How I'm getting 2.22% debt currently

[ChrisGav]

To all my fellow real estate people, I thought you may benefit from this tactic I'm using to get crazy low interest rate debt.
We like to call it Borrowing money the long way, here's how it works (the numbers are from a real deal I'm currently doing):
Seller has a house listed for 165k
I offer them 15k down, and they carry 150k, 500/mo for 300 months 0% interest. The key, I say I want to attach this debt to a different property, not the subject property I'm buying.
Seller accepts my offer
The house is realistically probably worth 140k.
After closing on the property, I turn around and list the house on the market for 140k.
Get an offer for 140k and sell the house.
I pay 6% realtor commissions and 1,600 or so in closing costs
Leaving me with 130k.
I gave the seller 15k down, so I'm really getting out 115k that is "new money" so to speak.

With the seller financed debt being attached to another property I'm able to walk out of the closing with 115k cash that I can go do whatever I would like with. I'm paying 500/mo for 300 months to have 115k. That imputes a 2.22% interest rate when plugged into a financial calculator. Will attach a screenshot to show calculation.

The best part, I now have a 25k loss that I'm writing off my tax bill. I paid 165k for the house, only sold it for 140k.

If you don't have free and clear property to attach the mortgage to you can get a hard money loan against the house you're buying, pay off another property and attach the mortgage to your other property you just paid off with the hard money loan. Once you sell the subject house, the hard money loan will pay off and you likely won't walk out of there with any cash. But you did just refinance your other property at a 2.22% rate. Of course, these are non-recourse loans with no personal guarantee as they are seller financed.

I've got 4 of these deals currently going as I continue to refinance out some of my higher interest debts on properties/use it to buy new deals. Cool tactic, and some of the best debt you'll ever find.

 

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[Johnny boy]

Alright Chris I’ll bite, help me do the first one

 

[Kevin88660]

To all my fellow real estate people, I thought you may benefit from this tactic I'm using to get crazy low interest rate debt. I started attending a national real estate exchange group about a year and a half ago. It's an invite-only "secret society", if you will, of incredibly creative real estate guys that do very well for themselves. Learned a few things that I started implementing and thought I'd share.
We like to call it Borrowing money the long way, here's how it works (the numbers are from a real deal I'm currently doing):
Seller has a house listed for 165k
I offer them 15k down, and they carry 150k, 500/mo for 300 months 0% interest. The key, I say I want to attach this debt to a different property, not the subject property I'm buying.
Seller accepts my offer
The house is realistically probably worth 140k.
After closing on the property, I turn around and list the house on the market for 140k.
Get an offer for 140k and sell the house.
I pay 6% realtor commissions and 1,600 or so in closing costs
Leaving me with 130k.
I gave the seller 15k down, so I'm really getting out 115k that is "new money" so to speak.

With the seller financed debt being attached to another property I'm able to walk out of the closing with 115k cash that I can go do whatever I would like with. I'm paying 500/mo for 300 months to have 115k. That imputes a 2.22% interest rate when plugged into a financial calculator. Will attach a screenshot to show calculation.

The best part, I now have a 25k loss that I'm writing off my tax bill. I paid 165k for the house, only sold it for 140k.

If you don't have free and clear property to attach the mortgage to you can get a hard money loan against the house you're buying, pay off another property and attach the mortgage to your other property you just paid off with the hard money loan. Once you sell the subject house, the hard money loan will pay off and you likely won't walk out of there with any cash. But you did just refinance your other property at a 2.22% rate. Of course, these are non-recourse loans with no personal guarantee as they are seller financed.

I've got 4 of these deals currently going as I continue to refinance out some of my higher interest debts on properties/use it to buy new deals. Cool tactic, and some of the best debt you'll ever find.

Ah. Basically you fool the seller into thinking they got a good deal in selling you at a market premium….betting on their ignorance on time value of money?

 

[ChrisGav]

Alright Chris I’ll bite, help me do the first one

Done, I'm ready when you are.

Ah. Basically you fool the seller into thinking they got a good deal in selling you at a market premium….betting on their ignorance on time value of money?

I think "fool the seller" is the wrong connotation. Everyone is in different situations and would have different reasons for potentially taking the offer. The deal I used in this example, the lady had been trying to sell her house for about a month and a half and was just asking too much for it. She was going to move into an RV and travel around the country after selling and didn't necessarily need the money from the sale. Another one I have, the sellers are buying a house in another state and don't want the burden of the current house anymore. Often times, your everyday seller isn't really savvy to think about interest rates and such. They just want their problem solved and be able to move on with their life.

When I first started pitching creative offers like this I would always get wrapped up in "Why would anyone take this offer". The only reason I thought that way is because it's an offer I know I would never take. That thought process held me back for a long time as I would just not make the offers thinking it would never get accepted. I had to learn it's not for me to understand why they would or wouldn't take the offer, just make the offer. The guys in this group always say "It doesn't matter what they want. Just make an offer that works for you and if they take it great"

 

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[Queenie]

I offer them 15k down, and they carry 150k, 500/mo for 300 months 0% interest.

