Five posts in one day… a new record! My brain must be on fire. Anyway, after Donny was done talking about how he invests without using his own money, he got to the sometimes juicy topic of lease options.
Lease options are the same as those “rent-to-own” programs. The great thing about this is that lease options are mostly unregulated. Let’s say I have a fully paid out property that I want to sell. Someone wants to buy, but is having trouble qualifying for a mortgage or doesn’t have the sufficient down payment or whatever. So I tell the poor bastard that I can sell him my property with him as a tenant (owner occupied). He gives me a down payment and we set up the monthly payments. The lease option would be for one year, giving him a year to secure financing for purchasing the place while he lives there and pays me. I get some decent money through the down-payment, plus a tenant who will be paying a higher rent than usual, with maybe $25-$50 a month going towards the principal of this “loan” I’ve given him. So I sell property Beta for $80,000 to a buyer with a down-payment and a monthly mortgage of a little over $900 month (average rent is $700). $50 a month is put towards the principal. The taxes and insurance are covered in the monthly payment. At the end of the year, if the tenant can’t come up with the financing, I can choose to renew his lease and keep it going the same way every year, or throw him out.
Donny usually renews the lease because, as he says, “Why stop making money if you have a good tenant in there?” Out of the 93 lease options he’s actually done, only 6 of them have ever resulted in a sale. They usually end up with the buyer staying as a tenant or they move on to another place. Should I need to evict them, I can take them to court to have them thrown out. This is where the down-payment comes into play. When one goes to eviction court for a “rent-to-own” eviction, a judge looks at certain things. The lower the down-payment is, the better chance that the judge will rule in favor of the seller and treat it as a normal eviction as opposed to a buyer who can't make his mortgage payments. If the seller charged a 20% down payment or more, the judge will see this more as a buyer/seller agreement and tell the seller that it looks more like a foreclosure than an eviction. So now the seller has to go to foreclosure court which takes longer and costs more. This is why Donny does 3% to 5% down payments for all his lease options. He chastised all the asshole investors who have seminars telling prospective investors on the joys of taking 25% of the down payment and throwing the buyer out when they can’t come up with financing. Even though it’s legal, it’s also a shitty thing to do and Donny's way of thinking falls right in line with my philosophy of doing good business.
Donny touched on some other topics that I found interesting, like:
Don’t Leave My Job Too Early
Due to stricter bank regulations that won’t be easing anytime soon, banks give money to people who have W-2s. There was an investor at the last meeting who said something like:
“I have a lot of money, but every time I apply for a mortgage I get rejected because I only have rental income as my income and not a W-2.”
Donny says W-2s are like gold, so I may have to consider keeping at least a part-time job during my "retirement"... maybe the shipping depot job weekend hours. The weekends there are nice, quiet, and I get to watch movies, so maybe I’ll keep that one. Not sure how this affects my retirement plans, but we’ll see. I’ve always liked the concept of having the days off during the week when people have to work, and then working at an easy job while people are out and about. I don’t think my dislike of people will ever change. Donny says to keep some form of work until I max out my loans.
Short Sales Suck
I remember at the beginning of last year when I was going for that 4 family that was a short sale. Donny says that short sales take way too long in NY State due to the sheer amount of them and, more importantly, because banks are mostly unwilling to give up good deals. Giving up the good deal means they own less assets, and it basically shows to everyone that they’re taking a loss. What bank wants to do that? Short sales are far more profitable and feasible in other states like Arizona and such. The average closing time for the short sales that Donny has done in NY is roughly 3 years. The average closing time for a short sale on the ones he did in Arizona was 6 months or less, much closer to what a regular mortgage closing time should be.
Buy Better Properties
It’s not just about the location location location. The big money issues like roofs and furnaces and hot water tanks must be in excellent condition. If I buy a place that will yield me $500 a month and, once I buy it I have to buy a new roof, I will wipe out a full year’s profits getting the work done. That’s one year that I’ll be making NO MONEY. Been there. Done that. Don’t wanna do it again.
LLCs
It’s a rule of thumb that all properties should be in individual LLCs. This keeps someone who is suing me from going after all my investments. If someone wants to sue me right now, all my assets can be added to that lawsuit. With my properties under individual LLCs, the suing bastard can only go after what’s in my name and my personal net worth. I always thought, however, that you can’t put a property under an LLC if it’s under a mortgage. Donny proved me wrong. Even if properties are under a mortgage, one can (and should) put the property under an LLC. Just go to a lawyer and tell him/her that I want the property in an LLC. Once it’s done, I can then get insurance on the LLC that will cover any damages, most likely an RDP insurance policy (Rental Dwelling Policy). It may also help to have tenant pay to that LLC in case there’s any confusion. The bank holding the mortgage obviously won’t be happy, so don’t tell them. Banks are so concerned with all the trouble they’re in, they leave the people who pay their mortgages on time alone. After all, why would they mess up a stable income source? As long as I pay my mortgage on time every month, a bank doesn’t care what I do. And since the insurance is for the LLC, the bank never has to know. Sha has done this with several of his properties but I’m always weary of following anything that Sha does. Donny made me a believer. And I always lean towards the advice of rich men wearing flip flops.
After Donny’s presentation, I was sold. I paid my annual dues and I’m officially a member of REIG. I highly doubt the future meetings will be as informative as this one, but this one meeting was worth the annual fee. With Damon also a member, I have added incentive to make it to the meetings every month. Good show!
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