Buying and Holding Houses: Creating Long Term Wealth

Buying and Holding Houses: Creating Long Term Wealth

The topic: buying and holding a house for monthly rental income and how to structure the deal. Here's how you buy a house and you rent it out and you make passive income without using any of your own cash or credit.

Financing and Structuring The Deal

First what you have to do is this. Anytime you're buying real estate you're either going to pay cash for the house or you're going to get financing. If you're paying cash for it, that means you're spending your own money and you're paying for it. Or you can find what's called a hard money lender, or a private lender to lend you the money to do this deal. In my opinion, I would say try to find a private lender because a private lender rates are going to be a lot cheaper than a hard money lender, right?

Here's how you structure the deal. Let's say what are we doing? We're finding deals. I'm going to give you an example. I'm going to give a great example of how you do this. I'm telling you, I'll break it down real easy. I bet you you can do it if you just try.

Look, so I find a deal. Let's say I get the house under contract for $30,000. I look at it and I'm like, all right, I can get the house for $30,000. How much does it need to fix it up? It needs $20,000 to fix it up because I know repair estimates. You should know that anyway if you're a wholesaler. I go in and I say okay, I can spend $50,000 to buy this house and have it all fixed up and ready to rent it, right? The house is worth $100,000, so I've got $50,000 in equity.

Let's just say in this one area right here will bring me in $1,500 a month in rental income guaranteed, Section 8. Here it is, I've got a house 50% below market value and it's going to bring in a rental income of $1,500 a month. Now, let's just say you know a rich cousin that's got a lot of money and they're always looking to invest. Also there are private lenders and hard money lenders that you don't have to personally know that will do this. Let's just say it was your best friend that had all this money. All you're basically doing is you're coming to this person with this money with a business deal. That's it. You're coming to them with an opportunity.

Why is it an opportunity? It's because you have already made money with this deal. What your job was to find this deal below market value. You actually went out there and found a deal that was well below

? 2015 Mark Whitten DEJ Enterprises, LLC

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market value. Not just a deal, but a house, a real asset. A real asset that any investor that's knowledgeable about investments would invest in, right?

How you would structure the deal. First let's talk about these key terms that's going to affect this deal. First we've got to talk about points. You come to an investor. You say, "Hey listen, I found this house. I got it for $30,000. I have to put $20,000 into it. It's going to be worth $50,000. I can resell it for $100,000 or I could rent it out for $1,500 a month."

We've got four things to talk about now because now we want to structure this deal. The first thing is points. What are points? Points is an upfront cost to you to borrow the money basically. Basically it's a percentage of the purchase price. Usually points are usually between 2% and 5%, right? Let's just say 2%.

Now the lender that I have, I know him well enough that my lender doesn't charge me any points. This is just an investor that I started investing with

Basically I'm going to use zero points just for easy math. Let's just say that your private lender was going to charge you five points upfront- or 5%. All you've got to know is this. If you buy the house for $50,000 and you borrow all of that, then they want 5% of $50,000 just to lend you the money. I'll lend you $50,000 but I need 5% of that just to lend it to you. That's just a cost to borrow the money. That's what points are.

Interest Rate

Now we've got to talk about the interest rate of this deal. The interest rate is simply how much interest you're going to pay on the loan. Most hard money lenders or private investors are going to do "an interest only loan."

What that means is this, for example my lender gives me a 12% interest rate a month, but it's interest only meaning that all I'm paying is interest on the money that I borrow. I've still got to pay them back. Look how they're making out. If they lend me say $50,000, then I've got to pay them back $500 a month at 12% every month. Then once my loan is over I've got to give them all the money back that they gave me. That's how they make their money.

Not only are they going to get their $50,000 back they gave me, but they're going to get $500 a month as long as I'm in that loan with them, if that makes sense. Now, that's your interest rate.

Length of the Loan

Now we've got to talk about the length of the loan. Usually the loans are usually one to three years.

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Exit Strategy

Then you've got to have your exit strategy which is the last one, key term, and that's you've either got to refinance the loan or sell the house.

For example, if I got a loan for two years, all right, so let's go through the loans on a deal. Let's say how we structured this deal with our person who got all this money. They're not going to charge us any points. They're going to charge us 12% interest, interest only, meaning that if they loan me $50,000 I've got to give them $500 a month for two years because that's the length of the loan. Then once the two years is over I've got to give them their $50,000 back.

It's no points, 12% interest, interest only for two years and I've got to have an exit strategy.

The main exit strategy you want to do is be able to refinance the loan because then you can keep the house. For example, if I purchased and renovated the house for $50k and I borrowed all that money for $50,000 and I'm paying $500 a month back to my lender for two years, once the two years is over they want their $50,000 back.

What I've got to do now is I have to refinance the loan so that way I can get out of the deal.

Refinancing

If you don't know what a refinance is, let me just break it down. What does it mean to finance something? It means to get a loan on it. You ever financed a car? Then you have a loan on it. What does refinance mean? It means to get a new loan.

Basically if bought a house and I financed it and then I refinance it, that just means I'm taking out another loan. The ideal situation would be for me to go to say another lender like a conventional lender or something like that that's not a hard money lender, like a bank.

