HOW TO M AK E I T WHEN YOU’ RE CASH

POOR
St r a t eg i es Fo r Bu y i n g Rea l Est a t e Wi t h Li t t l e Or N o Ca sh
HOLLI S N ORTON
Main Theme
Anyone can still make big money in real estate with little or no cash down. The key is to create win/win situations for motivated sellers
- they win by getting a problem taken off their hands and you win financially by being creative enough to see a solution to their
problems.
There are far more opportunities out there to create this type of deal than anyone outside the real estate industry could ever have
imagined. Real estate investment remains the safest, most secure and profitable way to go about building a fortune.

1. What Are You Waiting For? 11. Structuring Your Offer To Stay Out Of Trouble
Anyone who wants to can be financially independent within five years Make offers in writing to purchase real estate on terms that suit you.
through real estate investment. You can’t tell unless you ask.

2. How To Eat A Cow 12. Trapped By A Balloon?

Start investing in real estate at a level you feel comfortable with, not Avoid short-term balloon payments. Plan ahead wisely so you don’t
multi-million dollar deals. get caught out.

3. What You Need To Know About Real Estate 13. Understanding Rate-Of-Return
Real estate is still the only safe investment vehicle that can turn a How to calculate your actual rate of return on real estate investment.
small amount of money into large amounts.

4. What Kind Of Real Estate For You? 14. How To Retire Early
Raw land, single family homes, flats or apartments, shopping centers Generate $50,000 per year through the smart use of lease-options on
or commercial buildings. suitable real estate.

5. Finding Your Investment 15. Instant Money Makers

You are actually looking for the right kind of seller, not the right kind How to convert any spare cash you have into wealth through using
of property. real estate investment opportunities.

6. How To Talk With Sellers 16. How To Get A Discount From Sellers
Structure all discussions with sellers as problem solving sessions to Negotiate all the usual costs born by the seller out of the asking price
create a win/win situation. for their real estate.

7. How Much Is A Property Worth? 17. Investors Shouldn’t Manage Their Property
There are no simple formulas. A property is worth whatever someone Tips on how to avoid being tied up in the management of your real
is willing to pay for it. estate investments.

8. 21 Ways To Buy If You’re Cash Poor 18. The Tax Man Cometh. So What?
A check list of ways to structure a little or no cash down purchase Keep your money working for you in real estate assets rather than
arrangement. taking large profits.

9. Working With Lenders 19. What To Do About Rent Control

How to talk with banks or other lenders to finance a nothing down By anticipating, you can create a situation where rent controls will
purchase. have no effect on rental income.

