14 UNITS: NO MONEY DOWN
No Payments for a Year
Huge Positive Cash Flow
Free Recorded Message
You are really a player and you know that—you are playing this one with the house's money. You easily, effortlessly earn Big cash flows and big capital gains in TAX FREE Nevada—you have zero risk!
The headline is true because . . . imagine . . . on February 2nd, you negotiated with Paul Muski, a corporate attorney and contracted to buy a piece of real estate he was selling. The following is the OPTION TRANSACTION that you created--
"...the mortgagor may not transfer title
without the lender's consent..."
Brilliantly, you take control of the property using a ten year fixed-rate lease and option to buy THE EQUITY at today's price.
Using this lease & option strategy you do not transfer title so you easily circumvent this due-on-sale clause. You do not need to qualify.
Your lease payment is $1.00 (yes, one dollar) for the first twelve months; then it goes up to $773.03 a month for 97 months. That's when your lease payment becomes equivalent to the PITI payment the seller is paying now. "PITI" means Principal and Interest [of $446.00 a month]; plus Taxes and Insurance [of $327.03 a month].
Essentially, you are using a document called a lease to garner the right to possession and the right to the income. And, at current interest rates of 11% for commercial loans such as this; $446.00 a month for 97 months has a present value of only $28,576.46! That is a discount of $30,236.71 (the actual mortgage balance) minus $28,576.46 (the present value @ current rates) = $1,660.25 (the savings); just in the profit center called "assuming the mortgage [with a lease] at below market rates!"
You don't pay any closing costs, or points or origination fees. You get a pest inspection, a survey, title insurance and even fire insurance because and IF you want to, not because some application taker at the bank tells you "you have to." You make the policy. You create the documents because—you literally created the deal!
And now for something completely different...
THE EQUITY = $38,406.20. That is $70,000 (the price) minus 30,236.71 (the mortgage).
The equity is payable as tax-deferred option consideration. It is "tax-deferred" because option money paid or collected is never claimed as income or deducted as an expense until the option is exercised or allowed to expire. The IRS views an option as an incomplete transaction, impossible to ascertain gains or losses...until [the option] is exercised or allowed to expire.
Your option consideration is $325.05 a month (100% of which applies directly toward the purchase price of THE EQUITY). The option consideration is paid for 120 months; with no payments for the first twelve months. Think about it, not only do you have a twelve month moratorium on payments but, figure it out, with this payment schedule you are also buying the equity with 0% interest seller financing (in the form of tax deferred option money.)
Your option "strike price" is equal to the first mortgage balance at the time you exercise your option. So! . . . You are using a document called an option to control two powerful benefits "carved out" of that bundle of rights known as real estate:
#1. The right to the appreciation or increases in value and,
#2. The amortization of the loan or equity build-up. . .
Listen: This is Transaction Engineering at it's very best. It is free-form finance. Get used to it and learn these strategies because you are looking at the future of creative real estate. I promise you...the Government is not [the future] and neither is the banking system
The attorney (who "hates" this building) signs the deal on the spot...and gives you $1.00 as earnest money consideration to bind the deal.
The attorney is busy, so you schedule a time to tour the building two weeks from today (Saturday). You welcome this first delay made by the attorney/seller. As a Transaction Engineer you know how to strategically use these delays as a kind-of unwritten extension clause (or in real estate vernacular), "an option to extend".
Two weeks later it's Saturday morning and you're finally inspecting the building. It's four stories, of solid brick with half brand new windows. The first floor holds two commercial stores; a fabric shop and an antique store. They each pay $300.00 a month rent and they haven't had a rent increase in thirteen years. You smell the opportunity there and yes it is…
Another profit center…
Floors two, three and four consist of six one bedroom apartments that need furnaces and cosmetic renovations and three partially-gutted, two bedroom apartments.
You inspect the basement, the roof, the interior, the wiring, the plumbing, et cetera. You tell the attorney, you will get back to him with your conclusions.
Your March 2nd closing date comes and goes. You and the attorney are just talking away. Chit chatting. Building rapport. "Crafting" this deal, if you will.
Two more weeks pass...
You realize that this attorney is not the "deal killer." He wants to make this deal. He wants to comply. Why? Two reason:
Reason #1. Because clearly he "hates" this building (Translation: he's motivated, it's drowning him) and,
Reason #2. You are the only game in town. Imagine...if you were in a cartoon, he would look at you and you would turn into a big life preserver-do you get my meaning?)
You continue your research for the next month. You talk to contractors and material suppliers. You talk to your colleagues to get ideas. You show the property to prospective buyers, partners, financiers and more idea suppliers; all the while you are talking to the attorney. He is happy you are so committed. You are happy. You sit up late at night and early in the morning and you think.
Finally, you formulate a plan. The renovation will take place in two phases:
PHASE I -- You figure you can install furnaces for $1,900 a unit or about $11,400 and complete the renovation for only $4,100 a unit, or $24,600 more. Upon completion of Phase I, these apartments will rent for $300 a month and your laundry/vending room will make one hundred bucks a month. This means that immediately after you invest a tiny $36,000—your net positive cash flow will be $1,800 a month plus vending profits for ten months of the first year!!!
