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Lending Other People’s Money For a Profit
By David Campbell On 02/04/2011 · 2 Comments · In Investment Opportunities, Newsletter
In my last newsletter, I wrote about making passive income from seller financing. If you missed that newsletter, you can read it on my blog by clicking here. The idea is to buy a property with conventional financing from a bank at a 5% interest rate, and then immediately resell the property to an occupant at a 9% interest rate. Assuming you can borrow money at 5% and lend it out at 9% with little to no risk, how much money would you like to borrow? If you’re making 4% profit on $500,000, that’s $20,000 a year of passive income from the banks money!
Would you like an extra $20,000 of cashflow?
For a lot of people, $20,000 of additional passive income would mean instant retirement. Maybe it is just enough for your spouse to quit their job. Maybe you could cut back your work schedule so you’ll be home to pick up your kids at school every day. Maybe it would give you the security cushion you need to quit your job and become self-employed. Maybe you could just start living life first class instead of coach. Whatever you do with the money is up to you, the important thing is to get started on a plan of action right away.
Sad, but true. Most people never take action.
I have a live deal for you to consider, and if you are interested you should act right away. It’s not that I can’t find a similar deal in the future, but as the saying goes, a bird in a hand starts your passive income sooner rather than later… OK, maybe that’s not the saying your were thinking of, but you get the point! The more important concept at play is the the law of diminishing intent. Time has a funny way of eroding your momentum. If you take action on something as soon as you form the intention, you are likely to be successful. The longer you wait from the moment you are excited, the less likely you are to do anything at all. So, don’t wait!
If you’d like more passive income, here is a live deal for you to consider.
Above is a three bedroom, two bath house with a beautiful swimming pool built in 1973 located in a nice middle class suburb of Dallas called Mesquite. To a savvy investor, the details of the house will be unimportant. The interesting thing about this house is the DEAL STRUCTURE. A family wants to own and live in this house, but they need to rent your credit to do it. Here is how it works:
YOU and your good credit buy this house for $86,000 with a $17,200 down payment (20%) and a $68,800 bank loan (80%) at 5% interest. The monthly principal and interest EXPENSE on the money you borrowed is $369.
A FAMILY buys your house for $86,000 with a $17,200 down payment (20%) and a $68,800 seller financed wrap note (80%) at 9% interest. The principal and interest INCOME on the money you loaned is $554.
YOU collect $554, pay out $369, and KEEP $185 a month. That’s a profit of $2,220/year. Your profit comes from borrowing from the bank at 5% and lending to a family at 9%. Nine percent income less five percent cost of funds equals a four percent profit on the bank’s money.
Your total investment is about $3,500 in closing costs to make $2,220 per year profit. That’s a 63% annual return on investment!!! In 19 months, you have all your money back and your return becomes INFINITE!!!
BUT, you say… What if the buyer defaults on the loan? Whether the family pays their mortgage or not, a savvy investor will make sure it is a win for him either way. If the family doesn’t pay their mortgage, you foreclose on the house and either make it a successful rental OR resell the house to someone else in exactly the same way! You could collect $17,200 in down payments twice! While you want your borrower to be successful, in reality you will make more money if your borrower defaults. The borrower also has a prepayment penalty in the note to ensure if they pay you off early from a sale or refinance, you’ll make enough profit to make the transaction worth the effort.
If you have at least $25,000 and you can qualify for a conventional loan, you should be able to repeat this process over and over again. Within a few days you’ll have your down payment back from your buyer/borrower, and within 19 months you’ll have all your money back. If you can’t qualify for a loan, you can still play! I have commercial lenders who will lend non-recourse money to your entity with 35% down and 7.25% interest on a 30 year fixed rate. Commercial lending eats up a lot of your cash flow, but it allows people who are “Fannie / Freddied” out to participate in this opportunity. Commercial lending is available to non US residents as well.
You could implement this business plan in your own market, but why? Dallas is one of the strongest real estate markets in the country. The population is booming, the job market is stable, and many credible experts are predicting a looming housing shortage in Dallas. While choosing a strong housing market to invest in is important, you are ultimately not investing in real estate. You are investing in the spread between your borrowing rate and your earning rate (arbitrage). You loan is secured by an asset with 20% equity which protects you from default. You are investing in a family who would rather own than rent, but if you took the house back it would make an excellent rental and you’ve got instant equity in it.
While 9% might seem like a high interest rate for a mortgage, the family living in the property is WILLING and ABLE to pay an extra $185/month because there are no other financing options available to them. The occupant has credit challenges and 9% seems like a great deal to them.
I’ve done the hard work of finding an excellent property with a qualified buyer who has a substantial down payment. My team will handle the logistics of the entire transaction. A law firm will draw up the documents, a title company will handle the escrow, and all of these costs are paid by your buyer / borrower. Even after the sale, our team can service the collection of your mortgage for you. Ladies and gentlemen, this is about as perfect as Hassle-free Cashflow gets!
If you are ready for $185/month of passive income (or even better how about $185/month x 10 properties), please email me right away! I expect a high volume of calls on this opportunity.
While this isn’t the only time an opportunity like this will come along, the law of dimishing intent says act on your intention now or you probably never will.
To your success!
Professional Investor, Developer, Financial Mentor
[…] This post was mentioned on Twitter by Norris Glasson, David Campbell. David Campbell said: If you could borrow money at 5% and lend at 9%, how much money do you want to borrow? Learn how to do this safely: http://bit.ly/ik3qop […]
[…] David Campbell has shown us in previous newsletters (if you are not familiar with these articles, visit the blog page), purchasing highly leveraged undervalued cash-flowing real estate with long term, low fixed rate […]