by | 02, Mar 2022

MIMS Highlights

Wait a minute, Doc. Are you telling me you built a time machine…

This week we’ve got something special for you dedicated listeners! 

We are going back in time! Over the course of this show, we have put down some serious knowledge. 

So today we are going back and highlighting some of our favorite segments from previous episodes. 

Whether they were funny or educational, these are some of the show’s defining moments and subjects. We discuss red flags to watch out for in investing, money-making myths, networking, and lots more.

Thank you to all of you who listen and support this show! We really appreciate each and every one of you! 

Tweetable Quotes:

“Here’s my general rule of thumb when it comes to predicting the future and guessing metrics, and you have to plug these metrics and to get your return projections always assume the worst when it comes to numbers that could help you and always assume the best when it’s numbers that can hurt you.”  – Anthony Vicino

How is anybody ever going to learn how to be financially literate if talking about money is taboo?” – Dan Krueger

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five rules of investing

The Five Rules of Investing

** Transcripts

Anthony Vicino: [00:00:14] And welcome to multifamily investing made simple to podcast where we take the complexity out of real estate investing so that you can take action today, I am your host. Anthony Vecino of Invictus Capital, joined as always by my partner Dan. I got a brand new shiny camera. Kruger, not today. In under 10 minutes, we’re going to be talking about three red flags that passive investors need to be on the lookout for. You need to be on the lookout because if not, these red flags are going to jump out of the bushes and smack you over the head. You’re going to lose all your money. Right. Yes.

Dan Krueger: [00:00:49] Yes. I don’t know. Is that what red flags do? I thought they just sat there looking ominous and flapping in the wind.

Anthony Vicino: [00:00:56] Yeah, I guess they’re kind of an inanimate threat, but it’s what they represent. That’s so scary.

Dan Krueger: [00:01:00] Ok, so

Anthony Vicino: [00:01:02] Here’s here’s number one. Red flag to be aware of when looking at a passive investment, it is rosy assumptions not like a rose bush, but like, I actually don’t know,

Dan Krueger: [00:01:16] Rosy,

Anthony Vicino: [00:01:18] Optimistic, overly assumptions. So let’s break that down. What assumptions are we specifically trying to be cognizant of?

Dan Krueger: [00:01:25] Yeah, we should probably say that, you know, advertising the potential upside of a deal is perfectly fine. What really you should be looking for is the lack of transparency with what the potential downside could be. And we’ve seen this left out of a lot of operators’ deal decks that they distribute where they look at the best-case scenario. And it looks all fantastic and everything’s great. No one’s making a ton of money, but you’re not really sure exactly how bad things can go before that deal starts to lose money. So there are a few big factors a few variables that have a really major impact on the performance of a deal, and we’ve talked about them a lot, but we’ve got to do it again. Cap rates, that’s a big one. That one probably has one of the biggest pulls on a deal relative to how minor you adjusted. And really, it’s just because it impacts the valuation of the property. So if you notice that the operators have their cap rate moving favorably, which would be moving downward might be counterintuitive. But cap rates going down actually means properties are going to be worth more. So if you see a cap rate dropping consistently and operators underwriting package or deal package, that’s something you want to dig into a little bit and see what that looks like. If it inverts, if the market gets soft or that cap rate goes up or if it’s just flat.

Anthony Vicino: [00:02:39] Yeah. The other two things that we really want to keep an eye on and incorporate is the big one because just a tiny little tweak of it has massive ramifications. But two other ones that you really want to be aware of are your rent growth, your organic rent growth assumptions, and your expense growth assumptions. And so organic rent growth is just the appreciation that you can expect the market to demand over the next couple of years. Generally, we want to peg that as close to inflation as possible and in our market, say here in the Twin Cities, over the last couple of years, we’ve been seeing rent growth of around seven five to seven percent. So that’s really strong. But it’s not a good underwriting practice to assume it’s going to continue being that strong. Better is to say, let’s peg this to inflation at about two to three percent. So holding it pretty much steady at zero. And then we are going to force appreciation, which is an entirely different thing. But in that way and that world, then you’re not going to be caught off guard should the market soften. For some reason, rent growth doesn’t grow how you think it will. In the same way, with expense growth, always assume that expenses are going to grow and probably grow more than you think they are. They just have a way of doing that. Utilities never get cheaper. They’re only ever going up. And so you need to adequately budget for worst-case scenario. And here’s my general rule of thumb when it comes to predicting the future and guessing metrics, and you have to plug these metrics and to get your return projections always assume the worst when it comes to numbers that could help you and always assume the best when it’s numbers that can hurt you. So best is like, they’re going to go up.

