The Alchemy of Real Estate Finance
Archives: Daily Issues
Issue #2090
- WEALTHY: 3 reasons to do an "all-cash" deal – even if it costs more than bank financing (Justin Ford)
- HEALTHY: 300 hours to lose 6 measly pounds? (Craig Ballantyne)
- WISE: John Milton on creating wealth
ALSO IN THIS ISSUE:
- Helen’s marketing potential (Michael Masterson)
- 3 steps you can take right now to get your Internet business up and running (David Cross)
- It’s Fun to Know… about dolphins and whales
- Add "elan" to your vocabulary
The Billionaire Way
I would recommend "The Billionaire Way" program to anyone who is contemplating a new enterprise or business start-up, or is already in business for themselves. It enabled me to look at my life, attributes, and habits in a refreshing new way. I was delighted to discover that I too have a number of the traits and qualities that many who are successful in business possess, which I hadn’t realized. I am very excited to apply the principles that were presented in the program to my new business ventures.
A tremendous benefit was to be able to talk with the author of the program, Bob Cox, about my own business strategies and ideas. Bob spent an hour on the phone with me after I finished the program, and his personal insights and suggestions were very helpful and inspiring.
I know that I will often refer back to the information provided in "The Billionaire Way" to enhance my chances for success!
- Catherine McNeil, Monte Vista, Colorado
"If by fire of sooty coal th’ empiric alchymist Can turn, or holds it possible to turn, Metals of drossiest ore to perfect gold."
John Milton
The Alchemy of Real Estate Finance: How Buying With All Cash Can Deliver Infinite Leverage
By Justin Ford
When you buy a property "all cash," it doesn’t have to be all your cash. In fact, none of it has to be.
In the most general sense, a buyer may say he is making an "all-cash offer" even when he intends to seek bank financing. In this case, he simply means he’s not asking the seller to hold a note. Instead, the buyer will deliver all cash at closing, even if he has to borrow that cash.
A stricter use of the term, however, is that there will be no seller financing required and there will be no third-party financing contingency. The buyer is prepared to bring all cash to the table, without having to get approval from a bank or any third-party.
This is the kind of offer that can get the attention of motivated sellers.
So, where can you get the cash to do all-cash deals?
A hard-money lender may lend you 100 percent of the purchase price – including rehab costs, if you’re buying at a big enough discount to market value. You may have a network of private lenders to finance your all-cash purchases. You may have secured and unsecured lines of credit. You may have potential equity partners who put up the initial cash for a part of the deal – and those partners may also source their cash from their own lenders, not their own pockets!
Ideally, you’d have developed access to cash through all these resources.
Now, why would you want to do all-cash deals? For a few related reasons…
Cash Creates Opportunities
The most oft-cited reason is to be able to do deals you couldn’t do with third-party financing. These are deals that need to close quickly because the seller is seriously behind on payments or even facing foreclosure. These can also include deals that recently fell through after a few weeks or months at contract, when the buyer couldn’t pull the financing together.
Other scenarios are those in which it would be difficult or impossible to find an institutional lender for the property. For example, it may be vacant, in need of considerable repair, or both. Or it may have code violations that the seller won’t or can’t clear up.
Finally, you may be working with a wholesaler or a reseller of bank-repossessed foreclosures (REOs) who is liquidating inventory only to all-cash buyers.
For all these reasons, it makes sense to constantly work on developing sources – private lenders, lines of credit, and potential equity partners – to fund all-cash purchases.
But here’s the twist…
Even if you have a property under contract that banks are willing to lend on, it still may make sense to purchase it with all cash – even if the cost of that cash is higher than what you’d pay a bank (which will almost certainly be the case).
This is a good strategy to consider when you buy a property under market value to begin with, and you then increase the value by making repairs and raising the occupancy.
The idea is to use temporary bridge financing for the acquisition. Then, after the building is "performing" (rehabbed, leased out, and churning out rents like a Pez dispenser), you replace all your short-term acquisition money with long-term, low, fixed-rate financing.
The Benefits of Bridge Financing
In the right situation, bridge financing can allow you to achieve maximum leverage, free up your cash quickly, and then do it all again and again. This not only can help you earn a higher return on equity, applied repeatedly it can help you compound your wealth at a very high rate.
A caveat: This strategy – as profitable as it can be – only makes sense if you first have the fundamental real estate skills. You have to be able to buy right, rehab cost-effectively, and manage a property well (or put competent professional management in place).
If you can do that, this strategy can help you create a virtual money tree.
Here’s an example of what I mean…
How to Use 100 Percent Financing and End Up With Low, Fixed-Rate Bank Financing
Let’s say you have a $200,000 credit line available to you … from your home or other investment properties. And say you find a great under-market deal on a four-unit building. After putting in $30,000 in repairs, the property will produce $3,000 a month in gross revenue and it will have a market value of $260,000. You have a motivated seller/special situation, so you’re only paying $150k for the building.
Now, because the property and your credit are okay, you could get bank financing. If you did, you might borrow 90 percent of the $150k from a bank at, say, 7.5 percent. Then you’d have to come up with about $57k in cash.
