Pinch Me! I Just Got A Free House.

This Post is taken from More Good News October 2006 Glenn Simon Inc's Free Monthly Newsletter

Do you want the good news or the bad news first?

The bad news is the house you wanted has just been sold, and it sold for $45K above what you wanted to pay. The good news is that you can expect the next piece of property you buy in Alberta to substantially increase in value too.

Let me tell you a little secret…. Come closer, it’s a good one. I just gave my friends a house today. Well, not exactly ‘gave’ it to them, just sort of created it. Have you read those real estate books that tell you can buy a million houses with zero cash down and make a fortune? Of course you have. We all have. You turn the pages, tongue in cheek waiting for the catch or waiting to say ‘Yeah…but, you can’t do that here.’

And sometimes that may be true. But, back to the secret…

My friends (partners as it were) invested (I’m loathe to tell you how little), $32K with us wayyyy back in ’04 to buy a duplex in the North East of Edmonton. After spending $5K for reno costs out of the initial investment, we had a nice, simple, $157K property. Adding fresh tenants, both up and down, we pulled a modest $1100 per month in rent. Our property is carrying itself and just breaking even after all expenses.

Now the fun part…

September, ’06, we asked the bank for an equity take out in the form of a line of credit. The first thing the bank did, was ask the City to assess our property. City assessments are always low. Bank Appraisers tend to be better, but they still appraise buildings at about 20% less of actual value (hey, bankers like to be safe!).

So, what are we worth? $237,000.00 at the City Assessed price. Now, the appreciation alone is $80K.That makes an ROI of 250% If you don’t know real estate, you can stop you rolling your eyes in disbelief now, because this does happen and I haven’t even got to the best part yet…

So, we have a self-sufficient rental duplex worth $237K. Our friendly banker, who is just such a peach, will happily lend us the $65K needed to buy another property.

Are you going to ask me what I bought? Well, I put that $65K into a great, town house that is worth about $235K (and there is even $25K of equity in this property from the long close). Does the whole deal balance? No, it doesn’t. (Ah Ha! You got me!) In fact, it negatively cash flows about $150 per month, until we increase the rent to market value next year. What about the line of credit you ask? Well, we have to pay that too (interest only payments), but we factored in a little extra cash from the original property as rents have increased, to ease the equity loan repayments. What did it cost them to get this new property? Zero. That’s right. Zero down and small payments every month. That looks like $32K bought $472K of quality real estate or gave them a ‘free’ house. Not to mention the $25K instant profit.

Can we do it all the time? No, way! But when we can, we will and that rocks!