Ridiculously profitable L/O strategy - and no sub2 - Posted by Lou Pohl

Posted by Lou Pohl on September 29, 2003 at 18:13:56:

Sounds good. If you can continue to buy 315k houses that only need 15k in repair for 175k then more power to you - don’t change if it’s working for you. In my case I just haven’t found enough of those to fill my plate…

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?

Re: I can’t believe you’ve done this… - Posted by Jim V

Posted by Jim V on September 29, 2003 at 01:42:09:

You’ve promoted one of the last remaining secrets in real estate investing.

Buy low, sell higher.

Regardless of your local market considerations, I fear the day that this concept spreads to my area.

Two LOUP-holes - Posted by William Bronchick

Posted by William Bronchick on September 28, 2003 at 20:48:11:

What you have described is an old formula, done by investors all the time. Very profitable, but not as easy or profitable as you think…

First, you can’t always rent a $200,000 house for $2000/month. In my market, a $200,000 house rents for $1200 per month. In some markets you may get that kind of rent, but it’s the exception, rather than the rule. Also, $7k option money is optimistic; $3k-5k is more likely.

Second, you are making the basic “on paper” mistake that many beginners make. Even if you could rent it for $2000, it won’t always means $500/month profit. There’s advertising. There’s vacancy. There’s maintenance and repairs after the tenant/buyer (probably 1 in 5) defaults or doesn’t exercise their option.

You can still make plenty of profit, just understand it’s a lot of work - and well worth it.

The issue I see is … - Posted by Redline

Posted by Redline on September 28, 2003 at 15:44:39:

Sure this will work but for me, I’d be worried about holding onto 10,15,20 properties that had very little equity and having the bottom fall out on me. That’s how you go from doing really well to bankrupt. Ask all those guys who did it in the 80’s. Me, I’m just not comfortable holding that much real estate with no equity. It’s all predicated on the market continuing to rise and right now the market is shaky.


Re: Ridiculously profitable L/O strategy - Posted by michaela-atl

Posted by michaela-atl on September 28, 2003 at 13:31:29:

well, if you do want to qualify for a mortage, why not ask the seller to give you title with a 30-day balloon payment. Then refi for 80 of appraised value with a lender that doesn’t care about seasoning (greenpoint etc).

At that time you will only have to come up with closing cost and no down payment.


Re: Ridiculously profitable L/O strategy - Posted by Jack

Posted by Jack on September 28, 2003 at 11:20:03:

Why not buy at 75% LTV, refinance at 100%LTV, rent for $2,200/month and sell at 110% LTV? Oh, would that be unrealistic?

Re: Ridiculously profitable L/O strategy - Posted by Dan

Posted by Dan on September 28, 2003 at 08:20:38:

You could probably sell your system the way you have written it to 500 new investors and never even have to buy a house. I will just give you a couple of thoughts:

  1. Does your area pull 2k per month in rent? Make shure your realistic before you put a stake in the ground for 2k and the house sits empty.
  2. Most tenant buyers have credit problems that can’t be fixed in 12 months. Your should consider 36 month terms on your lease.
  3. You will have fix-up cost, holding cost, and taxes to pay if it sells in the 1st year.
  4. When you refi to get back your expenses, consider a 80% LTV to wipe out PMI. If your going to put your credit on the line with this house, you don’t want a 95% motgage worth 195K on a 200k house. If you need to wholesale it someday you will be stuck.
    After about 3 of these most lenders will start saying no unless your W2 earned income rock solid and can support 15 houses.

If you get the same house sub2:

  1. you will get 3-5 payments from the seller. ( $4-6k ) no loans, immediate possestion, fix-up and holding cost are now a non issue.
  2. If you took ovet a $189K note your at the same starting point you would have been after your refi.
  3. If 2k in rent is normal then putt out your signs and get 5-7 k in nroc.
    enjoy the spread for 34 months and here comes the back-end.
  4. how much money have you spent ?
  5. how many of these can you do in a year ?

check out www.getthedeed.com by Charlie France

Am I the only one that caught this?! - Posted by Jason (AL)

Posted by Jason (AL) on September 28, 2003 at 02:39:05:

Even if that is your real name…heh, it sounds like “loop-hole” :wink: I like it.

Oh, and your strategy…I like that as well. Best of luck to you. Let us know how it turns out.