Dan Krueger: [00:04:21] It’s very good practice. And you know, if more people did that, there would be fewer deals out there. But then you’d also notice that all the deals out there are performed really well. So it’s really important to look at that stuff. As we said, a lot of operators will focus on the upside, but if you don’t see it very clearly laid out what the potential downside is and how much of a cushion there is in a deal, then you definitely want to ask about that.

Anthony Vicino: [00:04:43] Yeah. And this gets to what you mentioned before about the stress. Testing is like being able to see where does this deals? When does it start falling apart? Where is the cap rate have to be? What do the rent growth assumptions have to be? Which what’s the intersection where this thing falls apart? Because even if it’s unlikely to ever find that intersection, it’s helpful to know where it is. Yeah, and every really

Dan Krueger: [00:05:03] Got a point where it starts to lose money. So it’s not a bad thing. It’s just how far is that from the current place? And you know how how how much do things really need to go the opposite direction than what the operators think they’re going to go before people start to lose money. It’s just you want to see a big, nice, big gap between where you lose money and where things are projected to be.

Anthony Vicino: [00:05:25] I like big fat margins of error, taking inspiration from the one, the only brand in Turner of BiggerPockets fame who put out a video earlier this week. Maybe last week. I can’t remember when we were watching this. It doesn’t matter where it was the seven moneymaking myths that are stopping you from making millions. And we thought, Hey, let’s do one of those. Reacts to videos where we react to somebody else’s content and we break it down for ourselves, so I have these seven myths here. We’re going to go through them one by one and address them. Take our take a hot, take our opinions and see if we’re in agreement with the one and only Mr. Beardy Brandon. And in the process, I think we’re going to have the opportunity to expound on why I think most people’s investing strategy is as bad, if not worse, than the Formula One K-like dream scenario that I proposed. All right. Are you ready to get into these?

Dan Krueger: [00:06:26] Let’s dive in.

Anthony Vicino: [00:06:27] Ok, so money-making myth number one that is costing you or stopping you from making millions? That’s a mouthful. So from now on, they’re just money-making myths. Number one. You shouldn’t talk about money.

Dan Krueger: [00:06:40] Yes, yes, yes, money in this country. The US is a taboo thing to talk about, and from what I gather, that’s not the case in other places around the world. I think it might be the case in Europe to some degree, but from what I gather, it’s a very much U.S., American Western culture kind of thing to be hush-hush about, about money.

Anthony Vicino: [00:07:04] Yeah, I have no idea if that’s true or not, but it is interesting to me that in our country, money is simultaneously worshipped and taboo. It’s crazy how we look up to people. Think of who you know off the top, your head celebrities. They are making a ton of money and like these big business people that we’re aware of like, we put this, we put money on a pedestal. When we look at Instagram, everybody has a jet and a Lamborghini and like just sip and Cristal at a sippy cups all day. Like, there’s this fascination with having all the money in the world. But then simultaneously, when it comes to being in a family-like, nope, no, talking about that and not talking about finances, no talking about investing, that’s awkward and uncomfortable, like thinking about my family wasn’t so much like this, and I think I’m really fortunate that my dad was very open in talking about business and finance with me. But my mom definitely wasn’t. My siblings definitely aren’t like they did not adopt this. And so talking about money is very uncomfortable because it’s either like it’s only OK to talk about it. If you’re complaining about not having it, I feel like that’s the only scenario.

