I’ve heard from a lot of my students that one reason they’re interested in investing is to wholesale their way to nice chunks of cash. And while we’re also in this business to help solve people’s problems – yes, there are also sweet profits that come with these deals.
But, what I don’t hear a lot about, especially from newer investors, is talk about how to build long-term wealth and stability.
But I get it… I mean, when I first started in REI, I really didn’t care about cash flow. Yep, yours truly, Cody Sperber, was young and uneducated - I only cared about creating a spread between what I could get a property under contract for and what I could quickly flip to another buyer for. I was short-sighted, thinking only about the profit from each wholesale deal - quick payouts and the ability to “invest” with no money or credit.
So, thinking I had this thing under control, 2 years into my full-time wholesaling business, I take some time off to live life. After all, I was averaging $30,000 a month at the time and, of course, if I needed extra money, I could simply wholesale a house super-fast.
Woops. HUGE mistake.
Why?
The market crashed and I couldn’t do a deal to a single deal. I was plowing through my savings. Then it dawned on me – I wasn’t really “investing” – I really only had a full-time j.o.b. wholesaling. Now, I was out of a job, no money coming in and my savings was now gone.
I freaked out – and then got smart…
Cash flow is smart business.
I immediately changed my philosophy on investing and began focusing 80% of my time on creating cash flow through long-term buy & holds.
My new plan was to make 2 offers to motivated sellers – they’d have 2 choices:
Choice #1: This is my Maximum Allowable Offer (MAO), which is typically calculated by taking the current market value of a property and subtracting out estimated repairs. I’d take that number from Choice #1 and multiply it by 70%, and then subtract what I wanted to make as a wholesale fee - that would be my cash purchase price.
Choice #2: This is my “terms” offer – I’d make a negotiated monthly payment at a 0% interest rate, but pay the seller’s asking price (or sometimes, even a little above the seller’s asking price). I’d negotiate with the seller to stretch out the length of the agreement to 10 years or more, giving me plenty of time to decide what I wanted to do with the property. Keep in mind, this only works if the seller has decent financing in place or if they own the property free and clear.
Okay, now, let’s look at these choices with the numbers in more detail…
It’s about the numbers.
Let’s check out my two-offer approach using an example property…
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Motivated seller who owns a house worth $100,000
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He bought it 10 years ago for $50,000
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His current mortgage costs $485 a month
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He currently only owes $30,000 on the loan
Offer #1
In this case, I’d make a cash offer at my MAO of $56,000.
I got this number by taking the current market value ($100,000) and subtracting the estimated repairs ($15,000 – I made up this number for our lesson). Then, I subtracted what I’d want to make for my wholesale fee, which in this case is $5,000, then I multiplied that by .70 (70%).
$100,000 - $15,000 = $85,000 - $5,000 = $80,000 x .70 = $56,000
If the seller began to seem uneasy or not willing to negotiate… I’d slowly “allow” them to talk me into paying more in exchange for the seller carrying back part or all of a note at 0% interest.
My goal is to have immediate cash flow and allow amortization to occur, which would help me build equity, quickly.
Offer #2
This is the “terms” offer. I’d pay $100,000 or even $105,000, but the seller would have to carry back $90,000–$95,000 at 0% interest.
So, to do it this way, I’d offer $10,000 down and take over the $485 monthly payments (including taxes and insurance) for the remaining balance of the original loan. (This is called a Subject-to transaction because I am taking over the seller’s property “Subject-to” the original loan.
Let me be clear: This doesn’t mean I am assuming the loan, I’m just making payments to the lender on behalf of the seller.
On top of paying the $485 per month, I would even offer to pay $100 a month directly to the seller just to sweeten the deal.
Here’s why the second ‘terms’ offers makes sense.
My cash invested would be $10,000. But what I’d want to do is quickly get the original seller out of the property, fix it up and rent it out for full market rent, let’s say $750 a month.
I’d be positive cash flowing $165 a month after all expenses.
And in the first couple of years, I’d apply every penny the property earned to pay down the underlying mortgage. When I did pay it off in full, my monthly cash flow would jump by $485 a month minus whatever the taxes and insurance cost each month.
And remember, over the years, I’d be able to raise the rent, which would increase cash flow.
So when you think about it, I could actually do loads of this kind of deal - and even if I didn’t have the $10k to put down, I could break the $10,000 into equal monthly payments to pay it over the first year or two out of the positive cash flow the property produced. That’s creative financing, friends.
Cash flow is king.
If you did several deals like this, you’d create enough cashflow to stop working altogether and live off the passive income the properties produced.
That is how you get RICH by investing in real estate. This strategy creates cash flow, which produces wealth - not just a paycheck!
Remember, yield is everything in the cash flow business. Just think about how huge my yield is from just a $10,000 investment and a little creativity.
So, your turn - go find motivated sellers who have equity and decent financing – and give them 2 choices.
Share below.
How do you create cash flow? Tell me about it in the comments section.
Market to and search for houses that are free and clear or the motivated sellers have lots of equity.
Always make two offers.
Invest in long-term buy & holds to create cash flow for true wealth-building.