Currency takes many shapes and forms. The most successful real estate investors are able to identify and leverage multiple forms of currency that create more investment opportunity.
You can too!
Discover a variety of ways you can craft real estate offers for flexibility to create monthly cash flow AND long-term wealth. Grow your intellectual currency and watch your bank roll grow in turn!
LEARN HOW with Matt Theriault and the Epic Wealth podcast.
What You Will Learn About How to Buy Real Estate With Intellectual Currency:
The different types of currency available to investors
Why intellectual currency can bring about actual currency
How real estate investing provides opportunity for everyone
How to make yourself an ally to the seller
Why you should position yourself to work with the seller
Where you can find money for your deals
When seller financing makes sense
Different ways to seller finance a property
Why it is so important to control the terms of your deal
Creative financing solutions for every kind of deal
How practicing finance strategy will open the doors to more investment opportunity
Read the Transcript:
Matt Theriault: Today's episode is sponsored by Creditbump, a new fast and simple way to get up to $150,000 of revolving lines of credit. Use the funds for anything you need: startup cost for your business, capital expenses, product development, inventory, marketing, promotion, creative real estate acquisitions and strategies, anything your business needs. They have a 60-second online application. It's a soft inquiry, meaning the application process will not impact your credit score in any way. There are no upfront fees, interest rates are as low as 0% for the first 12 to 18 months. If you opt in for their credit consulting, you'll learn how to extend your 0% interest rates far and beyond that, build corporate credit, and so much more. The approval is based on your credit score and your stated income, and if you're pre-approved and you don't receive at least $50,000 in funding, you don't pay a cent in fees. Through their service, I've helped members of my Epic community receive more than $13 million of funding in the last six months. They've got top-notch customer service, Creditbump has an A+ rating with the Better Business Bureau. In short, you're in great hands and you've got nothing to lose. Go to creditbump.com, creditbump.com. That's creditbump.com.
Narrator: This is Theriault Media. It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. You don’t have a money problem, you have an idea problem. Welcome to the final frontier where the average person has a legitimate shot at creating epic wealth. Your host, Matt Theriault.
Matt: Yes. Hello, and welcome. Welcome to the Creating Epic Wealth Show, the revolutionary new money show disguised as a real estate show, as real estate is the final frontier where the average person has a legitimate shot at creating epic wealth. You really just don't have a chance at any sort of financial freedom, unless you incorporate real estate somewhere into your financial plan. If you just don't have the time to do it, nor the desire to take on all of the heavy-lifting, then this is just the show for you. So glad you found us.
All right. Let's pick up from our last episode on creative real estate investing. I went over five different ways to do that, and there are more than those five. I want to get to them, I'll get you to a bunch of them, but the five I covered were conventional financing, seller carry back, subject to, seller seconds, and the lease options. I went over each of those very generally. Now, over the next, I don't know, several segments, maybe several episodes, we're going to dive into deeper detail into those individually.
So, creative real estate investing. One thing I guess I failed to mention, but those are just general overview anyway, but I'll bring it up now, is that creative real estate investing is probably not going to happen for you without some level of negotiating prowess. Negotiation skills, they lie at the center of creative real estate investing. As you may know, real estate, it's not free, right? No kidding, right? You do need currency to transact real estate, but currency can take many shapes, many forms, and many sizes. But just to keep it simple, I'm going to group currency into two categories for you. First, there's 'hard currency', like money, okay? Like that moola, cash, dollar bills, money. And second, there's what I like to call 'intellectual currency'. Like what's up here in your brain, what do you know? Okay? Now, both currencies can be used to transact real estate. The relationship between the two is a rather unique relationship. It's counter-balanced I guess you could call it, meaning, if you have a bunch of the hard currency, you got a bunch of money, the less of the intellectual currency you're going to need and vice versa. The more intellectual currency that you have, the more that you know, the less hard currency you need, the less actual money you're going to need.
Also, the more hard currency you use in your real estate, the more intellectual currency that you will receive in return. The more intellectual currency that you use, the more hard currency you'll return. Basically, the more educated you are around real estate, deal structuring in finances, the less actual money you'll need to transact real estate, and the greater your profits will be. Conversely, the more money you're using in real estate investing, the more experience and education you're going to receive. Those experiences, they maybe good ones, they maybe bad ones, but either way you are increasing your education and intellectual currency- it's growing.
