Managing the Debt, Cashflow, and Equity on a $70M Real Estate Portfolio
The Amplified Impact Podcast
February 16th, 2023
In this episode of Amplified Impact, Anthony delves deep into the management of debt, cash flow, and equity in a real estate portfolio worth $70 million.
The episode emphasizes how these concepts can be useful for businesses and personal finances alike.
Anthony talks about and acknowledges that debt is often misunderstood, and some schools of thought suggest avoiding it altogether. However, he also explains that debt can be a powerful tool when used correctly.
Anthony encourages listeners to learn how to use it effectively to gain an edge in the money game.
This episode emphasizes that interest rates matter, but it’s not the only factor to consider when managing debt.
Anthony shares his insights into the infrastructure systems that they use to scale their portfolio and points listeners to a course on building a Capital Raising Machine.
This episode is a detailed look at debt management in real estate and other areas of finance.
TWEETABLE QUOTE:
“Debt gets a really bad rap. But debt is simply a tool–and a tool is only as good as the craftsmen wielding it. Put in the time necessary to learn how to use it to your advantage rather than something you fear.” – Anthony Vicino
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Episode Transcript:
[00:00:00] What’s up everybody? Welcome back to the podcast. I’m thrilled as always to have you here with me. Today we’re going to get into the weeds. We’re going to talk about how exactly we manage the debt, the cash flow, and the equity, of our 70 million real estate portfolio. So this is what we’re going to talk about, will seem kind of mechanical, kind of in the weeds, and maybe.
It might feel as though it’s only pertinent to real estate. However, I encourage you, if you’re not in real estate and you’re just building a business in general, to stick around and listen. Because what we’re going to talk about are a lot of concepts that are going to serve you very well regardless if you’re in real estate or if you’re just doing like a direct to consumer SOC brand or something like that.
And even if you’re not an entrepreneur, even if you’re just listening to this and you’re just trying to like, be a little bit better today than you were tomorrow, than, than you were yesterday. And that’s the big ambition, like awesome. There’s going to be some things in here that you can apply to your personal financial life as well.
And so these are like the frameworks [00:01:00] that we use to think through debt, cash flow, and equity. So the reason that I want to talk about this is I got, I got some questions about it and it, it was, it occurred to me, Real estate is really this black box of information for a lot of people. There’s not a lot of insight.
There’s not like places that you can go and crack open the hood and see like how these, these operations function. And so I’m just on this mission to, to try and like pull back that curtain and show everybody like, exactly here’s how we do this. And so, I wrote a, I wrote an article a while back about three systems that we used to.
70 million portfolio. You guys can check that out at AnthonyVicino.com/blueprint. I would check that out because I, I, I share some of the infrastructure systems that we use to scale. and then if you’re ever interested in, like, going into the weeds of like how to actually build out a capital raising machine, well we, we got a course for that.
You just go to capital raising machine.com. But my goal here [00:02:00] is just to share this stuff, to put it out there so everybody can see. And then maybe apply some of it to your own life. That would be my, that would be like the perfect, ideal state. So let’s get to. Number one is debt. How do we think about debt in our portfolio and how should you be thinking about it?
Whether you’re in real estate and you’re in business or in just in your personal life. The, the thing that I always come back to with debt is that debt gets a really bad rap. A lot of people think that it’s a bad thing, and this comes from kind of the Dave Ramsey School of Thought, which says like, all debt is bad, is the.
And that you shouldn’t take on any debt, and I don’t necessarily agree with that. I think that if you, depending on where you are in your life, debt can be very, very bad and you maybe should, should avoid it. But understand that that debt is simply a tool and a tool is only as good as the craftsmen wielding it in the context in which that craftsman is wielding it.
And. If you’re not careful, that tool can [00:03:00] cut. It cuts both ways. It can cut, through the thing that you want to cut through or it can cut you. And so you have to be aware of the different ways that you can use it. And so this is where I encourage people, you know, debt might not be the right choice for you in your context and your skillset right now, but.