Dan Krueger: [00:08:15] Yeah, I think that’s accurate, and it’s really interesting. If you kind of unpack the logic behind that perception that people have to talk about money is bad because it’s like if you think about it, if you want to get something, you have to learn about it. If you have to learn about something, how can you learn about it if you don’t talk about it? I feel like that’s impossible. So I think that just sets so many people up for failure. If we kind of put this concept, this topic in the corner and say, we don’t talk about that, that’s hush-hush. How is anybody ever going to learn how to be financially literate if talking about money is taboo?

Anthony Vicino: [00:08:47] It’s a shame that we didn’t really cover this in school, high school, college much. Even if you go in to get a finance degree, which you did like, it’s still not really talked about in the same way. And it’s really interesting that I read a lot of books on finance and on money. Unlike books that are labeled things like how to get rich, right. And even when I’m reading that, like a book of that title, I still kind of go, it feels dirty, it feels clickbait. It feels like something feels gross about it. But the content is really good. And so I enjoy those books. But there’s even within myself, there’s this push and pull of like. Seals dirty.

Dan Krueger: [00:09:22] Yeah, it was really interesting. I was at an event a couple of weeks ago and there was an individual there, a younger guy. I think it was about twenty-five years old and he was from. Okay, so get this right. Oh. It was either Puerto Rico, Costa Rica, he’s from Costa Rica, I believe. I apologize if I get this wrong. I hope he’s not listening.

Anthony Vicino: [00:09:45] You’re listening to this, Mr. Puerto Rican. Maybe not a Puerto Rican man. Let us know.

Dan Krueger: [00:09:50] Yeah, I mean, I’m blanking because we’re recording. But the long and short of it is, is he was from another country. And one of the things he was talking about at this event was that wanting money, desiring money was perceived as bad in the country that he’s from. Hmm. So a little bit different than the way it is here, where we look at people who have money as the man and the bad guy, you know, in our country, I think desiring money and trying to get rich is a little bit more accepted, but we still like to hate the guy on top. Yeah. Even though we glorify people making that claim as soon as they get up there, they’re chastised for it. And so it’s really interesting to see that wanting money is somehow automatically lumped into greed, whereas at the end of the day, there’s a big difference between being greedy and wanting money. If you want money so that you can spend time with your family or give money to organizations or people that need it and help them kind of like Bill Gates and Warren Buffett and some of these guys do. That’s a perfectly moral cause. And so I think that a lot of people get just confused about the difference between wanting to acquire capital or assets and being greedy for their own.

Anthony Vicino: [00:11:05] And this ties into Brendan Turner’s myth number three. So we’re going to skip number two for a second. We’ll come back to that. But myth number three is that money is evil. And, you know, I don’t even think that you need to justify your desire or want or in need of money and the terms of like greedy or not greedy. Because it’s your life, you get one life, you get one, go at it as you live it on your terms. If that’s the thing that you want. If you want a lot of money so that you can go do the things that you want to do and like more power to you, like I’m not going to judge you, but the thing with money being evil is it’s not. It’s just a tool in which you use it is what really matters at the end of the day, like. And there’s some pretty egregious spending out there on things that are just silly. And there’s a lot of suffering in the world, and there’s a lot that you could do with your money. The most important thing for me, the most important function of money is that it allows you to buy back your time. It’s like I was using this analogy the other day. Money is a tool, and it’s like somebody coming up to you and saying, I want to collect all the tools in the world and you’re like, What are you going to build with it? And they’re like, nothing. I just want to keep all my tools in the shed. And that’s like what a lot of people do when it comes to, like just accumulating money is they just want to have the money. And it’s like, Well, what are you going to use it for? What kind of impact are you going to have? That’s the bigger question for me.

