Cash Vs. Cash Flow Vs. Wealth: Broke “Million Dollar Earners”

TRE 63 | Broke Millionaires

 

Success is found in the nuances and identifying what the differences are, and then executing on those opportunities. There is a lot of money to be made and has been made on these little differences. Coming back from a two-week vacation visiting the State of Utah to hit the Big Five National Parks, Jason Bible shines the spotlight on broke millionaires and talks about three things that are a big miss for most business owners and real estate investors – cash, cashflow, and wealth. Explaining each of these items and their differences, Jason reveals which one is the most important thing in risk management. He also discusses why buying and selling rental properties puts you in a much lower tax basis and long-term capital gains versus flipping and wholesaling.

Listen to the podcast here:

Cash Vs. Cash Flow Vs. Wealth: Broke “Million Dollar Earners”

I’ve been out of town for two weeks traversing the fine State of Utah. I’m not a Mormon in case you’re wondering. We took a trip for two weeks across the State of Utah to hit the Big Five National Parks there in Utah. I haven’t been on a road trip this long since college or right out of college. This country is big and the state is ginormous. We’re driving from the Grand Canyon to the North Rim if you are familiar with the Grand Canyon. We hit the top five National Parks, they call them the Big Five in Utah: Capitol Reef, Zion, Canyonlands, Bryce and Arches. There are five of these huge parks in Utah and they’re absolutely fantastic. The way I would describe these National Parks if you are an outdoor person is there are two that are National Parks and there are three that are what I call National Museums. It’s probably the best description I have for it. What’s in between a park and a museum? A museum is you go to someplace, you walk in, take some pictures of stuff and you post about it. There’s not a challenge to get to it. You show up and there’s this cool stuff.

Arches is a great example of this. You see a balancing rock. If you’ve ever seen a license plate from Utah, there’s this arch. That arch is in Arches. It’s the thing to see there. That’s like a museum. You pull up, you get out of your car or your truck, you walk down this little concrete trail, maybe half mile or quarter mile. You take a picture with delicate arch or with balanced rock and then you get back to your car or your truck and you drive two or three miles in the park down to the next exhibit. It is like an outdoor museum. Three of those parks are like that. Two of these parks are adult playgrounds. They are big places to run around, hike, swim and do all that other stuff. Those two were my favorite which were Zion and Canyonlands.

Big Lesson From The Trip

There’s one big lesson I took away from this trip and that is two weeks with your family inside of a vehicle is a long time. I’m just kidding. I didn’t say that. One big lesson I learned is when we were planning this trip and it took a year to plan it. It was a full year and this was not two weeks we showed up and leisurely went to the next place. We had a schedule here for these two days and then there for three days. It was a full-on deal. In fact, I don’t even know if my work schedule is that regimented. This was that. I was talking to a couple of my buddies on the way back, setting meetings up for the fund and some other stuff we’re doing. Every single one of them said it like this, “Two weeks, how are you doing? That’s a long time to be away.” I’m like, “It is a long time to be traveling.”

There was one big takeaway I got from this entire trip and that is you’re trying to plan this from a distance. I don’t know what the ground looks like around Canyonlands and Arches. Capitol Reef is a great example. You’re trying to figure out where do you stay? What do you do? Where do you get resupplied? Where do you get gas? Where do you get your groceries for the couple of days? It was all that how do you do these things? A lot of these parks are around these little towns so they’re not exactly accessible by the internet. You’re reading Yelp reviews and you’re in these different Facebook groups. You’re trying to figure out how do I get my hands around this thing. What we learned online versus what we learned when we were on the ground were two completely different things. Our experience once we got to the park or once we got to the area around the park was completely different than what our experience was from afar.

