Once I achieve an extremely early retirement at 35, I will consider my self a professional investor (capitalist). Because I take this very seriously, I want to learn as much as possible about actively investing in different sectors, including real estate. And so yesterday I made my first move into real estate by purchasing a home.
Actually, my first move was 2 weeks ago when I sought out a successful landlord in my area and asked her to be my mentor. In addition to teaching me a lot, we’ve agreed to go into partnership on some homes. She is cash strapped and actively working many deals. I, on the other hand, have lots of cash but no time to seek out the best deals. We’ve got along well, so we agreed to do business together.
The house we purchased is what is called “subject to”. Basically, the owners will keep the mortgage in their name but have signed over the title to a trust that we set up. We will set up a “rent to own” offer, where we find someone with low credit that wants a house but can’t yet get a mortgage. The rent will cover the mortgage payments that we agreed to make, with slight positive cashflow (mostly insignificant). But we believe the price we can sell it for as rent to own will be about a $30K gain.
I put $7K down, which covers a finders fee, paint touch up, and carpet cleaning. My partner will manage the property, including marketing the house, collecting rent, handling issues, etc. Once the renter can get a loan, they will buy it at the predetermined price which hopefully will be a $30K gain. I will first get my $7K back, then we’ll split the remaining $23K evenly. If all works out, I will make $11.5K in two years from a $7K investment. That is a 62.5% annualized gain.
My worst case scenario is that we only sell it for a 10K profit. The first $7K is paid to me, and we’d split the remaining 1.5K. That would be a huge disappointment, yet would still be a 10.1% annualized gain.
Overall, this isn’t the best deal in the world. But it’s a great way for me to learn another investment approach as I train for my new career in capitalism.