Many people think that flipping property, in other words buying it and quickly turning around and selling it for more than you paid for it, is the way to grow wealth. The people who believe strongly in this have been lucky enough to make money this way. But in my opinion, this is like day trading in the stock market. It isn't easy, and it is very risky.
No money down is another way of saying that the property is 100 percent financed. That means a much larger part, if not all, of your cash flow is going toward the monthly payment. In no-money-down deals, you'll be paying higher interest rates because there is greater risk to the lender, have higher loan costs, and have virtually no money to improve the property or even repair it should something break. With this model, you are banking on the property appreciating to make money rather than improving the operations of the property and making money through cash flow. Let's hope the market is high-flying and that you time it perfectly because you'll be banking on external factors being just right. Appreciation, as you'll see in great detail later, is only in your control when you've improved cash flow. In this scenario you have none!
As you might have guessed, I don't believe in zero dollars down, and I don't believe in flipping property. Even in the example where I personally put no cash down on the $9 million apartment building in Sun Ciiv, we as an investmeni team put $2 million down. I believe that buying and holding income-generating assets like rental properties is how you build wealth. You may say, "But I need the capital gain—the additional equity I've made on this property—to buy a second bigger rental property with more units. That means I have to sell the first one." In my experience this just isn't true. What you need is a second investment deal that makes sense that you can bring to investors. They will help you raise the down payment on the second property and you will reward them as the investment makes money.
We recently finished construction of a 208-unit property located in Goodyear, Arizona, which cost us $13.8 million to build. Upon completion it appraised for $16.3 million. We have received numerous offers to sell this property and brokers were standing in line for the listing. As tempting as it was to walk away after two years' work with $2.5 million in cash, we did not sell it. The problem is one of taxation. Had we taken the $2.5 million gain, we would have been forced to place that money back in the market to avoid a pretty hefty tax bill. Sure we had appreciation, but we also had what is known as a "taxable event." Imagine the tax bill of 30 percent on a $2.5 million gain. That's an unnecessary $750,000 tax payment.
If you want the money out, you don't need to sell. You refinance the property and pull out what equity you can. There is no taxable event, and you are not forced to put the money into another investment. In the case of the 208-unit property, we will refinance and we will use the equity that we pulled out of the property to pay back our investors with interest. It's a great system and best of all you still own the property, you continue to receive cash flow from the building in the form of rent, and as the building appreciates, you can refinance and take the gain—tax-free—again. That's the money that von can use for oilier deals and il s wiial I do every »1.i\
Property 95 percent of the time is going to become more valuable, not less valuable as the years pass. Especially if you follow the methods in this book that teach you to buy property right so you can afford the necessary improvements that will revitalize the neighborhood and make it a better home for residents. All that adds value and it makes sense to ride the wave of appreciation long term.
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