I thought I was going to love Moab, Utah and I ended up not liking it at all. Springdale, which is right outside of Zion is awesome but Moab, it’s very much a base camp for the four-wheel-drive guys. It’s a good way to describe it. Those two stark differences, I would not know until I experienced it myself. That’s the big difference. There are so many real estate guys out there and gals. When I started to get back into wireless communication mode, my phone worked and I can hook up to some internet that was faster than dial-up. I started checking emails. I didn’t realize I got them. I almost get 200 emails a day. It’s crazy. I didn’t realize I got that many. I was always on top of it, but when you lose internet connectivity for three or four days and you opened up your email, it’s like, “There’s 1,000 in here.” That’s in one account and I’ve got five companies now. There’s a lot of stuff going on.

The human experience is meant to be done with other humans. Click To Tweet

What I thought fascinating is I jumped on Facebook and I think Facebook is a good barometer for what’s going on in the real world. I don’t take this stuff on Facebook seriously. What’s going on in the world of politics, entertainment and business? What is the mill you think of whatever the hottest thing this week is? It’s probably a good way to put it at least in my circle of people that I follow and the circle of people that are on my friends’ list. When I got back in town, what I realized is not a whole lot has changed since I left. I didn’t have to look at any of that stuff for two weeks and I’d got a pretty good idea of what’s going on. Nobody likes Trump. There’s some new conference, new group or ten more meet-ups that popped up. There’s just all this noise. What I realized is nobody’s really talking about what’s important. You get some of this perspective whenever you go on these longer vacations and you disconnect from the world. You start to get a perspective on things that you didn’t have before because you were in this cacophony of noise and running to this thing and running to that thing.

Robert likes to say, “Most people have a hard time getting the kids to school, getting dinner done, running back and forth to work, get in the yard mowed, getting the cars, having the cars maintained, all that stuff.” Throwing something else like real estate at him is like they’ve already got so much other stuff going on. The other thing that was fascinating is we traveled mostly with Germans and French. It was 90% likely that I would speak with somebody who’s German or French than it was with another American. It’s very interesting to hear the things they were talking about and chatting with some of those people. The biggest takeaway I got is this is different than what I read online.

Travel Analogies

The parks I thought I would like were the ones I did not, and the ones that I did like are the ones I didn’t think it would be that great. There are so many analogies there between what happens in real estate, sitting in the seminar room in Class B, Class C plus hotel. The air conditioner is never right in those rooms. They can’t get the temperature right. They can build a Class A beautiful hotel, but they can’t get the thermostat right at 72 degrees. It’s the strangest thing in the world. Here you are. You’re in the seminar and you’re hearing all these great things. “Real estate this, real estate that. You’re going to be a millionaire in ten minutes and then you start doing it.” You realized this is a little bit different than what they talked about in the seminar. This looks a lot like work. My favorite term is passive income. There’s no such thing as passive income especially in real estate. What you experience on the ground is very different than what you heard about from afar, from the slick guy with the blue suit on stage who’s just trying to get you to run at the back of the room and write a $20,000 check. That’s a very different room than when you’re out there buying property.

I tried to not buy any real estate for the last few weeks and I failed miserably at that because I contracted a beach house and we might pick up two more units in EaDo. What’s fascinating is that you can build your wealth and income from your phone. I can tell you that I had a big lesson which is what’s online and what’s in the real world are two totally different things. The second thing is there is no way and it would have been absolutely impossible for me to have taken two weeks off to go run around Utah, the Southwestern United States, if I had a regular W-2 job. If you want to experience these things in life, there are not very many options out there available to you to where you can leave for two weeks and do it. It’s not just a money thing, it’s a time thing as well. We’re going to start talking about broke the millionaires.

TRE 63 | Broke Millionaires
Broke Millionaires: There’s no such thing as passive income especially in real estate.

