How I'm getting 2.22% debt currently

[msufan]

Here's a simple way to look at it: with $115K, if you can get a 5.22% return, you earn $6000 a year and can pay the $500 a month from that. 25 years later, you will have paid the $150K off and will still have your entire $115K.

Downside is you have $6K in taxable income to report for all 25 years, but that extra $150K of income (minus the $25K in losses immediately) won't cause you to pay $115K more in taxes. So yes, this is profitable.

 

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[biophase]

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.

I guess you could also call it a low interest loan with a decreasing prepayment penalty.

If you really did borrow $115k at 2.2%, your principal balance would start at $115k and move down. But yours goes from $150k down.

I just don’t think you can call it the same thing.

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.

Yes but paying $5k to essentially refinance just increases you’re overall interest rate. Hopefully you can get this done for free.

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:

I just did an amortization comparison and was actually shocked to see the balances didn’t intersect at all.

In hindsight it makes sense since the payment is the same amount for both cases so the 2.2% interest rate would never catch up if it fell behind in balance.

But as you can see there is a pretty big balance gap until probably about year 15.

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.

Yes, if you look at it this way. You basically got a $115k interest only loan for 6 years at 5.2%. With a hefty prepay penalty.

Then after year 6 it converted to a 0% 19 year loan.

 

[Two Dog]

OK, enough with the financial analysis for me. I understand the deal terms, pro and cons.

Some implementation questions...

• How are you identifying qualified prospects for the offer?
• How are you contacting qualified prospects for the offer?
• Are you closing the deals (not the RE closing) in person, remote, 3rd party or automated system?

Not looking for a book here, just curious about details that would make this usable. Not many RE investors have paid off properties period. No leverage. That makes it more likely to use the hard money workaround you already described. I'm mostly curious whether it's a targeting marketing campaign scraping public databases, niche advertising or something else entirely like partnership with a mortgage company. Stuff like that.

If you've learned a better way of targeting, offering and closing that works better than others, let us know.

 

[ChrisGav]

I guess you could also call it a low interest loan with a decreasing prepayment penalty.

If you really did borrow $115k at 2.2%, your principal balance would start at $115k and move down. But yours goes from $150k down.

I just don’t think you can call it the same thing.


Yes but paying $5k to essentially refinance just increases you’re overall interest rate. Hopefully you can get this done for free.


I just did an amortization comparison and was actually shocked to see the balances didn’t intersect at all.

In hindsight it makes sense since the payment is the same amount for both cases so the 2.2% interest rate would never catch up if it fell behind in balance.

But as you can see there is a pretty big balance gap until probably about year 15.

View attachment 53176


Yes, if you look at it this way. You basically got a $115k interest only loan for 6 years at 5.2%. With a hefty prepay penalty.

Then after year 6 it converted to a 0% 19 year loan.

All fair points for sure. It's a bit of a brain twister the more you think about it. I think the general idea of it is that it's a good way to raise money for deals that you have in your pipeline or refinancing out your assets you currently own that you don't plan on selling. If it was attached to a property that you never planned on selling, then the payoff doesn't really matter unless you ever got in a spot where you needed to refi/sell. How I've mainly been using it is for refinancing. For this example, I was planning to take the 115k and go payoff an 8% loan I have on a property that I rent. The loan is about 90k 30 year am and P&I payment is at $660/mo. Well I can pay that off, drop my payment by $160/mo, have a loan that's 5 years shorter + non-recourse, don't have to worry about a bank ever calling my loan due, and deposit 25k leftover into my right pocket national bank. Or use it to buy another property, just depends on the day. I think the goal would be to refinance out my whole portfolio using this method as there are so many benefits besides the fact about the payoff. Which one could argue is a pretty substantial downside.

OK, enough with the financial analysis for me. I understand the deal terms, pro and cons.

Some implementation questions...

• How are you identifying qualified prospects for the offer?
• How are you contacting qualified prospects for the offer?
• Are you closing the deals (not the RE closing) in person, remote, 3rd party or automated system?

Not looking for a book here, just curious about details that would make this usable. Not many RE investors have paid off properties period. No leverage. That makes it more likely to use the hard money workaround you already described. I'm mostly curious whether it's a targeting marketing campaign scraping public databases, niche advertising or something else entirely like partnership with a mortgage company. Stuff like that.

If you've learned a better way of targeting, offering and closing that works better than others, let us know.

I'm actually just having a virtual assistant go through on-market listings, creating a list of all the ones that are free and clear using the tax records, and then she's emailing blasting these offers to all of the listings. So I'm not really qualifying them at all, just sending out a ton of offers. Everything has been closed remote through docusign with the realtors. It'll usually involve a conversation or 2 because the realtors don't really understand what I'm doing.

If you were to target these sort of deals off market then the main thing would be properties that are free and clear. You could probably target a free and clear tired landlord list as the owner is used to receiving payments every month (from the rental) so they may be open to receiving payments through owner financing without having to deal with the headaches of being a landlord.

 

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[Antifragile]

If something is “too good to be true” it usually is. But ladies and gentlemen, this is a down market and here is a young man who’s doing deals!

He’s hustling and getting access to cash when cash is king! What I mean is that with traditional approach to RE and cash on hand today, there is a good chance of getting a few gems into a portfolio!

All things considered, kudos. Well done. Wishing you nothing but success.



PS - contrast it with whiny YouTube realtors trying to pump “buy now, buy buy buy because I haven’t had a commission in 6 months” lol.

 

[Carlitos]

Very interesting thread, even more that Jhonnyboy wants in.

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