Dan Krueger: [00:12:26] Yeah, it’s really, really interesting to me as well. I mean, just the statements that I don’t want Butcher was money is money. Money is evil. Yeah, the concept is so strange to me because really, it’s implying that if you are getting money, that means that you are taking it from somebody else. Yep. Which is not true. So I think people need to dispel that thought process and that myth that it’s a zero-sum game where if you acquire a dollar, that means it came directly out of somebody else’s pocket. It’s not true at all. If you create value in some way, you get compensated for that. You’re not extracting value from somebody else in order to to take it. If you’re doing it the right way, what you’re doing is you’re creating some sort of value that wasn’t there before that you’re going to reward for. So even though you might have acquired some money in a deal that you were doing, you probably created a job that created an income for somebody else that gave them money to go spend somewhere else. They ended up in somebody else’s pocket. So this exponential spread of wealth is created when you’re actually creating value. And if you get compensated for that nine times out of 10, you create more value than dollars, you are rewarded for it.

Anthony Vicino: [00:13:34] Mm-hmm. The people, this is interesting. The people that you will hear say money is evil or that money is scarce and that, like you, earning money is taking away from my chances for making money. Those people tend to be poor and the people who have a lot of money, tend to be very abundantly mindset where they’re like, there’s plenty to go around like me. That guy having a billion dollars isn’t stopping me from getting a billion dollars. And so right there, if when you think about money, if you immediately go towards the scarcity side, you need to start there on that because that is holding you back and you will never achieve the life of your dreams if that’s your starting point. So you need to pivot to the abundant mindset.

Anthony Vicino: [00:14:16] And this seemed like a really good opportunity to share our story of how we met, but then also talk about networking and the power of networking. So two years ago, we met at a conference and the story is I walked in and sat at an empty table because that’s how I network is. I go to a room full of people and then I. Hide in the corner and then, I guess, is very similar, so he came and found me, we sat next to each other and struck up a relationship. And here we are. Two years later, it’s been a wild, crazy ride. Now, this afternoon, we’ll go back to this same conference that we met at two years ago. And now, instead of being in the crowd, we’re actually on stage, which is pretty cool.

Dan Krueger: [00:14:57] Yeah, I mean, I guess the bottom line is it’s worth it because I’m the exact same way, super uncomfortable with the whole networking thing. It’s exhausting and intimidating for me, and I’m the same way as Anthony. I go and find the least populated area of the room and situate myself there. And that’s where he was, and that’s how we met, but it’s totally worth it. We’ve said it so many times in the show, but it bears repeating again because it is the foundation of pretty much any business, but especially the business we’re in. It’s all about who you know and who knows you.

Anthony Vicino: [00:15:25] Yeah.

Anthony Vicino: [00:15:25] One of the things is about networking events that I found with these big conferences, I think conferences. I typically like the events where you have to pay to get in the door rather than just going to the free networking events like the Arby’s. You get a different caliber of people who are willing to pay in travel for a thing. So I like conferences because it attracts a lot of people from around the country. But one of the really

Anthony Vicino: [00:15:47] The interesting things is you can have you

Anthony Vicino: [00:15:49] Can learn so much more about your industry really quickly in a short period of time during the networking periods. Because you’re sitting there having a conversation, maybe you have a beer and like tongues are getting loose and we’re starting to talk about like what’s happening in this market, in that place with this person and that thing and regulations. And you can gain insights into how the market is moving so much quicker than just what you see on social media or in the media and at large because that’s going to be filtered to a large extent. I’m not going to tell you the deep, unvarnished truth about all the deep, dark secrets I see in the industry right now. I’m not going to put that on blast out in public, but if you get me at a conference and you take me aside and start having a conversation, you might start to gain some insight into things that you just had no clue about before.

Dan Krueger: [00:16:33] Yeah, I think that’s a good point. You can go a lot deeper with people and have some really good conversations, especially when you go to the happy hour afterward. I mean, there’s a couple of drinks going around. People are going to, you know, start talking about some things that maybe might be a little bit more controversial. I don’t know, but I think the main thing I like to tell people about it is it’s the most efficient, the most time-efficient way to move yourself and your business forward because you can accomplish way more in one weekend at a really good networking event than you could in months of just trying to meet people one by one in the normal course of business, right?

Anthony Vicino: [00:17:05] Let’s talk about the three best investments that you can make

Dan Krueger: [00:17:10] Lottery tickets, cars, and boats. Those are the three great.

