Hey there, Grant Kemp here with Creative Cash Flow. Let’s dive into the world of free and clear properties and explore how you can leverage owner financing to maximize your profits.
What is a Free and Clear Property?
A free and clear property is a home with no debt. The owner holds the deed and title without any mortgage attached. Mastering owner financing with these properties is great because they’re simpler—no banks or mortgages to worry about.
Why Focus on Free and Clear Properties?
- No Bank Involved: No underlying mortgage means less paperwork and simpler transactions.
- Easier Math: You don’t need to worry about existing loan payments, making your calculations straightforward.
- Foundation for Complex Deals: Once you understand the basics here, applying more complex owner financing strategies becomes easier.
For our example, let’s assume our property is worth $100,000. This makes percentages easy to work with.
The 10bii Financial Calculator is your best friend in this business. Available for $5.99 on the Google Play Store and Apple App Store, this app handles all the vital calculations you’ll need.
Key Functions of the 10bii Financial Calculator
- N (Number of Payments): For a 30-year mortgage, you’ll enter 360. For a 15-year mortgage, 180.
- I/YR (Interest per Year): Just input the annual interest rate. For example, 9% is simply entered as 9.
- PV (Present Value): Think of it as the principal amount of the loan.
- PMT (Payment): The monthly payment amount.
- FV (Final Value): Always 0 for fully amortized loans.
Get familiar with these functions to streamline your calculations and maximize your deals.
Example of a Free and Clear Deal
Deal Terms
- Sale Price: $100,000
- Interest Rate: 9.5%
- Term: 30 years (360 payments)
Calculating the Payment
To calculate the monthly payment:
- FV (Final Value): 0
- N (Number of Payments): 360
- I/YR (Interest per Year): 9.5
- PV (Present Value): $100,000
Using these inputs, you’ll find the monthly payment comes out to approximately $840.
Huge Earnings Potential
Assuming a full 30-year term, your earnings look like this:
- Total Payments: $840 * 360 months = $302,400
- Interest Earned: $202,400 over the loan term
This means you could turn a $100,000 property into $302,400 in total income. That’s some serious profit!
Collecting the Down Payment
You’ll typically collect a 10% down payment:
- Sale Price: $111,000
- Down Payment: 10% of $111,000 = $11,000
- Net After Agent Fees: Around $7,700 (after a 3% commission to the agent)
This means you start off with some immediate profit before you begin collecting monthly payments.
Finding Sellers
Older homeowners are often the best candidates for free and clear properties because they’ve had time to pay off their mortgages. Probate properties are another excellent source.
Seller Motivation and Bottom Line
When talking to sellers:
- Understand Their Motivation: Always determine why they want to sell, not just their asking price.
- Ask About Installments: Phrase it as, “Are you willing to sell and take your equity in installments?” This makes the idea of owner financing more approachable.
Today Money vs Tomorrow Money
- Today Money: Quick profits from wholesaling or fix-and-flip projects.
- Tomorrow Money: Long-term income from owner-financed sales. This sets up your future, providing steady cash flow over time.
Managing Seller Expectations
Use a “Wants and Needs” pamphlet to discuss:
- Fast Money vs. More Money: Help sellers understand they might get less but quicker, or more but over time.
- Clear Options: Lay out their options clearly to manage expectations and ease negotiations.
Making Money from Acquired Properties
Once you own a property, your options are endless:
- Rent It: Generate steady rental income.
- Fix and Flip: Invest in renovations and sell for a profit.
- Owner Finance It: Sell with owner financing terms to maximize profits.
Backing Into the Deal
To determine your maximum purchase price, start with your profit target and work backwards. This involves:
- Calculating the Future Value: How much can you sell it for?
- Determining Costs: Include repairs, holding costs, and more.
- Setting Your Offer: Based on the remaining profit, decide how much you can afford to pay for the property.
Final Thoughts
In conclusion, leveraging owner financing for free and clear properties presents a lucrative opportunity for real estate investors. By mastering the use of financial tools like the 10bii Financial Calculator and understanding key strategies, you can simplify transactions, minimize risks, and maximize your profits.
Whether you choose to rent, fix and flip, or sell with owner financing, the potential for significant earnings is substantial. Remember, focusing on the motivations and needs of sellers, especially older homeowners and probate properties, can help you find the best deals and set the stage for long-term financial success.
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