– I use private money to buy my houses
– And I pay my Private Investors/Lenders 8% interest only 5 yrs.
– This private loan is NON-RECOURSE loan…collateral only loan…no personal guarantee.
– I give the Private Investors/Lenders a pristine 1st lien guaranteed by the title company
– I always borrow at least $2k more than the amount necessary to buy or to buy/fix. This goes in my pocket and is tax deferred until a major event; I get paid off or sell the note and payoff my loan.
Finding houses isn’t free.
– I sell the property with owner financing. My private lender is in 1st Lien position. My buyer owes me money on a note so I’m in the 2nd Lien position. My Buyer/Occupant pays me, I pay Private Investors/Lenders.
My Buyer/Occupant doesn’t pay me, I still pay my Private Investors.
– I collect a healthy down payment that goes in my other pocket; 10% minimum.
– The “Tax Payer of Record” (the owner) is my Buyer/Occupant.
– The Private Investors and myself are lien holders.
SELLING THE NOTE EXAMPLE:
– I contract to buy a HOUSE for $23k all in.
– I borrow $25k @ 8% interest only, 5 yrs = $167/mo.
– I sell the HOME for $57k w/ $5k Down.
– I finance the $52k balance @ 10.5% for 20 years = $525/mo p&I pmt
I owe $167 pmt/mo
I collect $525 pmt/mo
POSITIVE CASH FLOW $358/mo
*In this example I’m selling the note before collecting even 1 pmt but normally you collect some, if not a lot, of payments before you sell the note.
– I sell the $52k note owed to me (and it’s incoming payment stream of $525/mo) for $46k CASH +
I keep the last 60 payments.
The difference between what I’m owed ($52k) and what I sell the note for ($46k) is NOT a discount. It is a trade; I’m giving up $6k today for $31,500 tomorrow.
It is a time value equation. If I put the $6k in the bank at 10.5% for 20 years, it will be with $31,500.
– I use the $46k CASH pay off the $25k I owe my Private Investor.
I keep the difference;
$46k-$25k = $21k in my pocket.
and I’m still owed the last 60 payments of $525
(15 years from now)
60 x $525 = $31,500
So let’s look at the 7 incomes:
(1). $2k when I bought
(2.) $5k when I sold to my buyer/Occupant
(3). *We could have made monthly cash flow but didn’t in this example
(4). $21k net from the note sale
(5). $31,500 start collecting $525/mo in 15 years.
REMEMBER; you paid off the loan with the proceeds from the note sale, so you have no debt; you are collecting $525 and pocketing 100% for 60 months.
(6.) $8,500 LOAN SERVICING FEE:
You have an opportunity to collect the payment as the “Co-Note Holder” with your note buyer: the note was for 240 months…your note buyer bought 180 pmt you kept 60 pmts of the note…you are “Co-Note Holders.
You BOTH have an interest in the note. You can charge a fee for that work if collecting and keeping track. You can pass that fee along to your Buyer/Occupant if you state so in the original sale/closing docs. A fair fee would be $35/mo
$35 LOAN SERVICING FEE.
240 months x $35 = $8,400
(7). Late Fees
In this example no late fees are collected
DO THE MATH:
+ $2k Borrowed Equity
+ $5k Down Pmt
+ $0k Pmts collected
+ $0k Late Fees collected
+ $21k NET on Note Sale
+ $31,500 Back-end of the note(60 pmts)
+ $8,400 Loan Servicing Fee
$67,900 TOTAL COLLECTED on a house I found for $23,000
The TOTAL COLLECTED could be much higher if we’d have collected a few years of monthly payments.
The TOTAL COLLECTED would be drastically higher if this was a 30 year note instead of a 20 year note.
The TOTAL COLLECTED in this example assumes that all the payments were made on time and no LATE FEES are collected
In my humble opinion, OWNER FINANCING is the best strategy on the planet for an average joe to acquire cash flow and wealth.
This is all accomplished Dodd-Frank and S.A.F.E. Act compliant using a Residential Mortgage Loan Originator (RMLO)
Go to read more and get my latest book My Life & 1000 Houses: The Art of Owner Financing
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Now, let’s go find some deals!
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