Anthony Vicino: [00:17:16] I did not hear crypto on there, so I’m disappointed.

Dan Krueger: [00:17:19] I mean, you know, soon I’m not there yet. Lottery tickets are still a better bet. Now we all know boats appreciate like crazy.

Anthony Vicino: [00:17:26] So do boats actually appreciate?

Dan Krueger: [00:17:28] Oh yeah, a hundred percent like, really quickly.

Anthony Vicino: [00:17:30] Ok, not like a car

Dan Krueger: [00:17:33] That goes to the Moon.

Anthony Vicino: [00:17:35] Ok, well, well. More on a more serious note. Now you’re listening to this podcast, you might be thinking, OK, they’re going to tell me real estate, real estate is going to be on that top three somewhere. But guess what, people? You’re wrong. This is a real estate podcast, but it does not make it into the top three. So Dan, number one, what’s the number one best investment you can make?

Dan Krueger: [00:17:55] It’s going to sound cliche, but yourself. But really, it’s all about education, right? The first part of your life, regardless of what you’re going to end up doing, you’ve got to put every dollar into getting as smart as you can get and try to know and understand everything that’s out there to try to figure out what you like. And then also, I think this part goes unnoticed quite a bit, but really try to get educated on yourself. Try to learn who you are, what makes you tick, and learn about, you know, what’s going on under the hood in your brain. If you can be really self-aware about yourself and educate yourself, you know, in college or learning a trade or working or something. That’s where all your time and capital needs to go early in life, in my opinion. I might be wrong, though

Anthony Vicino: [00:18:39] I would agree with that. Actually, I’m writing this down because self-awareness. I say this all the time. It is not a superpower. It is a superpower. Like to understand how you work, your strengths. Your weaknesses are how you communicate with the world. That is invaluable. And so anything that you can do to level up that ability and going back to what you mentioned before, you are the most valuable asset. So anything that you can do that adds value to yourself, it’s going to compound over time. And so think about all the skills that you’re acquiring as

Anthony Vicino: [00:19:12] Though you’re leveling up this beast, this this

Anthony Vicino: [00:19:15] A machine so that it can go out there and do bigger, better, badder things. And one of the coolest things than about investing in yourself is the fact that regardless of what the market does, regardless of who’s the president, regardless of what happens with COVID, nobody can take your skills away from you. You always have those. So even if you go to zero, even if your business has to start over, you still have your skills from which to rebuild.

Dan Krueger: [00:19:38] Yeah, it’s like scooping up a car almost. You just tack it on different things to make it more powerful and more versatile. And like that comment I made about understanding yourself and becoming more self-aware is really almost like trying to figure out what kind of vehicle you’re driving, right? Might be in a car, you might be in a plane, you might be on a scooter. And if you don’t really understand yourself and what kind of vehicle you’re in, you’re not going to understand effectively how to how to drive yourself or steer yourself or whatever it is like. You have to figure out what the heck you’re in and then learn how to drive it.

Anthony Vicino: [00:20:06] Mm hmm. So figure out what are those skills that are going to serve you best in life? If you’re an entrepreneur or an investor and you’re listening to this, some ideas of things to be thinking about. One is probably really understanding finance, start to learn accounting and bookkeeping. Spend some time learning, marketing, and branding like these. These are skills that you’re always going to need. I would say learn how to communicate communication, whether through the written word or through the spoken word, whether that’s in a podcast format or this is like I’m trying to communicate to an employee my vision for the world, or I’m trying to communicate to a loved one like what it is that I need out of the relationship like communication is everything and there’s no shortage of ways that you can invest into that.

Dan Krueger: [00:20:49] Yeah, I mean, if you it doesn’t matter if you’ve got the best thing in the world, the best idea, the best product. If you can’t effectively communicate what that is and the fact that you’ve got it and what it can do to the world around you, no one’s going to buy it right. And, you know, to kind of double down on that point, you could have a really silly idea like the shake weight. For example, if you’re really good at communicating that thing out into the world, you can sell a ton of them. But yeah, I mean, communications, everything and just real quick on the whole financing because I’m kind of the finance guy between the two of us. You don’t need to understand anything complex, right? If you can understand how to read profit and loss statement and a balance sheet and a cash flow statement, then you’re going to be good. Beyond that, you get experts in your life to really handle the nitty-gritty of it, but you do want to be able to speak the language of business, which is accounting.

