Accretive is the adjective form of the word accretion, which means gradual or incremental growth.
The one thing you want to think about when it relates to investing in real estate deals is really two pronged. The first prong of the approach is to think about whether the real estate investments you are making are actually accretive to your net worth. The second prong of the approach is to think about whether the real estate investments you are making are actually accretive to your passive cash flow.
In that sense, when you use the word accretive to describe both your passive cash flow and your net worth, you want to ensure that you are getting gradual or incremental growth from your real estate investments.
You can get gradual and incremental growth from real estate investments in a number of ways.
The first way that you can invest in accretive real estate investments is by evaluating returns such as cash-on-cash returns, Internal Rates of Return (IRRs) and equity multiples by finding investments that match your investment thesis and desired return metrics.
Yet another way that you can invest in accretive real estate investments is by finding and investing in investments where you’re getting diversification by property and asset type, by geography, and by Sponsor.
A third way to invest in accretive investments is to use the equity leverage method. The equity leverage method enables you to scale your equity while also enabling you to benefit from economies of scale by being able to do larger deals with a smaller amount of money. This is done by investing in large deals with experienced Sponsors doing larger deals.
And the final way to invest in accretive passive real estate investments is to utilize a re-investment loop similar to Guardrail Finance’s AIRR Method, which stands for analyze, invest, refinance/recapitalize, and reinvest.
When you use all of these concepts combined with one another, and you know what your return metrics are on a cash-on-cash basis, on an IRR basis, and on an equity multiple basis, you can invest in accretive investments that assist you with growing your passive cash flow and your net worth over time whereby you can attain financial security and financial freedom at an earlier stage.
Having accretive investments is something that everyone understands intuitively. But it’s not always as easy to achieve because determining your investment thesis related to what types of properties to invest in, which geographies to invest in, and which sponsors to co-invest with, can be complicated.
You also have to determine which deals to put more money into, which investments you think have a lower risk profile with a higher return, which investments may be riskier, and which investments will potentially provide a higher equity multiple that can grow your equity faster.
Each of those things go into the decision-making process about whether an investment will be accretive or not. And at the end of the day, there will be some deals that just don’t work the way that you intended them to.
As an example, we bought one property in the Seattle MSA that on paper was an absolute no brainer, home run investment. When we first started with the investment, it looked like it was going to be a homerun, maybe a Grand Slam. However, we ended up having multiple issues on the management side, we had multiple issues on the tenant side, and while the property was fine, all of the turnover from the management and tenant issues caused us to spend a lot more money than we had initially intended to.
Ultimately, we decided to sell the property. We were in contract for a reasonable return that ultimately got sucked down to nearly breakeven because of ongoing issues and the outbreak of the COVID-19 pandemic. As the COVID-19 pandemic persisted, we decided to accept the deal to sell because we didn’t see a pathway for us to get back to significant profitability without a huge cash injection from the partners.
It was the right thing to do to protect our investors. We decided to sell to ensure that we would make money for our investors and to ensure that the investors got all of their money back. So that’s a deal that ended up being accretive, but with a lot of work for the partners. The investors got their equity back and they got back a little bit more than what they originally put in over the hold period.
The Sponsors worked on the deal to do the best we could for this investment over three years. You’re not always going to be perfect, however, you should do everything you can to ethically make money for the investors and ensure that you do not lose investor money.
Another example is an investment we made in the Portland MSA. We bought that property from an out of State seller who needed to raise money to resolve physical issues with the property. His investors did not want to invest more capital and he did not see a pathway back to profitability without the equity injection from the investors. He got his investors back their equity without much profit, so it was a similar situation to our example above.
The difference was that when we took over the asset, we over budgeted the repairs that we needed to make. We ended up doing the work at a much lower cost and within a year of completion, we refinanced the property and did a cash out refinance where we took out all of our original equity plus some.
We then refinanced again a couple years later, took out the same amount of our equity again plus some, and at that point, we also were receiving enough cash flow that we also received over 100% of our initial investment through cash flow over that time period, which had only been about three years.
We still operate that property and we’re still getting cash flow from that property. We’ve had over a 3x return on our equity so far and we still own the asset. We are also still getting cash flow and investing in the property to add more value so that we can refinance again in the future.
It is important to know your investment thesis so that you can choose the deals that you believe will be most accretive to your cash flow and net worth. It is important to understand the potential risks and potential returns of a deal. However, you still have to go in eyes wide open and know that there is a chance that you don’t get the returns that you require, or you don’t get your equity back. That’s just the nature of investing.
While I’ve had a very good track record on the real estate investment side, and I’m very proud of that track record, the reason I believe that is the case is that I try to do a lot of due diligence on the front end. I also stick to my investment thesis, so I can delete deals that do not fit very quickly.
I know what property types I’m interested in investing in, what geographies I want to focus on, and I know which deals that I believe will be accretive to my passive cash flow and to my net worth. I look at deals like this whether I am the Sponsor of the deal or with the Sponsors that I co-invest with.
Until next time, let’s continue growing our passive cash flow and net worth together!