I would encourage you to do the time, put in the time necessary to learn how to use it so that it can be a, a tool and not something that you fear. Because the truth is like if you want to win the money game, if you want to play it at the highest levels or even just play it better than you are currently, like debt is a huge component of it.
I mean, it’s, it’s underlying concept of how. Our, be our, our banking system works. And so if you, if you’re not playing the by the same rules as everybody else, or you’re not leveraging the same strategies, then you’re going to be at a pretty severe handicap. . Now, when it comes to debt, I like to say that, you got to focus on the very, like, on the details that actually matter, like, and there’s a lot of details around debt that you can get kind of tied up into.[00:04:00]
So the first thing that most people will fixate on is interest rates, especially when it comes to real estate. We’ve been seeing this over the last year with interest rates coming from being historically low. And now we’re in this crazy high inflationary environment and interest rates have just spiked.
You know, they went from being like two, 3% to now six, seven, 8%. And so in the the news media cycle, we’ve been hearing a lot about interest rates. People are getting all up in a tizzy. And yes, interest rates do matter. But if a 2% increase in interest rates, so, you know, taking it from a five to a 7%, interest rate on your loan, if that was going to make or break the deal that you were looking at, then the deal itself wasn’t very good.
You were subsidizing. The d the the, the deal with cheap debt. And that doesn’t mean the deal itself was good, it just meant that you had cheap money. And so you might need to start looking very hard at those types of deals and not do them into the future. and I think a lot of people got really complacent and lazy over the last [00:05:00] decade just because you could do those types of deals and you would probably be okay.
Cuz we were just in this really crazy, bull market where everything was always rising and heading to. , but I don’t think that’s going to continue here until the next couple of years. So you need to tread really lightly with that in particular. But if interest rate isn’t the thing that I fixate on in that, like in the grand scheme of things, isn’t that important to me, then the thing that is super important is optionality.
the Marines say don’t go in until you know how you’re going to get out. Actually, I don’t know if they actually do say that. I might have made it up and just attributed it to them, but it does sound like something they would say, right? Like, don’t go in until you know how you’re getting out. And it’s the same with debt.
And so when it comes to getting out of a deal, like how do I exit this thing profitably, there’s, there’s three things in particular you want to be paying attention to. You have your term, you have your interest only periods, and you have your prepayment penalty. And so of these three things like I would give up interest rate, I would take a higher interest rate if it meant that I could extend the [00:06:00] term or how long I have to pay back my debt.
if I could extend my interest only period, which means how long before I have to stop, start paying down the principle, which. it is great because it reduces my overall debt load in the early years of that deal. And then also, if I can reduce prepayment penalties, that’s going to be huge because that gives me more flexibility on my timing and exit at this the right moment.
And if there’s really steep prepayment, prepayment penalties on a, on your loan, that can be very problematic. Now the thing that you have to realize is that to get those terms, like it’s a, it’s a relationship game. It’s, it’s the same with banks. You might think that like it’s just one term sheet for all, but it’s not the case.
It’s, it’s going to be predicated on the relationship that you have with the banker, how well they know you, how well they like you. And so when you’re working with like small banks, community banks, credit unions, you know, they can be pretty flexible on these terms. If you come in and you’re like, you know, I’m willing to give a little bit on the interest rate, but in exchange, I want good term io a really cheap, low prepayment penalty or [00:07:00] some optionality, like, you can usually negotiate a, a fairly good, relationship there.
The, the most important thing though, I think that you have to pay attention to when it comes to debt is how much debt you’re putting onto an asset. And so in, in like early two thousands in the run up to the 2007, 2008 financial crisis, it wasn’t uncommon to see people putting a hundred, 110% leverage onto an asset, which meant that.
If you’re buying an asset for 300,000, the bank would finance the entire thing. Like for they’d give you a loan for 300,000, wouldn’t require any money out of pocket. and then this sounds like really good as long as you’re in an, an environment where the valuations continue rising. But when the valuations flipped and they started to drop, well, now you owe more than what the building is worth.
