Sooner or later, you'll make so much money buying and selling as a real estate dealer that you'll start looking around for tax shelter. The most obvious solution is, instead of buying low and selling high in rapid fire succession, to buy low and sell high in slow motion. By holding a house as a rental and reaping the income, tax-shelter, amortization, and depreciation benefits it throws off, you'll not only reduce the amount of earnings that are siphoned off by income taxes, but also build a solid retirement income when you decide to stop wheeling and dealing.
Seller financing offers the best opportunity for achieving this. Absent having a large financial investment nest egg you can draw on, your best bet for accumulating a fortune with single family houses lies in being able to negotiate seller financing when you buy, and learning how to finance and manage it to produce a positive cash flow while paying mortgage loans off. Once you are able to do this, the sky is the limit as to how rich you can become.
For the person who intends to amass a portfolio of rental income houses, positive cash flow is critical. Surplus rental cash flow will pay off the debt, pay for maintenance, pay for poor managers and poor tenants, and for periods of vacancy that will occur from time to time. Net rental cash flow adds safety to what could otherwise be a very risky portfolio.
When structuring seller financing, there are five factors that must be considered:
(1) Total Debt,
(2) Gross Rents,
(3) Operating Expenses,
(4) Principal and Interest Payments,
(5) Income Tax Shelter.
Of these, the amount of the monthly debt payment compared to the amount of net monthly operating income is most crucial for the person who is looking for high leverage and net positive cash flow, regardless of interest.
Here's is a little concept that might help you: Negative cash flow reduces leverage and positive cash flow increases it. With each increment of net income received in excess of your operating costs and debt service, part of your investment is returned to you, thus your leveraged is thereby increased a little.
Eventually, once all your down payment has been recovered through net rental income, you'll have a negative investment and an infinite investment yield. Considered in this light, you can see that, to realize the highest percentage yield from a long term income investment, the price is often secondary to the loan and payment terms.
When you expect to hold property for long-term use in your trade or business, or for the production of income, the amount of monthly payment becomes paramount. It would be reasonable to pay a higher the price on a house in return for payment terms that would generate more net rental cash flow after debt payments, and/or a faster loan pay down.
To achieve this happy state of affairs, long term investors have to be able to negotiate and to use creative financing as their principal tool for generating both cash flow and fast loan pay-off. It can't be stated and restated too many times: The key to generating net “spendable” cash flow when financing a property lies not so much in negotiating low interest rates as it does in negotiating payment terms that a properly managed property can easily support out of net operating income. Bear in mind that you will never go broke paying too high a price for a house so long as the house will generate enough cash after taxes to pay a profit over expenses on the value of your time.
To illustrate this, let's say that to buy a house that had a fair market value of $100,000 you offered $10,000 cash down payment and got the seller to carry back a fully amortizing $100,000 non-recourse Note with fixed monthly payments. We'll say that these terms enabled you to average $100 per month in net rental income after all operating expenses and loan payments had been paid.
Despite the fact that you might have paid $10,000 over fair market value, without counting any rent increases over the period, you will have recovered all of your down payment after 100 months without regard to the interest rate or loan amortization. Moreover, this property will go on to produce positive cash flow for you for the rest of your life; with a huge bump in income after the loan is finally paid off.
Learn more with Jack Miller's CREATING WEALTH WITH HOUSES eManual
