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0% Interest Land Contract Real Estate Investing
Joe: Hey, it’s Joe Crump. Zero interest land contract real estate financing. And it can either be a land contract or a contract for deed. Land contracts are in mortgage states, contract for deeds are in states that have trust deeds. So Illinois is a trust deed state, California is a trust deed state. That would be a contract for deed. Indiana is a mortgage state so that would be a land contract. Texas is a mortgage state. But it’s the same concept.
Joe: A land contract is a piece of paper between, agreement between the buyer and the seller of a property where that buyer agrees to pay a certain amount of money for that property over a certain period of time and makes payments on that property during that time. When that property is paid off, then the seller has agreed to transfer the deed. The deed does not transfer on a land contract until the entire contract is paid off. So as a land contract buyer, you don’t have the deed.
Joe: But if you’re buying with a land contract you will record that deed. And when we record a land contract purchase, we do it, we close at a title company when we’re purchasing. We close it at a title company. We get title insurance. Make sure that the title is clear. And we have the title company record that land contract. So it’ll be putting us in the line of title. And it’ll also keep that seller from going out and refinancing the property out from under us.
Joe: We also have the seller write us a deed that will transfer them to us when this things is paid off. And we put that deed in escrow with the title company. Escrow means a holding account. They put it in escrow, the attorney at that title company holds onto it, and then as soon as we pay it off all we have to do is tell the attorney and the attorney can record the deed and the deal is now deeded to us. We don’t have to go track down that seller again.
Joe: Now, it’s never really been a problem to have to try to track down the seller because we’ve been making payments to them the whole time, so we still know where they’re at. But it’s better if you can have this set aside and taken care of in this way.
Joe: Now that’s the basic concept of land contract/contract for deed purchase. Now let’s talk about the fun part, which is zero interest land contracts. And I’m gong to give you an example deal.
Joe: Let’s say we’ve got a property – I’m going to grab my calculator here – let’s say we’ve got a property that I’m able to get for $50K. It needs $10K worth of work and it’ll be worth $100K when we do that work to the property. It’ll rent for $900 a month when we do that and the taxes maybe $150 a month. Now we can find properties like this in rural areas, we can find properties like this in urban areas. There’s a lot of places all over the country that have properties similar to this. You don’t have to buy them in the area that you live. You can do this remotely, especially if you have automation systems like the Automarketer. If you use Push Button Automarketer.com you can bring in leads from all over the country using that system.
Joe: Once you get those leads if you know how to convert those leads into deals then you’ll be able to set up a structure like this. And one of the best ways with these cheap properties like this, we find that a lot of people own those houses free and clear. They don’t have mortgages on them. So it makes it really easy to do a land contract with zero interest. So let’s say we’ve got this $50K property. They’re going to sell it to us for fifty grand. After repair value is $100K. It’s going to cost us $10K to fix it up.
Joe: And you can buy these properties without having to put any money into fixing them up as well. If you don’t have the money to fix them up you can then sell them to someone else who does that work, or there’s other ways to deal with that as well, but let’s stick on the financing here for a second.
Joe: We’re going to ask them, I need to come up with a price that I’m going to pay them monthly that will work for them. So I want to look at how much can I afford to pay them and still have positive cash flow? So in this scenario I know that I’ve got $900 a month coming in. I’ve got $150 a month going out for my taxes and insurance. So let’s back in to my payment. I’m not going to offer them a payment that I can’t make, so $900 is the income. $150 is the taxes and insurance. So I subtract that. I also build in a positive cash flow for myself of let’s say $200 and then let’s say I want to throw in $90 for property management, 10% of the income for property management. That means I’ve got $460 a month that I can pay and still everything can be very comfortable on this particular property.
