The Art of the Income Property Deal

With most tasks we’re confronted with in life, there’s a right way to do it and a wrong way; or at least a better, smarter, more profitable way. Real estate investing is no different. While it’s certainly no crime to buy a piece of property with all cash and wait for it to appreciate – which it probably will at a rate of about 6 percent annually if historical returns continue to hold – why handcuff yourself with such paltry returns? Done that way, you’re barely scratching the surface of the profit potential of property as an asset.

If your standards for return on investment are that low, you might as well go back to Wall Street and take your chances with the modern financial mafia. Jason Hartman would like to submit the following real estate strategy for your consideration. Try it. You might like it, especially if you start seeing 30 percent annual returns like some people have.

Forget Cash
The first point to understand is that, in real estate, cash kills profits. The more of your own cash you put into the deal, the worse it is for you. Why? In a word – inflation. The only way to consistently profit in the face of this currency killer is to hold your value in something not based in traditional money. When currency is weak, something else must be strong. What is it? What’s the opposite of currency? Debt! Not just any debt, mind you, but a long-term, fixed-rate mortgage tied to a piece of income producing property

Your lender will probably make you put some level of cash into the deal as a down payment but less is better. Use as much of the bank’s money as possible and never plan on paying it off. Jason suggests a periodic round of refinancing instead.

Don’t Pay Your Mortgage
No, we’re not suggesting you embark upon a route of non-bill paying that leads to foreclosure. What we are suggesting is that, instead of raw land, buy a lot with a single-family residential house on it and rent it out. With a properly structured deal, the monthly income you receive from your tenant should cover your mortgage, maintenance expenses, and leave a positive cash flow as profit. Keep it rented for the life of the mortgage and you have just accomplished an amazing trifecta:

1. You own an asset free and clear
2. Someone else (the bank) loaned you the money to buy it
3. Someone else (tenant) made the monthly mortgage payment

If you’re still trying to make the connection to the 80 percent discount, here it is. Most lenders require a 20 percent down payment to purchase an income property. Keep it rented and pay the mortgage with tenant income and you’ll never put another penny of your own money into the asset.

You’re welcome. (Top image: Flickr | Gage Skidmore)

The American Monetary Association Team

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