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The Most Profitable Type of Real Estate Investing
Joe: Hey, it’s Joe Crump. I’m back. I know it’s been a while since my last video so thank you for being patient. My father died in the last couple of months and I want to first of all thank everyone for your good wishes and your condolences and all the love that I’ve received in emails and Facebook posts and all that. So thank you for that support. It’s meant a lot to me. I’m going to miss my dad. He was a good man. He was 91 years old and he taught me a lot about life. Not so much about real estate, but a lot about life and about how to treat people and how to live a good, ethical life, how to be a good dad and a good father and a good husband. So I give him kudos. I know he’s in my heart for the rest of my life.
Joe: Anyway, let’s get started. This first video now that I’m back is The Most Profitable Type of Real Estate Investing. And I’m going to lay them out into different categories so that we can look at the things that are making me the most money and the different types of deals that are making me the most money because the type of structure that you use makes a lot of difference when you’re going about this process.
Joe: The first one, and one of my favorites, is zero interest seller financed deals. So typically land contracts, contract for deed, those types of properties. And this typically works the best in the lower priced properties, typically under $100,000 where the seller owns them free and clear. So let’s say you buy a property for $70,000 and you make payments on that property of $300 a month but you don’t pay any interest. So you can end up paying that property off in six or seven or eight years, sometimes ten years which is one-third the time it takes to pay off a conventional mortgage that’s going to take you thirty years if you did subject to, for example.
Joe: So you can pay these properties down so much more quickly because you’re paying, everything that you’re paying is going towards principal. And that’s an incredible, incredible thing. We can talk, and I’ve talked a lot about mortgages and banks and where they make their money and how banks are the person, the banks and the entities that are making the most money in almost any real estate transaction out there. They’re going to be making, on a $100,000 property, they’re going tom make $300,000 over the life of that loan. And the person’s going to be paying back $300,000 to pay for that mortgage.
Joe: Where if you pay an interest free loan you won’t have to pay any interest all and you’ll pay it off in about ten years or less. Now, on these little cheap properties that we’ve been buying in rural areas and in urban areas, we’ll ask the seller to carry a note. And we’ll tell them would you consider letting us make payments to you over time to pay off the property? And if they say yes then we give them a price that we want to pay.
Joe: Now typically the way I come up with the monthly payment that I want to pay is I back out of the rent. So I’ll look at the rent and if the rent is $900 for example, let’s say you’ve got $900 rent, you’ve got, you know you want to get at least $200 a month positive cash flow. So that brings it down to $700. I want to be able to pay my taxes and insurance and maybe another $150 on a property like this. So now I’m down to $550 a month that I could pay on that property. And if I can I’ll try to get a little bit more cash flow out of it on top of that.
Joe: But let’s say that I pay $500 a month on a property. I’m going to be paying down on that property every year at $500 a month, we’re going to be paying down that mortgage or that land contract by about $6,000 a year. So over a ten-year period I’m going to pay $60,000 on that property, all of it’s going toward principal. So that’s all profit. That’s like putting money in the bank. So buying properties like this is maybe the most profitable way to buy real estate because you not only get the buy down on the note every month you also get the depreciation on the property which turns out to be over twenty-seven-and-a-half years or just 3.64% of the tax basis of the improvement on the property.
Joe: You also get an appreciation on the property as it goes up in value over time and averages about 3.0% that properties go up over time. So right there you’re making money. You’re also getting your cash flow on your property so you’re getting that $200 cash flow that we built into the deal and on top of that, if you sell it on a lease with an option to buy you’re also getting a lease option fee. Typically on a property like this we’ll get $7,000 or $8,000 as a lease option fee with maybe $4,000 in cash and maybe another $4,000 as a promissory note making payments of $150 to $200 a month. So that increases your monthly cash flow by $150 or $200 a month plus another lump sum that you’re getting back from that property of you know, $3,000, $4,000, $5,000 on a low-priced property like this.
Joe: So you can really get a lot of income from one little property. And that property is going to feed you for the rest of your life as long as that buyer doesn’t exercise their option. And as soon as you pay off that mortgage then you’re going to own it free and clear and it’s going to bring in even more money as you go down the pike. So that’s a wonderful way to buy properties and build a portfolio without putting much money into those properties.
Joe: Now a lot of these properties that we’re buying we go in and we clean them up and we fix them and we maybe put some carpet and paint and we typically will spend, you know, $4,000, $5,000, $6,000 on those properties so we’ll have a little bit of money into those properties. But we’re also buying them typically substantially under market value, typically 50% of their market value or less. So even though we put $5,000 or $10,000 of money into those properties the values are going up dramatically.