And that’s problematic because now the bank is going to come knocking. Right? And that can put you underwater really, really quickly. So when you [00:08:00] put too much debt on an asset, it allows you to get into it with less money out of pocket, which is going to increase your overall return profile by a couple basis points, which is great, but it also increases the risk profile pretty substantially because the more debt you have on the property, the more.
it’s going to eat into your cash flow, which, and we’re going to talk about cash flow here in just a second, but it truly is the lifeblood of a healthy company. So the less cash flow you have, the, the thinner your margin of error is. And so our happy place when it comes to loan to value, like when we’re putting it on a new building, is we’ll put about 75% loan to value on a new acquisition.
With our goal being to get that down over the coming years to between 65 and 66. Once we get below 65%, that means we have too much equity just sitting untapped inside the building. And at that point we’ll typically do a cash out refinance or maybe even sell the asset. so we can recoup that equity and go redeploy it [00:09:00] somewhere else.
Cuz that’s usually the highest and best use of that money. But, we never want to have more than 75% to all TV. And. That’s, I think where people get, can get into a lot of trouble is when you start floating up into 80%, 85% or 80% plus, you know, 10% seller carry or something like that. Like, we just don’t even go near that.
So be really careful on that front, because again, the, the more leverage that you have, the more it eats into your cash flow. So let’s talk about cash flow real quick. cash flow for me is like, it’s everything. It’s the, it’s what, it’s what keeps you in the game and keeps you alive to get to that really big pup at the end.
And so whether you’re building a business, you’re, you’re buying real estate like you’re the most money that you’re likely to make in either one of those two things comes when you sell, when you sell your business or you sell your piece of. . And so a lot of people want to maximize for that exit, which makes a lot of sense because you know, that can be a very substantial payday that can change your life.[00:10:00]
But I don’t want to sacrifice the cash flow on the way to that appreciation, to that big equity pop. I want to make sure that I have a healthy buffer so that when things happen, you know, there’s a fire on the property or have an eviction. we have a dry spell because, you know, the, we’re heading into a recession.
So the, the business isn’t just performing as well as it was like customer demand is falling off, prices are dropping, supplies are getting more expensive, all that stuff, right? And so I want to make sure that I have enough cash flow to be able to absorb that shock, because you’re never really in trouble in business until you run out of.
And when you run out of money, then now you’re going to be forced into being a distressed seller or just filing for bankruptcy. But as long as you have ample reserves and cash flow coming in, aka money coming in, you’re going to be doing okay. So I focus on this, Almost a exclusion of everything else. It’s very, very high priority to me is focus on cash flow and you, [00:11:00] and you do this by focusing on operations, so reducing expenses and doing everything that you can to increase revenue.
Now, one of the things that’s going to really cut into cash flow, can be CapEx or capital expenditures. These are the expenditures that are not just like maintenance and repairs, things that happen one off, like we got a broken window, or we got to go replace that piece of floor, that carpet or whatever the, the CapEx is, we’re going and making systemic improvements to a property or to a business.
That is going to benefit it into the years to come as well. Like it’s going to make it materially more valuable. So this is when we go into a building, we renovate the units, we put in new flooring, we put in new appliances, all that. That’s like CapEx. And so the type of business model that we deploy in real estate is we’ll go in.
And we do what’s called value add. So we buy these buildings that are undervalued for some reason, typically because the rents are low, maybe the building is old and dated, and we just need to go in there, refresh it. And so what we’ll do is we’ll go in there, we’ll [00:12:00] renovate, improve the property, and we’ll get the higher rents, and that will as a, as a consequence, make the building more valuable.
And so at those renovations, that’s CapEx. Now a lot of operators, what they’ll do is what we do will, we will raise that CapEx where we will close and have that money already raised and put into the bank. But some operators won’t do that. Some will just come in and just take a percentage out of the ongoing monthly cash flow to.
Take care of their CapEx. So the way that might look is for us, maybe we buy a million dollar building and we, we want to put about $50,000 of improvements into it. We will come with $50,000 day one in the bank ready to go so that we can do those, those, improvements. The, the problem with that model though is that you have $50,000 just sitting dead in the bank.