 

Action Items From The Trip

Here are two action items I got out of my trip. If you are interested, you need to send me an email at JPBible@Gmail.com. This is my personal email. Please don’t sign me up for a bunch of stuff. I want to put together a group and the first thing I want to do is the Rim to Rim hike in the Grand Canyon. We went to the Grand Canyon at the tail end of the trip. We were on the North Rim of the Grand Canyon which is spectacular. It is one of the least visited side of the Grand Canyon partly because it’s closed six months of the year because of snow. It’s about 1,012 feet higher than the South Rim so it’s cooler, but it’s absolutely fantastic. I want to put together a Rim to Rim hike. We’ll hike either from the North side to the South side or the South side to the North side. I’m not sure yet, but it will take a day or two to hike it because the elevation change. It’s seven to eight miles which is not far, but it’s 10,000 feet in elevation change. It’s literally like walking down and up eight miles with the stairs.

If you are interested in that, shoot me an email. I want to put together a group of people that go down there and do that. The cool thing is they have a conference center at the North Rim of the Grand Canyon. What I mean at the North Rim, it’s literally on the rim. The windows overlook the Grand Canyon. We could do a real estate conference out there. It would be pretty sweet. In any case, I want to do that. We could fly in. We could do it for a couple of days and we fly out. That’s how we do it. We’re not doing the driving thing again. That was not a whole lot of fun but I want to do that.

The second thing I want to do, and this is a little more hardcore, is to do the Maze district at Canyonlands. It’s the most dangerous park in the country. Less than 2,000 people a year visit that park because you have to have four-wheel-drive to get in. It is absolutely insane, but it is incredibly beautiful. Four-wheel-drive guys and especially hikers because we want to hike in and hike out. If you are interested in that, shoot me an email. We’ll put together a group to go down there. This is not for the beginner. They tell you on the website and when you get to the ranger station, you have to be able to self-rescue. They cannot come and get you in this place. It’s one of the most remote places in the country.

Jason’s Travel Philosophy

If you are interested in doing either one of those, I want to put together a group for 2020 or 2021 to go down there. I think we can do it in 2020. It’s just going to take some planning. If you’ve got some hiking and off-road four-wheel-drive experience, we can go do that. If you’re interested in either one of those, shoot me an email and we’ll get together and start planning it. Those are the two action items I came back with. Let me give you my travel philosophy because it relates to real estate as well. There are two reasons you should travel. One is because travel is fun. It gets you out of your comfort zone. You get to go see new people and you get new perspectives.

There is no worst idea than scaling a wholesaling business. Click To Tweet

The second reason you should travel is to become an interesting person. One of the worst outcomes you can have in your life is to be boring. The human experience is meant to be done with other humans. If you are a boring person, it’s tough to have a good time. This whole thing called “life.” You’ve got to be interesting and travel makes you an interesting person. Here’s the important part. This is the nuance that will make a difference in your life. Don’t travel and see the same thing that everybody else sees. “We went to Paris and we went to Louvre and the Eiffel Tower, it’s great.” That’s fine. Once you check those things off your list, now you need to find an adventure there.

I’ll give you a great example. We get to Arches and just about everything in Arches, a National Park, you can get out of your car and within a mile walk, you can see whatever this beautiful thing is. Here’s the little pro tip. I didn’t know this until we got there. There are 2,000 arches in Arches National Park. What is an arch? It’s a big piece of rock with a hole in it. That’s what it is, a red rock with a hole in it. My oldest son and I kept joking after about the twentieth of these Arches that my wife had drag is too. We both said, “There’s another red rock with a hole in it.” Then we found the Arches Newspaper and it says there are 2,000 of these red rocks with holes in them and every day they’re getting destroyed and every day there are new ones being made. This is totally like an ‘80s thing. If you went on vacation and took pictures of each one of those red rocks with holes in them, you sat your friends and family down and showed them your vacation photos with the projector clicking from red rock with a hole in it to the next red rock with a hole in it, everybody would get bored in about seven seconds.