The seller finances a 150k loan at 0%? People take this deal?

I must be confused.

 

[ChrisGav]

The seller finances a 150k loan at 0%? People take this deal?

I must be confused.

I'm going to copy/paste my previous reply to help answer this:
The deal I used in this example, the lady had been trying to sell her house for about a month and a half and was just asking too much for it. She was going to move into an RV and travel around the country after selling and didn't necessarily need the money from the sale. Another one I have, the sellers are buying a house in another state and don't want the burden of the current house anymore. Often times, your everyday seller isn't really savvy to think about interest rates and such. They just want their problem solved and be able to move on with their life.

When I first started pitching creative offers like this I would always get wrapped up in "Why would anyone take this offer". The only reason I thought that way is because it's an offer I know I would never take. That thought process held me back for a long time as I would just not make the offers thinking it would never get accepted. I had to learn it's not for me to understand why they would or wouldn't take the offer, just make the offer. It doesn't matter what they want. Just make an offer that works for you and if they take it great

Yes people do take it. I got 2 of these under contract last month both on similar terms. Both were on market houses with realtors involved.

 

[Antifragile]

Two things:
1) You are creative, kudos. I saw the same on Twitter/X by Casey Mericle and I love the outside the box thinking!
2) Your structures seem to take advantage of poor old ladies and that's a pass from me. Do this on a bigger scale with sophisticated groups and report back.

The issue I see (and would like you to comment please) is this: when you attach the $150K debt on another property, what is the value of that other property?

What happens if you go bankrupt, will the old lady have a shot at getting any money back on her debt? Of course not, as they are non-recourse!

What happens if you just stop paying because you feel like it?

It also presupposes that the old lady has a paid off house, otherwise she can't give you the seller financing. She first needs to pay off her own mortgage.

Lastly, if the old lady only needs $15K to travel the world, she could borrow against paid off house, rent it out and go...

 

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[ChrisGav]

Two things:
1) You are creative, kudos. I saw the same on Twitter/X by Casey Mericle and I love the outside the box thinking!
2) Your structures seem to take advantage of poor old ladies and that's a pass from me. Do this on a bigger scale with sophisticated groups and report back.

The issue I see (and would like you to comment please) is this: when you attach the $150K debt on another property, what is the value of that other property?

What happens if you go bankrupt, will the old lady have a shot at getting any money back on her debt? Of course not, as they are non-recourse!

What happens if you just stop paying because you feel like it?

It also presupposes that the old lady has a paid off house, otherwise she can't give you the seller financing. She first needs to pay off her own mortgage.

Lastly, if the old lady only needs $15K to travel the world, she could borrow against paid off house, rent it out and go...

That's hilarious, I know Casey Mericle and he attends the meetings I go to. Do you know him?

I think the taking advantage of old ladies is not necessarily the case. With this mindset, if I buy a house at a discount that I fix up and flip, am I taking advantage of that seller as well since I got the house for less than it's worth?

The other property I attach debt to is always worth more than the debt to give them security. I'm not a fly by night guy, I like to do right by people. If I stop paying they foreclose on the asset that they are secured to as they would with any mortgage.

In terms of them borrowing against the house, yes they could. A lot of people, particularly elderly people in your example, shy away from debt and going to pull equity out of their house. Taking a 0% interest offer is hard to justify as the smartest decision, I agree with that, but that's not for me to decide for them. I can only make the offer that works for me. She had a realtor that listed the house, it's the realtor's job to hold their hand and help make the best decision for their situation.

I will say, one of the 2 I got last month was from an investor. The guy flipped the house and was having trouble selling it. He needed 60k to roll into another project asap so I gave him 60k down and did the same 0% terms. I ended up walking out of there with a 3% loan after selling the house.

 

[Queenie]

It doesn't matter what they want. Just make an offer that works for you and if they take it great

WOW! What a mindset. Reveals a lot about my own.

No wonder they asked you to join that group of Real Estate GOATs.

 

[Antifragile]

That's hilarious, I know Casey Mericle and he attends the meetings I go to. Do you know him?

I think the taking advantage of old ladies is not necessarily the case. With this mindset, if I buy a house at a discount that I fix up and flip, am I taking advantage of that seller as well since I got the house for less than it's worth?

The other property I attach debt to is always worth more than the debt to give them security. I'm not a fly by night guy, I like to do right by people. If I stop paying they foreclose on the asset that they are secured to as they would with any mortgage.

In terms of them borrowing against the house, yes they could. A lot of people, particularly elderly people in your example, shy away from debt and going to pull equity out of their house. Taking a 0% interest offer is hard to justify as the smartest decision, I agree with that, but that's not for me to decide for them. I can only make the offer that works for me. She had a realtor that listed the house, it's the realtor's job to hold their hand and help make the best decision for their situation.

