Dec 04

TurnkeyFAQSave

There is more to real estate than just equity. Once you have a bit of wealth you start looking for tax write offs and real estate investing (done properly) allows for wealth accumulation – with NO tax liability. That compounds your net worth much faster.

 

Proper real estate investing is just like anything else, it can be learned, but if initially learned the wrong way it sets you back. Bad investing can be unlearned but it means you’ve wasted time and wasted resources and it can get darn frustrating.

If someone buys one Turnkey I do all of the work for them – if someone buys two Turnkeys I teach them how to do these

I forgot to include the Sec 199A tax write offs that you may qualify for. Here is a link

https://www.biggerpockets.com/blog/irs-code-section-199a-20-pass-through-deduction

It is a little involved but the tax savings are huge if you qualify.

I like to look at investments on a 1 Year, a 2 Year, a 3 Year and a 10 Year basis, so you will see references to varying lengths of time.

You will see that I’ve included, tax write offs (which it seems you really need), principal pay down and other facets.

 

it is a 2 step transaction. You are buying the house and I am finding you a tenant buyer. That is part of the agreement we sign.

Right now there are more people with down payments that can’t get traditional bank lending than you can shake a stick at.

Banks are not lending like they use to. People still want to buy homes, business people in particular.

W2 is fairly easy to buy a house if you make enough money and have good credit.

Self employed are much harder to find financing for. That is our target audience anyway.

They have money, but because they show tax write offs (if they take the write offs they are entitled to) they don’t show much taxable income and banks have a hard time figuring out how to lend to people who don’t show taxable income.

 

Any property you ever own as a rental has a potential to be vacant.

If that is a overwhelming concern, rentals of any kind may not be a good choice for you.

We take vacancies seriously, we don’t like them, and our main focus is to keep then occupied.

But, it is part of investing. Phoenix/Mesa has a shortage of single family homes for rent. Rents are going up.I have looked at the ‘numbers’ and I would be happy with 13% COC return plus additional benefits. however, if I understand it correct it is a two-step transaction and there is a risk at the second step:
First, I am buying house and taking over mortgage payments
Second, you have to find a tenant buyer who agrees to pay $20K option to buy the house for $265K or hopefully above.

Will it provide cash flow? Is the income greater than the outgo? In this case the income is $1650 a month and the outgo $995 a month for $650 a monthly cash flow or $7800 a year on ($80,000 minus the $20,000 option fee) so $60,000 invested for a yearly return of 13%. Most people are happy with 13% on their money with an appreciating asset that provides tax benefits.

Mesa – A great family home with 3 bedrooms 2 baths & Pool
Already Rehabbed

I have a 3 bed 2 bath 1,526 sq ft with pool Turnkey coming available in Mesa AZ.

Turnkey Fee $80,000
Built in equity $25,000

ARV $265,000
Sub To Amount $160,000

Rents for $1,650.00
Monthly is $995.28 PITI
No HOA

Cash Flow about $600 a month

Tenant Buyer Option Fee $20,000 to You, the Investor

 

To hold the property while arranging financing $10,000

Here’s your New Cash Cow for the New Year!
Turnkey – and it’s all yours for $80k + taking over the loan.

Truly Passive Investing at it’s Finest

We find the Property. We install the Tenant Buyer
The Tenant Buyer Does all Maintenance & Repairs
You get their Option Deposit (Usually $15,000 to $25,000)
You get the Cash Flow – Usually $500 to $700 per month
You get the Tax Write offs & Depreciation
You get the Principal Pay Down (they are paying down your principal

No Toilets – No Hassles – No Worries
Property is Now Available
Email: NewPath2010@hotmail.com – Attn: Ken

I have a couple of Tenant Buyers waiting for a place. Can’t put them in until the property is in the name of the investor. Checks and agreements have to be made out to the investor. Investor must approve the Tenant Buyer.

Q. What is it that you actually do?
A. We buy houses and sell them as Turnkeys to Investors. Then we put people (Tenant Buyers) with good incomes but damaged credit in them. The Tenant Buyers give the Investors an Option fee – the Tenant Buyer then get their credit fixed and they refinance and pay the Investor off. The Investor owns the home until the Tenant Buyer completes the Option agreement. The Investor gets the Option fee, the monthly cash flow, the tax write offs, and principal pay down. To see how the numbers work click here:

http://PassiveIncomeGrowth.com/735 These are numbers from one such Turnkey

Q. What is “Subject To” also called “Sub To” and “Sub2”?
A. When you do a ‘Subject To” you are taking over the loan. Those payments still have to be paid by you.

Q. What is a “Lease Option”?
A Lease is an agreement between a landlord and a tenant. The tenant may occupy the rental for the amount of time specified in the agreement for the amount of monthly payment agreed to.

An “Option” is an agreement between the seller and the buyer that allows the buyer to buy the property by some specified date in the future for a specified amount. For instance, the agreement may be that the “buyer” has the right to buy the property within 3 years for $225,000. The buyer does not own the property until he “exercises” his Option. When the buyer “exercises” his Option, he usually gets funding from a bank and pays the seller the amount owed. If the buyer doesn’t “exercise” his Option and his Option “expires” he no longer has a legal right to buy the property. During the Option period, the seller can not sell the property and can not raise the sales price, even is the value of the property goes up.

You can have a Lease without an Option (which most people who Lease do not have an Option) and you can have an Option without a lease, though this isn’t common.

