How Can We Improve Upon... - Posted by Tony Colella

import · November 27, 2010, 8:55am

Posted by Tarheel T on November 29, 2010 at 05:27:25:

I’m with you.

Lump sums are not necessary for everyone. Oftentimes seeking lump sums causes harm.

In fact some of those lump sums are now being given back anyway in the form of underwater properties.

I don’t like being on a treadmill where you have cash obtained by refinancing a property at a high LTV say at 8.5%. Then that lump sum needs to be put to use quickly or else you are paying 8.5% on money sitting at .1% interest. Epecially bad if the refinance puts you at break even or maybe just $100/month positive cash flow. Too many unexpected things (as we have seen) can happen to upset the applecart in the above scenario.

IMHO it has always been best not to refinance to pull out cash, at least for those with a similar “low risk” tolerance.

Tracy

import · November 27, 2010, 8:55am

How Can We Improve Upon… - Posted by Tony Colella

Posted by Tony Colella on November 27, 2010 at 09:55:49:

I would like to take a moment and discuss and expand upon a model that we have used and taught for years. The 3-legged stool model has been the general focus of my investing but each leg has had more attention than others at times.

You may recall but the 3 legs are:

Income
Lump Sums of Cash
Increase in Net Worth

I would like to welcome folks to post about ideas on what they are doing within each leg of that stool so that others might find opportunity to do the same where they live and invest.

To begin:

Income from land/home rental and small parks as well as part time employment income are what keep my family afloat at the moment.

Lump sums of cash are harder to come by. We have sold some properties and did manage to sell one of our parks towards the end of the bubble. I was almost too late but did well enough to provide for what I was seeking to achieve. I may sell (or cull) a few properties to work my way down to a portfolio of fewer ?core? properties.

Increase in Net Worth: Without the protection of preservation type investments such as precious metals and hopefully real estate that was purchased at reasonable prices that continue to cashflow, I don?t know much else to do at this time which leads me to create such as post as this.

What else can we do within and without this niche to shore up the 3 legs of the stool for each of us?

Tony Colella

import · November 28, 2010, 11:53pm

Re: How Can We Improve Upon… - Posted by Keith (OH)

Posted by Keith (OH) on November 29, 2010 at 24:53:04:

Tony,

Clearly in a down economy you are going to have to sacrifice the growth of one or more legs of the stool. For most of us this has been our net worth, at bare minimum. For some this is calculated (selling off properties) for others its just the impact the down market has had on our real esate portfolio.

So as we have little impact on shoring up our net worth we must focus on the other 2 legs to keep us afloat. Now the question becomes, of the 2 remaining legs which one gives you the most options to weather the storm. And for me that is lump sums of cash. This is the shining star IMO, the bionic leg if you will. Periodic lump sums of cash can be used as income. It can also be used to make purchases that will increase net worth. But you can’t use net worth as income and you can’t use income as lump sums of cash.

However the mobile home niche has not offered me the opportunity to get lump sums of cash as most of us have experienced as well. While Jeff has adapted on “2 legs”, I have diversified back into SFR rehabbing where it is much easier to get access to lump sums of cash. I’m not saying this is the answer for you or anyone else rather just sharing my experiences.

Keith

import · November 28, 2010, 3:45pm

Re: How Can We Improve Upon… - Posted by JeffB (MI)

Posted by JeffB (MI) on November 28, 2010 at 16:45:28:

Having been to your boot camps and many late-night discussions in years gone by, I’ve always seen wisdom in the 3-legged stool model you speak of. However, in practical application in my own life, I haven’t necessarily been able to achieve a 3-legged stool. More likely, it’s a two legged stool that I have to sit precariously on, being careful to never fall over.

In the LD realm it is difficult (but not impossible) to do. At least, not initially. After years of doing deals I find that I have adequate income and net worth, but those lump sums of cash are always elusive. Strangely, except for perhaps the first couple years, it hasn’t mattered. If your business generates excessively good rates of return, and you are not frivolous with those earnings, you can save up a nice chunk of cash pretty quickly. That is, if you choose not to grow the business in perpetuity. Rather, find a size that works for you and, once you achieve it, maintain rather than grow.

This model has always reminded me of the “liquidity-profitability-solvency” analysis we did in business school to evaluate the health of a corporation. A business that is very profitable, but lacks strong cash flow, will struggle. Similarly, a business with excessive debt, regardless how profitable, will also struggle.

Since learning those lessons in college, and later in business for myself, I have always evaluated deals and opportunities, at least subconsciously, on the basis of what is the best and worst case scenario. For example, if I buy a trailer for $1,000 and expect to sell it for $10,000, then there is a $9,000+ upside and only a $1,000 downside. I like those numbers. When I’ve done L/H deals and looked at MHP (but never bought) I find the relationship between upside and downside is not so favorable. This is just a matter of personal risk tolerance, I realize.

Where I’m going with all this is, if you run a business that is profitable and keep debt to a minimum or eliminate it, the need to worry about the 3-legs should be minimal. Sure, I’d love to have access to lump sums of cash, but my business doesn’t generate them without taking on debt somehow. I realize I have not really added anything here towards addressing your question, but what the heck, nobody besides you, me, and Shawn is posting anyways.

import · November 27, 2010, 2:58pm

Re: How Can We Improve Upon… - Posted by Shawn Sisco

Posted by Shawn Sisco on November 27, 2010 at 15:58:36:

Complementary businesses.
I have in my sales lot days sold homeowner insurance policies - I should probably do this from my MHP office to my residents.

I have in the past sold furniture/appliances as a side business - I probably should do this from my MHP office.

Cars - I might as well do some of that as well from my MHP office.

For me, since I maintain an office, I should be more diligent in offering other items.

If I didn’t maintain an office - well that would be a bit different.

I have a good friend that does legal process service - I think that you would be a great candidate for that Tony.