Here is an advanced technique we teach our mentorship stu­dents to use to make up to an extra $25,000 or more on every equity split they do. It’s called a “hybrid equity split,” and I think you’ll like this simple yet highly profitable technique and will want to add it to your investment toolbox.

The best way to understand the concept is to walk through an example of a deal I did with the owners of a two-bedroom, two-bath property. The sellers were motivated because the husband had been transferred in his job. When I met with them, we talked through doing an eight-year lease option on the property. Right at the very end they balked, and I pulled out this hybrid equity split idea to sweeten the deal just enough to close it.

The terms of the lease option were as follows: A term of eight years with a monthly rent of $913 and a purchase price of $102,000. The upfront option consideration we paid was $1.

Now, most investors would structure their equity split as fol­lows: They would split with the seller on a 50-50 basis anything they as investors sold the property for over $102,000. For example, if they sold the property on a two-year rent-to-own basis for $120,000, they would give the seller the first $102,000 and split the remaining $18,000 profit 50-50. In other words, they would make $9,000 from the resale plus any cash flow the property generated over the two years.

The way I structured our hybrid equity split was as follows: We did the eight-year lease option as described above and agreed that we would also do an equity split on anything we resold the property for above $127,000. In other words, the first $25,000 in profit would be mine alone, and we would do the equity split on any amount above that.

By the way, why offer 50-50 to a seller when they will often have their needs met and will be thrilled with substantially less? I agreed they would get 12 percent of the amount we resold the prop­erty for over $127,000!

How did I get the seller to agree to this? I simply asked the seller, “Mrs. Seller, if there were a way where you would get your full $102,000 we talked about and on top of that you would get a chunk of the future appreciation from the resale of the prop­erty is that something we should talk about, or probably not?” (If you haven’t done so yet, I encourage you to learn some simple “negative phrasing” techniques like we teach our students.)

Once the seller says that she is in fact interested in talking about that, you simply go on to explain, “Well, I don’t know if we could do this, but what if we set a percentage that you would get from the resale of the property? Obviously, we would need to build in a minimum base profit of $25,000 to make this worth our time, but what if we said that you’d get a part of anything we sold the property for down the road over $127,000? What I mean is that you would get all of the first $102,000, that’s completely yours, and you would also get, let’s say, 10 percent or maybe a little more of any amount we sold it for over $127,000. Is that something we should talk through, or probably not?”

My seller agreed to this, after negotiating strongly to move the percentage from 10 percent to 12 percent. Notice she just accepted the $25,000 base profit. I then sold the property on a two-year rent-to-own basis with $3,000 nonrefundable option money, a rent of $1,000 per month, and a final price of $120,000.

My tenant-buyer decided not to buy. When I checked the value of the condo prior to reselling it to a new tenant-buyer, I was thrilled to discover that the condo had jumped in value to $165,000. So I resold to my next tenant-buyer for $189,000 on a two-year rent-to-own basis.

Just remember to build in a base profit for yourself on any equity split deal you do. Even if it’s only $10,000 or $15,000 before you split the rest of the money that is pure profit for no extra work.

Ultimately, the equity split and the hybrid equity split are both great ways to get the seller to “partner up” with you. When you negotiate these types of deals, the best part is that getting a long term is easy. After all, the longer your term, the more money you will both make and the seller won’t have to do any of the work.

Make sure you don’t offer an equity split to start off with. Why give away a portion of your profits if you don’t have to? Save this new tool to use in those cases where you have a fit but need one last sweetener in the deal to make the seller say yes. As always, make sure you do so “reluctantly” using nego­tiating language patterns.

-Peter

Mentor Financial Group trains thousands of people each year how to strategically invest in real estate without using your own cash or credit.  If you want to take immediate action investing in real estate, and you want a guide to help you step by step, apply for the Mentorship Program. 

 

 

 

 

What do you do when you come across a seller who is moti­vated to do a lease option with you but is not quite motivated enough to give up on all the future appreciation of the property? This is a perfect scenario in which to try using the ‘Equity Split’ strategy.

An equity split is a way of doing a lease option with the seller of a property. But rather than giving the sellers a set price for their property down the road, you give them a set price plus a portion of your profits at the time you resell the property to a tenant-buyer.