What we do is combine the Lease and the Option to make it a Lease Option. The Tenant Buyer can occupy the property during the Option period as long as he pays the agreed to monthly Lease amount.

Q. Why would someone sell their home this way?
A. Sellers do these because they don’t want to work with real estate agents or they don’t want to fix up their house to sell it (too busy, too much work, no time)?

Actually, it is very lucrative. These are generally Not Fixers – Most sellers in this situation either:

1) have to sell quickly or

2) don’t have enough equity to cover real estate fees, closing costs and other fees or

3) don’t want to or can’t afford to do repairs and or don’t want to have people traipsing around their house or

4) have bought another place and are carrying two mortgages or

5) lost a job or have a medical emergency, etc or

6) are in pre-foreclosure and have to do something quickly or

7) are inherited with a mortgage and can’t make the payment or

8) have a job transfer and need to sell quickly

Q. Do I need a down payment?
A. No, the Turnkey Fee covers all of that

The $60k to $80k Turnkey fee covers the advertising, bringing the seller’s loan current, paying equity to the seller, prepping the house for a tenant buyer, whatever is left over is my fee. So, with a house worth $225,000 and a loan of $140,000 – and a payment of $1000 a month, you would take over the loan of $140,000 plus make the monthly payment plus pay $80,000 so you would owe $140,000 on the house plus have $80k invested in a $225,000 house. Then we find you a tenant buyer who gives you $20,000 option fee (that is yours to spend) and they pay you $1500 a month, you pay the bank $1000 a month for the mortgage for a cash flow of $500 per month. You get the tax write offs – they pay down the principal for you.

Q. What is the Capital Expense (CapEx)?

Expenses, maintenance and repairs (CapEx) do exist on rentals like

Q. What is Dodd-Frank?
A. It is a series of laws that have changed how banks can lend money. It makes it much harder for people to qualify and to get a loan. You can read about it here: Dodd-Frank

When you do a ‘Subject To” you are taking over the loan. Those payments still have to be paid by you.

Sellers do these because they don’t want to work with real estate agents or they don’t want to fix up their house to sell it (too busy, too much work, no time) if s seller filed bankruptcy you still have legal title and you are protected.

If some of the payment is applied to the principal it is no longer a lease option it is an executory contract per Dodd-Frank. If we get far enough I’ll send you the section of law. But O agree, no matter. And yes, I would prefer you drive the area to see if it fits your needs and see the house before we meet there.

7958 W Fairmount Ave Phoenix

 

https://www.biggerpockets.com/forums/83/topics/105709-dodd-frank-and-lease-option

 

 

Seller-Financing Restrictions Under The Dodd-Frank Act

https://barneswalker.com/seller-financing-restrictions-under-the-dodd-frank-act/

How Dodd Frank Law Changes Seller Financing for Investors

https://www.biggerpockets.com/blog/2014-01-17-dodd-frank-law-changes-seller-financing-investors

Q. What kinds of houses do you have?
A. We focus on family homes that are 3 to 4 bedrooms and 2 to 3 baths in nice, safe family neighborhoods.

Q. What is the difference between a Lease/Option and Rent to Own?
A. In a Lease/Option you are not required to complete the purchase. In a Rent to Own, you generally have to complete the purchase. However, the two terms are used interchangeably by many people, so it is best to ask what the requirements are before you sign.

Q. What areas do you cover?
A. We cover all of Maricopa County AZ including Mesa, Phoenix, Tempe, Scottsdale, Chandler, Gilbert, Glendale, Peoria, Sun City, to name a few and Travis County TX, Williamson County TX, and a few other counties around Round Rock to Austin to San Antonio.

Q. Do I have to go to a bank?
A. No. Our approvals are based on down payment and ability to pay. We do not need any bank’s approval, thusly, we can decide in a day or two rather than the several weeks they take.

When you put 20% down you have to qualify for financing. This is for people who understand that is not a good idea. Also, you don’t get a tenant buyer when you put 20% down for traditional financing and the bank isn’t going to look for one for you. And if you are satisfied in getting $100 to $150 a month on a property with having CapEx, then this isn’t for you. If you are happy getting a traditional tenant and paying for repairs and maintenance and paying for property management and turnover then this isn’t for you.

 

This is for investors who don’t want the hassle of bank financing so they can do an unlimited number of transactions without the bank saying “no”, once you have more than 4 properties. It’s for investors who want a large $20k to $25k down from the tenant buyer, investors who want the tenant buyer to do all repairs and maintenance, investors who want stability in their rentals with no property management fees, no turnover (and if it does turnover you get another $20,000 option fee.) Also, it isn’t sold to the tenant buyer for Zillow “Zestimate” it is sold to the tenant buyer for 5% or more above comps. The tenant buyers are willing to pay that because it gets them into a house. It means added equity for you.

Q. How long does it take to be approved once I decide on a house?
A. It generally takes 24 to 48 hours once you have filled out the request located here: Approval Most people choose to be approved prior to deciding on a house so that they are not wasting time looking at houses they don’t qualify for. However, once you are Pre-Qualified, you have the ability to start looking. Keep in mind that those that are Approved are looking at the houses too, and they have priority over those who are only Pre-Qualified.

