Building Cash Flow – Safely
By Mr. Land Trust
There are many articles in this blog about “building cash flow” using rental real estate. This is a goal every real estate investor should strive for because if you want to build wealth AND support yourself with your investments, you need POSITIVE cash flow! The interesting thing about building cash flow is that it becomes consistent and typically increases annually. It is similar to compound interest paid on savings accounts or reinvesting stock dividends. Unlike rehabbing, flipping, and contract assignments (which are just “jobs” like any other JOB), cash flow increases over time and allows you to be “free” of the insecurities that most people experience when employed by others. It is truly a wonderful thing!
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The big question regarding how to build consistent, reliable, and safe cash flow relates to risk. I have discovered after 50 years in the rental business that there are two primary ways to create positive cash flow. The first is through rentals held long term. I prefer single-family homes for many reasons but primarily because the management of these properties fits my personality. I typically have only 15-20 % turnover each year which saves me a lot of cash flow from turnover expenses. Low turnovers also allow me to “have a life” and not be saddled with constant management (Many years ago I controlled apartments on a college campus with 100% turnover every year. I quickly learned that I did NOT want to live that kind of lifestyle).If you maintain a long-term goal of keeping your rentals “forever,” you will wake up one day and the loans will be paid off. Your cash flow will increase by 500% or more in one day and you will realize that all your hard work and sacrifice was worth it! In addition, over time, your rents will increase due to inflation (I remember punching numbers into my HP12C calculator in 1985 and telling my wife, “Honey, can you believe that our $400.00 per month rentals will be bringing in $1,000 per month in ten years?” We were both amazed!Regarding the subject of risk, I believe your risk is low with the above scenario (especially if you self-manage your own property). A way your risk can be reduced even further is by distancing your name from your rentals and keeping it off the deeds in the courthouse. Privacy of ownership is the cornerstone of financial security. How do you do these things? I hope I have made that obvious: Use a separate Land Trust for each of your rentals and real estate-related assets.
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The second-best way to increase the cash flow is to “be the bank.” How do you think banks make so much money? They borrow from the Federal Reserve at a much lower rate of interest than what they charge their customers and profit from the spread. I like this model but the way the banks do it is too risky for me. If the borrower defaults, some type of foreclosure is required. Foreclosure is expensive, time-consuming, aggravating, and creates sleepless nights. I like sleeping. How do you “be the bank” and reduce the risk? Use a Land Trust! I like to buy houses and resell the Beneficial Interest in the Land Trust the same day on an installment contract. I buy at the best price I can negotiate, mark the price up to reflect my time, initial investment, and transaction costs, and sell to a user at 7% with a 25-year amortization and a five-year balloon. The number of Americans “out there” that would love to buy a house but need help getting into the market is tremendous. They cannot qualify for a loan now (and maybe never) because of a myriad of disqualifiers. I require at least 20% down and payments to me including principal, interest, and 1/12 the tax bill. They are required to buy their own insurance and make my trust the Additional Insured.
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The benefits to me are 1) Recovering my costs upfront through my markup 2) the security of $20,000 down (people will do everything possible to not lose that much money by defaulting on the contract) 3) 7% interest on my marked-up equity 4) 3.75% arbitrage (read, cash flow profit on the bank’s money) because I get a new first mortgage at 80% of the purchase price at 3.75%. My benefits are many, but you should always ask yourself when doing real estate deals, “where can this go wrong?” The answer is, “if the buyer defaults, you have to foreclose.” Foreclosure is a long legal battle that will cost you legal fees, lost cash flow, sleepless nights, and 6-12 months of making your mortgage payments without income. How can you avoid this risk? USE A LAND TRUST!
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When I close on the purchase in the morning, I take the title directly from the seller into my Land Trust. Then, when I sell the Beneficial Interest on an installment contract later that same day . . . I sell the Beneficial Interest in the trust (which is personal property in a vast majority of states.) This is a private transaction that is not recorded and does not cause a “cloud on my title.” If the buyer defaults, I repossess the Beneficial Interest . . . I do NOT have to foreclose! Repossession takes about 30 days, and I can do it myself. If the buyer does not vacate voluntarily, I evict them under a month-to-month lease situation.The Land Trust will serve you well in many ways. The methods described above are only two of many techniques to make money, create safe cash flow, and keep your name out of the public records using a Land Trust. Learn all you can about Land Trusts . . . they will make you tons of money!I encourage you to learn more by going to my FREE online training at www.landtrustwebinar.com/411 and text the word “reasons” to 206-203-2005 for my free booklet, Reasons to Use a Land Trust. You can also reach me the old-fashioned way by calling me at 217-355-1281. (I actually answer my own phone, unlike most other businesses in America today!)
