|How to Create a Real Estate Cash Cow
Is your real estate bringing you enough monthly cash flow? Is landlording draining you of energy? Is
property maintenance depleting your bank accounts? Are you open to new and safe methods of bringing
huge annual returns on your cash? If you answered "Yes" to any of these questions, please
read on . . .
The Dirty Little "Secret" of How Bankers Make Money
Actually, it's not really a secret at all. In fact, bankers have been doing this for over a hundred
years. Bankers make money by borrowing at low interest rates, then lending at higher interest
rates. You deposit money in a saving account and they pay you 3% interest. They lend the same money
back to you for home loans at 7% or more. The "spread" between the interest rate they pay
and the interest rate they collect amounts to incredible profit!
Consider this simple example: You are shopping for rates to refinance your home loan. A lender
quotes you 7% interest. On a $100,000 loan, the monthly payment (amortized over 30 years) is about
$665 per month. However, at the last minute someone at the bank decides that the color of you
underwear isn't right, so your interest rate changes to 7.25%. Your monthly payment will now be
$682. You aren't terribly upset, since, after all, what's $17 per month? What you don't realize is that
the extra ¼ percent amounts to over $6,000 in additional interest! An Incredible Opportunity in
Today's Market We are in a unique time in history in that real estate prices are rising, yet interest
rates are dropping. This means that those who can borrow at low interest rates and loan at higher
interest rates are making a bundle! Combine the interest rate "spread" and the "buy
low, sell high" principle and your profit grows exponentially.
Enter Wraparound Mortgages
Consider this example: Susie Seller buys a $90,000 house for a 10% discount ($81,000). She borrows
$81,000 from First Federal Financial on a favorable 8% thirty-year loan. Her principal and interest
payments are roughly $594 per month. She sells the property to Barney Buyer on an installment land
contract for $100,000 (about 10% above market), taking $10,000 down and carrying the balance of
$90,000 at 11% for thirty years. She does not pay off the underlying loan, but rather collects payments
($952/month) from Barney on a monthly basis and continues to make payments on the underlying loan. She
collects $358/month cash flow on the "spread" for 30 years!
This is a basic example of a "wraparound". The existing loan remains in place, and a new loan
is created which wraps around the existing loan. Susie makes a profit on both an interest rate spread
and a markup on the purchase price. People with poor credit rarely question the price of the property
(especially since they do not have to qualify for the loan). When the new buyer pays off the remaining
balance, Susie pays off the underlying loan. In the meantime, she makes monthly cash flow on the spread
between the interest she pays and the interest she collects. This cash flow is not offset by property
management, maintenance and the aggravation of tenants. There are no vacancies, calls from tenants,
city code violations or other headaches to deal with. You can collect your monthly checks for thirty
years, or you can sell your "wrap" note for cash!
You Don't Need Good Credit or Huge Sums of Cash
If you don't have the ability to qualify for low interest rate loans, not to worry! You can use
partners who have good credit and income. You can take over existing loans with low interest rates,
then re-sell the properties on a "wrap." There are multiple ways to make a profit on
"wraps," and you don't need credit, provable income or bundles of cash! If you are looking
for an alternative to landlording or a new way to create more cash flow, this is the ticket!
Copyright 1998 All Rights Reserved. No part of this publication may be copied
or reprinted without the express written permission of the Author.
William Bronchick, Esq.
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