After purchasing one of the 2 story homes to live in, I found another deal in the same growing
town. Here's how I found the money for that deal.
I found an opportunity to purchase a brand new house on a quarter acre lot. The house was one
door down from what would be a beautiful 40-acre park. The park would have many amenities such
as 4 baseball fields, 3 soccer fields, 4 volleyball quarts, 3-basketball quarts etc. A great
place that was sure to go up in value seeing how this was a newly established growing area.
The floor plan was 1723 sq. ft. which was the smallest plan being offered. That's an opportunity
in itself considering the larger more expensive homes will over time pull the value of this home
up. That's called "progression" and it's a valuable tool to watch for.
Great house! Great location! One problem, or should I say one challenge. How do I
get the money to purchase this new house? There are many creative ways to structure a deal. We've
all heard about them but have rarely gone any further than that. The reason is that we must deal
with people we don't know in situations that make us uncomfortable. But, there are
ways to find money and remain comfortable in the process.
Here's what I did. I was living in the 2-story house that had a FHA loan on it that I'd purchased
about a year earlier. Using a FHA loan while putting less than 20% down payment, you have to pay
mortgage insurance. That's insurance to protect the lender in case of default. Most traditional
loans will charge this. The advantage with a FHA loan is they require that a certain portion of your
mortgage insurance be paid up front at the time you establish the loan. In most cases that prepayment
is added to the amount of the loan so it's not coming out of your pocket when establishing the loan.
The reason I mention this is because those prepaid funds are refundable to you if you sell or
refinance your house within about 3 years of establishing your FHA loan. After 3 years that prepayment
is pretty much used up and the opportunity to regain that money in the form of a refund is gone.
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That being said, rates were down from the time I established the loan a year prior, so I refinanced
into a conventional loan. The FHA refunded me nearly $2,000. I was also refunded about $300 that had
been collected by the company servicing my loan payments. This money is considered "impounds" and it
represents money needed for fire insurance and property taxes. It accrues so that proper payments can
be made to stay current.
So, there is a source for money. The FHA mortgage insurance refund and the impound money refund.
Those two amounts in my situation added up to about $2,300. It should be known that because the FHA is
a governmental program, it could take many months to get your prepaid mortgage insurance refund.
The least amount of up front cost to refinance is usually limited to the appraisal fee which can be as
much as $350.00 and maybe $50 for other "administrative" fees. The rest of the costs can usually be
rolled into the new loan. Check with your local mortgage broker for exact figures. Obviously you don't
want to get into a loan that doesn't make good monetary sense just to get these refunds.
Here's another benefit of refinancing. Mortgages are paid in "arrears". That means your payment is for
the month that just passed. That's the opposite of when one rents where they are paying for the
upcoming month. When you first get a mortgage you don't begin making monthly payments until the first
month has passed.
You should schedule the close of your refinance for the last day of the month. That way you avoid
having to pay any prepaid interest and you don't have to make a mortgage payment until the following
month. Now you're able to keep one month's mortgage payment, which can add up to a lot! In my case I
saved about $832.00.
Just before I was to move out of my existing house, I turned around and rented it for $1,050 a month.
I received, at the time the rental contract was signed, a security deposit of $1,000. I could have
demanded payment of the rent then as well, but the renters were short on cash. I allowed them to pay
the rent the day they were to move in. (As mentioned above, my mortgage payment is $832 so my monthly
positive cash flow is around $200)
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Because this house was being built from scratch it took about six months to complete. Builders will
often allow you to make the down payment in installments over that 6 months to make the deal go
together. That's great because then you don't have to have all the money up front. You can make monthly
deposits toward the final down payment amount necessary. You should also be able to receive your FHA
refund within that amount of time.
So, let's recap:
- $2,000 FHA refund
- $300 impounds refund
- $832 saved on mortgage payment
- $1,000 security deposit
Total: $4,132 (+ $1,050 if I wanted rent and security deposit to be paid at same time)
The numbers in your deal will undoubtedly be different. But, here's a way of taking some simple and
achievable efforts coupled with time to make your next deal go together! Is
there any reason that you can't do this once every year or two? After doing this kind of deal once,
it can become familiar and routine. With this knowledge you can target houses where these numbers will
work. Talk about a winning formula!
That's a great plan to acquire property relatively painlessly. Here's an idea that you could think
about using down the road. Let's say you've acquired 10 properties. For the sake of explanation, let's
say you purchased these properties for $100,000 each. Let's assume these properties over the years have
experienced 5% appreciation. At the end of the tenth year, refinance the house you purchased first.
Considering the above numbers, it would be worth $150,000. Pull out $50,000. I'm not giving tax advice
here but many would say those would be tax free dollars. The next year do the same thing to the second
house you purchased. Repeat indefinitely. Wow!
Or, at the end of 10 years sell a couple houses you no longer really like and pay off your favorite
house so that it's free and clear! Talk about positive cash flow!
These are just theories and concepts but they are good models for your future real estate growth.
Author of Best Selling book "The Best Real Estate Investment Nobody Knows" Mark Walters
CashFlowInstitute.com