10. No Credit? What To Do 20. How To Get That Winning Feeling

When you borrow from the seller, there is no need to worry about a Keeping yourself motivated and moving ahead in the real estate
negative credit history at all. investment field.
 How To Make It When You’re Cash Poor - Page 2 -
1. What Are You Waiting For?
Main Idea
Anyone who wants to can be financially independent within five
years or less through investing in real estate.
Supporting Ideas
This is not a lazy man’s way to wealth. It takes study, work and
the application of spare time that might otherwise be frittered
away or spent on leisure activities. However, there is no magic or
mystery about the technique. It simply involves borrowing money
to purchase real estate that will be worth even more money later
on. And servicing the debt in the meantime.
To build wealth, you have to do things differently to how the herd
operates. It requires you to follow new paths and new directions
rather than plodding mindlessly onwards because that is what
everyone else around you is doing. It requires clear thinking and
the ability to make decisions coupled with resourcefulness and
creativity. But the rewards are worth it.
Once you understand how wealth is created, you never lose your
ability to create it. Safety is not in material things. It is a state of
mind, and the knowledge to know how to achieve things no matter
what conditions are around you. And the ability to apply your
knowledge effectively.
Your biggest enemy in creating wealth through real estate is
inertia. Whether or not you get out of a rut depends on how badly
you want it. If your desire for happiness and financial freedom is
strong, you’ll stop making excuses and get to work.
A real estate investment program can be run in your spare time if
you like - about five to ten hours every week. Remember, nobody
else cares about you financially. The only way to make sure your
income will continue into old age when you can no longer work is
to take matters into your own hands and build wealth.
Here are your first steps in real estate investment;
1. Buy a simple, cheap diary and start writing down;
-- Your financial goals.
-- How much time each day you are spending on your wealth
building program.
-- How many actual written offers to purchase real estate you
have made each week.
2. Quit watching television completely. Promise you can start
watching TV again when your net worth reaches a
predetermined level.
3. Plan a reward for yourself. Pick something you have always
wanted to do and decide for what achievement you can
reward yourself that way. Then go to work.
4. Don’t buy anything that depreciates in value. Rent or lease
things for the period you need them rather than buying them.
Save all your cash for investment in assets that will appreciate
in value.
2. How To Eat A Cow
Main Idea
Start real estate investing at a level you find comfortable and go
from there.
Supporting Ideas
If someone gave you a cow and told you to eat it, you’d think they
were crazy. However, if they gave you a couple of steaks at a
time, over a period of time you’d happily eat an entire cow.
Approach real estate investment with a similar frame of
reference. Don’t try and take on complex deals right from the start
(eating an entire cow). Instead, start with investing in houses and
build up from there. In reality, you can do extremely well sticking
to purchasing houses alone, and may never desire to go into
investment in other types of real estate. You will be surprised how
easy it is and how little capital can actually be required to
commence real estate investment.
The good thing about real estate is there is no such thing as
standard practice. Many people looking at real estate simply
assume you have to have at least 25% deposit and make regular
payments to purchase a house or other piece of real estate. In
reality, there are no guidelines whatsoever. Whatever a buyer
and a seller agree to as the terms of purchase are completely
suitable and legally correct.
Never be afraid to make an offer on a property simply because it
may be turned down. Also don’t accept the advice of others who
tell you the type of deal you are looking to structure is impossible.
This includes brokers who are, after all, simply looking for the
easiest way for them to get a commission out of organizing a sale.
You need to build a team around you of key people who can
assist your wealth building efforts. This will include an accountant
who understands what you are trying to do, a lawyer with
experience in contract matters as they apply to real estate,
bankers who have come to know and trust you, property
appraisers or valuers you are comfortable working with and
others as required.
3. What You Need To Know
About Real-Estate Investing
Main Idea
Real estate is still the only vehicle that can take a few hundred or
a few thousand dollars of your money and turn it into half a million
in as little as five years, with a high degree of safety. Other
enterprises may do this - sometimes - but they aren’t safe. Real
estate stays useful and valuable regardless of the economic
cycle.
Supporting Ideas
There are numerous real estate investment areas, but the most
accessible way is to buy good income property and hold it, letting
the rental income make you independent.
The key to making money in real estate is borrowing. This is
called leverage. The more you can borrow on a property, the
bigger the return you earn on your money invested when the
property appreciates in value. Borrowing for real estate is easy as
the lender’s money is secured by visible assets that can’t be
moved or hidden.
Every dollar of debt you are carrying today is a dollar of net worth
increase in eight to ten years. As the rental income pays off your
debts, it is also increasing your own net worth. If you can buy a
property for little or nothing down, you are creating a situation
where the maximum possible gain can come on the appreciation
of your property. The actual percentage yield on your investment
is directly proportional to the amount of your own capital tied up
in the property in the first place. If you have no capital invested,
the rate of return is accelerated.
You won’t be able to negotiate a nothing or little down purchase
with a seller who needs capital for buying their next house.
However, if you keep looking, you will find people who are in a
situation where they have to move on to something else who will
be willing to let you purchase their property on your own terms -
little or nothing down.
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Real estate investment debt is constructive debt as you are
investing in an asset that will appreciate in value over a period of
time. This is quite distinctive from destructive debt which involves
borrowing money to purchase something that will depreciate in
value over time.
Key Thoughts
