Thoughts please on my strategy...

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Thoughts please on my strategy...

Brandon R
Appraiser · Hoopeston, IL · Member since 2008 · 27 posts · 0 votes

Hello Everyone,
I have 6 investment properties after 16 months. 2 of which are rented. 3 are on Land contract. The last one is just finished and available for whatever..
I have been considering doing all my properties on land contract to qualified buyers. Those people that are very close to being able to get financing but can't. I run credit, background checks, refernce checks, etc.. and I send them to people who can help them improve credit.
I ask for 10% down and charge about 9-10% interest (I pay 7%). I make about $180-$200 profit off of each contract sale monthly. Their payments includes principle, interest and property taxes which I hold in savings until due. They are responsible for their own insurance in which my bank and I are listed as additional insured.
I really like this concept because 1. Down payment 2. eliminates maintanence calls 3. Puts ownership responsibilities on the contract buyer. 4. Better quality "tenants"
I understand that a high number of these buyers walk away from the deal. I think that is ok! So do renters but renters don't put 10% down payments and eliminate our management and maintenance headaches. If they start to get behind the first thing I will do to save months of disputing is go to them and offer a deal. Just leave within 30 days and no lawyers will be involved, no foreclosures, etc... if not then I call my attorney.. Then I clean it up, get another 10% down and do it again.
This seems better than renting. Safer and more profitable.

What your opinions on this strategy? Does anybody else do this? I am not against owning straight rental homes. I am just trying to be smart about it and increase my cash flow while limiting my time, maintanence, etc...

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    Selling on land contract or selling on lease option is really no different than renting. You are correct when you said that the majority of these people will not buy the property. Now, think about what happens when the "buyer" starts to get into trouble. They'll stop paying the insurance and stop doing maintenance. Furthermore, even when they are doing the maintenance, it is likely to be substandard.

    When you "sell" someone a house, it's theirs to do with as they like. If they want to paint all the walls neon purple, they can. If they want to knock out walls or divide rooms, they can. If they want to install a wood burning stove with with a pipe going straight up through the middle of the living room ceiling, they can.

    The point is that what you will get back is often a property that is in a significant state of disrepair and can easily exceed your 10% down. That is especially true if you must evict or foreclose on the "buyer".

    Finally, you need to understand the eviction/foreclosure procedure in your state. How long does it take and how much does it cost? When can you evict a land contract tenant and when must you foreclose on them? How far do they need to be behind before you can start the eviction/foreclosure?

    I'm not saying that "selling" on land contract is bad, but it's no panacea either. Just don't go into it thinking that everything will work out as advertised - they won't!

    Good Luck,

    Mike

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    17y

    I agree 100% with Mike OH on this one and add a couple more thoughts. You stated in a previous post you pay 20% down. Now you sell on 10% down, plus you'll have the fix up costs like Mike said. That is not a win in my mind
    Also, a sale especially short term triggers tax implications with no writeoff. If you're still the owner, you have depreciation and therfore some tax benefits. You're also creating an income stream, but not real wealth. Owning lots of properties for a period of 20 years is a guaranteed method to creating real wealth and at that point, you'll have your income stream also. Just food for thought.

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  • Brandon R
    OP
    Appraiser · Hoopeston, IL · Member since 2008 · 27 posts · 0 votes
    17y

    Yes I put 20% down but I also refi asap to get my down pymt back. I still will be about 60% loan to value. I typically use a construction loan to update or remodel for the initial purchase.

    Example.. Purchase foreclosure
    20,000 purchase
    4,000 down pyment
    10,000 updating
    New appraisal = $55,000
    Refi at 65% or 35,750
    Gives me my out of pocket back still 65%LTV
    Advertise sale on Land contract with 10% down.
    Get my out of pocket back at refi plus 10% plus monthly.
    I would charge around 550-600 depending on the area, etc..

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  • Brandon R
    OP
    Appraiser · Hoopeston, IL · Member since 2008 · 27 posts · 0 votes
    17y

    So it seems that the best way to invest is to have rentals. Am I understanding this correctly? Using the 40% rule (I manage myself) to find properties that net at least.....$100????? or more?????

