Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
For me, I don't like this strategy. My IRR on my traditional rental properties is over 100% in most cases. Paying cash is seldom a good idea. Then you have it tied up and all your are making is 8 or 10% on the loan. This is probably the lowest rate of return you can get with real estate. I don't recommend it at all.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
For me, I don't like this strategy. My IRR on my traditional rental properties is over 100% in most cases. Paying cash is seldom a good idea. Then you have it tied up and all your are making is 8 or 10% on the loan. This is probably the lowest rate of return you can get with real estate. I don't recommend it at all.
Another way of looking at this, is he would be paying 100% for something that would be only worth 8%/year. That means it would take him, assuming he would be getting principle back with each payment, which means it would take over 11 years just to break even.
For me, I don't like this strategy. My IRR on my traditional rental properties is over 100% in most cases. Paying cash is seldom a good idea. Then you have it tied up and all your are making is 8 or 10% on the loan. This is probably the lowest rate of return you can get with real estate. I don't recommend it at all.
I think the numbers are a bit different than your example :
Buy property for 85k, sell it for 100k, that's 17% charge ( I have seen 20-30% difference between cash buy and owner finance prices, so 17% is in my eyes not far fetched
So say that 100k is 10k downpayment, and 90k loan for 10y at 10%, for a p&i of $1189.
All in all you are in for 75, and you get 1189 for 10y, that's 14.5% IIR.
Throw in there ~5k in commission to a relator that helped you along the way, now its 12.8%.
Again, there are many strategies in real estate, and since I'm in the wholesales sub forum, maybe these numbers are nothing to what a good wholesaler does, but I'm looking at it from a different perspective. I'm looking to use my investors money, and earn on the spread, or sell a partial, that's what I do today with notes, and I'm looking at this method as a way to create inventory.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
I do not know anything about your local market BUT . . . in this era of historically low mortgage rates, do you really expect to find a sufficient number of buyers out there willing to pay 10% P&I? With property taxes and insurance added on, the payment would likely exceed reasonable rent for an $85K house, no? Again, maybe your market is different but I would be concerned about sufficient demand.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
I do not know anything about your local market BUT . . . in this era of historically low mortgage rates, do you really expect to find a sufficient number of buyers out there willing to pay 10% P&I? With property taxes and insurance added on, the payment would likely exceed reasonable rent for an $85K house, no? Again, maybe your market is different but I would be concerned about sufficient demand.
Yes, I can tell you from experience, there are borrowers out there that cannot get conventional mortgages, due to various reasons. I agree this is very market dependent, you will usually see this in properties < 150k.
As for the point of the p&i being higher, you are right, it can happen. Again, for some people this is the only way they can buy a home, and not just rent it.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
You're wrapped up in the percentages instead of the dollars, and the percentages are lying to you. You're also missing one the mot important aspects of investing...the cost to YOU is not the same thing as the total cost of the project. What matters is the cost to you. The difference between costs here is your way costs YOU $100k, my way only costs me $20k. Keep in mind that profit doesn't start until you recover ALL of your cost.
Take that a step further. If both methods start out with the same $100k, and the P&I you're getting per month is the same as the CF I'm getting, then I'm making 5 times the return you are since I can buy 5 properties at $20k each where you will only have one.
Let's take one more step further. That also means I have 5 properties appreciating where you only have one. So, if we both start with the same $100k, my actual cash return is both greater and much faster.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
You're wrapped up in the percentages instead of the dollars, and the percentages are lying to you. You're also missing one the mot important aspects of investing...the cost to YOU is not the same thing as the total cost of the project. What matters is the cost to you. The difference between costs here is your way costs YOU $100k, my way only costs me $20k. Keep in mind that profit doesn't start until you recover ALL of your cost.
Take that a step further. If both methods start out with the same $100k, and the P&I you're getting per month is the same as the CF I'm getting, then I'm making 5 times the return you are since I can buy 5 properties at $20k each where you will only have one.
Let's take one more step further. That also means I have 5 properties appreciating where you only have one. So, if we both start with the same $100k, my actual cash return is both greater and much faster.
You raise valid points, but the cash flow in both cases are not the same, in the example I gave I net cashflow close to 1189 (say 1150), and you net cashflow is (rent minus all expenses including this loan payments), that's going to negative cash flow. How is that better?
