I’ll start this article by stating that this strategy has not only helped me to double my ROI on the multi-family properties that I’ve acquired over the years but as a nice side effect, it has also allowed me to expand and grow at double the rate by allowing my cash to spread out among more investments. In the past I’ve talked about the wonderful hack for first time home buyers to take advantage of the low 3.5% downpayment required to enter into an FHA loan for first time home buyers to start of building a sweet real estate portfolio, but after you get your initial 4-unit property and move into your own residence, how do you continue to add to the portfolio?? It takes CAPITAL and lots of it….. 20% Downpayment to be exact.
So looking back at my late 20’s and early 30’s when I began to invest in real estate and specifically multi-family cash flowing properties, it was painfully obvious after my first 4-unit and then having to save up enough of a downpayment to acquire a single family home for my family to reside in, that the well had run pretty dry and there was no way I was going to be able to add more properties to the portfolio…so now what? There was no way that I could retire off of the $400/month cash flow from the 4-unit?? I needed at least another 10-15 of these to be able to stop doing engineering and work for myself so it was time to be a little creative.
So how can I bring less of my own cash to the table but still continue to grow my asset base and work towards a solid $120,000/yr of passive income?? (This was my original goal because it matched my 9-5 job). Well the first thing that came to mind was other peoples money (OPM) and although I had a few work friends with some money tucked away, I had never really approached another person on a business deal. Quite honestly, I wasn’t really sure I’d lend myself money at the time, and didn’t really have a solid track record to present my case if you know what I mean. One thing I did have though at the time was perseverance and a real desire to create something more!!
So I felt I had spent enough time understanding the numbers from all the books on real estate that I had read, and now was pretty much a veteran as I had a 4-unit home that I acquired for 3% downpayment, so why not ask my buddy Pete for a little partnership?? I’m in Maine and he’s in Boston, and quite frankly what kind of real estate investment can you buy into in Boston for $12,000?? Let me answer…Not much. So that’s what I did… I had this 4-Unit that I did the math on and it looked good, well not from the outside but you have to start somewhere…it had potential. I would manage the property and do all the work and he would own 50% for $12,000!! So not only did Pete get the deal of his life, but I was able to own 50% as well and had none of my money into the deal? Ok Phil…I’m doing the math here and Pete invested 10% and you invested zero, so where is the other 10%?? Now we are getting to the title of the article. The one question that will double your ROI on a multi-family property…..Will the owner consider any owner financing??? BOOM… That’s it… I would ask the real estate agent if the owner would consider owner financing and they came back and said yes, he would hold a note for 10% of the purchase price. I was super excited! It was actually going to happen… my second 4-unit building. Well 50% of it, but let’s not split hairs….
This building was purchased for approximately $115,000 about 10 years ago and is now worth about $180,000-$200,000 and the remaining balance on the loan is around $50,000. This represents about $130,000 in equity or $65,000 for Pete and $65,000 for me…. So this is approximately a 20% Annual return for Pete’s initial $12,000 investment, not too bad! My investment was time, which was all I had at the time. With my zero dollar initial investment though we calculate a moderate infinity return, my favorite when looking at investments.
After learning about owner financing and the incredible leverage advantage on this deal, my standard question when I’m evaluating the potential purchase of a property is “Will the owner consider any financing?”. Why not ask this important question, there are so many opportunities becoming available because of the aging population and people looking to move into retirement that you would be surprised how many would consider this to make a deal happen, and besides it reduces a little tax burden for them as well since they get paid over time.
The most powerful part of investing in real estate is the fact that we are leveraging the banks money on this asset in order to maximize our return, so let’s just use less of our own money when possible to make the ROI equation work even more in our favor, here are a couple examples. In the first example we are required to bring the full 20% down payment to the table and in the second example, the owner provides us with a mortgage for 10% of the purchase price.
So to wrap things up, of course if you can acquire real estate for zero money and the cash flow numbers work, than by all means go for it! But as you can see from the examples above, the less money we are required to bring to the table the higher our return will be for our invested cash. The annual cash on cash returns when we are required to bring $40,000 to the table is 26.6% which is pretty damn solid if you ask me, but if we are able to have the owner finance 10% of the deal with the same numbers we increase our annual returns to a whopping 45.2%!!! I don’t know about you but I’m going to take the latter any day of the week if the option is there, and the option will only be available to you if you ASK!!!! Will the owner consider any financing??? Good hunting….
Philip Henry – President & Owner