Why Creative Finance is Better Than Buying Traditionally


11th February 2024 | 00:11:41

Why Creative Finance is Better Than Buying Traditionally

Why Creative Finance is Better Than Buying Traditionally

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TLDR: Pace and Eric discuss a sub two deal where Pace acquired a fourplex subject to the existing mortgage, with no money out of pocket. A private money lender provided $81,000, secured against the property, at a 9% interest rate and a 5-year balloon term. The seller received $52,000 in cash and agreed to a silent second mortgage with no payments for 10 years. Pace's total cost, including assignment fees, was $656,000. The property generates $4,350 in monthly rent, resulting in a positive cash flow of $691.65 after covering the mortgage, taxes, insurance, and private money lender payments. Pace anticipates appreciation, tax benefits, and paydown over time.
Analyzing a Sub2 Deal: Unveiling the Strategies for Profitability
In the realm of real estate investment, the concept of sub2 deals has gained significant traction among investors seeking creative financing strategies. This approach involves purchasing properties subject to an existing mortgage, often referred to as a "silent second," and leveraging the seller's financing to acquire the asset with minimal upfront capital. To delve deeper into the intricacies of sub2 deals, let's dissect a specific transaction that exemplifies the mechanics and potential profitability of this investment strategy.
The Subject Property: A Fourplex with Promising Cash Flow
The property in question is a fourplex situated in a desirable neighborhood with a stable rental market. The seller, Steven, was motivated to sell due to personal circumstances and was open to creative financing options. After extensive due diligence and market analysis, the buyer, Pace, recognized the property's potential for long-term appreciation and positive cash flow.
The Purchase Structure: Leveraging Silent Second Financing
Pace, the savvy investor, structured the purchase as a sub2 deal, utilizing the seller's financing to secure the property. This strategic move allowed him to acquire the asset with minimal upfront cash, preserving his capital for other investment opportunities.
The purchase price for the fourplex was $627,966, with a remaining balance of $575,969.69 after factoring in the $52,000 down payment provided by the seller. This remaining balance was financed through a subject-to loan, where Pace assumed the seller's existing mortgage at a favorable interest rate of 2.9%.
The Cash Flow Advantage: Generating Positive Income from Day One
The fourplex generated a monthly rental income of $4,350, providing Pace with a steady cash flow stream from day one. After deducting the monthly mortgage payment of $3,508 (including principal, interest, taxes, and insurance) and the private money lender's payment of $67.50, Pace was left with a positive cash flow of $691.65 per month.
Unveiling the Multiple Profit Streams: Appreciation, Tax Benefits, and Equity Buildup
Beyond the immediate cash flow, Pace recognized the property's potential for appreciation over time. Based on historical data and market trends, he projected a conservative 5% annual appreciation rate. This appreciation would translate to a substantial gain of approximately $200,000 in just five years, adding to his overall return on investment.
Furthermore, the sub2 structure provided significant tax benefits. By assuming the seller's existing mortgage, Pace inherited the lower interest rate, resulting in substantial tax savings. In the first year alone, he projected a tax savings of $66,972, offering significant financial advantages.
As Pace continued to make monthly mortgage payments, he would gradually build equity in the property. Over time, this equity buildup would further enhance his investment portfolio, providing a valuable asset with the potential for future sale or refinancing.
The Role of Private Money Lenders: Facilitating Creative Financing
In this transaction, Pace partnered with a private money lender, Debbie Lou, to secure the $81,000 needed for the down payment and closing costs. Debbie Lou, recognizing the potential of the investment, agreed to provide the loan at a 9% interest rate with a 5-year balloon payment. This arrangement allowed Pace to acquire the property without depleting his personal savings.
The Collaborative Effort: Assigning the Contract and Facilitating the Transaction
To initiate the deal, Andrew, a skilled cold caller, reached out to the seller, Steven, and successfully locked in a purchase contract. Subsequently, Andrew assigned the contract to Eric, another seasoned investor, who brought Pace into the transaction.
Eric, recognizing the deal's merits, facilitated the assignment process and coordinated the closing. For his efforts, Eric received a $5,000 assignment fee, a testament to the collaborative nature of sub2 deals and the ability for multiple parties to benefit from a single transaction.
Conclusion: Unveiling the Power of Sub2 Deals
Through this detailed analysis of a sub2 deal, we have illuminated the intricacies of this creative financing strategy, highlighting its potential for generating cash flow, appreciation, tax benefits, and equity buildup. By leveraging the seller's financing, Pace was able to acquire the property with minimal upfront capital, unlocking the door to long-term profitability.
The involvement of Andrew, Eric, and Debbie Lou demonstrates the collaborative nature of sub2 deals, showcasing how multiple parties can work together to achieve their investment goals. Whether you're an experienced investor or just starting out, understanding the mechanics and potential rewards of sub2 deals can open up new avenues for real estate success.
Q: How did you structure the private money loan for this deal?
A: The private money lender provided $81,000, secured against the fourplex property. The loan terms include an interest rate of 9% and a 5-year balloon payment. The lender receives $67.50 in monthly interest payments, while the principal balance of $81,000 remains outstanding until the end of the loan term.
Q: How does the subject-to financing work in this deal?
A: The seller agreed to carry back a $52,000 silent second mortgage, which means that the buyer assumes the existing mortgage of $523,966 at a rate of 2.9%, resulting in a monthly payment of $3,508. The buyer does not make any payments to the seller on the silent second mortgage for ten years.
Q: What are the different ways you make money on this property?
A: There are four primary ways in which money is made on this property:
  • Cash Flow: The property generates $4,350 in monthly rental income. After deducting the monthly payments for the subject-to mortgage ($3,508), private money loan interest ($67.50), and property taxes and insurance, the net cash flow is $691.65 per month.
  • Appreciation: Over time, the property is expected to appreciate in value. Based on an average appreciation rate of 5% per year, the property's value is projected to increase from $627,966 to $829,583 in five years. This appreciation represents a potential gain of $200,000.
  • Tax Benefits: The property generates tax benefits through depreciation and mortgage interest deductions. In the first year, the tax savings are estimated to be $66,972.
  • Paydown: As the buyer makes monthly payments, a portion of each payment goes towards reducing the principal balance of the subject-to mortgage. Over time, this paydown builds equity in the property. After five years, the buyer will have paid down approximately $60,000 of the principal balance.
Q: How did you find the private money lender for this deal?
A: The private money lender was found through networking and connections within the real estate investment community. It is important to build relationships and trust with potential private money lenders to access their capital for investment opportunities.
Q: Is it possible to make money in real estate without any cash, credit, or credentials?
A: Yes, it is possible to make money in real estate without any cash, credit, or credentials. Creative financing strategies, such as subject-to deals and private money loans, can be used to acquire properties without the need for traditional bank financing. Additionally, working with experienced mentors and partners can provide access to knowledge, resources, and opportunities that can help aspiring investors succeed in real estate.

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11th February 2024

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