John Carlson (AKA “JohnBoy”) has posted this incredible article several times on our Discussion Forums:
This is for all those who live in the more expensive areas where homes are selling in the $300,000+ bracket. I made this post some time ago in response to someone living in California. She couldn’t figure out a way to buy in this price bracket, get a mortgage, and be able to rent with a positive cash flow. Maybe this will help with getting your creative juices flowing.
Whether homes in one area are selling for $20,000 to $40,000 vs. $200,000 to $400,000 in another area is irrelevant. Granted, a $200,000 house in some areas may not be able to throw off a positive cash flow as a rental, but buying houses to hold as a rental is only ONE way to invest in real estate.
Quite frankly, buying to hold as a rental property isn’t the best way for a beginner to get started investing in real estate. If you are just starting out and have limited capital to work with, you should be focusing on building cash first before worrying about buying rental property.
If you don’t have enough capital built up, how are you going to survive the tough times? Where would you get the capital to cover vacancies, repairs, evictions, pay the mortgage while a tenant lives in your property rent free until you can evict them and attorney fees, etc.? If you have been focusing on looking for rentals, wondering how you will be able to borrow $200,000-$400,000 on a home with no money and bad credit, you’re approaching this all the WRONG WAY.
It doesn’t matter where you live. No matter where you live, SOMEONE is having a problem with their property and they need help with finding a solution to solving their problem. STOP looking for properties or trying to figure out
- How you can make a positive cash flow, and
- Who would give you a loan to buy one of these for $200,000-$400,000
That’s a total WASTE OF TIME. It ain’t gonna happen that way.
You need to restructure your thinking process. You are NOT looking for properties. You are NOT looking for someone to give you a loan. You are NOT going to buy to hold as rentals. You are NOT to think in terms of you being an investor.
You DO NEED to start thinking in terms of being a PROBLEM SOLVER. You NEED to start looking for people with a PROBLEM. Become a PROBLEM SOLVER and look for people with a PROBLEM. People who are having a PROBLEM, are MOTIVATED. That’s where you find your deals.
Your job is to find the solution to solving the problem. If you find the solution to solve the problem, the deal will practically close itself. People who are having a problem are motivated. They NEED HELP. They don’t know what else to do. That’s where you come in. YOU will know how to come up with a solution that will solve their problem.
So how can you possibly make money on a $400,000 house when you have no money, bad credit, and no one will give you a loan? The answer is simple. You don’t NEED any of that stuff. The only thing you NEED is knowledge. If you possess the KNOWLEDGE in being able to solve problems pertaining to real estate, you can make money anywhere, anystate, anytown USA.
Let’s use an example
Mr. Downandout is having a problem. He owns this nice $400,000 home that he lives in. Mr. Downandout had only purchased his home a year ago. He had an excellent job, excellent credit, and was able to buy his home with minimal money down. He paid $410,000 for this only putting $10,000 down. His mortgage amount is for $400,000 at 8% interest on a 30-year loan.
His monthly payments are $2,935.06 principle and interest, plus taxes and insurance.
You know that even if Mr. Downandout just gave you his property and said, “Here, take it. I just want this headache to go away.” You know that you could never get $3,000 a month for rent when other homes in the area like this are renting for only $2,200 a month. So what can you do to make any money off this?
No matter who came along to buy this house, how much are they going to have to pay in payments every month to own this home? We already know that even if the buyer has excellent credit his payments are going to be around $3,000 per month plus taxes and insurance. So, no matter WHO buys a home in this price range, they will be looking at $3,000 + per month with excellent credit.
Now what about someone that has credit problems? Let’s say they are classified as a C, B borrower. They will have to pay a much higher interest on any loan they were to get. Let’s say they found a lender that would approve them with some credit problems.
They will end up paying somewhere around 10% to 12% in interest. So let’s use the middle and say they will be at 11% interest on a $400,000 loan. At 11% on $400,000 their principle and interest payment each month will be $3,809.05 for 30 years, plus taxes & insurance.
Since they were approved for the $400,000 at 11% we know they make enough income to qualify for the loan, otherwise the lender would not have approved them, right? So, it would be safe to say that anyone who is buying homes in this price range has a good income in order to qualify.
If they didn’t, no one would be buying these homes. But a lot of people are buying these homes everyday. In fact, there are so many people in your area that are buying these homes in this price range, that the market is so hot most homes sell as soon as they hit the market.
So let’s think about this for a second? Hmmmmm? If there are so many people buying in this price range and getting loans to purchase them, I wonder how many people out there could afford these payments, but they can’t qualify for a loan, or at least qualify for a loan even at 11%?