I will say, one of the 2 I got last month was from an investor. The guy flipped the house and was having trouble selling it. He needed 60k to roll into another project asap so I gave him 60k down and did the same 0% terms. I ended up walking out of there with a 3% loan after selling the house.

I was wrong...

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".

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.
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.

Imagine someone came to you and said: hey, which would you rather have?
a) A $150,000 loan at 0%
b) A $115,000 loan at 2.2%

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.

Yet that's false.

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.

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.

On top of the loan, you also put in $15,000 cash that you aren't getting back, it's part of your transaction.

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.

That's a puzzle...



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!

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.

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.

So I was wrong in my first blush look at these structures and don't like them as much anymore. 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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[ChrisGav]

I was wrong...

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".

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.
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.

Imagine someone came to you and said: hey, which would you rather have?
a) A $150,000 loan at 0%
b) A $115,000 loan at 2.2%

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.

Yet that's false.

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.

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.

On top of the loan, you also put in $15,000 cash that you aren't getting back, it's part of your transaction.

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.

That's a puzzle...

View attachment 52973

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!

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.

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.

So I was wrong in my first blush look at these structures and don't like them as much anymore. 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!

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%?
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

editing:
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?

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.
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

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)

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.

 

[Antifragile]

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?

To answer that I must rephrase what you are saying.

Would you take a deal from the bank as follows:
- Bank fee: $35,000 “loss”
- Broker fee: $15,000 “deposit paid”
- Loan: $115,000 at 2.2%?

No matter how I spin it, that pre-payment (that you called a tax deduction loss) causes me to say “no”. This loan is too expensive for my taste.

I view this loan as being not 2.2%, but far more expensive than that. You are viewing the loss as just a “paper loss”, but your loan remains fixed at $150k, not $115k as you keep pointing out to what cash is left in your pocket. You created liquidity, but not a sound investment, in my opinion.

Where is your cash flow? My math says you must be able to generate CASH every month to pay for your loan, that means investing the $115k in something that pays you interest so you can cover the $500/mo or $6K/yr. Plus, you already kissed your $15k goodbye, so there is that…

Does this make sense?

 

[ChrisGav]

To answer that I must rephrase what you are saying.

Would you take a deal from the bank as follows:
- Bank fee: $35,000 “loss”
- Broker fee: $15,000 “deposit paid”
- Loan: $115,000 at 2.2%?

No matter how I spin it, that pre-payment (that you called a tax deduction loss) causes me to say “no”. This loan is too expensive for my taste.

I view this loan as being not 2.2%, but far more expensive than that. You are viewing the loss as just a “paper loss”, but your loan remains fixed at $150k, not $115k as you keep pointing out to what cash is left in your pocket. You created liquidity, but not a sound investment, in my opinion.

Where is your cash flow? My math says you must be able to generate CASH every month to pay for your loan, that means investing the $115k in something that pays you interest so you can cover the $500/mo or $6K/yr. Plus, you already kissed your $15k goodbye, so there is that…

Does this make sense?

Well, the 15k broker fee is recouped. I really got out 130k but reimbursed myself 15k leaving 115k as the "loan". The rest of the loss is a paper loss. At the end of the day I'm only paying back a total of 150k that I have 115k to show for it. If you add the "broker fee" back in, i have to pay a total of 165k that I have 130k to show for it. The bank fee in your example is the 2.22% interest. If I sold the house for 165k and got out 150k cash then it would just be a standard 0% loan.

It's none of those fees. it's 115k at 2.2%. the 50k that is in said fees is what makes it 2.2% instead of 0%. Because if said fees weren't apart of this it would just be 150k loan at 0% if I wasn't losing that money. It's also not cash paid out of pocket, it's just put into the total loan amount. So it's not even really a fee.

I guess another way of looking at this is if the bank said I'll give you a 150k loan against your house at 0%, but we are only going to give you 115k of that at 500/mo 25 years because we need to take some fees out of that amount. Would you not take that? It's 115k for you at 2.2% interest and you didn't have to bring any cash to pay said fees. Oh, and hey those fees we charged you, go ahead and write that off your tax bill.

Or another simpler way of looking at it is just if the bank will give you 115k at 2.2% interest and no fees would you not take that? 115k at 2.2% interest amortized over 25 years equates to you having paid a total of 150k over 25 years for their money.

P.S. I do appreciate this challenging as it's making me try to wrap my head around it more to see if I'm missing something.

 

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[Antifragile]

Well, the 15k broker fee is recouped. I really got out 130k but reimbursed myself 15k leaving 115k as the "loan". The rest of the loss is a paper loss. At the end of the day I'm only paying back a total of 150k that I have 115k to show for it. If you add the "broker fee" back in, i have to pay a total of 165k that I have 130k to show for it. The bank fee in your example is the 2.22% interest. If I sold the house for 165k and got out 150k cash then it would just be a standard 0% loan.

It's none of those fees. it's 115k at 2.2%. the 50k that is in said fees is what makes it 2.2% instead of 0%. Because if said fees weren't apart of this it would just be 150k loan at 0% if I wasn't losing that money. It's also not cash paid out of pocket, it's just put into the total loan amount. So it's not even really a fee.

