A Residual Income Opportunity in Real Estate
- Author Steve Gillman
- Published December 24, 2010
- Word count 511
The basic idea of a residual income opportunity is to find a business or investment where you can put in the time and effort up front, but continue to receive income for years afterwards. A simple example is a decent website. I have a site that I built years ago, and now work on for only a few minutes once monthly, which produces thousands of dollars per year.
However, the disadvantage of this model is the unpredictability and the special skills required. I also have sites that I worked hard on and produce almost nothing. It also took a while to learn what I needed to know to do business online.
Real estate, on the other hand, is something that most of us already have a basic understanding of. We generally know what properties are worth near where we live. We can often recognize a good value without any need of special training. And what information and knowledge we need is readily available from bookstores, libraries, local investors and real estate agents.
But how do you make real estate into a classic residual income opportunity? After all, being a landlord can be as much a job as an investment, and fixer uppers provide only a one-time profit for a lot of work. How do you get monthly income without the ongoing work and hassles?
There is a way if you have cash. The basic concept is this: Buy cheap for cash, raise the price and sell for easy payments. I first did this with a lot that I purchased for $3,500 and sold two weeks later for $4,750. I bought at a decent price because I had cash and could close in days. I sold high because I made it easy for the buyer. I took a down payment of just $250, and payments of $100 per month with 11% annual interest.
I received the payments for several years until the property was paid off. Notice that this is much better than money in the bank. I received 11%, but on the whole $4,500 - not just my original $3,500. Thus my real rate of return was something over 20% for the time I had the money out.
That was a small deal. Later I did the same with a rental that I owned. Just months after I bought it I sold it for 15% more than I paid, and I received monthly payments with 9% annual interest for years. I also sold our own home in this way, getting a price that was about 20% higher than we would have received for a cash sale. There are always people who need an easy way to buy or just can’t get traditional financing.
For a residual income opportunity like this to be simple and safe, it is probably best to stick with land, whether acreage or small lots. A house can be wrecked before you have to foreclose, reducing its value beyond any payments you have received. Land is safer, and there is usually a higher premium above the cash market value for providing financing, since few traditional lenders loan on land.
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