‘‘Ninety per cent of all millionaires became so through owning real
estate. More money has been made in real estate than in all
industries combined.’’
---- Andrew Carnegie
‘‘Buying real estate is not only the best way, the quickest way and
the safest way, but the only way to become wealthy.’’
---- Marshall Field
4. What Kind Of Real Estate For You?
Main Idea
There are five types of real estate investment - raw land, single
family homes, flats or apartments, shopping centers or
commercial buildings.
Supporting Ideas
Real estate investment can be in;
1. Land Always looks alluring, especially when people assure
you they aren’t making any more land. It always looks like you
can make big money developing it.
The obvious problem is that raw land will not generate any
cash flows for paying off a mortgage. Land also requires other
outgoings like rates and other services. And land does not
appreciate value uniformly across the country. If you have a
hot tip on a new development, you might be able to get in on
something spectacular but the odds are long. You will also
become a prime candidate for a swindler if you are after that
type of land investment.
Pick up raw land only if you are positive you are getting a
bargain. Do your homework. Buy only land that you have
definite plans for, that you can build on, subdivide or add value
in some other tangible way.
2. Single Family Homes (SFHs) The easiest form of real estate
investment known to man. Almost everyone you meet has a
feel for house prices. There are also no rent controls
applicable. It’s relatively easy and straightforward to get
mortgage finance for them. They are constantly in demand by
potential renters. And they are widespread.
You can develop a very substantial property portfolio through
single family homes alone. You can set a goal to buy one or
two a year at the start, and build up to purchasing one per
week.
A key feature of SFHs is that generally speaking mortgages
are widely available to a higher percentage of the value than
for commercial or industrial buildings. This makes them ideal
for nothing down type purchase agreements. Their
drawbacks are that you either have 100% occupancy or 100%
vacancy rates, and people have to be able to afford to rent a
house as opposed to renting an apartment.
3. Flats or Apartments
4. Shopping Centers
5. Commercial Buildings Commercial property investment is
really geared to big investors. While the potential returns are
impressive, the risks are also proportionately larger. These
types of property investment are very much directly related
with the health of the economy as a whole. There are also
numerous rent controls and other management matters that
make this type of investment not as attractive as SFHs.
5. Finding Your Investment
Main Idea
The important concept is that you are actually looking for the right
kind of seller, not the right kind of property. You are looking for a
motivated seller whose need to sell is more pressing than his
need for cash.
Supporting Ideas
Most people know the safest and surest way to make money is
by investing in real estate. Yet, most people also won’t try it for
themselves because they have fear caused by a lack of
knowledge.
Almost all flexible sellers are people in transition. A change is
occurring in their lives requiring a relocation or other change. This
could be caused by divorce, job transfer, loss of job, retirement,
family grown and moved away, death in family, etc.
The trick is to create a win/win situation where these people get
their property sorted out and you get the chance to make some
money by providing a service. The seller names the price, you
name the terms. This ensures that you are never in a situation
where you can be accused of having taken advantage of the other
person.
Keep a close eye on the local newspaper. You will come across
a multitude of flexible sellers who drop hints in their
advertisements that they are willing to be quite flexible on sale
terms. These hints come in an assortment of shapes and sizes,
and include "Owner financing", "Low Deposit", "Flexible
financing", "Owner will participate in financing", etc. You should
also seek further information about all advertisements with "Must
sell", "Make an offer", "Reduced for quick sale", "Owner going
overseas", "Fast sale wanted", etc.
If you invest five to ten hours per week studying the local
newspaper real estate section, you will uncover a number of
possible opportunities within a fifty mile radius of where you live.
You can also stop at all homes that have "For sale by owner"
signs outside them. Call in and have a chat with the owner and
establish whether or not they are motivated sellers. If nothing
else, you’ll meet a lot of interesting people.
Have a business card made up. Put on it, "Real Estate Investor.
I buy homes, apartments, commercial properties." Make it a good
looking business card that you are proud to leave with people.
Hand the card to everyone you come into contact with. Just one
successful sale will pay for a lot of business cards.
The other alternative is to run an advertisement for yourself in the
classified section of the newspaper. Say something like,
"Properties Wanted. Will pay full price for your property if you will
sell on flexible terms (little or nothing down). Call (your name) at
(your phone number)." Will this turn up properties? Maybe it
won’t, but if it does you are already well on the way to negotiating
a purchase.
6. How To Talk With Sellers
Main Idea
Structure all discussions with potential sellers as a problem
solving session in which you are looking to create a win/win
situation with them.
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Supporting Ideas
You’re now ready to start steering the seller towards selling you
their property on flexible terms. Here are the key principles to
keep in mind;
1. Be confident. When all is said and done, they will either accept
your offer or refuse it. One answer is great, the other is no
major setback. Keep in mind that you are a problem solver for
these people. You can be enthusiastic.
2. Make sure you are talking to the person who is able to make
the decision, and that they are in fact motivated, flexible
sellers. Never make an offer on your first contact by phone -
that has to be done in person to be most effective.
3. Listen more than you talk. Pay close attention to all that the
seller tells you about the property. Take notes on details.
4. Ask the key question - "Why are you selling the property?"
This will tell you which approach to follow with them. It will also
tell you if they need cash to move into their next home.
5. Finish the conversation with an appointment to visit if they
sound like flexible sellers. Ask, "If we can agree on terms,
would a ten day closing be too soon for you?" That will give
them something to think about before you call around.
6. When you see them in person, make sure your grooming is
