Oct 12 in Creative Financing
💰 Here’s how I made $100k today 💰
NETWORK. REFERRALS
Getting your name out there and letting people know you’re actively acquiring real estate deals can naturally bring you opportunities. This deal is a perfect example: if the person who referred it to me hadn’t known that I was doing deals, they wouldn’t have brought me the opportunity. It may seem obvious, but sometimes the most straightforward strategies can lead to the most profitable outcomes.
Deal Context:
We leveraged an existing property in our inventory to optimize this opportunity while maximizing profits from an otherwise vacant property.
Deal We’re Trading:
• Property Location: Commerce, GA
• Acquisition Price: $350,000
• Financing: 3.5% interest rate on a subject-to existing mortgage $261k left
• Initial Investment: Approximately $35,000 (closing costs, arrears, etc.)
• Monthly Payment (PITI): Roughly $2,000
End Buyer:
• Situation: Family relocating from New Port Richey, FL
• Current Property: They own a house worth approximately $250,000, with a $162,000 mortgage balance. We agreed to pay $228,000. The property hasn’t been listed yet.
Exit Strategy: Collateral Trade w/ Lease Option
The strategy we’re using here is a “collateral trade,” which allows us to achieve several key goals:
1. Move Existing Inventory: We can offload a vacant property that’s currently costing us in terms of lost cash flow.
2. Maximize the Option Fee: By structuring the deal creatively, we can secure a higher upfront payment.
3. Tax Benefits: Continued tax benefits since ownership does not officially change hands until the end of the agreement (option period) allowing us to run cost segregation studies on these deals.
4. Less Headache: With a lease option tenant that has equity at stake they are more likely to not default since they have skin in the game, more likely to respect the property etc.
How It Works:
1. Trade Equity: We agree to take over the buyer’s existing mortgage of $162,000. In exchange, we credit the equity from their current home as a promissory note toward the purchase.
2. Lease Option Terms: We lease option the Commerce property to the buyer for $2,300/month. The buyer has an option to purchase the property in 5 years.
Financial Breakdown:
1. Monthly Cash Flow Over 5 Years
• Monthly Income: $2,300
• Monthly Expenses (PITI): $2,000
• Net Cash Flow: $2,300 - $2,000 = $300/month
Total Cash Flow Over 5 Years: $18,000
Option Fee and Equity Considerations
• Buyer’s Equity in Their Current Home: $228,000 (home value) - $162,000 (mortgage balance) = $66,000
• Option Fee Credit: The $66,000 equity serves as the option fee, credited toward the purchase.
Final Payout at the End of the Lease Option
- Sales Price: $425k (commerce, ga; acquired $350k)
• Outstanding Mortgage Balance: After 5 years, the remaining balance on the subject-to mortgage would be roughly $292,000.
• Net Proceeds from Sale: $425k - $66k - $292k = $67k
Total Profit Calculation:
Combining all the components:
1. Monthly Cash Flow Over 5 Years: $18,000
2. Option Fee Credit: $66,000
3. Final Net Proceeds: $67,000
4. Entry Fee: $35,000 (Commerce GA purchase)
Total Projected Profit: $151k - $35k entry = $116k
By utilizing this strategy, we can achieve a total projected profit of approximately $116,000 over a 5-year period, with no additional cash outlay after the initial investment. This approach allows us to generate positive cash flow, recover our initial investment, and secure a significant final payout, all while moving a vacant property out of our inventory.
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💰 Here’s how I made $100k today 💰
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