Here is an example of how this might work. You find a seller who owns a rental house, and he is open to selling it to you on a two-year lease option. But he’s just not motivated enough to give you a longer term. You ask him, “Mr. Seller, if there were a way we could get you your asking price of $180,000 plus a small percentage of the appreciation too in exchange for a bit more time, is this something you might be open to, or maybe not?”

The seller scratches his head and thinks for a moment. You negotiate back and forth for a while, and this is what you agree on: a six-year lease option for a purchase price of $180,000 with a monthly rent to the seller of $1,200. Plus, you also agree to give the seller 50 percent of any amount you resell the property for to your tenant-buyer above the $180,000. This is an equity split.

The seller gets all of the first $180,000, which is your option price, and half the amount you resell it for above this $180,000. Imagine that your tenant-buyer ends up buying it from you for $230,000. The seller gets $180,000 plus half of the $50,000 profit you made for a total payment to the seller of $205,000. You made $25,000 from the resale plus any cash flow from the spread between your tenant-buyer’s rent and your rent to the seller.

Now there is no set rule that says you have to do a 50-50 equity split. You can negotiate the deal any way you want. If you want to negotiate a 60-40 equity split or a 75-2 5 equity split, it is up to what you and the seller can agree on.

Here is a key point: You are only splitting the money from the resale of the property. You get to keep all of the cash flow and all of the option money that is left if the tenant-buyers decide not to exercise their option. After all, you are the one who provided the expertise and effort to find and keep an eye on your tenant-buyers.

One of our mentorship students used an equity split on his very first deal. His name was Matt and he was a pilot for a large com­mercial airline company. At work, on the company bulletin board, Matt saw a ‘For Sale By Owner’ flyer for a nice house. It turned out that the seller, who was also a pilot for the same airline, was several payments behind and headed toward foreclosure.

Matt met with him and saw that the seller had a nice home in a good area with a fair amount of equity in the property. Matt also saw that the owner was not going to be able to make up the back pay­ments or continue to pay the lender each month even if he could find the money to cure the default.

Matt and the seller agreed to a four-year lease option with a 70- 30 equity split. Matt paid the seller $7,000 up front, which went to the lender to bring the payments current, and he locked in an option price of $242,000—which was substantially below the market value for the property. In addition, Matt agreed to split the profits he made from this deal with the seller, with the seller getting 30 percent of anything Matt sold the property for above $242,000 and Matt get­ting the other 70 percent.

Matt then marketed the property and found his tenant-buyer who gave him a $15,000 option payment and agreed to pay him $2,000 in rent (which gave Matt a $250 per month positive cash flow). Matt’s tenant-buyer had an option price of $322,000. It turned out that the seller Matt bought the place from was struggling financially, and Matt ended up buying him out for roughly an addi­tional $20,000. That brought Matt’s total investment in the house to $27,000, of which he got $15,000 from his tenant-buyer. So Matt had $12,000 of his cash tied up in this house that was generating at this point over $300 per month of cash flow. Plus, Matt no longer had to do the equity split with the seller! Eventually, Matt’s tenant-buyer decided not to buy and Matt just got the house back. At that point, the house was worth over $320,000! Matt bought it for a total of $222,000, $27,000 paid in cash of which $12,000 was Matt’s money and $15,000 was his tenant-buyer’s money, and the rest was financed by the original owner using a strategy called buying “sub­ject to the existing financing”. He’s got close to $100,000 in profit from this one deal alone!

When we last spoke with Matt, he had gone on to do three other deals and was planning to use real estate to allow him to quit flying for a living and pursue his passion—teaching music.

-Peter

Mentor Financial Group trains thousands of people each year how to strategically invest in real estate without using your own cash or credit. If you want to take immediate action investing in real estate, and you want a guide to help you step by step, apply for the Mentorship Program.

There is hidden profit for you in every real estate deal you put together. Most investors miss out on this extra profit simply because they do not have the specialized knowledge or experience.  Each and every time one of our students in our mentoring program gets a deal, we walk through all the possible opportunities they may have missed for extra cash. 

You understand that real estate is a powerful investment, or you wouldn’t be reading this. You probably know about amortization, or loan pay down, as one of the benefits of owning property. What many investors don’t know is that they can reap this benefit pro­vided they know five magic words. I’ll get to these words in just a moment. First, I want to make sure you’re clear on what this means to you.

