Buy a business to create cashflow

Discussion in 'Investment Strategy' started by melbourne171, 1st May, 2020.

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  1. Cousinit

    Cousinit Well-Known Member

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    Yes, of course many businesses may run at a loss at the beginning depending on a lot of things, and that includes realestate. Amazon I don't think has ever paid a dividend and look where it is now!
     
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  2. Cousinit

    Cousinit Well-Known Member

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    One of the good things about online retail is you can diversify out into multiple countries and end up being paid in a range of currency. Not just US$
     
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  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Nor has afterpay and it is still racking up massive losses but is trading at over $100
     
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  4. euro73

    euro73 Well-Known Member Business Member

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    Onetel also never ran at a profit and look where it isn't now :)

    The question wasn't about asset values. It was about cash flow issues.

     
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  5. Cousinit

    Cousinit Well-Known Member

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    OK, so here is the initial question again. Using IP equity to BUY a business to improve CASHFLOW. Of course there is nothing wrong with doing that. You don't have to buy either but instead start one from scratch if you have what it takes, which is what I would prefer for a whole range of reasons.

    My point is that you might not have that great cashflow at the beginning but that doesn't mean the business is unviable.
     
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  6. Scott No Mates

    Scott No Mates Well-Known Member

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    Came down to the basics, they simply paid too much for their sites and didn't have the customer base to support it. Most Telcos today still aren't paying anywhere near what Onetel were prepared to pay close to 20 years ago.
     
  7. euro73

    euro73 Well-Known Member Business Member

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    All well and good, except that these companies don't require credit assessments , are not required to pass serviceability tests, are not restricted by DTI ratio's etc.... but resi portfolios do and are .... so the asset value - whether good or bad - isn't really a valid way to compare things in the context of this particular discussion.

    Also completely valid - provided one also has the holding power to wait for yields to mature. If one's borrowing capacity is already challenge though, as the OP implies is the case for many investors, one would imagine refinancing capacity may also be challenged at some point, resulting in P&I being required - possibly..... Should that occur, it takes a long time for rents to climb 50% to cover the P&I reset .

    Which is why I suggested that purchasing properties(businesses) that produced good income and could manage that situation was an effective approach to those particular challenges
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    Financing of telco is much more complex than throw a couple of numbers (salary/rent) against a wall and hope that it sticks.

    Funding is through a mix of shareholders, venture capital, promissory notes and borrowings etc. Every site is subject to a detailed DCF/IRR and incrementals of revenue of the network based on its footprint - a house is a house but a telco site is subject to a whole range of radio planning issues on top of regulatory and planning controls.
     
  9. inertia

    inertia Well-Known Member

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    Well kinda. @euro73 was also right. I was working for Lucent at the time - who built and managed the network. They didn't want to buy the integrated software that would deal with usage and billing, and they had incredible trouble correlating the services to usage, and failed miserably at reliably billing customers (and hence cashflow was impacted).
     
  10. euro73

    euro73 Well-Known Member Business Member

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    That was my point , really ... and demonstrates precisely why arguments prosecuted using loss making telco's or Amazons or other corporates as comparisons with resi property ( businesses ) are not relevant . Resi property has a fairly black and white set of rules around finance - and within a relatively small margin of error if you hit a ceiling, you hit a ceiling .... you cant exactly undertake a new round of capital raising or seek out new institutional investors if you hit a servicing wall ....

    The business of owning resi property needs to account for the realities of borrowing capacity limits ... and at the risk of repeating myself for the third time in as many posts, is the subject of the OP's post and the context in which I commented. Radio frequencies , venture capital, shareholders and other such stuff bears no relevance to this particular conversation....
     
    Last edited: 21st Dec, 2020
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  11. Reddy

    Reddy Well-Known Member

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    Thank you
     
  12. kierank

    kierank Well-Known Member

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    To me, a property portfolio is not a business.

    The value of a property portfolio is simply the sum of the value of its physical assets. Cashflow, brand, ... are not part of the equation.

    The value of a business is not the sum of its physical assets. Cashflow, brand, ... are all part of the equation.

    BUT I do believe that one should run their property portfolio like (not as) a business.
    I don’t agree.

    I have and am still happy to buy a business that is making a loss if I believe it will make a profit in the future.

    Likewise with a property portfolio, I have and am still happy to buy a property that is making a loss if I believe it will make a profit in the future.

    For me, my greatest success came from owning businesses where I continually improved their profitability and used some of that profit to fund a property portfolio that was in the early years was making a loss.
     
    Last edited: 22nd Dec, 2020
  13. euro73

    euro73 Well-Known Member Business Member

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    One cannot do that if one has no borrowing capacity though ...which remains the OP's question and the point of the thread. In a world where borrowing capacity continually expands, we all understand that speculation worked for many as DTI ratios didnt exist, IO was allowed for as long as required without ever hurting capacity, P&I was never required, equity was easily harvested etc. In a world where those ingredients have changed, borrowing capacity now needs to be managed- just like it would be in any business.
     
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  14. Lindsay_W

    Lindsay_W Well-Known Member

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    Buying a business doesn't instantly create additional borrowing capacity either, it will need to be held and operated for some minimum timeframe before the income would be considered for serviceability purposes.
    It can certainly improve cash flow but serviceability won't get better instantly.
     
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  15. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Such a great thread.

    It is very interesting to compare the cash flow from running a business the cash flow from real estate.

    It is definitely true that businesses are generally better at producing cash flow than real estate, though not always the case in the early years.

    However, to point out one obvious difference: property income is passive whereas the cash flow from a business is usually labour intensive. You can generate cash flow from property and do other things at the same time.

    I think the reason why we are forgiving to properties that are cash flow neutral or negative in the early years is that while it might cost some cash, it doesn't cost any time - and time is the most valuable commodity of all.

    If you combine the passive nature of property income, plus the tax benefits and capital appreciation, property becomes a very compelling asset class.

    I think comparing the cash flow of a business vs the cash flow of a property is a very limited way to compare the two.
     
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  16. euro73

    euro73 Well-Known Member Business Member

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    Buying properties that provide significantly superior cash flow and then using it to pay down debt was my point.... the increased rental income has an instant positive effect on borrowing capacity - albeit a modest effect due to lender yield caps..... but the ongoing debt reduction is where the magic really happens over time....
     
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  17. kierank

    kierank Well-Known Member

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    I have always believed that borrowing capacity had to be managed.

    When one owns assets with good capital growth (eg good property) and assets with good income (eg good businesses), then borrowing capacity tends to look after itself.

    That has been my limited experience over the last 40 years and, even more so, in today’s world with such low interest rates.

    To me, this is common sense but, as they say in the classics, “common sense ain’t that common”.

    This year has shown this to be especially true.
     
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  18. MTR

    MTR Well-Known Member

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    Hey John

    There are plenty on this forum who also develop property .....and this is Most certainly a business.

    Property is forgiving as a long term hold, however I get Euro point where strategies that worked in the past may not necessarily work today ie servicing debt has changed and now we have P&I loans
     
    Last edited: 22nd Dec, 2020
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  19. Cousinit

    Cousinit Well-Known Member

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    Yes I agree John it is a very limited way of comparing things. A good business or two can certainly feed well into developing a real estate portfolio of substance. Kiyosaki talks about the BI triangle in some of his books in more detail.
     
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  20. Cousinit

    Cousinit Well-Known Member

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    Yes but this is getting off topic again. The thread is about the merits of buying a business to improve cashflow. Euro seems to be talking about property only.
     
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