You’re not earning a return on it. And so your cash on cash return is lower as. So what some operators will do is they’ll, to try and maximize their returns by a couple, you know, percentage points [00:13:00] is they will not come to the table with that $50,000 already in the bank. And so out of cash flows every month, they’ll, maybe they’ll just take a portion of that.
And they’ll do the, the renovations as they go. And this can be good. This can be a good strategy. It limits your, your outlay of capital at the beginning, but it also makes you more exposed to risk because if anything ever interrupts that cash flow, like you have a tenant leave or a customer leave, You might not have the money necessary to do the, to, to do, do the improvements that you had planned or that might become necessary, right?
Like if the roof goes out suddenly and you don’t have that money in reserves and you’ve been just kind of pulling it out of cash flows, you might suddenly find yourself going pretty deep into the red. And depending on your financial situation, you might just not be able to survive. And. We like to make sure that we come to the table really well, capitalized with plenty in reserves and CapEx already ready to go, even if that means that it’s going to make our returns overall just a little bit worse.
Now on the [00:14:00] financing, like the equity side to get these deals done. Like we have a $70 million portfolio. We’ve raised about 25 million for down payments, for CapEx reserves, all that stuff from private, private investors. And these private investors are, you know, they could be doctors, lawyers, high paid sales professionals, like those type of people who maybe have like, you know, minimum investment on our deals is usually around 50,000.
And so people hear this and they’re like, oh, that’s a really cool way of, you know, getting into buying really big real estate and everything. I want to, they, I want to do that. and so they’ll just jump right in trying to raise capital from their friends or family and they’ll start like trying to build a private equity real estate firm.
And the problem is that they’ve never paid their own tuition at the school of hard knocks. And so now they’re trying to like, borrow money from their friends and family to pay that tuition. So what I encourage everybody to think about, If you’re, if you want to go that route, if you, if you think I want to build a real estate, private equity firm like we have at Invictus, make sure [00:15:00] that you are first, like taking your lumps on your own dime.
So you should be going out and buying small properties, partnering with joint venture, on smaller deals. You can, you can learn the robes, so to speak, before you ever start raising capital. I think that’s really important because a lot of people just kind of just jump straight in. So the way that you can do that to get your toes into the water, the way that I got started was with an FHA loan.
So that’s a first time home buyer loan that’s designed for people who have low credit. maybe they don’t have a lot of money in the bank. And so what the beauty of this product is that you can get in with three and a 5% down payment, which is. This was like crazy low, like on my purse property. It was a triplex that I bought for $246,500 and I put like $7,500 down on that.
That’s like, that was like nothing. And so I lived in one of the units. That’s how I came up with the equity and that’s a pretty low barrier. but from there, I just did what we, what I mentioned earlier is I improved the property and then pulled it out in a refinance, or I sold it [00:16:00] and then I take that capital.
I went and bought the next thing and I kept doing that, kept stacking it for a number of years before I ever got to the point where I decided to start raising capital from private investors. So, I think a lot of people just trying to jump to the syndication and capital raising side a little bit too soon before they’re ready, before they’ve proven themselves out, before they have the systems, the teams and network and all that stuff.
And so I just encourage you, like, if that’s you, if that’s what you’re thinking about doing, please go out there and do it on your own. For you try to raise capital. But if you have done it and you are ready to start making that transition to raising capital, then definitely check out the capital raising machine.com.
That’s just capital raising machine.com where we, I really just open up the entire kimono and show you exactly all the systems and processes that we use at Invictus to, to build and to raise 25 million over the last three years. So if that brings you any value, that’s awesome. Go check it out. Otherwise, if you’ve made it this far in this, Let me know, is this interesting?
Like, is going into the weeds into this much [00:17:00] detail, is this helpful for you guys or would you guys like a little bit less of like, kind of this detail oriented in the weeds of real estate content? Let me know, on social media, DM me, share the content, let me know. Just like hit me up, gimme some, gimme some feedback so I can kind of gauge where your guys’, interest is at.
And as always, I appreciate the heck out of you guys. Thank you so much for being here. Stay hyperfocused my friend. I’ll see you in the next episode.
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