Did you catch the first two articles in this series about investing without needing bank financing? The first one was titled, Fire The Bank and was all about the reasons you should invest in real estate today without relying on bank financing.
The follow-up article was Show Me The Money, and it includes methods for you to find your own private lenders who can replace your bank financing. Now that you know the “why” and the “how, ” I want to show the benefit of buying and holding real estate using private lenders.
When you eliminate the bank from your investing equation, there are only two relevant parties in the transaction–the investor and the private lender. The real estate investor is the “catalyst” who does all of the work for the investment including:
- Find the property and negotiate the sale at a great price
- Completes the property fix-up to make it “rent ready”
- Manages the property (landlording)
The private lender is completely passive and does no work, but supplies all of the funding for the investment up-front at closing for the catalyst. The funding includes all closing costs, all repair costs, and all funds required for the acquisition, so the catalyst has no money out of his own pocket.
When the catalyst works directly with private lenders, you have a winning combination for cash flow using a joint venture arrangement. The best part of this joint venture is that both parties are critical to the overall success of the investment.
A Case Study for Cash Flow & Infinite Returns
The catalyst markets and finds a great deal on a 3 bedroom, 2 bath home at a 40% discount price point (60% loan-to-value ratio). What that means is the purchase price and all fix-up costs will not exceed a total of 60% of the after-repair-value of the home.
|Purchase price:||(includes closing costs) $ 40, 000|
|Fix-up costs:||$ 20, 000|
|Total investment required:||$ 60, 000|
|After repair value:||$ 100, 000|
The total investment required is $60, 000 and the after repair value of the property is $100, 000, which leaves $40, 000 of equity once the fix-up is completed on the property. The catalyst found the deal, negotiated it, and performed the fix-up, while the private lender funds the entire transaction expense of $60, 000.
In my market here in Richmond, VA, a house like this one will be a typical 3 bedroom, 2 bath house in a working class neighborhood. This house in Richmond will rent for $950 per month creating a nice income stream for the joint venture investment.
The primary on-going expenses associated with holding real estate are taxes and insurance. In Richmond, the taxes and insurance combined will be about $150 per month for the house in this example which leaves $800 net rental for the on-going monthly income stream for the joint venture.
The $60, 000 investment has now been used to pick up $40, 000 of gross equity and a $800 monthly income stream. I hope you are wondering how this gets applied back to the members of the joint venture because the answer is… any way that the Private Lender and Real Estate Catalyst come to terms.
For simplicity sake, let’s assume that the two joint venture members agree to a 50/50 split in this venture.
With a 50/50 split, the $800 monthly income stream is split so that both members receive $400 each month; along with this monthly income stream both members also will share the upside equity at some point in the future.
What Did Each Member Earn?
Let’s make one last assumption to show how the ultimate return can be easily calculated for both members of this joint venture.
Let’s assume that both members hold onto this investment property for five years then sell it for $100, 000, which is today’s value of the house. What did both members earn on this joint venture?
|Private Lender earnings:|
|$400 per month for 60 months:||$ 24, 000|
|Upside equity split of the total $40, 000:|
|Total return over the five years:||$ 44, 000|
|Total investment made:|
|Annualized return for private lender:||14.66%|
|Real Estate Catalyst earnings:|
|Annualized return on investment:||Infinite|
Everyone Is Happy
The private lender made a very strong return of 14.66% annually and his $60, 000 investment turned into a $104, 000 at the end of the five years.
The real estate investor (catalyst) used none of his own money, enjoyed $400 per month in cash flow and an overall return of $44, 000 over the five years. The catalyst enjoyed an infinite return because he used none of his own money in the investment.
How many houses would you want to buy and hold this year and earn $400 per month on each house? I challenge you to establish a plan and invest in yourself, so you can easily structure investments similar to this one.
A Mohatra contract is way of loaning money with interest without breaking the letter of the usury laws. The lender sells the borrower a trivial object to be paid for on the loan due date. The borrower then sells the same object back immediately for cash at the price minus the interest.
Cash flow loan is a type of debt financing, in which a bank lends funds, generally for working capital, using the expected cash flows that a borrowing company generates as collateral for the loan.
To secure repayment, the bank covenants a borrower on such levels and ratios as enterprise value, EBITDA, total interest coverage ratio, total...
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