See how they work together? See how they go hand in hand? You're either getting paid or you're getting an education in-- in my world, both are good. So, keeping those two different currencies in mind. Let's say in your left pocket, okay? Your left pocket, you have your hard currency. That's where all your money, it's in your left pocket, and in your right pocket, you have your intellectual currency. In every turn of a real estate transaction which requires you to trade some currency, you get to decide which pocket you're going to dip into. In most deals, regardless of how much intellectual currency you may have in that right pocket, in most deals, you're going to need some hard currency. You're going to need some money, and the first step to finding that money is to reduce how much of it you need to find, and we do that through negotiating.
So, your negotiating skills. They make up a significant portion of your intellectual currency, and the negotiation portion of your intellectual currency can be used to either 1) reduce expenses and costs, or 2) create income or profit. If you can do both, hey, even better. Either way, from this point forward I want you to view your negotiating as currency, as money. It is indeed currency. It has a monetary value, a cash value. I'm going to prove it to you.
For example, if a seller tells you they want $100,000 for their property, and you replied with, "Yeah, I understand, I can see how you'd want $100,000. I wish the market would allow it, but you know how it is, Mr. Seller, what's your bottom-line?" And they respond with, after they’ve think about it for a second, "Not a penny under $95,000." See what happened right there? See what happened? That one question, "What's your bottom-line?" That one question just made you $5,000. That's what I mean by viewing your negotiation, or you're negotiating as money. But you might still have to find more money to complete the transaction but you did just find some money. There are no if's, and's, or but's about it, and once you get this, embrace it and implement it, you're going to start noticing the many different places your newly found intellectual currency is accepted. It's everywhere you want to be.
Here's another negotiating tip. You might have noticed it in this example I just gave you. When structuring your deals and presenting offers, understand that it's not a 'you' versus the 'seller' conversation. No. It's always a 'you' and the 'seller' versus the 'market' conversation. That's your negotiation position, okay? You're building rapport and trust with the seller for a reason, to make a friend, to make an ally. You want to be the good guy, you want to be their ally. You never want to be the bad guy. The market- that's the bad guy. You are the solution, you're there to help, don't be the problem. The market is causing the problem for the seller. And that’s the seller's problem, you're there to help the seller solve their problem. Got it?
All right. So, based on what we've covered so far, the intent of that was just to establish the first step to finding the money is to reduce the amount of money that you need to find. As I mentioned in the introduction, money- it's everywhere. Okay? It's everywhere you wanted to be. You need to complete your real estate transactions, that all that money that you need to complete, your transactions- abundantly available. Now the caveat here is, all the money you'll need to find is rarely going to come from one source, unless it's all from your left pocket where all your hard currency is.
So, what I'm going to do is I'm going to lead you through multiple sources of where you can find the money for your deals, and I'm going to lead you through in order of which I look-- now depending on your situation, your financial situation, your network, your credit score, your resources- you may choose to look for the money in a different sequence. That's okay, there's no right or wrong here. Nothing wrong with that. There's no one way to do this, it's just that I prefer to not use my money, okay? In every deal, I try to spend every cent of my intellectual currency before ever going into my pocket for my hard currency.
So with that in mind, the best place to find the money for your real estate is the owner of the real estate itself- the seller. I first reduce the amount of money that I need to find by negotiating the price with the seller, and that's ongoing, and negotiating- it doesn't stop for me until the deal is closed and you'll see that as we progress to the lessons. The second place that I'd like to look for the money is for the seller to finance the deal for me, what we call 'seller financing'. Also known as 'carry back mortgage', 'private mortgage', 'seller carry back'. It's appropriate often when the seller wants a specific market price, and just won't budge. Yet, they have no takers and they're open to the idea of a fix rate of return over a long period of time. That's kind of when it fit, that's a perfect situation for it. And I love seller financing. It's how I hold most of my own portfolio. I'll take it just about anytime that the seller is going to give it to me. The only real exception is probably if the seller failed to provide a title insurance policy. Other than that, I'm typically all-in. If they're open to carrying back I can typically make something work.