Where’s the adventure in Arches? In the four-wheel-drive trails. In the ten-mile hike to get to something that 99% of people that visited that park will never see. That’s what makes you interesting. You’re at a cocktail party and they go, “I heard you got back from Arches.” “Yeah, it was really great. We saw a balancing rock and delicate arch. We stayed in what’s called the Devil’s Canyon.” “That’s so great. What else did you do there?” “We did a ten-mile off the road section and then did a hike up to the Mystical Tower Arch or Magical Tower Arch, whatever it is. The one that nobody ever sees because it’s twenty miles round trip four-wheel drive and then it’s another six miles round trip hiking it.” “I didn’t know there are so few people who do that. What was it like?” Now you’re the most interesting person in the world to the people who have been to Arches National Park.

We went down to Capitol Reef, which was interesting. These parks are in the desert. You get down to Capitol Reef and it has these incredible fruit farms and these fruit trees are all over the place. It was the first time I’ve ever had apricots right off the tree. The kids were doing that and they’re playing in this river with a beaver right there building his dam, five or six feet away. People have that similar experience when they go there, but do they ever make it to the Temple of the Sun and Moon which is four-wheel-drive about 40 miles round trip? That’s what travel is supposed to do. Travel is fun but then you also want to have an adventure. That adventure needs to be unique in such a way that makes you an interesting human. Otherwise, we all end up the same and that’s pretty boring.

TRE 63 | Broke Millionaires
Broke Millionaires: The three big misses for most real estate investors are cash, cashflow, and wealth.

 

Broke Millionaires

Let’s talk about broke millionaires. I want to talk about three things that are a big miss for most business owners and real estate investors. These are cash, cashflow and wealth. I have spent an inordinate amount of money on starting these five companies. We have five companies that started in the last few months. The normal human being should not do this. It’s absolutely insane. We built these five companies at the same time while we bought 70, 80, 90 doors, some crazy number of houses. We now have a hotel we’re under contract for. We’re negotiating another hotel. I contracted a beach house. It’s in Surfside. I contracted it for $105,000. We’ve got about $5,000 in concessions already. The rehab is $25,000 to $30,000. I think it’s worth $180,000 to $200,000. The long-term rental is probably $1,200 to $1,500 a month. As an Airbnb, easily $100 a night even in the off-season. It’s a great deal, cute little place. It’s on the new part of the island.

If you go over the bridge and take a left, it’s the first main entrance to the beach. It’s probably four, five or maybe six houses from the beach. We’ve got a great deal on it. I was negotiating that while I was in Utah and we got it under contract. We got it under contract for about $100,000, be all in for $130,000 to $135,000 worth, close to $200,000. We’ve got a deal in EaDo that I got approval for from our private lenders to fund and my guess is that one deal will probably make $1 million on net. It will make us about $1 million over the next five years. I wanted to talk about the difference between cash, cashflow and equity. The nuance and what’s important. Sometimes there is a distinction without a difference. It doesn’t matter if there’s a difference because the difference is arbitrary.

Cash Versus Cashflow Versus Net Worth

However, success is found in the nuance and identifying what the difference is and then executing on that opportunity. There’s a lot of money to be made and has been made on these little differences. Let’s explain cash. Let’s say you’re a hardcore Dave Ramsey guy like I used to be and you have a pile of cash in savings. At one point, we had $100,000 in savings account earning 0%. Think about that. We were the classic Dave Ramsey people. “We’ve got to make sure we’ve got a year’s worth of savings.” It made no sense because I don’t think we’ve ever spent $10,000 a month in our lives. We’ve got $100,000 and that was our rainy-day fund.

We had $100,000 in there in case something happened like the house we lived in completely burned down and we didn’t have insurance. It’s an insane amount of money to have in a savings account, but that’s what we did. We had a pile of cash. Before I got into real estate, I went back and looked at what was the most expensive thing that happened outside of our normal budget. I think we had to replace a water heater. It was like $600. We had this $100,000 sitting in this checking account. I got into real estate and I started investing but I had this cash sitting there because you’ve got to have cash. You have this big pile of cash.