immaculate, suited to the negotiation.
7. Treat them like you are a problem solver. If you feel
comfortable, say, "You name the price and I’ll name the terms.
You’re going to get what you want. Let me show you how."
8. Ask questions often to make sure they understand the
terminology you are using and to help them feel like they are
doing the buying, not you are doing the selling.
9. When you have a rough general agreement, ask, "If I can
satisfy you on this, do we have a deal?" Then simply fill in the
blanks on an agreement form and ask them to okay the
paperwork.
7. How Much Is This Property Worth?
Main Idea
There is no simple way to calculate market value. You can only
make an educated guess with an informed background of
experience.
Supporting Ideas
Probably the only reliable way is to sit down with brokers and look
through their sold records for the prices houses have sold for
lately in the neighborhoods you are interested in. Don’t worry if a
broker is reluctant to give you this information - just go out and
look for another broker. Not too many brokers will throw out a
potential purchaser.
Another way to get a feel for the actual expenses of a building are
to ask to see the tax records submitted for that building. Some
sellers won’t show it to you, but if they are truly motivated they will.
This is usually pretty accurate as far as the expenses are
concerned as they want to get the most deductions possible.
Other than that, there is the government valuation and any private
valuations or appraisals that have been done.
8. Twenty-two Ways To Buy If You’re Cash Poor
Main Idea
Every property seller is looking for a big down payment. If you can
find a seller who is motivated to sell (i.e. doesn’t acutely need an
immediate cash payment), here’s your check list to mentally work
through;
1. The lease option. Lease a house with an option to purchase
at a future time, with part of your monthly payments to count
towards the down payment.
2. Installment down payment. Offer to make the down payment
in installments you can handle.
3. Family and friend loans. Make an attractive offer to someone
you know with money.
4. 100 percent financing. Take over the existing mortgage and
get the seller to carry an additional mortgage for their equity.
5. Private loan. Advertise in the local paper for your down
payment. You can even offer 10% of the profits at some stage
down the road.
6. Anything for a down payment. To some sellers, a boat, car,
motorcycle are fine for a down payment.
7. Blanket mortgage. You offer the title to something else to be
added for collateral for the 2nd mortgage.
8. Raise the price, better the terms. Offer more than he is asking
for on the property if he’ll accept little or nothing down.
9. Existing paper for a down payment. If you’ve sold a property
and hold a mortgage on it, offer that as a part down payment.
10. Current equity as down payment. Offer your equity in another
property as down payment for a second property.
11. Buy foreclosed properties. You’d be surprised at the favorable
terms they are willing to resell on.
12. Borrow on your life insurance or other savings.
13. Take partners. Find busy people with high incomes and make
them partners in the deal for the down payment.
14. Borrow from credit unions.
15. Paper the broker. Find a broker willing to take a note for a
future commission and eliminate closing costs.
16. Use tenants money as a down payment. Get the first month’s
rent out of all tenants, as well as any deposits, etc. Use for the
down payment.
17. Create paper. Write a promissory note or mortgage anything
of value. The terms are negotiable.
18. Offer other land as a down payment on a property.
19. Buy with credit cards. If you have enough, you might be able
to get enough money for a small deposit.
20. Buy government owned houses. These are often sold through
rental or housing agencies for extremely attractive prices and
terms.
21. Offer the seller a bonus for paying closing costs. Add more to
the mortgage to make it worthwhile for them to pay the closing
costs.
22. Split funding. Something like half of the deposit now and half
in a year’s time. If necessary, you can then find a partner and
sell him half of the property to meet that payment timetable.
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9. Working With Lenders
- Or, Where’s Your Down Payment?
Main Idea
Prepare ahead of time for meeting with lenders to get finance for
purchasing a house for little down.
Supporting Ideas
It pays to shop around when you need a loan. It is amazing how
few borrowers actually do this.
Keep an ear to the ground. When a bank is new and/or small, they
are often looking for customers The only way they will grow is by
making loans. Open an account long before funds are needed so
the bank gets to know you. Ask the bank’s officers for advice,
even on relatively minor points. That way they get to know you.
The best time to borrow is when banks are expanding their
business. The worst times to borrow are when there’s a
recession, there’s trouble in the bank with bad publicity, interest
rates are high or the bank is low on funds.
However, despite anything else, when you are buying real estate
with little or nothing down, you are always going to get a frosty
reception. Bankers hate it if you don’t have much equity. They use
two killer questions;
A. "Is there any secondary financing on this property?
B. "What is the source of your down payment?"
Here are four solutions;
1. Have the seller take your unsecured personal note.
Works best with people you know but always try this with
every seller first. The answers to the questions are then;
A. No
B. Notes and/or other valuable considerations to be delivered
at the time of closing.
2. Transfer the mortgage. That is, use a second property as
collateral for the mortgage. Your answers;
A. No
B. Equity and/or mortgages on other property delivered at the
time of closing.
3. Buy on a contract i.e. contract for deed or contract of sale. In
this case, the bankers questions do not apply at all. You are
going to pay cash at the time of settlement, by financing the
full purchase price which must be only 80% of the valuation.
4. Have the seller refinance. They take out the new finance
arrangement with the bank and you enter into an agreement
to both take over the payments and pay them the percentage
the bank has not financed. Once again, under this method, the
bank’s two questions do not apply.
To get a high appraisal, call the bank and ask who they use as a
valuer. Hire one of these valuers to do your valuation. Instruct him
that you want the highest appraisal he can give and still sleep at
nights. Then, when the bank tells you they will have to have their
own appraisal done, casually ask them who they use. You can
then tell them that you use the same valuer and he has just
completed a valuation for you.
Be prepared. Before going to apply for bank loans, compile a
