1. Hello Ben. Thanks for taking the time to speak with us.
My pleasure Noland!
2. Can you give us a little background about yourself.
Well, I was born in the former USSR. My family immigrated to America in 1989. My professional destiny was sealed, so to speak, at the age of three when my grandfather gifted me a book about the world-renowned violinist David Oistrakh with a message inside the cover: To my grandson Ben – a future violinist. From then on everybody, including me, knew that I was going to be a professional violinist. I began my studies by the age of 5 and upon arrival to the United States, I enrolled at the University of Cincinnati College-Conservatory of Music on a full scholarship. Everything went according to plan for a few years, but eventually some developments forced me to change course…
3. Can you describe for us what these developments were?
Yes – do you want the short version, or the long?
4. How about medium?
Well, I had just begun working on my Master Degree, when one day I suddenly felt some tingling sensation in my legs. I didn’t pay much attention to it at first, but the sensation became more pronounced and I started experiencing vertigo as well. Within a few days, I started noticing a loss of coordination in my right arm. I knew something was seriously wrong when a loaded fork would miss my mouth and I would smear food on my cheek.
I saw a doctor who promptly ordered an MRI. Two days later I was due for a follow-up visit, but around 9:00 P.M. that night all hell broke loose inside my body. My legs were buzzing, my head started spinning, and my tongue started to curl uncontrollably inside my mouth.
Needless to say, I was seriously scared. I jumped into the car and drove to the hospital like a bat out of hell. By the time I got to the emergency room, my speech was so slurred that I could barely tell them who I was, the right side of my face was numb, and I had barely the coordination to put my scribbles on a few sheets of paper.
Noland, to make the long story short, I was told that the MRI images were consistent with Multiple Sclerosis (MS), which is an auto-immune disease that causes deterioration of the protective fatty tissue around the nerves. Think of electrical wiring – the plastic tubing on the outside of the actual wire is the equivalent to this protective sheath. If the plastic cover over the wire breaks down, the wire sparks and causes a fire. Similarly, if this protective sheath around the nerves is disturbed, the signals that travel from the brain get interrupted. This is why I was experiencing all that tingling, numbness, and loss of control. This is also why over time, once the deterioration is bad enough, I could gradually lose control of my body!
This was my crossroads! I am a violinist – music is what I know; it’s what I am; it’s who I am; it’s what I love and what I’ve done since the age of 5 for crying out loud. What now? Can I still play the instrument? Is it wise to plan on being able to earn a living as a performing artist knowing that I could lose control of my limbs at any time? But, if not music, then what?
5. Wow. I can’t even imagine what you were going through. Most people would have difficult time recovering from this. What happened next?
This was a very difficult period in my life indeed, but eventually I realized that what’d happened was a road block, not a death warrant, and I began to examine my situation. The first thing I needed to establish was what kind of a job would be good for me under the circumstances – how do I make money if not by playing music?
I researched the world of money extensively, and I came to realize that there are three types of income: Earned Income, Passive Income, and Portfolio Income. Earned income is employment and self-employment income. It is the result of performing labor in exchange for a paycheck. It’s the be healthy, and go punch the clock kind of income, and since I wasn’t sure for how long I would be healthy, I decided that the punch the clock approach to making money wasn’t going to do.
I learned that portfolio income is income resulting from paper assets, such as stocks, bonds, mutual funds, annuities, etc., while passive income is the domain of real estate. Both types belong to the world of investment, and therefore both are a lot more passive in their nature than earned income; both require management, but not labor. I concluded that I needed to learn to generate investment income.
Realizing that the world of investing is gigantic, I needed to narrow down exactly what type of investing will work for my circumstance. I quickly realized that portfolio income was not right for me for two reasons. First of all, what I really needed was income to pay my monthly bills. Therefore, my investments had to produce cash flow. I learned, however, that paper assets offer very few possibilities in the way of income. True, I could buy dividend stocks and annuities, but at 5% annual return I would have to own $600,000 of such assets in order to generate $30,000 of annual pre-tax income. $30,000 per year is the bare minimum, and obviously my family will require a much larger investment base than $600,000, and unlike real estate which can be purchased using leverage, paper assets have to be paid for with cash. Where am I going to get that kind of money?
This meant that real estate had to become the underpinning of my financial life, and thus about 11 years ago, or approximately one year following the MS diagnosis, I dedicated myself to the study of the art and science of real estate finance and acquisition.
6. How many deals have you completed over the years?
Enough to build a portfolio of 28 units in 11 buildings, which generates gross revenue of about $180,000 annually. What is important to understand is that my area of expertise is creative finance. More specifically, 100% financing, or as close as I can get to it. This has not been by accident – I had very little money when I started, and leverage was the only way for me to get into the game. And while I am in a much better situation now than I was, having experienced the power of leverage, I still choose to utilize it to the max whenever possible. Whatever cash I do have, feels better in my pocket than any place else…
As you can imagine, however, it is not particularly easy to find deals which are not only financeable in this way, but having been leveraged 100%, still show strong and stable cash flow. For this reason, I am very picky indeed about the type of opportunities I pull the trigger on! I have no interest in OK deals – just excellent opportunities, and because of this, I average only one or two new acquisitions per year.