Anthony Vicino: [00:21:35] So that’s absolutely right. So that is number one, that is the best investment that you can make is in yourself.

Anthony Vicino: [00:21:41] Let’s talk about what we’re here to talk about, which is infinite returns. Oh, like, that sounds pretty good, right? Like, I want an infinite return. Now, this isn’t just clickbait, right, like we actually have something underlying this that is interesting and compelling for a real estate investor at home to know more about right, we didn’t just bait and switch them.

Dan Krueger: [00:22:04] Yeah, no, it’s important to notice for any of the people who are looking for life insurance information, we’re not trying to bait and switch you. We’re not going to talk about that. If you’re looking for. Oh no, I’m sure it’s infinite banking wrong. Video. Keep going.

Anthony Vicino: [00:22:15] Video Yeah, we’re

Dan Krueger: [00:22:16] Talking about something else, which I think is actually cooler.

Anthony Vicino: [00:22:19] All right. So. So walk me through infinite returns. And what do we mean by that? Because it’s a term that we use occasionally when we’re talking to investors to get them their appetite like, whoa, that sounds really cool. Get them on the hook, so to speak.

Dan Krueger: [00:22:34] Yeah. The example I like to use when describing this concept is people and honestly, we don’t use infinite returns much because it’s got a little bit of a buzzword. Nature to it. It sounds,

Anthony Vicino: [00:22:42] It sounds clickbaity.

Dan Krueger: [00:22:43] And yeah, but I mean, it is going to get people to click on this video, which is why I used it today. But what? We’re really talking over here listening. Aren’t you being able to make money without having any capital at risk? So the way I like to describe this concept to people is through an analogy that I think most people should be able to wrap their heads around regardless of whether they understand real estate or not. So let’s say you go into the casino and you put down a hundred bucks at the blackjack table and you win a hundred bucks on your first hand. And you take that out, you take your winnings out, your hundred bucks, and you keep playing with what is now known as house money, right? Your winnings from that first hand, you took the money out that you put in and that was your capital, that you had a risk. It is now off the table and it is not at risk anymore and you continue to play. And let’s just say you do pretty well and win more money off of that one hundred bucks that the casino gave you. Those would be infinite returns when that denominator drops to zero. Your capital investment is zero. You got your initial capital out. That denominator goes to zero. You cannot calculate your ROI anymore because the denominator is zero, and that’s why we call it infinite returns. But today we’re going to do a little bit more of a deep dive on how that works in real estate, which is pretty cool.

Anthony Vicino: [00:23:59] Yeah. And the thing here is there are a couple of different ways that you could generate an infinite return. One would just be to buy a deal with absolutely none of your own money. With no money, there’s none. All right. Like if you could get one hundred percent financing, you’re in the deal for zero dollars, like you’re getting an infinite return. The problem with that is you have one hundred percent leverage. That’s really risky. That’s really scary. And so we don’t recommend that path. There are some operators out there that like to leverage up to the hilt so that they can get close to that infinite return. But we are not those people. We’re very risk-averse. So we like to keep our debt coverage ratio nice and beefy. So that leaves us with one other way of really getting that infinite return, and that’s through the cash-out refinance. So if you’ve listened to us before, you’re familiar with value, add multifamily real estate. But if this is your first time listening to this, let’s just quickly walk through how this works. When we buy an apartment building, the way these things are valued is as a function of that building’s net operating income divided by what’s called a cap rate. So let’s put aside the cap rate right now because that’s it can be confusing. No, it’s a multiplier. It’s a way of calculating the building’s value. And so when we go in and acquire these assets, our goal is to improve that in a line.