Q. How much income do I need?
A. Because of Dodd Frank, which regulates our financing to you, you can have a mortgage payment of approximately 33% to 40% of your gross monthly income (before taxes). That means that if you make $4,000 a month before taxes, your housing payments can be between $1300 a month and $1600 a month. This is a “rule of thumb” and there is room for flexibility. It is also modified by the amount of down payment you have. The more down payment, the smaller the mortgage payment. You will also enjoy the tax write offs from home ownership which means your actual monthly is less.

Q. Why don’t I just get a mortgage from the bank?
A. You can, if you wish. But, a mortgage from a bank is not useful in this process. The few people who are being approved by bank lenders are finding that it is tougher to close than they thought and even some when “approved” are finding the bank withdrawing the “approval” just before closing. This is very disruptive for all involved. But if you think the bank will approve you, go for it. You will want a real estate agent and start with the MLS at that point, since we do not accept bank mortgages.

Q. How long does it take to get a Tenant Buyer?
A. For that house I had a tenant buyer in two weeks last time. I always allow a couple of months though. It takes time to clean it up and get it ready for occupancy. In this case the tenants that are leaving need until Dec 31 2019 to move their things. I would be making the payments until then. Your first payment wouldn’t be until Jan 1, 2010 Finding someone to put down $20k is surprising easy. People have money, they just don’t have bank approved credit. What is the $145 you ask about? The tenant buyer option price is $265,000 (or whatever you and I agree on) I recommend $265,000.

But it’s not a true Turnkey, if I have to wait for a Tenant buyer : as I would have to keep paying my mortgage until a tenant buyer is found; which takes much longer than finding a regular tenant.

.When do you email these opportunities: after you get a property on your name with sub2 contract but before you find Lease-option tenant or after you find Lease-option tenant?

 

Q. Do I need a real estate agent?
A. No, once you have decided on a property and are Approved, the “closing” is done with an attorney to make sure all paperwork is done correctly.

Q. What do you need to know from me to get started?

  1. What you want to accomplish ?
    2. Do you invest full time or do you have a day job?
    3. If you have a day job what is it that you do?
    4. Are you wanting to replace a day job income with investments?
    5. Where are you located?
    6. How much money are you wanting to invest?
    7. If you find the right opportunity what is your time frame for investing ?I respect my investors privacy as I would yours. I don’t give out investor’s information unless it is warranted.
  2. I respect my investors privacy as I would yours. I don’t give out investor’s information unless it is warranted.

Equity is just a construct. Properties are only worth what someone is willing to pay for them. It doesn’t matter what someone is trying to sell a particular property for if no one is willing to pay the price. As such, let’s say a particular house is worth $200,000. It’s a made up number. Some realtor has told a seller they think they can sell the house for $200,000. Does that mean it will sell today for cash to an arms length buyer without inspection and without concessions and without an appraisal? No, it simply means that’s our starting point. Then when an offer arrives, we find the seller has a loan of $175,000 on the property. That has to be paid. So, does the seller have $25,000 in equity? No, the realtor is getting 6% fee or about $12,000 – the closing costs are about $3,000 and the typical concessions to the seller are another 2% so about $4,000. I contend that the true equity is $200,000 – $175,000 – $12,000 – $3,000 – $4,000 = $6,000 if the seller doesn’t discount the sale but they usually sell at 97% of asking price. So, I view equity as “squishy” and can’t be determined until sale. Therefore, rather than being deceptive and trying to claim something I can’t prove, I simply offer my services to buy the very best way I can and offer to investors with full disclosure, and allow them to make a determination if it’s a property they want. I don’t much care one way or they other. I only buy properties that I’d be willing to keep in inventory.

When someone wants to be at the top of the list they fund an Arizona LLC Escrow Account that I control and use the money to market, locate, procure and make ready for a tenant buyer. Any money left over is my actual fee. All of that is in writing with a JV Agreement and is notarized. So, if it takes me $30,000 to find and buy a property, I get only what is left over. The investor can reject any particular property and we keep going until the investor accepts one. The Investor gets to approve the Tenant Buyer. The Investor gets the Option Fee and the Investor gets the cash flow and gets the tax write offs and gets the equity growth.

I believe you are correct that if you own an LLC you pay the California LLC fee. However, it is not necessary for you to have an LLC at all, it is your decision. Most buy in their own name. I recommend that if you are just doing two or three, you get umbrella insurance instead of forming an LLC. You get better coverage and fewer expenses.

