Velocity of Money

What if you could have $1 doing the work of $2? You work hard for your money, why shouldn’t it work harder for you? That is the principle behind a strategy we call “Refi & Roll” or Velocity of Money: how quickly can we get $1 to do the work of $2. 

How does it work?

There are two critical tools you need to understand in order to employ the refi & roll strategy. 

1. Forced Appreciation: The concept of forced appreciation revolves around how multifamily assets are valued. Unlike single family homes, multifamily assets are businesses that are valued based on the net operating income (NOI). This means that you have control over the asset’s value because you can control the NOI through increasing revenue or decreasing expenses. 
2. Cash out Refinance: As you increase the value of the property, you are able to tap into the equity you created through a cash out refinance. This means that you replace the existing debt on the property with a new loan at an increased value. The difference between the new loan amount and the old loan amount is tax free cash in your pocket. 

Let’s look at an example. You decide to invest $100K passively as a limited partner in a syndication. Let’s assume the deal you invest in provides an 7% cash on cash return and a 2x equity multiple. Let’s also assume that in year 3 there is a refinance event and investors receive about 60% of their initial capital back. This means that over the course of 3 years, the sponsor team was able to force the appreciation of the property, (i.e., boost the NOI), and refinance the property to pull that equity out and return capital to investors. 

The graphic below shows the cash flow received over time (in red) and the capital returned in year 3 (purple). This means that you received approximately 60% of your initial investment back and notice that in years 4-8, the property is still generating cash flow! Now, you can “roll” that return of capital into another cash flowing investment while this investment continues to also generate cash flow. That original investment is now working hard for you in two places!

If you’ve read “Rich Dad, Poor Dad” by Robert Kiyosaki, you know the importance of buying assets that generate income. The refi and roll strategy is a great way to not only buy a cash flowing asset, but to have your dollar working harder in more than one place. 

One important final note about this strategy:

Your ability to refinance and take out a decent amount of your capital is somewhat dependent upon the sponsor’s ability to force the appreciation of the property, the cap rate and the interest rate at the time of refinance. In today’s market with so much uncertainty around interest rates it is important to understand how the sponsor has underwritten the overall deal and what pro forma interest rates are used for refinance. Be sure to ask! While no one has a crystal ball, you do want to make sure the sponsor has stress tested the model and that the deal still works with conservative assumptions.