The sexiest thing in real estate is free and clear assets. Click To Tweet

Let’s talk about equity. Equity is as worthless as cash but it’s in an asset that’s not cash. That’s what equity is. If you’ve got to get down to the technical definition, equity is a value in an asset that is not cash. We’ve got a house that we’re refinancing that when I bought it, everybody freaked out. I bought it right after Hurricane Harvey. Literally, the house was still wet from the hurricane. We bought it for $55,000, I think. We put about $55,000 or $60,000 into it. We’re into $110,000 or $115,000. It was appraised at $170,000 and it was worth $140,000 before the storm. The appraiser is low somewhere between $20,000 and $30,000, but it doesn’t matter because I don’t have much of my own money in it. The bank is 100% financing it so no harm, no foul. I’ve got about $60,000 to $80,000 in equity in a less than $200,000 house. I’d literally have 50% equity in this thing. What is that equity worth? We can come up with a number. I could sell it and make $70,000 or $80,000 on it. Let’s say I sell it, now I’ve got the cash sitting in my checking account.

Another way to put equity is net worth including the cash that you’ve got. I’ve never been a big net worth or big cash guy. Don’t get me wrong, you need to have cash because stuff comes up. Cash to me is a risk mitigation plan. Cash is something you use when something goes wrong or you execute an opportunity and you have to have cash to do it. Equity is the same thing. It’s just parked in an asset. If you want to go to any of our events, if you want to become a member of our club or our mastermind group, we’re calling it The Mastermind, where we train people on how we do real estate but it’s a peer-to-peer sharing group. Inside that group, our realtors and our wholesalers will bring deals to the people in our group before we send them out to the masses. A lot of times, I don’t even go out to the masses in our entire universe. They just go to the people that are inside our group.

If you’re interested in doing that, send us a text message to (281) 401-9008, “I’d like to be a part of your club or I’d like to be a part of The Mastermind.” We’ll be more than happy to send you over the info. I will start the twelve-week small apartment mastery group. That’s a focus group. We meet on Sunday nights virtually. We don’t have to meet anywhere. You can view at your leisure from home, but we started somewhere between 8:00 and 9:00. For an hour, for twelve weeks, I put on a course on how to invest in small apartments. If you’re interested in that, fire a text message to (281) 401-9008. You can get all the information there. Veronica will be in contact with you.

Let’s get back to the matter at hand here. We’re talking about cash versus cashflow versus net worth or what I like to call equity. The way I look at cash and wealth, although cash has a little bit more utility, it’s already liquid. Meaning you can use it on anything. Cash and net worth to me are like keeping a score on a game that nobody cares about. To me, net worth and cash is like preseason football. You’ve got a lot of it, that’s great, but cashflow is what pays the bar tab. Cashflow is what pays the rent. Cashflow is what you’re after. Talk to any real estate investor that’s gone through a real downturn, a real crash and nine times out of ten, they’re going to tell you, “I had a high net worth before the crash. My net worth was negative after the crash, but the only reason I survived is from cashflow, from the cash that these assets produce.” The problem with having a lot of wealth that’s tied up in equity, that doesn’t produce cash is that it can be gone overnight. In fact, equity or your net worth less your cash is the least important metric you should track.

TRE 63 | Broke Millionaires
Broke Millionaires: Cashflow is the most important thing in risk management.

 

I’ve heard guys go like, “My net worth is about $10 million.” I’m like, “How much cash does that $10 million produce?” That will tell me how efficient you are from a finance standpoint, from a return standpoint, from an IRR return on investment. There are a lot of people before the crash in ’08 that were really rich net worth wise and they were broke a few months later. Cashflow is the name of the game. It is the most important thing in risk management. That equity that gets built up over time and is used will make you incredibly wealthy and let me explain that. This little house I’ve got in Katy. My guess is in the next few years, that will be a $225,000 to $250,000 house. I’m going to be all-in for $100,000. Fast forward a couple of years, I’ll have $125,000 in equity in that one deal, one little single-family house, one transaction. We can take that equity out and buy an apartment complex or a commercial storage facility, whatever it is you want to do. What I should have done in that neighborhood is not just buy that one house. I should have bought two. That house has $125,000 in equity. If I had bought two of them, I’d have two houses where I’d be in for about $220,000. I could sell one and pay off the other house, netting probably $1,000 a month in cashflow.