I guess another way of looking at this is if the bank said I'll give you a 150k loan against your house at 0%, but we are only going to give you 115k of that at 500/mo 25 years because we need to take some fees out of that amount. Would you not take that? It's 115k for you at 2.2% interest and you didn't have to bring any cash to pay said fees. Oh, and hey those fees we charged you, go ahead and write that off your tax bill.

Or another simpler way of looking at it is just if the bank will give you 115k at 2.2% interest and no fees would you not take that? 115k at 2.2% interest amortized over 25 years equates to you having paid a total of 150k over 25 years for their money.

P.S. I do appreciate this challenging as it's making me try to wrap my head around it more to see if I'm missing something.

Short version:
You owe $150k
You have $115k in cash to pay off that debt

What’s your next move?

You own no property. Just cash. So you must invest it to pay off the $150k.

What rate of investment matches the breakeven point to your monthly payments? Do you agree that 115,000 x 2.2% is a far cry from the 6,000 you owe annually?

 

[ChrisGav]

Short version:
You owe $150k
You have $115k in cash to pay off that debt

What’s your next move?

You own no property. Just cash. So you must invest it to pay off the $150k.

What rate of investment matches the breakeven point to your monthly payments? Do you agree that 115,000 x 2.2% is a far cry from the 6,000 you owe annually?

1. go buy a house to flip using this cash as a down payment/rehab money and borrow the rest. Make 35k on the house which recoups my fees paid.

option 2: Go buy a 115k house that rents for 1,000/mo. Use that house as collateral for my next deal that I structure like this and snowball.

Option 3: I bought 24 unit apartment building 2 years ago 1.2m, 200k down 3.5% 1m financed 30 year am. This 115k will provide over half the downpayment on something like this. Go find a partner to bring 85k.

option 4: go lend 115k to a flipper on 12 month term. Charge 2 points and 12% interest. Keep rolling it this way and I'm making 1150/mo + 2300 on points

I guess what I'm struggling with is, you can use this logic on any mortgage. If I buy a house with a bank and get 100k at 3% 30 year am my payment is 422/mo. That's 5k/yr. So that's saying I'm borrowing at 5%. Some of that is principle paydown and equity building in the asset that said loan is attached to. Not necessarily money down the drain on interest, just money I don't see today.

I do understand what you mean how I have to go make 6k/yr to breakeven, I don't understand how that means I'm borrowing at 6% because it's being paid down on the property that it was attached to. So it's not the same as 6% interest only payments.

 

[MitchC]

I’m not in real estate at all and I’m not in front of the computer to do the maths but I have 3 questions for the sake of my curiousity

1. Is the bulk of the value in the deal not convincing someone to give you 0% interest loan for a premium price, why not make it simpler for them and just stick to that deal and buy the house and keep the debt on that house, you’d get more deals with a simpler structure id think
2. If you have a hard money loan on the house you are putting up as collateral is there not interest on that money as well?
3. Is there an opportunity to buy houses and pay monthly from people who have fixed loans at 2% and have them keep those loans?

Wish I lived in USA real estate sucks in Australia you could not do any of this here

 

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[ChrisGav]

I’m not in real estate at all and I’m not in front of the computer to do the maths but I have 3 questions for the sake of my curiousity

1. Is the bulk of the value in the deal not convincing someone to give you 0% interest loan for a premium price, why not make it simpler for them and just stick to that deal and buy the house and keep the debt on that house, you’d get more deals with a simpler structure id think
2. If you have a hard money loan on the house you are putting up as collateral is there not interest on that money as well?
3. Is there an opportunity to buy houses and pay monthly from people who have fixed loans at 2% and have them keep those loans?

1. I'm selling the house that I'm buying from them. I'm attaching the mortgage that the seller is carrying on a different property so that when I sell their house that mortgage is not being paid off, I'm walking out of the closing with that cash. If It's attached to the house I'm buying, then it will just be paid off when I sell the house since it is a lien on the house. Then all I did was lose 25k and get nothing.

2. The hard money loan is on the house you'd be buying not on the house I'm putting up as collateral. You would use hard money loan to pay off another property at closing so that you can attach the new mortgage that the seller is carrying to the property you just paid off. Then immediately listing and selling the house you bought from seller. Yes there is payments on that, but since you are re-listing the house immediately it's very short term.

3. Yes. I do a lot of these deals called Sub-to. The seller keeps their 2% mortgage in place. I take over their payments and get control of the property. I now have a house with a 2% mortgage. The structure that I posted in this thread is if they have the property free and clear or a lot of equity, not if they have very little equity. Sub-to is for when they have very little equity.

 

[MitchC]

1. I'm selling the house that I'm buying from them. I'm attaching the mortgage that the seller is carrying on a different property so that when I sell their house that mortgage is not being paid off, I'm walking out of the closing with that cash. If It's attached to the house I'm buying, then it will just be paid off when I sell the house since it is a lien on the house. Then all I did was lose 25k and get nothing.

