Using businesses to buy real estate

[DrGraeme]

Hi all

How many of us are trying to accumilate property using earned income, relying on capital appreciation to fund further purchases? It's certainly achievable, but Robert Kiyosaki states that the common way to great wealth is to build a business and use the excess cash generated by the business to buy real estate.

Even if you look at many of the prominant real estate commentators they are using businesses to generate cash for this purpose. Lets look at some of my favourites.

Michael Yardney has Metropole Properties and a significant "Guru products/seminar" business. Rick Otton vendor finances homes to fund the ones he keeps. Martin Ayles runs a development company to fund the ones he keeps. Ed Chan has Chan & Naylor. Bill Zehn has Invertor Direct. Steve McKnight even has his books and his web site/ guru products business.

Then of course you have the people most of us have never heard of who have unrealated businesses and just quietly chanel business funds into substantial portfolios.

I ran out of steam for purchases a while back, so have let the portfolio sit while I've been building a business based on selling and distributing a product I've had built to fill a need in my area of expertise. In a very short time its well and truely wiping out the negative cashflow of my portfolio and should get me buying again soon

Has anyone else had experience in this regard?

Graeme

 

[JamesGG]

Hiya,

Yes, this is a theory that I stumbled across a while ago, too.

Buying property is all well and good. Many of us are doing very well out of it and have seen others do even better again. And, one of the biggest complaints (for the negative gearers amongst us) is serviceability.

I've also seen many clients - and my old man - use businesses not just as a revenue stream to fund further investments, but also as a capital gain asset to sell or leverage. Whilst the risks (and arguably, the time and effort) are much higher, the rewards for success can far surpass anything that the residential property market can offer.

Which is why I'm putting some time into developing another little project. If (sorry, when!) that goes according to plan, it should accelerate my expectations significantly.

Cheers

James.

 

[Harris]

Exactly my line of thought over the last year or so. Have decided to invest in a fully managed business (without having to work full time into the business due to a great job that produces excellent income for 25 hrs per week work).

The idea is to leave the profit generated by the business into the business (without drawing an income through it) and leverage the cash flow to either diversify further into other businesses or buy more real estate.

Have looked at multiple ventures, from a fully managed medical centre to multiple franchises (that allow management run operations by franchisees).

Next step is to offload some prop with highest cf shortfall and leverage the proceeds to buy the business.

Harris

 

[pennyk]

I had the opposite experience. Had a business which went well for a while and then was just a great big cash drain. We had to sell our IP's to fund the business losses. It was also more difficult to get loans for the IPs when we did buy.
I think a lot of people don't realise the amount of work and capital a business requires, and how it can limit your ability to get loans, particularly in the first 2 years.
Pen

 

[Harris]

I had the opposite experience. Had a business which went well for a while and then was just a great big cash drain. We had to sell our IP's to fund the business losses. It was also more difficult to get loans for the IPs when we did buy.
I think a lot of people don't realise the amount of work and capital a business requires, and how it can limit your ability to get loans, particularly in the first 2 years.
Pen

Thats where fully managed businesses come into play that allow you to work on the business without quitting your job, have a long term history of producing good profits (relative to investment) and are in a vertical segment that could cushion any effects from a retail spending slowdown.

The investment for such business ventures with documented and long term profits whilst being run under management is always higher than a business (run by the proprietors themselves) without the documented and constantly improving ebitda year on year.

I am toying with the idea of investing in such a venture as a JV with another business partner whilst looking at improving the bottom line of the business and then diversifying into commercial real estate acquisition or further businesses.

My current challenge is not to buy more real estate currently (since I am already sitting on a very significant portfolio) but to improve my cf situation and create long term annuity stream. Then use the annuity stream to acquire further businesses or add to more real estate acquisition.

If I could successfully "manage" the running of a fully managed business without quitting my work, then it will be a great outcome for me personally. Any profits generated by the business can stay in the business and would only be used to generate further asset base or income.

Harris

 

[geoffw]

I bought a business which I thought would produce an excellent income with minimal work.

It turned out to be the other way around.

I spent a lot of time due diligence with somebody who:
1. Had bought struggling outlets at a discount, or started new outlets from scratch- instead of buying a successful outlet at too high a price
2. Who may have had a vested interest in ensuring that the price of an outlet was kept high
3. Who had had a lot of experience of businesses, and who was a very good businessman- but who may have run some things in a way that I cannot. I find it very hard to make the hard financial decisions which adversely affects employees- especially when I've "committed". So if it's a public holiday, where my staff costs are higher than my takings (I have to open for all but three days a year) I still do not like to send people home early involuntarily when I have rostered them for that shift.

