How Quickly…(long) - Posted by Sean
Posted by Sean on April 19, 1999 at 16:13:39:
…could I turn $100,000 cash into $1.0M cash, or how quickly could $100,000 cash be turned into $1.0M equity?
I think the problem that most of us run into in this business is we all (either quickly, or slowly) turn into millionaires ON PAPER. However the costs and time of converting that equity into cash is prohibitive.
So a lot of us BORROW money to buy real estate and either sell on contract or rent it to earn a spread (like how banks borrow money from the federal reserve, then loan it to us on credit cards for 18%). Other people’s money does most of the work with as little of our own money (ideally none) involved.
But let’s say that you do have $100,000.00 cash and you wanted to make a killing. Let’s also say that you were located in or around Southern California (which is where I am). And let’s say you had the expertise of a John Behle.
So you search and find notes or deeds of trust for sale and you buy three of them for $33,333.33 each it would not be unreasonable to find that these notes would have face values of $67,000.00 and bear interest at 9 percent (180 payments).
In essence, you have doubled your money. The problem now becomes converting this paper worth $201,000.00 into cash (aside from waiting 15 years for it to arrive). So you search for people that own their units free and clear and you find three 1+1 condos going for $80,000 each.
So you convince the people owning them to take back $67,000 in financing and you’ll put down $13,000 cash (a little over 15% down payment … reasonable). You get a bank loan for $64,000 … you give them $13,000 cash and a $67,000 note. That leaves you with $51,000 cash from each property. You’re up to $153,000 cash.
Plus, if you are lucky, you might even be able to get a positive cash flow out of these three units on a 30-year amortized loan (though I doubt it). Let’s assume this whole thing took you three months to find the notes, find the property, do the negotiations and close the deal.
So you’ll need to repeat this type of a thing about 6 times to get $1.0M cash and so I’m figuring about 18 months. Applying the rule of 72 it seems like I’m getting about a 480% return on my money not counting equity gains.
Of course this scenario assumes you have good enough credit to qualify for a bank loan. It also assumes that banks will continue to give you loan after loan, but I’ve heard a nasty rumor banks start balking around 5 or 6 real estate loans. It’s a good theory, tho, and I learned it from John Behle.