How to cash out in a bad market and hold long term rental properties

What is a bad market, well, look around your in one. As of January 2008, we are in a downturn and most likely this downturn will be one of the largest in history. Should this scare you? Probably not. The vast majority of homeowners will be just fine and in 10 years will again be on the road to slow steady wealth from their properties.

Now, if you are the type that loves bad news, mainly because you want to find deals, here is the most common real estate investment tool in today’s bad market. It involves finding distressed, undervalued, broken down properties fixing them up to hold, not to sell. The key is to get the money out up front, not when you sell it.

If you have tried to get a loan lately, you know what I’m talking about when I say it is nearly impossible, even with high credit scores. You need collateral in this market and this is where the real deal comes into plan. For this example I’m going to make the numbers round and simple.

The whole goal of this plan is to get 80% of the value from a home. The different from 80% to what you paid (roughly 60-70%) will be your cash out, and the rest will be paid from the bank. Yes that’s right, in these rough times you will make a living from the bank.

Your adventure begins on the steps of the county court house at a real estate foreclosure auction. You did you research and you have 4 properties that will fit into your plan. You play the game with the other investors and you are able to acquire a property for about 60% of its value. It does need work, but once the home is fixed up your will have a nice little gem on your hands. The house appraises at $200,000, you go it for $120,000. You plan to put $10,000 into fixing it up and then renting it out for a long term investment. Most banks will still lend 80% of the value of the home. In this case you will be able to get a loan for the property at $160,000. Quick math off the top of my head shows that you will cash out at $30,000 (purchase $120K + repair $10K – loan $160K). Your monthly payment on $160K will be $1,015. So, all you really want to do is rent the property out for your mortgage payment. Basically let some else pay off your mortgage.

Do you see how simple this is. The whole plans falls into finding properties that are below market value and holding them for long term. This plan will get you well on your way to a large bank roll padded with investment properties.