I know that I told you that I’d show you how $7,500 would make 10,000 about 2 days ago, however, I got sidetracked. It’s not quite like I have a lesson planner…it’s just how they roll out. But $7,500 will make $10,000 when the interest over time is applied. I showed you to negotiate with your seller for the $100,000 property by negotiating a note on the down payment. The note would be $7,500 over 3 years at 19.8% for a monthly payment of $277.96. If you take $277.96 and multiply it by 36 (months) you will get $10,006.67.
I was poised to upgrade my family home from where we are to a spacious 3000 sq. foot home on approximately 1 acre inside the city. Unfortunately, the seller, a very nice doctor, felt as though he was going to be getting the raw deal on it and pulled out. He listed the house for $178,000 (a price reduction since the house is assessed for taxes at over $250,000.) Here’s the offer we made him:
$75,000 Owner Financed with an OPTIONAL 3-year balloon.
7.9939% Interest on property.
$550.00 Monthly Principle/Interest Payment
If you have negotiated for owner financing, you need to consider the terms. There are a few things that will affect the terms and they are, an existing mortgage, seller’s needs, and flexibility of the seller. Obviously the seller is fairly flexible if he is considering owner financing, however, you need to know HOW flexible he’s willing to be before continuing. The only way to know is to ask. This might be a parental home that was willed to them and they just want to get it off their hands.
Ask the seller if there is an existing mortgage. If there is, ask him if the mortgage is assumable. Most mortgages now are no longer assumable, banks fear the risk of foreclosure transferring a mortgage from one to another. However, even if the mortgage is NOT assumable you can try to get a mortgage that would pay off the existing mortgage (at close) and then owner finance the rest. If the owner possesses 40% equity in the home, all you need a mortgage for is the remaining 60%. Here’s how with that $100,000 home.
Cost: $100,000
Existing Mortgage: $60,000 @5.25% for 30 years = $331.32
Owner Finance: $40,000 @6.00% for 10 years = $444.08
Total per month: $775.40*
*All numbers are estimates and only incorporate Principle and Interest.
I will start by saying this: These are advanced techniques used by seasoned real estate investors. Failure to research these techniques can result in financial trouble, Please DO NOT hesitate to ask me questions. Your questions will be answered on my blog. For more guided coaching let me know and I will dicuss some options.
There are several basic methods that work for purchasing a home using up to 100% owner financing. There are tale-tell signs that an owner is willing to consider owner financing, such as “motivated seller”. If the property has been on the market for quite some time or if there has been a price reduction.
Some quick tricks are to ask the agent if they are willing to take their commission as a note (small loan). If they are you may be able to negotiate from the stance that you will pay 100% agent commissions. The seller will see more money in their pocket and could come down by 10,000 to 20,000 dollars (less reduction is possible).
5 Ways to Make Money Investing in Real Estate
I have been a real estate investor for about four years, I have snagged some jewels and lost a few. I have bought bad deals and learned how to make money off of them. I have flipped a few houses, but prefer to hold onto properties and rent them out. Like I said, if you can make $100 profit per month renting out a house, why stop at just one?
With real estate, you can buy a property, slap a coat of paint on the outside and inside, fix a few things, then sell it for a profit. This is called “flipping.” You do have to work, and when you sell it, you get paid…so it’s still Earned income. Plus you’ve got the capital gains taxes you will have to pay. That is one way, the most commonly seen way of making money with real estate, it is also a way to get money for a larger property. Remember the roll-over you can do with a Form 1031 and use that money to purchase a more suitable property for rental purposes, or a home for yourself.
By renting the property, your renters are increasing your equity by paying down your mortgage. Also, even with the current housing market, values are still increasing in a majority of states. Plus, next year your house will be one year older, and the IRS allows a certain amount of depreciation on the house.
Understanding Your Financial Report Card
As a child the school would inform your parents as to how well you do by sending home a report card. As an adult, you too have a report card, it is called your personal financial statement. I know I’ve touched on this before, even gave you a template for one. I have discussed your income, and had you reduce your expenses. Now on to your assets and liabilities. Your assets are all items that have cash value AND put money into your pocket. Liabilities are always taking money from you. Separate them as below:
There seems to be a school of thought that you should work on your smaller debts first, I say, tackle the dragon first. This goes two different ways. If you want to reduce your credit card debt, find which one has the highest interest rate, pay the minimum on all other cards, then see if you can free up $100 - $200 per month and apply that to the highest interest card. Continue this until your cards are paid off. It is important that you DO NOT ADD ADDITIONAL CHARGES!
Generating Passive Income
There are several ways to generate and/or increase passive income; start a business, buy into a franchise, join a network marketing group, or get into real estate. All require education on your part…and some more than others.
Network Marketing
There seems to be a negative stigma associated with network or Multi-Level Marketing (MLM); often times they are called “Pyramid schemes.” Believe it or not, the pyramid is the most solid architectural structure…just look towards Egypt. If it is a pyramid, think of yourself as the apex, the top of your pyramid. Alone, you are not much so you have to recruit a team, then train them to do the same…all at the same time you and your team are selling the products or services offered by the company. Network marketing companies offer some of the best business training with very little upfront cost to you. Do your homework one the company to determine if it will be around next year, or five. I have seen that Amway is making a comeback…it’s worth a look.