Let’s say you have a four-year lease option on a house at a $200,000 option price. The loan balance at the time you sign up the deal is $175,000. Hence the seller had $25,000 in equity. This equity is calculated by taking the option price of $200,000 and subtracting the total amount of the money owed against it which, in this case, was $175,000. Why all this fuss over figuring out the seller’s equity at the start of the deal? Because, when you resell the property to your tenant-buyer in three years, that $175,000 loan will no longer be that high. Depending on how old the loan is and a few other vari­ables, the loan balance will be roughly $170,000. That means there is an extra $5,000 in this deal for someone! It’s up to you whether you give this to the seller or keep this money for yourself. It’s pretty obvious what I think you should do with the extra five grand.

The way that you make sure you get the amortization is by spell­ing out in your lease-option agreement with the sellers the exact amount of money they will get at the closing. In my above example, the seller is expecting to get his or her $25,000 equity at closing. You simply label this amount as “full payment for seller’s equity.” In fact, in the one-page residential lease-purchase agreement I had these five words preprinted in our agreement because we want to make sure you remember to write up the deal correctly. It’s too easy in the confusion of signing up the deal to forget to calculate the seller’s equity at the time of entering into the lease option and as a result forget to clearly contract this as the amount of money you will pay them if you exercise your option. In the above example, at an option price of $200,000 with the current loan balance of $175,000, you would specify that your $200,000 option price is payable as fol­lows: $1 paid cash today, with $25,000 due at closing as full pay­ment for seller’s equity. At the closing, the lender gets paid in full and the seller gets $25,000 as full payment for the $30,000 of equity (remember, the loan had been paid down by $5,000). In most lease option deals, simply by doing your paperwork correctly, you’ll make an extra $2,000 to $12,000 just from the amortization alone.

I know that you’re probably wondering, “What if the seller objects to this?” In our experience, seven out of ten sellers don’t care about the amortization. They know what their current equity is, the option price less what they owe, and they expect to get that at closing. Period. The other three out of ten will say something like, “But in four years my loan will have been paid down a few thousand dollars and I’ll have more equity than $25,000.”

Respond with, “Mr. Seller, of course the loan will be going down. That’s one of the reasons we are willing to buy the property. I mean, after all, I am the one who is going to be making the monthly payments for all that time.” You’ll find most sellers will accept this reasoning. They recognize that if they sell the property, they weren’t really expecting to get this money anyway. If you are negotiating with a tough seller, use this as a bargaining chip. Trade it for something else, like a longer term, lower rent, or a lower pur­chase price. Either way you are still getting a great deal.

One of the houses I picked up with some of my students on a Challenge was a three-bedroom, two-bath house. I was there with John Seitz, one of the three students selected for the Challenge, and he was writing up the five-year lease option on the house. I stopped him, made one change to the agreement, then let him finish the paperwork. That small change only took 30 seconds but made a huge difference.

Back in the car after we left the sellers John asked me why I had made the change. I asked, “John, do you remember the loan statement they showed us while we were standing in the kitchen?” John replied that he had.  I explained to John that the sellers had a 15-year loan on the property that was already several years old and that this meant that the amortization on the loan was a lot each month. “John, the state­ment showed that each month they make their $950 house pay­ment they get $325 paid towards principal. Let’s forget that this goes up each month and pretend it just stays the same. What’s $325 multiplied by the 60 months we have the house under contract?”

John thought for a moment then burst out with the answer, “$19,500! Peter, we just made an extra $20,000 just because we changed a few words in the contract!

The key is to make real estate deals as profitable as you can.  The best method is to spend some time with a real estate attorney and create agreements that are in your best interest as the investor.  OR, you can find these agreements already created for you, such as the residential lease purchase agreement.

 To Your Success,

 Peter Conti
America’s #1 Real Estate Mentor

 

The Lease Option is the easiest and simplest of the buying strategies I teach. Plus, it is probably the lowest-risk way to get started in real estate investing. Bare with me if you’ve already read the ‘basics’ behind the Lease Option in one of my books or courses. This is essential information well worth repeating in order to get you taking action with this buying strategy now.

The Lease Option Simplified

Have you ever seen a rent-to-own store? Did you know that you could walk into that store and buy a brand-new big-screen TV? All you need to do is make nice, easy monthly payments and, in a few years, you will own that TV. Of course, in the long run you will end up paying between two and three times more for that TV than if you paid cash up front.

