Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
This Deal Looks Good But Will Bankrupt You | Real Estate Rookie Mistakes
Navigating the world of real estate investing can be treacherous for beginners, especially when sellers disguise money-losing properties as profitable opportunities. In this analytical breakdown, Cole—a part-time real estate investor, airline pilot, and military instructor—dissects a misleading 14-unit Milwaukee apartment listing that perfectly illustrates this danger.
Cole takes you through his step-by-step evaluation of a $1.575 million property marketed with promises of substantial returns despite actually generating negative cash flow. With clarity and precision, he exposes how the seller manipulates numbers by inflating principal reduction claims and relying on speculative appreciation to mask the property's fundamental financial weakness. The property, requiring a hefty $315,000 down payment, would immediately lose approximately $600 monthly—a stark contrast to the 8.5% return advertised in the marketing materials.
What makes this analysis especially valuable is Cole's exploration of risk factors that new investors frequently overlook. He demonstrates how interest rate increases during refinancing could dramatically worsen the already negative performance, potentially increasing losses to over $20,000 annually. He also highlights the significant opportunity cost of tying up capital in a non-performing asset, emphasizing that successful real estate investing must prioritize cash flow over speculative appreciation.
Whether you're considering your first investment property or looking to sharpen your analytical skills, this detailed breakdown provides essential insights into separating marketing hype from financial reality. Take control of your investment decisions by learning how to run your own numbers, stress-test potential deals, and identify the red flags that could save you from costly mistakes.
What is up everybody? My name's Cole. I'm a part-time real estate investor, full-time legacy airline pilot and a part-time military instructor pilot. Today I'm gonna be breaking down a deal that I think is not great, but it's being positioned in a way that could be confusing to a new investor. So I wanna illustrate, using a larger deal, what exactly can be hidden in the weeds if you don't know what you're looking for. So I'm looking at here to figure out whether or not this deal is a buy or a bust. It's got some interesting documentation along with it that might try to convince you, if you're a new buyer, that this is the deal for you. Ya, what is up everybody? Here we are in the screen share.
Speaker 1:I literally just went and typed in Milwaukee apartment buildings for sale and I'm on loop net, which is totally free. You can pay for it. As you can see, I'm not even logged in on this bad boy, so I didn't pay for anything. I wanted to. I use MLS usually cause I'm a real estate agent and I have access to it, but I wanted to show you guys how I can do this without even having access to the MLS. So I literally just went to this property, 319 West Bolivar. I just happened to stumble on it and I was like interesting, 14 units for 1.575 million. This is not an uncommon price. You can see a lot of these buildings are in that same neighborhood of price. I just did one on this building as well, so it's not like they're asking some astronomical number. But I want to show you that this doesn't actually make money. It doesn't cash flow. It loses a ton of money but it's being sold as if it makes money, and I'm going to show you how that all works.
Speaker 1:319 West Bolivar. We got it over here. Not a bad looking building, it's super clean brick building. I like brick buildings in general. Nothing too crazy, though. It's a landlord special, as you can see. Pretty basic, clean, dry basement, decent looking. Pretty basic clean, dry basement, decent looking appliances and whatnot here. Nothing too crazy. I condensed this down.
Speaker 1:You don't necessarily have to read all this. It's talking about how the rents are below average. Everybody says the rents are below average because that's just what people do. They try to increase the value artificially by saying, hey, these rents should be raised. Well, if they should be raised, why didn't the previous owner do that? That's always my question. But no one tends to have a great answer for that. So so if you look at this, we've got all the information about the property and its expenses right. So I transpose the majority of these over here.
Speaker 1:You'll notice here there's a missing piece for management. Maybe they manage it. They said that it's caretaker for $600 a year is managing the whole building. I don't know, it could be accurate, maybe it's not, but I put in what I pay for management fees at 8% of this number. So I rounded up to 15,000.
Speaker 1:But if you look down the rest of this line, I was pretty generous with them. I gave them a lot of benefits of the doubt. I didn't beat them over the head as far as this stuff goes. I stuck pretty close to this list. I made some adjustments. Insurance I went up a little bit because I know what it's been costing to try to get insurance, but only 800 bucks right. So if you see, here I came up with $84,000 worth of expenses against their 63. And the main difference there would be the management fees. Here I think we were doing okay as far as giving them a chance to make this thing profitable.
Speaker 1:Here's the rent rolls. You can see, generally speaking, these rents are pretty close, but everybody says they should be higher. So I literally told them okay, I'll give you a thousand, just over a thousand dollars for your two bedrooms, even though they only have maybe two of them that are actually at that price range. And could they get them the rest of them all up that way? Sure, but it doesn't happen overnight. A lot of times you're not gonna be able to adjust these. Maybe these are on your leases. We have no idea what the lease situation is here. So if these people are on your leases, your hose, you're not gonna be able to raise those. Even if you wanted to and I don't know that you would want to those people can move out, and then you have additional costs of resetting that unit for somebody else. So there's a lot of there's a lot of trickle-down effects if you just decide to artificially raise them to what the pro forma says they should be and, as you can see, I give it a great name here.