So, there are many ways a seller can participate in financing the deal for you, from lease option to subject to, or straight seller financing. You see the seller can finance some or all of the equity. Or the seller can let you tap into the existing financing that they already have against the property. If you have no idea what I was just talking about there, no worries. We're going to cover it all. I'm just going to give you an overview for it.
And for now, what we're going to do is I want to go focus solely on straight seller financing in the form of the seller carrying back a note specifically a promissory note. A promissory note- that's a promise to pay. What that does is the note, it defines who is borrowing, defines the payor, and the lending, who's lending, the pay-ins. So we get the payor and the payee. And the note details the terms of the financing. In other words, how much is being borrowed and how is it going to be paid back, okay? So that's what the promissory note does. It says who's borrowing, who's lending, and how much is being borrowed, and how is it going to be paid back. That's what I love most about seller financing, is the how it's going to be paid back part. Because you can pay just about anything that a seller wants for their property even if it's double with the property's worth. But as long as you control or have a say in how it's paid back, you can turn just about any deal into a real deal. Did you get that?
I mean, if I have this $100,000 property, and I said you're going to have it for $200,000, it's twice as what it's worth, would you take it? Well, it depends. If you can control the terms, then certainly you can make that a really good deal. I'd take it. I'll pay you $200,000 if you're going to accept my terms, and that's what we're going to talk about, okay? I want to go over some really cool examples of exactly how to do this, and we're going to that right after this.
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And now, back to Creating your Epic Wealth.
Matt: What I love most about seller financing is the how it will be paid back part, because you can pay just about anything that a seller wants with their property, even if it's double of what the property is worth, as long as you control or have a say in how it's paid back. You can turn just about any deal into a real deal for yourself.
So with that said, when you're looking into acquiring your next property, I want you to go into the deal with the objective. This is your mission. Your mission is to go in and control either the price or the terms. You've got to get control of one of them. As long as you can control one of these, you can create a good deal for yourself. So, assuming that our example seller, say they rejected your $50,000 all cash offer for that $100,000 property we're talking about, and that $50,000 being your price, and the all cash part being the seller's terms. The seller is stuck on their $100,000- their price. So if they're stuck to that price, they're sticking to that price, what do you have to work with? Yeah, you got the terms to work with. If they're seizing control and they're not letting go of control of the price, then you got to take control of the terms.
So, let's create some terms and how we're going to pay $100,000 for this property, and have it still be a good deal for us. It's kind of tough to pay-- as an investor to pay $100,000 for a $100,000 property and still make some money. But if you've got control of the terms, we can do it, okay?
So, we're going to need some more information to complete this exercise. So let's say the fair market value of the property is indeed $100,000. Let's say it rents for $1,200 a month, and after taxes, insurance, vacancy, maintenance, and property management, we’re probably left with a net monthly cash flow of-- it would be $720 is what the number would be. My quick and dirty math how I got to that number, it's taking 60% of the gross. So we took 60% of the $1,200, and we're left with $720. That's the income that this property would produce. So with our terms, we just need to make sure that the terms that we create fall below $720 a month, got it?
All right. So, let's start working with the terms. What's one way we can pay the seller $100,000 for this property and it still cash flows for us so we can still make some money. Well, if we went conventional, we'd put 20% down and we then borrowed the rest, say it's 6%, that monthly payment, if we did that, that would be $480. So will that work? We have to make sure that our debt service is below $720. So if we just, very conventionally, like with 20% down, 6% interest, that'd be $480. Will that work? Yeah, it would work. So, whether we got that money from a bank, or the seller carried a back, it will make no difference, that would work.
So, how about if we put 10% down and the seller carry back the rest at 6%? Well that payment would be $540, would that work? Yeah. Is that less than $720? It is, right? So yes, that would work too. So how about if we offer the seller 0 down? And the seller carry back- all of it at 6%? That's a monthly payment of $600. Would that work? Yeah, that would work too.
