Creating Income Streams with Houses

Topics: Landlording

What about those who don't live in areas where prices rose very swiftly, and where they are now dropping even faster? No matter where you live, there are going to be people who can't sell houses that they must sell. Although housing is a very narrow, local market, credit is a very broad national market. The effects of the banking crisis can be felt in areas where there hasn't been many foreclosures or much financial distress. Nonetheless, sellers can't find buyers who can get the loans they need to buy houses.

In this market, where there are relatively small numbers of unsold houses in bank inventory, finding good long term rental properties and being able to buy them with a combination of creative financing and taking title “subject to” existing loans can make a lot of sense.

You can't make much of a deal unless the seller has a real reason to be motivated to sell. This could result from being laid off, or transfer to another area or part of town, or school closing, or medical issues, or death or divorce. It's incumbent upon the buyer to discover the real source of the motivation and to find a way to ease the sellers' anxiety by buying their house.

Since I NEVER buy any house with institutional financing, I have to rely upon a seller being willing to carry back most of the financing. Absent of rapid appreciation such as we saw in bubble markets, there are really only two tangible rewards for buying a house and holiding it long term. In this Blog, I'll focus on using a house to create an income stream. To do this, I have to find a way to incraese the net positive cash flow by reducing the payment, and to find a way for rents to pay down loans fast.

If you want a property primarily because of its potential for creating a rental income stream, the easiest way to do this is to “sandwich lease” it. This is achieve by leasing a house with the right to sublease at one long germ rental rate, and to sub-lease it for more than you are paying. To grasp the efficiency of this, ask yourself how big a down payment you would have to put down on a house with a 6%, 30-year loan in order to be able to have it produce as much NET cashflow as a sandwich lease that produced $150 per month.

If you had to come up with $30,000 to do this, then the value of your lease would be that much; but realistically, you'd have to put down much more on an upscale house that would attract better, more stable tenants. Even if you could come up with the cash without borrowing it, how many houses could you buy? By setting and meeting your net cash flow objectives, the only limit on the number of leases you could enter into would be your ability to manage the houses.

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