CHAPTER 5

To call these next sections "investing" would be a bit of a misnomer.

You will not only learn to buy homes with no money out of pocket  but how to buy and get cash back at close of escrow.   That's right, buy Not Only with No Cash, Get Cash Back at Close of Escrow!

What we will be discussing is actually no investment at all!  And in one case, you could almost call it reverse investment because instead of putting money into the transaction, i.e. absolutely nothing down, you will actually be taking money out at the close of escrow while still owning the property.

That's right, Cash back at the close of escrow.  In the long run, I think this is the section that will be of the most benefit for the most people.  You will learn a number of ways to buy property without investing one cent and without using any of your present assets as collateral. The thing you need to keep in mind, is that although, these methods will work for anyone, they will not, necessarily, work for all properties or with all sellers. 

 During real estate negotiations, there is a common saying, "You give me my price, I'll give you your terms.". When buying a property with nothing down, you need to take the attitude that your main concern is long term profits not short term gain. 

The reason for this is that if the seller is giving you such great terms that you don't have to put a penny into it to buy it, chances are that he will, at least, want a reasonable price for his property.  The flip side of the coin is that if you can provide a sizeable chunk of cash, there is a good possibility that he will be much more flexible on price.  But, since we are assuming that you do not have the cash to work with, your main criteria for a purchase should not be price. 

Although, at times, you will find an exception to this rule, (ie. a property that is worth maybe $80,000 that you can purchase for $65,000 AND get terms) the point I am trying to make, is that if you insist on waiting for the great price, for every property you buy, you will probably pass up nine that over a period of a couple of years could have made you thousands.

 Although, everyone has their own criteria for determining their investment strategy, here is what I think is important:

 1) Price I don't feel that it is necessarily important that you purchase the property substantially below market value, but I do think it is definitely and obviously important that you don't pay too much. 

2) Terms The main concern here is that it does not cost you anything to buy it.

3) Cash Flow It is important that the rents you receive on the property are roughly equal to or greater than the mortgage payments plus taxes and insurance.  Many people feel that they can afford a negative cash flow of $100 or $200 per month (i.e. monthly expenses that are $100 or $200 dollars more than the rent they receive).  This, in the long run, limits you because there are only so many properties you can afford if they are each costing you $200 per month.  

Also, I've seen colleagues who thought they could handle these kinds of "negatives" only to find that they had buried themselves financially and eventually lost everything.

 4) Area  For anyone who has ever taken a real estate course, this comment is going to be a shock.  I don't think location is that important.  In real estate school we are taught that the three most important features of a property are "location, location and location." But I'm a firm believer that any property is a good investment regardless of the location IF YOU GET THE RIGHT PRICE AND TERMS!

The most important thing you should consider when buying a property is will it pay for itself?  Even if you don't buy it for ten or twenty thousand below market, if it pays for itself, it is a gold mine.  Why?  Even though you haven't made a dime yet, you are immediately reaping the many tax advantages that are still available to the private investor.  Also, as I mentioned earlier, your goal should be long term profit. There is hardly any area in the U.S. that, with the exception of normal business cycles, real estate does not consistently go up in value.  As we all know, there are exceptions, but historically, the downturns are few and far between.  Different areas appreciate at different rates, but it is usually going up right along with rents.  For the smart investor, that creates a huge opportunity...

Let's say that in the next year you buy five duplexes for about 200,000 dollars each.  We'll further assume that they are each valued at $200,000; your payments are about $2000 per month and you are receiving rents in the amount $950 per month per unit. 

Many shortsighted individuals would be less than enthusiastic with this situation.  What they would see is five duplexes with $1,000,000 dollars of debt, no equity and payments higher than the income. 

But for the person with some vision, that is very exciting! Let's look at your situation five years from now...

 The appreciation rate on real estate varies greatly nationwide, so I'm going to use what I believe in a normal market is an almost ridiculously conservative figure of 5%.  Also, rents are increasing at a much greater pace than real estate values so I'm going to use a 10% per year rental increase...

    1) At an appreciation rate of only 5% per year, in five years, each of your duplexes would now be worth over $250,000 dollars.  You bought them for $200,000, so you now have $50,000 in equity on each of your 5 duplexes for a total of $250,000 in equities!  And that doesn't even take into account your principle reduction from making those payments for the past five years!

    2) With a rental increases of 10% per year, at the end of five years the rents you would be receiving would increase from $950 per month to a little over $3,000 for each of your five duplexes.  So, even after making your $950 monthly mortgage payments you would still have over $1,000 dollars per duplex, per month, of pure profit.  So, you would now have a positive cash flow of over $5,000 dollars per month! 

PLUS, you have over $250,000 in equity!

As you can see, even though at the time you bought these properties they did not make you a dime and in fact were costing you a little bit every month, by simply holding on to them you have acquired a substantial amount of equity plus, a hefty monthly income.  The moral of the story is simple If it pays for itself, buy it!  Now, here's how you do it...