So, these three examples are extremely basic. I'm just working with one variable here- the down payment, right? That's the only thing I've changed in the whole scenario, it's just the down payment. But let's start pushing the creativity here, and this is going to be your homework. I want you to take a blank piece of paper, I want you to write $100,000 at the top of that page and practice. I want you to write down at least 10 different ways you can pay someone $100,000, keeping the monthly payment below $720. I'll do a few with you, alrighty? So, how about I'll pay you $500 a month until it's paid off? Will that work? Yeah. You don't have to deal with a down payment, you don't have to deal with interest rates. If you don't want, right? Just 500 bucks. So, what if the seller came back with, "I'll be dead by the time I collect all of that money," and you replied with, "Okay. What's the longest you're willing to collect all of your money?" The seller replied with, "Well, I want it all within five years." You replied with, "Great! I'll pay you $500 a month and at the end of the five years I'll pay the rest. I'll pay the balance. Will that work for you? Would that be a good deal for you?" Not sure? Let's add it up. Since it's just $500 a month, we already know that deal's going to cash flow at those terms or that payment, so we're good there. Now, what about at the end of the five years and it's time to pay the piper? What position we'll be in? Well, you got to pay the balance. Well, with five years, of $500 monthly payments, that's $30,000 you've chipped away at the equity, right? So on this $100,000 house, at the end of five years you're going to owe $70,000. That would be a good deal for you at that point, wouldn't it? No way. I mean it's up to you. Maybe, maybe not. So do you think in five years that house would still be worth $100,000? That's something else to consider.
What if you experience the average annual appreciation rate of 3%? Would it be worth it then? So that house would probably worth about $115,000 at the end of five years, and you owe $70,000 on it, would that be a good deal for you? No, maybe. I mean what if you applied the cash flow to the principal as well during those five years, of $250 a month, that's another $1,500 chipped away at the principal. Now you owe $65,000 on a $115,000 house. Is that a good deal? Sound a lot better though, right? That sound a lot better. Again, that's up to you. So, that was the second way to pay $100,000. $500 a month and then the balance in five years.
So let me give you a third way. I'll pay you $100,000 in 250 equal monthly payments. That's just how I'm going to phrase it. So that's $400 a month. That works right? Yeah. We're still way below the $720 so that works, so that cash flows. Or how about I'll pay you $300 a month and then if and when I sell it, I'll pay you the rest plus 25% of the profit that I get above $100,000. Will that work? See how you can play with all of these different variables and come up with all these different solutions. And you're paying $100,000 for this $100,000 property and you're still making money. Or how about 10% down payment, $200 a month, and I'll pay the balance off in 10 years? And that payment at the end of the 10 years would be referred to as a balloon payment. That’s the word. We’re talking about balloon payment when we say we're going to pay the balance off at a certain time.
Maybe the seller doesn't like this flat payment going 100% to the principal. They want interest, right? Okay fine. I'll give you 5% interest only payments for 10 years, and $100,000 balloon at the end of the term. That would still be a smoking deal with payments of $416 a month, right? That will be a nice cash flow in property. Yeah, but how are you going to pay off the $100,000 balloon payment? Where is that money going to come from? We're going to talk about balloon payments soon in great deal, coming up. So I'm going to just keep it simple. First, in 10 years, how much do you think the property is going to be worth? And I'll keep it super conservative and propose just an annual 2% appreciation. The property will be worth $122,000 at the end of 10 years, and you'll owe $100,000. If you absolutely had to do you think you could sell that property for $22,000 below market value to get you out of that situation? Would it be such a bad thing to dump the property like that if you had to? I mean you cash flowed $300 a month for 10 years, you made $36,000 off that deal. Not a great deal, but not anything near terrible. I do that deal, I do that deal everyday.
Anyway, you can see how you can play with the terms here in many different ways. I could do this all day long with you. But I think you get the picture, right? So just keep playing with it. I want you to practice. Practice makes perfect. I want you to take that piece that paper, I want you to write down at least 10 different ways you could pay $100,000 for a $100,000 property and still make a profit for yourself, okay? That's your homework. It's only going to work for you if you do the homework, okay? It's practice makes perfect, that's the mother of all skill. Get over there and practice. Once you've got those 10 ways down, those will be in your head. At least half of them you're going to have it at a moment's call, and when that situation comes up, you can recall on that and you can present an offer, one that actually works for you and the seller at the same time.
Now, I can hear the wheels turning already. I mean, these balloon payment, right? A question I always get is what happens if you don't have the money once they are due, what do you then? Easy. I'm going to tell you exactly what there is to do right after this.
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Matt: That’s it for today. We’ll pick up from where we left off right here next week. See you then.
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