It's easy to talk about the terrific foreclosure yields that are available to wheeler-dealers in the buy/sell markets, but those with a long term investment perspective are seeing excellent prospects as well. Let's revisit our $200,000 private line of credit investor and change the players to tax-paying former stock market investors who are looking for long term grown and income.
Most of those who would like to diversify stock investments into real estate don't know what to do, how to buy, how to finance, how to manage, how to pyramid equities, and how to take advantage of all of the tax laws that favor single family houses.
This offers a cornucopia of opportunity to those who can provide the services so desperately needed by passive investors. One Broker I know does nothing but attend foreclosure sales and make bids on behalf of investors in other areas. His only criteria is that he not pay full retail prices, and that he arrange for any needed cosmetic repairs to ready properties for rent up, and local management to handle them. For this, he is paid $5000 per house that he researches and buys. He usually buys about 40 houses a year. That boils down to $200,000 per year in gross income.
Another entrepreneur who is a licensed contractor and house inspector offers a complete repair package to bring houses up to code. He operates as a corporation and charges $40 per hour to drive around and oversee the work of casual labor used to fix up houses. That may seem to be a high price in many markets, but with his on-site supervision, it is possible for him to hire common labor at around $8 per hour to do most of the work. He is thus able to work on several houses at the same time, thereby holding down the overall costs and relieving the owner of having to find needed labor, and of any employer liability for accidents on the job. When special talents are needed, the contractor performs these tasks himself, all at $40 per hour.
One entrepreneurial manager has built a fortune by entering into joint venture and leasing agreement with long term investors. Here's what he does: First, he locates houses that can be bought both in the foreclosure markets and from distressed owners. He either buys at deep discount to fair market value or with seller carry back financing at below market interest rates. In any event, he aims for total loan payments that are less than net fair market rents so that he can avoid negative cash flow situations. Once he has contracted to buy a house, he agrees to do one of two things to suit an investor.
(1) Using a Non-Recourse Zero Interest Promissory Note that will fall due only when he either stops managing the property or jointly with the investor sells his interest in it, he borrows one half of the cash needed to buy the property from the investor. Next, he uses the cash purchase an undivided one half interest in ownership of the house as Tenant in Common with the investor, who owns the other half interest. He secures this loan with a mortgage on his half of the house. He manages the house at no cost to the investor, dividing all income and expenses 50/50.
(2) When an all-cash purchase is required, such as at a tax or foreclosure sale, the investor puts up all of the cash and becomes the sole owner of the property. The entrepreneur then leases the property with the right to sub-lease to qualified occupants under terms and conditions that pass on all net cash flow to the investor.
The Manager retains an Option to buy one half of the house for one half of the money supplied by the investor. This Option can only be exercised while the Manager is current on his lease obligations. Once the Option has been exercised, the investor and the Manager divide income as in (1) above.
As a matter of policy, both the manager and the investors for whom he works have agreed to use all excess cash flow to pay down mortgage debt on those houses that are leveraged. This has enabled him to get free of debt in less than half of the ordinary mortgage term. Over the span of 25 years, the Manager has acquired half interest in 80 mid-priced free and clear single family homes which produce almost $1000 per day in net rental income to him, with another $1000 going to his investors.
