Josh Cantwell: So, hey guys, welcome back to Accelerated Investor with Josh Cantwell. And I announced a few days ago that I was going to be doing a series specifically on the nine traits of elite entrepreneurs and eight-figure multifamily investors, and do a deep dive on these traits that I’ve witnessed in myself and my partnerships, my coaching students, and other elite entrepreneurs, and share with you what it kind of takes to become an elite entrepreneur in real estate.

When I think about elite entrepreneurs, I think about somebody that has at least an eight-figure net worth, so at least a $10 million net worth, somebody that makes at least a half a million dollars a year of passive income. I think about somebody who makes at least a million dollars a year of consistent total income. I think of somebody who pays very little in taxes because of the tax write-offs, the depreciation schedules, the cost segregation studies that real estate allows.

I also think of somebody who’s fit, happy, healthy, has family, friends, faith, has their finances in order. These are all some of the characteristics that result of being elite in business. Being elite in business gives you the free time to be able to take care of your body. It gives you the free time to be able to take care of your family and have a great relationship with your spouse. It gives you the free time to be able to go have fun and feel like you have a joyous, happy life. These are all the things that I think of when I think about elite entrepreneurs.

And the very first trait of elite entrepreneurs that I’ve witnessed is, number one, they invest for cash flow now. Right now, write that down. They invest for cash flow now. So, let’s hunker down on this for a minute. What I mean when I say they invest for cash flow now is the first thing I think about is that they don’t flip properties. They don’t buy a house, put $50,000, $100,000, $20,000 into it, carry that debt for a long time, rehab a house, and sell it. They either wholesale houses very quickly or wholesale apartments very quickly for quick cash with no work and no renovations. Or they buy the asset with the intention of renovating it and improving it in order to keep it to push the income and push the equity. They don’t flip. They don’t buy and rehab and sell. They might buy, rehab, and keep, but they don’t buy, rehab, and sell. So, that’s the first thing that comes to my mind.

The second thing that comes to my mind when I think about investing for cash flow now is that these elite entrepreneurs use somebody else’s private money. They don’t just get as much bank debt as possible because bank is always going to be cheaper than private money, but bank also is going to have a balloon payment, it’s going to have more closing costs, it’s going to have less flexibility. You see, everybody thought that debt was cheap over the last couple of years, and it was. So, they bought apartment buildings, self-storage buildings, rehabs, small portfolios. They bought it with bridge debt that had maybe a two-year or three-year or four-year balloon. So, they got a really high leverage, very little private money, high loan to value with an upcoming balloon payment that’s coming soon. And everybody thought that that was the best route to go. Well, it wasn’t, and it isn’t.

When I buy properties for cash flow now, I use long-term debt at a very low loan to value and I bridge the gap. So, let’s say I get 70% loan to value or 65% or 75% loan to value. I bridge the gap using somebody else’s private money. So, I might pay 3%, 4%, 5%, 6% on the bank debt, but a very low loan to value, and the rest of it, private money with the long of a term as possible.

So, elite entrepreneurs, when they do secure bank debt, they invest for cash flow now and they get the longest-term financing they can, 7 years, 10 years, 12 years, so that gives them lots of options. Also, investors that invest for cash flow now, they lock in debt as long as possible, as cheap as possible, and still, debt is still historically very low. Interest rates have gone up on commercial permanent financing from 3.5%, 3.6% into the fours, into the fives, and now, it’s in the middle fives and even in the low sixes. And people are like, “Oh, my gosh, the cost of the debt is much higher.” Well, it is, but historically, it’s actually really, really low.

When I think about the elite entrepreneurs that I know that invest for cash flow now, I also think about people that are buying income-producing properties, they’re buying duplexes, quads, small, medium, and large-sized apartment buildings. They’re buying self-storage facilities that are underperforming. And then what they do is they execute the CapEx, the rehab, while most of the units are still occupied.

So, if I buy a quad, a four-unit, and I’ve got three of the units occupied, I can renovate the fourth unit and still be at least breaking even on my cash flow. I bought a little five-plex called Warner Road about a year and a half ago. It was about $130,000, and four out of the five units were occupied. We renovated the fifth unit. We got it occupied. We then bumped the rents on the other four units. We did some other exterior kind of cleanup. There were some violations from the city. We clean that up. We’re all in it for about $150,000.

A year and a half later, we continue to bump the rents where we could, and the property cash flowed the entire time. There was no loss of income, no operating losses. And we sold that building about a year and a half later for $225,000. So, that’s a very small example in my world, five units. We just bought 296 units and we’re doing the same thing. We’re renovating about 40 units right now, about 13% of the portfolio, while the other 87% of the portfolio is occupied. So, the CapEx is happening while the units are occupied, so we can get cash flow now while we’re looking for more cash flow down the road.

The other thing we can do is push the rents during the improvements. So while we’re improving, if somebody comes up on a lease renewal, whether it’s a get a self-storage building, whether it’s an apartment complex, we can do at least renewals and bump rents. The other reason why investors are investing for cash flow now is that investing for cash flow always works.

