How to Build Wealth with Long-Term Investment Solutions
Lately, we have seen a handful of pitch decks with other operators. The common theme between them is they are essentially long-term flips. What we mean here is that they will significantly improve the property and sell in four to five years. The goal here at JB2 is quite the opposite, where we want to hold forever. We hold forever because selling forces you to either re-place the capital via a 1031 exchange or pay substantial tax bills. So, why do some of the smartest players in business sell?
Why do some of the smartest players in the business sell?
It seems that many players in this business are incentivized to sell to cash in on the promote. They make a vast majority of their money from profit share (promote) models at the sale. The promotes are calculated off profits before taxes so it's not based on the real returns. It's nothing insidious - it's just an industry norm.
Many of these groups are newer to the industry and have newer investors trying to build up capital to invest in larger deals. Additionally, IRR calculations tend to look better with shorter time horizons. That's why we like the cash-on-cash return calculation. Most of these firms also use acquisition fees and monthly cash flow to fund the business's overhead. There is nothing wrong with this approach if you are looking for a quick flip.
If you intend to invest for longer-term cash flow and stability, however, then this above concept is completely flawed.
How and why we do things completely different at JB2
As we said above, our goal is to hold forever. The only time we may sell is to purchase more considerable, better assets through a 1031 exchange. We also may sell when depreciation has run out after 27.5 years. But either way, this buy-sell strategy would take us many years into the investment.
The JB2 Investments team got its start in the flipping business before leaving for the long-term-holding world. As such, we have years of experience paying high taxes and not seeing our net worth grow incrementally. We know what it is like to chase deal after deal. So, maybe it's that deep-seated feeling that doing flips, in the long run, wasn't getting us anywhere.
Or, perhaps it was the fact that in our past successful real estate ventures, we could build a decent capital stack to invest alongside our investors. This strategy aligns us with our investors and incentivizes us to stay the course alongside them with that particular property. When we first started, we initially thought of using just our capital to do deals.
The truth is, we could grow quickly and with better focus by using others' funds to build that momentum. In turn, we could help others secure their financial future as well. Just like many people, we get a warm fuzzy feeling inside when we help others. Things are just more fun when you can enjoy them with our Tribe. It also has made us better investors when using others' funds. This is because we have that much more responsibility to others for the trust instilled upon us. So essentially, we are in this boat together.
Selling is not good for the Individual Investor
Though we do model some an exit because we need to forecast returns, the primary intention is to refi back most of the capital and hold, if not forever, for a very long term. It's just not suitable for the individual investor when it comes down to selling and reallocating the capital elsewhere.
The JB2 Investments method allows you to allocate capital in fewer deals (when there are finite opportunities out there) and still hit your financial goals. It comes down to this - if you have a useful asset in an improving area, you put on conservative debt and hold forever.