This is an interesting business model which just popped into my head while reading "Das Kapital" from Karl Marx. Influenced by talks from Richard Wolff who is an advocate of worker cooperation based businesses. This is a 4 stage rental strategy which i plan on implementing on the house i just purchased for $50,000. $60,000 after renovations.
some numbers, mortgage is about $270, and taxes and insurance are about $250. so $520 a month in bills. Currently living in Gulfport Mississippi.
The strategy goes like this. People like to invest and will be willing to spend a little more money if they can get something in return. Therefore if you take the current market price for an area (this area is about $750 for the rent in the house i have) and you raise it by about 30% to make the math easy. Thats $1000/month.
You sign a contract with your first tenant saying that they are in a probationary period with your buisness. They agree to pay $1000/month for three years and in return for those three years, and vacating the house so that it can be rented afterward they share ownership of the property. In essence you become buisness partners. Essentially they paid $36k to own half of a $60k house. Good deal for them right since they were only planning on renting. Good deal for you too since you now only owe $24k and have not spent a dime of your own money yet and its only been 3 years. Since they are a shared owner you know they will take care of the house as well. Simply write into the contract that repairs and maintenence are on them. You also write into the contract that this process must be repeated.
The tally so far.
You: spent 10k, owe $24k, own $30k. You could say you are -4k assets to liabilities.
Partner: Spent $36k, own 30k. You could say they are -6k assets to liabilities.
[really the partner only "spent" 9k since they were planning on renting at $750/month anyway. so true tally is they "spent" 9k and own 30k. ]
So you repeat the process. Lets for simplicity sake say the value of the house does not change just to keep the numbers simple.
You sign on another probationary partner for a 3 year contract at 30% above market price guaranteeing them shared ownership of the house when they are done and the condition that they move out after three years, do maintenence while they are there etc.
You split the $36k over those three years with your partner, you get 18k, they get 18k. and all three own 1/3 of the house.
tally so far.
You: spent 10k, owe 8k, own 20k, you are positive 12k in assets to liabilities.
1st partner: spent $36k, recouped $18k, and ownes 20k, they are positive 2k in assets to expens
[or "spent" 9k recouped 18k, and ownes 20k. really 200% ROI + 20k in assets]
2nd partner: spent $36k, ownes 20k
[really "spent" 9 k and ownes 20k in assets]
Repeat it again with a 4th owner. the three of you then get 12k a year.
You: spent 10k, recouped 4k, own 15k, you own 15k in assets. and an ROI of 40%
1st partner: spent 36k recouped 30k, and ownes 15k, they are positive 9k in assets
[really "spent" 9k, recouped 30k and owns 15k, they are 330%ROI +15k assets]
2nd partner: spent 36k, recouped 12k and owns 15k,
[really "spent" 9k, recouped 12k and owns 15 k, they are 130%ROI +15k assets}
3rd partner: spent 36k, owns 15k.
[really "spent 9k" owns 15k in assets.]
Finally 1 more time each gets 9k a year
You: spent 10k recouped 13k, own 12k, so 130% ROI and own 12k in assets
1st: spent 36, recouped 39k and owns 12k [ "9k" ->39k is 430% ROI +12k assets]
2nd: spent 36k, recouped 21k, owns 12k [ "9k" -> 21k is 230% ROI + 12k assets]
3rd: spent 36k, recouped 9k owns 12 k ["9k" -> 9k is 100% ROI + 12k assets]
4th: spent 36k, owns 12k [ "9k" owns 12k assets]
You could maybe do this one more times before the process became detrimental "spent" to asset gained for the new renter. but lets say you stop here with 4 partners. and just decide to rent the house out for the $750/month. Here you would all pitch in a bit for fixing up costs, but with $500 split between 5 of you you would be pulling in $100/month. or an extra $1,200 a year. (4th partners ROI is 13.5%)
Admittedly your partners pull out better than you in this example, by my calculations you should be able to do 50% more instead of 30% and come out ahead of the partners. But even with these numbers what are the benefits.
1. you are spreading the risk. With more owners there is less risk on you, also with owner occupants you run a far lower risk of them treating the property in a destructive way.
2. you are not only helping yourself create passive income but you are also helping others generate it as well.
3. You are quickly paying off your mortgage in less than 10 years without using any of your own money. and profiting in 12 years with positive overall ROI.
4. You now have partners whom you can pool resources together with to invest in more properties.
Contrast this method of 12 years before debt free profitability with the buy hold and rent method.
Purchase 50k, fix up 10k. rent 750 spending 520/month. surplus of 230 each month. in 12 years you make roughly 33k. You are still 17k in debt with 10k waiting for its return on investment.
Meanwhile this method has produced 4 individuals who have a positive return on investment, and one individual who will be positive in 8 years after their initial investment.
Let me know what you think of this method. I am actually extremely eager to try it out but need to wait until i move out of this place first.
