How Do You Know if You Got A Good Return on Your Real Estate Investment?
So many people, including me years ago, don’t realize the potential returns possible when buying and selling real estate on terms (owner financing or lease purchase – no banks).
I’m a big proponent of real deals, real stories versus theory.
This deal had its fair share of peaks, valleys, and pivots—but the end result was well worth the effort.
We talk a lot about pivoting in the terms business and how there is virtually always a way to get out of a deal or keep things going when times get tough. These pivots can get complicated, and it may take a few years before you feel comfortable implementing them in your own deals… But once you fully grasp these concepts, you’ll be able to feel confident with nearly every terms deal you do—because no matter what happens, you can pivot and ensure it will be successful.
Today, we’re looking at an incredible terms deal that had a number of pivots. There were times where it seemed like this thing wasn’t going anywhere—but in the end, it created a 2,000% return for our Associate student. And no, that’s not a typo. That’s a two-thousand percent return on investment. (Actually, it’s 2,086% if you want to get technical.)
So how did this come together?
Let’s cover some basics on this deal before we dive into the pivots. This was an FSBO (for sale by owner) that our Associate contacted almost two years ago as of this writing.
It was a funky house in a rural area, and the owner was looking for $390,000. The house needed some renovations and the owner ended up doing the renovations herself for about $50,000. She wasn’t getting much traction on the house selling it herself, so she ended up listing it with a realtor for $460,000 after the renovations were complete.
Well, the house still didn’t sell with a realtor. After about six months, our Associate reconnected with the seller right when the listing was about to expire. He knew it was mortgage-free and he said to her, “Look, I will pay the price you want if we can agree to terms.” She was fine with that, although she had one stipulation—she wasn’t going to wait more than five years. Fine with us!
Our Associate ended up purchasing the home from her for $460,000 on a five-year term. There was a $1,500 mortgage payment per month that was principal only—so with just some quick math, that’s $90,000 in profit for our Associate over five years just from principal pay down which falls into Payday #3 always.
The Specifics & The Pivots
When our Associate kicked off this deal, he told the seller he would close the property within 60 days. Well, it ended up taking a bit longer than that. After about three months, he had missed the 60-day window and was getting a bit nervous (most of our deals we make contingent upon finding a buyer). But then he got an interesting inquiry…
He was contacted by someone who was building a house in the area and needed a short-term rental to live in while the house was built. They said they needed 3 months, and our Associate was happy to get them into the home to provide some cash flow while he continued to look for a buyer (reminder: we place buyers needing time = tenant-buyer).
He rented the house to them at $2,950 per month. But guess what happened? Those three months turned into seven months… Then, one day, the renter called our Associate and told him they weren’t going through with building the house—there were too many delays, and the builder luckily offered to give them their money back. (That was pivot #1.)
Our Associate had another property for them in the area that was perfect for them—and he ended up doing an owner financing deal that netted him about $150,000 in profit in the end. We’re not including that in the total profit, but it’s just another example of how he was able to make pivots throughout this deal to bring in extra cash (That was pivot #2…)
Our Associate put the house back on the market. But he made one key change to his listing. He wrote in “Seller financing available to well-qualified purchaser with a significant down payment.” This is a subtle technique we’ve been using that can help bring in great buyers for owner-financing deals. Yes, a simple script change brings in way better buyers for us now and that tweak was made about a year ago. Within a month and a half, he had a buyer that was interested in owner financing. They were self-employed and didn’t want to deal with banks, so it was a great solution for them. Here’s what our Associate did…
First, he put them on a three-month lease-purchase deal. That’s because he wanted this deal to be outside of the 1-year anniversary of purchasing the property, allowing him to pay long term capital gains tax instead of ordinary income tax. So he leased it to them for $2,550 per month. With the $1,500 mortgage payment and $450 in taxes and insurance, that gives him around $500 per month in profit—or $1,500 over the three months (Pivot #3!)
We Always Create 3 Paydays (TM) Per Deal
Payday #1 is the down payment—$49,700 in total. This was spread over a few different payments, including $10,000 upfront, $10,000 over the next several months, and then $29,700 at closing for a total of $49,700, or 10% of the sale price.
Payday #2 is the monthly spread. Our Associate had a monthly profit of $1,181 ($2681 in from buyer, $1500 out to seller). Over 48 months (remember, it was a five-year term but one year has already gone by at this point) that’s $56,688. Add the $7,500 from those seven months of renting plus the three months of lease purchase, and the total for Payday #2 comes out to $64,188.
Payday #3 is the profit from the sale. In this case, our Associate bought the house for $460,000 and had been paying $1,500 per month for five years—which comes out to $90,000. When you subtract that, it means he’s left with $370,000 (his balloon payment).
But the buyer’s balloon payment (he financed them at $447,120 at 6%) at the end was $423,040. That gives our Associate a profit of $53,040 for Payday #3.
Add all of those Paydays up and you’ve got a total of $166,928.
The only money our Associate invested in this deal was $8,000 in closing costs. When you factor that in, the return on investment is 2,086.6%. Not bad if you ask us!
These pivots can be tricky when you’re first starting out. That’s why we always recommend getting a mentor or coach to help you through these nuances. We help our Associates through tricky situations like this all the time because we’ve been through them ourselves.
But without a mentor, these situations can be extremely difficult to navigate and many dollars are left on the table or not captured at all.
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