For those of you that are using real estate as a means to retire, how many paid off $1,000 a month net cashflow houses do you need to retire? Everybody wants to make $100,000, that’s their minimum goal, make $100,000 a year in real estate. A lot of people mess that up by getting into wholesaling and flipping. I did the same thing. It’s so much easier to do it this way. Buy a single-family house, wait two years and sell it. This little house over here that we’ve got $70,000 to $80,000 in equity in, it’s not really hard. Those houses were wholesaling after Hurricane Harvey for $70,000 to $80,000. Let’s say I only have $50,000 in equity in that house. If you want to make $100,000 a year in real estate, buy two rental properties a year and sell them two years later. There’s a group out there and I understand what they’re doing. They’re wholesalers and they’re talking about scaling their wholesaling business. I can’t think of a worst idea than scaling a wholesaling business. There’s a show that comes on after ours. They’re excellent flippers and wholesalers. After owning flipping and wholesaling business, there are way easier ways to make money.

Why not just buy some rental properties and then sell them a couple of years later? Buy some more and sell a couple more. It produces cashflow in the meantime. It puts you also in a much lower tax basis, long-term capital gains versus short-term earned income. I’ve owned a business that fixed and flipped and wholesale over 600 houses. The question I ask myself every day is how do I do more with less? How do I do more, putting in less time? How do I do more putting in less money? That’s the real secret to building wealth in life, not just financially but timewise. You can’t go on vacation for two weeks if you don’t have any time.

Free And Clear Assets

The question I got online is, “Jason, why wouldn’t you just hold on to those rentals?” You can totally hold onto those rentals. I prefer personally, stuffed them and hold onto quadplexes, duplexes, five units, ten, twenty. We had a thirteen-unit we’re refinancing. My preference is to hold on to the small apartment stuff. When you look at the strategy of real estate, the sexiest thing in real estate is free and clear real estate. The most successful real estate investors that I know, there’s a 99% chance that their portfolio contains a significant number of free and clear assets. There are a couple of reasons for that. When you have a free and clear asset, what is your downside in a market crash? It’s about zero. You’ve got to cover taxes, insurance and the HOA. You don’t even have to pay those right before they come and take the property. Your risk is almost zero of losing the asset.

If you’ve got 80% to 90% leverage on that thing and there’s not a tenant in there, let’s say it’s a multi-unit building, now you’ve got some financial risks. You’re going to have some cash to continue to service that debt. Paid-off real estate is attractive because it doesn’t cost you anything if it’s vacant. It does but from a cash standpoint, it doesn’t. The second thing is it allows you to go to a bank and cross collateralize with other assets. Let’s say you own a $250,000 beach house, free and clear. Let’s say the bank says, “We want to see more reserves. We want to see more cash in your checking account.” You go, “Why don’t I just pledge this $250,000 property against this other property that I’m buying?” They go, “Cool.”

Cross collateralization is something we used early on in our career and it works well, especially with real estate guys because they go, “You’re buying this thing for $100,000. It’s worth $200,000, but you’re going to pledge this $250,000 piece of collateral against that other project. I’ll do it all day long and twice on Sunday.” You don’t have to put 20% down. We don’t care about your reserves. If you’ll pledge this free and clear asset against this project, let’s do the deal. It’s a little like Monopoly. We trade some things around and that’s a point at which the game starts to get fun because when a lender sees that you’ve got all these free and clear assets, they know you’re a very mature borrower. I want to thank you for reading. I want to thank everybody for welcoming me back. It was fun being away, but I like doing this stuff.

important Links:

Leave a Reply

Your email address will not be published. Required fields are marked *