Hey gang this is Mike with My Real Estate DOJO and today we are going to be talking about the three profit zones in owner financing. Now I know that if you are an investor or a realtor or even just a buyer, you’ve been on Craigslist and you’ve people that say: “Hey, owner financing or rent your own and they want a down payment, want a monthly payment”. This lesson is about explaining to you about the three zones of owner financing.
The number one thing I want to explain to you is when you do owner financing you don’t need to own the house free and clear. This is such an important idea that I want you to understand. You don’t need to own the house free and clear. So when you do owner financing you actually have a mortgage on the home. It’s called an ‘on the line’ note. That said, let’s go ahead and explain and pull the curtains back on owner financing and the three ways you can make money with owner financing.
The first step is the down payment that is going to be required by the retail buyer. Most retail buyers that are willing to do owner financing, they can’t qualify for an FHA loan or a conventional loan and the reason for that is maybe they have bad credit, maybe they are small business owners. Whatever it may be, your goal is to find good people that fell of the horse and they are trying to get back on the course and have great credit.When you want to do owner financing, you don’t want to put dead beats in the property, you don’t want to put people that don’t care about your credit, you want to put people that actually care about your credit, but can’t qualify or they are inches away from qualifying. Going back to the story, there’s 3 zones for profits in owner financing and the first step is the down payment.
Whenever you do an owner financing on your property, you are going to require a good chunk of money down 10-20- 30 depends on your property. So that’s your profit zone number 1. What I like next is the monthly cash flow which is profit zone number 2. You get a cash flow. Let’s assume that you own the property not fleer and clear. What I mean by that is you have a loan on the property and your interest rate to the underlying mortgage let’s say Bank of America in this case is 3% or 4% whatever it may be. Whenever you sell your house owner financing and you wrap it, you are going to charge that retail buyer to a 2-3% higher of what your original loan from Bank of America is.
Let’s in this scenario I have a house and I have a mortgage on it with the bank of America and my interest rate on it is 3%. What I am going to do is owner finance it through a wrap strategy. If you don’t know what a wrap is watch my previous videos on my Youtube channel. So again, my underlying note on bank of America is 3%, I’m going to turn around and sell it to a retail buyer through a wrap and at the time my interest rate with Bank of America was 3%. I am going to go ahead and give it to the buyer at 8% or 9%, so I am making a spread. It was 3%, I am giving it to 9%: 3,4,5,6,7,8,9- I am making 6% or you could do 3%, 2%, 1% or whatever you want. The power is that now I am getting a monthly cash flow from what my underlying mortgage was and I wrapped it around and sold it to the buyer. Mine was originally 3%, I wrapped it and I am selling it at 9%. So I am getting the spread, the difference every month. Month after month for 10 years, 5 years,20 years. Whenever buyer cashes me out I am getting that monthly cash flow.So end of story, being a note holder or doing owner financing, there is three phases of cash flow. Number 1 was a down payment, number 2 was the monthly cash flow, which I personally love and number 3 is going to be the back end profit zone. What do I mean by the back end. Let’s say I sold the property for $100 000 and once the buyer likes to cash me out I want to get that remaining money the principle balance that he hasn’t payed for at closing.
Let’s say the buyer gets a loan from me and he’s on the owner financing. He put 20 grand down, which is phase 1 of profits then he pays me for 10 years monthly, let’s say it’s 1300 bucks. He is paying me 1300 bucks and out of the 1300 bucks I am profiting with I am profiting 500 bucks every month into my pocket as a monthly cash flow. Because after I service my monthly cash flow to the bank of America which is 3% the remaining percentage goes right into my pocket. That retail buyer has paid me 10 years of payment services. Then after 10 years he is going to cash me out. He is going to go to Wells Fargo and get a loan to pay me for my remaining principle balance, which he hasn’t payed. That is your stage 3 profit zone,where he is going to cash you out that $80 000, because you put $20 000 and you payed 10 years of monthly payment. It will be less than $80 000, but not much less and the reason is because of the amortization that the banks chose.If I am a bank and I am doing owner financing I will capitalize on the amortizing.