complete up-to-date financial statement. Include a separate
sheet with all current real estate loans including addresses and
phone numbers of all lenders.
Key phrases to use with banks are;
-- "The nice thing about this loan is the ease with which
we can repay it."
-- "This is a good loan. I wanted to bring it to you first."
Avoid like the plague the phrase "I need...". Instead say "I can
use.." or "That amount would handle it..."
To turn a no into a yes, ask "Will you make this loan if I make a
$10,000 term deposit?" He will agree to that, and you then
advertise for a lender to deposit $10,000 at an interest rate 2%
higher than the bank will pay. You then pay the additional 2% to
the investor yourself.
Key Thoughts
‘‘Banks are where the money is.’’
---- Willie Sutton, famed bank robber
‘‘A bank is a place where they lend you an umbrella in fair weather
and ask for it back again when it begins to rain.’’
---- Robert Frost
10. No Credit? What To Do
Main Idea
Motivated sellers create opportunities for everyone to buy real
estate, regardless of their credit history, background or past
successes and failures. The idea, then, is to borrow from the
sellers, not from banks.
Supporting Ideas
Good credit will prove to be a long term benefit however. Buying
without credit is not always the ideal way to buy anything, but it is
realistically achievable.
If you have bad or absolutely no credit, here is how to establish a
good credit rating.
1. Pick your bank. Talk with other property owners about which
banks in town are geared towards property investment. Select
the best three.
2. Set up a savings account at each of these banks. Put a
thousand dollars (or as much as you can afford) into each.
3. Go to each bank, tell them you want a thousand dollar loan
and that you will pledge your savings account as collateral.
Make sure each loan agreement is for six months or longer.
4. After a week, make an installment payment on each loan.
5. After a second week, make another installment payment.
6. Pay off the loans to each bank taking care to stay at least one
month ahead at all times.
Now you can use these three banks for your credit reference
whenever you apply for finance. Everyone always asks for three
references so you have got everything covered.
You can use anything else as collateral for these loans. Perhaps
the ownership papers of your car, stocks, bonds or anything else.
Also get as many credit cards as possible so you have easy
access to a few thousand dollars when you need it. Make it a habit
to ask for an increase in your credit limit every year.
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11. Structuring Your Offer To Stay Out Of Trouble
Main Idea
Don’t be afraid to make offers to purchase real estate in writing.
There are only two answers to any offer, and one of them is great.
The only path to the yeses is through the no’s, so don’t take those
no’s personally. Nobody ever got shot for writing bad deals.
Supporting Ideas
Debt means that you multiply the return on the money you invest
in a property. The key is to make sure you structure a purchase
agreement in such a way that you avoid negative cash flow -
where the rent is insufficient to meet all mortgage payments. Most
often, this is not a price related problem but a knowledge problem.
There is no such thing as a standard interest rate when buying
property. Don’t assume that a low rate will automatically be turned
down. Start out with a low offer and give the seller the chance to
say yes. This may sound unusual to a real estate agent, but the
fact is they aren’t trained in financing, only in selling. You need to
know more than they do.
In fact, you should always try to make an offer in writing on your
first visit to a seller. You cover yourself by inserting clauses like;
-- "...subject to inspection and approval by the buyer."
-- "...contingent on buyer’s approval of an appraisal."
-- "...if approved by the buyer’s attorney."
-- "..subject to buyer’s inspection & approval of records."
There are some additions to the "standard" contracts that you
should always try to add in;
1. Liability limiter or exculpatory clause.
"The total liability of this mortgage shall be the building itself,
and shall not extend beyond it."
This protects you in that if you can’t meet the mortgage
payments and you get foreclosed on, your liability is limited to
the property and not the difference between the mortgagee
sale value and the value of the mortgage.
2. Subordination clause.
"The seller’s loan shall be subordinate to the existing first
mortgage and any renewal, extension or replacement
thereof."
This lets you cash out the first mortgage and leave the existing
second in its secondary position instead of automatically
assuming first mortgage status. Allows later flexible
re-financing.
3. Extension clause.
"Seller agrees to extend mortgage for a period not exceeding
18 months if, in the opinion of the buyer, prevailing interest
rates are not low enough to provide a feasible refinance."
This will once again increase your later flexibility.
4. Closing costs clause.
Write in the offer that you expect the seller to pay the closing
costs. If they don’t agree, you can suggest paying half and
dropping the interest rate on the second mortgage by a point.
5. Broker-blocking clause.
"Buyer to accompany broker to present offer."
This way the broker is legally bound to both present your offer
and to have you along in person.
6. Assigns.
Add the phrase "or assigns" after your name as buyer on any
offer. You can then select someone else to take your place as
buyer if the need arises.
12. Trapped By A Balloon? Strategies For Escape
Main Idea
The rule of thumb is that the shortest safe balloon is five years. In
that time, the property should become worth much more than you
owe. You can build financial independence on balloon mortgages
of eight or ten years.
Supporting Ideas
Techniques for rapidly approaching balloons;
1. The first line of defense for a balloon coming due is to have
inserted a clause into the original contract of sale. This should
say: "Seller agrees to extend mortgage for a period not to
exceed 18 months if, in the opinion of the buyer, prevailing
interest rates are not low enough to provide a feasible
refinance."
Even if you don’t have this clause, your first action should be
to ask for an extension. See the seller long before he starts
wondering whether you are in trouble. Offer him something he
will like - for example, point out that the payment of this
balloon will create a tax liability and offer to spread the
payment out over a period of time to help ease that liability. Or
offer a higher interest rate in return for an extension. Or
slightly higher payments and a fee for renewal.
2. Help him to buy more property. Many months before your note
is due, contact the seller and ask if he would like to buy a piece
