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6 Reasons Owner Financing Property Beats Renting

Most new real estate investors follow the same path: They invest their hard-earned cash into single family homes with mortgages, repair/rehab, and rent them out.

Often, they buy cheaper houses built in 1950 or earlier because the rate of return on them is higher. However, the expenses and repair headaches on them are also higher. I know investors who have bought class C rental houses. After the initial renters left, the repair costs ate the investors alive and they couldn’t rent out the houses again.

What most new investors don’t know is that you can owner finance your property rather than rent it out. That is, your occupant is purchasing the property from you the investor over time (10-30 years typically). This means the occupant has an ownership interest in the property, a sizable down payment, and is incentivized to maintain and improve the asset.

There are six main advantages to owner financing over renting property:

Minimal Repair Expenses

When you first acquire the asset, you may need to complete a light rehab of $5000 or $10,000. If you rented it out, you likely would have to do a much fuller and more costly rehab. With owner finance, you do a minor rehab, and then the qualified buyer is responsible for completing repairs and maintaining the home. Naturally, your ‘qualified’ buyer is only as good as you make it. You should find a buyer with a good, steady work history and with enough disposable income that they can afford to repair the property.

Steady, Predictable Cash Flow

Because you have no repair expenses, you know what your cash flow per property will be each month. After taxes and insurance are paid, the rest of the cash flow goes into your bank account.

Fast Foreclosures in Many States

Some states allow you to foreclose in 60-90 days for $1000 or less, if the buyer defaults. Then, you may get the house back and resell it. There are owner finance investors who have resold the same house three times – $5000 down, $1000 per month. Check the foreclosure rules in your state.

Secondary Sources of Cash Flow

As mentioned above, you can reacquire the property in foreclosure, and resell the home with another down payment. Also, some buyers may pay late each month, which allows you to charge a late fee with every payment, therefore increasing your yield.

Property Increases in Value

Generally, as the owner occupant improves the property, the value will increase. If the buyer ever defaults, you get an asset back that is worth more than when you bought it. You then may sell the property for a higher price and larger down payment.

Neighborhood Improves

Bringing homeowners into an affordable home area helps to raise the standards of the entire community. As more homeowners move in, entire blocks of houses improve and crime decreases. This in turn raises property values and the general appeal of the area.

Whether the investor purchases the house in cash or has a wraparound mortgage on the asset, owner financing is an extremely valuable and important tool in the investor kit for building long term wealth.

 

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How I Invest $55,000 Cash in Real Estate and Sleep Like a Baby

View this article on Linkedin.

There are as many ways to invest in real estate as there are fish in the sea (and many real estate investing train wrecks that can cost you big time). For me, however, I have very specific requirements for my $55,000 cash, and one in in particular is vital – being able to sleep like one of these:

Specifically, I do not want stress, hassle or headaches with my real estate investing. Also, it is very important for me to make a good return over 10%, AND to be able to be profitable in ANY real estate market – from red hot to crashing and burning.

So How to Invest and Sleep A Baby?

After more than 10 years of investing – and making more than a few mistakes – I have found the best way to meet my requirements is to invest my $55,000 cash in single family homes in certain lower-cost American markets for long term cash flow. Sounds risky, right? Wrong. Here’s why:

I make a rate of return 12-15% with no overhead expenses.

I am protected in a real estate crash. If I buy right, I purchase at 70-80% of the house’s market value. So, if the house is worth approximately $80,000, I will not pay more than about $55,000. Purchasing the asset under market value ensures that I am protected in a bear market. It is people who buy at or even above market value that end up losing everything they own in a market crash.

This type of real estate INCREASES in demand in a bear real estate market, at least in the markets I buy in. Why? Because when the engineer with the $325,000 house loses his job, he still needs a place to live. But now he makes only $37,000 a year. Affordable single family homes are the answer for his needs.

No overhead costs with owner financing, rather than renting out the property. As mentioned above, a key requirement for me is to sleep like a baby at night. That is difficult for me when I am a landlord. With owner financing (and doing my homework on finding a good end buyer!), I am secure knowing I will make my $800 per month with no expenses or maintenance headaches.

Relatively stable real estate prices. It is true that the asset will depreciate in value in a crash, however, the $55,000 house will likely only depreciate to $35,000 or $40,000. This was what happened in my city in the last downturn. And keep in mind that my goal is cash flow anyway, not appreciation. The lower prices allow me to buy more, cheaper homes for more cash flow.

A $55,000, 15.8% ROI Example

Here is a distressed property in San Antonio TX that I am going to acquire for $55,000, with an actual value of approximately $80,000.

eg

It is located near the San Antonio Riverwalk, and requires only $1000 in rehab before I owner finance it. Here are the numbers:

  • Purchase price: $51,500
  • Closing: $1000
  • Commission: $1500
  • Rehab/clean up: $1000
  • Total Cash Outlay: $55,000

Now I will owner finance this property to a buyer I qualify to ensure they have a steady job and documented income. A $5000 down payment is also required. Terms:

  • $900 per month, including taxes and insurance
  • Price: $89,900
  • 10% interest
  • 30 year note
  • Taxes and insurance total $175 per month
  • $8700 total income per year
  • 15.8% rate of return in first year
  • Maintenance costs: zero

And so, for me, investing in distressed properties under market value with owner financing really is one of the most sensible investments for $55,000 cash. It makes me an excellent return, I’m protected in a market crash, and I can sleep like……well…….