2. The hard money loan is on the house you'd be buying not on the house I'm putting up as collateral. You would use hard money loan to pay off another property at closing so that you can attach the new mortgage that the seller is carrying to the property you just paid off. Then immediately listing and selling the house you bought from seller. Yes there is payments on that, but since you are re-listing the house immediately it's very short term.

3. Yes. I do a lot of these deals called Sub-to. The seller keeps their 2% mortgage in place. I take over their payments and get control of the property. I now have a house with a 2% mortgage. The structure that I posted in this thread is if they have the property free and clear or a lot of equity, not if they have very little equity. Sub-to is for when they have very little equity.

1. Got it
2. Makes sense
3. So sick, longest you can fix here is 5 years and you pay a tax every time you sell a house so this would never work

 

[Kevin88660]

Well, the 15k broker fee is recouped. I really got out 130k but reimbursed myself 15k leaving 115k as the "loan". The rest of the loss is a paper loss. At the end of the day I'm only paying back a total of 150k that I have 115k to show for it. If you add the "broker fee" back in, i have to pay a total of 165k that I have 130k to show for it. The bank fee in your example is the 2.22% interest. If I sold the house for 165k and got out 150k cash then it would just be a standard 0% loan.

It's none of those fees. it's 115k at 2.2%. the 50k that is in said fees is what makes it 2.2% instead of 0%. Because if said fees weren't apart of this it would just be 150k loan at 0% if I wasn't losing that money. It's also not cash paid out of pocket, it's just put into the total loan amount. So it's not even really a fee.

I guess another way of looking at this is if the bank said I'll give you a 150k loan against your house at 0%, but we are only going to give you 115k of that at 500/mo 25 years because we need to take some fees out of that amount. Would you not take that? It's 115k for you at 2.2% interest and you didn't have to bring any cash to pay said fees. Oh, and hey those fees we charged you, go ahead and write that off your tax bill.

Or another simpler way of looking at it is just if the bank will give you 115k at 2.2% interest and no fees would you not take that? 115k at 2.2% interest amortized over 25 years equates to you having paid a total of 150k over 25 years for their money.

P.S. I do appreciate this challenging as it's making me try to wrap my head around it more to see if I'm missing something.

I think what Antifragile is saying is while you indeed get a low-interest loan, you have a monthly repayment cash flow liability to meet.

This is different from a revolving line of credit that gives you a lot of flexibility.

This creates a potential "asset-liability mismatching" kind of short-term issue if you invest your cash in anything that does not have a monthly payout. For example, if you pay a T bill of one year you earn 5% guaranteed at year-end if you hold till maturity, but you don't have the monthly cash to answer the obligation.

This means you cannot fully invest the 115k. You probably need to park six months of cash for payment. Invest in T bills with six months' maturity for a small amount. Invest in a 1-year T bill for another amount, and invest in 2 years maturity T bills for another amount........ It is not an issue that cannot be fixed with planning. I will take that over of 115k at 2.2% loan for sure as a debtor ANYTIME at current interest rate environment.

I am using paper/security investment as an example because I am not into real estate, and paper/security is something I am much more familiar with.

 

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[Kevin88660]

I think "fool the seller" is the wrong connotation. Everyone is in different situations and would have different reasons for potentially taking the offer. The deal I used in this example, the lady had been trying to sell her house for about a month and a half and was just asking too much for it. She was going to move into an RV and travel around the country after selling and didn't necessarily need the money from the sale. Another one I have, the sellers are buying a house in another state and don't want the burden of the current house anymore. Often times, your everyday seller isn't really savvy to think about interest rates and such. They just want their problem solved and be able to move on with their life.

When I first started pitching creative offers like this I would always get wrapped up in "Why would anyone take this offer". The only reason I thought that way is because it's an offer I know I would never take. That thought process held me back for a long time as I would just not make the offers thinking it would never get accepted. I had to learn it's not for me to understand why they would or wouldn't take the offer, just make the offer. The guys in this group always say "It doesn't matter what they want. Just make an offer that works for you and if they take it great"

I am not making a moral judgment but more or less trying to understand the gist of the bargain you are getting.

You are acting as a broker who takes the risk of execution and needs to have the niche knowledge to do it. You have to sell the house later confidently without too much of a discount and proceed to find the next investment to arbitrage the rate difference while answering the monthly repayment obligation.

If she knows how to do it, she will not take the offer and do it herself.

 

[Kevin88660]

Chris it would be good if you could share how an individual with a paycheck or an entity with cash flow can optimize their book (legally) to get the maximum credit from a bank (personal loan or real estate investment).

By the time you need to apply for a loan if the right things are not ready, it will be a little too late.

It seems that a lot of assets are on bargain but everyone is stretched to the limit (not having the balls tp put cash in due to past losses or the ability to leverage further).

 

[ChrisGav]

I think what Antifragile is saying is while you indeed get a low-interest loan, you have a monthly repayment cash flow liability to meet.