Another good example is one of the options when getting a new car—leas­ing to own. You simply make a small down payment and then each month you make an easy lease payment. At the end of your lease period (usually three or five years), you have the option to buy that car for X dollars more. Or you can simply hand back the keys and go find another car, if you choose. Of course, if you buy the car on these lease-to-own plans, you will end up paying much more for it than if you had purchased it for all cash up front.

Why do people pay more for something on a rent-to-own basis? They are paying a premium for the easy financing with which they are then able to own that item. What most people don’t know is that you can do the exact same thing with real estate! Just by controlling a property and changing the terms with which you make it available to a new buyer, you instantly increase the value of that property.

With the Lease Option strategy, you are going to be using the ‘rent-to-own’ concept, which has been around for many years, in a new way—with real estate. You are going to be a matchmaker, matching up a motivated seller and a hungry tenant-buyer. And by helping both these people get what they want, you are going to get paid handsomely for your efforts.

Remember, your motivated seller is someone who has a com­pelling reason to get rid of his or her house quickly. Your tenant-buyer is someone who desperately wants to own his or her own home but for one reason or another can’t qualify to buy a home in the traditional way right now. Remember the three things you need to buy a home traditionally—a large down payment, good credit, and adequate monthly income. Well, your tenant-buyer is someone who is lacking in one or more of these key areas. Your tenant-buy­ers figure that while they can’t buy right now, down the road, after they clean up their credit or get an increase in salary, they will be able to qualify for a new loan and buy in the traditional way.

Let’s walk through a hypothetical example of what we are talk­ing about to make things easy to understand.

Sam Seller is a motivated seller. He was transferred three months ago to a new city. The job is a great career move, with an increase in pay and prestige. The problem for Sam Seller is that he hasn’t been able to sell his house yet. He tried listing it with a real estate agent for three months, and he just couldn’t sell it. Now he is faced with moving in just three weeks.

His options are either to slash the price of the house for a quick sale, something he is hesitant to do, or he can rent it out until he can find a buyer. But then he would have to either manage the prop­erty long distance or hire a property manager and pay him or her to manage the property—typically 8 percent to 10 percent of the monthly rent—with no guarantee that he won’t have a vacancy for several weeks or months at a time.

That’s where you come in. As a creative investor, you are able to help solve Sam Seller’s problem. You come in and agree to rent out Sam Seller’s house for six years for the amount of his pay­ments. At the same time, you agree upon a price at which you can buy the house at any time you choose over that six-year period. This is called a “lease option” or a “lease purchase” and it is the founda­tional strategy of my Real Estate Protege Program system and the first of the seven real estate buying strategies that I teach.

Say for example that Sam Seller’s payments on the house are $1,300 a month, which includes principle, interest, real estate taxes, and insurance. You will cover this amount so that Sam Seller will have no costs associated with his property over the period in which you control it before you purchase it. As for the price, to show you how you can pay the seller top dol­lar and still make money for yourself, you have agreed to pay the seller close to full market value for the property. In this case, the seller was asking $190,000, and you negotiated the price down to $180,000. After all, you tell the seller, he will pay no real estate com­mission. In another post, you’ll learn exactly how to use this strategy and several others to get the price down without having to wrestle with the seller. With Lease Option investing, you can offer the seller a healthy price and still make a large profit for yourself. Obviously, if you are a good negotiator and are able to bring that price down lower, then you will end up making even more money. So you are locking in the price at or below today’s value for a long period of time. As that property appreciates, you will capture the future appreciation as one part of your profit in each deal.

If you are in an area with slower appreciation, or even no appreciation, you simply negotiate harder on price. Let’s face it: If you are talking with a motivated seller in a stagnant market, the seller will have little choice but to be flexible on price. The most attractive feature of the deal is that you only make part of your profit from the difference of the price you lock up the property at and the price you sell it at.

What Does It Take in Upfront Money?

Well, if you are like the students we work with across the coun­try, you will probably be able to lock up the property without giving the seller any upfront money. Actually, you will give the seller $1 up­front as “legal consideration” to make your agreement binding.

But let’s say in our hypothetical example the seller won’t do the deal unless he gets at least $2,000 upfront.