Anthony Vicino: [00:25:20] By doing that, we can make our buildings more valuable. The way that we do that is we increase the revenue or decrease the expenses. So those are the two ways to improve the NOI. And once we do that, if we go into a property and we renovate the units, we make them Nazeer and then we start charging two hundred dollars more in rent per month. Well, we’ve just added a ton of value. And so then what we do is we go to the bank and we say, Hey, our building is worth more now. We did all this work. We increased the revenue. We decreased the expenses. We would like to refinance this. And the bank says, sounds good. It does look like it’s worth more. And so now they give us a loan for that new higher amount. We pay back our old lower amount loan and we make the difference and we pay back ourselves, we pay back our investors and now we have no more money in the deal. Hence, from that point forward, all cash flow, all distributions. It’s an infinite return. So let’s maybe let’s get into some numbers because the cash-out refinance was always kind of confusing to me. I tried to explain it with words and not numbers because the numbers kind of confused me. But now that we have the base, let’s layer some numbers in there.

Dan Krueger: [00:26:31] Let’s do it. Try to keep it simple. It’s I know people are listening to this as opposed to watching it. Those of you watching, you can just look at us. But for those of you listening, I’m going to try to make this as simple as possible. So you could just listen to these numbers. And it’s not confusing. Let’s say you buy. We’ll just use a house. Use a house. You get a house for one hundred thousand. And you put twenty-five percent down, so you put down twenty-five thousand dollars to buy this house for $100000. And you know. And this is a bad example because I’m using a house and a house isn’t valued based on the now. I, but we’re going to ignore that for the sake of simplicity, just so we can use something small and something people can wrap their heads around pretty easily. Let’s pretend like this house is valued off its A.I. just like an apartment building is. So let’s say you buy this place and you know you can fix it up for, let’s say, twenty-five thousand dollars. You can paint it, you’re going to put new appliances in and you’re going to make it way better than it was when you got it.

Dan Krueger: [00:27:36] And once you do that, it’s going to be worth one hundred and seventy-five thousand. So you buy your house for twenty five thousand dollars down. You put twenty five thousand dollars into renovations, so you’re into it for $50000 down payment of twenty five thousand plus twenty five thousand dollars of rehab costs. You’re into it for fifty thousand dollars and you go back to the bank after a year or however long it takes you. And you say, Hey, Mr. Banker, I just made this place way better. I’d like to refinance it, and you find out that it’s now worth one hundred and seventy five thousand dollars. So you get a loan out on that new higher value. Let’s say again, it’s seventy five percent, just like your first loan. That means that the new loan is going to be one hundred and thirty one thousand two hundred and fifty dollars. That’s seventy five percent of the new value one hundred seventy five thousand dollars. So your new loan is one hundred and thirty one thousand two hundred and fifty your old loan was. Seventy five thousand. Well, no, it’s probably down to like seventy three thousand now because you’ve paid some debt pay down.

Dan Krueger: [00:28:39] Yeah. So let’s just say you’ve had it for a year and you’ve paid off some of that. So now it’s down to seventy three thousand. So we take our proceeds from the refi, which is the new loan minus the old balance, and that nets us fifty eight thousand fifty eight thousand two hundred and fifty dollars. Ok. And you put in fifty thousand and you just got fifty eight thousand two hundred and fifty back, which means all of your initial investment is back in your pocket, you can go get another deal. You still own the property, so you’re still going to be getting cash flow checks, albeit a little bit smaller than before, because the debt service is higher. But at this point, you’re not overleveraged. You have a seventy five percent loan and you’ve got no more money in the deal. And so your returns are infinite. And so let’s say you’re getting five 10 grand a year off of this deal and you wanted to calculate what your cash on cash return is. You can’t because your denominator is zero, there’s no money in the deal. You can’t calculate the rate of return and that is what we call an infinite return.