of real estate with your note. Explain that the sellers will
accept his note as down payment for their property. If he’s
interested, go out and locate a property that will fit the bill.
3. You can ask the seller to subordinate his note to a new first
mortgage on the property. With the new first mortgage, you
pay the note holder a negotiable portion of the note, and offer
a higher interest rate on the remainder he is carrying.
4. Raise the amount of the second mortgage. For example, add
$5,000 to the amount due on which interest is being charged,
at the same interest rate for several years more.
5. Find a private lender. Advertise in the local paper for a new
mortgage. People who have money to lend can quite often
read. Alternatively, you might be able to arrange a new
second mortgage from the professional money lenders.
6. Don’t be limited by the ideas here. Get into the habit of
thinking creatively and come up with new and different
solutions. The more practice, the more inventive you’ll get.
13. Understanding Rate Of Return
Main Idea
To calculate your rate of return, determine;
-- Cash flow - your net cash from the rent income after paying
expenses and debt servicing.
-- Tax savings - money you keep instead of paying in tax on
the depreciation write-off.
-- Equity build-up - freehold percentage of the property.
-- Appreciation - the value the property has risen since
purchase.
Rate of Return is the sum of these factors divided by the amount
of capital actually invested.
Supporting Ideas
Even in a situation where you don’t seem to have an appreciable
positive cash flow, a positive rate of return can still be generated
by other factors.
 How To Make It When You’re Cash Poor - Page 7 -
Remember,
1. Cash flows which may be zero now increase as rent raises.
2. Equity build-up increases with time, as the effects compound.
3. The smaller your down payment, the bigger the returns on
invested dollars.
14. A Fairly Simple Way To Retire Early
And Put Kids Through College
Main Idea
You can generate an annual income of more than $50,000 per
year through the use of lease-options.
Supporting Ideas
A lease with an option to buy is great for everyone. The owner
likes it because the tenants are motivated to look after their future
home. The renters can move into a better home than they would
otherwise have been able to afford, and they have tied up the
property while their incomes are rising. The only people who hate
them are real-estate agents who don’t get their commission until
later when the purchase proceeds.
To generate a $50,000 per year income;
1. Find a $250,000 house owned by a motivated seller.
The house should be old enough so that the property has
doubled in value since it was originally mortgaged.
2. Offer the owner a lease with an option to buy, and get them to
accept it. The lease payments should be roughly equal to their
mortgage payments, and deductible from the final purchase
price of the house.
3. Put the house up for sale on an interest only down payment.
You offer a contract for the sale of the house at the time your
option expires for $5,000 more than the price you have an
option to buy for. Then offer the house for sale at $5,000
down, and interest only until settlement at the agreed time.
The interest only payments will more than pay for your lease,
giving you cash in hand every month as well as a $5,000
signing on bonus. As long as you have a signed option to buy
at that time, you can legally enter into a contract to sell the
house.
The key is to find the motivated sellers who will enter into this type
of arrangement. Try looking through the papers for people who
have been trying to rent their homes for a while and ask, "I’m
looking for a home I can rent now and buy later. How would you
feel about that?" or "I’ll give you a three year lease if you would
consider giving me an option to buy."
Some lease-option guidelines;
1. Don’t rely on verbal agreements or loosely worded
arrangements. Get everything spelled out in paper right at the
start.
2. Always put a "right to sublet" clause in the lease-purchase
contract without the consent of the owner. There is no such
thing as a routine agreement or a standard form.
3. Have the seller sign a deed to the property and put it into a
neutral depository place (an escrow) with a clause stating it is
to be delivered to you if you exercise your option.
4. Get the lease-option notarized and properly recorded with the
appropriate government office. This protects all the parties.
5. Make all payments into a neutral depository such as a bank
or escrow company, and have them make the payments to
the owner.
6. Whoever is buying from you must sign a quit-claim deed and
put it into escrow to be delivered to you if he is more than 30
days late with a payment. If he performs as agreed, the deed
is returned to him at the time he gets title.
7. Put a heavy prepayment penalty into the purchase agreement
to discourage early settlement. Don’t allow the words "or
more" to be inserted with the payment amount, as this gives
him an automatic right to prepay the note at any time.
8. Get title insurance against hidden liens or mortgages.
15. Instant Money Makers
Main Idea
Use any spare cash to build wealth by;
1. Buying real-estate mortgages for a discount. When you have
say $50,000 worth of paper for which you paid $25,000, find
someone who will take the paper for their house. You now
have a freehold house you can refinance and keep going on.
2. Buy with no interest. Look for someone who will take a large
down payment and charge you no interest while you pay off
the rest of the property, say over five years or so. You can
then rent this house or refinance it.
3. Save interest by getting a shorter mortgage. In other words,
pay off a 30 year mortgage in 15 years. On a $100,000 home,
that will mean an interest saving of $170,478. The higher the
price of the home, the more you save.
4. If you put your house in the name of a Trust, you can
circumvent the due-on-sale clause of a standard mortgage.
This means that the buyer can keep the old loan, just
changing the name of the beneficiary of the trust to the new
owner. The trustee remains the same, and thus the mortgage
is valid.
Here are some things you can do with any mortgages you are
holding in order to make sales on your own properties;
1. Sell the notes at a discount for cash. Not always too smart, as
the typical discount is 50% or so.
2. Sell the payments. Instead of giving a discount on the
mortgage capital amount, you are discounting the actual
amount of cash that will be paid over the life of the note, and
thus giving a discount on a much larger amount.
3. Sell part interest in the mortgage. Why not sell just a third,
quarter or a half of the mortgage. That way you can give a
much smaller discount.
4. Pledge the mortgage as collateral when you go to a bank to
raise money.
5. Offer a mortgage on the mortgage. In lieu of a down payment