Wait a second, you say. You don’t have $2,000! Just hang in there because in a moment you are going to learn where you are going to find this money. And here’s a hint for you—it won’t be from your wallet or purse!

Let’s get clear on exactly what you and Sam Seller have agreed upon. You have agreed to rent out the property for six years for the amount of the monthly payments of $1,300. You have also agreed on a price of $180,000 at which you can buy the property at any point over the next six years. In essence, you have negotiated a lease with the option to buy.

As for the $2,000 of upfront money, you are going to tell your motivated seller, “Sam Seller, I will give you the $2,000 as soon as I take occupancy of the property or find someone to occupy the property.” You’ll see in just a moment why it is critical for you to add this part into your agreement because it will be essential in your funding of this deal.

The Best Source of Funding for Your Nothing-Down Deals

Here is the secret to doing nothing-down deals: Nothing down does not mean “nothing” to the seller. Nothing down means none of your money to the seller. The distinction is critical. Your moti­vated seller may get money up front—it just won’t be your money! The best way to fund any money you need to get into the deal is by using a tenant-buyer’s money. In our next hypothetical example, your tenant-buyers are the ‘Byers’.

The Byers are a young couple who have two children. They have good credit; however, because their current income isn’t high enough, they can’t qualify for the mortgage on a house this nice, yet. The Byers know that when Mrs. Byers goes back to work (she has been staying home with the children who will both be in school full-time soon) their income will be high enough to qualify for a mortgage to buy a house like this.You are able to help the Byers by letting them rent to own the house. The Byers will rent out the property from you with an option to purchase at a price you have set in advance.

In this example, the Byers are going to rent the property from you for two years. (You’ll soon learn there is a specific reason you always want a longer term with your motivated seller than with your tenant-buyer.) The current market rent for a house like this in the area is $1,400. But this property isn’t just a rental property, it is a rent-to-own property. A rent-to-own property usually commands a premium over the current market rent because of the advantage of the easy financing it offers a future buyer. This means the Byers will­ingly pay you above-market rent. In this case, they pay you $1,500 a month in rent.

You also agree with the Byers on a price at which they can pur­chase the property at any point over the next two years. Because you want this to be a win for the Byers too, you set the price at less than the house will be worth in two years.

If the house appreciates at just 5 percent per year, then in one year it will be worth $199,500. After two years, the house will be worth $209,475. (We are leaving the money-making effects of com­pounding out of the equation to keep the concept simple.) You are going to let the Byers have a purchase price of just $199,900.

Note: Appreciation has averaged 6.58% over the last 50 years. Ups and downs smooth out over time.

Because of this value you are giving the Byers, they will pay you 3 percent to 5 percent of the value of the property as an upfront payment (technically called an “option payment”). In this case, you collect $8,000 from the Byers up front as their option payment on the property. This money gets credited toward the purchase price if they decide to buy. If they choose not to buy the house, it is yours to keep for allowing them to lock in their option to purchase and tie up the property for two years. It is nonrefundable.

After a year or two, the Byers will be able to get a new loan from their mortgage lender and cash out both you and the moti­vated seller, Sam Seller. In essence, that’s how the system works.

Remember the $2,000 you owe Sam Seller, the motivated seller? Where do you think you are going to get it? That’s exactly right! You are going to take the $8,000 cashier’s check you collect from the Byers, deposit it, and give $2,000 of it to Sam Seller. What happens to the remaining $6,000? You get to keep it. By the way, as an option payment this money is nontaxable until the year in which your ten­ant-buyers either exercise or quit their option to purchase.

You might think this is a nothing-down deal, but it’s not. It’s better than that. This is a nothing-down deal with an extra $6,000 that goes into your pocket.

Let’s add up your profits. Each month you are earning $200 in cash flow. Over 24 months, that adds up to $4,800. You are buying the house for $180,000, and the Byers are paying you $199,900 for it. So you make an additional $19,900 from the spread in the sale prices. All totaled, you will earn $24,700 from this Lease Option deal.

The Biggest Difference between Lease Option Investing and Traditional Investing

Imagine you were buying an investment property the tradi­tional way. You would negotiate a price with a seller, put a large chunk of your cash down, and sign personally on a bank loan for the balance.

