Which Type of Real Estate Investing Deal Has The Highest Yield?Posted on February 9, 2013 by
Which Type of Real Estate Investing Deal Has The Highest Yield?
Our bank savings account is earning less than 1% interest. It’s not even keeping up with inflation. Meanwhile, Kim and I did a Lonnie Deal a few weeks back and we’re getting an eye-popping 50.38% yield on our investment. If you’re like us, you believe it makes better financial sense to get a higher yield versus a much lower one.
So what’s a Lonnie Deal? Basically, it’s when you buy a mobile home (that’s right, a trailer) in a mobile home park for cash and then sell it on time. Hey, in 2008, I had the same soured look on my face as you do right now as you ask, “Trailers? Seriously? Are you kidding me?”
Back then we were getting tons of calls from folks looking for $500-per-month housing. We couldn’t help them because our single-family houses rented for between $800 and $1,400 per month. I remember telling Kim that because of the huge demand for $500-per-month property, we needed to start doing Lonnie Deals.
We bought our first trailer on September 19, 2008 in Bartow County, Georgia. Our all-in purchase cost was around $5,500. We sold it on November 9, 2008 for $16,900 with the following sale terms: $500 down, $16,400 loan balance for 75 months at 18% interest with monthly payments of $375. Our yield on this deal is a jaw dropping 81.22%!
There are a number of advantages to doing Lonnie Deals. First, in today’s market, there’s a huge need for affordable housing. Second, there’s not much competition. Folks wanting to buy a trailer are forced to pay all cash – cash they don’t have – because banks won’t lend on used mobile homes in a park. At the same time, very few sellers offer owner financing. If you buy for cash and then sell on time, you’re offering a very unique – and profitable – service. Third, every month you receive mailbox money that is taxed as portfolio income – which means these earnings aren’t getting hit with Social Security or Medicare Taxes.
There are also a couple of disadvantages. First, you must remember that park owners are all-powerful. Don’t do a deal in a park unless you and the park owner have a clear meeting of the minds. Second, some of the buyers you work with can be pretty interesting. It’s shocking how many are 100% healthy but still get monthly disability checks. These are your tax dollars at work, folks!
A few weeks back, I partnered with my buddy Houston Long on my most recent Lonnie Deal. He is a long-time friend and fellow investor. I put up the deal and the purchase money. Houston agreed to be responsible for the rehab, marketing and selling. After I’ve been repaid my purchase money, we will split all profits 50-50.
The trailer is a nice three-bedroom, two-bath doublewide in a park in Acworth, Georgia. The seller was asking $12,000. She agreed to our $5,500 offer that included the following purchase terms: We’d give her $3,000 cash down if she’d accept an unsecured note for the $2,500 balance with payments of $100 per month at 0% interest for 25 months.
A few weeks later, Houston sold this home with owner financing for $17,500 with the following sale terms: $2,000 down, payments of $250 per month at 14% interest for 114 months.
Including our expenses (about $2000), our yield on this deal was 39%. When it came time to make our first $100 monthly payment to the seller, we offered her $895 cash in exchange for our $2,500 note. She quickly accepted our offer. Shorting our note from $2,500 down to $895 lowered our purchase price from $5,500 down to $3,895 and increased our yield from 39% up to 50.38%!
Over the years, Kim and I have done a wide variety of creative deal structures. Our favorite – and it happens to offer the highest yields – is Lonnie Deals.