I want to share with you some ideas on using real estate to become
debt free and build your cash reserves. It has worked for me and I
have also shared this with many other investors and it has worked
for them also. Many investors start out in real estate thinking that
you have to “have money to make money”. That is not the case at all.
You will need one of two things though; either good credit or
cash…remember that it doesn’t have to be your cash or credit as far
as that’s concerned. It’s OK to start out with other investors until
you can do it on your own. I would rather share the profits and have
some of something rather than all of nothing.
We only buy when we can get paid and still cash flow the property.
Let me explain. Let say you find a property that has an after
repaired value or ARV of $100,000. Because the property needs
$20,000 in work you can buy it for $50,000. Now you will be in the
property at 70% of value once the work is done. Whether you paid
cash, borrowed from relatives or got a hard money loan for purchase
and rehab makes no difference. Once you have a $100,000 property you
can now refinance at 80% loan to value or LTV and after closing cost
pull out about $7,000 to $8,000 in tax free cash.
Yes you do not pay taxes on borrowed money.
But just remember that it is still borrowed
money and has to be paid back, even if it is the tenants that are
paying it back. I do not recommend refinancing over 80% loan to
value. This way you still have some equity for your financial
statement and the property should cash flow with no problem.
Now, what do you do with the cash out from the refinance that you
just received? No you don’t buy a new car, go to Vegas, or anything
like that. You simply pay off a credit card, installment loan, your
car, your equity line, etc. You can buy real estate and get cash to
pay off your personal bills and increase your cash flow from the
rents at the same time. If the property you just bought and
refinanced has a $200 cash flow but you also used the cash out to
pay off your car that has a $300 payment, how much did you really
increase your cash flow? $500! Every time that you buy a property
think about what bill you will soon be able to pay off. Once you
have all of your consumer debt paid off then you start paying off
your home that you live in. Once your home is paid for then you go
to your banker and get a line of credit on your home to use to buy
and rehab properties. Then you simply refinance once the work is
done and pay off the line. It is much easier to negotiate with a
seller when you can simply write a check to purchase their property.
Then when you ask a seller the least they will take if they can have
a check by Friday, you can back it up. Sure it may take some time to
get to this point but once you have become debt free (with the
exception of rental property, of course) it opens up so many options
for you to do things that you have never been able to do. Not to
mention the peace of mind.
We have a property analysis form that we use to determine if a deal
will fit into this plan. The form even shows the cash flow, cash out
and equity gained by purchasing each property. If you would like a
copy, please visit the “Freebies” section of www.larrygoins.com.
I hope you have enjoyed this article. For more articles on real
estate investing, to sign up for our free newsletter and listen to
free weekly training teleconferences please visit my website at
www.larrygoins.com where you will also find free forms, documents,
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for investor financing.