I go to the bank and say "hey look, I've got this house. I owe $50,000 on it but it's worth $100,000. See all the comparables for other houses in the area that are similar?" I'm looking to get a loan for $50,000 so I can pay off my original lender.

Then they say okay. Why? Because that makes sense for them, but they'll give me a much lower interest rate, and maybe like a 30 year loan like somebody on a normal house would do. Then instead of me paying $500 a month on interest and getting $1,500 a month in rent, or netting a profit of $1,000 a month without any of my own cash or credit, now my interest rate goes down.

Now my new rate might be just say $350 a month or $400 a month.

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Understanding the Future

Let's say I'm profiting $1,100 a month on a 30 year loan. Now for the next 30 years I can be making $1,100 a month. I can use that to pay for my son's school, pay for anything, my school loans. At the end of the day you want to build this rental portfolio up because say you've got 20 of these rental income houses, you could easily be making $20,000 a month. Could you imagine what you could do with that? You could live in a mansion. You could drive a Ferrari.

This is how you really get REAL money in real estate, but you have to start wholesaling first because you want to build these relationships. You want to have access to other people's money. Suppose something happened in one of the houses. What if the furnace go out and that's $5000? How are you going to pay for that?

What if there's a crack in the foundation. You find out that later after say a year and you've got to pay for that. If you are not wholesaling and you are not making five to 10 grand a month or four to six grand a month, how are you going to be able to afford that? You see what I'm saying?

It comes along with the territory. That's pretty much how it works. You can go and refinance the loan or you're going to sell the house. Think about it, it's a win win because check it, now let's say you couldn't refinance the loan and you say all right, I've got to get out of this loan. I'm just going to sell the house. All right, cool. If you got it for 50 and you're in it for 50 and it's all fixed up, cash flowing with a tenant, you could probably sell it to another investor for say 70 and make 20 grand.

Or you could sell it to a home owner and make 50 grand. Look at how much you just made without using no cash or credit. The best way to do it is to refinance it and keep the house forever so you can get the monthly rental income. All you've got to know, all I'm trying to teach you guys is this. If you can come across somebody with some money, let me say this though first. Why does this make sense to anybody that's got some money? Because this is how you approach.

Look, at the end of the day you're going to lend me $50,000. You're going to get 12% interest on your money. You can't get that nowhere else. You can't go to the bank and put $50,000 in there and get 12% interest on that a month? Somebody with money is going to be like wait a minute. You meant to tell me I can get 12% interest a month if I lend you $50,000? Where else they going to put $50,000 and get 12% interest a month? It ain't happening, right?

What I'm saying is that right there to them is a no brainer in itself. Then they say well, how am I covered? Well, the loan is backed by real estate. Think about it. You've got the lien on the house. It really is your money. You're like the bank. If I started paying you you can foreclose on me and take the house back, then you got the great deal.

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You see what I'm saying? You could take that house and list on the MLS. Say you don't want to bother with tenants and renting. You could just go put it on the MLS. It's all fixed up and everything. You could just go sell it to a home owner and make 30, 40, 50 grand. You see what I'm saying? It's a no brainer for somebody to lend you money to buy real estate. You've just got to know about points, interest rate, length or the term, length of the loan and how you want to exit the property. What your exit strategy is. You know what I mean?

I've got two houses right now that I did like this, the rest of them I paid cash for which I'm really mad that I did that at the end of the day because when I talked to my lender and I was telling her how I was paying cash for houses, she laughed and was like you're not even getting the same rate of return on your money by paying cash. I sat there and I thought about it. I was like, you're right. I was like, damn, that doesn't even make sense. If I've got one rental and it's given me 1,500 a month, I'm getting straight 1,500 a month, all right, that's cool, but I've got 40 grand tied up to get that when I can have nothing tied up and get 1,000.

Think about it. What would you rather do? Get $1,500 a month but you had to put $40,000 of your own money aside to get that? Or would you rather put none of your money aside and get $1,100 a month or 1,000? It's a no brainer. I'm just saying that to say I don't care how successful I get in real estate and I'm grinding everyday working my way to the top, you know what I'm saying? It don't matter how successful I get, I will never pay cash for a house again. I want you all to remember that. I'm telling you something that you should learn from.

When you all start wholesaling and you start getting this real money, like how other investors are getting, I ain't trying to brag. I'm not like that that's why I don't really want to say myself, but at the end of the day once you get out there and you learn this business and you start making money, don't just take your money and say, "Hey, I'm going to pay cash for a house." Remember what Mark Whitten told you. Don't do it. Don't do it.

If you guys have got any questions about that, I'm open for questions right now, but before the questions I just want to say this to everybody, real quick Ryan.

Before we get into the questions on this I just want to plug this in one more time for you guys. I will take 3 months out of my time and coach you unlimitedly on your deals. I would be walking you through a deal, going over your contracts, making sure everything is right. If you're willing to take that step email me at markwhittencoaching@ with the subject line "COACH ME MARK- SEND DETAILS!"

You've got to know I'm for real about this. Again, I'm going to take the time, three months to do it. Let me just say this too guys. I'm a real estate investor, you know what I mean? If you don't know this, that's why you guys rarely get emails from me. You rarely see me during the whole real estate seminar stuff. I don't really do it as much because they aren't really my main thing.

? 2015 Mark Whitten DEJ Enterprises, LLC

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