  1. It covers making the home “clean, safe and livable”. We don’t put in new cabinets, new floors or anything like that . It is cleaned and made “broom clean ready”. If a toilet is broken it is fixed, if a wire is hanging out of a wall it is fixed. Things like that. Yes, the $70,000 covers that. If there is substantial renovation to do, it isn’t offered as a turnkey because it wouldn’t fit the profile.
  2. Holding costs are outside of the $70,000. For instance, say we buy a property in November and the seller has until Dec 31 to vacate, which is common, (we have to give people time to move of course). The seller picks up the costs until they vacate. Meanwhile, from the day we get a signed agreement we start looking for a tenant buyer. Sometimes we have a buyer before we can get it cleaned up, sometimes it takes a few months. Always plan on it taking a few months and be pleasantly surprised when it fills quickly rather than the other way around.
  3. After year one, many investors raise rents and it is written into the agreement that rents “may” rise. It is up to the investor tho’. I typically follow AZREIAs recommendation of where rents are and how much to raise them. For some I don’t raise them yearly because I started them out at an above market rent to begin with, they pay on time, they gave me a substantial down, they have been no problem and they have been in the agreement for several years. However, It is common practice to raise rents.
  4. It generally takes a couple of months to find a suitable property. There are no carrying costs during this period. The investor gets to decide if a particular property is suitable for them. The normal process starts when an agreement is okayed by the investor. Then whatever time is required for funding the LLC. Some people have to set up a 401(k) transaction, etc others write a check. It just depends on the investor. Once funds are available, mailers are prepared, and advertising is ordered and door knocking is arranged. Mailers on average take a week to 10 days to get out based on the mailing list and type of mailer. (Mailing houses that do these for you take 30 days to 45 days and do them in bulk) I don’t use mailing houses since it isn’t efficient and they have high minimums for using their services. No rehab is done on the property, so that takes zero time. It usually takes several days to a week to get a property cleaned. A little longer if we have to wait for a dumpster arrival. As much as is necessary is used for advertising. It could easily be $10,000 . That would be 2,500 mailers a week for 4 weeks. No, you don’t get any responses if you send out a few hundred. It just doesn’t work that way. Costs run about $1 a mailer.
    It takes time to prep the mailers, then time when it goes into the mail for them to be mailed, then time for the sellers to respond (85% of responses are “why’d you send this to me”, “take me off your list”, “I don’t have a house for sale” type of calls. Most investors don’t like doing this part and as such the investors never do mailers and consequently never buy a property. There is a high rejection ratio so a lot of investors stop picking up the phone. (This is supposed to be easy and fun, right? 😉 It’s a business and it has to be treated as a business. I’ve had some pretty funny calls and some weird ones, but I don’t take the call rejections personally. And, then, not everyone willing to sell, fits the profile. The property may have too much debt or too high of a payment or they want more than the property is worth or have too much work to make it livable or they are in a bad location (High tension wires, high traffic) and on and on.

When we get to the training part this all becomes as natural as walking into a Baskin & Robins and ordering ice cream. It becomes second nature.

Keep the questions coming.

  1. Does the 70k cover all rehab costs needed for the property as well?

 

  1. Does the 70k cover costs to hold property while finding a tenant buyer?

 

  1. The rent raise you mention after year 1. Is that a one time raise and then stays flat rate after that? And, does the tenant buyer know about the raise after year one before they enter into the agreement?

 

  1. On average front he time an investor funds the LLC with 70k, how long does it take to find, rehab, and obtain a tenant buyer?

 

  1. What do you do for advertising/finding a tenant buyer? You mention that cost coming from the 70k, how much is used for advertising?

Hi Tim and Kirk,

Here is the agreement to look over, if you decide to go ahead we’ll meet to go over the agreement.

It basically states that you are hiring me as a consultant not as a 50/50 partner.

You will own the property.

All cash flow, equity, option fees, principal pay down, tax write offs, appreciation, etc are solely yours.

Once you have the property you decide what happens to the property and I help you achieve those goals.

 

Obviously, by proceeding there is a certain amount of setup that I help you with to make things happen.

It’s good training in it’s own right but the detailed training comes if and when you go with a second property.

The $70k is used for marketing to find a property, earnest money to the seller, equity to the seller (and that amount isn’t determined until we negotiate with the seller), prep costs of the property and marketing to find a tenant buyer. Tell me what you have in mind and I’ll see if it works.

 

  1. There is always the possibility that a bank can call the loan due based on the Due on Sale clause. It is extremely rare. I’ve had that happen twice in 25 years. Once in 2006 when the seller wouldn’t vacate the property (I had already given him his equity. I showed the lender’s attorney the actual clause and it says “lender MAY call the loan due) that means they don’t HAVE to. In that case we worked it out to everyone’s satisfaction. So, I learned the lesson to hold back the equity until they vacate) and

the other is the house I am currently flipping. It’s the first time I bought a house with a Reverse Mortgage. Between the time the seller vacated (he was a hoarder) and the time I started working on the property, some of the homeless people he would invite in became a problem, the city was called and the city contacted the lender to board up the property. The lender sent a letter that gave 30 days to respond before they would take any action. It would take another 90 to 120 days for them to exercise their DOS. Plenty of time to do one of the solutions. I simply paid off the loan to take care of the problem since my intent is to rehab and sell.

If I had chosen to keep the property, my other options were to take over the loan by assuming it formally (that can be done on most loans but not on a reverse), or pay off the loan, or move the seller back into the house while I found a different solution, or sell the property, or find someone to partner with and joint venture, or put the deed back into the seller’s name until I got an agreement worked out with the bank. There are lots of solutions, but it rarely comes up. Can it happen? Yes. Does it happen? Rarely. You then do one of the solutions. Banks are not in the business of owning properties. They don’t want the house. They just want to be paid on time.

If you pay on time it isn’t an issue.

  1. You take your $150,000 and buy properties Subject To. Get Tenant Buyers in, get $20,000 to $25,000 option fee per property and cash flow for $500 to $800 a month per property. You are replacing almost all of your investment to turn around and add to your portfolio immediately. Since the Tenant Buyer is taking care of all repairs and maintenance, you aren’t depleting your resources and that money can be invested in the next property. You can learn how to do this by joining AZREIA.org (classes are taught through out the year) or learn it from youtube classes and within a yer or two become competent in doing these.
  2. You can kind of see how that works here:

Average Turnkey Cash Flow Per Door In Phoenix Metro Area No Bank Financing Needed

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

  1. You can buy 2 Turnkeys, get all of the benefits of #5 plus personal training in how to find and do these on your own. That means you actually own the properties, it isn’t a partnership, you own it all and get the equity, cash flow, depreciation for tax write offs, training on finding (marketing), buying, managing, along with asset protection and higher end tax training.