Joe: You can also do this same thing without putting any money into it at all and that’s by doing a flip property without doing any fixup. You would have to sell it on a land contract to do that if it’s not a habitable property. If it’s habitable then you can sell it on a lease option. If it’s not habitable you’d have to sell it on a land contract. And if you did that you could of course raise the price, you could charge interest when you sell it on a land contract. Make sure you get at least market rent for it so you have a positive cash flow and let them pay it off over time with maybe a balloon payment after five years. And if they decide not to pay off that property after the five years, balloon payment is up, you can take that property back and then you can sell it to someone else for a higher price because the values have gone up. So there’s lots of ways to do this either in good condition or in bad condition when you buy these types of properties.
Joe: The second way that I love buying these properties is subject to. When you buy a property a subject to you’re taking over somebody else’s existing mortgage. All they’re doing is deeding you the property, giving you the payment stubs and you’re making the payments to the bank. And it’s your property now. So make sure that you have enough money that’s built in for cash flow to that property. Make sure that you can get monthly payments of that that are enough to cover your costs. You don’t want to build negative cash flow into these deals.
Joe: Also you’re going to be able to, when you’re doing subject to, you’re going to be typically dealing with a little bit more expensive properties, maybe $150,000, $250,000, $350,000, $450,000, you can buy subject to properties. Now, with properties that are under $200,000, $250,000 on subject to you can typically get enough money from market rent to be able to cover the monthly payment of the property. But once you start getting over $250,000 or so, market rents don’t usually cover the mortgage amount. So you have to change the way you talk to your buyers about those types of deals and start talking to them and saying this is how much you would pay if this were a mortgage. You’re buying this property even though it’s a lease option, so you connect the monthly payment to what a mortgage payment would be and let them know that if you can’t make this mortgage payment you wouldn’t be able to buy this property anyway. So that way you can get more money for your down payment when you’re doing it.
Joe: You’re also going to typically get about ten percent down on a lease option fee. So if they’re going to pay you ten percent down on a property, let’s say you bought it for $250,000 and you turned around and sold it for $290,000, let’s say you raised the price by you know, $30,000, $40,000. So you raised the price to $290,000. You try to get ten percent down on that property. So you’re going to get about $25,000 or $30,000 down on that property. Now, you may not get all of that in cash. Maybe get half of it in cash and half of it as a promissory note that they make payments on over time. And you want to try to get payments that they can do. Don’t put them in such a bind that they’re not going to be able to do that but see the most you can get out of those monthly payments.
Joe: We typically are going to ask for $200, or $250 or $300 a month on that promissory note to try to get that buy down depending on how high that mortgage, that promissory note is. We want it to be able to pay off in a couple of years because our lease options are typically three years long. So we don’t want our promissory notes to drag out longer than three years because we probably won’t be able to collect that money if those people don’t exercise the option and they move out of the property. So we want to try to put it into that time window to make sure we get that money.
Joe: So subject to is the second way that is very profitable because once you have these properties like this they’re going to start going up in value. You may not make a ton of money up front. You’re going to get your lease option fee which may go to cover some repair costs, it may go to cover some fix up costs. You’re going to get your monthly payment out of the property, you’re going to get the buy down on the note, you’re going to get the tax profits, the values are going to go up over time if your buyer doesn’t exercise their option. The values are going to go up over time. And you’re going to build value into that property.
Joe: I recently sold a bunch of my subject to properties in different states, in Texas and South Carolina and in Arkansas and a couple of other – Ohio – a couple of other states because I was trying to consolidate my portfolio. And I had some of these properties for fifteen years. So they had been bought down substantially over those years. They had also gone up almost double in value over that period of time and I was able to walk away with a ton of money that I used that money to buy down other subject tos that I had in my portfolio. So I was able to make a lot of my subject tos free and clear after that time which makes sense for me, you know, at my age, you know, as I start to move towards sort of retirement mindset.
Joe: So those are things that you know, having a big portfolio and you know, building it and leveraging it as much as you can as you’re younger makes more sense and then as you get older to start consolidating those things, making them easier to manage, doing less work to make them manageable, you know, builds that equity over time.
Joe: The next type of property that is very profitable is flip properties, so that you’re fixing up, you’re putting money into and you’re turning around and flipping. And that all has to do with how well you buy them. You can buy them for cash but you’ve got to get them at substantially below market value. For me, I want to see them at around 50% market value before I buy and before I put money into those properties. And then we’ll fix them up and we’ll make them nice. We want them to be the nicest property in the neighborhood. So we’ll make them nice. We’ll maybe spend $10,000 or maybe $20,000, or if w buy a real junker you know, $30,000 or $40,000 and put them back into that property. But we want to make sure we have enough money in the deal so that we walk away with a nice profit at the end.
Joe: And we want to look at the return on the cash invested. So let’s say I buy a property that’s worth $100,000. I buy it for $50,000 and I put $10,000 of work into it. It’s going to cost me maybe $10,000 to sell that property so I’m going to make about $30,000 in profit on a property like that. So $30,000 on a $60,000 investment over maybe a six-month period. So I’m making about 50% return on my money.