That would be $15k for the down payment, another $30k for repairs, $7k for closing and carrying costs, and maybe $5k for cash reserves once the property is up and running.
But you know this property will cash flow very strongly and will appraise at a much higher value once it’s performing. So you decide to do an all-cash purchase to maximize your leverage and ROI.
Now, instead of coming up with $57k and borrowing the rest, you come up with $190k. And all of it is borrowed from a credit line.
The $190k breaks out as follows: You use $150k for the purchase, $30k for the repairs, and $10k for closing and carrying costs. (The carrying costs would be higher because you’d be borrowing more at a higher rate.)
But, remember: Once the property is rehabbed and performing, it’s worth $260k. So at that point you go to the bank and get a "cash-out refinance loan." In this case, the bank might agree to lend you 75 percent of the new appraised value of the property: $195,000. That repays the entire $190k you put into it, and you end up with $5,000 to leave in the property’s bank account as reserves.
The $195,000 is only 75 percent of the appraised value, so the bank gives you a fixed rate of just seven percent. Your principal and interest on the loan come to about $1,300 a month. Add $300 for taxes and insurance, and another $300 as an allowance for vacancy. Add $200 as an allowance for maintenance (which should be relatively low since you just rehabbed), $75 for lawn care, and $125 for common-area utilities.
In total, your monthly mortgage, expenses, and allowances are $2,300. Subtract that from your gross monthly rental revenue of $3,000, and you have $700 in monthly cash flow. That’s $8,400 annually that you created without locking up a dollar of your capital. And, at the same time, you created $65,000 in instant equity (the property’s $260,000 market value less the $195,000 loan).
And here’s the kicker…
That $200k from the credit line you used to make it all happen? It’s freed up and ready to go again!
In fact, you may easily be able to get a 20 percent to 30 percent increase in the money available to you from the credit line you used, since you’ve proven that you can make payments on time and zero out the balance. Your successful track record will also help you develop your network of private lenders and potential equity partners.
Meanwhile, you now have equity in another property that you may be able to get another credit line on . And if you’re buying in the right part of the market cycle, the value of that property – and your equity – will continue to grow (through appreciation, amortization, and increasing net rents).
The point is not to over-leverage. You should never do that. This strategy works because you turned a non-performing property into a star performer – a money hole into a money producer. Because you knew how to realize the cash flow potential of the property and thereby dramatically increase its market value.
[Ed. Note: Justin Ford will be one of 12 highly successful real estate entrepreneurs to teach their investment secrets at the Doral Golf and Country Club Resort in Miami this fall. Other speakers include Dave Lindahl (on apartment house investing and condo conversions), Alan Cowgill (on building a multimillion-dollar network of private lenders), Steve Cook (on wholesaling properties for quick cash), Thomas Phelan (on buying real estate with your IRA), plus other expert investors and teachers in the most profitable segments of real estate investing - from pre-foreclosures to short sales. Click here to learn how you can attend this extraordinary 3-day event for less than the cost of your daily newspaper.]
The One Event That Moves Every Stock in the Market
There is one event which takes place four times every year and is responsible for some investors making absolute fortune in the market. In fact, nothing else moves a stock quite as fast… or as predictably.
The opportunities around this event are so great that Wall Street spends BILLIONS on research to maximize their profits. Now, one former insider is prepared to let the secret out.
Last quarter, investors who tested this system were rewarded with 100% winning recommendations! Here is YOUR chance to profit!
Dear Michael Masterson: "How do I generate interest in my course on a large scale?"
Helen V. writes to say, "Thanks for all of the wisdom you’ve passed my way in the last few years" and to ask how I can help her build her business. Her business is teaching a religious course that she leases from a private foundation. She says it is "designed to help each person understand "what they should do with their life to become productive and fulfilled."
Helen says that she has delivered the program to "several ladies’ groups, a youth group, a church group, and a high school cheerleading squad." Her question is about marketing it. "I have tried sending letters to all of the churches in my town. I’ve sent letters to school principals (only after they expressed interest) to no avail. When I speak to people about it, they get excited and are very interested. But how do I generate interest in my course on a large scale? And, how do I turn the interest into closed deals?"
She says, "The problem is not the material, it gets rave reviews. It is not my speaking skills; again, people really enjoy my seminars. Do you have any ideas?"
What Helen Should Do
Helen has identified the problem. The product is good but the marketing is weak. That’s easy to fix. She needs to learn direct-response marketing. She can do that by taking the ETR direct-marketing program, the best program of its kind in the world. Then she should apply every lesson to her business, paying particular attention to how to construct a compelling offer. This is the key challenge for her – to make her program more appealing.
There are only two ways to make any offer more appealing: You can make the promise of benefit stronger or you can reduce the barriers of resistance. Helen should look at the promises she is making now in her sales pitch – what she is saying the course will do for her potential clients. It would be very easy to ratchet up the claims she is making by making the benefits more concrete and more specific.
