Use What You Have To Get What You WantPosted on June 2, 2011 by
Years ago, Pete Fortunato, one of our primary real estate investing teachers since 1999 (and the BEST creative deal structurer I know), taught us a lesson that has been critical to our success. He said, “In order to create solid win-win deals, use what you have, to get what you need, to get what you want.”
When you read the above quote, you probably said to yourself, “What is Pete talking about?” Do this: Write down his quote, and then get with some other like-minded folks and discuss it. You’ll be pleasantly surprised how deep the discussion goes.
Let’s look at Pete’s wisdom in action.
In 2007, Kim and I bought a four-bedroom, two-and-a-half bath home in The Planters subdivision in Cartersville, Georgia. The Planters is a beautiful subdivision with three pools, a clubhouse, a workout room and tennis courts. We bought the home at the foreclosure auction for $14,298. (Not a typo!)
For the past three-and-a-half years, we’ve kept it as rental property. The property brings in $1,200/month.
Here’s the thing: I don’t like having a rental property that’s that big. I prefer our rental properties to be solidly built three-bedroom, two-bath homes. Why? A smaller home is cheaper and easier to maintain and repair. Plus, a lot more folks can afford to pay $800/month than can afford to pay $1,200/month.
Here’s our plan: We just put this property up for sale. Because it’s summer and the home is across the street from the big pool, it will sell quickly. When it sells, we’ll net about $158,000.
At the same time, we have an option to buy four nice three-bedroom, two-bath, bank-owned homes for $40,000 each. All four homes are less than ten years old and need nothing more than a simple shave and a haircut (paint and carpet).
Let’s go back to Pete’s quote: Use what you have, to get what you need, to get what you want. What we have is the home on English Turn in The Planters. What we need is money. What we want is to move from one big, high-end rental property to four smaller bread-and-butter rental properties that bring in more monthly cash flow.
Now let’s put this deal into motion. We sell the English Turn property and get $158,000. We use the $158,000 (plus $2,000 out-of-pocket) to buy four smaller rental properties. And here’s the best part – right now, we’re receiving $1,200/month in mailbox money. After this deal has been completed, we’ll be getting $2,400 ($800 x 4) in mailbox money – a 100% increase in cash flow!
But there’s more: With English Turn, our equity stands at about $160,000. After completing this deal, because the bank is giving us a fifty-cents-on-the-dollar deal, our equity will climb to $320,000 ($80,000 x 4). And because we’re doing something called a 1031 Exchange, we won’t be hit with taxes.
Is this a good, creative deal structure? Would you do this deal?
Please know that creative deal structuring is a learned thing. Join your local real estate investors group. Also, you might want to attend Pete’s June seminar in Tampa – you know we’ll be there!