Once you closed on this house, you would start to hope. You’d hope that you would be able to find a renter. You’d hope that you would be able to rent it out for more than your monthly payment. You’d hope that you wouldn’t have any major repairs to take care of. You’d hope for a lot of things. And then you would wait and see how you would do over time.

The biggest difference between Lease Option and tradi­tional real estate investing is that you know what you are going to do before you move ahead with the deal. What we mean is: With Lease Option investing you never make a final commitment to a deal with a seller until you have presold the house to your tenant-buyer. This way you don’t have to worry about how you are going to make those $1,300 a month payments to Sam Seller. You know how you’ll do it because you’ll have already collected cash in hand for the first month’s rent of $1,500 and an option payment of $8,000 from your tenant-buyers, the Byers.

How can you do this? You will use a special “subject to” clause, which states that your agreement with the motivated seller is sub­ject to your finding a qualified resident to occupy the property. In other words, your agreement is subject to your finding a qualified tenant-buyer. If you don’t find your tenant-buyer, then you don’t move ahead with the deal.

What you do when setting up a Lease Option deal is to have both halves of the transaction complete before you ever fully com­mit to the deal. You find your motivated seller and lock up the prop­erty. Then you quickly go out and find your tenant-buyer. Then and only then, do you fully commit to moving ahead with the deal.

Here’s the exact wording of the clause we use in our lease-option agreement with sellers that makes this possible. We call it “Clause Number Nine” (okay, so I’m not terribly original).

Clause 9: Qualified Resident: Because having a qualified resident to occupy the property is of the utmost importance to all parties, this agreement is subject to Buyer approving a qualified resident to occupy the property.

It seems so obvious to invest this way, but traditional investors don’t. They do their best due diligence and then hope. Lease Option investors don’t leave it up to chance. They know that you can only be sure of a deal when you have already found your end-buyer for the property who has given you cash in hand to hold the property.

CAUTION! When you use such a powerful “subject to” clause, you need to be respectful of the seller. You need to let them know right away if you are having any problems finding your tenant-buy­ers—within two to three weeks. Under no circumstances would you ever want to tie up a seller’s property for several months and then tell them that you cannot find your tenant-buyer. That would be both unfair and wrong.

How to Sidestep the Landlord Trap

Unless you have a way to get out of the hassle of the day-to-day management of a property, you are still going to run into the Land­lord Trap. Here is how you can safely sidestep the Landlord Trap and escape the hassles of tenants and toilets.

When you are talking with the motivated seller, you will say to him, “Sam Seller, to make this a real win for you, would you like me to take care of the day-to-day maintenance on the property? Why don’t I take care of the first $200 of maintenance in any one month? That should take care of 98 percent of the problems. Would that work for you?”

Of course, the seller will be thrilled that you will be taking over the day-to-day upkeep on the property.

“But wait a minute,” you say, “how does that get you out of the Landlord Trap?” Next, you go meet with your tenant-buyer. You tell your tenant-buyer, “Mr. Buyer, you’re coming into this property as if you are the future owner. And we expect that you would treat the place as if you owned it. Of course, this means that you are going to be responsible for the maintenance on the property. But so that it’s a win for you and so that you know that you won’t have any major repairs that you are responsible for, let’s put a limit on it. Let’s see,why don’t you take care of the first $200 in any one month and any­thing above that I’ll see that it gets taken care of, okay?”

See how easy it was for you to sidestep the Landlord Trap? If a repair is needed and it costs over $200, who is responsible for the amount over $200? That’s right, the seller is responsible. If a repair is needed that is less than $200, who is responsible for it? That’s right, your tenant-buyer pays for it. What are you left responsible for? Well, you might have to coordinate some phone calls, but your tenant-buyer will be the one waiting at home for the plumber to come give them a bid. You get to sit in the middle, making money without 90 percent of the hassles of traditional rental real estate.

Of course, you do have other responsibilities. Each month you have to collect a check, deposit a check, and write a check. The beauty of the system is that once you have set up a property cor­rectly and you collect a chunk of money up front, for the most part you have a hands-off residual stream of income that flows to you each and every month. Then at the end of a period of time, you get a large payday when your tenant-buyer gets his own loan on the property, cashing both you and the motivated seller out of the deal.

Check back for more posts on the 6 other real estate buying strategies I teach.