All cash flow, equity, option fees, principal pay down, tax write offs, appreciation, etc are solely yours. Once you have the property you decide what happens to the property and I help you achieve those goals. Obviously, by proceeding there is a certain amount of setup that I help you with to make things happen. It’s good training in it’s own right but the detailed training comes if and when you go with a second property.

Option 1. As opportunities come up, we add you to the email list on a “first come, first serve” basis – and is which I believe you are indicating. Opportunities come up every 3 or 4 weeks – since there are others on the list it is usually selected by someone 2 or 3 days after it is announced. I suggest you should see the property in person before buying.

Option 2. Fund the LLC and move to the front of the list and we focus on finding you a suitable Sub To property

Option 3. Fund the LLC for two properties and I teach you how to do these for yourself as well as you get two properties. Previously you said you wanted to be passive. This is a more active investment.

Hi Alex, correct, the numbers have to work for the investor for it to make sense. My experience is that using a HELOC for a long term hold can be a bit risky. It is usually based on your personal home and if the market goes down, they usually close the HELOC. That being said, HELOCs are often used for short term investing like Fix & Flips to built cash to invest in long term investments. I don’t have any new Fix & Flips but I can inform you when the next one comes along. I do sell Turnkeys for $70,000 plus taking over the mortgage. It isn’t a partnership – you would own the property yourself along with all cash flow and equity.

I can get you in touch with people doing Fix & Flips if that is of interest to you.

Your dilemma is a common one and maybe I should write a post about it at some point.

But, here is enough to begin the conversation. Let’s start with the fact that are at least two kinds of Turnkey.

1. Turnkey A – generally in Ohio, Tennessee, Indiana or Michigan. Generally means a property has been bought cheaply, sometimes in a not so nice neighborhood. The Turnkey provider sells you the house, (they sometimes will provide financing at above market rates) they tell you how much it will cost to renovate and they find a renter for you. You pay the provider slightly above actual value since you didn’t have to locate the property etc. Generally cash flow is $100 a month or so.

From reading people’s comments and listening to someone who actually bought two turnkeys that way, they are losing money every month and are having problems with their renters. Over time you deal with toilets, tenants, broken water heaters, roofs, etc. They feel the Turnkey provider over promised and under delivered. Not every property is a “dud” but enough are. These providers are doing “high volume” and quality suffers apparently. But, the investor got into the game and that at least is a start. Houses are generally in the $80,000 to $100,000 range

2. Turnkey B – generally in Arizona and Texas. Generally a property has been bought below market using “creative financing” with taking over the financing (equity comes with the property). Generally in a nice family neighborhood. The Turnkey provider sells you the house, and there is no renovation for you to do. (So, you save $10,000) You invest a set amount (well below the amount Turnkey A charges). And the Turnkey provider finds a Tenant Buyer for you who gives you $20,000 to $25,000 for a Lease Option on the property. Over time you DON’T deal with toilets, tenants, broken water heaters, roofs, etc. The Tenant Buyer takes over all responsibilities. Generally cash flow is $500 a month or more. Houses are generally in the $200,000 to $300,000 range.

You get the same tax write offs with both Turnkey types but a heck of a difference in cash flow and cost and return using Turnkey B.

Remember, if you have a house worth $100,000 (Turnkey A) and it goes up 10% that is $10,000 improvement.

If you have a house worth $200,000 (Turnkey B) and it goes up 10% that is $20,000 improvement plus you get the $20,000 from the Tenant Buyer plus you get $500 positive cash flow a month for $6,000 in cash flow.

You can see how the numbers work at the link:

How I buy houses for pennies on the dollar

https://www.biggerpockets.com/forums/311/topics/67…

I buy houses “off market” (not listed on the MLS) These are people who for whatever reason need to sell in a hurry. I give them money for their equity, take over their mortgage and start making their payment. I own the house.

 

I buy “Subject To” (take over the loan) and either take it into inventory or sell as a Turnkey.

 

With a Turnkey, your $60,000 investment gets you a $200,000 property in the Phoenix area, no rehab to do, and $25,000 back when the Tenant Buyer is found. It’s called taking over the existing financing and putting a Tenant Buyer in. Plus you get the cash flow and the equity. It is your house and investment. We do the following to get you a Turnkey:

 

How I buy houses for pennies on the dollar

How I buy houses for pennies and make a mint!

 

***************************************

Perhaps the hardest part of real estate investing is buying affordable properties that cash flow in good neighborhoods.

The technique I show here is called “Subject To”. That simply means you are taking over the loan instead of putting down 20% and going through the hassles of bank qualifying.

 

In an attempt to simplify explaining the process, so it can be understood, I am leaving out details that I cover in other posts. If you want more detail PM me or follow the link at my Profile and I’d be happy to explain.

