Posted by Merle on October 25, 2000 at 21:44:01:
You’ve asked an excellent question. Wish I could give you a real good, iron-clad method for creating immediate income. I will tell you what we did … but, I doubt that it will work for you. Not sure I would even try it again today. Know too many reasons why it won’t and shouldn’t work.
Perhaps someone with experience in others methods will respond with a way to do it today.
Ken’s questions is, “How do you generate cash income while building your business and creating long term income?”
We began in this business with enough cash to buy 3 houses. That’s what we did. Should have kept some in reserve.
When the cash ran out, we came up with the following plan. We paid the seller 85% of the appraised value for their home. We paid them 70% of the appraised value in cash. They received a note from us for the other 15% of the value. That note payable in 7 years … no monthly payments and no interest.
We then borrowed 80% of the appraised value from the banks (later from our private investors). Thus, we had 10% of the appraised value of the property left over at closing. That went inot our pocket. As loan proceeds, it was not taxable income.
For example, if we purchased a $70,000 home, we paid the seller $49,000 cash while borrowing $56,000 from the bank. We had $7,000 cash at closing. We also collected $2,000 to $3,500 as down payment (option consideration) from our buyers. That first year, we put about $80,000 in our pocket and paid zero income tax! Next year was even better!
A little math will tell you we financed 95% of the value of the property. But, remember the note to the seller was at zero interest, no payments. The actual face value of the note therefore was about 55% of its amount (calculating an imputed interest amount). So realistically, we were financed at 90%.
I can see some of the readers squirming at being leveraged so high. All I can say is that we are still in business after 16 years and that never created a problem for us.
Today, we put some cash into almost every purchase. Some properties we purchase with no loans at all. Our volume generates a nice cash flow.
By the way, about 3/4 of those sellers called to offer discounts on those notes for early payoffs.
If we were starting over today, we would probably try to come up with a similar plan. Would have to think about that for a while.
Hope this at least stirs some creative thinking for you.
Thanks and remember to enjoy this day … TODAY!!