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I just bought a 40% share of a 3 Bedroom house, already rented for $850/month, for $12,000. An IRA holds the mortgage, collecting 60% of the net income. My share (after taxes and insurance) is $288/month (about 29% return before vacancy and repairs, which are also split 40/60).
Is there a way to sell part of the payments to give someone $120/month for $12,000 – getting all my cash back, while giving the buyer a 12% return cash-on-cash?
it would be a very hard sell but not impossible.
probably an IRA would be your best bet.
$12,000 could make a LOT more spent on options.
So your ideal buyer would be someone who is not active at all anymoreIf your monthly payments were $120 to someone that gave you $12,000, you would be paying “interest only” at a 12% rate with no amortization. You could do that for however long you both agreed. However, at the end of that period, you would owe them $12,000 as a balloon payment since none of the principal was paid down.
If you don’t want a balloon, one possibility is you could sell off 54 payments at 12% in exchange for the $12,000, but you’d have to give up all of your current cash flow (plus 68 cents) and you’d be in the hole after vacancy and repairs. $12,000, 54 payments, $288.68 per month, 12%.
There’s an infinite number of possibilities, but you’ve got to pay more than $120 per month if you don’t want a balloon at i=12% and PV=$12,000.
Gregg,
I guess I should have given a few more details…
The tenant: is on a lease purchase situation. If it sells to this buyer, then I will get at least $12,000 on the back end, making paying off the principal on an interest-only note no problem. And if it doesn’t sell to this buyer, I have no urgency to sell built into my note with the underlying investor.
The potential buyer of this payment stream: I have two different people identified as wanting to invest, who have already mentioned that they would be interested in 12% interest-only payments, but neither have enough funds to put up for a first mortgage position on another house. The $12,000 amount really is in either one of their comfort zones.
My question more revolves around: what’s the best way to structure this? As a second mortgage on the property? I’ve never sold payments before, let alone partial payments, so I’m not sure if its as simple as just creating a note and mortgage.
The first mortgage is for $60,000.
Ongoing income: No interest rate – just 60% of the net income on the property. So if there’s an expense, effectively the mortgage holder pays 60% of the expense.
Final disposition of the property: the mortgage holder gets his $60,000 back first. Then, the higher return for the investor applies: either 60% of the net profit, OR, 8% simple interest per year on his $60,000. HOWEVER – if this doesn’t leave me enough to get $12,000 back, then he gets the first $60,000, I get up to $12,000, and he gets whatever is left.
The note is for 30 years, with a call available after 5 years. If the note is called, I have 180 days to come up with the cash.
Chris
Greg ( redcanoe) is the note guy so he will know how to structure this better than anyone.
IN Atlanta I heard that many of the properties are worth HALF of their value from 2 years ago. What’s the real market value of the house today? Dyches said that he’s not even buying anything in the Atlanta area now.
I think the buyer would want to know who they are in the deal with — that can make a big difference. And how are they protected.
Sounds like there are too many players in this one already.
Jackie,
They certainly have dropped, in some cases substantially! You’re right, in many areas the foreclosures are dominating the market so heavily that houses that sold for $120,000 are now going for $50,000-$60,000 through HUD – and that’s IF it’s in top notch condition.
I can’t speak for Dyches – I’ll actually have the opportunity to ask him about it tonight at Danny’s meeting tonight. But I really, really don’t care about equity. If prices drop even further, yippee…. I stopped caring about equity two years ago. I’m in it for cash flow, cash flow, cash flow. And while prices have dropped 50% or more in some cases, rents have only dropped 10% or 20% at most. I’ve only had to drop the rent on one of my properties, and that one was way over the market average to begin with.
Eighteen months ago when I shifted focus away from equity, and towards cash flow and profit margin, I had $600 total cash flow above PITI on five properties mortgaged in my name. Had a lot of equity, but no room for anything bad to happen. Since starting to work with private investors on income sharing and profit sharing terms, I’m now up to $1600 cash flow above PITI on eight properties. More importantly, eighteen months ago my profit margin (ONLY counting PITI as my fixed expenses, not even accounting for vacancy and repair) was 15%. Today it’s 40%, and I’m sleeping much easier.
To be honest, I’m starting to back off the idea of selling the payment stream on this house. I just feel so FREE getting away from having fixed payments whether my houses are occupied or not, that the more I think about it, I do NOT want to go back there again!
Jackie, You are too kind.
CHeekin, I like and agree with your last sentence. Selling a piece of this deal would lower your profit margin/safety cushion, which doesn?t sound like what you want. Also, as Jackie noted, bringing in another person would increase the number of interested parties to 4, including the tenant-buyer, which I?ve found is 2 too many most of the time. This deal also hinges on good management to help preserve as much of that monthly $288 as possible.
If you WERE to sell off some of the payments, you would need to create a note and mortgage in second position since they don?t currently exist. If they did exist, you could simply assign the note.
If someone is going to put up $12,000 they will want to know there is equity in the property and not just a percentage of the cash flow…when and if it comes in.
If there is a default seems they would be in a very weak position. I just think this would be very hard to sell to anyone.
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