I've done dozens of real estate transactions where the seller carried a zero percent interest mortgage.
It's pretty easy once you are commited following a professional prospecting program. You must know how to close. This takes practice. You will get plenty of rejection. The real secret is to find the right seller.
I've gotten out of the real estate business as a buyer and owner/landlord. I've become a banker. It seems that everybody you talk to is wanting to buy and own real estate. And the rest are teaching about how to do it.
I subscribe to the contrarian theory of investing. That is if everybody else is doing one thing, then I should be doing something else. Everybody is an amateur landlord just fresh from a weekend seminar.
Personally, I'm fed up with tenants so I'm going into banking. Besides, I have this affinity for CASH.
When I buy real estate I use a very simple formula. I take the income minus the expenses. Then I deduct something for management. What's left is what the property can afford to pay. Then I divide that amount into the equity to determine the number of years it would take to pay it off. That's pretty simple. Yep, 0% interest. Remember the only thing that determines the payments is the income minus the expenses. Financial calculators do not and neither do interest rates, banks, bankers or even the federal reserve.
EXAMPLE: A property will rent for $500. And the expenses including principal, interest, taxes, insurance and management is equal to $300. That means the property can afford to pay $200 a month. Usually that is all I am willing to pay. Anything you pay in excess of that would result in a negative cash flow and that's a no-no. I like to pay my payments in arrears and yearly so $200 per month would equate to $2,400 per year. Now suppose I was buying a $24,000 equity. I would offer to pay $2,400 per year for a term of ten years.
As a banker, I might agree to pay say $3,000 a year with no down payment. Yes, $3,000 a year would mean negative cash flow. But it would also be a zero-interest-installment-down payment. The question is: Would you rather write a check today for a down payment or pay an extra $600 per year that would apply directly to the purchase price of the equity? (That is 0% interest) Get the idea?
To continue this scenario -- as a banker I'd be willing to pay twice the amount as I would as a dime-a-dozen real estate investor. Why? Well, first the debt would pay off in half the time. Example: I could afford, as a banker, to pay $4,800 per year for a term of five years. This payment schedule would fully amortize the $24,000 equity in five short years. ($24,000 divided by $4,800 = 5 years).
Then I could bring in a partner that owns a liquid asset like a certificate of deposit (C.D.). I would also accept a partner with an asset that is one-step-to-cash like the title to a free and clear Mercedes Benz. Do you think any seller anywhere would object to holding a C.D. as collateral?
I didn't think so.
Onward. Since the collateral of the purchase money note is secured by something other than the real estate you're buying, do you see that the day you close you will have an instant equity of $24,000 in the property? Now, sell the property for cash. You would have $24,000 cash in hand and you would owe $24,000 at $4,800 per year for five years. If all you did with that money is put it into a passbook account at 5 1/4% you would be making 5 1/4% on money that isn't yours. Isn't that exactly what your bank does?
The idea is to sell the house FAST. How do you sell a house fast? drop the price. And you could afford to do that if you started by paying $4,800 per year for five years and you sold the $24,000 equity for exactly what you paid. You would have borrowed the $24,000 hard money at zero percent interest. But what if you sold the equity for say $20,000? You would have $20,000 in your hand and you would owe $4,800 per year for five years. Put the following into your financial calculator: N = 5; PMT = $4,800; PV = $20,000. Solve for I. I, the interest (or your cost of money), would be a measly 6.4%! What do you suppose you could do with $20,000 of liquid capital that you owed at 6.4%? Think you could put it someplace where you could earn more than 6.4%?
Watch this: You could literally pay more for the property than they are asking and then sell the property for less than what it's worth. You could structure the financing in myriad ways. You would always come out ahead.
Want more ideas? I have been talking about investing the proceeds of the sale in safe, low yielding vehicles like savings accounts or money markets. But what if you invested the cash into high yielding paper? High yielding paper would not be the same as investing in liquid assets because paper is not as understandable and/or readily acceptable as collateral. However, the yield on discount paper would be much higher than investing the cash in money market accounts.
There are so many possibilities with this that my mind hasn't stopped racing since the moment I first thought about it. If the seller asked for interest you could simply add the interest to the end like I wrote in my report called The Effect Of Adding What-Would-Be-Interest To The Tail End Of 0% Interest Payment Schedule.
Maintain the power and luxury of sitting at your desk just like your banker does. This is a superb way to implement your Warbucks/Red Inc. Strategy. i.e. Red Inc. creates these deals as an agent under contract with Warbucks. Then Red Inc. sells the package to Warbucks for a fee. Warbucks earns the interest in TAX FREE Nevada. Finis.
© MMI 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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