Re: Post for Johnboy - Posted by JohnBoy
Posted by JohnBoy on July 14, 2002 at 19:56:13:
I don’t recall if Merle has a mortgage he uses drawn up by his attorney or if his title company has one or where he gets his from. But you can use any standard mortgage.
I would think 9% would be really good today considering how low interest rates are. Using 10% - 11% on the sell side for buyers with credit problems is pretty standard. Most contract for deed sales are structured at 9% - 12% with 10% and 11% being the most common. But you wouldn’t actually charge your buyers 11%. You would just use that to determine your rent amount. Anytime you have a 2% - 3% spread on the interest factor you are going to create decent cash flow.
Lets say you have a property worth $100k.
You use $85k from your investor to buy the property which at 9% interest amortized over 30 years would be a principal and interest payment of $683.93
Then you L/O to your tenant/buyer getting $5k down. If they exercise the option they will need $95k to purchase the property. So you figure $95k at 11% interest amortized over 30 years and the principal and interest payment would be $952.34
$952.34 - $683.93 = $268.41 difference which is your monthly cash flow.
But you need to add in the taxes and insurance.
So if the taxes and insurance came to $150 per month add that to those numbers.
You would pay your investor $683.93 plus $150 for taxes and insurance for a total of $833.93 per month which is your total debt service you have to pay.
Then add the $150 to the $952.34 which is a total of $1102.34 you would charge your tenant/buyer for RENT.
So might round that off to $1100 per month as RENT that you charge your tenant/buyer.
Then when they pay you the $1100 RENT each month, you would take $683.93 of that to pay to your investor, plus $150 to pay towards the taxes and insurance for a total out going debt of $833.93 and the difference you would keep as your cash flow.
$1100 - $833.93 = $266.07 per month in positive cash flow.
Then at the end of 5 years your balance owed to your investor on the $85k you borrowed would be $81,498.02.
Your tenant/buyer would owe $95,000 to exercise their option from you.
$95,000.00 - $81,498.02 = $13,501.98. This would be your back end profit.
So you would have made,
$5,000.00 up front in option money
$266.07 per month cash flow x 60 months = $15,964.20
$13,501.98 back end profit.
$5,000 + $15,964.20 + $13,501.98 = $34,466.18 Total Profit over 5 years!
Of course you don’t want to just give your tenant/buyer a 5 year L/O term. You want to only give them 2 year terms at the most. Then if they need more time just renew their L/O by giving them a new contract. If they went 5 years to exercise their option then the above amount would be your profit over 5 years based on the numbers I used.
See the power of what a few percent difference can make on the interest rate?