Speaker 1:But anyways, I gave them the benefit of the doubt. I literally took them from 12.7 to 15.1, which is a significant change. If you math that out, that's a massive change. This is assuming that you got up to that immediately, which you're not going to do so. You can see as you look down a little bit further. I don't want to get too far ahead of myself, but if you look down further, even with giving them that extra $3,000 a month, almost it's not quite going to make this stuff work.
Speaker 1:But I did notice this document which I thought was interesting, and here it's being sold $1,575 on the price, $315,000 down, with a first mortgage of $1.26 million, and they're saying 6.25% interest. I just don't see that being realistic. I put 7% into both of my calculators I got one up here too. I just don't see 6.25 being realistic. And when they made this it may have been realistic, but I just don't see that anymore. Five-year note that's not crazy. This amort over 30 years means it's being amortized, the payment's being split up amongst 30 years and it's locked for five years. That's not crazy. Most investment properties find themselves in that situation years. That's not crazy. Most investment properties find themselves in that situation. And so the net annual income they're saying is $85,000. And I actually came up with $88,000. So they were really not that far off.
Speaker 1:You divide this out by 12 months, you see what they got and, long story short, this loses money. You can see you're losing about $600 a month as far as your payment goes. You're feeding the billing from day one and you put three hundred and fifteen thousand dollars down. Now I'm gonna let you just sit there for a second and think what if I put three hundred fifteen thousand dollars down in the smp? Or if I bought hymns that's a hot one today or oscar, or some other stock? What could I do with that? Three hundred fifteen thousand versus losing six hundred dollars a month? That's one thing. But then we continue down.
Speaker 1:He says principal reduction on the loan monthly is approximately 2840 times 12 months. So he's saying that you're going to pay down $2,840 worth of principal reduction every month on this loan size. And I can tell you right now that is not entirely accurate. That's not even close to accurate with what I've seen. Now I'm not saying I don't know how he came up with this, but I've got loans that are in these ranges and I am not even close to that.
Speaker 1:If you actually go over here, this is just off nerd wallet, which is just a free website. If you look at what they've got, I already you can see. I already scrolled down to see where it would start being close to that. When you start this loan, you're only paying about a thousand dollars a month in principle, and it's not until let me keep going it's not until about 2040, the beginning of 2040, before you even getting close to that kind of principal reduction, and by that point you're only paid down maybe $300,000 worth of principal. Was that 15 years from now? That's not even close to accurate. In my estimation. That is not even close.
Speaker 1:They're calling for $34,000 of principal reduction and they're using the principal reduction as a way to generate a return. Right? So they're saying you're going to lose seven thousand dollars in cash flow a year, but you're paying down the loan value. So if you take what you paid down on the loan value which we don't believe to be accurate and you subtract out the freaking loss, you're actually making twenty six thousand dollars a year. And there's nothing more american than this right here to me.
Speaker 1:I just think, okay, yes, if this is a business, you have to look at this as a business. If someone was selling you this business and they told you actually you're going to lose If you buy this business, I need you to give me $315,000. But you're actually going to lose seven grand a year. But the thing is you got a big giant loan and you're paying down that loan. So you're actually getting $26,000 a year in return. And I understand that there is an aspect of principal reduction, but it's not nearly this pronounced and it doesn't really matter to me. I don't really care. If I'm losing 500 $600 a month and I had to put $315,000 down, then this to me is I'm already done, I'm already out.
Speaker 1:But there's more to read. Right, they're taking the $26,000 and dividing it by your down payment, right? So they took your principal reduction, subtracted out your losses from cash flow and then divide that out by the $315,000 that you have to put down. They say it's an 8.5% return and they're saying the average appreciation in the last 10 years for this property is going up $45,000 a year. They're basically looking at okay, 10 years from now, if you own this property for another 10 years, you're going to make another $45,000 a year. So they're taking 45 and they're adding 26. And that's how they're coming up with $72,000. And they're dividing that by your down payments and say you're getting a 23% return.
Speaker 1:I understand that not everybody really deeply understands the math on these properties and what the implications are. But the plan here, if you bought this property, the way that they want you to play the game is, your only hope is that you're going to reduce principal and that the property is going to continue to go up every single year by $45,000 a year and it could. I'm not saying that it can't by any means, but that's your only plan. There's no cashflow plan. There's no plan to get this cash flow up. Granted. They say the rents are low on average, blah, blah, blah, blah blah. But this whole page to me was just that's.
