$52,000 House Makes 13.5% Cap Rate - No Investor Maintenance

18 Replies

This house on the southside of San Antonio was purchased cash for $52,000. It had central air added and was painted inside, also the kitchen and bath were rehabbed. Total cost was $10,000. 

Then we got a qualified owner finance buyer in the house, who is responsible for all maintenance. $895 per month, $5000 down, 10% interest, 30 year, no prepayment penalty, may refi anytime. Cap rate is 13.5%.

That's not a bad return for your cash.  However, seeing as you will not be ending up with this property, the question you probably should be asking is:- what next?  Where to put your cash flow so that it will generate MORE cash flow? (At this stage you might not need to know how many yachts you want or where you will spend your holidays). BP is mostly about helping you turn money into MORE money. Congrats...

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I have heard that criticism before. Its a 30 year note. How many people hold a rental for 30 years? 

The buyer always can refinance and cash me out. It happens. Or, they default in 5-10 years and I resell it 5k down, 900 a month again :). Not what I want but it's very good for my finances.

What next? Save the cash flow and buy more houses! ;) My mentor/partner retired himself before 30 with several dozen of these owner financed homes, owned in cash. He started out dirt poor as well. 

In your scenario, if my circumstances permitted, I'd be tempted to pull out as much cash as possible now and refinance it again with a conventional mortgage (historically low rate); then rinse and repeat, without needing to wait for your cash to start accumulating first.  Cheers...

Also, I flip houses to build cash for more of these buy and holds. The flips are a means to an end, not something I will do forever. I've made almost 20k in the last 4 months on two flips, will use that cash to do more flips, and then buy and hold owner finance. 

If my Math is right you would have sold that for @ $107,000, nice work.

Now, If you want to accelerate your process you could sell the next 120 payments at 14% and net $56,459, get almost all your money out and do another one right away.  In 10 years you get the remaining cashflow.  If you sell those payments with at 10% yield you would only have to sell 96 payments to net 56k.

Good luck, you are on to something!  You should be able to scale this pretty quickly.

How does that work bob? selling the payments? I have heard of that but it's not my area. My partner here in town has done very well just buying and holding the properties. Thanks. 

Joe, Congrats on the SF deal, hope you used a RMLO to qualify the buyer and do the underwriting, and that you're using a loan servicer for that owner occupied deal.

Payments can be sold, if your loan is compliant, as an annuity, an investor can give you a lump sum for any period of future payments due, generally with recourse if they fail to pay you make up the difference, but other arrangements can be made. Search the note threads for details. Good luck :)

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Interesting, thanks I will look at the note threads. Yes we do everything legally regarding owner finance, fully dodd frank compliant. We use a RMLO yes sir. Thanks. 

Joe Pickett nice work. I have came across several opportunities where this would have worked out well, but I didn't know how to structure the deal. Do you escrow for taxes and insurance? I'm assuming since you are the 1st position lean holder you would want to make sure the house is insured or not going to be foreclosed on for unpaid taxes? How does that work in a situation like this. Thanks!

Yes sir, we escrow taxes and ins. Do not depend on your buyer to pay them :). We've been there, bad idea. We also fully comply with dodd frank in our qualification of the buyer - tax returns, bank statements and pay stubs. No undocumented income. Don't go there either unless you like DEA agents waking you up at night. 

The key is to find the property cheap and in the right area and to qualify the buyer properly. My partner has the system down  in our city. If you have other questions, let me know! If I can't answer I can get the answer. 

Our deals on the end buyer usually are 5k down, 10% int, no balloon, 30 year, no prepay pen.

@Chris McDaniel  If you use a servicer they can handle the escrow for taxes and insurance.  They can also send the proper legal notifications if the borrower stops paying.

The mechanics are fairly simple, find a buyer that wants a house but can't get credit.  The might be self employed have a recent short sale etc.  Use an RMLO to make sure you are Dodd Frank compliant.  Most title companies or an attorney can draft the proper paperwork.  When your sale closes send the paperwork to your servicing company and then hope you did a good job qualifying your buyer and collect the payments.

yes bob is right. We do not use a servicer on most of our deals we are involved in as most of our buyers only do a few houses, but some of our big buyers who buy 20 houses do so. 

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