Make 800%+ with Little/No Money Down. The Gems of Seller Finance.

[Fernando Angelucci]

Hello BP Family,

I was recently speaking with a buddy here on BP that is new to the game and is worried about how he is going to replace his and his wife's income. He just had a new baby in February (congrats Andy!) and wants his wife to not have to work anymore. However he told me that he thinks this will take forever to accomplish because he does not have a lot of cash and had concerns about getting mortgages with their high down payments and crazy rules. Here was my response to him that I think all new investors should read...

"Andy,

It will not be a long time for you, I guarantee it. I was able to replace my income in 18 months from the day I started. The great thing about negotiating properties that are off-market (not on the MLS) is that you can pretty much do anything you want as long as you and the seller agrees. I feel you on the small cash position and the hard to navigate world of conventional loans. I avoid them all together because I structure amazing deals with the seller. Most of the rentals I own are with no or very little money down. Let me provide you with an example of the last deal I did with very little of my own cash because I structured a seller financed mortgage.

The purchase price of the property was either $33,500 (50% market value) cash or $60,000 (92% market value) seller financed. The seller said they wanted the $60K. I put down $3,000 (5%) and she carried the remaining $57,000 for TEN years at 4% interest only. The rent is $775, I usually use 50% as a rule of thumb for expenses leaving me with $387.50 after expenses (Net Operating Income = NOI). Then we subtract the $190/mo debt service payment which leaves me with $197.50 per month Cash after Debt Service (CADS) times 12 is $2,370 per year.

Now I only have $3,000 of my own money in this deal which means $2,370/$3,000 = 79% Cash on Cash Return (COC or CCR) per year. Now lets pretend there is no appreciation for the next ten years and that rent will not go up over the next ten years and you only rent it to tenants instead of doing a rent-to-own strategy to really rake in the big bucks.

With $30,000 you would increase your yearly income by $23,700... is that enough for you or your wife to go part time?

Let me sweeten the pot for you. Now, 83% of the US cannot qualify for a loan and are looking for rent-to-own (Lease-option) situations where they will pay a premium on monthly payments and purchase price if you will just work with them and get their credit score up to 620 so they can qualify for FHA.

You say "In order for me to take this risk on you, I will need $6,000 non-refundable option consideration fee, $1,000 per month, and the 3 year option price of 110% of market value. That is:

$60,000 in non-refundable option consideration fees - your $30,000 = $30,000 profit

$10,000 monthly rent - your 50% expense - your $1,900 debt service = $3,100 per month profit x12 = $31,000 per year profit

$570,000 in real estate owed + $657,000 owed to you = $87,000 in equity

ALL AT AN INFINITE RETURN because the original $30k you used to secure the properties was payed back to you 2-fold due to the $60K you got in non-refundable option consideration fees.

That is $30K + $31K + $87K = $148,000 profit off of an initial $30,000 investment for a return of 493%.

Now we can break this down into yearly return on non-sales years and sales years but I will try to keep this as short as possible so lets just lump them together and pretend that you only count one year of rent spreads for the calculation.

Now, because I am an engineer by training and plan for the worst case, I did not include any of the "frosting" which would be the depreciation tax benefits, the appreciation, the increases in rents over time, and the fact that a lot of the tenant-buyers will not execute the option, in which you would keep the rents and the non-refundable option consideration fee and do it all over again collecting a new non-refundable option consideration fee.

With this model and only owning 10 properties with a total of $30,000 out of your pocket over the next ten years and taking the "frosting" into account, it is very easy to hit 800%+ return or higher.

Not to shabby huh? I think I am going to copy this and post it on a forum because more people need to know about this strategy and realize that there are more options that just paying all cash or getting a conventional mortgage where you need to put 20-30% down.

Cheers!

Fernando"

This strategy is fantastic and I recommend it to all. It is not about the amount you own, it is about the amount you control. And with very little money out of pocket you can control quite a bit. If you do not have the time to do this look for wholesalers that structures their deals in this manner like my partners and I or ask them to do so if are already working with one. I have found that many of my investors prefer these low cash in deals where there is financing in place that is 1/3 the cost of getting hard money for 10x the time period.

Live long and prosper my friends!

Fernando