Starting a Business
If you decide to start your own business or buy into a franchise, do some research. Find out if your area needs this product or service. When starting a business, you don’t have to like the product/service offered, but it helps. Do some serious research, go to your local college, often times they have a Small Business Development Center (sponsored by the Small Business Administration.) Talk with them, they are a wealth of knowledge, and might be able to assist you in getting funding.
Types of Income - Passive Income vs Active Income etc.
Everyone knows you work and you get paid. That is only partially true. When you go to work and clock in, your income is earned income; you put in a week’s worth of work, they pay you for what they think your time is worth (of course, you agree with it by not asking for a raise.) But there are two additional categories of income that many do not realize.
Portfolio / Paper Income
This type of income comes from dividends from stock holdings or the sale of stocks or bonds. Many of us already have this, even if we don’t own stocks. Raise your hand if you have ever received a statement from your bank, usually in January, on the interest accumulated from savings or interest-bearing checking accounts? (How many of you still have your hand raised? Put it down, you look silly.)
Passive Income
This type of income is the best because often times it requires the least amount of ongoing work. Passive income is when you do something or create something that pays you indefinitely (or for a set period of time.) Passive income can be business holdings, rental income, or royalties.
Personal Finance Education
Before I begin the next section in looking at creative financing options for real estate purchase, there are some basic financial principles and skills I would like to instill and insist on you knowing. Some that you may know, some you may not, but you need to take them into consideration. I am going to make some suggestions that you might not agree with, but you need to remember that our preconceived thoughts on money and finance are deeply ingrained from what we’ve learned throughout life, our parents, school/college, work, all have shaped our views on money and finances. Keep your mind open to my suggestions, and if you have never read it, I highly suggest you reading “Rich Dad, Poor Dad” by Robert Kiyosaki.
When talking about real estate you will often hear people say that your house is your largest investment, or it’s a real “asset.” Have you ever stopped to wonder what they mean? What is an asset? I view assets as anything that bring you money. Your job is a TYPE of asset, however, you are the asset to yourself, because you go to work…but outside of that, does your house put money into your pocket every month? Most likely it does not. If anything you probably pay more than your mortgage every month on your house…repairs, service, utilities. Therefore, is your home your biggest asset, or is it your biggest liability? I would place your house into the liability category. Usually the person telling you it is an asset is your banker…and it is true, for him. Your house is your biggest asset for the BANK…not for you.
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Reign in Your Personal Spending with Sensible Budgeting
Recently I’ve been getting up-in-arms and have my blood boiling listening to the out of control spending by our government (both Federal and State.) I believe that I have nailed down the problem. It boils down to the views on money. Depending on the type of home life you had, or school/college you designed, it all shaped your views on money.
I am not trying to offend anyone for their money beliefs or views. Some view money as the root of all evil, and others believe it’s a world of endless wealth. While the “root of all evil” happens to be the single most misquoted Bible verse, (the real one is “the LOVE of money is the root of all evil.” Essentially GREED, it’s a deep-seeded belief with many people, and those people have the mindset that they will always keep them poor. Yes, I said it, a negative money mindset will keep you poor. But a view that money is never-ending can also keep you poor. There has to be a basis of financial education.
Historically, Democrats for the last sixty years have represented the blue-collar worker. The Republican party represented businesses and white-collar workers. That being said, when a low-income worker needs more money there are usually three courses of action a blue-collar worker will choose:
- Take out a loan
- Work more hours/Ask for more money
- Get a second job
The problem is, a loan will allow him to spend money he doesn’t have (are you seeing the pattern from Washington?) Asking for more money could force his boss to give him a raise that might not be big enough to suffice and cause disloyalty between the boss and worker…which could end in no job at all. Working more hours could do the same, in these times, employers are cracking down on overtime, if the boss comes down on the employee and doesn’t allow any o/t, again, disloyalty and resentment. So working harder is the blue-collar way to increase income.
Second Mortgage Tips and Tricks
Second mortgages can be enticing because you can get a large sum of money. However, there are some common bank tricks you should be aware of. Take a quick look over these second mortgage quick-tips. You will be in a better position to negotiate the best second mortgage.
Watching these hidden items and factors will help your second mortgage:
- The APR. Don’t take the rate you see. Contact at least one bank, one credit union, and one dedicated mortgage lender about your Second mortgage.
- Try to avoid default penalties. These are applied when you miss a payment or are late. We all think it won’t happen to us, but a clerical error can become very costly. The interest rate on your second mortgage could increase dramatically.
- If things change, you don’t want to pay a hefty prepayment penalty to get your second mortgage off the books. Flexibility is important, so avoid locking yourself in.
- Beware of second mortgages that are bundled in with voluntary insurance policies. While this coverage may be useful, you may or may not need it bundled into your second mortgage. Furthermore, you may already have adequate coverage outside of the mortgage.
- Know about any balloon payments in the deal. Some second mortgages start with low, easy-to-afford payments (at the cost of a huge payment at the end). Read the contract carefully to see if this is why a particular second mortgage is so attractive.
