Real Estate Investment - A Simple Formula

I saw the ads on and off in our small-town newspaper for years before I knew what they were about. They were the same every time: A home for sale with a 5% down payment and monthly payments of 1% of the purchase price. A three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.

A friend started investing the same way, and explained the process to me. It was a method to get a great return on capital. It was the opposite of buying with no money down - you bought for cash.

A Real Estate Investment Formula

It is a simple idea. When buying for cash, you often get a better price. A house that needs some work might be worth $75,000, for example. You offer $65,000 cash, and negotiate your way to $68,000. If not, you just walk away - there are always other properties.

You put few thousand into high-return repairs and improvements. Paint the kitchen, carpet the living room, and maybe asphalt for the dirt driveway. For this example, we'll say you put $5,000 into it.

Now it's worth $85,000. You target those who can't get financing easily, and you finance it yourself, and by making it easy for the buyer, you get $90,000 for the home - and you do it without a realtor's commission. Whatever the price, you let the buyer put 5% down, and make monthly payments of 1% of the purchase price. Of course, you charge higher than market interest too.

The buyer is thrilled to buy instead of rent. You're thrilled, because you get a capital gain of perhaps $14,000 after expenses, plus good interest. Your total rate of return is over 25%!

The first to do this consistently in our town were both lawyers, and saved money by doing their own foreclosures when necessary. Of course, after foreclosing, they just raised the price and sold it all over again. A final note: Did you know that if you can get an average return of 18% on your money, you'll turn $75,000 into more than one million dollars in about fifteen years.