Speaker 1:The reason I'm making this video is because this is insane. If you were an uneducated buyer, you could look at this and convince yourself that this is actually a good deal. And it's not a good deal at all. It's a terrible deal. And I'm not saying that somebody won't pay this money for it. That that's not what I'm saying. I'm just saying, if you're a new investor or you're an early investor, this is not where you need to be putting your money. This is absolutely not the place to be.
Speaker 1:I transpose all their information right. I gave them the benefit of the doubt. I said you know what. They are going to raise those rents. They're going to get those rents way up 15,160 times 12, with a 5% vacancy for people moving out, it gives us this number.
Speaker 1:Subtract out all these expenses I'm not gonna go into them in detail because you guys can read them and pause the video if you like Total expenses of 84,000. So 50% almost of your gross is in expenses. That leaves you with 88,805 a year. My debt service this is how I calculate it out $8,382 times 12. So you need 100 grand a year to pay, just to make your payments right, just to pay for everything. That's not making a profit at all. So you're showing I don't know just about twelve thousand a year in losses. So you're gonna be down twelve grand a year.
Speaker 1:If you buy this building and you also have the three hundred fifteen thousand dollars down now, could you pay it down, of course, and eventually it'd be worth more money and this the game could continue going up forever. Now let's say the game doesn't go up forever. Let's say that this Whole plan is all you've got. You're going to take a twelve thousand dollar loss every single year and actually you buy this for 1.5 million and next year there's a 10 haircut and you're down 150 000 On the value of the property, because it's the only thing that you're betting on. You're not betting on cash flow. There's no chance that this is with everything running perfectly and it's still losing 12 grand a year. And it's not running perfectly. They still say that there's all this room to be growing.
Speaker 1:So if you extrapolate that and you say that you take a 10% haircut in the next five years, now you're down on your down payment and you have no cash flow to lean back on. You can't sell this as a profitable business. You can't. There's nothing you can do. And the next thing I would be thinking about is okay, let's say I do buy it. You know what? I've got 300 grand laying around and I really need. It's burning a hole in my wallet. I tell you that I want to buy this building.
Speaker 1:If you do that and the price does stay the same, guess what else can change interest rates? Now, everyone thinks there's no way that we could ever get back to double digit interest rates, but we've been sitting in the six and 7% range for a long time now. I don't think that there's an unreasonable scenario where we see a 10% interest rate. And if you sit on this property for your five year term on your commercial loan and the note comes due and you have to refinance it. And now you have to take it to 10%. What happens to this number? I can promise you it's not going to be good.
Speaker 1:Let's just take a look real quick. Let's extrapolate this. Let's say we're going to go to 10% when we refinance this building and this is assuming that we bought it like this, with nothing else changing. I guess we can leave it alone, with nothing else changing. Your monthly total will be in the $10,000 range right Now.
Speaker 1:I know I didn't do this math exactly right. I know that somebody's gonna say you really should be starting. You should have set the start date differently and whatever, it's still gonna be a lot more and in this case it's gonna be about two thousand dollars more. So now you extrapolate that out, now you're losing twenty thousand plus a year and you have no exit because now your initial down payment is eaten up or at least it's damaged in some way, and you can't sell it. You can't cash flow on it. You have no hope. The only hope you have is that these just skyrocket and that you get an emergency parachute because the rents go to the moon.
Speaker 1:So that is a quick breakdown as how a deal like this can be sold to you as if it's the holy grail and you're going to make 26 on your money and in reality you're just giving somebody a bunch of money for something that will never cash flow, unless something extraordinary happens in the markets. When I saw this, I said to myself there is no way that is being sold that way. But it is, and no fault to them. They're trying to make a sale or trying to get rid of the building. If you're starting your investing career and you're trying to figure out where to buy and what to buy and how to buy, I can't tell you're trying to figure out where to buy and what to buy and how to buy. I can't tell you necessarily what to buy, but I can show you what not to buy and in this case I would definitely pass on. This. $315,000 could go a hell of a lot further in a market like Milwaukee and other markets as well.
Speaker 1:If you're looking at getting into your first purchase, I implore you to take a chance to sit down and try to look at some of these deals and quickly think about them. Get an Excel spreadsheet like this or something else and try to plug and play these numbers to see what it actually looks like, because if you're just getting your story from the listing agent, you're only getting one side of the story and you're probably missing a lot of nuance in that. I'll continue to make videos like this to try to shed some light on deals that are out there. I'm just picking ones at random. If you have something specific or you want me to look at a deal, drop it in the comments, let me know. I'll take a look at your deals, throw them up here, see if they make money, see if they're worth buying. I appreciate you guys If you spend any time watching this video. It means the world to me and I'll talk to you guys soon, See you.