I like to think of learning as a way to see things that were there all along, but which I couldn’t perceive without the new insights I’d gain through learning. It’s kind of line the jeweler who has glasses with increasing magnification. With each additional lens, he sees things that weren’t visible before.
I think everyone starts out buying or listing houses the same way. Almost every deal is considered in the light of available institutional financing for both the buyer and the person to whom he sells the house. When loans are readily available, the business is fairly routine; buy a house below market value, fix it up to bring top dollar, sell it to a buyer who can get a new loan. Does this sound familiar?
As time goes by, and the real estate cycle changes along with the credit cycle, loans become harder to get, so you have to change to deal with the new realities of the market place. At first you buy with subject to” financing by taking over existing loans and borrow enough on a 2 mortgage or “wrap-around” mortgage to pay for the seller’s equity. When that source of funds dries up, you start getting the seller to carry back the financing.
When he won’t you try to find an investor who will put up the needed money to complete the purchase. Then, one day, the investor withdraws from the market, and the seller has to carry back all the financing if he wants to sell his house. When the seller won’t carry feasible financing, you lease/Option the house and try to make money with a spread in the rents and Option price.
All through this process you are learning more and more about how to negotiate with the sellers, investors, and lenders to raise money; and how to structure lease/Options. Then one day, after you’ve learned how to manage property efficiently, it hits you that you don’t need a lender or an investor if you simply lease/Option every house you want to buy with lease terms that will guarantee positive cash flow. When that happened to me, I began to make money hand over fist.
My point is that every new technique that you are forced by circumstances to learn will serve you in every kind of real estate market, and with every kind of owner or property; so learn all you can.
When you learn to manage property to make it produce cash flow, then couple your lease with an Option, the costs of your investment drops to a negative number because you’re either making money with your lease, or you’re getting a huge credit toward the purchase price in return for giving the owner a positive cash flow.
More significantly, the credit toward the purchase price is even better than a zero-interest rate loan because it is applied directly to principal with nothing going toward interest; and is being paid by your tenant, not you.
Once you get this technique down pat, your next step is to lease/Option a house with a credit toward the purchase price, then sub-lease it to a management company without any Option credit. By giving the management company all the net income from the lease, you’ll not only be able to stop managing property, but also begin building a lot of equity in your Option with zero investment or work. This is called a sandwich lease/Option.
I know of one individual who lease/Options upscale houses from owners who must rent them in order to be able to hand on to them, but who don’t want to manage. For his trouble, he makes no effort to cover their payments. His lease/Option merely pays a portion of what they pay so that he can derive positive cash flow from the management company while leaving enough on the table for them to make a profit. With each monthly rent check, his Option equity grows by leaps and bounds. Oh yeah, did I mention that he has a lot of these deals going?
Try it, you’ll like it.