Joe: So $460 a month. So if I have a $50K mortgage and I divide by $460, that gives me 108 months. I divide that by 12, that’s 9 years. So it’d be fully amortized, zero percent interest over 9 years at that $460 a month. And every payment that I make goes 100% toward principal. That means that it pays off so much faster. And in this situation it pays off in 9 years. So I own this property free and clear. If I had a mortgage on this property my payment would be very similar to this. Except it would take me 30 years to pay it off if I did it through a bank.
Joe: So doing it with zero interest pays it off in less than a third of the time and builds equity every month. Just on $100K mortgage if you’re paying 5% or 6% interest, a good portion of that payment is going toward interest. Only a very small percentage, especially at the beginning of a 30 year amortized loan, very small amount is going toward principal. So instead of $460 going toward principal, maybe only $50 or $100 is going toward principal if I were to finance that particular property.
Joe: So having zero interest makes all the difference in the world. Your interest rate is going to determine how quickly you pay off your properties. So make sure you get good interest rates.
Joe: Now I’ve bought properties on subject to from 11% and 12% way back in the 80s and 90s all the way down to you know, 3% and 4% more recently. We’re in a time right now of unprecentedly low interest rates. And they’ve been phenomenal. But even over the last decade or so we’ve been able to get deals for under 5%. And that’s great.
Joe: But it’s nothing compared to zero interest. That difference is night and day and will determine whether or not you pay that property off in 8 or 10 years versus, you know, 30 years. A big, big difference. I want to be able to spend that money a lot sooner. I want to be able to have that property paid off and free and clear as quickly as I can and using this technique will make that happen. So when you go to your sellers and you make these offers say, what if I paid you $460 a month and just paid off this $50K over the next 9 years or so? Would that be okay with you? I’ll give you your full $50K but we’ll do it over a 9 year period. And that usually works. When you have somebody who’s got it free and clear and is looking to get rid of that property.
Joe: Now it’s also possible when you own a property like that to be able to go back to them and let’s say a year later or 5 years later and say, I still owe you $40K on this property. What if I paid you $20K right now and just paid it off? I could do that right now. Would something like that work? Or what if I paid you $5,000 right now? Bird in the hand, you can have this money right now, or I could continue to pay you the $460 a month until it’s paid off. A lot of times they’ll take that discounted note and they’ll let you pay it off. And if you’ve got the capital to do that you can suddenly make $20K or $30K or $40K immediately by spending a few grand to pay off that mortgage. So that’s a great way to be able to spend money and make money immediately on that property and have it paid off as long as you’ve got the capital to make that happen.
Joe: Anyway. That’s a few ways to look at these types of properties and if you buy them inside your Roth IRA. You have to buy properties that have non-recourse loans. So you have to make sure you put the verbiage in your land contract that makes it a non-recourse loan. So just ask your attorney, there’s some specific verbiage that you need to show that it’s a non-recourse loan. Non-recourse means that if you default on that property they can’t come after you for other money that you have assets on. All they can come after is the property itself. And if you put properties, loans into an IRA, a Roth IRA, it has to be non-recourse. That’s why we’re able to do it with land contract or contracts for deed. We’re also able to do it for subject to because they also are non-recourse. So you’re able to buy those inside your Roth IRA and be able to build that wealth and essentially use very little money within your Roth.
Joe: Maybe you don’t have very much money in your Roth. Maybe only put your initial investment into that, you’ve only got a few thousand dollars in there. When I first started the Roth’s I thought I had to pay each property off free and clear until I realized oh, yeah, I can do these two techniques and have non-recourse loans so that I would go to a bank and get a non-recourse loan because there are some of those lenders available out there, too. But the interest rates are so much higher. They charge a couple extra points on top of everybody else. I wouldn’t do it that way. I would do it the way I’m suggesting here.
Joe: All right. I hope that helps. Good luck to you. Subscribe to the channel. If you like this information go to ZeroDownInvesting.com if you want to find out about my six month mentor program. And PushButtonAutomarketer.com to help you find your leads and manage your business and automate your systems and then of course JoeCrumpBolg.com is my blog and you can sign up for my free newsletter there as well.
Joe: All right. Take care.