Ridiculously profitable L/O strategy - and no sub2 - Posted by Lou Pohl
Posted by Lou Pohl on September 27, 2003 at 21:04:22:
Wanted to see what you folks think about this strategy. I plan on targeting 150-300k houses, but have used a 200k FMV price in my scenario for the sake of simplicity…
Buy a 200k house for 20% below FMV. That’s 160k. I’m going to buy this property with a 95% LTV investment loan, which means I’ll have to put down about 10k including closing costs. My PITI will be about $1500 a month (taxes are high here).
Now I’m going to sell this property for say $210k on a 1-year lease/option (with the right to renew for another year) to a tenant buyer who pays me say 7k in option consideration and $2000 a month in rent. So my cashflow is around $500 a month.
So basically I get 7k now, about $500 a month until they excercise, and another 43k when they do. If they excercise at the end of 1 year I make around 56k.
If they need to renew for another year, I immediately do a 90% LTV cash out refi and pull out about 35k. I continue to collect $500 a month. If they finally excercise the option at the end of the 2nd year I get another 14k or so. So if they took 2 years I’d end up making around 70k.
So basically I end up making 55-70k on this property in 1-2 years, maybe even more if they never excercised their option and I had to start all over again.
The key is that whether they excercise their option or not, I can do a 90% cash out refi at the end of the 1st year and get a big portion of my profits guaranteed within 1 year at the latest.
How many of these would I need to do to make some serious cash? Not many it seems. Am I missing something?
To make this even better, I might use private investors’ money instead of my own when acquiring the properties. For example, have them put down the 10k to acquire the property, and give them the monthly cashflow for example. Actually I shouldn’t give them ALL the cashflow, because that would be around a 60% yield for them. That’s way too much so I should probably keep some of the cashflow I guess. Plus I make a minimum of at least 50k more (the difference between what I bought and sold it for) without using any money of my own. Granted the private investors would be in a 2nd position at around 80% LTV so this might not always be possible for everyone, but I have friends and family who would be happy to do so and make at least 25%.
So, am I missing anything here? This sounds pretty easy. When I was using bandit signs I was getting perfect leads for doing this type of thing … so that’s probably how I would get started. I can’t see NOT doing at least 10-15 of these in 1 year. Adjust the numbers a little lower or higher depending on the price of the houses you were buying, but either it adds up to some serious cash without ever hassling with doing any major rehab, worrying about lenders calling your loans due, etc. etc. Comments?