How to buy a home or house and get cash back at close of escrow
That's right, buy Not Only with No Cash, Get Cash Back at Close of Escrow!
To refer to this section as real estate investment is actually a misnomer. What we will be discussing is actually no investment at all! And in one case, you could almost call it reverse investment because instead of putting money into the transaction, absolutely nothing down, you will actually be taking money out at the close of escrow while still owning the property. That's right, You actually get Cash back at the close of escrow. In the long run, I think this is the section that will be of the most benefit for the most people. You will learn a number of ways to buy property without investing one cent and without using any of your present assets as collateral. The thing you need to keep in mind, is that although, these methods will work for anyone, they will not, necessarily, work for all properties or with all sellers.
During real estate negotiations, there is a common
saying, "You give me my price, I'll give you your
terms.". When buying a property with nothing down, you need to
take the attitude that your main concern is long term
profits not short term gain. The
reason for this is that if the seller is giving you such great terms that you
don't have to put a penny into it to buy it, chances are that he will, at least,
want a reasonable price for his property. The
flip side of the coin is that if you can provide a sizeable chunk of cash, there
is a good possibility that he will be much more flexible on price.
But, since we are assuming that you do not have the cash to work with,
your main criteria for a purchase should not be price.
Although, at times, you will find an exception to this rule, (ie. a
property that is worth maybe $80,000 that you can purchase for $65,000 AND get
terms) the point I am trying to make, is that if you
insist on waiting for the great price, for every property you buy, you will
probably pass up nine that over a period of a couple of years could have made
Although, everyone has their own criteria for
determining their investment strategy, here is what I think is important:
1) Price I don't feel that it is necessarily
important that you purchase the property substantially below market value, but I
do think it is definitely and obviously important that you don't pay too
The main concern here is that it does not
cost you anything to buy it.
Flow It is important that the rents you
receive on the property are roughly equal to or greater than the mortgage
payments plus taxes and insurance. Many
people feel that they can afford a negative cash flow of $100 or $200 per month
(i.e. monthly expenses that are $100 or $200 dollars more than the rent they
receive). This, in the long run,
limits you because there are only so many properties you can afford if they are
each costing you $200 per month. Also,
I've seen colleagues who thought they could handle these kinds of
"negatives" only to find that they had buried themselves financially
and eventually lost everything.
4) Area For anyone who has ever taken a
real estate course, this comment is going to be a shock.
I don't think location is that important. In
real estate school we are taught that the three most important features of a
property are "location, location and location." But I'm a firm
believer that any property is a good investment regardless of the location IF
YOU GET THE RIGHT PRICE AND TERMS!
The most important thing you should consider when buying a
property is will it
pay for itself? Even if
you don't buy it for ten or twenty thousand below market, if it pays for itself,
it is a gold mine. Why?
Even though you haven't made a dime yet, you are immediately reaping the
many tax advantages that are still available to the private investor.
Also, as I mentioned earlier, your goal should be long term profit. There
is hardly any area in the U.S. that, with the exception of normal business
cycles, real estate does not consistently go up in value.
Different areas appreciate at different rates, but it is usually going up
right along with rents. For the
smart investor, that creates a huge opportunity...
Let's say that in the next year you buy five duplexes for
about $90,000 dollars each. We'll
further assume that they are each valued at $90,000; your payments are about
$950 per month and you are receiving rents in the amount $940 per month.
Many shortsighted individuals would be less than enthusiastic with
this situation. What they would see
is five duplexes with $450,000 dollars of debt, no equity and payments higher
than the income. But for the person
with some vision, that is very exciting! Let's
look at your situation five years from now...
The appreciation rate on real estate varies greatly
nationwide, so I'm going to use what I believe is an almost ridiculously
conservative figure of 5%. Also,
rents are increasing at a much greater pace than real estate values so I'm going
to use a 10% per year rental increase...
1) At an appreciation rate of only 5%
per year, in five years, each of your duplexes would now be worth $115,000
dollars. You bought them for
$90,000, so you now have $25,000 in equity on each of your 5 duplexes for a
total of $125,000 in equities! And
that doesn't even take into account your principle reduction from making those
payments for the past five years!
2) With a rental increases of 10% per
year, at the end of five years the rents you would be receiving would increase
from $940 per month to a little over $1,500 for each of your five duplexes.
So, even after making your $940 monthly mortgage payments you would still
have $560 dollars per duplex, per month, of pure profit.
So, you would now have a positive cash flow of $2,800 dollars per month!
(5 x $560 = $2,800).
As you can see, even though at the time you bought these
properties they did not make you a dime and in fact were costing you a little
bit every month, by simply holding on to them you have acquired a substantial
amount of equity plus, a hefty monthly income.
The moral of the story is simple
If it pays for
itself, buy it!
Now, here's how you do it...