Anthony Vicino: [00:29:33] And it’s so great this strategy, because infinite returns are it sounds really cool and it is. But what’s even cooler to me is that you now have an entirely de-risked investment. You own this thing and you are still at a seventy five percent loan to value, let’s say, right? Like we’re not leveraged up to the hilt. We have all of our money out of it and it’s still generating cash flow. It’s a de-risked investment and that’s really hard to beat. And I love it because the way that we talk about this sometimes is most people are familiar with fix and flip like single family homes that you see on HGTV, where they go in and they buy the shanty, they fix it up and they then sell it to recoup all that new equity that they built up. But with our strategy, what we do is we don’t sell it. We refinance it, so we still hold on to it. It continues generating and it’s like the win win win of all wins.

Dan Krueger: [00:30:28] Yeah, one of the biggest reasons why that’s so win win win is because you keep getting those cash flow checks, which is great. We’ve talked about all the time, you know, that the cash flow component is such an important part of being financially stable, having some kind of reoccurring paycheck coming in. But then the biggest one is those people that turn around and sell right away. Well, they got to pay capital gains taxes on those profits, whereas for a refinance, it’s a nontaxable event. You get to pull your money out, get that cash in hand in a tax-free capital. Events go out and redeploy that without having to pay the taxman. So that flipper who turned around and sold that thing has to pay the taxes on that thing, and they only get to reinvest what’s leftover. Whereas you get to take that money and put it all to work and not have to pay the taxman until you actually sell the building much later, if ever.

Anthony Vicino: [00:31:19] So if you thought infinite returns are good, let me just blow your mind with this concept. So we did this with our first property right? We refinanced, we got all our money back plus some. And then, like Dan said, we go and redeploy that in deal number two. So we have now acquired two deals with the same amount of money, the same dollars, just like a bank would do. And now let’s say we do the same thing again, where we add value to the property number two and we refinance it and we get all that money back again. Now we have double infinite returns.

Dan Krueger: [00:31:51] We’ll triple because they’ll take that and buy a third property.

Anthony Vicino: [00:31:54] Oh my God, we have infinite, infinite returns. It’s it’s it’s like infinite regression.

Dan Krueger: [00:31:58] It’s a really powerful strategy, and that’s why we keep doing it over and over again. It works really well. It’s low risk because of all the things we named. You’re not overleveraged, you’re just using your capital as efficiently as possible. And the biggest thing I think is the tax component. If you don’t have to take that tax burden on to get your money, then that’s extremely powerful because that tax drag is huge. I mean, if you’re paying 30 to 50 percent in taxes every time you make money, extrapolate that out for 30 years and then compare it to a guy who doesn’t have to do that. And the guy who doesn’t have to do that is going to have a whole bunch of extra zeros and commas in his number at the end of 30 years, then the guy who’s flipping and paying taxes every time.

Anthony Vicino: [00:32:39] Hmm. So that is the infinite return. Hopefully, you got a little bit of value out of this episode. You don’t feel like you were baited and switched. You weren’t baited. Well, we did do that little bit, but we wanted to get you in here because that’s that’s fun. The more people at the party, the more fun I get. I hate parties,

Dan Krueger: [00:32:58] So that wouldn’t be fun for me.

Anthony Vicino: [00:33:00] Yeah, it wouldn’t be fun for me at all. But we appreciate you taking a little bit of time out of your day, and we’re going to look forward to seeing you next week. Do we have any, anybody in particular? Do we want to call out to go leave a review? Brenda’s and Jeremiah’s,

Dan Krueger: [00:33:14] Can we get Jeremiah’s in there?

Anthony Vicino: [00:33:15] Yeah. Jeremiah’s, you’ve been slacking recently. Jeremiah’s Brenda is Carlisle’s. Go leave a review over on iTunes. The rest of you also may be goes Think about leaving a review, but just know it’s not your time quite yet.

Dan Krueger: [00:33:26] How many Carlisle’s do you think are listening right now? If you’re listening

Anthony Vicino: [00:33:29] To this and your name’s Carlyle? Shoot me a message. I got something for you. It’s not weird. I got a book for you. You get a free copy of passive investing made simple. I’m going to send it out to you. If your name’s Carlyle just for being a Carlyle, it has to be first name, not last name. And it sounds like a good book. It’s a fantastic book, and not just because I wrote it, but that’s going to be a fresh guy.

[00:33:50] We’ll see you next week.

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