What are your thoughts about how I’m investing my $55,000? Please comment below.

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Have You Ever Tried THIS to Find Your Real Estate Investing Mentor?

You probably are going to fail in real estate investing – without a mentor.

Your chances of success soar, however, once you find that (free) mentor. To find him or her, please dispense with the desperation tactics of the rookie investor hordes: posting in real estate forums something like this:

“I need a mentor!”

Why would an experienced real estate investor choose to work with you, one of thousands of strangers wanting a mentor? You must expend some EFFORT to locate your mentor.

So….The Secret to Finding a Real Estate Investor Mentor Is……

Hold that thought. Back up.

Who first mentored you in life? At home, it probably was your parents. In high school, maybe your government teacher or volley ball coach. In college, probably your English professor.

And at work, that first really outstanding boss you had, maybe? Let’s hone in there: Why did he put you under his wing? Possibly because he observed qualities and talents in you that gave him the urge to help and further your career?

What do all of these situations share?

Your previous mentors knew you well and observed your positive qualities – right up close. They knew you intimately first, and then the mentoring relationship sprouted from those roots.

So to find your (free) real estate investing mentor, get the heck off the online forums and develop relationships with people in real estate!

Here’s what you need to do right now:

Establish productive, mutually beneficial relationships with experienced investors in your city (or in another city). Go to real estate networking meetings for months. Talk, network and share ideas with everyone there. Learn who the BIG investor players are in town. This may take weeks or months. That’s fine. Remember: These meetings are crawling with rookies looking for mentors. You need to show you’re serious, so keep showing up, networking and asking questions.

Once you identify the BIG ONES, make yourself an asset to them. Help the investor in a selfless way. Offer to post bandit signs, answer emails, pick up building supplies, scout for buyer and seller leads. Volunteer for all the grimy, dirty work. It won’t make you money, at first, but you will absorb real estate investing gold – information from a seasoned expert.

(In my case, I help my mentor by posting bandit signs, putting properties into the MLS, manage the website, and take phone calls from potential buyers)

3. Never ask for anything in return. Just think about how you can help the mentor succeed even more. In that process, you will learn a LOT. Since I have been mentored by my expert, my knowledge of owner finance real estate has increased 1000000%! I am using this knowledge today to do deals and make money in real estate.

4. Don’t offer the investor to share a deal with them in exchange for X hours of their time. That’s meaningless. 90% of ‘real estate investors’ never do a deal. The expert knows that. Make yourself VALUABLE to the expert by helping them with their business. That is how you add value to this situation, and you in turn will learn how to become a successful investor.

5. You don’t necessarily have to have a mentor in your city. A good, expert investor mentor can be incredibly valuable in any market! As long as he or she is experienced and successful, you can benefit tremendously. If you’re looking for a good, free mentor outside your area, let’s talk sometime!

Getting your hands dirty and putting yourself out there through these steps will find you a good mentor. And when you do get a good mentor, you could enjoy some unforeseen benefits! In my case, my mentor turned me onto this incredible deal that makes me 16% per year – with no property maintenance costs.

How did YOU find your real estate investing mentor? Share in the comments below.

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4 Ugly Real Estate Investing Train Wrecks and How to Avoid Them

See this article on Linkedin.

My first foray in real estate was a disaster, and the second has been a success. The difference? I have learned how to avoid the big mistakes that turn a smooth operating ‘investing train’ into a smoldering, derailed wreck. If you are considering investing in real estate, be certain to avoid these four, ugly real estate investing train wrecks.

Train Wreck #1 – Going It Alone

Many real estate investors get into the business like this:

They come across some cash, most often through home appreciation and a line of credit. They take $100,000 out of their home at 4%.
They go looking on their own for a ‘good deal.’ After all, anyone can make money in real estate investing! How hard can it be?
They buy a cheap house with a mortgage at too high a price, pay too much for rehab, and have maintenance and tenant problems (broken water heaters, leaking roofs, kitchen fires, broken windows etc. etc).
Best case, they break even. Worst case, they have to SPEND money to keep the ‘investment’ afloat.

I intimately understand the above scenario because I lived it in 2006! I was a rookie real estate investor and I made the cardinal sin of investing on my own. To maximize your chances of success, you MUST build an expert real estate team.

First of all, you have to have an EXPERT investor/agent scouting for deals for you. What do I mean by expert? He or she should have done several hundred deals in real estate investing in the niche you’re investing in. If your investor/agent invests only in $2 million mansions on the bluffs, you probably don’t want him scouting for $25k fixer uppers on the south side! Keep in mind that most real estate agents are NOT investors. You only want to work with an agent who is an experienced and successful investor. Don’t know anyone like that? I know some, contact me.

