The Case for Cashflow (and Why You Should Always Make 2 Offers)
Ya know, it seems that everybody who gets into REI sets their sights on flipping houses – whether they want to be a fix & flip rehabber like you see on TV or a wholesaler. And don’t get me wrong, I’m both… and I’m a firm believer that earning those chunks of cash through flipping houses is far better than almost any other way I can think of to make great chunks of money.
But, that’s not how you build wealth and stability in your business and in your life…
When I first started investing I really didn’t care about cashflow. Young and dumb, I only cared about creating a spread between what I could get a property under contract for and what I could quickly flip to another buyer for. The idea of wholesaling appealed to me from the beginning, and like a drug I was addicted to the quick payouts and ability to “invest” with no money or credit.
Two years into my full time wholesaling investment strategy I decided to take some time off and just enjoy life. I was averaging $30,000 a month at the time and knew I could just flip a house quickly if I needed any extra money.
HUGE, HUGE mistake.
During that same time the market crashed (end of 2006) and I couldn’t do a deal to save my life. I was burning through all my savings and realized that I was never truly “investing” but instead just had a full-time job wholesaling. Now that all the cash buyers dried up I was out of a job and panicking.
I instantly changed my philosophy on investing and began focusing 80% of my time on creating cashflow through long term buy & holds. The goal was to make offers to motivated sellers where I offered them two choices. The first choice was my Maximum Allowable Offer (MAO) at wholesale pricing, which typically was calculated by taking the current market value of a property and subtracting out estimated repairs. Then I would take that number and multiply it by 70%, and finally subtract out what I wanted to make as a wholesale fee and that would be my cash purchase price. (I will walk you through the numbers in a moment.)
The second offer would be my “terms” offer where I would make a negotiated monthly payment at zero interest rate but pay sellers asking price (or sometimes above the seller’s asking price). I always tried to stretch the length of the agreement out 10 years or more, which would allow me plenty of time to decide what I wanted to do with the property. Now this only works if they have decent financing in place or if they own the property free and clear.
Here is an example of my two-offer approach on a property where the motivated seller owns a house currently worth $100,000, which he purchased 10 years ago for $50,000. His current mortgage costs $485 a month and he currently only owes $30,000 that’s left on the loan
Initially I would offer $56,000 cash for the property, which is my Wholesale MAO. I calculated this number by taking the current market value ($100,000) and subtracting out the estimated repairs ($15,000 – I just made this number up for the purpose of this exercise). Then I would subtract out what I would want to make as a wholesale fee, which in this case is $5,000 then multiply the final number by .70 (70%). This gives me $56,000.
If the seller started back peddling, I would slowly allow them to talk me into paying more in exchange for the seller carrying back part or all of a note at 0% interest. My goal is to have immediate cashflow and allow amortization to occur and help me quickly build equity.
My second offer would be a “terms” offer where I would pay $100,000 or even $105,000, but the seller would have to carry back $90,000 – $95,000 at 0% interest.
I would offer $10,000 down and take over the payments of $485 a month (including taxes and insurance) for the remaining balance of the original loan. (This is called a Subject To transaction because I am taking over the seller’s property “Subject To” the original loan. This doesn’t mean I am assuming the loan, I’m just making payments to the lender on behalf of the seller.
On top of paying the $485 per month, I would even offer to pay $100 a month directly to the seller just to sweeten the deal.
Let’s look at why I would do this
My cash invested would be $10,000. My goal would be to quickly get the original seller out of the property, clean it up and rent it out for full market rent, which for this example, is around $750 a month.
I would be positive cash flowing by $165 a month after all expenses. My first year or two I would be applying all the money the property earned to pay down the underlying mortgage, and eventually it would get paid off and my monthly cashflow would jump by $485 a month minus whatever the taxes and insurance cost each month.
Plus, over time I would be raising the rent on my tenants and increasing cashflow there as well.
In theory I could do as many of these deals as I could find, and even if I didn’t have the $10,000 to put down, I could get creative and break the $10,000 into equal monthly payments and pay it over the first year or year and a half out of the positive cashflow the property produced!
Over time, you would literally have enough cashflow to stop working all together and just live off the income the properties produced. This is how you get RICH by investing in real estate and is the only true inviting technique that produces wealth and not just a paycheck!
Yield is everything in the CASHFLOW business. My yield is HUGE off of just a $10,000 investment and a little creativity.
Now get out there and start making offers to motivated sellers that have equity and decent financing. I know you may think they are not out there, but they are. You would be surprised at how many FREE and CLEAR properties there are… you just have to go hunting for them. Even in areas decimated by foreclosures, you can still find solid deals if you learn how to market for them.
To your continued success,
How did you do it?
Is this the way you built your business? Tell me about it in the comments section below.
Tags: Cash Purchase Price, Current Market Value, MAO, Market Rent, Maximum Allowable Offer, Offers, Subject To, Wholesaler Fee
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