“works well in theory” kind of thing - Posted by Brent_IL
Posted by Brent_IL on November 10, 2001 at 10:16:40:
We tried this approach about ten years ago.
When receiving 12 monthly payments for ten in advance, our returns were around 35%. Pay 15-20% for the money, Get rich on the spread.
It didn’t quite work out that way. The whole concept is simply a way to conceptualize making high interest, short-term, loosely-secured loans. You don?t have a lot of control over what?s happening throughout the deal. This was our experience.
A landlord with tenants that pay on time, each month, every month, will usually have the capability to go to a bank to get short-term financing.
We get the ones that can’t. The note would most likely be secured by an assignment of rents, or a highly encumbered property. Otherwise, they?d be talking to the loan officer.
Because prompt payment depends on a full house of happy tenants, you would want repairs and maintenance to be taken care of quickly. The landlord, who will swear to you that expenses haven?t gone over 10% in decades, needs to defer maintenance to have a cash flow after his payment on your note. Expenses are cut back. Tenants withhold rent, or move. No money to pay you. What can you attach? Messy.
One solution is to take charge of everything via a triple net lease. A SFH rented at a discount over a longer timeframe, say one year plus four extensions, and re-rented at a profit might work. My thought is that if an owner would accept a NNN lease, and I am going to go to that much trouble, why not simply buy the property on terms.
A generation ago in Chicago, there was an influx of people who emigrated from Poland. Real estate was the investment of choice. Folks have told me that one method that was used for partial financing was to sell the annual rental income from one day, or 1/30th of a month, to thirty people. Vacancies weren?t a problem. I think it was a much different legal climate, and personal obligations were taken more seriously.
It can work; it?s just not an easy way to fame and riches.