How To Create Baby Money Soldiers

Leverage The Power of Compounding To Scale-Up Your Apartment Portfolio

We bought our first 25-unit property for around US$600,000, in 2013. In 3 years, we made all of our investment back from the property through a refinance. Now, here is where it gets interesting. Most people would have used the proceeds to buy a ultra-luxury car or similar liabilities. But, we knew better. Having or aspiring for a supercar is not a problem, however, we suggest to finance such liabilities from passive income generated from real estate further down the road. That way it is more sustainable and you won’t lose on wealth-creation opportunities while you are in wealth creation mode. Coming back to our story of the first deal, we refinanced all of cash and then some and we rolled that into another deal. It is a simple yet proven way to multiply money quickly. It is like creating baby money soldiers who go further and further in the market and generate multiple streams of income for us. Every dollar needs to procreate and have a specific job assignment.

Refinancing or Refi and Roll as it is more popularly known is an excellent strategy to access the equity you have accumulated in a property. At Jake and Gino, we have used reinvestment as a tool to consistently grow our portfolio of properties. To date, we have refinanced over US$20 million. The first deal is where it all begins. It is the factory that generates cash flows that can be reinvested. We made so much out of our first deal in terms of cash flows, appreciation in property value and cost aggregation benefits, etc. It is still making us over US$5,000 per month in positive cashflow. As the saying goes, it is not what you make; it is what you keep.

You too can achieve similar results through deploying baby money soldiers like us and leverage the power of compounding. To put it simply, reinvesting returns from investments to maximize profits will result in compounding. It is the smartest and surest way to build wealth in the long term. In Multifamily real estate, this works by reinvesting rental income or income generated from a refi into other properties. Every time an investor cashflows or refi’s a property, the profit should be used to reinvest in another property.

Even if you decide not to buy another property, you can reinvest returns in remodeling your existing apartment homes. As a rule of thumb, remodeled apartments earn a higher rent because tenants are more likely to pay for properties with additional amenities and upgrades. Reinvesting returns into your property can appreciate the property’s value on an annual basis. Even a small increase every year can add up to a huge profit over a period of 5-10 years. Remodeled apartments also fetch a much higher price, should you ever decide to refi or sell. Cash flows from existing properties can also be used to make a higher down payment on other rental properties. A more significant down payment allows investors to get loans at attractive terms because such borrowers are seen as less risky by banks. This is especially true for Fannie Mae and Freddie Mac loans.

Building wealth from real estate is scalable if you have a diversified apartment portfolio with multiple properties. Multifamily properties are lower-risk investments because even if there is one vacancy, there are other tenants generating passive income. If you want to build long-term wealth to take care of your retirement needs, reinvesting profits from real estate in other rental properties will generate passive income and save taxes. Even for those who have already reached their financial goals, reinvesting will generate and grow additional wealth.

But keep in mind that real estate compounding takes time. This is the get rich slow game. For investors looking to compound profits, now is the right time to start. It does not matter if property prices are high or if the economy is not doing well. You are investing in the long-term, so what happens right now needs to be evaluated over 10 year time periods. Investors always have the option to spend the money they make right now on liabilities, or they could defer that gratification and increase their wealth by investing in another deal. But do not expect to compound profits overnight. Real estate is a long-term game. Cash flows can vary over a period of time, in case of vacancies or repairs to the property. While apartment prices as a rule tend to rise over the long term, there can be fluctuations in property value. Again, think in decades.

Whether reinvesting real estate income or spending it depends on an investor’s financial goals. Any investor looking for financial freedom and a substantial nest after retirement to maintain their current lifestyle would do well to reinvest real estate profits into other deals. There are certain parameters that investors must keep in mind while reinvesting. The first is ensuring that they have enough cash flows to reinvest, taking the time to screen tenants before renting out properties so that tenant turnover rates are low, and managing existing properties well by hiring a good property manager. Good management of properties is absolutely essential to reduce tenant turnover rates, prevent sudden repairs, and appreciate property values.

Remember, if it don’t cashflow, let the grass grow!

– Jake Stenziano

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