 

This is the Buying Side: First, I look for “don’t wanters’ that are not on the MLS. Once I have located such a property, I offer to take over their loan and make their payments for them. I give them cash for their equity and they show up to closing and sign a Warranty Deed. From then on, I make the payments and I own the house. The house doesn’t even have to have equity for me to make money on it. One such deal went like this on the purchase side:

 

This is an actual purchase I did with a 4 bed 2 bath in a nice neighborhood in Mesa AZ

 

Bought Using Subject To (I took over the loan) Notes:
ARV $225,000
Balanced Owed $223,969 Seller had recently refinanced
RE Agent 6% $0 No Agent Involved
NET to Seller $0 So No fees
Asking Above ARV $0
Seller Walking Money $0 Sometimes Used
My Costs I Took Over the
Asking Price $223,969 Existing Loan
Amount Down – $100 $100 $$ tied up
Loan Amount $223,969
Title Report $600
Closing Costs $1,250
Total Costs $1,950
Monthly Payment $1,225 I Took Over payment

 

So, that is the quick and easy explanation. The Title went into my name, but the loan stays in the name of the seller. I can do as many of these as I find time for. About 5% to 7% of homeowners are trying to get rid of their property at any given time. Now, let’s look at the Selling Side.

I then found a Tenant Buyer who had $25,000 to put down and sold the property to them on a lease option. (I generally cash flow these for $500 a month or more.) It’s a lot less risky than fix & flip and provides great cash flow. I got the $25,000 plus about $8,700 a year in return and the principal pay down and the equity capture and the tax write offs. For years to come, per house.

 

 

I Sold To Tenant Buyer
Sell to Buyer $250,000 Yes, I raised

the price

Real Estate

Agent Fees

$0 No agent, it’s a Tenant Buyer
My Purchase Price $223,969 Took over seller’s loan
My Equity $26,031 Equity Capture
So, I’ve already made Option Fee $25,000 and Equity Capture $25,031 for a total $50,031 Just by buying the property
Tenant Buyer

Gave Me

$25,000 To move in

(option fee)

Tenant Buyer

Pays Rent

$1,950 monthly
Monthly Cash Flow $725 monthly
Yearly Cash Flow $8,700
Add in Option Fee $25,000
First Year Return $33,700 Wonderful ROI
10 Year Cash Flow $87,000
Add in Option Fee $25,000
10 Year Profit

Cash flow &

Option Fee

$112,000
Maintenance Costs $0 Buyer does all maintenance
Rehab costs $0 Buyer does all rehab & repairs
My payoff after

10 Year Paydown

$184,383 Tenant Buyer is paying down my principal
Tenant Buyer Owes $250,000
Tenant Buyer

Option Fee Paid

($25,000) I already got this when he moved in
Tenant Buyer

Payoff to me

$225,000
My payoff to bank $184,383 When the Tenant Buyer refinances I pay off the bank
At closing I get $40,657 In addition to the Option Fee and

cash flow

 

As you can see, it is a bit of an advanced technique so it requires a lengthy explanation.

Turn Key Type 1 vs Turn Key Type 2

 

 

1) Assumption: Turn Key – Type 1

Memphis Invests

Mostly Passive Investment

2) Assumption: Turn Key – Type 2

PassiveIncomeGrowth.com

Mostly Passive Investment

Assumption: Investor has to get financing from a bank or from Turn Key company

Or Invests $80,000 cash

Requires $16,000 cash plus closing costs

 

 

Assumption: Investor takes over seller’s loan (Subject To or Wrap) and does not have to get financing from a bank or from Turn Key company. No Bank, No Credit Needed

Requires $50,000 cash

 

Assumption: Turn Key company has found and rehabbed property and found renter to install

Assumption: Turn Key company has found property with equity and taken over loan with Subject To or Wrap. And found Tenant Buyer who puts $20,000 down, pays a premium lease and does all maintenance and repairs

Assumption:

Goal Is Cash Flow with Eventual Property Appreciation

 

 

Assumption:

Goal Is Cash Flow, captured equity with Eventual Property Appreciation

 

Assumption:

Investment Amount $80,000

Assumption:

Investment Amount $50,000

Location: Columbus Ohio Location: Phoenix Arizona
2,373 miles from Los Angeles 373 miles from Los Angeles
Investor 100% Profits (No Back End Equity) Investor 100% Cash Flow &

Back End Equity $$$

Investor’s Total 10 Year Return (Plus (Does Not include Tax Write Off’s) $75,240 Investor’s Total 10 Year Return (Does Not include Tax Write Off’s) $249,971
Investor Funds LLC $80,000 Investor Funds LLC $50,000
Investor Profits $75,240 Investor Profits $249,971
Less Cap Ex (Roof, AC Unit, Landscaping, Water Heater, etc) -$$$$$ No Cap Ex (Tenant Buyer does All Maintenance and Repairs) $0
Investor sets up LLC Investor sets up LLC
Investor Funds LLC $80k or applies to bank and hopes to qualify Investor Funds LLC $50k
Turn Key locates &

acquires property

Turn Key locates &

acquires property

Turn Key teaches Investor Subject To, Wrap, Lease Options
Investor 100% Ownership Investor 100% Ownership
Investor 100% Cash Flow Investor 100% Cash Flow &

Back End Equity

Investor makes

management decisions

Investor makes

management decisions

Investor collects rents, disburses Investor collects rents, disburses
Property ARV $80,000 Property ARV $225,000
Purchase Amount $80,000 Purchase Amount $180,000
Cash Out – to Seller $0,000 (Cash Out – to Seller) $15,000
Seller Carry Back $0,000 (Seller Carry Back) $20,000
Bank Financing $64,000
Amount Cash Have To Put Down $16000 (Underlying Note Subject To) $145,000
Monthly Payment Out $419 Monthly Payment Out $995
Repairs & Maintenance $5,000 No Repairs or Maintenance $0
Sell Amount to Tenant Buyer $0 Sell Amount – New Tenant Buyer $245,000
Seller Carry Back (Paid when

