Sometimes You May Be Forced to Take a Step Backwards, But It Doesn’t Mean You Have to Lose Money!

As many of you know I have taught hundreds of students over the years and I am constantly asked what the most important things a new real estate investor needs to know. First of all I believe every new investor needs to realize that if they plan to be successful and make money from the real estate they buy, they will find that every situation will require a different strategy and structure that they will need to learn if they wish to achieve their goals and dreams.

The key to make almost every deal work is not to “Buy High and Sell Low”, it’s how you structure the deal. Actually this has happened to me a few times over my 35 years as an investor, this IS NOT a good strategy to adopt but it shouldn’t mean you need to lose money. Over the years I have done two deals where I bought a property and because of circumstances beyond my control I was forced to sell those properties for less than what I paid for them. Even though I paid too much for those properties “over time” I made a nice profit on both of those deals.

Each of those properties I bought with seller financing terms and then sold each with seller financing terms. Even though I sold each property for less than what I paid for them I received a higher interest rate when selling than the interest rate I was paying to buy each property. I was able to make a nice profit on each.

Let me give you an example of one of the deals. I bought a property for $150,000 @ 6% interest for 20 years with a monthly payment of $1,074.65. I then was forced to sell that property for $140,000 @ 8% interest for 30 years with a monthly payment of $1,027.27. Because I was forced to sell the property for $10,000 less than what I paid for the property that $10,000 loss gave me a write-off against other income I had that year. This loss could be a benefit for any seller who is in a high tax bracket.

I now have a payment going out of $1,074.65 each month for the next 20 years at which time I will have paid off what I owed the seller. I am receiving $1,027.27 each month for the next 30 years which is ten years longer than the period of time I have to pay off the property to the seller. After 20 years I will have no payments going out so then I get to keep the entire payment of $1,027.27 coming in. Let’s take a closer look at the numbers of this deal.

I bought the property for $150,000 @ 6% interest for 20 years with a payment of $1,074.65. I sold the property for $140,000 @ 8% interest for 30 years with a payment of $1,027.27.

When you are paying out $1,074.65 and you are only taking in $1,027.27 you have a monthly loss of $47.38, for the next 20 years. You will have over 20 years a loss of $47.38 per month X 240 months = $11,371.00, or $47.38 X 12 months = $568.58 as a yearly loss. This loss is less than one Starbucks coffee per day over one year.

After 240 months I will then get to keep the entire payment of $1,027.27 each month for the next 120 months (ten years). $1,027.27 X 120 months = $123,272.40 and if you deduct the $11,371 loss over the previous 20 years I will end up with a total profit of $111,901.20 net before taxes.

Yes I know I lost $47.38 per month for 20 years, but look what I made over the next 10 years. This works out to average a profit to me of $310.84 per month or, $3,730.04 average per year for 30 years. Not a bad return for being forced to sell a property for less than what I paid for it. Time was the key to make this profit.

Let me ask you, would you be willing to give up $568.56 per year or one Starbucks coffee each day for a year for the next 20 years to make a profit of $111,901.20 over the following 10 years? I don’t know about you but I don’t think this deal will be too detrimental to my financial future. What do you think? Time was the key that makes this deal work for me.

Happy Investing,

Larry