How I got a multi unit with Good Credit, No Money, and Audacity

[Christopher Bennett]

Like most of you reading this I realized the massive potential of real estate and thought “Wow How do I get started”. I was 24 years old, broke, but had decent credit. At the time I had a friend who for the purpose of not releasing her identity we will call her Stephanie. Stephanie was homeless with 6 kids and after running into her and talking for a few minutes she also told me she was not only living in a homeless shelter but had what’s called a Department of Social Services Voucher which means she can move into any apartment and the landlord will be fully paid every month through a county program indefinitely. Stephanie and I exchanged contact info and I told her to wait on looking for an apartment so I can figure out a way to obtain a home for her and her children to live in.

As an investor its important to take an opportunity and make it work perfectly instead of waiting for a perfect opportunity. At this moment I started researching different ways to obtain a mortgage loan. After running into many road blocks due to the 25% banks would normally require for a down payment and the two year landlord experience requirement plus the 6 month reserves I needed I was convinced that this normal path of obtaining a mortgage was not the way to accomplish my goal.

So how did I do it? I called the Realtor who happens to be a Realtor I used in two other purchases and asked him if his seller would be interested in holding the mortgage. To my surprise the seller was interested.

If you are unfamiliar with what it means to “hold a mortgage” let me take a second to explain. If you know exactly what this means you can skip to the next paragraph. In this particular case the seller had no mortgage on the property and the property would likely appraise for somewhere between $115,000 and $125,000. The seller and I can create a mortgage contract and we can both agree that I will pay a particular interest rate and for a specified amount of time. In this case I received an eight year mortgage loan that’s amortized for 30 years. So I make payments to this mortgage as if though it’s a 30 year mortgage but my last payment amount due is whatever the principal balance left over is at the end of year eight. This loan payment was amortized for 30 years to make it affordable. In this case the interest rate we agreed on is 3.5%. The benefit of doing this type of deal is a win win. I get the property for no money out of my pocket (More on that later) and the seller doesn’t have to worry about taking care of this property. I’m on the deed as the owner and the seller is holding the mortgage and making interest on their money just like a bank. The interest on a mortgage of $100k at 3.5% over 30 years is $61,656.09! The payments are managed by an escrow company and they keep track of payments and calculate interest and charge late fees if need be according to the agreement with the seller. They can even make auto withdrawals from my account to pay the mortgage monthly. I pay the third party company and they pay the seller. They send me my tax info at the beginning of the new year for deduction purposes and they send my seller interest rate profit documentation for the sellers taxes.

So how did I get the seller to agree to something like this? Patience and smart negotiating tactics. In this case I used the Realtor as a middleman because the interaction between the seller and I was not the best way to go about negotiating interest rates, terms, and the seller building confidence in me to make the payment and not have to worry about me foreclosing on the property. Even though I had the sellers phone number and email address at this moment I knew using the Realtor in this case was best because the seller whole heartedly trusted the real estate agent. I then prepared a list of talking points. I wanted to give the seller a list of reasons why they should do this deal. I printed a copy of my credit report, tax information showing how much taxes they avoid by holding the mortgage instead of selling and paying taxes on it, an amortization schedule (a list showing monthly payments, interest and principal) to provide a clear understanding to the seller of how much they will make on interest and then I told the seller I would pay the Realtor fee of $5,000. That last one made the Realtor hustle because he knew if the seller agreed he would get $5,000 at the closing. Putting the sellers Realtor on my side worked like a charm. We eventually agreed on a term, rate, and interest. I should also mention the sellers property was in a family trust. This monthly payment can be used as an inheritance tool. The family will always have this trust creating interest and paying their trustees and beneficiaries for a long time changing their inheritance to a long term monthly payment.

Lets do some math! Closing costs, Down payment of $1,000 and the Realtor fee of $5,000 put this total deal at approximately $10,000. But I’m broke remember! So I used the only tool I had, Credit! I took an advance from my line of credit and used it to pay the $10,000 in closing costs to acquire this asset. The monthly income is $1800 and cost for the mortgage, taxes, insurance, water bill and repayment of the ten thousand still leaves me with $652.15 a month! And that’s not all! This property qualified for a lead paint removal program from the county and I not only had the lead paint remediated by a professional for FREE! But the county replaced all the windows as well! $20,000 worth of work! At this moment the only thing this property needs is a new garage roof. Honestly I’m not renting the garage out because I want a place to store my Sunday cars and motorcycles. WIN WIN!

This short version of the story is pretty glamorous. But I had many sleepless nights due to small mistakes I made. Like not getting a building inspection done early enough in the negotiating phase to use as leverage or not having a lease the first year I owned the property. Bigger Pockets has helped tremendously and I’m glad I can now confidently call myself an educated landlord. I stick to what I call the fundamentals of real estate investing. Always get another pros opinion. In this case it was a building inspector because the $400 I spent for an inspection is worth the $20,000 in headaches. A day before the closing I wanted to have the exterior oil tank removed because I was afraid it could have been leaking which means the fines would be tremendous and I could pretty much be charged a minimum $20,000 just for having this leak on my property (This is what I was told by the inspector) The seller dropped the total cost of the property by $3,000 in order to continue with the sale about 3 hours before the scheduled closing. Another fundamental is there is no such thing as too much research. I had to redo the apartment after Stephanie pretty much destroyed the place when she moved out 2 years later and after I paid for a dumpster, new paint, bed bug removal, and labor plus rental income loss I realized I could have done more research into her living habits. One last fundamental rule (I can go on forever with these) is to ALWAYS run the numbers more than a few times. If Im working on a flip or a buy and hold I run the numbers over and over to ensure success.

At the end of the day I purchased a house that’s worth about $115-125K for $93,000 with no money out of my pocket and it’s been cash flowing annually since ownership. If I continue to make $652.15 a month for 30 years I will make $234,774 in profit with the only thing I had at the time, Good Credit, No Money, and Audacity.

I will gladly answer as much questions about this story as I can. Connect with me or reply to this discussion.