 

[james_w]

I had the opposite experience. Had a business which went well for a while and then was just a great big cash drain. We had to sell our IP's to fund the business losses. It was also more difficult to get loans for the IPs when we did buy.
I think a lot of people don't realise the amount of work and capital a business requires, and how it can limit your ability to get loans, particularly in the first 2 years.
Pen

sorry to hear that penny many of the worlds richest lost in there first

businesses personally we do have a few small managed businesses

these days it's 12 months not 2yrs cba changed this policy

we originally bought to get off dsp and have more serviceability

we still live on a small wage and invest the rest it's not easy but is rewarding if you pick up the right ones would you consider giving it another shot if the right opp came along?

 

[pursefattener]

Exactly my line of thought too . Mine is self managed (by me) and it has been very profitable and rewarding but certainly not easy . The business throws off the cashflow to fund the aquisitions and is meanwhile also growing quickly .

Problem is I am very tied to it . Maybe I should sell up and be done ?

Robert Kiyosaki calls it power investing I think ? Part of the pyramid of tremendous wealth or something...

The rewards are certainly there for those of us who have what it takes . Just finished reading 'Aussie John' by John Symond about how he built Aussie homeloans from the ground up . Remarkable story .

Great thread ...

 

[RPI]

Hi
I bought an existing business, worked my but off for a year (as in 40 hours per week)to sytemize it all and now all I do is physically pay the bills. I even have the staff enter them onto a spreadsheet so that I can access over the net and not have to go in unless I want to. Sometimes I do more when I a staff member leaves at short notice like at present I am doing 2-3 days per week but am hiring 2 more staff this time so the extra person should be able to cover any of this stuff.

Had it nearly 2 years now and looking at refinancing properties but apparently still much easier when you have ahd for 2 years.

 

[sjp]

Hi All,

We too have had our business for just on 2 years. We started it from the begining and it has been a very long haul. We currently have 15 staff, but we are still very self managed. It has been very hard on the cash flow, and although our PPOR is sitting at 40% LVR, we are struggling to secure funds to move into purchasing our first IP, due to our low income.

Our intitial forecasts were to be fully managed by this stage, with a much better return and concertratiing on building wealth through property, but i must admit, this seems like along way away in the current situation. Every application we make, we must submit full doc for everything - business & personal, only to be rejected due to such a young business.

We are continuing to try and improve our bottom line, yet there is a another hurdle at every corner. Fortunately i am optimistic, and can see the rainbow, and with the help of these forums, hope to achieve our goals in due course.

Simon

 

[BlackSpider]

Hi Graeme,

We did exactly the same and followed Kiyosaki's method of using business to service property. 3 years ago we were just managing the motgage on our own home. Wife and I were both in low paid jobs so we needed to increase our incomes to be able to buy more property.

We are glad to have stepped back to take a break trying to play this game on low incomes, we would have been in the same position today as 3 years ago. In the meantime we built a business and just surpassed 1mil equity.

We have only just now purchased our first IP and things will be easy from now.

I was always annoyed that we would have to struggle and sacrafice alot to try to build a modest property portfolio because we were on low incomes. And those on more comfortable incomes of 200k+ could have a comfortable life and invest more freely. So the obvious thing to do was increase the income through business which allows for many more options with increased the cashflow available.

So we stopped trying to hack down a tree with a blunt axe, took the time to repair and sharpen it, and are now ready to cut down many big trees.


Spider

 

[DrGraeme]

Go for it

Hi Spider

Congratulations,, go for it

 

[jingo]

Hi Graeme,

We did exactly the same and followed Kiyosaki's method of using business to service property. 3 years ago we were just managing the motgage on our own home. Wife and I were both in low paid jobs so we needed to increase our incomes to be able to buy more property.

We are glad to have stepped back to take a break trying to play this game on low incomes, we would have been in the same position today as 3 years ago. In the meantime we built a business and just surpassed 1mil equity.

We have only just now purchased our first IP and things will be easy from now.

I was always annoyed that we would have to struggle and sacrafice alot to try to build a modest property portfolio because we were on low incomes. And those on more comfortable incomes of 200k+ could have a comfortable life and invest more freely. So the obvious thing to do was increase the income through business which allows for many more options with increased the cashflow available.

So we stopped trying to hack down a tree with a blunt axe, took the time to repair and sharpen it, and are now ready to cut down many big trees.


Spider

Hi Blackspider,

Congratulations on your success. Which business did you go into?

Regards Jason.

 

[Xenia]

We are using cash from businesses to fund property purchases and using equity in the properties to fund businesses during growth spurts.

You need to be realistic and PLAN. Profits and losseses in our businesses were all anticipated on day ONE and all in an 56 page business plan which is updated every January. Franchises sometimes can bypass the initial start up costs but if you are starting one from scratch you need to know all the pitfalls as well as expected wins. LOTS of research is needed and far more due diligence than buying an investment property.

Yes they are a great asset if planned well.