Tenant Buyer Refinances)

$0 Seller Carry Back (Paid when

Tenant Buyer Refinances)

$20,000
Underlying Note Subject To (Paid when Tenant Buyer Refinances) $0 Underlying Note Subject To (Paid when Tenant Buyer Refinances) $145,000
Cash In – From New Tenant Buyer $0 Cash In – From New Tenant Buyer $20,000
Monthly Payment In –

From Renter

$550 Monthly Payment In –

From Tenant Buyer

$1,650
Investor Does Repairs & Maintenance $$$$$ Tenant Buyer Does Repairs

& Maintenance (No Cap Ex)

$0
Amount Tenant Buyer Owes Investor $0 Amount Tenant Buyer Owes Investor ($245k – $20K) $225,000
Monthly Payment In $550 Monthly Payment In $1,650
Monthly Payment Out $419 Monthly Payment Out $995
Monthly Cash Flow Investor Total $135 Monthly Cash Flow Investor Total $655
Vacancy Rate 10% Vacancy Rate – None
Renters Occasionally Need To Be Evicted -$1,000 Note: Tenant Buyer puts down $20,000 Non Refundable – If the Tenant Buyer vacates the property – another Tenant Buyer is found with an additional $20,000 Non refundable down $20,000
Year 01 Cash Flow

Investor – $135 monthly

$1,620 Year 01 Cash Flow

Investor – $655 monthly

 

$7,860

Year 02 Cash Flow

Investor – $135 monthly

$1,620 Year 02 Cash Flow

Investor – $655 monthly

 

$7,860

Year 03 Cash Flow

Investor – $135 monthly

$1,620 Year 03 Cash Flow

Investor – $655 monthly

 

$7,860

Year 04 Cash Flow

Investor – $135 monthly

$1,620 Year 04 Cash Flow

Investor – $655 monthly

$7,860
Year 05 Cash Flow

Investor – $135 monthly

$1,620 Year 05 Cash Flow

Investor – $655 monthly

$7,860
Year 06 Cash Flow

Investor – $135 monthly

$1,620 Year 06 Cash Flow

Investor – $655 monthly

$7,860
Year 07 Cash Flow

Investor – $135 monthly

$1,620 Year 07 Cash Flow

Investor – $655 monthly

$7,860
Year 08 Cash Flow

Investor – $135 monthly

$1,620 Year 08 Cash Flow

Investor – $655 monthly

$7,860
Year 09 Cash Flow

Investor – $135 monthly

$1,620 Year 09 Cash Flow

Investor – $655 monthly

$6,000
Year 10 Cash Flow

Investor – $135 monthly

$1,620 Year 10 Cash Flow

Investor – $655 monthly

$7,860
Cash Flow To Investor $16,200 Cash Flow To Investor $78,600
Repairs & Maintenance (Roof, AC Unit, Water Heater, Painting, Appliances, Landscaping, etc) -$$$$$$ No Repairs or Maintenance

(No CapEx)

Tenant Buyer Does All Maintenance & Repairs

$0
10 Year Principal

Pay down by Renter

$11,940 10 Year Principal

Pay down by Tenant Buyer

$28,871
Cash Down – From Tenant Buyer $0 Cash Down – From Tenant Buyer – Goes into Investor’s Pocket $20,000
Tax Write Offs For Investors $$$$$$ Tax Write Offs For Investors $$$$$$
Appreciation Is Investor’s -10 Year $40,000 Appreciation Is Investor’s -10 Year $112,500
Note: Appreciation on a $80,000 property in Indiana at 5% per year is $4,000 per year $4,000 Year Note: Appreciation on a $225,000 property in Arizona at 5% per year is $11,250 per year $11,250

Year

Investor Borrows From Bank $80k

to acquire property

$80,000 Investor Funds LLC $50k

(From Cash IRA 401(k) for Property

$50,000
Sell Amount to Tenant Buyer $0 Sell Amount to Tenant Buyer $245,000
Payoff Amount for Investor $64,000 Payoff Amount for Investor $180,000
Creates “Back End Equity” $16,000 Creates “Back End Equity” $65,000
Original Down –

From Tenant Buyer

$0 Original Down –

From Tenant Buyer

$20,000
Tenant Buyer – Pay Off Amount $0 Tenant Buyer – Pay Off Amount $225,000
Tenant Buyer Eventually Refinances $0 Tenant Buyer Eventually Refinances $225,000
Underlying Note Paid Off $64,000 Underlying Note Paid Off $145,000
Seller Carry Back Paid Off $0 Seller Carry Back Paid Off $20,000
Remaining Equity $16,000 Remaining Equity $60,000
10 Year Cash Flow To Investor $39,300 10 Year Cash Flow To Investor $78,600
Backend Equity –

Investor 100%

$0 Backend Equity –

Investor 100%

$60,000
Total $39,300 Total $138,600
Investor’s Amount Invested

Investor’s Total Return

 

From Tenant Buyer

10 Year Cash Flow

Principal Pay Down

Appreciation

Back End Equity

Total

 