What I said is assume rent minus insurance and property tax eqauls p&i, but you as the renter still have to pay the loan, say in this case you are at 0 cash flow, before taking into account property management, vacancy, repairs.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
You're wrapped up in the percentages instead of the dollars, and the percentages are lying to you. You're also missing one the mot important aspects of investing...the cost to YOU is not the same thing as the total cost of the project. What matters is the cost to you. The difference between costs here is your way costs YOU $100k, my way only costs me $20k. Keep in mind that profit doesn't start until you recover ALL of your cost.
Take that a step further. If both methods start out with the same $100k, and the P&I you're getting per month is the same as the CF I'm getting, then I'm making 5 times the return you are since I can buy 5 properties at $20k each where you will only have one.
Let's take one more step further. That also means I have 5 properties appreciating where you only have one. So, if we both start with the same $100k, my actual cash return is both greater and much faster.
You raise valid points, but the cash flow in both cases are not the same, in the example I gave I net cashflow close to 1189 (say 1150), and you net cashflow is (rent minus all expenses including this loan payments), that's going to negative cash flow. How is that better?
What I said is assume rent minus insurance and property tax eqauls p&i, but you as the renter still have to pay the loan, say in this case you are at 0 cash flow, before taking into account property management, vacancy, repairs.
The loan won't be 10% and I wouldn't buy a property with that money that didn't cash flow at least $400/month with that loan. The comparison between the two examples is not based on the same property, it should be based on the best use of funds, applied to each of the two options.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
I used to do this with mobile homes in parks. I'd buy for like $6500 and sell at $10,500 with $3000 down for 3 years. Large margins, small dollars, but half my money back up front.
I just called it carrying the paper or flipping paper maybe. Receiving interest / ordinary income has no tax advantages.
I could see maybe doing this with small dollar houses that need work but not $85k+ houses. Run out of capital too quickly IMO.
@Gil Ganz
The strategy makes total sense if you are comfortable with a relatively hands off 8-10% ROI on cash play the markup less transactional costs, then having that cash tied up, potentially for a long time.
I don't think that it fits the BRRR or Rental mindset in general. However, that doesn't mean it's not a great strategy for YOU.
Different strokes for different folks...
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
You're wrapped up in the percentages instead of the dollars, and the percentages are lying to you. You're also missing one the mot important aspects of investing...the cost to YOU is not the same thing as the total cost of the project. What matters is the cost to you. The difference between costs here is your way costs YOU $100k, my way only costs me $20k. Keep in mind that profit doesn't start until you recover ALL of your cost.
Take that a step further. If both methods start out with the same $100k, and the P&I you're getting per month is the same as the CF I'm getting, then I'm making 5 times the return you are since I can buy 5 properties at $20k each where you will only have one.
Let's take one more step further. That also means I have 5 properties appreciating where you only have one. So, if we both start with the same $100k, my actual cash return is both greater and much faster.
You raise valid points, but the cash flow in both cases are not the same, in the example I gave I net cashflow close to 1189 (say 1150), and you net cashflow is (rent minus all expenses including this loan payments), that's going to negative cash flow. How is that better?
What I said is assume rent minus insurance and property tax eqauls p&i, but you as the renter still have to pay the loan, say in this case you are at 0 cash flow, before taking into account property management, vacancy, repairs.
The loan won't be 10% and I wouldn't buy a property with that money that didn't cash flow at least $400/month with that loan. The comparison between the two examples is not based on the same property, it should be based on the best use of funds, applied to each of the two options.
Yeah, i'm sure you won't, me neither and no would would, these kind of rates is for people who want to live in property.
In any case, thanks for the input.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
You're wrapped up in the percentages instead of the dollars, and the percentages are lying to you. You're also missing one the mot important aspects of investing...the cost to YOU is not the same thing as the total cost of the project. What matters is the cost to you. The difference between costs here is your way costs YOU $100k, my way only costs me $20k. Keep in mind that profit doesn't start until you recover ALL of your cost.
Take that a step further. If both methods start out with the same $100k, and the P&I you're getting per month is the same as the CF I'm getting, then I'm making 5 times the return you are since I can buy 5 properties at $20k each where you will only have one.
Let's take one more step further. That also means I have 5 properties appreciating where you only have one. So, if we both start with the same $100k, my actual cash return is both greater and much faster.
You raise valid points, but the cash flow in both cases are not the same, in the example I gave I net cashflow close to 1189 (say 1150), and you net cashflow is (rent minus all expenses including this loan payments), that's going to negative cash flow. How is that better?