If you don’t know what the amortizing is, it is when you get a loan, let’s say from any bank for the first few year when you make the monthly payments, it is going to interest. 90% is going to interest. What happens is that the banks are getting rich and you are not paying that principle reduction. The same story happened to my retail buyer. After 10years of paying, he is still going to be still paying me $80 000, maybe $76 000,$75 000 or $70 000 because the first few payments that he made for the first 6-7 years are going towards interest and then a small amount of principle reduction. Let me summarize it right back up, guys. This is the reason, why I love owner financing and being a note holder, there is three pocket zones of profit. You get the first lumps of money as a down payment, you get your monthly cash flow month after month and then you also get your back in profits, which is going to be a big chunk of the money.
Now here’s another reason why I love owner financing, I made a video about it a couple of days ago is that you’re holding a note, you’re not holding the property. Somebody else owns the property, you’re just a note holder, you are like the Bank of America. Since you own the note, you don’t own that property, so you don’t have to deal with all the bullshit that goes down with the property, like theA/C breaking, the plumbing breaking, if you’re buying whole guy like me you don’t have to deal with dead beat renters. When you’re a note holder you don’t have to sweat that small stuff, because that’s not your property. The only time you have to sweat it or start to you know sweating it is if your retail buyer doesn’t start making the monthly payments to you. At that time what you do is you hire an attorney, go ahead and foreclose on that retail buyer,you take your property back. Now I don’t recommend that, but that is the worst case scenario should you do foreclose, because I like to create win-win situation and help everybody out. I do all my hard work upfront, so I can out good tenant buyers in there, retails buyers are actually going to cash me out,because I make most of my money at the back and I make a lot of money in the monthly cash flow and I don’t make money upfront.
But again, the majority of the money is going to come in from the back end, because that’s where the big profit is at. I want to make sure I put good people in there and that’s what my advice is to you-put good people in there. Worst case scenario as a noteholder, the only time you are sweating it or you are having stress in your life is when that retail buyer or that tenant buyer is not making payments to you.If they are making payments to you-great, if they are not making payments to you-that’s when you stress it a bit, but then you can foreclose on them, take the property back and start all over. You’re in a very safe positioning without having the liabilities of the plumbing, the A/C, taxes, city violations. Let me give you an example, I own a house by White Rock Lake that I rent out and that city code enforcements are there on my ass, because they know it’s a company owned business. They are always giving me tickets for the grass being high, it’s totally not high, the guys has a grudge. I think the guy has a family member that cuts grass. If I was a note holder in this scenario, I wouldn’t have to deal with it.
The owners would have to deal with the city code violation enforcer. I am just holding a note. End of story, owner financing is a great opportunity for people, who want to sit back and not get their hands dirty on being a landlord. Alright, let me summarize it up- three profit zones: your down payment, your monthly cash flow and the profit at the end. Now guys if you like these videos and you feel like I am giving value to you please like, please share, please comment. If you really think I can help you reach your goals or you’ve been watching the videos and you’ve though “Damn, Mike has given me some ideas and I’ve been using them and getting results”. Imagine what you could do if I am coaching you. Come join my smartcoaching program that is performance based- if you don’t make money- I don’t make money. I have a vested interest in you so that I can make money.
That’s why I am revolutionizing the coaching business, because instead of paying me like all the other gurus thousands of dollars upfront, a huge amount of money and say “Adios, amigos! I hope you do deals” I have a linear interest in you to make money without wasting my time. So join the SmartCoaching, I am very confident I can help you do multiple deals if you’re a champ. If you’re a chimp I can’t help you get your mindset right. This is Mike with My Real Estate Dojo, gang. Have a great day, let 2016 be your year!