7. Do you focus on a certain type of real estate investing strategy?
Well, let’s see. I have MS, which means that eventually I won’t have the use of my body. Do I really want to stake my financial future on flipping houses, which has to be the hardest and most labor-intensive activity in real estate?
8. Probably not.
Definitely not! I am a buy and hold kind of guy. I am in real estate for one reason and one reason only – Passive Cash Flow.
Allow me to qualify myself; I need to be careful not to leave the wrong impression with your readers. This has never been about not wanting to work. I love to work! In fact, I work more now than I ever have before. However, MS has forced me to realize that relying on earned income is dangerous. Thus, I work very hard for passive income…
You know Noland, when most people talk about wanting out of the proverbial rat race, what they are typically referring to are concepts such as fear of being fired or laid-off. I have to say that while this kind of rationale is reasonable and even wise, hopefully your readers can appreciate the reality that being fired, as bad as it can feel at the time, hardly registers on the “shit happens” spectrum of bad things that can happen to us.
Personally, I can’t stop thinking about how blessed I am – it could have been much worse than MS! I am a dad and a husband. I lead a healthy life style and my health is good. I am able to work and be productive and useful. And having been diagnosed has created a sense of purpose and a sense of urgency in my life which were not there before. But, it took a very traumatic experience to get me to take action. If I have an overriding message for your readers, it is this:
DON’T WAIT until shit happens! Be proactive in taking control of your financial life!
9. Talk us through how one of your typical Creative Financing works.
Well, first of all let us define creative finance, since this term can mean a lot of things. If I were to ask 100 investors to identify the greatest obstacle to the achievement of their goals, I imagine that the vast majority would answer – insufficient CASH. I would concur with this general perspective. Real estate is a cash-intensive game, at least as it relates to acquisition of income-producing assets, and there is never enough cash.
While I am aware that there are a lot of techniques that can be used to “gain control” of the property without requiring a lot of capital, this is not what I am talking about here. In my brand of real estate investing, I am building financial freedom through stable passive cash flow, and I would not define cash flow as stable unless I have the Fee Simple Absolute title to the property; unless I have the legal title. With this in mind, I define creative finance in the following way:
Creative Finance is a combination of tools, techniques, terms, or approaches which allow us to gain ownership of assets without needing cash.
As to a “typical” deal – there is no such thing. Every deal is different because the problems being solved are different, requiring different modes of acquisition and financing.
Having said this, I do tend to utilize a blend of private and institutional financing in most of my deals. I very seldom utilize short-term money nowadays because I think this is dangerous in today’s environment. I work with medium to long-term money; minimum five years. I utilize tools like blanket notes, cross-collateralization, and substitution of collateral quite extensively. But, the deal I am going to tell you about just happened a few months ago, and is actually one of my more straight-forward ones.
My experience has been that success is a function of knowledge, and knowledge takes time and effort
On February 4th, 2013 I closed a 10-unit. This is a 1980 two-story structure, with a mix of 2 brm/1.5 bath and 2 brm/1 bath town-house style units. The purchase price was $373,500, or $37,350 per unit. The Scheduled Gross Income on the day of closing stood at $5,805 per month, while the monthly Operating Costs added up to just about $2,400, resulting in monthly NOI (Net Operating Income) of roughly $3,400.
Just going by those numbers this was a solid deal. The going CAP Rate in my neck of the woods for a building such as this, representing this particular revenue stream, is 10%, meaning that most investors would have been willing to pay about $410,000. Thus, by paying $373,500 I received a little bit of a discount, but not much – about $36,000, which put me at an 11 CAP.
For me, more value than this discount was represented in the financing package that I was able to structure. Would you be intrigued if I told you that I closed on this deal with $5,300 out of pocket? Sure, this wasn’t financed 100%, but a 1.5% down is pretty good, I think.
Most people would have automatically assumed a 25% down-payment. But this would have meant close to $100,000 out of pocket. Some day I may be in a financial circumstance that allows for writing a check of this magnitude, but as things are – forget it! Having to write a check like that would have made this deal completely unachievable for me today.
So, how did I do it? Well, true to my methods, the financing package included a blend of an institutional portfolio loan for 70% of the purchase price, and a private loan collateralized with a promissory note and mortgage for 25% of the purchase price. My contribution was 5%, but after proration of rents and transfer of security deposits, all I needed to bring to closing was about $5,300.
I know what you are thinking – what’s the cash flow? Well, in this deal, I plan on a 15% expense for vacancy and repairs as part of the operating costs, which is about $900/mo. But even with that, the building is still showing cash flow of $1,000/month after debt service. So, what I’ve managed to do is to buy a great cash-flowing asset for what a lot of people spend on fast food and coffee in the course of a year.
Do you see what I meant when I said earlier that while the $36,500 discount on the purchase price was nice, there was much more value in the terms? One looks good on paper, while the other puts real money in my pocket!
