Real Estate Investing – Sam Kwak
Whenever I tell people, “You can buy Real Estate without your own money or credit” people usually blurt back to me saying “That’s not possible! That’s Illegal! What a scam! What?!” In any of that variation. Those people usually hear the words “Without, Money, and Credit”. But what they don’t hear are the three words: “Without your own”. And some people would say, “You’re not referring to stealing money here, are you?”. Absolutely not! It’s perfectly legal and in fact, some of the most successful Real Estate Investors around the world use some of the strategies that I’m about to share with you here in this article. If you’re interested in buying real estate for the purpose of either flipping it or renting it out, you may want to read on! Oh! and I’m going to remove all the clutter and go straight into the heart of it all.
Please consult with a competent licensed Real Estate Attorney and a CPA to make sure all strategies and transactions that I share with you fits into your investment strategy and situations! My advice today is not a legal advice but rather a recommendation for your real estate investing success.
Now this is the #1 talked about strategy around the real estate investing community. It’s almost like a go-to strategy for everyone. “Subject-To!” “Subject To!” Everyone is raving about “Subject-To!” But what they don’t know is that there are lots of moving parts to the subject-to. Remember, consult with a LICENSED real estate attorney about executing this strategy. Keyword: licensed! In any of the transactions that I mention here, it is best to use a legal entity to protect your personal assets from being co-mingled into your business assets. Remember to talk to your attorney about this! Subject-To is a shortened phrase for: “Subject-To existing mortgage”. It’s used best when the seller of a home is wanting to get rid of his or her property and is highly motivated to sell using any means necessary. Subject-To transactions are great because it almost requires no money upfront (maybe a option fee or consideration) and you can obtain the deed of the property. Essentially, you are taking over the seller’s existing mortgage payment and the title of the property. In this case, the seller may not be worried about getting a lump sum payment for his or her existing mortgage but rather not want to worry about the payments. This would require tremendous amount of trust between you and the seller so you may need to build ton of rapport with the seller. Another thing to consider with this strategy is that you now have to pay property taxes. Because now you’re the holder of the title, you are in effect the owner of the property in the eyes of your county. In the eyes of the bank, the original seller’s name is still on the mortgage but the bank wouldn’t stress the fact that you are now the owner as long as the payment is coming in on time.
So in short, this is an excellent strategy to take over the existing mortgage payment and take the stress away from the seller of having to worry about selling the property. In general, you want to create a win-win result with your seller. This may mean that you’ll maybe pay the seller more on the interest so that the seller has an incentive to collect a periodic payment rather than a lump sum. Allow the seller to see that he or she can create positive cash flow without the burden of holding the property under his or her name.
You may be saying, “Well, now we have to make payments”. The point is that we want to have a tenant pay for those payments, right? In the best scenario, we want to give ourselves up to 90 days to find a qualified tenant for the subject property. So perhaps, you can make an agreement to defer the payments to the seller for 90 days? Is it challenging to do? Absolutely! Can it be done? Sure! In most cases, you’d want to work with a leasing agent to find a tenant asap!
Seller financing is very similar to the Subject-To Strategy in a way that you’re making periodic payments to the seller. But in this strategy, we want to position that payment as a new note (loan) created by the seller himself/herself. We’re treating the seller as the bank in this situation and the seller can determine the financing terms in accordance with the law. This is a favorable strategy to the seller as he or she can charge interest for allowing you, the buyer, to take on a loan instead of a traditional method of purchasing and selling real estate.. What’s also different here is that you, the buyer, is not taking over an existing mortgage. This is a separate loan issued by the seller to you. In some cases, the seller may ask for a down payment on this loan and in other cases, he or she may simply want to get rid of the property. Much like the subject-to strategy, the seller can transfer over the deed/title to you and now she/he is simply collecting payment. Again, this strategy requires a lot of trust between you and the seller.
