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It Takes Money to Make Money?

by Lonnie Scruggs   

How many times have you heard someone say, "It takes money to make money"? I've heard that saying all my life, and I still hear it today. And there was a time when I didn't know any better and believed that saying.

Thankfully, I learned many years ago that you don't need money to make money. What you need is knowledge and education. Let me illustrate my point by several examples.

He didn't know: "It takes money to make money"

Harry was on his way to Kansas City to attend a two-day investing seminar. On the plane ride, he read a book explaining how to buy and sell mobile homes. When he arrived in Kansas City, he rented a car. The driver for the car rental company was taking Harry to pick up the car and in casual conversation learned that Harry was in real estate and was there to attend a seminar.

The driver told Harry that he had been trying to sell his house and couldn't find a buyer. Hearing this, Harry asked some questions and found out it was a double wide mobile home on an acre of land just outside of Kansas City. The asking price was $20,000, which according to the seller, was a good fair price.

Harry told the seller he would see if anyone at the seminar would be interested in buying, and if so, how negotiable would he be if Harry could find a buyer. The seller said he could do better if it was a quick cash sale. So Harry got the seller's phone number and told him he would see what he could do.

That night, Harry called the seller and told him that he had a couple of investors that might be interested in a quick cash deal, but they were only willing to pay $10,000. Harry explained how hard it was to find investors for mobile homes and what poor collateral they were. The seller said he was sure they couldn't drop the price that much, but would talk to his wife.

Later, the seller called Harry and said the best they could do was $11,000. The next day in class, Harry asked the group if there was anyone who would like to buy a double wide on an acre of land. The price was $20,000, and he would arrange financing with a reasonable down payment.

Three hands went up. One couple had $2,000 to put down, one couple had $1,000, and the other couple didn't have anything. Harry agreed to sell to the couple with $2,000 and carry a note for $18,000, payable $480.66 per month, 48 months at 12.75% interest. The question came up, "How did you arrive at 12.75% interest?" Harry said, "Oh, that's the industry standard."

Then he asked the group if there was anyone who wanted to buy an $18,000 note for $12,000, which would yield 36%. And he got a buyer for his note. Now, let's sum all this stuff up and figure out what happened.

The seller received $11,000 cash for the mobile home. Harry sold the home for $20,000 to a couple in the class, received $2,000 cash and a $18,000 note from his buyer. Then Harry sold the note for $12,000 cash. Harry walks away with a $3,000 cash profit in this deal and never put up a dime. (But Harry, it takes money to make money; don't you know that?)

Bob didn't know: "It takes money to make money"

In this next example, I agree to put up the money and Bob agrees to do all the work and we split the profits. Let's suppose that Bob knows how to find a mobile home, make any repairs needed and find a buyer. So Bob finds a fixer-upper that can be bought for $1,000, makes the repairs, and gets it in good shape for resale.

The material, lot rent, and advertising adds up to $1,000, so I now have $2,000 invested in this home. Bob sells the home for $6,000, $500 down and $200 per month for 32 months. Our agreement says I keep the down payment, and I will receive the monthly payments until I have all my money back at 18% interest. Once I have received all my money with interest, we split the remaining payments 50/50.

By keeping the $500 down payment, I now have $1,500 left in the home. At $200 per month, it will take eight payments to return my $1,500 plus interest. When we reach that point, we each get $100 per month for 24 months.

So Bob will make $2,400 without having to put up any money, only a little time and work. Suppose Bob could average one deal a month like this, what kind of income would he have in a year or two? And he has no money in the deal.

Now, suppose after several deals like this, Bob has enough money to buy the home with his own money. So he buys a mobile home with his money, does the repairs and sells it for the same price and terms. Then suppose Bob agreed to sell me that note at a 50% yield. How would he come out?

If he sells me his $5,500 note payable $200 per month for 32 months at a 50% yield, that means I will pay him $3,500 for his note. Bob received $500 down payment, so he now has $1,500 left in the note.

If I pay him $3,500 for the note, he's just made $2,000 in cash, and I have a note with a 50% yield. Bob started out with no money, and you just can't do that. At least that's what I've heard.

You can't really do this. It takes money

Let's take this one more step and do some more "supposing." Suppose I don't have $3,500 to buy Bob's note, but I understand notes, financing, and the time value of money. (I learned this going to seminars and reading books.) Suppose I knew an investor who does have money and buys mobile home notes.

What if I had an option to buy Bob's $5,500 note for $3,500 and agree to sell that same note to an investor at a 25% yield. If I could do that, my investor would pay $4,637 for that note, and I would make $1,137 in cash without putting up any of my money.

Can you really do such things? Nah, it takes money to make money. Guess I'll just have to start saving some money and open a bank account. My bank is paying 5.35% now on two-year CDs, shouldn't take long until I have enough to buy one of those mobile homes.

About the Author:

lonnie scruggsLonnie Scruggs owned, rented, and managed his own rental properties for 24 years. He became a burned-out landlord, sold all his rental properties and started investing in discounted notes. He soon developed his own specialty in used mobile home notes, with little competition and earning high yields.

Lonnie tells all and shares his inside secrets in his book: Taking the Mystery out of Money

 
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