How to structure a killer real estate Deal

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Structuring a deal (owner carry, private lending and buying right)

Do you want to win in real estate? Find a great property, if you want to win BIG in real estate, find a great property and structure the purchase that best accomplishes your goal.

I just got off the phone with an investor who wants to generate $2000 per month of positive cash flow. We discussed homes in A and B Class neighborhoods that generate good appreciation and can be very profitable when you sell, (In fact this is where 90 % or millionaires create there wealth in real Estate is with this massive influx of cash when they sell these great equity build up properties). The trade off is these homes tend to be higher priced and have higher property tax and therefore tend to cash flow less.

This investor however has stated that his number one objective is strong positive Cash flow. So  cash flow needs to be the theme of his investments. Cash Flow properties tend to be properties that are B- and C class properties in B- and C class neighborhoods. These properties tend to  have higher rent to price ratios. In his case he rather make money on the front end with cash flow as opposed to the back end with equity growth.

So what do Cash Flow investors look for in a property?

·         Properties that have a high rent to price ratio ( most people look for this)

·         Properties that have been recently renovated so it can provide sustainable returns that are not burden with unexpected expenses ( I trust most people look for this)

·         Properties that may be in the path of progress (many forget to even consider this)

Structuring the deal for optimum cash flow

Real estate investing means structuring deals that optimizes your investment success. Think about creating win win situations, you are the savvy real estate investor. You think outside the box and create great deals that your buyers or sellers will find appealing. Often what works good for you will also work well for the other party. Everyone loves a great deal.

Seller financed properties are the seasoned investor’s deal of choice. Seller financing is a wonderful thing, but what exactly is seller financing? This is where a seller owns a property and he plays the lender. Instead of going to a Bank the seller plays the bank.

This may happen in one of two ways:

·         Currently the seller does not have a loan on the property: The property is owned free and clear without a loan on it. This gives the flexibility for a seller to act as the bank and instead of paying the bank; the monthly payments are paid to the seller. Why would a seller want to do this is what I often get asked: simply stated a seller who is not in need of immediate cash to buy a new property may prefer to play the bank. They get to make much more money than the cost of the property because they also get the interest payments from you. Plus they have income for the next 15, 20 or even 30 years.

·         Subject to: The seller who has a mortgage on it may also sell the property to you. In this case you purchase the property (subject to also known as a wrap) the seller’s mortgage. The seller pays their mortgage from the payment you pay to them. For example Let’s say the seller has a $50, 000 mortgage balance and a $500 monthly payment. You buy the property from Seller for $100,000 and you have a $1,000 monthly payment. So you pay $1000 to the seller, he pays $500 to his lender and he pockets the remaining $500 per month. This is great deal for both of you. Writing these subject to deals may require the help of an attorney to draft this correctly to make sure seller indeed makes his payment to his lender so doing this correctly to keep things safe for you is paramount. But done correctly is very advantageous so a couple hundred dollars for an attorney to put a great win win deal together will reward you both very well.

Where to find seller financing?

Simply stated you ASK. Most people do not openly offer or market seller financing. Most people think they prefer to cash out when they sell because that is the norm and simply do not think of anything else. This is where you, the savvy investor can do your thing and create a win win.

There are countless reasons why a seller would be interested in doing a seller financed deal, but you have to look for the win and most importantly you have to ask.  You have a 50/50 shot if you do ask. Let’s face it, if it were easy everyone would do it. It is not difficult, however it does require a bit of effort and diligence on your part. But this effort is rewarded big-time. To be a successful investor you have to be able to look for and offer up a win win for both parties.

A great example of structuring a deal

 Here is a deal I structured with the purchase of a 4 unit building. I wanted to purchase a property which through researching tax records I could assume did not have a mortgage on it. I approached the seller and offered to purchase it from him with only a 5% down payment and asked him to carry the mortgage. (Side note: the sellers first response was he would never sell this property as it was his first and favorite investment, but I persevered and he not only sold it to me, he gave me terms, so keep focused and preserver). After he started warming up to the possibility of selling, he of course was asking why he would want to carry financing on a property he did not even want to sell, so it was up to me to create the win win (in advance).

Win for seller:

  • Get a monthly residual check in the mail with no management headaches.

  • By deferring the lump sum money of a sale he was not subject to large capital gains and he would realize a larger net proceed as he could keep more of his money. (this proved to be this seller's hot button)

  • He not only received the money from the sale of the property, he also received the interest on the loan he gave.

  • Many investors who are reaching old age no longer want to deal with the headaches of property management or even managing the properties. They understand your motivations as an investor so they are open to creative deals.

Win for the buyer (me in this case)

  • You Save approximately 3% in cost of acquiring the loan from a bank by avoiding all the bank fees that you would pay.

  • You are able to get a loan that often you may not be able to qualify for through regular bank financing

  • The loan does not show up on your credit report preserving your income to debt ratios and maintaining you good credit scores.

Private money financing

This is a great investment vehicle for both parties. People with strong cash positions can borrow money at a premium rate without having to get their hands dirty and research properties. They let people do the heavy lifting and bring deals to them. They are happy to listen to great opportunities. As an investor it is your job to show the private money lenders that you have found a great investment opportunity and you can bring a win win to the table. When you do this they are eager to keep lending you money.

Private Money financing Solves problems for many buyers and sellers

·         Often properties are not suited for a loan due to deferred maintenance and the house will not qualify for a conventional home loan. This is a perfect investment for the person looking for a value play. And often requires private money to get the deal done.

·         Great investors with lots of experience own lots of properties and have trouble financing more deals due to banking rules of only allowing so many home loans. Seller financing and private money lenders love financing these investors.

·         Look for the win and ask for the deal. When you think outside the box you will find many areas that buyers and sellers can both benefit from private money financing

Think outside the box and create a plan

You can see from the above examples there are many creative ways to be purposeful and invest even when you do not have the funds to invest. You want to think outside the box, know what you want to accomplish, be confident and do not take no for an answer.

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