for a property, offer a mortgage on your mortgage. In other
words, the original mortgage is the security for a new
mortgage. Why not?
Whenever you make an offer on a property, remember to insert
the clause, "Buyer reserves the right to show the house to
prospective tenants before closing." That way, you can line up a
tenant before the final closing.
Whenever you make an offer with a split down payment,
remember to include the total paid as down payment, outside of
the interest clause. Instead of a "$10,000 down payment and
$10,000 18 months later", structure it as "$20,000 down payment,
$10,000 paid at closing and $10,000 paid 18 months later." That
way, you have $10,000 interest free for 18 months.
 How To Make It When You’re Cash Poor - Page 8 -
Always keep an eye out for buildings that are charging below
market rentals. If you enter into an agreement to buy one of these,
you can raise the rents by 10% and resell the building at a new
value based on the higher rentals almost immediately. That is a
handy way to make a good profit.
16. How To Get A Large Discount From A Seller
Main Idea
Approach the discouraged sellers - who have had their property
on the market for a while without success - and offer to buy their
property for what they would have actually received net if they had
sold through an agent or broker.
In other words, start with their asking price, and then take off;
-- Margin - most homes sell for 5% to 7% less than the asking
price.
-- Broker’s commission - usually 6%
-- Closing costs - usually about $1,000 - $2,000
Show them you are prepared to pay the net amount they would
have received.
The harder you work at it, and the more ideas you can come up
with, the more useful and successful this technique will be.
17. Investors Shouldn’t Manage Their Property
Main Idea
Your time can be much more profitably spent building wealth than
minding pennies managing a property. If you want to settle for $10
an hour, swing a paint brush and collect the rents. If you want to
make $300 an hour, write offers.
Hire a part-time manager, either an individual looking for
additional work that you like the look of or a property management
company. Talk with other owners and find out who the best
company in town is.
Negotiate with the property managers on their fees. Implant in
their minds the fact that you will be a major investor in the future
with a number of properties for them to manage. Try to arrange a
reducing scale of fees that lowers their rate as you add more
properties for them to manage. It costs you nothing to ask.
If you just feel that you can’t afford a manager, use these
guidelines;
1. Look at a family’s total income when they apply to rent your
house. If the rent is more than 30% of their income, you are
going to have problems collecting the rent.
2. Run a credit check on all potential renters.
3. Check with landlords they have previously rented from. You’ll
get brutally honest information.
4. Try and stop by unannounced at their present residence. Find
something on the form you wanted to ask about, but really you
are getting an idea of how they will treat your property.
5. Never rent to someone you dislike the first time you meet
them. Your other tenants will feel the same way.
6. If you get bad tenants, offer to buy them out. Offer them a
months rent if they vacate the building within three days.
7. Smile whenever you are talking on the telephone.
8. Raise your rents a little above what you need, and offer a
discount for prompt payment.
9. Offer rewards to your present tenants who bring in new
tenants.
10. Look out for special interest groups in the community you can
cater for and specifically target.
11. Don’t strive for a full building - that only means your rents are
too low. Instead, keep raising rents until you have about an
85% occupancy level.
12. Never live in a building you are managing. It will drive you
absolutely crazy how petty renters can be sometimes. And
you’ll find it hard to charge the market rate for rent.
13. Motivate your part-time manager with a financial arrangement
that will put more money in his pocket when he increases the
building’s income.
18. The Tax Man Cometh! So What?
Main Idea
While you are building wealth (and after you are wealthy) the
problem is to stay that way. The first temptation you have to deal
with is the urge to sell your properties and pocket a nice capital
gain. The problem with this is that you are converting your assets
from an appreciating asset back into a depreciating asset. And
the tax man will have a field day.
So, instead of selling, how about swapping? If you trade up, you’ll
get a property that is worth as much as the increased value of
your original property. Or how about re financing your property
periodically. The increased mortgage will be paid by the rent
anyway, so you are in effect borrowing money that your renter will
pay back for you over the years. And best of all, this will be tax
free, as re financing is not a taxable event. Imagine if you are
doing this on ten different properties every 7-8 years?
And while talking about tax, don’t forget that all your expenses are
deductible from income on the property. This covers everything
from seminars and subscriptions to out-of-pocket expenses not
covered by insurance. Keep every scrap of paper that may help
you to prove your expenses in relation to any particular property.
Keep these records for as long as you own the building, as you
never know when they will be required. Institute safety and
back-up procedures to secure copies of important records for
future reference.
Also, don’t wait until the end of your financial year to work out your
tax liability. If you work it out at the start of the last month of the
year instead, you then have time to prepay expenses or do
anything else that will be advantageous from a tax perspective. If
you wait until the end of the year, it will be too late. Have your tax
returns compiled by a reputable firm who are willing to guarantee
their work. Remember, in a few short years of real-estate
investing, you can be a millionaire plus, and you’ll be a candidate
for estate planning.
19. What To Do About Rent Control
Main Idea
Rent controls mean distortions to the normal market forces of
supply and demand. They are brought about by housing
shortages. In the long run, they invariably lead to further housing
shortages, as the motivation to develop new rental housing is
eroded. The good news is that single family homes are invariably
exempted from rent controls. Only the larger rental properties
tend to get targeted by the well meaning efforts of legislators.
To handle rent controls:
Say the current month-to-month rent for your apartments is $500.
Boost it to $650 on your new rentals but offer a $150-a-month
discount. Tell your tenants they get this discount if they pay their
 How To Make It When You’re Cash Poor - Page 9 -

