Note well the state of your flocks

 

Have you ever read the book of Proverbs in the Bible? If not, check it out sometime. It was written by King Solomon who was called the wisest man who ever lived. He led Israel to become one of the most prosperous nations on earth and amassed great personal wealth.

The reason I bring that up is because the book of Proverbs is a book of wisdom Solomon wrote to whoever he could get to read it in order to find wisdom, riches and long life. And it has a ton in it about business if you think of reading it through that lens.

 

For instance, Proverbs 27:23-27 reads as follows:

Know well the state of your flocks; Set your heart to your herds; For riches are not forever, Nor a diadem to all generations. Grass vanishes, and new grass appears, And the vegetation of the mountains are gathered in. The lambs are for your garments, And the goats for the price of a field; And goats’ milk enough for your food, For the food of your household, And sustenance for your girls.

 

It may be hard to see the business wisdom in this on the surface. But I want you to realize he is talking about stock here… livestock that is. At our business, we view our rental portfolio as our flock, and we even title the document that keeps up with the annual metrics for each property “The state of the flock doc” in honor of this passage.

 

The way I take what Solomon is saying here is that markets change. Sure, when the grass is green, properties are prevalent and you can buy low and sell or rent high, things are great. But that market, and those riches, aren’t forever. Once things change, you have to look at your flock and see what they are doing, how they are doing and in what way can they feed you. That includes your business, furthering your investments and last but definitely not least, feeding your household.

 

I spoke to you recently about our leads drying up and how my cheese moved. We are about to finish up the last flip we have in the pipeline, and I’m scrambling looking for another deal to try and keep my employees busy. As I was door-knocking yesterday, it dawned on me that the market has changed, and it may be time to evaluate our flock and see if we need to get rid of any underperforming houses to help feed the business. One house in particular came to mind, and I thought the stats on it would make a great case study for y’all to follow.

We bought the house in 2019. It was a brick ranch in Calhoun that I found door knocking the pre-foreclosures. The reason it was going to auction was the seller had gotten a job transfer, moved out of state and could not make both house payments. It was on the market to sell but had a water main issue that kept the contract from closing. All the seller wanted was to stop the foreclosure and save their credit.

 

To make a long story short, we bought the house subject-to a 30-year fixed 3.875% mortgage. The balance on it was around $100k and the maturity date was in 2043. So, it was a pretty new mortgage with a payment of $650 a month. But they were behind $10,500.

 

Our out-of-pocket expenses were the arrears, the closing costs and minor rehab. We fixed the water main, cleaned the inside and painted the walls. So, our all in was just shy of $14,000.

 

We rented the house out and have had the same tenants in place ever since.

 

After pulling some reports, we were able to determine that we had made a return on investment, or ROI, of just over 20% on this house. And just to remind you, ROI is way to evaluate investments through looking at what percentage of your initial investment you receive back each year. So, if you invest $100,000 and get back $10,000 each year, you have a ROI of 10%, which means you get all your money back in ten years.

 

So, the bigger the ROI, the better a deal is. Our 20% ROI means we received all our money back in 5 years! Not bad huh?

 

But here is the thing, that also means it took us 5 years before we started actually making a profit. And to date, that house has only made us $500, and it looks like we are about to have to put a roof on it. So, have we really made any money yet?

 

These are the kinds of questions we have to ask when we evaluate our flock. We can go up on rent, but with the new roof it will still be at least 2.5 years before we make a profit. And that assumes we have no other issues like repairs or vacancies.

 

So even though there is a great ROI, cashflow wise, there is no money there to feed our house.

But what we do have is equity. That house has a mortgage balance of $96k but would sell for $240k right now. We would still have to put the roof on it, but that is going to happen regardless. At least if we sell it, we will get that money back in months, not years.

 

The takeaway here is ROI can be deceptive. You have to think past the calculator to see how your flock can best serve you when market conditions change, and new grass appears.

 

So, note well the state of your flocks and use them accordingly.

 

Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.