If I could just take a few moments and vent about my frustrations with real estate investors who do not follow formulas and do not stick with systems. Sheesh! If it isn’t one bad deal working it’s three bad deals working. Are times that bad that you have to reach for a good deal? NO! Are times that bad that you need to cut corners to make the deal favorable? It is never that bad. Have real estate investors forgotten their original high standards? Maybe so. I know one thing though, Investorino has lost its mind this month.
For those that don’t know me very well, I like free and clear investment structuring. My mentor has given me more than enough incite on how to creatively purchase free and clear real estate. So I have a very hard time seeing and believing the types of deals that are pieced together as though no rod of measurement is being used at all. Well, the name of the game in free and clear is that if the seller has time you have money and if the seller doesn’t have any time you don’t have any money (or much even) to give them. You can certainly pay upwards of 100% of a property’s value today, but the only catch is that price is going to be paid in one lump sum way later or paid over the course of time with agreeable terms.
So Investorino is strapped for cash. NO PROBLEM, because he’s got a great relationships with private lenders. He sees a killer free and clear property that is worth maybe $145,000.00, and it is time to do something a little creative. The subject property needed about $30,000.00 in repairs, so Investorino came up with a special big money down, monthly payment, schematic that the seller seemed to be fond of. The terms of the purchase were $40,000.00 to the seller at the transfer of title and 95 monthly payments of $1000.00. Target rent on houses within the subdivision with the same specs was approximately $1400.00 per month.
Does everyone see the cash flow?
Yes. Now let me show you a magic trick. I can show you how to make cash flow disappear (not that you really wanted to learn anyway). Investorino is going to solicit private funds for $85,000.00 to be disbursed as follows: $55,000.00 is to be made available for the jumbo pay at the title transfer for $40,000.00, to take care of any of the closing costs, and undoubtedly put some aside as a small reserve for the $1000.00 per month payments. $30,000.00 was to be used for the repairs.
Now if you think the bank was tough; check out these terms.
12% interest only on a year term with 5 points upfront and a 2 point renewal after each 365 days. Because Investorino didn’t want guarantee the deal with a partner or personally, the private lender decided that he wouldn’t provide the $30,000.00 in cash for the repairs and would like to see the finished project prior to submitting those additional monies. Uh-oh.
So now Investorino has to pay an additional $550.00 per month on a non-occupied property that needs $30,000.00 in work. Did you see it disappear…the cash flow? I did. Oh wait! Where is the $30,000.00 going to come from? Remember the property was free and clear of all mortgages and liens. The sellers will be in first position with the outstanding balance of $95,000.00, the private lender will then be in 2nd position with the $55,000.00 loan, and now there may be a 3rd mortgage needed to see this deal to the end. So this transaction is yielding about $5,700.00 to Investorino at the transfer of title. That amount is certainly not enough to get the ball rolling a the repairs.
Ending A: $30,000.00 magically appears in his account from an anonymous donor and the work is completed. Now the private lender will pay $30,000.00 to Investorino on which he will then pay an additional $300.00 per month for the adjustment in the loan amount. BOO! So now we are at $1850.00 in outward payments. Keep in mind that the market rent is based on those properties in rental condition and we can assume that this one is not. So now instead of losing $150.00 if he would have put a person in the property in its condition, he loses $450.00 per month because of the post-rehab disbursement. I told you it was magic.
Please be careful. This is about staying on the course and sticking to the formulas. Private lenders throw the formulas off all day long. Account for it and make a true adjustment in your purchase activity.
Blessings to your Real Estate Investing Success,
Milton B. Yates