How Can One Deal Lead to More Deals?

Most folks think real estate investing consists of finding a deal, taking it down, getting it rehabbed and sold, and then going out to find the next deal.  But what if you structured the deal in such a way that one deal leads to more deals?  Let’s look at two real-world examples of this. 

A few years ago, our good friends Joe and Ashley English, found an investment property they wanted to buy.  Only one problem: they didn’t have the money to buy the home.  Joe sent an email to several investors explaining that he was seeking funding.

Within minutes, Joe’s phone rang.  It was Pete Fortunato – the best creative deal structurer we’ve ever met.  Pete was on Joe’s email list.

After a short conversation, Pete agreed to fund Joe’s deal with these terms: Joe would pay Pete one-half of the $400 net monthly rent.  In addition, if Joe sold the property, he and Pete would split the net profit 50-50.  This is known as a performance loan.  The purchase money would come from Pete’s Roth. 

Fast forward to today.  The tenant in Joe and Ashley’s property wants to buy it.  The result: When it sells, Joe will pay off Pete’s loan and they’ll split the profit.  Sounds great, right?  But is it?

Here’s the problem: After getting paid off, what will Pete need to do?  Put his Roth money right back to work, right?  To accomplish this, Pete is gonna need to find another investor whom he trusts like Joe.  How long will that take?  In the meantime, Pete’s Roth money will sit in an account not earning anything!

So here is Pete’s One Step Beyond suggestion to Joe:  Instead of selling the investment property and cashing out, he advised Joe to do a 1031 Exchange and buy two other rental properties.  (A 1031 Exchange allows an investor to sell a property, and buy one or more other “like-kind” properties without any sort of tax consequence.)  If Joe agrees to this, Pete has agreed to walk the mortgage to the two new properties.

As Pete thought about it, he realized that Joe is better than that!  He thinks Joe can find four properties to buy!  Just think: Joe, if he wants it, already has built-in financing in place for his next four rental units.  This is a classic case of an old guy doing deals with a young guy.  The old guy brings experience and know-how; the young guy brings labor and desire – and both parties benefit!

The most risky thing – the most traumatic thing – for Pete is to have Joe pay off this loan.  Why?  Pete may be forced to move from an investor he knows and trusts to one with whom he doesn’t have a history!

Here’s another example: Some years ago, Kim and I bought a house to flip.  Purchase price was $100,000.  We put $20,000 into the property.  It went on the market at $200,000.

At the first open house, a young couple came by.  They loved the house but could only qualify for a $120,000 mortgage.  While talking to them, we learned that her parents, who babysat her kids, lived down the street from the house we were selling.  To make this deal work, we sold them the property for $120,000 – that’s $80,000 below the retail price.  The buyers gave us a twenty-year option to buy the house back from them for $120,000.  This allowed us to capture any appreciation that would occur over the next twenty years.

Just think, both the buyers and we got what we wanted – a true win-win deal!