Be Wary of the 2 Percent Rule

Source: https://thinkrealty.com/wary-2-percent-rule/

Anyone who’s been in real estate long has heard of the various percent rules floating about; the 70 percent rule, the 50 percent rule and the dreaded 2 percent rule. These rules are, of course, just rules of thumb to be helpful guides when evaluating properties. But while I believe the 70 percent rule (multiply 0.7 by the after repair value of a property and then subtract the rehab cost to get your strike price) is good and the 50 percent rule (a multifamily property’s operating expenses …

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Are you thinking of investing in property? However, you do not have enough cash to do this. Here is a tip you can use as long as the property seller is willing to negotiate along.

To be fair, not every seller will be interested (or even understand) the concept outlined. Your better guess is to locate a land that the owner has great interest in offering it, whether because they are moving, divorce, or they are frustrated with tenants.

Actually, if you are currently renting and considering using this strategy perhaps the owner would be glad to help you out! There are several variations that may be used depending upon you and your seller. Do they need the market price or are they just desperate to get out of the monthly payments – maybe facing foreclosure?

The easiest way is to consider taking over their mortgage repayments – called ‘assuming’ the mortgage. You will need to be approved by the initial lender to presume the mortgage. If you cannot get approved for an assumable mortgage you could also try a ‘subject to’ assumption where you merely make repayments while the property stays in the seller’s name.

You take over the first mortgage and make a second mortgage on the remaining cost of the house with the seller. Offer a high, interest-only payment for a short time period – 2 or 3 years. Rather than having the money sit in a bank they can be collecting a high interest over two or three years with the remainder due in full at the end of the investment term.

When the term draws to a close you should be able to refinance the cost, or you could sell. Unless you strike a real bad market the value of the home should have risen by then.

A lot of mortgage lenders merely need to make a great investment. While your local bank could still be scared there are lots of financial lenders that would wish to make a deal. Financiers like property investing. The mortgage is mostly around 60-70% of the value of the land, so as long as they know they get their money back in the value of the property if you default, they don’t care what kind of money you make. Conclude the deal with a 2nd mortgage done with the seller. If you default they could eventually foreclose on the property and sell it, settling the existing mortgage with the proceeds.

Now you can see the complete picture. It is better that seller and buyer can work hand in hand. If they can’t wait for a sale, you could still give them their initial price with a little overall flexibility on their part.

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