Maricela Soberanes Friday August 26th, 2022


Have you heard about the term “Generational Wealth”? I had, very frequently lately. That term seems to be passed around like salt and pepper on the dinner table. So I decided to take a deep dive, and here I share my two cents, no pun intended.

A joint agreement of the term “Generation Wealth,” as defined in the https://www.forbes.com/sites/forbesfinancecouncil/2022/02/18/closing-the-generational-wealth-gap-five-ways-to-build-wealth/?sh=4bdb93fb72df Forbes article (by Crystal McCollough), “is anything with the monetary value passed down from one generation to the next. This can include property, money, investments, and businesses. Intangible wealth is considered education, financial literacy, values, and spending habits ingrained into your family and sometimes even your culture.”

This definition hit home for me. Mom used to tell us (eight siblings), “I have no material things to leave to my kids. All I have is the teachings about work ethics and values”. It is true; she left zero assets or other material things. However, her generational wealth has been the foundation of my building wealth strategy, an asset that I consider of greater value than any bank account.

I also hear the phrase, “make it your goal to take your family to the next financial level .”Example: from poverty to middle class, from middle class to wealthy, from wealthy to financially free, etc. That concept also resonates with me. It is common for people to stay in the same economic class, or maybe even move up one class, but sometimes a person’s responsibility can be overwhelming if pursuing the goal of going from poverty to wealthy. A goal of this magnitude can be paralyzing and intimidating.

The first intangible task is to believe you can do it!

Easier said than done, so work on it if you haven’t mastered it yet. Regardless of your current situation, if you work on the intangible tasks it will add value and wealth down the road, just like a tangible investment would pay dividends later.

Here we want to share five building blocks that have allowed us to preserve capital. We offer an abundance of free educational content to help you achieve this. If you are not, taking advantage of those resources, make sure you follow us or connect with us.

Five strategies for capital preservation when it comes to buying Real Estate Assets.

#1 – Heavy capitalization
Raise money to cover capital expenditures upfront. This allows you to have working capital available to move forward on any projects that could potentially affect the occupancy, ultimately affecting the property cash flow and NOI (Net Operating Income). The sooner you complete projects that affect expenses or revenue increases, the more overall impact they have. Prepare for the “worst case scenario” and anticipate it with the guidance of experts and professionals (inspectors, contractors, experienced partners).

#2 – Purchase cash-flowing properties
Think about it, if the asset is performing as you purchase, you will be able to preserve your capital instead of injecting it into ongoing projects and waiting for returns. Some exceptions to this strategy would be land development, a hotel conversion, or a heavy value add with renovations requiring or due to low occupancy. All of these expectations of low to no cashflow should be presented in the business plan, and again, heavy capitalization will be needed to implement the plan before returns will be realized.

#3 – Stress test every investment
Performing a sensitivity analysis of the business plan before investing allows us to see if the investment can weather the worst conditions. During our underwriting process, we model (simulate) worst-case scenarios and analyze the numbers to identify breakpoints. Based on that, we make financial assumptions. For example, what if vacancy rose to 15%, and what would happen if the exit cap rate was higher than at the time of purchase?

#4 – Have multiple exit strategies in place
Our mentor Grant Cardone always advises you to buy the property, thinking about who you will sell it to when the business plan is met. Based on that, we are looking for the most favorable conditions to sell and what we can do to the property during our ownership to make it an appealing product for our ideal buyer.

Having more than one exit strategy is vital, just like on a plane. If the aircraft is on fire, we would want as many options to escape as possible. When acquiring properties, we want as many options as possible. For example: can we hold 3-5-7 years? Could we refinance? Could we form a portfolio and sell as such? Can we sell to a REIT? So, we build contingency plans to pivot our business plan as needed.

#5 – Team with people with similar goals- to preserve capital!
Part of getting on the same understanding is to keep the communication channels open. If a team member is looking to capitalize more on cash flow now, instead of wealth preservation, this can be a source of conflict. Additionally, if you sponsor the deal, ensure you know your investor’s goals and talk about them often. If you are an investor, get clear on your financial goals and communicate them to your sponsor (cash flow, wealth preservation, wealth accumulation, tax optimization, etc.).

I want to take it back to our dinner table conversations with our kids, grandkids, and loved ones. What are the habits we are modeling for them? My mom said, “by the age of five, I taught my kids all I could (yes, no, please). Everything else, they learn from what they see me doing”. What is your family seeing you doing? What conversations do you have that prepare them for life, or a change in financial direction?

I believe we all have the power to create generational wealth (intangible or tangible), the key is consistency and clear goals.

Let’s connect soon. We love having those elevated “million-dollar” conversations. I assure you, your time will be well worth having those conversations. Happy investing!

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