Imagine you were buying an investment property the traditional way, and you purchased a single family home.
Because you bought this house the traditional way you now have to sit back and hope. You hope that you will be able to find a renter. You hope that you will be able to rent it out for more than your payment. You hope that you won’t have any major repairs to take care of. You hope for a lot of things. And then you wait and see how you did over time.

That’s traditional real estate investing. You buy your properties and find out how you did afterward.

 The biggest difference with buying real estate without your cash or your credit is that you know how you are going to do BEFORE you move ahead with the deal. This way you only choose winning deals and leave all the other deals on the table.

How can you do this? You use a “subject to” clause, which states that your agreement with the motivated seller is subject to your finding a qualified resident to occupy the property. In other words, your agreement is subject to your finding a qualified tenant-buyer. If you don’t find your tenant-buyer, then you don’t move ahead with the deal.

CAUTION! When you use such a powerful ‘subject to’ clause, you need to be respectful of the seller. You need to let them know right away if you are having any problems finding your tenant-buyers—within two to three weeks. Under no circumstances would you ever want to tie up a seller’s property for several months and then tell them that you cannot find your tenant-buyer. That would be both unfair and wrong.

What you do when setting up your deal is to have both halves of the transaction complete before you ever fully commit to the deal. You find your motivated seller and lock up the property. Then you quickly go out and find your tenant-buyer. Then and only then to you fully commit to moving ahead with the deal.

How to Sidestep the Landlord Trap

Unless you have a way to get out of the hassle of the day to day management of a property, you are still going to run into the landlord trap. Here is a way you can safely sidestep the landlord trap and escape the headaches and hassles of tenants and toilets.

When you are talking with the motivated seller, you will say to them, “Mr. Seller, to make this a real win for you, would you like me to take care of the day to day maintenance on the property? Why don’t I take care of the first $200 of maintenance in any one month. That should take care of 98 percent of the problems. Would that work for you?”

Of course, the seller will be thrilled that you will be taking over the day to day upkeep on the property.

But wait a minute, you say, how does that get you out of the landlord trap? Next you go meet with your tenant-buyer. You tell your tenant-buyer, “Mr. Tenant-buyer, you’re coming into this property like you are the future owner. And we expect that you would treat the place as if you did in fact own it. Of course this means that you are going to be responsible for the maintenance on the property. But to make it a win for you and so that you know that you won’t have any major repairs that you are responsible for, let’s put a limit on it—the first $200 in any one month.”

See how easy it was for you to sidestep the landlord trap. If a repair happens and it costs over $200 who is responsible for it? That’s right, the seller is responsible. If a repair happens that is less than $200, who is responsible for it? That’s right, your tenant-buyer pays for it. What are you left responsible for? Nothing! You get to sit in the middle making money without the headaches and hassles of traditional real estate.

Of course, you do have specific responsibilities. Each month you have to collect a check, deposit a check, and write a check. The beauty of the system is that once you have set up a property correctly, you have a hands-off residual stream of income that flows to you each and every month. Then at the end of a period of time, you get a flood of money when your tenant-buyer gets his own loan on the property, cashing both you and the motivated seller out of the deal. 

Creating Multiple Streams of Income

Let’s say it took you an entire year to find and put together your first deal (we have students in our residential mentoring program who are averaging one a month, but let’s be conservative.) After a year of part-time effort, maybe 5-10 hours a week, you have your first deal set up. And each month you are earning a stream of income from the property, plus you collected a big chunk up-front as the option payment, and you are waiting to collect a huge chunk of money down the line when your tenant-buyer gets new financing for the property and purchases.

Then the next year you go out and look for more deals. By now you are much better at it and you find two deals. Again, once you set up each deal, it’s a hands-off investment pumping residual streams of monthly cash-flow into your bank account. In year three you find four properties in your spare time and set them up. You keep doing more and more deals as your expertise increases. The only limit is your own ambition.

By setting up each property as an independent money-making machine for yourself, you are creating multiple streams of income buying homes in nice areas with nothing down.

Peter Conti, Real Estate Investing Author

Mentor Financial Group, LLC

Peter Conti went from auto-mechanic to self-made millionaire investing in real estate.  For a limited time, you can access Peter’s best-selling eBook, ‘How to Create Multiple Streams of Income’ and get $429.56 worth of free investor tools.  Go quickly to this page and download the free real estate investing material.