There's a missing component of return in real estate profits that very few investors have ever tapped - but could readily tap into if they knew about it and how to do it. Real estate Guru, Jim Evans, explained that most real estate professionals calculate their return on investment by adding up their traditional four real estate components and dividing by the down payment (or equity in succeeding years).

  The four traditional components are: appreciation (if the real estate goes up in value), cash flow (gross income less expenses and debt service), principal payoff (each time you pay the mortgage part is principal payoff), and tax savings (multiply your depreciation by your tax level and you get a tax savings in dollars). The down payment includes the cash down and the non-financed closing costs due at closing.

  Let's take a residential income property to make these components more concrete. Let's say you buy a duplex for $200,000. Assume that you bought it under appraisal, which is $240,000, and you could sell it within a reasonable time for $240,000. Suppose you put down 20% or $40,000 and the closing costs were $10,000.

  The principal payoff would be about $400. The tax savings for an investor in the 15% tax level might be around $1,200 in actual dollars. Let's say the cash flow is 5% or $10,000. If the property goes up in value 2% then it would be worth 102% of $240,000 or $4,800 in added value for the coming year.

  The traditional components total $16,400 (400 + 1,200 + 10,000 + 4,800). If we divide that by the total down of $50,000 then we get 32.8% rate of return (16,400 divided by 50,000).

  This is great and will beat stocks all day long and any bank! But it just scratches the surface for what is really possible!!

  Mr. Evans explains that the fifth component is usually the greatest profit component for real estate return. This is Equity Discount. Look at the above example where the investor bought the property for $200,000 but it was worth $240,000 and could be sold for that price within a reasonable time. This means that the investor would realize another $40,000 in benefits for buying the property.

  Add this $40,000 to the traditional components of $16,400 and you get $56,400. Divide that by the down payment and non-financed closing costs of $50,000 and you get a whopping 112.8% return. This is really exciting.

  Most investors that buy foreclosures and "flip" the properties instinctively know that they must buy the property at lower than appraisal price but they don't know how to accurately compute their return. It is a known factor, though. Many gurus say that you make money "when you buy the property." Jim says you make money in real estate "when you buy AND when you sell."

  Combining all of these five components is what Jim calls the single profit system. In other words, you have one property and you make five components of profit on that one property.

  What if you could make multiple, simultaneous transactions, with multiple profit systems? What if you could reduce the down payment, closing costs, and need to obtain a mortgage in the first place? What if you could cut out or reduce rehabilitation costs, loss of rents while rehabbing, and other costs?

  That would truly be exciting! Not only very exciting but very profitable.

  This is the essence of the multiple-profit real estate investment system. You use several properties to create multiple profits. Here's an example.

  Let's say that you arrange to buy the property outlined above but you add one feature - you arrange for a trade on that property. If you found another property that you could buy for $200,000 and was worth $240,000 and you arranged for them to be exchanged simultaneous you would make another $40,000. And you wouldn't be responsible to obtain mortgages, pay closing costs, rehabilitation, loss rent, or anything! You just show up at the closing and collect the profit!

  If you did just that, you'd make another $40,000 added to the $40,000 (a whopping $80,000) from the other property (you wouldn't get the tax benefits, cash flow, principal payoff, or appreciation - just the double Equity Discounts). Your down payment would be zero or perhaps $100 in closing costs. The owners would pay the title insurance, etc. Thus, in this case, for a double-profit scenario, your return would be just about infinite. In reality, you wouldn't need to qualify for a mortgage and you'd be anxious to do as many of these as you could.

  Now, what would happen if you could find three properties and do a simultaneous three-way exchange? If they were all discounted $40,000, then you'd make $120,000!

  Reality says that very few investors can do this because they don't know how to structure the transaction, find the properties, write it up on a binding contract, and actually go through the problems s/he will have to close it. It can be done, though. Each transaction is difficult, but doable. Even if the investor had to try on multiple transactions until one went down, he would be far ahead and be able to do this regardless of his credit or down payment ability.

  Suppose further that the investor couldn't buy the properties simultaneous but he could buy the first property. Let's say then that he took the first property, with the $40,000 discount, and then traded it for another property, with an additional discount, in a month or so. S/he'd have $80,000 in profits in the new property.

  Let's further complicate it - say that the investor wanted to do this but couldn't qualify for the mortgage and didn't have the down payment. There are several solutions to those problems. First, the investor can typically buy the property for 100% hard money financing if s/he can find the right property. Second, the investor can most assuredly find a co-investor that will put up the down payment and qualify for the loan - if the right property can be found.

  So, assuming that can be covered, all the investor has to do is find the right property. Most people will look in foreclosures, rehab properties, and the like. They may be missing many bargains that are theirs for the asking if they just asked. They should check pre-foreclosures, people that want to trade, or owners that just hate their property.

  Jim did his first double-profit in 1974. He'd found a nice 15-unit apartment in Salt Lake City, Utah, that could be discounted for cash. He also found a nice 4-unit apartment that wanted to trade up.

  Jim paid $100 to a nationally recognized exchange expert to help write up the deal. He has used that same formula for tens and hundreds of millions of deals. It was well worth it.

  Basically, he wrote an agreement to purchase the 15-unit apartment, and then had the owner of the 4-unit trade for his interest, simultaneously. The result was that Jim walked away with the 4-unit apartment, with no down, no closing costs, and heavily discounted. Jim actually got cash at the closing to buy the property for no down!

  A few weeks later Jim refinanced the 4-unit apartment and put some additional tax-free cash in his pocket. It was a sweet deal!

  He has done many similar transactions, and some with three-profit deals. One was some land for a 4-unit, the 4-unit took an 8-unit apartment, and the 8-unit apartment took the land. Jim walked away with cash profits on all three at the closing. No closing costs, no mortgages, no rehab, no lost rent, and no risk!

  In one of the three-profit transactions, Jim put the transaction together and walked away with a property free and clear, for his profit. This cannot be done in any other way! You cannot buy foreclosures for nothing and even tax sales require some cash. When you walk away with a free and clear property, with cash to boot, you know you are doing the ultimate transactions.

  In addition, an investor can add trust deeds, cars and boats, barter credits, or anything else of value to these transactions. Everything else is just your creativity after you learn the basic formula and how to write up the agreements.

  Doing single-profit deals with no down, no closing costs, and not even paying the earnest money are quite common with his system. One of Jim's clients, Robert, in Orem, Utah, just closed on a $107,000 home for $66,500. Before he closed, he had written offers for almost $20,000 more. Robert is now looking at higher single-profits and possible double-profit situations.

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