This is different from a revolving line of credit that gives you a lot of flexibility.

This creates a potential "asset-liability mismatching" kind of short-term issue if you invest your cash in anything that does not have a monthly payout. For example, if you pay a T bill of one year you earn 5% guaranteed at year-end if you hold till maturity, but you don't have the monthly cash to answer the obligation.

This means you cannot fully invest the 115k. You probably need to park six months of cash for payment. Invest in T bills with six months' maturity for a small amount. Invest in a 1-year T bill for another amount, and invest in 2 years maturity T bills for another amount........ It is not an issue that cannot be fixed with planning. I will take that over of 115k at 2.2% loan for sure as a debtor ANYTIME at current interest rate environment.

I am using paper/security investment as an example because I am not into real estate, and paper/security is something I am much more familiar with.

When phrased this way I understand exactly what you guys mean now.

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.

What really threw me through a loop was when he said the above ^ . Because I am getting 2.2% debt. It's just amortized over 25 years so yes the payment looks like 6%. My whole point was, every month my debt is being paid down because it's amortized. So while my payment looks like 6% I'm building the equity in that property that I leveraged because it's being paid down not actually paying a 6% rate. All it is is an amortizing mortgage.

As for what you said Kevin, yes you're right that could create a short term issue. I mean, the reality is if you set aside 1 year worth of payments you'd still have 109k to go play with. Maybe I should of mentioned earlier, I didn't attach this loan to a vacant house. I sold the property owner financed so I have no maintenance, taxes, or insurance payment and tenant is paying 1,400/mo for 30 years. So I'm really netting 900/mo and have 115k if you isolate the case like that.

I think for me, being in Real estate full time, it's incredibly easy to go find a return much higher than 6% cash on cash return. I don't have anything in my portfolio that is producing less than a 30% cash on cash return, and I am even hesitant to take those deals as it feels low. So for me I feel like I can get higher than 6% in my sleep and would do these deals any day of the week and twice on Sunday. Even If I can't go find something to roll the cash into, I just re-financed my house at a 2% interest rate. Still better than any other rate you would find.

Yes this whole thing is much different than the flexibility of a revolving line of credit, because it's not a line of credit, it's a mortgage. I understand how if used to a typical line of credit it can look different

 

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[ChrisGav]

Chris it would be good if you could share how an individual with a paycheck or an entity with cash flow can optimize their book (legally) to get the maximum credit from a bank (personal loan or real estate investment).

By the time you need to apply for a loan if the right things are not ready, it will be a little too late.

It seems that a lot of assets are on bargain but everyone is stretched to the limit (not having the balls tp put cash in due to past losses or the ability to leverage further).

I will say, of the 170 rental units that I own, only 4 of them were purchased with a bank. 2 of which I'm on, the other 2 my partner did the "golden arm" and signed on the debt instead of me. My entire portfolio, for the most part, is made up of seller financed deals or subject-to deals where I took over the payments on a seller's property and the debt remained in their name. There's a saying amongst my fellow real estate peeps: "Friends don't let friends do business with banks"
I see you're in Singapore so I don't know what banking is like there, but here, if things get bad banks can call loans due and really make things difficult. The best way to borrow money is from sellers. Either through a method as described above or through a traditional seller finance where you're keeping the house as a rental.

With that said, the banks that I have worked with have primarily gone off my net-worth when looking at lending me money and my local banker believes I'm a strong borrower and doesn't really put up a fight if I were to ask him for a loan, depending on the size. A lot of this is due to the fact that I have a lot of liquidity. My tax returns look horrendous as every year I'm losing money on paper due to deals like this one described above and me forward depreciating most of my assets. Uncle sam and I have some beef and I don't like paying him.

Again, not sure what things are like in Singapore, but as things continue to look doom and gloom in the real estate world more sellers are open to hearing these wacky creative offers. This opens the floodgates for deal flow if you understand how to structure owner financing and other creative options that can get you into deals with very little cash. Meaning, you can avoid going to a bank.
Let me know if this doesn't really answer your question...

 

[Antifragile]

Chris, I like that you are hustling and this thread has been very engaging for me too. Thank you for sharing your work.

What I do is very different, but anyone making my brain think hard gets a gold star in my books. . Keep up the good work!

 

[Two Dog]

Both were on market houses with realtors involved.

I heard lots of these kinds of ideas last go around in 2007. At first blush, the math seems right, but it always does.

Some legitimate questions along with a couple of details that maybe you could clarify for me.

1. Didn't the realtor(s) get paid on the original $165K deal? That's another 6% in fees = $10K being ignored, right?

2. Aren't you ignoring the risk of clouded title, seller repairs on the resale, etc? I'm assuming you're closing without using a title company and skipping due diligence, title insurance, inspections, all the standard stuff. Obviously, there's inherent risk since you're flipping properties - not deals - that isn't factored into the 2.2% calculation. Too many hard luck stories about investors buying at auction and getting eaten by the unknowns. Buy one meth house or property with a cracked sewer line and all the benefits of many other deals at 0.0% financing get wiped.