Joe: Now, if I could get that same property and instead of buying it for cash I get the same price on it but I get it on terms and I get them to carry that $50,000 even for six months and I put $10,000 of work into it and I turn around and sell it for $100,000 within that six-month period then I’ve made $30,000 on a $10,000 investment so my profit on, my return on my investment is three times what it was if I put all cash into that property. So anytime you can get terms, even if you’re going to do a quick flip, it makes a lot of sense. So try to get your deals on terms.
Joe: Sometimes you’re just going to get the best price if you give them cash. So you have to take that into account as well, if you can get an even better price by giving them cash or if the deal makes sense by giving them the cash, and you’ve got the cash to spend, then I say go ahead and do it. It makes sense as long as you know that exit strategy, as long as you know how you’re going to sell that property. And in this case we’re doing flip properties and typically investors don’t have millions and millions of dollars to invest. So they’re going to run out of money if they’re doing quick flips unless they flip that property and sell it and get their capital back.
Joe: Now, if you have a lot of capital and you’re starting to make a lot of money and you need to put your money someplace, buying properties under market value, fixing them up and keeping them makes a lot of sense too. Then you sell them on a lease with an option to buy. You take a chunk of money plus you’re going to get monthly income on that property and you’re going to get a good return on your property. So if I have $50,000 to invest and I go out and buy a property that’s worth $100,000 for $50,000, I put maybe $10,000 into it. So let’s say I’ve got $60,000 to invest. I invest that $60,000 and I don’t sell it. Let’s say I hold onto that property. And let’s say that I’m getting $1,000 a month of income on that and after all my expenses I’m getting maybe $700 a month.
Joe: So I’m getting about $8,400 a year on that $60,000 investment which is a substantial return on my money. That’s almost 15% return on that capital. And that doesn’t include the equity that I built into the property. So I built in $40,000 of equity into the property in addition to that. So in my first year my return is dramatically higher than that. In actuality, I guess, if I put $60,000 into it it’s worth $100,000, I immediately walk into you know, a 70% or 80% return on that cash investment.
Joe: And then over that next year I’m going to make another 15% and the next year I’ll make another 15% and I’ll actually make more than that because I’m going to get money on my taxes, on the depreciation of the property. I’m going to make money because the property goes up in value another 3% of the value of the property. So another $3,000 on top of that which is like 4% or 5$ on that $60,000 that I invested. So when start adding up all the places that you’re making money on these deals it’s certainly a very attractive-looking type of investment.
Joe: The other thing to remember when you’re evaluating the value of an investment is not just how much money you’re going to make on a property but how long it takes you to make that money. I’ll have people come to me and say, hey, I made $100,000 on a deal. And I’ll ask them how long did it take you to do that? They say, well, it was two years. We had to buy the property, we fixed it up, we flipped it and I turned around and I made $100,000. I say that’s great. How much actual effort, how much of your time do you have into it? Well, I’ve got you know, perhaps months of effort put into that property, managing it, getting it fixed up, you know, doing all the work, managing the contractors, all that effort that they put into it to make that $100,000.
Joe: If you can buy a property that doesn’t take much of your effort and you can outsource it to other people then you’re return on your time invested is going to be much, much higher. So you kind of want to look at this as how much am I making hourly on a deal? Let’s say you do a simple For Rent Method deal where you’re taking a property with a lease option memo and you’re getting the right to sell that property on a lease option. This is what I teach my mentor students when they’re just getting started.
Joe: You take a property with a lease option memo, you get control of it at a particular price. Let’s say you’ve got a property that’s worth $200,000. And you’re going to turn around and sell that property for about $220,000 on a lease with an option to buy with $20,000 down payment from that seller who’s going to get a three-year lease option. You’re going to get probably $10,000 in cash and another $10,000 on a promissory note that’s going to pay you maybe $300 a month over time. You’re going to then give that buyer to the seller and they’re going to be able to have a lease with an option to buy tenant in there giving them market rent and promising to pay them $200,000 if they exercise the option in the future. So those are the numbers that they’re going to be looking at.
Joe: When you figure out the actual amount of time that the investor has in this deal, it’s probably eight to ten hours, enough time to talk to the seller, fifteen minutes to half an hour, enough time to find a buyer which may take you eight or ten hours if you’re doing the work yourself. If you’re not doing the work yourself you’re going to make much more money than that.
Joe: But let’s say you’ve got ten hours into a deal like this and you made $20,000 on that deal. That means you made $2,000 an hour for every hour you put into that deal. Now if you keep that property over time, you’re going to make even more money. And that’s one of the places that you eventually want to get to. You want to make enough money to be able to support yourself, to be able to maybe quit your job and do this full time, or maybe part time, ten hours, twenty hours a week. And then you also, once you get to that point and you’re able to support yourself, you want to be able to use the money that you’re making from these flipped properties and start putting them into portfolio properties and keeping properties for the long term and buying portfolio properties with zero down so that you can build it much, much quicker. That way you’ll be able to own a $1M, $2M, $3M worth of properties in a year, two or three years. It doesn’t take long to build a portfolio like that.
Joe: All right. I hope that helps. Good luck.