3. Sweat Equity
Sweat equity is an interesting strategy and perhaps one of my favorite! While this strategy requires no money on your part, it does take tremendous amount of work. Hence the words “sweat equity”. Imagine sweat equity as an invisible money that gets created to match to how much work, skill and knowledge you bring into a Real Estate deal. So for example, your rich uncle brings in $20,000 worth of investment capital to a certain deal. You, the investor, may do all the work in making this deal work and put in the actual effort. In most cases, a fix & flip deal would fit into this category. So you would put in about $20,000 worth of labor into the deal which allows you and your uncle to become a 50/50 partner. At the end of the transaction, whatever profit is created, you keep half and your rich uncle keeps the other half. Now you created profit out of your knowledge and effort while your rich uncle simply allowed his money to work for him. Does this idea make sense?
In the accounting world. equity can be created either by cash, exchange of service, performance of services and/or intellectual property. Thus, it gives you a equitable position in this particular real estate deal. The hardest part of this strategy is finding the person with the money. The good news is that most Americans have a retirement account in which they can roll the funds over into a real estate deal. While the stocks, bonds and mutual funds may generate 3-7% annualized return on an investment, a fix and flip deal CAN generate a potential of 12-30% return on investment. In some cases, I’ve seen up to 50% ROI! Who wouldn’t want that kind of a return on their retirement account?
4. Options Contract
While options contract won’t give you a legal title of a property, it DOES give you an equitable interest of the property so you can wholesale it. Now, I know I’m going to0 fast into this strategy so let’s back up. An options contract is an agreement in which the seller gives you the rights to buy their property for a set amount of price and the contract usually has an expiration. (You’ll want the expiration date to be far out into the future as possible) The options contract may also gives you the “first place” in line when it comes to buying the property. Now some options contract require you to put down a small fee into an escrow. Correct me if I’m wrong here but the law says the buyer must give consideration to obtain an options contract. In this case, “consideration” can be $1, $10, or even $100. It depends on what the seller wants. To protect you any potential loss of opportunity here, you may want to record a memorandum indicating that you have an options contract with the name of the buyer. You can do this by going to your county’s recorder office. It makes the memorandum public. You may not want to record the options contract itself because the contract will have the purchase amount indicated on the options contract. The whole point here is that you record the memorandum so that you are the “first in line” to purchase the property if someone else inquires about it. We don’t want to give away too much information out. That way, you can sell the options contract with a fee to another buyer who has the money or financing ready to go. For example, a property is listed at $120,000 but you negotiate it down to $100,000 and set an options contract, allowing you to purchase the property with that price in the future. You record a memorandum indicating that you have an options contract with the subject property tied to it. If and whenever you find a potential buyer, you would charge the buyer a fee so that the 3rd party buyer can buy the property. I’m going to be very clear with my language here.. The 3rd party buyer is not buying the property.. He or she is buying your options contract which in turn, gives them the right to purchase the property at a lower price than what it was originally listed for. Get the difference here? If you say that you’re selling the property for the original seller without a broker’s license, that is considered illegal. This is why I recommend working with a competent real estate attorney.
So to wrap this article up, you can use those strategies individually or combine them to create a desired outcome. This is what investors call “Creative Acquisition”. I personally know a gentleman who acquired all of his rental properties using those strategies above. I left out some of the other popular strategies such as “Seller Carry-Back Mortgage” or even “lease option”. I can go on and on about these strategies so feel free to email me with any questions or comments that you may have. I also want to warn you that if you’re investing for the first time, I highly recommend taking on a supervised training class and some education before attempting to execute any of these strategies. Always consult with a lawyer and use a competent lawyer when it comes to executing a creative strategy. In fact, I have a recommendation to the #1 Real Estate Investment education program. I personally took this education and I can personally guarantee that this program will set you apart from the rest of the investors out there. If you are interested, I will personally mentor you and guide you through your process of learning here:www.student2investor.com
If you’re an investor with some prior experience, it wouldn’t hurt to see what other investors are doing. The moment you tell yourself that you’re set and don’t need to learn anything new, you have already lost your business to your competitors like me. Always be willing to learn and adapt. 2008 market crash is a prime example and for those that weren’t willing to adapt to the new market, they were out of business quick. So partner up with me and I am more than willing to share my knowledge in the world of Real Estate Investing!