3. The seller note is collateralized by an existing property. Paid off, no problem, but you said you are *refinancing* higher cost debt to utilize the 2.2% money. Either the person is getting a useless 2nd or 3rd lien or there's a bunch more legal stuff involved than you're mentioning in the original post.

4. Hard money used to cost 4 points up front + 15% APR for six month term. Flash cash was something like 1-2% for a 24 hour loan to close a back to back transaction. No idea what hard money goes for nowadays, but it's certainly isn't free and clear to close a deal with 3rd party money and magically transfer all the debt around to different places. None of those costs appear in the 2.2% imputed interest rate.

Personally, not surprised you can find people who will finance non-recourse at 0%. Also not surprised they don't know enough to use a title company to verify the collateral is legitimate and actually owned by you. Really, the only thing that's a bit surprising is that you can find enough people who don't need or want the cash ASAP from what's almost certainly the single biggest asset they've ever owned.

What do you think?

 

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[Two Dog]

I’m not in real estate at all and I’m not in front of the computer to do the maths but I have 3 questions for the sake of my curiousity

1. Is the bulk of the value in the deal not convincing someone to give you 0% interest loan for a premium price, why not make it simpler for them and just stick to that deal and buy the house and keep the debt on that house, you’d get more deals with a simpler structure id think
2. If you have a hard money loan on the house you are putting up as collateral is there not interest on that money as well?
3. Is there an opportunity to buy houses and pay monthly from people who have fixed loans at 2% and have them keep those loans?

Wish I lived in USA real estate sucks in Australia you could not do any of this here

The simplest of all is putting a tenant in place to cover the $500 / month loan payment.

* $15K down + 0% financing
* $500+ cashflow makes for a pretty rocking COC return (assuming there's enough rental value there)

You can also get fancy and start offering lease options with an upfront deposit, yada, yada. All this stuff is only new when it's been long enough that the current players haven't seen the scheme before. Ain't saying it doesn't work, just saying there's far more risk than players are willing to acknowledge. Unexpected repairs, clouded title, property sits on the market, can't sell it for $140K, etc.

 

[ChrisGav]

I heard lots of these kinds of ideas last go around in 2007. At first blush, the math seems right, but it always does.

Some legitimate questions along with a couple of details that maybe you could clarify for me.

1. Didn't the realtor(s) get paid on the original $165K deal? That's another 6% in fees = $10K being ignored, right?

2. Aren't you ignoring the risk of clouded title, seller repairs on the resale, etc? I'm assuming you're closing without using a title company and skipping due diligence, title insurance, inspections, all the standard stuff. Obviously, there's inherent risk since you're flipping properties - not deals - that isn't factored into the 2.2% calculation. Too many hard luck stories about investors buying at auction and getting eaten by the unknowns. Buy one meth house or property with a cracked sewer line and all the benefits of many other deals at 0.0% financing get wiped.

3. The seller note is collateralized by an existing property. Paid off, no problem, but you said you are *refinancing* higher cost debt to utilize the 2.2% money. Either the person is getting a useless 2nd or 3rd lien or there's a bunch more legal stuff involved than you're mentioning in the original post.

4. Hard money used to cost 4 points up front + 15% APR for six month term. Flash cash was something like 1-2% for a 24 hour loan to close a back to back transaction. No idea what hard money goes for nowadays, but it's certainly isn't free and clear to close a deal with 3rd party money and magically transfer all the debt around to different places. None of those costs appear in the 2.2% imputed interest rate.

Personally, not surprised you can find people who will finance non-recourse at 0%. Also not surprised they don't know enough to use a title company to verify the collateral is legitimate and actually owned by you. Really, the only thing that's a bit surprising is that you can find enough people who don't need or want the cash ASAP from what's almost certainly the single biggest asset they've ever owned.

What do you think?

1. Yes the seller pays their own realtor costs

2. There’s no risk in that all. I’m getting deed to property and going through a closing attorney. They do title search and make sites there’s no other liens before I buy it.

3. I’m *sometimes* putting a 1st position with hard money on the property I’m buying from seller (property A). The 1st position I’m putting on their house (property A) I’m using to pay off an existing debt on my other property (property B) to make it free and clear to allow me to put the seller financing debt on my other property (property B). Once I seller Property A, the hard money is paid off and I just refinanced myself because I’m only left with the seller financing mortgage I put on property B. If this makes sense

4. I’m getting it at 2 points and 12%. I didn’t factor it because I didn’t use hard money on the deal that was described here. I’m only carrying the hard money debt for like 3 months. So it wouldn’t really change the numbers too much. May turn it into like a 4.5% rate on Property B. Still better than a bank though

 

[Two Dog]

1. Yes the seller pays their own realtor costs

Ideally. I've seen seller agents attempt to claim dual agency and keep both sides of the commission. All the rest makes sense. Been thinking over the specific deal you posted and morphing it into something more common.