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    17y

    I hold the contrarian view on the cash flow. I'm NEVER been concerned about a magic equation for expenses or cash flow. Most of the time the #'s don't hold water anyway.
    If you don't need the cash flow, then you'll ALWAYs be able to buy more properties, have less invested in equity, and benefit double or triple in appreciation and creating real wealth and pay less or no taxes. To many investors, receiving cash flow just adds to amount of taxes already being paid. Just like Monopoly, buy as many properties as you can safely handle and then watch the wealth snowball gain size as it goes along. Cash flow will be there later in life when you need it and are retired.

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  • Brandon R
    OP
    Appraiser · Hoopeston, IL · Member since 2008 · 27 posts · 0 votes
    17y

    Rich,
    But you don't want to loose money monthly correct? Should the appreciation of the home be a bigger concern than current cash flow?
    Brandon

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    17y

    Brandon- I forgot to address your example. I like the refi process if you can actually do it. BUT, when you sell the property, all the gain including the refi is taxable-likely short term gain and ordinary income. Ouch! You obtain the same benefits not selling it on contract. More depreciation to write off income and more appreciation, over time.
    I don't see real benefits to you selling on contract. The 10% you get down is less closing costs, and fix up costs. There is also the problem foreclosing on a contract. I'm not attorney and also not familiar with your state.

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  • Chris A
    WY · Member since 2008 · 44 posts · 0 votes
    17y

    Rich,
    The problem I see with ignoring positive cashflow as a requirement in a deal is that you get to the point I am where you run out of working capital to finance anything else. I have several properties but am fully leveraged 80% LTV and am stuck. I can see other decent apartment building opportunities but simply can't come up with the downpayments anymore. Exploring the hard-money options looks like it would destroy the profitability of the ventures and make them significantly cashflow negative. Suggestions?

    Chris A.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y

    Chris, I don't think Rich is saying to "ignore" positive cash flow. Simply to say that if you can get into a property with 35% equity at purchase, have adequate reserves, you can still benefit from that investment without cash flow (tax deductions, 35% equity, future appreciation, etc)
    Bottom line: Shoot for cash flow on buy and holds, buy with equity, buy in a market your research has pointed to future appreciation, use the power of leverage properly, manage properly (self or hire) and repeat.
    The topic was talking about single units and then apartments were mentioned. TWO different investment vehicles with two different business models. (apples and oranges)
    Brandon,
    your startegy is creative and possible viable, however, Rich made an important point that you are missing out on tax deductions and future appreciation, as well as principle paydown from rental income. These are factors you should consider with your strategy. If you like the "better tenants" and "less management" approach, a simple lease option should suffice. You keep the tax deductions, until sold, and still have your better quality tenant with less maintenance, or so you hope. When investing in 1-4 unit properties, the larger portion of your profits come from a combination of your equity at purchase, appreciation (compounded by the use of leverage), principle paydown, tax deductions, and appreciation.
    In commercial properties and multifamily 5+ units, your are purchasing an income stream, plus the ability to force appreciation (increase income, lower expenses, add capital improvements, etc), and of course, buy at a discount giving you intstant equity.

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    17y

    I think Will took good care of replying for me. I was counseling a beat up investor on the phone!!
    Chris-
    The problem in your example is not the cash flow. The problem is you decided to buy 2 homes with max down of 20% on each and that gave you 2 cash neutral properties. Now look at your alternative. If you wanted cash flow and your loan was at 7%, you could have added 14K more down and received $100 per month positive. How long would it take you to save up the mo net to pay another 20% down on a property? FOREVER. What you did was use the 14K to purchase another cash neutral property. Now you have double write off(less taxes owed will increase your investment pool), and 2 properties affected by appreciation.
    In your position, I'd have done EXACTLY what you did. 2 properties cash neutral is better than 1 with a $100 back each month. There are other ways to go buy more properties. Don't slow down or get discouraged. Get creative.

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