What I said is assume rent minus insurance and property tax eqauls p&i, but you as the renter still have to pay the loan, say in this case you are at 0 cash flow, before taking into account property management, vacancy, repairs.
The loan won't be 10% and I wouldn't buy a property with that money that didn't cash flow at least $400/month with that loan. The comparison between the two examples is not based on the same property, it should be based on the best use of funds, applied to each of the two options.
Yeah, i'm sure you won't, me neither and no would would, these kind of rates is for people who want to live in property.
In any case, thanks for the input.
Not following what you mean by what you just wrote.
Hi
Not sure if this is the right subforum, let me know if there is another one more fitting for this question.
I have recently been exposed to a method of investing, buying properties with cash, then selling it quickly for higher price, with owner finance, and keeping the loan. Most of the time without any work done, maybe some light cosmetic (nothing close to a flip).
Basically a way to buy a newly originate loan with a discount.
- Is there a name for this strategy?
- Is anyone here doing these kinds of things? I am looking to partner with someone who has a track record of doing this and is looking for serious investors.
Yes there is a name for it, it's called "Losing money fast 33".
Can you explain why what I mentioned above does not make sense? Main risk as I see it is if the borrower stops paying after a very short time, and the money I have put in is close in value to the as-is property value.
You're return on your investment is putrid (couldn't think of a better word). Why would you tie up that much money for such a small return. Do the math, including the alternative math, which would be buying the property with 20% down, and renting it.
What you want to do is the same thing as renting the property, with different terminology. You're getting a monthly cash flow either way. The goal is to recover your cash ASAP since the entire cost to you is what comes out of your pocket. By paying 100% in cash upfront, you just paid 100% for the property. If you only spend 20% on the DP, that property only cost you 20%. If the cash flow as a rental is equal to the mortgage payment, you are losing money.
Taking your route, you spent 100% instead of only 20% for the same return. Why?
Ok, if I need to compare this option to being to buying it with a small downpayment and making it a rental, in this option I do not have the cost of fixing things, property tax, vacancy, insurance, property management company etc'. I only have the loan servicing cost, which is a fixed cost, so its probably going to be 2-5%, depending on the p&i, so the net cash flow is very close to the gross cash flow. Downside is if borrower does not pay a foreclosure is needed, but this is something I know how to handle.
It really depends on the rent rate, but for sake of discussion lets say that the rent minus property tax and insurance, equals that p&i, in that case the ROI of keeping the note is much higher then buying the property with with a small down payment and renting it out. Keep in mind the rate in this loan is 10%, quite hard to make money renting this when you pay that kind of interest.
You're wrapped up in the percentages instead of the dollars, and the percentages are lying to you. You're also missing one the mot important aspects of investing...the cost to YOU is not the same thing as the total cost of the project. What matters is the cost to you. The difference between costs here is your way costs YOU $100k, my way only costs me $20k. Keep in mind that profit doesn't start until you recover ALL of your cost.
Take that a step further. If both methods start out with the same $100k, and the P&I you're getting per month is the same as the CF I'm getting, then I'm making 5 times the return you are since I can buy 5 properties at $20k each where you will only have one.
Let's take one more step further. That also means I have 5 properties appreciating where you only have one. So, if we both start with the same $100k, my actual cash return is both greater and much faster.
You raise valid points, but the cash flow in both cases are not the same, in the example I gave I net cashflow close to 1189 (say 1150), and you net cashflow is (rent minus all expenses including this loan payments), that's going to negative cash flow. How is that better?
What I said is assume rent minus insurance and property tax eqauls p&i, but you as the renter still have to pay the loan, say in this case you are at 0 cash flow, before taking into account property management, vacancy, repairs.
The loan won't be 10% and I wouldn't buy a property with that money that didn't cash flow at least $400/month with that loan. The comparison between the two examples is not based on the same property, it should be based on the best use of funds, applied to each of the two options.
Yeah, i'm sure you won't, me neither and no would would, these kind of rates is for people who want to live in property.
In any case, thanks for the input.
Not following what you mean by what you just wrote.
I meant, buying a property with a loan that has 10% rate, in order to have it as a rental, does not make sense.
@Gil Ganz
Hi Gil. This is called a rent to own or lease option strategy. These can be very great deals. PM me for more info.
@Gil Ganz
Hi Gil. This is called a rent to own or lease option strategy. These can be very great deals. PM me for more info.
