Profits thru Financing Strategies

[Don Konipol]

Profits Through Financing Strategies

Although most investors (including myself!) seek investment profits in real estate through some form of purchasing under market or adding value, I've sometimes used FINANCING to generate the kind of ROI that accelerates "wealth building". Here are three examples (quick summaries)

1. 1. Retail / Warehouse we acquired through down payment and assumption of underlying 12% mortgage loan. We renegotiated loan interest to 7% in return for a balloon payment in 18 months. Within 6 months we had a new refinance loan at 4% interest fixed for 20 years. We later sold the property to an investor group that had $450,000 cash down but not the credit to obtain institutional financing. As a result we were able to sell for a price $125,000 over what a cash sale would have brought, and wrap a 10% interest note around the existing 4% note. Lots of different ways to look at the result, but suffice to say we earn $39,000 difference yearly on the $650,000 wrap portion of the note and the one time $125,000 differential on the price between selling for cash and providing seller financing.
2. 2. Years ago I purchased a 4 unit (2 residences, 2 storefronts) property paying market price ($120,000). Interest rates were double digits so the seller had trouble selling receiving offers in the $98,000 - $108,000 range. My terms were $15,000 down and owner financing of the balance of $105,000 over 7 years at 0 interest (payments of $1250 per month were all principal). When I closed the 2 residential units were leased as was one storefront. The net was about $1,000 per month. Despite my best efforts, I was unable to obtain a satisfactory tenant for the vacant storefront, and eventually leased to the other storefront tenant for $250 per month. During my period of ownership, I was able to increase the rents on the residential units somewhat, when the 7 years of note payments was up I had never received any cash flow - it was not even break even as on a cash basis I was out an additional $3,000. However, I now had a property free and clear of all liens. An investor group was interested in the property and I sold to them for $200,000 cash.
3. 3. In 2016 I purchased a townhouse for my daughter offering the following to the seller: I’d either pay $220,000 cash OR I’d pay $250,000 with $55,000 down and $195,000 seller financed note at 3% interest. She chose the latter. I added a substitution of collateral clause. After about 12 months I identified a note I could purchase with an unpaid principal balance of $184,000 and carrying an interest rate of 3.5%. I purchased the note for $95,000 and paid off the $190,000 balance I owed on the townhouse by “substituting” the $184,000 note I just purchased and adding $6,000 cash to make up the difference. So the townhouse cost me the $55,000 down payment, the $95,000 I made for the substitution note, and the $6,000 difference. I ended up paying $156,000 for a townhouse I had offered to pay $220,000 cash for. In 2020 with interest rates at their lowest EVER, The townhouse appraised at $350,000 and I borrowed $200,000 at 2.5% which I promptly invested in hard money loans yielding 12%.

Let me know your comments, experiences, or thoughts