Lease Purchase help needed


#1

New investor needing education on lease purchase deals. I have found a mobile home dealer here in nevada who has rehabbed a single wide trailer on a private lot that has a buyer for the trailer wanting to purchase the trailer but they can not find a bank that will provide financing on an older single wide trailer. Buyer has fica score of 804 and 20 thousand dollars for down payment.

My idea is to buy the trailer and lot from dealer with cash, then resell trailer to buyer on a lease purchase contract which will let me hold title to the land and trailer for over a year to make this a long term capitol gains project and to do it inside of my LLC to avoid self employment taxs.

If I buy the trailer for $60,000; all cash and then resell for $70,000 with $20,000 down, I will create a note for $50,000 @ 10% interest for 15 years then payments for PI would be $537.30. My yield on this note would be 14.17%;…right???

Questions are …

What am I missing? Are my numbers right? And is this worth doing or is there something else I can do to improve my numbers? Anyone know of any NV lease purchase problems that would make this blow up in my face?


#2

your yield calculation is right; but is 14% good enough to tie up 40K for the 80 months it will take to get your money back?

I buy these for about the same or a little less, but my intent is to rent, with eventual upgrade to a financeable DW, then rent for more and consider pulling out equity to regain my basis.

Or sell, whatever.


#3

Jerry,

I’ve not taken the time to run the numbers so I don’t know if your yield is correct or not…

On the fly your numbers are WAY to skinny for my taste! I compare a deal based on the amount of work, how secure the deal is, how easy the money is to collect, time to recover investment, and what my overall return & yeild will be. (there are a few others but those are the big ones.) Then i compare risk vs. reward, I use OPM alot so gambling is just not an option for me.

On your deal you are looking at:

Almost no work = good

111 months to get all your money back = bad

Little security as 10k in damages is possible and it would be hard to sell for 60k damaged = bad

Buyer is below sub-prime making the money hard to collect = bad

Yield is less than 20% = bad

total return per 1k invested is 611.9 = OK if it was short term (s or investing in MH notes or other paper in smaller chunks. 111 months to recover your money is a LONG time!

Maybe Lonnie and the folks here have me brainwashed but I want as many people sending me checks as I can get while trying to keep as little cash in a deal as I can.

Best wishes,

Ryan Needler


#4

didn’t see the 20k down, Steve’s recovery time is correct.


#5

Unless this deal has merit as a land play (ie. path of development- rapid appreciation in land value) it is a mediocre yield by MH standards. A classic Lonnie deal: buy for X, sell for 2X, yields > 70%, so a $40k investment would produce a cash flow somewhere in the neighborhood of $2000/mo. If you don


#6

I am going to address something other than the others have. You are planning to put this inside your LLC to avoid self employment tax. I want to clarify something regardless of the merits of the particular deal.

Self employment tax has NOTHING to do with an LLC. You can have an LLC and pay self employment tax. That depends on what the function of the LLC actually is. Rental property is rental property no matter if you hold it in an LLC or personally. There is no self employment tax on rentals.

If you were FLIPPING this property then there would be self employment tax, whether held in an LLC or personally. That is considered a “business” rather than the “investment” of the rental property above.

I doubt you are the only person misunderstanding this. Some LLCs are going to flow to your personal taxes on a Schedule “C”. Rental properties flow through on a Schedule “E”. I have one LLC that exists only to loan money to our other companies. The interest it earns from them goes to my taxes on a Schedule “B”, which is interest and ordinary dividends. I do this through an LLC rather than personally so I can have a lien on titles that looks more official. (This has other tax-related benefits for us as well, but that is an individual thing.)

I strive very hard to keep up on income tax issues, even though I choose to have someone else prepare our tax returns. I have found that I sometimes know the issues better than a CPA, and actually made our CPA change something that he had done when our taxes came back to us this year. How did I know? I LOOKED at all our tax returns when they came back to us. I called him when I came across the item I had a problem with and successfully argued the point because I did what I did purposely for tax reasons.

I have a stack of income taxes to mail. I don’t intend to do this until the very end of the extension period. The taxes are paid, but the strategy is to have the auditors max out their audit numbers for the year well before ours hit. Less chance of audit, less money to pay out for it to happen!


#7

Thanks for the advice and yes, the 14% yield is NOT worth tying up 40K for BUT Greg Meade gave me advice over the phone and today I meet with a local guy from American General who tells me that he can loan up to 65% LTV on this trailer so the current plan is for me to buy the trailer for $60K, get a loan (based on an apprasel of $75K of $$48,750 max loan value but if I only have 40K in the deal, I can borrow that 40K @ 8% on 30 years and have a PI of $293,50. Then sell the trailer on a Contract For Sale; leaving title in LLC’s name until loan is paid off; Sales price of $70k with $20K down so note at $50K @8% for 30 years would be a payment to me of $366.88; minus my note of $293.50 leaves a positive cashflow of $73.38 a month with ZERO invested. $73,38 times 360 payments totals $26,416.68 and the yield would be …“good enough”…LOL

$75 bucks a month is not much but if I only invest a couple of days getting this setup and then collect checks for 30 years… might be worth doing.

I am mainly doing this deal just to make sure the procedure works and then apply it to trailers I can buy off Greentree and make a better margin and rate of return but if I can get a dealer flipping houses to me with a buyer in place then that may be a good long term way to create notes with little time or work involved.


#8

but what is on the line for your monthly $75?

I dunno . . . you have a good plan, but still, the numbers just dont seem worth it to me . . .


#9

If you


#10

I agree that the numbers are slim for a “rental” property and yes, I have handled those before and in fact still have one in Texas but this is not a rental and even if the buyer walks away to first day after putting 20K down, how bad can I get hurt? I would then foreclose which takes less time because the title would already be in my company’s name, and in NV it takes 2 months max to foreclose on this type of deal and then I would have a $67K property for a net cost of about $45K. And with a FICA score over 800 I do not think the buyer will walk anytime soon. In fact, I HOPE that the buyer does not pay off the property and allows me to resell it in the future.


#11

What has yet to be addressed here is the fact that you are looking at using your credit. Am I reading this right that you are going to put a mortgage on your credit file for the buyer. If they have a score of over 800 why in the world would you risk your credit to finance them? Run away!

Why would you risk so much on an old mobile when a newer home can be bought at a good discount as a LH from the bank? I think you are working too hard on a very, very bad deal.

Just get a contract with the sales lot for the home and land and ask them to put it in writing that you have 30 or more days to close the deal. I wouldn’t give them more than $10 to secure the deal. If they balk, you walk. They should do this to get rid of a problem house. The you have the 30 or so days to sign a deal with the buyers. Or else you can just assign them the deal for a couple grand and be done with it.

If you want to protect your income from taxes just be sure to invest it back into another unit in the same tax year. Make sure you keep track of your time spent on investing in a log and if it hits 750 hours a year, including meetings, time on the forum. education etc. you can file as a pro investor and deduct losses from profits.

Don’t do it! Don’t do it! Don’t do it!

I hope I have not missed something here but I would have to be way off for this to make a lick of sense. Don’t get deal fever. You are almost there.

If you are going to use your credit to buy someone else a house make sure you really profit from the deal (like double your money) and make sure you get a house you can easily resell if you have to take it back. Just becuase you can finance the deal doesn’t mean it will re-sell easily if needed. Honestly I see this as a career breaking deal not just a losing proposition. You will likely pay for this deal for a long time to come.

Your time, knowledge and credit score are worth far, far more than any profit that may be in this losing deal.

Did I mention don’t do it?