To continue my quest for amortization at the expense of cash flow: I decided to offer to pay sellers their equity over a period of time with a zero interest loan. This robbed me of some of the cash flow, but gave me incredible loan amortization. For instance, if they accepted a 6% interest-only monthly payment on $50,000 in equity at $250 per month, all due an payable in 7 years, the same payments on a zero interest loan would amortize $21,000 off the amount owed with the same payment.
Sometimes, to sweeten the pot, I’d offer a higher payment, but on a lower amount of loan. If I reduced the foregoing loan balance by 20% and increased my payment by 20% , I’d have been paying $300 per month and would only owe $14,800 when the loan came due. Of course, I’d still have an unpaid balance on the existing first mortgage debt.
I considered ways in which to “wrap” the existing loan with a zero interest loan. In the foregoing illustration, assume that the underlying 6% loan had a balance of $50,000 with payments of $419. I’d wrap this payment and my $40,000 loan into a single $90,000 wrap around zero interest loan with a payment of $725 including principal and interest. Every month my $90,000 loan would be amortizing at a rate much faster than their underlying loan, but they’d be getting more cash than before, and I’d agree to pay them everything I owed them at the end of 5 years. When this balloon payment came due, I’d only owe them my total debt would be reduced by $43,500 and I’d be able to pay them off completely with $6500.
Amortization is mathematically precise where appreciation boils down to a matter of luck, buying houses at a price lower than they can be sold at. I’d far prefer to gamble on tenants paying rents that amortize debt than on buying houses that tenants’ couldn’t support that I hoped would go up.
Of course, many people absolutely refused to accept this kind of financing. When they said they’d rather just rent their house, I’d offer to rent it from them and to take care of all landlord duties, including paying the mortgage payments, taxes, insurance, maintenance, etc. so long as I could sub-lease it. What I wanted in return was a full credit for all rent payments toward the purchase price, which was set at (i.e.) $40,000 over the loan balance at the end of 5 years.
Isn’t it odd that this had precisely the same results to them as the offer they turned down, but somehow it seemed better? It’s just as odd that people who lease/Option houses tend to focus on capturing future appreciation and somehow overlook how swiftly they can amortize equity and capture all loan pay-down.
