A Real Estate Formula – Great Returns on your Money
t was a simple real estate formula. The ads ran in my local newspaper (online version) for about a year before I realized exactly what was going on. The ads were always the same: A house for sale with 5% down and payments of 1% of the purchase price. Maybe a three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.
When a colleague started doing the same thing he explained the process to me. It was a way to get a great return on capital, and it was the opposite of buying with no money down.
The Simple Real Estate Formula
You probably know that when you buy with cash, you can often get a much better price. With no financing contingencies in the offer, and the promise of a faster closing, sellers are willing to sell for less. You can offer $90,000, for example, on a house that might be worth $108,000. If you can’t get it for less than, say, $95,000, you walk away – there are always other opportunities.
Once you buy the house, you put few thousand dollars into high-return repairs and improvements. These might include paint, carpet, and some wholesale priced granite countertops. For our example, we’ll say you spend $6,000. Let’s suppose the house is now worth $120,000 after your improvements. You’re ready for the next important step in this real estate formula.
You put it up for sale, targeting buyers who can’t get financing easily. You provide the financing. Because you are making it easy for the buyer, you can get more than the $120,000 value for the home – and do it without paying a realtor’s commission. Let’s say you sell it for 127,000. The buyer needs a down payment of just 5%, or $6,350, and makes monthly payments of $1300 per month. You charge higher interest than the going rates at the banks, of course.
This is a win-win situation. Your buyer is able to buy a home instead of renting, and you get a capital gain over $20,000 after expenses, plus good interest. Your total rate of return will often be over 20%!
I know a father and son team of lawyers who do this consistently. They saved money by doing their own foreclosures when necessary. Once they foreclosed, they raised the price and sold the home all over again.
They make millions. Did you know that 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? That’s the power of a good real estate formula.