Finance Guide

I was on a conference call earlier today and wanted to see if my first impressions and thus conclusions were sound. Please advise me on your take. I will attempt to be as open as possible on talking from the other side of the conversations.

I was contacted on a real estate investment opportunity. Maybe some of you have heard of this even though I am not going to mention any names.

For mere $34,900 I can invest into a company where they would find me a home (usually in the mid-west) and rehab it for me. I would then be the owner of the home. The ARV market prices of these homes are in the mid to upper $50,000s. They would then provide up to a year of payments at $400 per month while they find a buyer for my home. I would then carry financing on that home for the end buyer on a 30 year PITI note. There is no balloon payment thus you have strong cash flows. Mortgage payments are based on a 9.9% interest rate and the market RENTS. Thus, the end buyer is paying based upon the market rents. Their down payment is about 2% of the value of the home, normally around $1000.

The Cash-On-Cash Return on these in the first year is approximately 16 to 18%, plus the equity difference of your buying the home and the actual value.

Here is my dilemma. I believe in the speed of money. Thus, when you are investing how quickly do you get your money back. These are all cash deals. At a 18% cash-on-cash this would mean you are cashed out in about 6 years. A little slow for my tastes, but ok.

Another issue is I am in the profession of lease options in Las Vegas, NV. Thus, for an option the tenant/buyer (not the actual end buyer at the time the contract is signed) is putting down at least $2000. I would ask the same on an option in the mid-west even though the price point of the home is lower. This would mean a larger percentage of a down payment. Thus, someone putting down $1000 to buy a home is not as productive as a lease option. And you lose control of the home.

Third issue is these are all done through a separately owned LLC holding the note (and originally the property). If you have to foreclose this is a bit more costly than an eviction — in most cities and municipalities.

In conclusion, I did not see the advantage of doing a program like this unless you are doing this as a small part of your investing portfolio (maybe 20% of your real estate investing) over simply doing a rental or a rent-to-own. I understand the humanitarian and philanthropy benefits, but the math to me doesn’t make sense.

Please give me your input on this. The numbers and returns are higher than most stock or commodity markets and I wouldn’t mind promoting this to certain investors. I just need to know if your initial reaction is similar to mine or am I missing something.

Thanks for your feedback and Happy Investing!