You figure two months for renovation. This means you will get back $1,900 x 10 months = $19,000 in the first twelve months.
PHASE II -- You will renovate the three two-bedroom apartments for $10,000 a unit or $30,000 more. These two-bedroom apartments will rent for $400 a month. The cash flow on the finished product looks like this:
Gross Rental Income (subtenants)…..$3,600.00
Less Vacancy (5%)..................................180.00
Less Management (7%)...........................252.00
NOI (Net Operating Income)......…......3,268.00
Less Master Lease Rent (equal to PITI)..773.03
Less Option Consideration......................325.05
Net Monthly Cash Flow.....................$2,169.92
Using the IRV Formula—I= R x V to solving for fair market values; where:
I = NOI = $3,268.00 and you assume
R = "Capitalization Rate" = 10%, then
V = Value = $392,160.00
The present value of what you owe is less than $49,000 and, after only thirty two (32) months you will have every penny of your invested capital back!
With your plan on paper, as well as in your minds eye, you contact the building inspection people. You find out that the building inspector is also the fire chief; that the fire department does all inspections; and that the inspection is part of an ordinance mandating that all property sold in this community must be inspected before selling. The fire chief/building inspector explains that the inspection will cost $15 a unit; be according to the BOCA Code and that it will be 3-4 weeks before they can s-q-u-e-e-z-e it into their schedule!
You contact the attorney and explain that the law requires this inspection; that he must pay for it; and that it will be another 3-4 weeks delay. The attorney expresses grief but realizes that this is absolutely necessary. Now you understand the expression --
"Bureaucracy means hurry-up and wait."
The inspection takes place in four weeks. Then you wait two more weeks for the results. The whole deal is at a standstill for six more weeks. Yet, you welcome these delays too. Why? Because all the while you are working, marketing, talking about the deal, making sketches and THINKING early in the morning and late, late at night.
You bring the deal to marketing sessions and you run ads in the newspaper in search of a joint venture partner. You spell out this deal in an electrifying four line classified ad in the investment property section of your Sunday newspaper. The ad reads:
14 UNITS: NO MONEY DOWN
No Payments For a Year.
Huge Positive Cash Flow
Needless to say, you get two trillion calls. Over the two to three months of delays you are running ads. You enlarge your database of investment buyers by capturing over three hundred names, addresses and phone numbers. You capture lots more information like "Who-has-what?" and "Who-wants-what?" All this is...you guessed it,
another future profit center...a powerful hidden asset.
During each call you explain that your "company" policy is for them to look at the outside. In the meantime you will mail them information about the property, along with your Credit Pak (Yes, taking and charging for credit applications is another profit center). If they like it from the outside, they're instructed to call you back and you will make arrangements for them to get inside.
Lots of amateurs call. Lots of window shoppers call. Trillions of "nothing down" seminar junkies call.
After arduously interviewing a couple hundred would-be thrill seekers over the phone, you find a contractor with over thirty seven years experience; who has a partner with financial resources. They are literally in search of an opportunity. So you set an appointment to meet your prospective buyers/partners at the property.
As you tour the building you notice that the partners are starting to talk we, we, we. Soon all three of you are talking about "we'll do this..." and "when we do that." You sense gut-level compatibility.
Over lunch you sketch out a workable deal on the back of a paper napkin. Here it is: You will form a new Nevada Corporation. You will contribute your deal for a one-third interest in the new corporation. The contractor will do the work for one third. And the financial partner will put up the money for one third. In essence, a Deal Made In Heaven!
Your Nevada corporation will actually own the deal and all the neat benefits just described above. Your Nevada corporation will develop the project by naming you (personally) as Transaction Manager. (You'd be an employee.) When the work is complete, you "sub-lease" the entire building to your hometown corporation giving Hometown Management, Inc. a nominal fee and "the thrill of management." You set up the lease so the lion's share of the cash flow stays TAX FREE in Nevada.
Finally, keep the deal, the master-lease and the option private, safe, judgment-proof and ultimately in the pro-business State of Nevada. Then, if you ever choose to sell your position or the some part of the deal, you can do it in TAX FREE in Nevada and never again disturb the title. Who knows, the feds might even give us back capital gains tax treatment and wouldn't that be special?
So there you have it. Three deals like this and you know you will retire in style!
As you may have guessed, this is a real deal. We closed it on Friday, July 15th last year. After receiving the building code report, we negotiated a reduction in the purchase price by a whopping $9,763.29 AT THE CLOSING TABLE! Here is what we did: We reduced the option consideration from $325 a month to $250 a month. The work begins tomorrow. I'll keep you informed as to how it goes, but for now maybe you'd like to write me about how you emulate these ideas and use my motto: Make Your Profit Going In, then Conceptualize the Deal Beyond The Deal.
© MCMXC By Ray Como. All Rights Reserved
Ray Como has created, produced, copyrighted and self-published 15 audio cassette programs and lots of other forms and tools for business, real estate, corporations, selling, marketing, finance, management and Entrepreneurship.
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