How is that possible? I hope was your first knee-jerk reaction when you read that title.
Or perhaps it was: What’s the catch?
Well, there is no catch, and it is possible. Plus, this is not a standalone deal—we’re doing them all the time.
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
Buying Real Estate on Terms Without Using Your Cash or Credit
I love when deals take twists and turns because usually that means we’re creating more income streams from the same deal. This particular home that I’m talking about, featured below, started out as a lease purchase with an owner who did not have a mortgage on the property. This was the home he grew up in, and he was now in his 80s, having outlived two wives. He was caring for his third wife and did not want to be burdened with this home.
Related: How My Promising First Deal Resulted in a $5,000 Loss, Tenant Eviction—& Plenty of Valuable Lessons
We exit almost all of our properties with a rent-to-own buyer, so this one we sold for $225,000 on a 36-month term. See, it’s super important to structure your selling side shorter than your buying side to allow room for delays, financing, or any other curveballs that can come your way (and they will!). The monthly payment was $1,276. The monthly spread on this property was $426.
On all properties we buy and sell on terms, we create three paydays. The first is the nonrefundable down payment we collect from the buyer after they’ve been prescreened and have a mortgage-ready plan they can succeed with. In this case, it was approximately $12,000. Payday #2 in this case was $426—or for the entire term, $15,336. If we owe the seller $177,300 (if it went 48 months, it would be $173,100 as noted above, but let’s assume the buyer is successful and does 36 months, which is what they were prequalified to do) and have a cash-out coming from the buyers’ financing of the $225,000 less $12,000 paid, our payday #3 is $35,700.
Now, as this deal sits so far, the three paydays total:
Payday #1: Deposit $12,000
Payday #2: Monthly Cash Flow $15,336
Payday #3: Back End/Financing $35,700
By most people’s standards, the fact that we put $10 down (all our lease/purchase agreements are structured with a $10 deposit) and are able to extract $63,036 from this small single family is pretty good—and is actually fairly standard practice for us. In fact, our current average all three paydays is $80,471.86, and we do two to four of these every month with our small family company and another five or more around the country with students.
Where Did the $225,000 Profit Go?
This deal gets interesting.
There was a hurricane in the home country of the buyers, and part of their financing plan was a down payment increase from Dad. Well, with Dad and Dad’s area hit by a hurricane, they came to us in tears and asked if they could extend their term just before the 36 months was up.
We had a few choices.
The first option was to stick to their contract and they’d lose their down payment and have to move out. We’d then sell the property for about the price they had it tied up for, if not slightly higher.
The second option would be to simply extend the term with the seller (remember, we had 12 more months with him already, but of course the buyers don’t know that) if we needed more than another 12 months. At that time, we could raise the monthly and the price if we wanted since we had to extend, thus increasing paydays #2 and #3.
There are many combinations to a successful deal structure here, and that’s why, in this instance and many others, it pays the investor well to become what I call a “master transaction engineer.” That means having the ability to look at any deal and know which way to pivot in order to create win/win scenarios, all while protecting the profit.
A Combination of Strategies
We chose a win/win/win on this one.
We called the seller knowing that he was caring for his third wife who was very ill and that he did not want to deal with this home any longer. We offered to purchase the home with owner financing for the balance due (approximately $177,300) and a down payment of only $11,000.
Now, before we go further, I’m a big advocate of not using my own cash or credit, so where did the $11,000 come from? The $11,000 came from another payday #3 that was scheduled to cash out from a previous deal (the cash out was actually $116,000) because, remember, we do two to four of these monthly, which creates all kinds of ongoing paydays. We already spent the original $12,000 that came in three years prior from this buyer.
We negotiated a new term with the seller of 60 months, with him accepting $810 principal-only monthly payments. So now we’ve increased our payday #2, we’ve created massive principal pay down of $810/month (we were previously only getting $350/month), and the seller is thrilled that he gets a cash flow without the tie to the property. The buyer, on the other hand, is quite thankful and relieved, as we gave them a new 48-month term, so they’re not worried about it.
Let’s play this one out because when you do owner financing and principal-only payments, you are able to extract six figures out of most deals.
Sales Price: $225,000
Less Deposit: -$12,000
Due at Financing: $213,000
We owe the seller in 60 months the $177,300 less the $11,000 deposit, less $810 x 60 months, so approximately a $117,700 balloon payment. When we go to the closing table, we’ll be left with our $213,000 due less our balloon payment of $117,700, so (not adjusting for closing costs) approximately $95,300.
Wait a minute, Chris. You said $225,000 profit!
We’re not done.
This home comes with an extra lot next door that is already taxed separately that the owner agreed originally to let go with the home as long as I kept up the tax payment on it. When we renegotiated with the buyers, we made it clear that we can extend the term, but we would be keeping the lot. They responded that they’re never in the yard anyway and were fine with it.
The lot is on the market as of now for $79,900, and we’re projecting to sell it for $70,000.
This brings the total profit to $165,300 plus the $12,000 payday #1, plus payday #2’s total of approximately $48,960. So total profits reached $226,000.
This deal started as a sandwich lease and converted to owner financing.
It pays to be a master transaction engineer.
What do you think of this deal? Have you ever structured something similarly?