Invest In Real Estate Through Financing
Below we'll review several scenarios. One is an actual one that we closed and the next few are based on real situations which investors can expect.
Important note: these are all done by the book. We don't and won't participate in any stuff that would be even near questionable as the ethics or legality. If you have something like that don't call us.
Scenario One:
A investor purchases a property as a short sale for $172,000 with closing costs. The property is shortly there after sold to a buyer for $210,000 on a 5 year interest only note at 7% annual interest rate paid monthly. The investor purchased the property cash.
Instead of being a landlord the investor put aside the responsibility to the new buyer and the investor is still able to get a truly good return on a secured asset with none of the hassle of being a landlord.
Here is how the money works out for the investor over the 5 year period. The net gain in value is $38,000 less closing cost of $2,300 = $35,700. In addition the investor will receive monthly interest payments of $1,225.00 per month for a 7% return. Add to this the $38,000 in additional gain over the 5 years when the note is paid and the annual return on money invested is 13%.
If you kept that money in the bank you would get maybe a quarter to a half percent return before inflation and taxes eat away the rest. You could invest in stocks, but that's a more volatile market in which the investor has less control. The 13% return is real: we just made it happen.
To be realistic this is not so easy to achieve: I can't get you dozens of these, but I can get you more of what you'll see below.
Scenario Two:
A person that has a good income who is in a house worth more then the outstanding debt, but she needs to get a loan to buy it from the other occupant or take over the loan. An investor can come in purchase the property for $125,000 and resell it to her for $135,000 on an agreement for sale at 8% interest on a 3 year note. The monthly interest payment from this will be $834.00. Over the 3 year period the investors return is 11% annually.
Scenario Three:
A fourplex is purchased for $120,000 then the new buyer purchases it off the investor for $150,000 on an agreement for sale with a 5 year interest only note at 7.75% interest. After closing costs the initial equity spread is $25,000.
The monthly income from interest is $969.00. The interest along with the equity over a 5 year period provides the investor an annual 13% return on their money invested or a total of $83,140 over the 5 years.
Scenario Four:
The investor purchases a home for an existing buyer, a home of the buyer's choice for about $95,000. The investor then resells the property for a price over market of $110,000 on a 5 year note at 7% interest, using, of course an agreement for sale. The total return to the investor over 5 years is $48,500 or an annual return of 10%
In each of these at the end of the note there are only the normal closing cost paid to the title company to close out the transaction and record the deed, the bulk of the cost is taken upon the initial sale to the buyer in which there are no broker fees. Broker fees are paid by the seller at the original purchase.
Can you get a higher return? Yes, over a shorter term, but over the longer 3-5 year periods on a fully secured below market asset these returns are very good, especially when you consider that you don't have the added cost of management or often under accounted for cost of aggravation of investment property ownership.
In all three scenarios the initial investor holds the note - a seller carry back - but the deed does not transfer to the new buyer until the note is paid, this is done by an 'agreement for sale'.
This means that in case of a buyers default the mortgagee does not have to go through the full arduous foreclosure process to get the property back, but the goal is the avoid that by putting together win-win situation where the investor gets a good return and the buyer sill gets and overall affordable and profitable deal. Both parties need to be in a good position because rather then being greedy and going for higher but more risky deals.
Article originally published at Phoenix Market Trends.
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