It's effectively a cash out refinance. One that conveniently avoids all the usual bank headaches.

You paid $15K (the down payment) in closing costs, received $130K cash (sale proceeds) and ended up with a $150K note @ 0.0% (new mortgage). That's no different than finding a lender offering 25 year refis with a massive buydown ($35K) to get a dirt cheap rate (0.0%). Part of the $35K was paid up front (down payment) and the other $20K was rolled into the note.

It took awhile to pin down what was bothering me about the imputed interest from the financial calculator. The 2.2% rate relies on the hidden assumption that you'll hold the property for the entire term of the note. I'm honestly not clear whether TVM applies vs. non-recurring loan payments vs. IRR calculation or something else entirely. Not my world.

* If you sell the property in 25 years, the note gets paid off on time and the financing terms are *really* awesome.

* If you sell the property in 2 years, the note gets paid off early and the financing terms are *really* awful.

You are definitely paying $35,000 to get the cash. The only question is WHEN you're paying it. Since you're paying back a fixed amount - not principal and interest - early payoff costs more than with a tradition refi. That's actually a little weird and not obvious at all unless I'm getting something wrong with the deal terms. Interesting technique.

 

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[biophase]

* If you sell the property in 2 years, the note gets paid off early and the financing terms are *really* awful.

This.

So you have a $150k mortgage at 0% on some other property that you own. You can never sell that property.

If you sell that right away, you owe $150k and you only received $115k. So $35k down the drain instantly.

If you sold 6 years for now, 72 payments, you would have paid down $36k and owe $114k.

Have you calculated exactly how long you need to hold this property for the $35k down to make sense and equal a reasonable interest rate?

How would you work your way out of this in order to sell this property if you needed to?

 

[ChrisGav]

Ideally. I've seen seller agents attempt to claim dual agency and keep both sides of the commission. All the rest makes sense. Been thinking over the specific deal you posted and morphing it into something more common.

It's effectively a cash out refinance. One that conveniently avoids all the usual bank headaches.

You paid $15K (the down payment) in closing costs, received $130K cash (sale proceeds) and ended up with a $150K note @ 0.0% (new mortgage). That's no different than finding a lender offering 25 year refis with a massive buydown ($35K) to get a dirt cheap rate (0.0%). Part of the $35K was paid up front (down payment) and the other $20K was rolled into the note.

It took awhile to pin down what was bothering me about the imputed interest from the financial calculator. The 2.2% rate relies on the hidden assumption that you'll hold the property for the entire term of the note. I'm honestly not clear whether TVM applies vs. non-recurring loan payments vs. IRR calculation or something else entirely. Not my world.

* If you sell the property in 25 years, the note gets paid off on time and the financing terms are *really* awesome.

* If you sell the property in 2 years, the note gets paid off early and the financing terms are *really* awful.

You are definitely paying $35,000 to get the cash. The only question is WHEN you're paying it. Since you're paying back a fixed amount - not principal and interest - early payoff costs more than with a tradition refi. That's actually a little weird and not obvious at all unless I'm getting something wrong with the deal terms. Interesting technique.

Yes you're looking at it right. The only thing about paying $35,000 I think is slightly off. If I sell the house in a year that the mortgage is attached to then yes I have to pay that $35,000 out of pocket and the whole deal was for nothing because I owe 150k and only walked out of there with 115k. However, the fact that I got 115k but I owe 150k is the part that actually makes it 2.2% interest. If you go get a loan for 115k at 2.2% interest for 25 years from the bank, over the course of 25 years you will pay a total of 150k. The interest is built into the payoff if that makes sense.

This.

So you have a $150k mortgage at 0% on some other property that you own. You can never sell that property.

If you sell that right away, you owe $150k and you only received $115k. So $35k down the drain instantly.

If you sold 6 years for now, 72 payments, you would have paid down $36k and owe $114k.

Have you calculated exactly how long you need to hold this property for the $35k down to make sense and equal a reasonable interest rate?

How would you work your way out of this in order to sell this property if you needed to?

Yes exactly. Definitely not designed to use this strategy and attach the mortgage to a house you would sell in a few years. If you ever HAD to sell the property that it's attached to, there's something called walking the debt which we will do. Call up the seller that gave you the mortgage and have them attach it to a different property you own instead. For them to do this, you may have to give them a little "moving money" for them to be motivated to move the mortgage to a different house. Maybe you give them 5k to get them to show up to the closing table and sign the mortgage over to another property of yours then allowing you to sell the original property that the debt was attached to without paying off the loan.

The idea is that you will keep this debt in place and ride it out to the full amortization, or for majority of it at least. I think to the point that Antifragile and I were discussing on this previously: If you kept it for 6 years you would owe 114k. but, for 6 years you had access to 115k that you had to pay 6k/year to have in your possession. If you can go make more than a 6% return, it's worth it to have the cash for 6 years and sell the property after a minimum of 6 years because you were able to go make more money than the payments with it in that time frame.