Do not limit yourself to one property … - Posted by Peter1212

Posted by Peter1212 on September 27, 2003 at 23:49:03:

Why limit yourself with buying one property only at 20% below market? Why don’t you buy 20 properties below market with the same scenario make 10K positive cash flow a month, and sell them 5% above market in a year and BOOOM you are a millionaire! Than you can start teaching others how to become millionairs in RE.

I’m out the door… - Posted by Hank FL

Posted by Hank FL on September 27, 2003 at 21:39:51:

and I’ve read your post very quickly but I think I can add on an idea before I hit the bricks.

Once you own a property by taking it sub2, there are many lenders that will treat a new loan on that property as a refinance w/out much seasoning at all.

MUCH better terms. Food for thought, no ?

At least that’s how some programs worked before I left the country after the Holidays.

Re: Ridiculously profitable L/O strategy - Posted by Brent_IL

Posted by Brent_IL on September 27, 2003 at 21:27:33:

If you can buy consistently at 20% below FMV and rent it as a L/O at 5% above FMV, go for it.

Re: Ridiculously profitable L/O strategy - - Posted by phil fernandez

Posted by phil fernandez on September 27, 2003 at 21:27:03:

I like your plan. Looks and sounds reasonable to me. Make sure you know your local market. Keep in mind in today’s financing world, if you fog a mirror there is a pretty good chance that someone will give you a mortgage. So there are fewer folks out there for you to push your lease option scenario on. And will the left overs have the $7,000 tucked away in their bank account to give it to you as option money.

But sure your plan could work and would work even better if mortgage interest rates shot up to 10% - 12% like the olden days.

Agreed… - Posted by Lou Pohl

Posted by Lou Pohl on September 28, 2003 at 21:11:00:

As far as the rents, luckily for me those type of numbers will fly around here. In the DFW area a 100k house rents for around $1000. I close on a property tomorrow - it is currently rented for $550 and I’m buying it for $42k. It needs a little work …

And I definitely agree on your 2nd point. I just didn’t get into all those little details for the sake of simplicity. I plan on creating a nice buyers list once I get going so hopefully I can get t/b’s in there quickly, but I understand that it might be a few months at times, their will be repairs and maintenance, etc. As you suggested at the end of your post, I figure these things will eat into the profits a bit but with 40, 50, 60k+ in potential profit per deal there is plenty of room.

Thanks for the reply!

That’s not an issue … - Posted by Lou Pohl

Posted by Lou Pohl on September 28, 2003 at 17:03:54:

I wouldn’t hold onto “10,15,20 properties that had very little equity”. I would be more than happy to just do 8-10 of these a year. So 10 max at any one time. And they all have at least 15-20% or more in equity. A few of the options will get excercised in a year (more depending on your “clients”), and you refi the rest and hold them for another year and/or just sell them after 1 year if the t/b doesn’t excercise. But either way you’re not holding a ton of properties with no equity, right?? This strategy is NOT predicated on the market continuing to rise as the majority (practically all) of the profits are realized by buying the properties below FMV. You would only hold on to them for 1 year in order to sell them on a lease option to make more money AND to allow you to pay the significantly lower long term capital gains rate.

Re: The issue I see is … - Posted by Brent_IL

Posted by Brent_IL on September 28, 2003 at 16:35:36:

Not to mention that we’re all dancing around the 20% under FMV with no repairs part.

What is your point … - Posted by Sally Fodern

Posted by Sally Fodern on September 28, 2003 at 11:25:17:

What is the point of your post? The scenario that was pointed is quite reasonable and people are doing it all over the country. What part of the original post do you think is unrealistic?

Re: Ridiculously profitable L/O strategy - Posted by John

Posted by John on September 28, 2003 at 09:24:19:

Just buy at 78% below FMV and re-rent at 118% going rate for your market.

Re: Am I the only one that caught this?! - Posted by Hank FL

Posted by Hank FL on September 28, 2003 at 16:02:23:

I shoulda spotted that on the count that I recently posted this:



Hugh Jorgan

Not taking it subject 2… - Posted by Lou Pohl

Posted by Lou Pohl on September 27, 2003 at 22:06:12:

I wouldn’t be taking these properties subject 2 … I would be getting new loans to pay off the sellers’ loans. I know this is debated quite a bit on this board, but I personally don’t like the idea of taking properties sub2 so I just won’t do those. I have no problem taking out there loans and getting a new one. Plus it will be easier to find houses to buy…