If buyers are going to command wealth-building factors, you are going to have to be able to control the financing terms. Obviously “interest-only” will increase net cash flow and leveraged appreciation; but you’ll have given up all amortization. If you sell your property on an installment sale, you’ll have converted management effort to possibly higher income, but sacrificed tax shelter and leveraged appreciation and amortization. You’ll have passed these on to your buyer. I’m afraid there’s no way out; if you want to become filthy rich, you’re going to have to latch on to as many of the wealth-building tools as you can, and this is best done by buying property rather than selling it. The way you finance a long term rental house holds the key to accomplishing this.
The most expensive cost of a newly financed house is interest while the most rewarding benefit is leveraged appreciation. Under ordinary circumstances, these seem to be at odds with each other, but not with creative financing provided by the seller. Your first task then is to change your goal from buying up-scale house to buying up-scale houses that you can finance the way you need to get as many of the wealth-building benefits as possible. This is going to require face-to-face negotiation; so you’re either going to have to find a cooperating Broker who will let you do this, or to go it alone without a Broker to find motivated sellers. For the past 5 years or so, this was a virtual impossibility, but not today. The higher up the housing scale you go, the more motivated a seller will be. This is because he has the most to lose if he fails to sell while both house sales and market prices are still dropping; and the bottom is still nowhere in sight. Sellers know this and they are beginning to advertise “Seller Financing” without being asked.
Once you find a seller who is motivated to accept a financing proposal. You are going to have to know how to come up with a financing arrangement that will deliver the most wealth-building benefits to you while sacrificing the least. Fortunately, the seller who has been buying and selling with conventional financing will be as inexperienced as you. A little knowledge goes a long way. If you can manage to be the one-eyed person in the valley of the blind, you’ll be able to write your own ticket; but what will you write on it? Let me sketch out some concepts:
To capture maximum amortization, you need to negotiate a zero-interest loan that wraps around the existing first mortgage loan. Alternatively, you could Lease the property with a lease that provides for payment of the existing mortgage, taxes, and insurance in return for a 100% credit against the purchase price. To get an owner to agree to this, you’ll probably have to give up some appreciation by offering a higher price, and positive income, but look at how much you’re the negative cash flow that you might have to sacrifice can buy you:
Suppose you agreed to pay rents of $2000 per month on a 7 year lease on a $300,000 house on which current P.I.T.I. payments were $1600. Let’s say that it would initially only rent for $1750 per month. When you counted in operating expenses, this house would cost you about $250 per month. In return, you’d get an Option to buy the house for $315,000 anytime during the lease term with a full credit for all rents paid against the down payment and purchase price. That’s not much of a mark-up, but bear in mind that the owner would be getting payment relief and would save the real estate commission on sale. Until you could raise rents, your $250 per month negative cash flow would be buying you $1750 in amortization, and the leverage given you by your Option would control all the appreciation.
I once bought a house by taking over the absentee owner’s loan that was about 45% of its $250,000 price. I paid nothing down, but agreed to pay full current appraised value for his equity any time that I could net 10% profit after all expenses when I sold it. This gave me cash flow, amortization, and negative cost for a certain $25,000 profit. Why did he agree? He got payment relief.
