Why Low Priced Houses In Rural And Urban Areas Are Cash Cows
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Why Low Priced Houses In Rural And Urban Areas Are Cash Cows
Joe: Hey, it’s Joe. I’ve got another thing I want to talk about today. It’s something that I’ve seen a lot of my students do and we’ve been doing it as well. We go and buy really inexpensive houses in either urban areas or rural areas. There’s a ton of rural areas, especially here in Indiana, and in states in the Midwest where you can buy a property for $30K or $40K that’ll rent out for $600 or $700 a month, and that are in pretty good condition. And there’s a bunch of them out there and a bunch of places out there where you can do this.
Joe: There’s also, if you go into the city, and you know, you don’t have to be in a war zone, you can be in an area that’s a good solid blue collar neighborhood for $30K, $40K, $50K a month in some of these cities. And you don’t have to buy these where you live. You can buy them remotely.
Joe: Now, one of the things that we’ve been doing with areas like this, now, I’ve also been, we’ve been rehabbing and buying properties and flipping them because I’ve got cash to work with and I have partners that do the work and I bring in the cash. But, one of the ways that you can do it if you don’t have capital, is to buy these properties on, let’s say a land contract. And there’s a ton of these properties that are free and clear. The owners own them free and clear. Because they’re only worth $30K. They paid off years ago, or, you know, got them taken care of, so they’re paid off. They’re willing to sell them to you for $30K or $50K or whatever it is. And then you can figure, you can make payments on these properties.
Joe: So if you have a property that’s say, $50K. And you know that it makes $750 a month of income, right? Let me just do the calculation on this. $750 a month of income, and let’s say you’ve got $100 in taxes, insurance and maybe $150 in, if you figure in property management as well. So that means you’ve got $600 a month of income on that property. You want to make sure that you have cash flow on that property. So let’s take out at least $200 for that. So, subtract another $200 because I want that money coming to me every month. That means I’ve got $400 a month that I can pay on that property. So, if I take $50K and I divide that by $400, I get 125 months divided by 12, that’s 10.5 years, a little less than 10.5 years that I can pay that property off completely – free and clear – if I do it with a no interest land contract. And when I present this to the seller, I say, “What if I pay it off to you over time? I’ll give you $400 a month. You don’t have to worry about anything, and I’ll pay you off.”
Joe: And it’ll take, we’ll do it over the next ten years. And a lot of the people that we run into, they’re older folks, and they say, well, I won’t even live to be, you know, ten more years. This is, you know, when you pass, we’re going to give it to your kids. You know, and they’re going to continue to get the payments, you know, until it’s paid off. Would something like that be acceptable? And we’ve found that that system works over and over again, especially on these price ranges because we can pay them off in a pretty short period of time. A $30K property we can pay off in six or seven years. $50K, you know, ten years. You know, $60K, $70K, you know, twelve, fifteen years. And they’re paid off. And every dollar that comes in and goes out to the seller, is principal. So if at any particular time the values go up enough and you want to sell that property, and just take the equity out of it, you can do that. And you can make a profit because all the money that’s going towards it is buying down that rent every month.
Joe: If you were to go out and get a mortgage, and I’ve talked about this on other videos, don’t get mortgages. But if you go out and get a 30-year mortgage, 90% of your payment is going toward other expenses. Only, you know, out of $1,000 that’s being paid, $100 of it is going toward your principal. So at that rate it’s going to take 30 years to pay that thing off. Now, that amount gets bigger and bigger every year, until, you know, by the last year it’s a big part of your payment. But in the first 10 years, it’s going to be, you know, it’s going to take a long time to buy that note down. So if you do it with it’s all going towards principal, you’re going to be much better off and you can build a really beautiful portfolio.
Joe: I’ve got students who’ve built portfolios of 50, 100, 200 properties in just a few short years buying properties like this in rural areas that have cash flow that they can sell – and by the way, they’re not just renting them – they’re selling them on lease options. So they’ll take $5,000 as a lease option fee, they’ll get the $200 a month cash flow and then they’ll get the $400 a month that goes towards the principal that buys that note down every month. And when that person, if they exercise the option, then you can go ahead and sell it to them for cash because they’ll go out and get a new loan. Or, if they don’t exercise the option, you can go around, turn around and sell it to another lease option buyer and make money doing it that way.
Joe: And typically you can sell a property for a little bit more than it’s worth when you’re selling it on terms anyway. So, if you bought it for $30K you might want to sell it for $45K, or $40K. If you bought it for $50K, you might want to sell it for $70K. And you can still make a profit on those deals.
Joe: Anyway, those are great properties to have. Hope that helps.