You also will need a home inspector, an appraiser and a good real estate attorney at least. You also need to have affordable but good maintenance people: plumber, roofer, HVAC and handyman.

In my current real estate investing, I have an entire team of experts working with me so that I get my properties at the right price with the right investing strategy.

How to avoid this train wreck: Do not play Lone Ranger as a rookie real estate investor. I advise investors I know to partner up with an expert real estate investor in good, affordable markets. You want to work with a real estate investor who has done 1,000 deals and succeeded in up and down real estate markets. That investor will ensure you get GOOD deals at a good price that won’t end up costing you in the long run. By working with an expert who really knows the local market, your chances of investing success are increased 10 fold.

And don’t begrudge paying your investor a commission or a referral fee to snag you that great deal! I’ve run into more than a few investors that get hung up on paying someone a $1500 commission. Look: If the deal is going to make you 15% a year, who gives a damn what the commission is?! My first deal in San Antonio TX nets me 16% per year; whatever commission I paid on it was too low! 🙂

Bonus tip – If you team up with a good, local real estate investor, he may have access to deals that don’t hit the open market. Experienced investors with a good reputation in town often get inside information on good deals that most investors don’t know about. You can often find experienced investors at local real estate meetings.

Train Wreck #2 – Paying Too High a Price

There’s a very simple reason that most real estate investors lose money: They paid too much for the house. What I didn’t understand in my earlier investing is this:

Your profit, or loss, is locked in the second that you sign the contract and purchase the asset.

You need to do extremely thorough analysis of any house that you are considering to purchase. At the very least, you need to know:

  • Mortgage payment
  • Down payment requirements
  • Rental income for you to qualify for a loan
  • Price to income ratio
  • Price to rent raito
  • Rental yield
  • Capitalization rate
  • Total monthly cash flow after all expenses

How to avoid this train wreck: You can become an expert in your local real estate market or wherever you are considering. The easier way, however, is to work with an expert investor who scouts the deals for you. That is what I do in my city. I know when I buy a property, I am getting an under market value property that will make 10-13% per year.

Bonus tip: Strongly consider owner financing your property instead of renting it out. Owner financing has the advantage of minimizing your ongoing maintenance and overhead costs. The end buyer maintains your property and you just enjoy the monthly cash flow. See my recent post on 3 Reasons I Never Buy Rental Properties.

I also personally only invest in cash, so that I have no ongoing mortgage payments to worry about.

Train Wreck #3 – ‘Get Rich Quick’ Thinking

Many real estate investors are seduced by ‘get rich quick’ thinking, most often peddled by ‘real estate investing gurus.’ You know – the people who advertise the $20,000 real estate investing classes who promise you’ll make trainloads of cash within a week (see my recent post Why You Should Never Pay $20,544 for a ‘Real Estate Guru’ Program ).

In my case, I wasn’t seduced by a real estate investing guru. I just thought at the height of the real estate bubble that investing in real estate was easy. It seemed like making money would be simple. It wasn’t! I lost my butt.

Becoming wealthy in real estate takes a lot of work. You need to be patient to find good real estate deals that produce solid cash flow. Don’t try to rush it or you could end up with a serious mess.

I also personally do not advise investing in real estate for appreciation. That works for some investors, but to me it’s akin to stock speculation. I invest only in safe deals that make me 10-13% ROI in cash flow.

How to avoid this train wreck: I am a huge, monster advocate of partnering with an expert real estate mentor for at least your first dozen or so deals. If you locate a good mentor, expert real estate investor with a long track record of success, he or she has most likely learned this lesson. Building wealth through real estate takes time.

They can work with you to slowly develop your real estate portfolio over time so that eventually, you can be earning $5,000, $10,000 or much more in monthly cash flow.You can possibly help your expert mentor with his or her business in some way, in exchange for their helping you get some good real estate deals for your portfolio.

Bonus tip: Again this is personal preference, but my strategy is buy and hold cash flow using owner financing. It is simple, low risk, no maintenance, and generates excellent ROI.

Train Wreck #4 – Cash Flow Analysis Errors

Many real estate investors just don’t realize all of the ongoing costs of owning rental property:

  • Maintenance
  • Management
  • HOA fees
  • Insurance
  • Misc – this is where the rubber meets the road and disaster can unfold! If you are a rental investor, assume 1% of the property value each year. So if you own a property worth $100,000, you should have $1000 a year available for these extras.

If you are a buy and hold investor with rental properties, you need to be positively certain that you have enough cash flow to cover your maintenance costs. You also need to account for vacancies. If you are relying on a property manager to handle maintenance and repairs, remember that will cost you about 10% of your rent roll per month.

Keep in mind that while you are waiting for that property to be leased, you still have to pay a mortgage if you have one, taxes and insurance.

How to avoid this train wreck: Just simply calculate all of the above expenses. However, my personal preference to avoid a lot of these cash flow problems is to simply not invest in rental properties. Once again, I owner finance my houses, so I know exactly what my cash flow is per month.

I hope that you are able to avoid all of these real estate investing train wrecks, and you stay on track in your real estate investing:

What are some of the mistakes you’ve made or avoided in real estate investing? Please share in the comment section below.