It’s odd that people love to brag about their net worth at the same time as they complain about needing more cash flow. Of course, when they get more cash flow, they complain about having to pay more taxes. Each of these topics are important for different reasons. Net worth is a measure of wealth. After tax Income determines lifestyle, so learning how to create income without learning how to keep it from being eaten away by taxes does little to improve lifestyle. They go hand in hand. For now, let’s look at ways to create more income; first when buying and selling, and then as long term investors.
Probably the most effective way to create more income buying and selling houses is to be able to increase the number of houses bought and sold in a given time period. This is controlled by the availability of houses, and the financing that’s available to non-owner occupants. In recent months, with foreclosures mounting, lenders have tightened loan underwriting standards to that it has become much more difficult and expensive for a non-occupant to finance a house. This has two completely different effects. It reduces competition from other buyers and, at the same time, increases competition among sellers of properties that need remodeling. The net result is that they are much more willing to listen to unconventional financing schemes than in the recent past.
There are many ways to arrange seller financing without the use of banks, but the most efficient way to buy houses for sale is not to buy them at all. Rather, with only a minimal earnest money deposit, enter into a contract to buy a house at a discounted price, then sell the contract for a profit to an owner/occupant who can get financing. This uses up very little cash and virtually non of your credit line, yet the profit is comparable to actually buying and selling the same house. When you can put less down, you can afford to buy Options and increase your volume without increasing your investment or risk.
Some lenders are now posing “seasoning” restrictions that require a seller to have owned a property for several months prior to selling it to someone else who would apply for a mortgage. As the Option holder, at closing, your buyer would be buying directly from the long term owner, who would use some of the loan proceeds to buy back your Option, or to induce you to cancel it. Voila; no seasoning problem.
Some States have placed severe restrictions on people who take title “Subject To” a loan, but an Option that calls for a full cash payment legally skirts this problem. Some States don’t want a person to “flip” a contract, in that case, once the buyer has gotten to the closing table, you can use your buyer’s money to close your contract, have the house deeded to you, and immediately deed it to your buyer. This can cost more because of recording fees and document preparation, but it still offers a way to generate cash when you need it most.
One tried and true way to make long term investment property generate more income is to buy cheaper properties and to rent them out at high prices to marginal tenants. In short, you’re getting paid once as a return on your investment, and the extra rent compensates you for the extra management and maintenance effort these types of properties create.
Or, you could refinance and stretch out mortgage terms as far into the future as possible to reduce monthly payments. When you can refinance with money from a private lender, it can provide an opportunity avoid escrowing taxes and insurance payments, thus increasing monthly cash flow. But, when these payments fall due, you’re going to have to come up with the cash to pay them. In the meantime, you’ll have a little slack on a month to month basis.
Another way to increase income is to sell a partial percentage interest in the house to an investor. If you sold it for cash, you might be able to completely pay off the mortgage, which would generate immediate cash flow. Or, he could buy his share of the equity on terms with a monthly payment in addition to paying you to manage his share of the property. He’d get his share of the rents, and pay his share of the expenses.
Another variation on this theme relates to reducing costs of the house you live in. I once lived in a waterfront house that cost me more than my budget could afford. I sold it to an investor who took over my payments with zero down payment, then I leased it back for 5 years at half the payment. He got a super-leveraged deal with nothing down and all the write-off and appreciation. I got the good life for half price for 5 years. I used the money I saved to buy a lot more houses by taking over existing financing during this period.
Suppose you lived in an expensive house and wanted to harvest your equity without having to move. You could sell it to an investor at enough of a discount to bring it within the Section 121 residence sale tax exemption, and retain the right to continue to live in it at a deeply discounted rent until you had “used up” the equity you left on the table. For instance, If fair market rents were $2500 per month, you might sell it for $100,000 less than it was worth, then lease it back for $1000 per month for the next 8 years. Or if the payments were lower, you could repeat the above, but retain an Option to buy the house at a price that would give the investor his desired yield, while preserving the balance of the appreciation for your self.
In short, in all of the foregoing concepts, you’d be giving up part of your future to improve your present while reducing your debt or payments, and certainly the risk of defaulting on payments.
Tell me why you couldn’t do this where you live; or why you wouldn’t do it if you needed more disposable income each month?
