How to Make $50K on $150K Houses Without The Need to Steal Them

[Wendell De Guzman]

Rehabbers are fighting over deals in many markets.

Profit margins are becoming thinner and thinner.

A few years ago, you can buy a house worth $200K for $50K, put $50K of repairs in it and come out - after all expenses - making a cool $50K. Well those days are long gone.

However, with a few tweak and just a little but of patience, do you know you can make $50K on a $150K house without the need to buy that house dirt cheap? Meaning, you no longer have to "steal" that house. In fact, you can buy (and rehab) that house for 80% of its market value and make a cool $50K. That's right - you can make $50K on this house even if you are "all-in"into it for $120K.

This not theory.

We are doing this right now.

I want to share this with BP Nation as a way of giving back and I also need help.

The strategy I am talking about is RENT TO OWN.

With rent to own, you can:

1) Sell the house at a higher price (+10% premium is not uncommon). For a $150K house, in the right markets (where houses appreciate by 5-10%), you can justify a $165,000 sales price. Why? You are selling this house 1 year from now so you sell at a premium. This premium gives you $15,000 additional profit in addition to the $30,000 equity (since you bought the house for $120K and it's worth $150K).

2) Get good cashflow. With today's low interest environment, you can get investment loans at 5% interest. Even in a high property tax environment like Chicagoland, we get on average about $400 a month cashflow for a $150K house we purchase for $120K. That's roughly $5,000 a year from cashflow. With cashflow like that, it does not matter even if you have to wait an extra 6 months before the tenant/buyer gets a mortgage.

The math right here looks like this:

Sales price -  $165,000

less "All-in" $120,000

add cashflow: $5,000

equals $50,000 profit

I get my tenant/buyer to pay for all the closing costs when they qualify for a mortgage.

3) Get "no-hassle landlording". With rent to own, the tenant/buyer is responsible for maintenance and repairs. So the difference between rent and PITI is cashflow. Because of this no-hassle landlording, I don't get a property manager to manage my rent to own homes.

4) Get better quality tenants. Rent to own is more desirable than rentals since people want to finally own their homes. This attracts tenants with "ownership" mentality.

5) You get a non refundable "downpayment" upfront - ensuring you have some reserves and you get a tenant with a lot of "skin in the game". We get at least $5,000 - preferably $10,000 upfront. If the tenant/buyer does not buy the house, or decides not to pay the rent, you have enough reserves to kick the tenant out and get another tenant with another non refundable downpayment. With a normal rental property where you're making $200/month cashflow and all you have is one month security deposit (say $1,000), when the tenant decides not to pay you, all that security deposit is gone and you will be in the NEGATIVE.

Rent to own sounds good. But what about the risks?

In my next post tomorrow, I will explain the risks with rent to own, how to mitigate the risks and how to prepare for the risks if they happen.

For now, are there investors out there in BP Nation who do rent to own? How do you do it? Are you profitable or not? If it's profitable, share us some numbers. If it's not profitable, what have you learned? Share your experiences here so we can all learn from each other.