Do you think there are many people in that area that make the income to afford the payments? You think some of these people have some money in the bank they could put down a house if they found a lender to approve them for a loan? Count on it–they are out there.
Now, we know Mr. Downandout is having a serious problem. He may have lost his job; he may have been transferred to another state with his job; he may have purchased another home and now he’s stuck with two mortgage payments until he gets his old home sold, facing foreclosure, getting a divorce, incurred too much personal debt, etc.
Whatever the reason is, he has a serious problem–he needs out!
No problem. YOU come to the rescue. YOU are just the person that can help this guy out because you are a master problem solver. You can come up with a solution to solve Mr. Downandout’s problem today.
Mr. Downandout just wants out. He knows he can’t even list the property with a Realtor because he doesn’t have enough equity in the property to even cover the agent’s commission. By the time someone comes along and finally makes an offer, Mr. Downandout will be lucky to get what he paid for the house. Then he will have to pay some closing costs, cover the agents commission, and on top of all that, it may take 3 to 6 months before he finds a buyer.
That means for every month he is sitting on the house, he’s throwing away another $3,000+ each month on a mortgage he can no longer afford.
He needs to do something quick. If he doesn’t, he’s facing foreclosure; or if he has money in he bank, it’s getting depleted rapidly by keeping up with the payments. Then if he finds a buyer, he will have to come to the closing table with a chunk of cash just to get the thing sold.
YOU see Mr. Downandout’s problem. YOU know there is a solution to this problem and it will save Mr. Downandout thousands.
After you get face to face with Mr. Downandout and figure out the problem, you show Mr. Downandout a solution to his problem. You explain to Mr. Downandout that he can save thousands of dollars and put a stop to his bleeding cash flow problem by agreeing to let you take over his mortgage “subject to.”
By Mr. Downandout agreeing to this, it will save him from losing additional money each month waiting for a buyer to come along. It will save him from having to go to the closing with thousands of dollars in closing costs and enough to cover the agent’s commission because he won’t need an agent and won’t have any closing costs and won’t have to take a discounted price to sell his property because YOU will just take over his problem and end his nightmare right now.
Mr. Downandout is happy to get rid of his problem. He doesn’t even care about whether you have good credit or not. He assumes you must be responsible after listening to the way you were able to put together a solution that solves his problem so easily. Heck, Mr. Downandout is so happy he’s hugging and thanking you for coming along and saving his behind.
Next, you run an ad in the major newspapers:
OWNER WILL FINANCE
NICE 4bd/2.5ba Home
You find a buyer who has been dreaming of owning his own home for years. The buyer says he has $15,000 to put down. You say, “Well, I was really looking for $25,000 down, but I might be willing to work with that.” You tell the buyer that house is $435,000.
The terms are contract amortized over 30 years with a the balance due in two years. So with $15,000 down, the amount you would be financing is $420,000 at 11% interest plus taxes & insurance. So the payment amount from your buyer will be $3,999.76 per month plus taxes & insurance.
Your payments that were taken over “subject to” are $2,935.06 plus taxes & insurance.
$3,999.76 – $2,935.06 = $1,064.70 per month in positive cash flow.
The home was only a year old when you picked it up. So at the end of two years, your loan balance will be around $389,120.55.
Your buyer will owe around $416,000.13 at the end of two years when the contract comes due.
$416,000.13 – $389,120.55 = $26,879.58 additional profit to you at closing.
So you will have made:
$15,000 up front from the buyer’s down payment
$1,064.74 x 24 months = $25,553.76 in positive cash flow
$26,879.58 at closing when your buyer refinances to pay off the contract
That’s $67,433.34 total profit over two years from buying a house with no equity, no money, no credit and reselling it on contract. That’s an average monthly profit of $2,809.73 over two years.
So you see, you don’t have to just look for properties to hold as a rental. If you read this site everyday, the How-to Articles, Money-Making Ideas, Success Stories, and the discussion forums, you will discover many other ways to buy property no matter where you live and no matter what price range the homes are in.
The price range only reflects a number. Those numbers are the affordable prices that property is selling for in that area. It doesn’t matter how many zeros you add to the numbers if those numbers reflect what that market is getting.
Forget about the numbers and focus on people that have a problem. Forget about thinking in terms of becoming an investor, think in terms of being a problem solver. Search for the problems, figure out a solution to solve the problem and the deal with practically fall in your lap and close itself, as long as YOU know what you’re doing and have the knowledge to get it done.
Now get busy and educate yourself. Then take ACTION and go get a deal.