoom out, you know, 10 years from now, 20 years from now. Here's what this is going to look like.

And like, bear with me. Let me like script out what the other thing looks like. Yeah. This is. The trade off like, yeah, okay. We're not going to do cashflow, but we have income from our other jobs. Like you were saying, here's our, here's our cashflow statement. It's like, we're going to be fine even if it doesn't cashflow.

And then over time, like here's the exponential growth.

James: And I think it's that recognition that it takes time. Like this is a 10 to 15 year process. And so it's okay if you're not collecting cashflow day one. Right. You know, if you're not maximizing that day one, cause it's really, it doesn't matter until 15 years from now.

Jessi: And I, I don't, I just don't think I had that.

James: Me neither.

Jessi: Longevity

James: viewpoint. Yeah. I agree. You know,

Jessi: it was like, yeah, but this month, like, what is that going to look like? Yeah. Yeah.

James: Yeah. I think for us, it was like. Yeah. Yeah. Cause we both were working. We both had good paying jobs. We were like, I don't have time to do flips, which in retrospect, I'm like, yeah, I could have hired someone, but I didn't know that because I was still just getting started.

And and so we were like, no, we want to do the cashflow. Cause that's the thing that gets you out of the rat race. Yeah.

Jessi: And

James: it's like, yeah, it's totally true. You just don't need to do it day one, right? That's probably be my big advice is you don't need to optimize for, you don't need to try to maximize the cashflow day one.

Instead, I would maximize asset growth and really focus on value add, fixer upper type of stuff. And if you don't have the time, energy expertise on how to do that, partner with someone else who is doing it and go along for the ride with them.

Jessi: Yeah.

James: And, and that's kind of a best of both worlds. And I would have, I would have considered something like that when I was working and didn't have time to do it all.

Yeah.

Jessi: Yeah. Interesting.

James: There you go. There you go. That's that's cashflow. That's why it's good, but it's not everything. And I think it's important to think of the other stuff as well. So hopefully that was informative and you learned something. And if you did, I would love it. If you left a, a comment or even just a rating.

wherever it is that you listen to podcasts. And if you are interested in tagging along with what it is that we are doing and investing in some of those more, let's grow deals and or cashflow deals. You can check us out at furlo.com again. Thanks for listening. Have a great day.