Minus Repairs, Maintenance,

AC Units, Roof, Water Heater, Landscaping and other Cap Ex

$80,000

$75,240

$0

$39,300

$11,940

$40,000

$16,000

$75,240

-$$$$$

Investor’s Amount Invested

Investor’s Total Return

 

From Tenant Buyer

10 Year Cash Flow

Principal Pay Down

Appreciation

Back End Equity

Total

 

Minus Repairs, Maintenance,

AC Units, Roof, Water Heater, Landscaping and other Cap Ex

$50,000

$299,971

$20,000

$78,600

$28,871

$112,500

$60,000

$299,971

$0

Additional Investor Funds to buy

Another Property in Year 1

$0 Additional Investor Funds to buy

Another Property in Year 1

$20,000

(From New TenantBuyer’s DownPayment)

Investor’s Net Return Profit $75,240 Investor’s Net Return Profit $249,971
10 Year ROI 9.40% 10 Year ROI 49.90%
1st Year ROI Cash Flow 2.03% 1st Year ROI Cash Flow 15.72%
1st Year ROI Including Down Payment 2.03% 1st Year ROI Including Down Payment 55.72%

Generally, here is what I do, it is called Subject To
Actually, it is very lucrative. These are generally Not Fixers – Most sellers in this situation either:
1) have to sell quickly or
2) don’t have enough equity to cover real estate fees, closing costs and other fees or
3) don’t want to or can’t afford to do repairs and or don’t want to have people traipsing around their house or
4) have bought another place and are carrying two mortgages or
5) lost a job or have a medical emergency, etc or
6) are in pre-foreclosure and have to do something quickly or
7) are inherited with a mortgage and can’t make the payment or
8) have a job transfer and need to sell quickly
I allocate $50,000 per property. The money I give a seller comes out of the $50,000 investment.
When I sell to a Tenant Buyer, since I am offering Terms that they otherwise can’t get, I sell the property “As Is” for a “built in equity” of an additional $10,000 to $25,000 depending on the house. (I bump up the sales price what the value WILL be) then I get that (it is called “the back end” when they refinance or sell. The buyers are usually successful businessmen that can’t get bank financing because they aren’t W2. They have good income, money in the bank and want to buy a home.
I get a “down payment” up front of $20,000 to usually $25,000 then I get the monthly cash flow and then I get a “back end” equity payoff.
When I “Buy & Hold” and only rent it out, I have to take care of a tenant, fix the roof, replace the AC etc. Worry about them trashing the house, worry about vacancies. When I eventually have to replace the roof or AC it wipes out the profit from that house. The most I get up front is one month’s rent. I continually have to find new sources of money for the next one, usually a bank. Bank’s Stop Lending at 10 properties.
However, when I sell it to a tenant buyer, there are no real estate agent fees, I get $25,000 immediate cash, I don’t have to worry about roofs, ACs, and tenants and I get the same cash flow. When the roof or AC goes, the Tenant Buyer owns the house, so he takes care of those. If the market tanks, my built in equity still exists. Each time I get a Tenant Buyer’s down payment, that gives me Money to Buy the Next one and the Next one and the Next.
Pretty cool, eh?

 

When I sell to a Tenant Buyer, since I am offering Terms that they otherwise can’t get, I sell the property “As Is” for a “built in equity” of an additional $10,000 to $25,000 depending on the house. (I bump up the sales price what the value WILL be) then I get that (it is called “the back end” when they refinance or sell. The buyers are usually successful businessmen that can’t get bank financing because they aren’t W2. They have good income, money in the bank and want to buy a home.

I get a “down payment” up front of $10,000 to usually $25,000 then I get the monthly cash flow and then I get a “back end” equity payoff.

When I “Buy & Hold” and only rent it out, I have to take care of a tenant, fix the roof, replace the AC etc. Worry about them trashing the house, worry about vacancies. When I eventually have to replace the roof or AC it wipes out the profit from that house. The most I get up front is one month’s rent. I continually have to find new sources of money for the next one, usually a bank. Bank’s Stop Lending at 10 properties.

However, when I sell it to a tenant buyer, there are no real estate agent fees, I get $25,000 immediate cash, I don’t have to worry about roofs, ACs, and tenants and I get the same cash flow. When the roof or AC goes, the Tenant Buyer owns the house, so he takes care of those. If the market tanks, my built in equity still exists. Each time I get a Tenant Buyer’s down payment, that gives me Money to Buy the Next one and the Next one and the Next.

Pretty cool, eh?

I do teach this (there is a coaching fee since it is “hand’s on” and you will actually buy properties) but you can also find the basic information free on BP and on Youtube, if you are a “book learner”.

If you want to learn how to do them for yourself take a look at

http://PassiveIncomeGrowth.com/Investors/

http://PassiveIncomeGrowth.com/FAQ

http://PassiveIncomeGrowth.com/New-Available-Projects/

regards,

Ken

 

My experience is that people who don’t think they have enough equity to sell don’t even contact an agent. Those who do contact an agent, if they read the agent analysis of “money to the seller after all payoffs” and it says that the seller has to come to closing with money, won’t list. I am not an agent, but when I talk to off-market sellers, that is what they tell me. When I buy Subject To, no agent is involved, so that fee amount is saved by the seller who has little equity. Oftentimes it makes it a sale that could not have otherwise occurred. So, I can pick up properties that otherwise won’t even hit the MLS.