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Real Estate Financing: The Key to BIG Profits

by Ernest Tew   
Many years ago, I made an important discovery: The most important thing we can do to improve our income, net worth, and our lifestyle is to do things today that will result in an income stream for several years into the future.

When money is received in a lump sum, such as a salary, a fee, or from the sale of an asset, a part of it usually goes for taxes, much of it is spent, and little or none is saved. As a result, we must continue to work to get more cash flow.

This habit of "doing things today that will provide an income stream for years into the future" has served my family well. It has allowed us to sample some of the finer things in life and the financial freedom to do the things we want to do.

The recent sale of a mortgage reminded me this important discovery. After providing a net income of $2,500 a month for most of the fourteen years we held the mortgage, it was sold for $363,000 cash. The remarkable thing about it is that our original investment was only $20,000.

Negotiate for great terms

About twenty years ago, we purchased a rental property from an owner who was tired of managing and maintaining the property. (Although this particular property involved apartments, the results could be the same with mobile home parks or other rental property.)

During my discussions with the owner, it became obvious that he was more concerned with getting his price of $250,000 than he was with the terms. So we agreed to pay his price while negotiating better terms. We paid the seller $20,000 down and assumed his current mortgages totaling $71,000.

We gave him a mortgage for the balance of about $159,000. He agreed to payments of $1,000 a month including 6% interest for seven years, at which time the payments would increase to $2,000 per month. After making payments of $2,000 for a few months, we were able to convince him to reduce the payments to $1,200 in return for increasing the interest rate from 6% to 7%.

Improve the value of the property

In the meantime, after doing some fix-up work and raising the rents, we sold the property for $509,000 with $50,000 cash down. The down payment was enough to recover our entire investment, including fix-up work. The buyer gave us a $459,000 "wrap-around" mortgage, payable $4,700 per month, including 10% interest.

The wrap mortgage was put into a trust for the benefit of my family. For fourteen years, the trust collected $4,700 a month, including 10% interest. It paid $2,200 a month, including 7% interest, on the smaller underlying mortgages.

Because the payables were being reduced at a faster rate than the receivable, the equity in our wrap mortgage actually increased each month, even after the trust received a net cash income of $2,500 per month.

Go back to the seller for better terms

Last year, I convinced the seller to satisfy his mortgage (then about $104,000) on the rental property and substitute a mortgage on our home, leaving the payments and interest rate the same. Once that was done, the wrap mortgage became a first mortgage, making it much easier to sell. The trust recently sold at a small discount and collected $363,000 in cash.

Needless to say, the income from the mortgage was far greater than the income we earned while managing and maintaining the property.

After paying off enough mobile home loans and other debts to offset the drop in monthly income, the trust still had more than $200,000 cash left over. It was reinvested in other profitable ventures, which are expected to further increase the trust's income and equity growth.

Those who take the time to learn the business will find that the combination of rental property and creative financing is a great way to create wealth. While the experience with this particular property may seem complicated, keep in mind that steps were periodically taken to make the investment more profitable.

It's okay to go back to a seller and ask them to change the terms of your agreement...as long as you can show them how the change will benefit both parties.

About the Author:

Ernest Tew majored in real estate at the University of Florida and has been involved full-time in real estate investments since 1960. He has been actively involved in the acquisition, development, management, and marketing of more than $200 million worth of real estate.

He was president of the Gainesville, Florida, Board of Realtors in 1965, the youngest Realtor to hold the presidency at that time. In 1983, he was one of only seven in the country to receive the Academy Certified Exchanger designation from The Academy Network.

In 1989, he received the Golden Eagle Award, the highest award given by the Academy, for the creative way he structured the purchase of the 20 story Founders Tower office building in Oklahoma City, one of the best known landmarks in the state.

 
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