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Cash Flow is King, and Illiquidity is Queen

Updated: Apr 23, 2020

Cash flow is King. It’s a mantra that is ubiquitous across both real estate and business in general. The idea is that when things get tough, cash flow is what’s going to save you. If the money coming in is enough to cover expenses, you’ll never be forced to sell an asset prematurely.

In the case of real estate, debt is by far the largest expense. So the key in buying real estate is to have such a firm grip on the market demographics you’re buying in, that you choose a leverage amount that strikes the perfect balance between returns & risk. Buying right is everything. Buying an asset for a price that is under market value is critical.

Some important factors in making the right purchase are:

• Relationship with the seller • Experience navigating the negotiation • Matching the degree of value-add to rent premium • Thorough due diligence • Securing long term debt In the case of value-add assets, knowing what your construction team can do, how fast they can do it and weighing that against what the market will accept is key. You don’t want to get too far out ahead of yourself with renovations, while at the same time keeping your residents happy and the cash flow pipeline flowing is crucial.

The worst case scenario is defaulting on the property. When economic occupancy drops below break-even, and there aren’t enough cash reserves to float the property, defaulting becomes a possibility. Forcing a premature sale and putting investor equity at risk simply isn’t an option. So when we buy properties, cash flow is king. We want enough buffer to guard against the worst market movements. The debt service coverage ratio is a useful measure of how large or small this buffer is. Changes to operations may also need tweaking in times of need, so a strong property management relationship is also important.

You would think that as many times as we’ve heard ‘buy low, sell high’, that in practice that would be the norm. But the reality is this is far from what happens. When markets are up, the propensity to buy into the frenzy grows stronger. Latecomers don’t get into deals at adequate prices. The reverse is also true when the market is down, investors are timid and tend to behave like the herd who is sitting on the sidelines. It’s like Warren Buffet always says,

“Be fearful when others are greedy. Be greedy when others are fearful.”

One of the hidden benefits of real estate is its high transaction costs. When these properties are exchanging hands, there are loan points to pay, broker points, legal fees, due diligence fees, etc. Those costs force transactions to slow down and are thus more resistant to the human nature of acting out of emotion. You simply can’t sell a large real estate property short notice. There is a lot of trust placed with the asset management team and general partnership to weather the storm. Having open lines of communication is critical to ensuring the success of the investment.

Invest with fyre CAPITAL

fyre CAPITAL is a commercial multifamily investment firm. We purchase and/or partner in 150-600 unit, value-add apartment communities in fast-growing Tier 1 & 2 U.S. markets. Together with our strategic partners, fyre CAPITAL represents over 500 Million Dollars of successful real estate acquisitions. Our developers, sponsors and capital partners have amassed a network of over 1,500 unique investors. We provide new opportunities to invest in projects targeting a 14%-21% Internal Rate of Return . If you would like to join us on our next project, your first step is to Submit an Interest Card. We look forward to partnering with you.

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