Buy And Hold Vs. Buy And Sell Techniques

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Topics: Getting Started, Investor Success

 The  Board of Trustees for Social Security (which includes the US Treasury Secretary) wrote that major parts of the program have already run out of money, and the rest of Social Security will run out of money in the next decade.  See the report here

Amazing even Social Security knows that they’re bankrupt and unable to keep their promises to taxpayers.  In fact, this Social Security funding deficit has been taking place for several years now, and it’s actually accelerating. So the problem worsens each year.

According to the analysis, the astounding rise in Social Security recipients (10,000 people turning 65 every day!) vastly outpaces any growth in tax revenue received into the program. And this trend will continue for decades.   The report goes on to describe Social Security’s two main trust funds, OASI (for ‘Old Age Survivors Insurance’) and DI (‘Disability Insurance’).  They tell us that DI actually went bust several months ago.

This is going to cause an unbelievable crisis in the United States.

Think about it: half of Americans have ZERO retirement savings and will be fully dependent on the Social Security once they retire. But the average Social Security check is less than $2,000 a month which is hardly enough to live on in the United States.

But by the time their retirement comes, the program will have likely already run out of money.

Pension plans are not doing much better.  Some cities have had to reduce or cut pension payments because the money is just not there.  Congress passed a law allowing pensions to be reduced or cut.  See this article for details.  I know people living in Panama who had a $5,000 a month pension which was cut to $2,000 a month recently.  And their pension may be reduced more.

TIME TO GET SERIOUS

So, it’s time for you to get SERIOUS about your real estate business and building cash flow.  Instead of replying on Social Security or a Pension which may not be there for you when you are ready to retire, you need to start accumulating cash flow properties.

Following is an excerpt from Jack Miller’s Cash Flow Concepts book which explains a way to FAST TRACK your cash flow. One of the biggest objectives to owning rental properties is that it takes a long time to get them paid off so you can get really good cash flow.  Read the lessons below to learn how you can pay off your rental properties MUCH faster and reap the rewards of higher cash flow.

Entrepreneurs come in all shapes, sizes, and dispositions. Some are willing to patiently watch their equities compound over many years as loans amortize, values appreciate, and cash flow increases. There is absolutely no doubt that single family landlords are the ultimate winners in the long run. You can find otherwise humble people who command great wealth derived from rental houses, but it takes years for loans to pay off and for a house to start generating real cash flow.

The secret to receiving cash flow from rents is to get the house free and clear of loans as soon as possible. We’ve been talking about $150,000 houses in which just about all the rent is consumed by loan payments, taxes, insurance, management, and maintenance. What would a single family house investment look like if the trend line for the past 25 years were extrapolated over the next 25 years?

Twenty five years ago in Tampa, a 1300 square foot, 3 bedroom, 2 bath house with a double garage and den could be bought for about $30,000 with $2500 down by taking title subject to 7% existing financing. It rented for about $295 and just about broke even. Today, that same house is worth $90,000 and it rents for $795. Back then, with a little negotiation and seller financing, that home would also have enjoyed break-even cash flow after mortgage payments. Why bother buying houses just so they’ll break even? There must be more to this story than meets the eye.

Suppose you were the person who had bought 10 houses just like this a quarter century ago? It would now be free and clear, and you’d be collecting about $10,000 in net rent each year after all costs of taxes, insurance, management, and maintenance. With 10 free and clear houses, that boils down to an income of $100,000 per year. Twenty five years may seem like a long time, but try to find people twenty five years older than you are right now who have that kind of income without working. Of course, in the 1970s, many people bought more than 10 houses .

What if you didn’t want to wait 25 years to be able to quit rich? There is a simple short cut for the person willing to work very hard. I learned this from a fellow I used to work with named Jerry. We both made less than $10,000 a year, but he was getting rich. There’s an old saying that Jimmy Napier used to quote that goes, “Buy liquor by the barrel and sell it by the shot; buy land by the acre and sell it by the lot.” That was Jerry’s technique for getting rich.

On weekends, Jerry would cruise the area looking for land he could buy. He’d typically locate a parcel of forty acres or so of land in the countryside a few miles outside of Tampa that he could use seller financing to buy with about 10% down payment and 10% interest for 10 years. Next, Jerry would cut the acreage up into 2 acre lots and sell these at a higher price on a contract on identical terms.

He paid off his debt by giving the lot-sale contracts to the original land seller for a release of the sold lot, plus a credit against his own debt. Once all debt was repaid, he’d quit selling and keep what was left over free and clear. Not bad, but here’s another technique he used:

Suppose Jerry were paying $1000 per acre for the land, he’d have to come up with $10,000 for the down payment, and make payments of $396.45 for 120 months on the $30,000 balance. After cutting the land into 20 parcels, he’d sell them for $4,995 each on a land sale installment contract with $995 down and fully amortizing payments of $52.86 per month for 10 years.

Once he’d sold 8 lots, he stopped selling. At that point, Jerry would have received $7,960 in down payments to offset his $10,000 down payment, and he’d be holding eight $4000 contracts totaling $32,000 with monthly payments of $422.88. He’d use the cash flow from these eight payments to pay off his own mortgage. He would have kept the 32 remaining unsold lots for himself.

Monkey see, money do! I didn’t know much about land, but I did know about houses. I started looking around to see what I could do, but before I could get started, I was laid off. About the only job I could find was as a real estate salesman. I never forgot the lesson I learned from Jerry. I bought as many houses as I could using seller financing and negotiating prices that were about 80% of fair market value in return for a quick pay-off that varied between one and 5 years.

Some of these were “keepers” that I intended to use to fund my early retirement. Others were bought strictly for resale. Within a 10 year period I bought and sold literally hundreds of houses using every conceivable kind of financial arrangement. As I bought, I also sold; and paid taxes on my profits, I also paid off loans with the after-tax cash flow that I generated this way.

After a couple of years my net rental cash flow reached “critical mass”; the point at which my net rents provided enough income to enable me to buy an additional house every month. Then I gradually sold houses and used the cash to free and clear others. Although I continued to buy, sell, trade, and rent houses, I was able to completely retire from Brokerage after only 5 years using this formula.

ANOTHER WAY…

I purchased most of my rental property by buying them subject-to the mortgage or with seller financing.  There was built in equity and instant cash flow.  To get the houses free and clear much faster I’d continue to do wholesale flips or get options then do a Highest Bidder Sale.  The proceeds from these deals were used to pay off the “keeper” houses faster.  The result was that cash flow went from $300 to $500 per month per house to $1000 to $1500 per month per house as soon as the mortgage was paid off.  It does not take many of these to be able to retire!  Ten to 20 free and clear houses is better than money in the bank!  They produce cash flow and tax benefits.  And, they can be exchanged for other properties tax free.  But if you ever needed a lump sum of cash for an emergency, you could always sell one of the houses if necessary.

SAFETY NET…

A CashFlowDepot member’s wife is seriously ill.  Unfortunately, even though they have Medicare, it does not cover all the expenses.  If he only had Social Security to reply on, he would not be able to afford the medications and care that his wife needs.  But luckily, he has a portfolio of free and clear houses which produce more than enough cash flow to support their lifestyle, cover medical expenses and the special care  that his wife needs to have a comfortable life.  That is true peace of mind!

LEARN MORE  – Get the Cash Flow Concepts book. 

 

 

 

 

 

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