Comments on: “Whip Out” — a technical finance term for entrepreneurs

By: Rich Weisberger

Rich Weisberger — Thu, 30 Oct 2014 00:48:00 +0000

Wow. Nice. I’ll stop here for pancakes more often.

By: JLM

JLM — Wed, 29 Oct 2014 15:33:00 +0000

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It’s determined by your personal circumstances. As a general consideration, liquidity is better than having illiquid investments. But then paying off the mortgage is a legitimate way to create equity even if it is not liquid.

A real estate owner has a nice depreciation and interest deduction to shelter though not as generous as it was pre-1986 tax act. In the day, I didn’t pay any taxes for a couple of decades. It catches up to you when you sell it all and you have to send the IRS a check equal to the GDP of a small country — it’s called “recapture” and it is an ugly thing.

BRC
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By: JLM

JLM — Wed, 29 Oct 2014 15:30:00 +0000

In reply to Mayo DeLeon.

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These days you should probably consider a bit more equity in a deal. You want to get to a 1.5 DCR (debt coverage ratio) and a 70-75% LTV (loan to value ratio). This a threshold “rated” security.

BRC
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By: Mroberhozer

Mroberhozer — Wed, 29 Oct 2014 14:57:00 +0000

Just getting in the conversation here, thanks to your recent comment on AVC.
At what point do you take whip out every few years versus sitting on the cash flow? With $10M in cash flow, the original $70M loan could be paid off in short order, and then you’re sitting on $10M (albeit taxable) profit annually. And that will likely go up with increased rents over time.

By: Mayo DeLeon

Mayo DeLeon — Sun, 30 Jun 2013 16:01:00 +0000

In reply to JLM. But even after paying taxes, the whip out from the cousin can be used to invest in real estate...typically requiring 20% down for investment property loans or new commercial construction loans. So embrace your cousins and make limonade.

By: JLM

JLM — Wed, 30 Jan 2013 03:02:00 +0000

In reply to Parkite.

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Real estate, when done correctly, is a great asset but it too is subject to business cycles.

Nobody in this scenario is selling anything. Just refinancing it and getting just a bit of whip out.
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By: Parkite

Parkite — Wed, 30 Jan 2013 02:51:00 +0000

In reply to JLM. Why would one ever part with a cash cow like described above?

By: JLM

JLM — Wed, 30 Jan 2013 00:04:00 +0000

In reply to Parkite.

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Private company.

In this example, you are accessing the phantom equity and not playing games with LTV.

It is still very conservatively finance and would look like a AA credit.
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By: Parkite

Parkite — Tue, 29 Jan 2013 23:51:00 +0000

How did you get the $14M in whip out past the auditors? Seems like when you refinanced, the $14M in excess cash would be setting in the company bank account. Really, this is no different than what many people did on a residential basis during the real estate boom. Although, the high LTV sealed their fate when the market crashed.

By: JLM

JLM — Tue, 29 Jan 2013 05:15:00 +0000

In reply to Ryan Carson.

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Sorry.

BRC
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