Interest amounts to rent on money. We've already seen how the power of compound interest creates wealth. To the person renting out money to others, there's little doubt that interest is a valuable source of income. On the other hand, when one is a borrower, interest not only increases the costs of doing business, but also increases the risk of default. Let's consider interest from the standpoint of someone who is trying to sell or buy a house to see if we can't gain some perspective on the subject.
At the same time that compounding interest is creating wealth for a lender, it is creating poverty for the borrower. It follows therefore, that, when a borrower can avoid paying interest, all that saved interest cost can be invested to compound its own return for the benefit of the borrower who avoided paying it. The name of the game is to try to escape the obligation to pay interest on debt that a seller carries back. The place to start is with your own attitude. It's immoral to pay Interest. It's inefficient. It delays you many extra years in your quest to build wealth. The lender isn't entitled to it!
First of all, where does it say that a lender is automatically entitled to interest payments? Brokers are quick to point out that the internal revenue code will impute interest to transactions where no interest is specified. This has nothing to do with the fact that nobody is required to charge interest on a loan. As a matter of fact, the vast majority of money in America is loaned out at zero interest!
If you don't believe me, take a quick glance into your billfold and tell me how much interest you are receiving on those Federal Reserve Notes you (hopefully) see in there? What about your checking accounts; how much interest are they earning? What about those free credit cards that you pay off prior to the interest being charged? How about money paid out as Option consideration? How much interest do family members pay each other for loans? How much does the IRS pay in interest on money that has been withheld from paychecks for the following year's income taxes?
Don't be brain-washed into automatically paying interest on loans that are offered by sellers who offer to provide financing on their home sales. Bear in mind that the seller is much more interested in selling to someone who will make the mortgage payments promptly when due than on the specific amount of interest being paid in.
When a person offers to pay off the equity in a short period of time with high payments, that's often all it takes to motivate the seller to accept zero interest financing. Let me give you an example:
The house was vacant. All boarded up. Standing forlorn waiting for a buyer. The courthouse records revealed that the seller, who lived across the country in a distant State, had bought the property at a foreclosure sale for $23,500 a few years before. He'd sold it once for $63,000 on a contract, but, after neglecting the property, the buyer had defaulted on the loan, and the seller had gotten it back.
Now, in its dilapidated condition, the house was only worth about $52,000, but he wanted to sell it for the same $63,000 he'd try to sell it at that price. It stood there unwanted and unlisted. I decided to make a telephone call to the owner. I discovered two things. One of them was that the disabled unemployed owner was going to retire on Social Security in 1 0 years. He wanted a minimum of $500 per month in the interim to tide him over. And he had a real emotional fixation on getting $63,000 for the house. I set about trying to meet these needs.
I offered him two choices. (1) I'd either to prepay one years rent to him of $6000 to be held in escrow and used to repair the house; and 108 payments of $527.78 per month commencing in 12 months. Or (2), I'd make him 120 payments of $500 per month starting immediately and pay for the repairs out of my own pocket. He took the later offer. (Incidentally, it always pays to offer a choice when negotiating.)
I started running 'fix up for down payment' ads in the local paper and found a young couple who agreed to a 10 year loan at 10% interest only, to balloon at that time. I under-wrapped the purchase price, selling the property for less than I paid for it. The purchase money loan was for $53,500. Each month they paid me $445.83 which I dutifully passed on to the seller along with $54.17 of my own money. Let's look at the math:
At the end of 10 years, I will have spent $6500 of my own. money in negative cash flow. The house will be completely free and clear. Because all of the buyers' monthly payments will have gone to make my own payments to the original owner, at the time of the final balloon payment, they will pay me $53,500 in cash.
When you think of all the ways a person can make money with real estate, loan amortization is often the most overlooked factor because of the time involved with conventional financing. But with your own financing wrapped around zero interest financing, amortization can generate a profit even when you have to sell for less than you're paying for a property. It only takes one of these to pop every year or so to pay a lot of your living expenses.
