Would you like to learn how to turn notes and new purchases into tax free cash? Wouldn’t it be even better if you’d bought the property at a cool discount? What if it was virtually self perpetuating?
Transcript: Hi this is Jeff Brown the “BawldGuy”. We’re going to continue our discussion on notes today talking about one of the ways you might be able to use them in the market to get a leg up on your next purchase. First of all, we’re going to assume that you bought about $200,000 in notes at a discount. Maybe you paid $130,000 or so for them. Like last time, they’re thirty years, amortized, 10 percent interest, and the payments are about $1,755 a month. Now, what you’re going to do is you’re looking for a property in the market you like, and you know for a fact that the sellers are not in a cash market, so they’re pretty much resigned to the fact they’re gonna carry owner financing. So you come to them and you say, “You have a $200,000 property. I’m going to give you a $200,000 note, and it pays 10 percent.” Now, this is especially attractive to people over 50, who are looking for income. Now, let’s go back to what they’re trying to do. They’re trying to sell their place in a market that’s not really getting everybody cash, so now they carry back with 20 percent down. The positive side compared to your offer is they’re getting $40,000 cash down if they get 20 percent. Here’s the down side from their point of view: they’re going to be carrying back 80 percent, and they’re probably going to get no more than 6 percent, even in a 3-1/2 to 4 percent interest rate market. That means their payments are going to be somewhere around $960 a month. That’s barely over half of what you’re offering them, and it’s the same loan to value in both cases. The note you’re offering is 80 percent loan to value – so’s theirs. Now, what’s going to happen is you’ve developed a problem, because you’ve got a deal, but you don’t realize that you just created a taxable event. Here’s why. You’ve got a $200,000 asset, but you only paid $130,000. Now you’re going to scream from the mountaintops to the IRS that somebody just gave you a $200,000 asset for what you paid $130,000 for. So here’s what you do. You go to your seller. You say, “Here’s my problem. Maybe we can both solve problems together by doing this. I will ask you to lower your price from $200,000 to $130,000. I’m still going to give you the entire $200,000 trust deed. You’re just going to be valuing it in the deal at $130,000. That way, I’ve avoided a capital gain.” Now, here’s what’s further going to happen. He’s going to say yes or no. If he says yes, you have a free and clear $200,000 property that you paid $130,000 in cash for. He’s going to get the $200,000 note at 10 percent, and almost twice the payments. Everybody’s happy. They’re walking away from the table, and they’re going to have beers together. Now, what you do the next day is you go to your local lender, and you say, “I want to borrow 70 percent against this.” And he says, “Fine,” and he loans you money at the going rate. In this case, it’s going to be about $140,000. And you’re going to get that, and it’s going to break even, or better, you’re probably going to cash flow very well in that market. And that $140,000 is $10,000 minus costs more than you paid for the note. You have the house. You have the cash. And that refi is not even a taxable event. You didn’t avoid taxes; it wasn’t even a taxable event. Now you can go out and do the same thing again, and you can keep doing it over and over. This is Jeff Brown, the BawldGuy. Thanks for listening today. I’ll catch you next time out.