Selling with financing is absolutely not RTO or a lease option.
Whatever information you have on the subject is obviously very wrong.
Make your profit margin MUCH MUCH MUCH larger on the sale of the property!
There are markets where the down payment covers the cost of the property.
And only sell to buyers with real jobs and good credit and a referral from current Landlord.
The main issue with this is finding enough property. You are being the bank and the flipper at the same time. Banks make their money off of volume. Unless you can attain a large enough scale of deals, it probably isn't worth it. You can already go become the first position bridge lender and get paid 8-11% with no headache of finding deals; etc.
Also if you buy and sell within 1st year holding paper the tax man can treat it as profit that first year....i bought a mobile with land ($30k) and sold ($60k with $15k down) and accountant wanted me to take whole profit that year.....on larger scale could get costly on money slowly (3,5 10yr note) rolling in .....
That would be close to financial suicide in my market. You are basically making a subprime loan. There is a high risk of default, and then you have to foreclose. My State is a judicial state and in my County, the foreclosures take a very long time. You can do a rent-to-own situation, which even has a lower chance of success.
This is a very easy way to make a boat tin of money. It is not unrealistic to buy at 50% of value that you can sell it for on financing. I bought one this year for $60,000 and sold it 3 weeks later for $120,000. I didn't sell it at a crazy price, I bought it at a crazy price because it wouldn't finance. By the way, bought it right off the MLS and it had been listed for months. I usually get 10% interest, and I can sell the note if I need the cash back (at a discount of course)
It’s not fool proof, but when done correctly I consider it to be one of the most safe, and profitable, of any investing strategy.
And... when you have all your money invested you can borrow to do it instead.
Another one I did this year that we did actually do work on: purchased for just under $50,000 and out $20,000 plus labor into it. We borrowed the $50,000 and pay our investor 10% interest, which is $500/mo amortized at 18 years.
We sold it for $140,000 and received 15,000 down, balance is being collected at $1100/mo and also getting 10% interest. Can’t remember how long the loan is because buyer has some irregular payments as well to accelerate it. So in this one we will make 600 profit a month, and only 20,000 of our own money. Over the course of the loans if they go full term we make tens and sometimes hundreds of thousand in interest one one deal, and That’s after paying our investors tons interest too. It’s absolutely crazy more people don’t do this!
My only complaint is that we don’t get depreciation like on rentals so we pay a little more taxes on these.
Also works excellent with land. I’ve bought cheap land for $5,000 and sold for $12,000, no work involved, just providing people with opportunity they wouldn’t have had before.
@Gil Ganz I am floored at the volume of ignorance being thrown at you in this thread, I apologize for them.
I am not certain as to a "correct" industry term but I and others actually doing such refer to it as Finance Flipping and it is a grand-slam when properly deployed.
The formula once used, for template reasons, is when we sold on 3yr term sale price was 117% of our current market price. Deposit was taken as a non-fundable option fee in construct, interest rate between 5-8%, amortized on 30yr term. There was an option to extend option for additional 12 months for a 1pt fee.
Now where this model really makes $$$$. On average only about 35% ever close. What happens is John & Jane Doe, John is a plumber with his own 1 man operation subing for everyone and always maximized write off's, Jane does daycare from home as a cash operation. Big Bank xyz said they don't have enough reported income to qualify for a mortgage, spend 2 years paying tax's and come back. BUT they still want the home in the area they want sooooo when they found out they could do this C4D thing they thought it was well worth it as home prices keep rising so, it actually save $$$$ to pay a bit more to get a home today vs how much more it will be in 2 years.
2 1/2 years later John & Jane just wrapped up mortgage application and guess what, 2yrs ago they thought $300k was what they'd spend, max, because they are thrifty, and now they got approved for $450k and the C4D at $280k is looking a bit... well yesterdays thing compared to what Jane has found online for $425k, and she feels it's deserved for all the work they did.
What happens, John & Jane walk away from their C4D and instead buy that nicer, newer, much more $$$$$ home they now are approved for.
You the investor, got a big pop of $$$$ when the Doe's contracted, received solid monthly payments because afterall they didn't want to loose everything they paid for, and now you get the property back, market price has increased, and it's rinse and repeat.
By the numbers you will do this 3 times per property.
Anyone saying there is no money in it is just ignorant, plain and simple. Anyone saying you'll loose money has no business being on BP, that's such a incorrect statement that it does not even merit a response.