Real Estate Investment – One Simple Formula
The ads in the small-town newspaper were always the same: A house for sale with 5% down and payments of 1% of the purchase price. It might be a three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.
Finally it was explained to me that it was a way to get a great return on capital. It was the opposite of buying with no money down. You bought for cash.
A Real Estate Investment Formula
It is simple, really. When you buy for cash, you often get a much better price. A house that needs a little work might be worth $75,000, for example. By offering $65,000 cash, you negotiate your way to a $68,000 purchase price. If not, you walk away – there are always others.
Then you put few thousand into high-return repairs and improvements. Paint, carpet, and maybe asphalt for the dirt driveway. For our example, we’ll say you put $5,000 into it.
Now it’s worth $85,000 perhaps, but you target those buyers who can’t get financing easily, and you finance it yourself. By making it easy for the buyer, you can get $90,000 for the home – and do it without paying an agent’s commission. Whatever the sales price, you let the buyer put 5% down, and make monthly payments of 1% of the purchase price. Of course, you get higher than market interest too.
The buyer is thrilled that they are buying instead of renting, and you get a capital gain of perhaps $14,000 after expenses, plus good interest. Your total rate of return is somewhere over 25%!
You can save money by doing your own foreclosures if they become necessary. After foreclosing, raise the price a bit and sell it all over again, of course. By the way, if you can get an average return of 18% on your money, you’ll turn $75,000 into more than one million dollars in about fifteen years.