rent on time with a cheque that doesn’t bounce. When rent

controls are in effect, you can lower this discount to $50 for new
tenants, and the rent is still set at $650 per month.
If you are already holding a building in an area with strict rent
controls, look at ways of selling the building and buying SFHs.
Use the techniques described in Chapter 8 to make the deal
attractive to a prospective purchaser. Sell on very attractive
terms, or look further afield for a purchaser. Or how about
swapping? Offer your equity as down payment on a much larger
property. Or offer to swap with someone whose building is outside
the rent controlled area.

20. How To Get That Winning Feeling

Main Idea
You now need to decide what to do with all this information about
real estate investment. Your choices are simple - between the old
way of life on the job and a new way of carving out your own
dreams.
Maybe you are in a situation where you can’t quit your job at the
moment. How about asking yourself, "My job is a temporary
inconvenience I’m putting up with for another year while I’m
building my financial independence." Now your attention shifts
away from the organizational rat race towards your spare-time
money making. You still do the best possible job, but your
long-term planning changes.
Well, thinking about it won’t improve the finances. The only thing
that will do that is by applying the principles learnt. Here’s what to
do;
1. Set goals. Without a goal, you are just drifting. Writing it down
breathes life into your goals. How about, "Buying two
properties per year for the next five years". Write your goal
somewhere where you will see it every a number of times
every day.
2. Commit time. Try to set aside five to ten hours per week to
work on becoming financially independent. This takes
willpower and sacrifice. It may even require drastic action -
like giving away your TV set.
3. Buy the cheapest five-year diary you can find and start writing
down every day the hours you are spending making money
from real-estate. Every Sunday, add up the total and compare
with previous weeks. Pay your dues to become independent.
4. Get your husband or wife actively involved. This is not just a
benefit but an essential. You’ll actually grow closer by working
together building wealth.
5. Write offers, even when you think they won’t accept them. You
should be writing at least one or two offers every month. Keep
track in your diary.
6. Visualize a mental picture of success. This will help develop
your urge to get out and buy property.
7. Take seminars that are full of down-to-earth information from
people who have been there and done that already.
8. Read books and magazines catering to the real-estate
industry.
9. Join associations where real-estate owners get together.
Meet successful people.
The only one standing between where you are now and where
you want to be is yourself. Treat every problem as an opportunity
to be turned into a fortune.