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CRE Online > How-To Articles > Article
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How to Create a Real Estate Cash Cow by William Bronchick, J.D. |
Is your real estate bringing you enough monthly cash flow? Is landlording draining you of energy? Is property maintenance depleting your bank accounts? Are you open to new and safe methods of bringing huge annual returns on your cash? If you answered "Yes" to any of these questions, please read on . . .
The Dirty Little "Secret" of How Bankers Make Money
Actually, it's not really a secret at all. In fact, bankers have been doing this for over a hundred years. Bankers make money by borrowing at low interest rates, then lending at higher interest rates. You deposit money in a savings account and they pay you 3% interest. They lend the same money back to you for home loans at 7% or more. The "spread" between the interest rate they pay and the interest rate they collect amounts to incredible profit!Consider this simple example: You are shopping for rates to refinance your home loan. A lender quotes you 7% interest. On a $100,000 loan, the monthly payment (amortized over 30 years) is about $665 per month. However, at the last minute someone at the bank decides that the color of you underwear isn't right, so your interest rate changes to 7.25%. Your monthly payment will now be $682.
You aren't terribly upset, since, after all, what's $17 per month? What you don't realize is that the extra ¼ percent amounts to over $6,000 in additional interest!
An Incredible Opportunity in Today's Market
We are in a unique time in history: real estate prices are rising, yet interest rates are dropping. This means that those who can borrow at low interest rates and loan at higher interest rates are making a bundle! Combine the interest rate "spread" and the "buy low, sell high" principle and your profit grows exponentially.Enter Wraparound Mortgages
Consider this example: Susie Seller buys a $90,000 house for a 10% discount ($81,000). She borrows $81,000 from First Federal Financial on a favorable 8% thirty-year loan. Her principal and interest payments are roughly $594 per month. She sells the property to Barney Buyer on an installment land contract for $100,000 (about 10% above market), taking $10,000 down and carrying the balance of $90,000 at 11% for thirty years. She does not pay off the underlying loan, but rather collects payments ($952/month) from Barney on a monthly basis and continues to make payments on the underlying loan.She collects $358/month cash flow on the "spread" for 30 years!
This is a basic example of a "wraparound." The existing loan remains in place, and a new loan is created which wraps around the existing loan. Susie makes a profit on both an interest rate spread and a markup on the purchase price.
People with poor credit rarely question the price of the property (especially since they do not have to qualify for the loan). When the new buyer pays off the remaining balance, Susie pays off the underlying loan. In the meantime, she makes monthly cash flow on the spread between the interest she pays and the interest she collects. This cash flow is not offset by property management, maintenance and the aggravation of tenants. There are no vacancies, calls from tenants, city code violations or other headaches to deal with. You can collect your monthly checks for thirty years, or you can sell your "wrap" note for cash!
You Don't Need Good Credit or Huge Sums of Cash
If you don't have the ability to qualify for low interest rate loans, not to worry! You can use partners who have good credit and income. You can take over existing loans with low interest rates, then re-sell the properties on a "wrap." There are multiple ways to make a profit on "wraps," and you don't need credit, provable income or bundles of cash.If you are looking for an alternative to landlording or a new way to create more cash flow, this is the ticket....
About the Author . . .
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and confounder of the Colorado Association of Real Estate Investors. Bill specializes in all forms of asset protection and is the author of several great home study courses, including:
Bill Bronchick is also the host of our Legal Corner.
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