Posted by John Behle on June 06, 1999 at 17:37:52:
I’ve never written any kind of course and only a couple articles. One is posted here and I’m not sure where the other is at.
For a while I held the houses as rentals, til I decided “Tenants and Toilets” wasn’t my favorite game. Actually, if I hadn’t discovered real estate paper, I would have probably just kept at it.
Somewhat by accident I had a couple properties I sold off on “wraps” and ended up with some great cash flow. I looked at one particular triplex that I had learned to think of as the “Triplex from Hell”. I think it was on “ELM Street” (my nightmare on Elm street).
I had exchanged into the property - primarily because the other side threw in some cash and I wanted the cash. He received two of my best SFH rentals and I received his property with “potential”.
I had a horrible negative cash flow, repairs and some very lousy “inherited” tenants. Once I sold the property, for the first time I had a cash flow and no calls at 3:00 in the morning. At about that point and with some others I had sold on contract, I looked and said “Hey, I like this better”. So, my strategy became primarily to buy, sell, trade and finance.
Most of the properties we would have 100% or better financing through seller financing, private financing and mortgage companies. We ended up with one mortgage company loan officer solely devoted to our business.
So, there was very little if any cash in the properties and they were sold at higher prices or rates to create a cash flow and we moved on to the next. Once we started turning the houses, and using real estate agents, we kicked it up to a million a month in property.
I learned to like the cash flows more and more and quickly found it easier to just build a portfolio buying existing paper.
As you mention, if values go down, sometimes those with buy and hold strategies end up with declining and even negative equities and declining cash flow.
With turning properties to create paper or buying existing paper, the cash flows remain constant. I handle the interest rate fluctations and consequent fluctations in the yields buy tying in long term capital for the funding and keeping my cash liquid. So, I buy a note at 17% and borrow at 13%. I’m locked in to a 4% spread no matter what happens. If interest rates go down, I still have my 17% yield and I can lower my cost of capital from the 13% to maybe 9%.
Plus, “refunding” happens and there is a windfall yield enhancement. I’m paid off early - at face value - as people refinance. That works best if you are into the paper at a discount, which is the best way to go anyway. There is a major difference between discounted paper and hard money loans. There are safety and other yield factors also.