I had friends of mine buying units and renting them out back in 2004 when I got in the business full time. We had guys that were buying assets and buying properties, again, right at the top of the market in 2008. Now, if you were on the coastlines – New York, New Jersey, California, if you were in Florida and you bought just to flip, you got killed in 2008. But if you bought for cash flow in the Midwest, in the Southeast, in the South, Texas, Georgia, Charlotte, Northern Florida, Ohio, Indiana, Pennsylvania, places like that, it didn’t matter if you bought at the top of the market in 2008, it still cash flows. It did matter if you bought at the top of the market and got bad debt. Like if you got a 100% loan to value with adjustable-rate mortgage, then you got hammered.

You see back in 2007, there were 116 million households, households meaning households where there were multiple people living under one house, one roof. It could be a new boyfriend/girlfriend could be husband and wife, could be a single mom with kids, whatever the mixture is, does it matter? But there were 116 million households back in 2007. Today, there’s 128 million. You can look around. You can verify that where you want. There’s 128 million. There are 12 million new households.

Also, back in 2007, we were 2.5 million units overbuilt. We were building condos so fast. We’re building houses so fast. People were getting all this easy, that easy loans. We were overbuilt. We had too many houses. People were speculating. So, when the market stopped and people stopped buying, there were way too many houses. That’s why house values went down. Today, we’re at least 1.5 to 2 million homes underbuilt, which means if we go build 2 million new houses, we still are not going to be able to catch up to the demand. We won’t be able to catch up at one time, but then we’re still going to have more demand next year.

Also, another reason why investors invest for cash flow now is because rents increase with inflation. And as we know, there’s always going to be inflation. The Fed targets an inflation rate of about 2.5% to 3.5%. They want inflation. So, we know that rent values are going to be going up a minimum of about 2% to 4% every year all the time for the rest of our lives.

Another reason why elite entrepreneurs invest for cash flow now is that house values. Even though we had the big economic reset of 2008, 2009, 2010, house values have gone up all the time. Obviously, in my lifetime, my parents bought my house when I was a kid growing up for $47,000. My parents were ecstatic when I was in college. They sold that house for $150,000. That house today sells for about $250,000. So, in my lifetime. 45 years old, my parents did nothing and they bought the house for $45,000, sat on it, paid off the mortgage. Their house is worth now $250,000, just letting the regular economy, the market, cash flow, and somebody else pay down the debt from the rent.

So, house values are always going up. Again, there’s going to be some changes to that if there’s an economic reset at some point, but look, because there are so many new households forming and we’re so far underbuilt, normally, you see there’s two to three– I mean, right now, there’s usually about nine months of supply. Nine months of housing supply means that we have what’s called an even market. It’s not a seller’s market. It’s not a buyer’s market.

Right now, we have two months of supply. So, house values are going to keep going up. I don’t care if the interest rates have gone up from 3.5% to 5.5% percent on a mortgage. There’s no supply. So, these homes are still going to– maybe not at the same pace because remember, in the last year, so since the pandemic in 2020, house values have increased depending on where you get your data, somewhere between 32% to 38% in the last two years. That’s an average of somewhere around 16% to 20% annual increase in home values.

Well, when you have only two months of supply, in a normal market, it’s nine months of supply, they’re going to keep going up. But even if it was the reverse, even if there were 15 months of supply in a normal market is only nine, which means it’s now a buyer’s market. Because there’s too much supply, these properties can still be bought with low leverage with private money. Cash flow and long term create more equity and more cash flow for the investor.

The question is, is how fast can you get your cash flow to equal your day job income? For everybody that I talk to, limited partners, general partners, that’s the number one question is how many properties I need to buy or how many limited partnerships do I need to do, how many deals and units do I need to own in order to replace my income? Let’s say you’re a sales rep making $250,000. Let’s say you’re a doctor making $450,000; maybe say you’re a nurse, you’re making $65,000 to $80,000, whatever that is. A teacher making $65,000 to $100,000, depending on if you have your master’s degree and your tenure, etc., etc., how fast can I buy cash flow to replace my W-2? That’s ultimately what every single one of my members, students, limited partners, that’s what they want.

And so, that’s why elite entrepreneurs invest for cash flow now. You’re not going to replace your income now with cash flow, but if you invest for cash flow now, you will eventually replace your W-2 with cash flow. It could be two years from now, could be 10 years from now, but that’s going to happen so much faster than, hey, I’m going to keep a W-2, I’m going to save 15% of my income in a 401(k). Thirty-five years from now, I’m going to have a million-dollar 401(k) that earns a 7% return and I’m going to have a $70,000 annual income. Barf, I could create $70,000 of income in a year or less just buying some buildings, buying some small to medium-sized apartment buildings, let alone a big one, let alone a big self-storage facility.

So, invest for cash flow now. That’s what elite entrepreneurs do in real estate. That’s what my buddies and I, we’re eight-figure multifamily investors with an eight-figure net worth or larger that have a lot of experience. And one of the only regrets that we have, one of the only regrets that I have is that I didn’t just keep every property that I flipped. Remember that, as you make your journey to becoming an elite real estate entrepreneur.