<div class="bbWrapper"><blockquote data-attributes="member: 55234" data-quote="Antifragile" data-source="post: 1100272"
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I was wrong...<br />
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Being a numbers guy, I couldn't let these structures out of my mind and had to run them for myself to grasp what you were doing and why did it all feel both "too good to be true" and "scam like".<br />
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1) I don't know Casey, it's just that Twitter/X RE community is small and he got on my radar because he posted similar structures. While I felt they were super creative, I found them hard to grasp. Now you posted it too... thanks for that.<br />
2) At first I thought it was scamming little old ladies, but since the $150k loan is registered against a property with higher value, it's no longer a scam in my books. Then I focused on the terms and what bugged me that you felt like having a loss was a good thing. The way I re-interpreted your post is by looking at it from a different angle.<br />
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Imagine someone came to you and said: hey, which would you rather have?<br />
a) A $150,000 loan at 0%<br />
b) A $115,000 loan at 2.2%<br />
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It feels like a scam when asked that way, you took advantage of some poor old lady, who got a 0% on her loan to you.<br />
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Yet that's false.<br />
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Because you actually owe the full $150,000 on your loan, not the $115,000. And your losses today do not bring down your debt. Sure the debt is at 0% rate, but you still owe the full $150,000 over the next 25 years.<br />
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What does that mean about your $115,000? It means you better put it to good use and invest it in such a way that generates enough to bring you back up to $150,000 in the next 25 years. That would be break even on the loan only.<br />
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On top of the loan, you also put in $15,000 cash that you aren't getting back, it's part of your transaction.<br />
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That means that your remaining cash on hand, being $115,000 better generate enough to get you back to $150,000 and give you more to cover the initial $15,000.<br />
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That's a puzzle...<br />
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<a href="https://www.thefastlaneforum.com/community/attachments/52973/" target="_blank">View attachment 52973</a><br />
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By my math, it looks like you've set yourself up to generate a GIC like investment returns at 6% over the next 25 years, every year. That's an obligation on your part. To make profits you need to beat that!<br />
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In short, it doesn't look like you are getting a 2.2% debt currently, more like you are getting liquidity (access to cash) that will break even at 6% every year for the next 25 years.<br />
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Real estate typically goes up over long periods, so I am not too worried about your moves - it's your business. And I don't see the old lady being scammed either.<br />
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So I was wrong in my first blush look at these structures and don't like them as much anymore. <img src="/community/imgs/emoticons/em-smile2.png" class="smilie" loading="lazy" alt=":)" title="Smile :)" data-shortname=":)" /> But I give mad props to people like Casey and you for coming up with these, they are brain twisters and best of all, they do get some deals done!
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</blockquote>I think if I'm looking at this right, you have it inputted wrong. The pmt on debt is 500/mo for 300 months. not 900/mo. And excuse my ignorance, what does GIC stand for? With TVM calculator it comes out to 2.2% rate that I borrowed the 115k at. How did it get to 6%?<br />
If I have 115k in cash that I'm paying 500/mo to have fully amortized over 25 years, that computes a 2.22% interest rate<br />
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editing:<br />
I'm re-reading what you said several times over and I think i know what you're saying. You're saying the 6000/yr payment is effectively 6%. However, much of that is principle pay-down and only 2.22% of that is "interest". Unless you get an interest only loan at 2.22%, any financing will look like that due to the amortization part of it. Am I missing something still?<br />
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edit #2: I see what you mean now, in order to break even you must get at least a 6% cash on cash return. Got it.<br />
Another thing that I do with these is the whole same situation, but go pay off another 100k loan that's at say 5% interest on a different property and replace it with this one. Then I effectively re-financed myself that is not with a bank, loan cannot be called, and is a 2.22% interest rate. I will say, I'm kind of of the belief that if you can't figure out how to get a 6% return you should probably just give up. Maybe I'm wrong here? haha<br />
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edit #3: since you've really made me curious, you could go put 115k in the S&P 500 and it would be valued at 380k in 25 years. That's almost 2.5x the 150k that you borrowed to begin with. So you effectively make 230k with what's deemed "low risk" this was also assuming a 30% tax rate, though I don't know many real estate guys that pay tax, but figured I'd include it. I don't like the stock market, but it does seem like an interesting concept. Get 50 of these and you made 11.5m over 25 years not really doing anything. (according to screenshot below)<br />
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Edit #4: You said at the end you don't like this deal structure really. Just so I can understand, you're basically saying you wouldn't go to the bank and get a 115k loan at 2.22% interest fully amortized over 25 years against a house you own if they were offering that at the bank? The 6% part is only because of the amortizing nature of the loan, the same as any. Curious to hear your thought on that.</div>
