passive – Hassle-Free Cashflow Investing

Hassle-free Passive Income from Seller Financing (part 1)

The housing trend in Dallas is clear. The population boom is creating a housing shortage, but home buyers can’t get conventional financing. Building apartments for people to rent is a great solution for real estate developers like me, but how can average investors turn this situation into a profitable outcome for their family? Your answer might be “BECOME THE BANK”!

Here are three common stories in Dallas:

PERSON #1 just moved to Dallas from California because his company relocated and he chose to follow. He has great income, but he just lost his over-leveraged California house through foreclosure or short sale. The result is bad credit which prevents him from buying a house.

PERSON #2 felt the pinch of the economy and was unemployed for a few months. He burnt through his savings and got behind on his bills. He finally found a new job, caught up on his bills, and even put a few dollars in the bank but his credit is still shot which prevents him from buying a house.

PERSON #3 moved to Dallas from Mexico. He is hard working, employed or self-employed in the service industry, and he has thousands of dollars tucked under the mattress in his apartment. He makes enough money to buy, and he has a down payment, but he has no credit profile and his income is hard to document

All three people share the following characteristics:

They WANT to buy a house.
They can AFFORD to buy a house.
They can’t get a BANK LOAN to buy a house.
They are WILLING and ABLE to pay a high rate of interest because they have very few financing options available to them.

A private investor can step in to fill the void created by today’s tight lending conditions. This usually translates into seller financing. Here is a case study:

Investor buys a house for $125k with $25k down and $100k bank loan at a 5% interest rate.
Investor sells the house to a home owner (one of the hard to finance people described above) for $130k with $10k down and a $120k seller financed “wrap note” at an interest rate of 8%. The investor makes a small profit at the point of sale by reselling the house for top dollar (remember the buyer has very few choices).
The investor originally invested $25k and “got back” $10k from the buyer, so the investor’s net investment is $15k (we’ll assume the hard to finance home buyer pays all of the closing costs for both transactions).
The investor’s principal and interest payment on his 30 year $100k mortgage is $537.
The investor’s principal and interest income from his 30 year $120,000 seller financed wrap note is $881.
The investor’s cashflow is $344 / month of which $42 represents the amortization of the investor’s $15,000 investment and $302 is PROFIT!!!
$302 monthly profit = $3,624 annual profit
The investor’s return on investment is $3,624 divided by $15,000 which is 24% annualized.

Sound complicated? Well, it’s not! Here’s how YOU can do it:

Our company identifies a financially qualified but hard to traditionally finance buyer (occupant).
Our company matches the buyer with an investor willing to owner finance.
Our company helps the investor and the homeowner locate or build the perfect house to be financial “partners” on.
The investor buys the house from our company.
The homeowner buys the house from the investor.
The homeowner makes payments to a third party note servicing company.
The third party note servicing company collects monthly payments from the buyer, pays the investor’s mortgage, and distributes the PROFIT to the investor.
The note servicing company handles all of the annual paperwork reporting requirements.
Our company handles all of the details for the process with the goal of making the investor’s experience HASSLE-FREE!

Yes, this seller financing strategy would work in other markets as well. While Dallas is our specialty, we’re happy to help you implement this strategy in other cities as well. If you are interested in participating as an investor or a buyer in a hassle-free owner finance transaction, please send us an email to learn more.

To your success!

David Campbell
Professional Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com

Part of our series of articles on investing in Dallas

Real Estate Christmas Story

Last year I was at a friend’s home for a Christmas party. As I was mingling through crowds of festive party goers, I was surprised to meet my friend’s landlord. The party was at his rental house and my friend invited to be a guest of the party. I’ve been a landlord to over 100 properties and I’ve never once been invited to my tenant’s Christmas party!

The landlord, Mike, was a friendly man of about 68 years. We had a great time talking about real estate. In 1965, Mike took a job as a school janitor and he worked at the same job his entire career. Mike bought four single family homes over a period of 45 years and is now a multimillionaire with a $75,000 / year passive income from real estate. His passive real estate income is more than double what he earns from his janitor’s pension and social security.

What astounds me is the simplicity of Mike’s success. Mike purchased four “bread and butter” single family homes over 45 years. He always bought new properties, he always paid retail, and his cash flow was break even with 20% down and 30 year fixed fully amortized mortgages. Mike never refinanced, never prepaid his mortgage, and he never sold. While this plan may not have yielded the highest return, it was powerful none the less. The fact that the plan was so simple is one of the reasons Mike was successful with it.

