I’m shooting a quick video for you guys. Right now it’s 2016; we’re in February. The markets are changing. I’m up in Winnipeg, Canada, but that doesn’t mean we don’t see changes all over North America. We got oil down at about, it’s going down to $20 a barrel. It’s at $30 and it’s going down. It’s probably going to go down to $20 or $10 a barrel this year.
This is changing a lot of markets across Canada and the US. There is a 7-year cycle of real estate. It goes like this … over a 7-year period. Now you’re going to have 4 years here where the market’s going up. In that 4-year period, that’s when you’re going to do your flips. You’re going to do your wholesales, just about anything works at this part of the cycle.
Then, we get up to the peak after 4 years. We’re going to peak; we’re going to plateau, for about an 18-month period up here. This is when it’s time to get into rentals. A lot of people in my market right now, we just hit this part of the cycle, where it’s been strong here for 4 years in my local market from about 2012 until, today is about 2016, we’re now entering this flat part of the market.
A lot of people that were flipping properties and wholesaling properties, are now buying, fixing, refinancing, and holding the properties. Then when the market starts turning down, we got about 18 months of downturn, this is where you pick up your inventory for the next cycle. Then it’s going to flatten and you go back to flips.
You need to understand how this cycle works. Now, in this part of the market, maybe you have a great flipping company. Maybe you have a great wholesaling company. In the current flat market it’s going to be kind of tough, and especially when the market’s starts going down, to flip properties and to wholesale properties. That’s why we talk about rent-to-own.
Some places you can’t do rent-to-own, like in Texas. I spent a month there; it’s illegal to do rent-to-own, but they have a different arrangement they can do. That’s not this video today. In rent-to-own, that’s a strategy that we can use now. We can use rent-to-own, in the uptrending market. Rent-to-own works great. In the flat market, rent-to-own works, and in the downtrending market rent-to-own works. In all cases, rent-to-own works.
Structuring The Deal
I’m going to do an example for you guys right now. We’re going to do a rent-to-own example. In my local market, the average home in 2016, is going to be 281,000 dollars. That’s for Winnipeg, Manitoba. I did an example last night at my local REA, my real estate club, where I took a 281,000 dollar home in Winnipeg.
Now, we’re going to have, in the next little bit, we’re going to have people trying to sell their homes and they can’t. The homeowner in this example would have a mortgage of about 224,000 dollars, at about 3% interest, 25-year amortization. The payment, including the taxes and insurance for this property, we’re looking at around $1400 a month, PITI, which is principle, interest, taxes, insurance.
It’s going to cost about 1400 dollars for the homeowner to carry this home. Maybe the homeowner lost their job. One thing you can do is we’re going to talk about doing a little bit of a sandwich lease option here. That’s where we do a no-money-down strategy. This strategy, I want to show you, takes absolutely no money to do. If you have zero dollars in your bank account, you can do this strategy.
We have a distressed homeowner; they’re willing to sell you the home for what they owe. They just want out. They don’t want to make the payments anymore. Maybe they’re downsized or moving, or whatever it is, they want to get out of this home. What we’re willing to do is we will lease the property with an option to buy for 1400 dollars a month, and our option is going to be at $224, 000, so we’re going to buy this home in the future for $224,000. In the meantime, we’re going to lease it for 1400 dollars.
Now on the other side, we’ll take a tenant buyer. This is somebody who maybe has some bad credit but maybe they have some cash. On this side of the equation, we’re going to have somebody here who has 20,000 dollars of cash, let’s say it’s Bob and Mary, Bob and Mary. They’ve got 20,000 dollars cash. They have bad credit. It’s going to take 3 years to repair. They also can make a payment; they’re willing to rent-to-own this home at 2200 dollars per month.
What that would include, that includes the PITI payment, so they can cover the house. We’re going to make about, in this deal, if we do this deal with Bob and Mary, we have a cash flow of about 800 dollars a month. What’s amazing about this is that if we were to just straight rental this house, if we bought it for $224,000 and we were just renting it, it wouldn’t cash flow. It’d be rented for 15 or $1600 a month, which after management and some other expenses, we’re not making any money. If we do rent it at $2200 a month, suddenly, we’re making about an 800 dollars spread per month.
Let Me Show You The Big Money
Over a 3-year period, we’re going to do a 36-month rent-to-own, I’m writing up here 36 months. Over 36 months, this 800 dollar cash flow works out to … $28,800 in profit, 28,800 dollars in cash flow over that period. I’m going to work the entire deal; I’ll show you how it works out over 3 years.
We’re going to sandwich lease it. Over that time, I’ll have a cash flow. We’re going to make $28,800. Now another thing we’re going to do in the contracts, we’re going to have a lease with an option to buy on the purchase side, with the homeowner at the mortgage value of $224,000. We’re also going to have a lease with an option to buy with Bob and Mary.
First of all, we’re going to sell them the home at 281,000 dollars, but we’re also going to appreciate the home, so they’re going to buy it 3 years later, not for $281,000. They’re going to buy it for $307,000. That’s the price that they’re going to pay, because they’re paying a 3% appreciation per year on this retail price.
Now in 3 years time, we’ll have collected $28,800 of cash flow. We collect 20,000 dollars in a deposit, which we don’t call a deposit. We call it an NROC, which is a non-refundable option consideration. That’s cash we collect today. We’re also going to collect 307,000 dollars when we sell it to Bob and Mary down the road. This is the sale of the property.
We’re going to pay out … Here’s the minuses. Now we’re going to minus, we have to pay the vendor. They had to hold the house the whole time, for 224. We have to refund Bob and Mary 7% of the down payment, 7-8% which works out to about 27,000 dollars, we’re going to give back to them. That’s their deposit, plus they paid down the house a little bit, so they get 27,000 dollars back in credit.
When we do all the math here; when we add this up … we have $28,800 plus 20,000 dollars, plus we have 307,000 dollars, so we’re taking in $355,000 of cash. We’re going to pay out $224,000 and we’re going to pay out a 27,000 dollar credit to the buyer, so we’re taking home $104,800. 104,800 dollars of profit. Now that’s profit on a deal in a market where things are not going great.
This is amazing. What’s amazing about this deal, guys, you make a 104,000 dollars. The reason why this number is so high is because we bought this property at roughly 50,000 dollars under value, 50K under value, under market value. We sold it to Bob and Mary for the retail price. About half of this is because we bought right.
Now let’s say over that period, the house didn’t appreciate at all, and we had to sell it to Bob and Mary for the full retail price, just full retail. We’ll we would still make, over that period, we still collected all the cash flow, and we still collect their NROC. Let’s say the house went down in value. We still collect the cash and we still collect the NROC. Even if the house went down and Bob and Mary decide not to buy, we’re still making, on this deal, if the market sideways or goes down, we’re still making 48,800 dollars, whether the market is good, bad or sideways.
That’s the power of rent-to-own, guys. If we were to just buy this house and wholesale it, you know maybe we’d make 5,000 dollars. Now if the market’s going down, you can’t wholesale. If the market’s going down, you can’t flip it, but if the market’s going down and you do a rent-to-own like this, you’re still making $48,800. Now I don’t know about you, but I would love to make $48,800 even when the market’s going down.
It’s something to think about. If you don’t have rent-to-own in your portfolio, you need to get my book, “Self Made.” Go to selfmadeconfessions.com, pick it up. A little bit about my story, how I started with 1200 dollars of cash, did many deals, got a mentor, learned how to do real estate properly, and this is something you absolutely need to have in 2016. As always, like, share and leave a comment or question you want answered below.