But there is more to this deal, because through some strategic management, I intend to increase the NOI over the course of 12-24 moths by about $500/month, which will accomplish several goals for me. First of all, this will obviously increase my cash flow from the building. But also, the increased NOI will constitute an improvement of value by about $60,000 at 10 CAP.
A couple other things to note here:
1. Even if a lot of things go wrong in the first year, chances are better than the average that I will receive everything I’ve put-in back ($5,300), which would constitute 100% cash on cash. I could not have touched this employing traditional financing.
2. Financing close to 100% of the purchase enabled me to do a deal which I otherwise would not have been able to do. I am 37 years old; I have three year-old twins; even if I had this much spendable cash, I would never choose to allocate it this way at this stage in the game.
Yes, I am highly leveraged into this building. But, my capacity to hold on to the building is a function of cash flow, which is strong. Besides, between the discounted price at the front door and the forced appreciation resulting from the increased NOI, I will easily own 75k – 95k of equity within one to two years.
3. My ability to finance close to 100% of this purchase is a function of a lot of things. First of all, I had a private lender who decided to play ball to a tune of $100,000 – this is big! Hint – this wasn’t just some hard money guy off the street; it took years to develop the kind of relationship that makes this possible.
Also, I have a commercial lender who is obviously more creative than most. This relationship also took years to develop.
And finally, the deal was simply very good. The lenders, having looked at the building, decided that what it is and where it is located makes it safe collateral, otherwise they simply wouldn’t have lent; and having looked at the numbers, they obviously decided that there was plenty of cash flow to float the debt service. Hint – not just any building out of your local MLS will fit this bill.
10. What was your toughest deal?
This one is easy. At the outset of my career, before I knew anything, I got myself into a flip which ended up costing more than a year in a private university – can you say “school of hard knocks?” This house needed everything. The scope was entirely too extensive for a beginner which I was at that point. I bought the house for $45,000, sold it for $110,000, and in the process lost $20,000.
I financed myself out of trouble and subsequently was able to wrap this debt into another property, but this is where a lot of people would have quit. I did not quit, but this experience taught me that flipping is the most dangerous and work-intensive activity under the umbrella of real estate investing and that it should be left to the pros…
11. What are some of the biggest mistakes you’ve made or seen others make?
Besides the one I just described?
12. Yes, were there others?
I made some decisions early on that I would not make again, like buying a little house that perhaps I wouldn’t choose to buy again. But I am not sorry, because I learned.
As to the biggest mistake I see others make is focusing on the money too much and on the knowledge too little. The question “how can I buy real estate if I have no money?” has become a proverb. And yet, my experience has been that success is a function of knowledge, and knowledge takes time and effort. However, with the right kind of knowledge, access to money is not an insurmountable problem. So – study, study, study!
13. What would be your dream deal?
Owner-financed 100-unit with cash flow in the range of $100 – $130 per door.
14. What advice would you give a beginning investor or someone considering real estate?
I have several:
1. Do Not Procrastinate! MS diagnosis forced me into making decisions, but I wish I’d had the presence of mind to have started earlier; how much farther would I have been by now?
Be proactive! Don’t wait until you are forced into action by your circumstances. Remember – “shit” happens to everyone, it’s just a matter of time. You’ll either be ready, or you won’t be – it’s up to you…
2. Realize that lack of money is not an excuse. Knowledge trumps money in real estate.
3. Don’t focus on winning too much. Concentrate on NOT losing. If you don’t lose, winning happens by default.
4. Find a mentor. I have been fortunate to have had several. Nowadays, whenever I have a question, the answer is just a phone call away. This is priceless in my opinion.
5. Chose your friends wisely. It is human nature that when you begin to succeed, some people will try to “knock you down”. This is because your success will make many feel as though they are being left behind – nobody likes that. Make sure you surround yourself with people who know success intimately! Dr. Steve Maraboli said it best:
“If you hang out with chickens, you’re going to cluck and if you hang out with eagles, you’re going to fly.”
Chose your friends wisely!
15. Before we go, are there any final thoughts you’d like to share with us?
Most people believe that real estate is about dirt and bricks, but this is only partially true. In my opinion, real estate is about people! Nobody takes action in real estate without an underlying need. A real estate transaction, therefore, is a means of providing a solution to a problem, whatever it may be.
As a real estate entrepreneur, your success is a function of being able to recognize exactly what the problem is, and having the tools in your bag to cater solutions to everyone involved. Your ability to do this is a function of your real estate education!
Ben Leybovich has been investing in multifamily residential real estate since 2006. He specializes in creative finance, and his preferred mode of acquisition is 100% financing. In his business Ben works extensively with private as well as institutional capital. Ben is a licensed Realtor in the State of Ohio with YOCUM Realty. He is a blogger at www.JustAskBenWhy.com and the creator of the Cash Flow Freedom University – an educational program for real estate entrepreneurs. Ben developed a cash flow analysis software CFFU Cash Flow Analyzer.