Mike purchased his first house in 1965. He paid $18,000 using 20% down ($3,600) and an 80% mortgage ($14,400). His mortgage payment was $86/month. That was a lot of money when Mike was a 23 year old school janitor earning $350/month. Today, this Northern California house is worth $575,000 and rents for $2,200/month.
Mike's home price
Mike purchased this $18,000 house with only $3,600 down and his mortgage was paid off by his tenant 15 years ago. His $3,600 investment is now worth $575,000. Mike’s annualized non-compounded return on investment has averaged 350% per year for each of the past 45 years. What investment vehicle other than real estate can do that?

mikes ROI with 20% down

In 1970, Mike bought a second house. In 1975 he bought a third house and, in 1980, Mike bought his fourth and final house. All four houses are now owned free and clear with $2.3 million of equity and positive cash flow of $75,000 year. Mike spent his career as a janitor and retired a multi-millionaire because he had the foresight to acquire four pieces of real estate over 45 years.

Inflation seems small because it is reported as a year over year number. However, inflation (and real estate prices) actually move as a compounding force. Below is a chart of a basket of goods with prices from 1965 and 2010. I created a chart to illustrate the annualized compounding rate of increase for this basket of goods. Mike’s houses increased in price just slightly faster than the overall rate of inflation over the same period.
inflation basket of goods

Mike was the happiest guy at the party. He has the most abundant retirement plan of any of his peers, and he spent his entire career as a janitor not worrying about money or inflation. He always knew that when he retired he would have four houses that were completely paid for by his tenants, and these houses would take care of him and his children forever.

It is nice when real estate investing has had such a positive impact on someone’s life. I asked Mike what he would have done differently 45 years ago and he said, “I wish I would have bought more houses.”

Merry Christmas and Happy New Year,

David Campbell
Professional Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com

Please leave a comment on this article.

Investing Versus Trading

INVESTOR = mostly passive + dividends + long term capital gains

TRADER = mostly active + short term capital gains

As a Hassle-Free Cash Flow Investor, you must clearly understand the difference between an investor and a trader. This is an important distinction in your investment style / investment philosophy. Many people call themselves real estate investors when they are really traders. While you can make a lot of money as a real estate trader, it is not the same thing as being an investor.

Hassle-Free Cash Flow Definition of INVESTOR: An investor converts a lump of cash into an asset that has the probability of paying an income stream over a long period of time. An investor is primarily concerned with cash flow and security of his principal over a long period of time. To an investor, the increase in the equity value of an asset is a secondary benefit. An investor is generally passive and expects his money to earn more money without the contribution of a lot of personal time and skill.

Hassle-Free Cash Flow Definition of TRADER: A trader converts a lump of cash into an asset that has the probability of being resold for a larger amount of cash in the future. A trader is primarily concerned about velocity and security of his principal usually over a shorter period of time. A trader must buy and sell quickly or carrying costs and time will quickly erode his annualized return. A trader is generally active and expects to contribute substantial amounts of management time and skill, as well as money. A trader makes money ONLY if the value of his asset increases in value.

Being a trader is a job. If you are like most people, you already have a job and don’t want a second one. Being a trader is NOT Hassle-Free. As an investor, your money works so you don’t have to! A good investor enjoys freedom of time and money. Begin with the end in mind. Focus on making good investments that will take care of you in the future while not eroding your quality of life in the present.

People looking to make money in real estate often call themselves investors, but their idea of investing is negotiating short sales, going to foreclosure auctions, scouring the world finding a needle in the hay stack deals, or doing rehabs and “flips”. All of these are active forms of real estate trading that involve controlling a distressed property, improving its value, and reselling the property for a short term profit. Admittedly there is a lot of money to be made being a real estate trader, but it is a JOB. I have done over forty real estate flips in my life and I have made a lot of money doing them. But doing flips is VERY hard and VERY time consuming. It took me five years of study and practice before I successfully completed my first flip. If the trader doesn’t show up to work, nothing happens. Unless you want to quit your day job and become a full time real estate professional, stay away from being a real estate trader and focus on being a real estate investor. A Hassle-Free Cash Flow investor should never have to do anything but monitor his cash flow and management team.

It is possible to build a real estate investment portfolio that takes less than one hour per month to manage. With the right deal structure, leverage (financing), and cash flow it is very possible to achieve investment results well over 100% per year as a semi-passive investor. If you can double your money every year as an investor working less than one hour a month, why take on the worries and time hassle of being an active trader?

TAKE AWAYS: Being an active real estate trader takes time, skill and tenacity; it is a job. However, being an investor in Hassle-Free Cash Flow real estate can be semi-passive, simple, and highly profitable. The goal of Hassle-Free Cash Flow Investing is to enjoy your quality of life now, while creating financial abundance for the future.