How, exactly, will she make their lives more "productive and fulfilled"? Spell it out for them, over and over again. Then prove she can do that by offering testimonials from people who have taken her course and benefited. If she doesn’t have those testimonials already, it is a bad sign. It means that either the course is not effective or she has not kept in touch with her clients. If she does have testimonials, it will be easy to make the claims specific and concrete. And that will make her sales pitch more compelling.
She can also lower resistance by making the offer softer (although it’s already pretty soft) and making the guarantee much stronger. When she gets all this down and working on a local basis, she should go regional and then national and then international by converting her course to one that works on the Internet. Before doing that, she will have to renegotiate a better deal with her supplier or, if they aren’t smart enough to do that with her, reinvent the course as something new and stop paying royalties.
The Best Starting Point for Your Online Business
By David Cross
There’s an old joke about a stranger in New York City who stops and asks a local for directions to the Empire State Building. "Well, if I was heading to the Empire State Building, I wouldn’t start from here!" quips the local.
I was asked recently whether I thought a podcast on iTunes or a video on YouTube was the best way to start a new online business.
"Well, if I was starting an online business, I wouldn’t start in either of those ways," I answered.
Where I would start – immediately – is with this three-pronged approach:
1. A Simple Pay-Per-Click (PPC) Ad Campaign
Most major search engines offer you the ability to buy ads that appear when someone searches for keywords or phrases you select. You can set a daily budget of a few dollars, and within an hour have people clicking on your ad. This is the best way to test your marketing messages – with real potential customers.
2. A Content-Rich Website
Attracting people to your website through a PPC ad campaign is one of the best ways to drive targeted traffic – people who already have expressed interest in what you are offering – to your website. Once they "click through" to your website, keep them there by making sure you have useful, relevant content (articles, product information) for them to read.
3. An E-mail Newsletter and/or Special Reports
The success of your Internet business depends on your ability to convert the people who click on your website into customers. I’ve always found that the best way to do that is to capture their e-mail addresses so you can send them product promotions on a regular basis. And the best way to get those addresses is to offer free special reports and/or a free subscription to your newsletter – which can be sent to them – instantly and automatically – via e-mail.
[Ed. Note: David Cross is Senior Internet Consultant for Agora Inc. in Baltimore. This week in Denver, David and ETR's team of Internet marketers will be teaching dozens of ETR readers how to build their own online businesses from scratch. If you couldn't make it to this conference, you can still learn how to start your own money-making Internet business at this fall's Info-Marketing Bootcamp. Get the details here.]
This Common Exercise Method Is a Waste of Time
While the mainstream fitness media still insists that aerobic exercise is a great way to lose weight, readers of ETR know that interval training is the better way to burn body fat – and with less workout time.
Still not convinced?
A recent study published by the North American Association for the Study of Obesity instructed subjects aged 40 to 75 to do 60 minutes of aerobic exercise per day, six days per week, for an entire year.
Given the amount of exercise, you would expect weight losses of 20 or 30 pounds or more, right? Well, the surprise findings showed the average fat loss for female subjects was only four pounds for the entire year, while the men lost 6.6 pounds. That’s over 300 hours of aerobic exercise just to lose a measly six pounds of blubber. Not time well spent, in my opinion.
Try one of these interval-training exercises:
- If you are walking outside, find an incline and challenge yourself to run up it for 60 seconds, then walk down for 60 to 120 seconds. Repeat up to six times.
- If you’re walking on a treadmill, adjust the incline or speed to challenge yourself for 60 seconds, then return to a normal pace for 60 to 120 seconds. Repeat up to six times.
[Ed. Note: Craig Ballantyne is an expert consultant for Men's Health magazine. If you're looking to burn fat, build muscle, and quickly step into the body you have always wanted with just three workouts each week, check out Craig's fat-loss system, Turbulence Training for Fat Loss.]
It’s Fun to Know: About Dolphins and Whales
A Welsh scientist has discovered that dolphins off the coast of Ireland have a different "accent" or "dialect" than those found near Wales. The researchers believe different environmental conditions may have contributed to the distinct dolphin vocalizations, which include whistles, barks, and groans.
Scientists have also found that blue whales near the Pacific Northwest sound different than those near the Chilean coast.
(Source: CNN.com and MSNBC.com)
Do You Need To Start Out Small?
If you don’t have an Internet business yet, or if your company is smaller than $1 million then you need something different… something that lets you start off small.
One man I know turned $10 into over $500,000. How’s that for starting small!
Let me show you how to get a similar Internet income stream running for almost nothing.
- Patrick Coffey
Word to the Wise: Elan
"Elan" (ay-LAHN) – a French word from the Latin for "to throw a lance" – is (1) enthusiastic and assured vigor, or (2) distinctive/stylish elegance.
Example (as used by Deborah Garwood in a New York Sun article about Swiss-based photography team Peter Fischli and David Weiss): "Fischli/Weiss’s humor and elan about the very process of being artists – European artists in particular – is at the forefront of their practice."
[Ed. Note: Become a more persuasive writer and speaker ... build your self-confidence and intellect ... increase your attractiveness to others ... just by spending 10 VERY enjoyable minutes a day with ETR's new Words to the Wise CD Library.]
Michael Masterson
Copyright ETR, LLC, 2007
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