3 Solid Strategies for Debt-Free Investing

October 20, 2014 | By | Reply More

2014-10-20-260As we all know, real estate investing is a highly-profitable endeavor. That’s why we’re in this business, right? But there’s also risk involved…

Debt can be a risky proposition

A lot of times that risk comes because of the debt that might be involved in the investments – whether you’re a long-term buy-and-hold investor, or whether you’re a short-term flipper – frequently there’s still a component of debt involved. This could be from a hard money lender, a private money lender, or a long-term mortgage.

Debt can come in many different forms. It can certainly be a risky proposition if not handled wisely.

More and more investors are exploring the possibility of investing in real estate debt-free. The problem is many believe that in order to invest debt-free , you have to slowly, over time, save up a big bag of cash with your extra nickels and dimes until you have enough money to buy one single house…

This certainly isn’t a very sexy way to go about building your business. For that reason, most people just file away the idea of debt-free investing as being impossible.

But – heads up – there are ways that most people don’t think about that you can actually invest debt-free sooner rather than later. Now, let’s get to exploring those ideas.

Strategy 1: Wholesale Chunking

The first debt-free strategy is wholesaling properties. This is what is known as transactional income. In this situation, you don’t have to take on any debt in order to make money. Through these deals, you can build up your cash reserve.

With wholesaling, you never have to borrow any money to make a profit. You simply make a contract assignment in a double closing and no borrowing is involved.

As you close your deals, hang on to the bulk of your profits until you’ve built up a cash reserve… and with that you can go to the next step, which is Strategy #2.

Strategy 2: Wholesale, Retail Double-Chunking

The second strategy is just a slight modification of Strategy 1, but it allows you to leverage even faster. It works like stepping stones.

In this scenario, you would save big chunks of that cash from wholesaling, and eventually you’ll have enough to pay cash for a cherry-picked rehab deal.

2014-10-20-awesomenessAs I’m sure you’re aware, checks for wholesale deals will be relatively small, perhaps anywhere from 3K to 5K. But checks for rehab deals will be more substantial.

Make sure the rehab deal you choose is a real homerun – and on the other side of that deal you will find a big check waiting for you. It could be as much as 80K. Now, after you’ve completed two or three rehab deals, you’ll have enough cash to purchase a buy-and-hold deal free and clear.

Taking this tactic, going step-by-step through the process, you’ll be doing it all debt free. You’re leveraging the various strategies that are available to very quickly pay cash for properties.

In this way, you can move up from the wholesale deals to the fix-and-flips and make a lot more. You can live off a portion of the wholesale profits, and then use the rehab profits strictly for leveraging into buy-and-hold properties.

This is a proven strategy that absolutely works.

Strategy 3: Turn Your Private Lenders into Equity Partners

In this strategy, we’ll look at how you can eliminate debt even if you’re working with a private investor. Instead of paying this lender a rate of return, bring that person in as a money partner.

When working with a private investor, there are always two ways to structure the deal. It can be a debt investment or it can be an equity investment. Let’s look at the difference between the two

Debt investment…

In this scenario, you are more in control of the deal. You are full owner of the property. You’ll make more money at the end of the transaction because you’re only paying a rate of return.

The downside is exactly what we’ve been talking about – and that is debt. You’re going into debt when you set up a loan arrangement. Also you are taking the full brunt of the risk. If a tenant is not paying you, or they move out, you still have the loan payments that must be made to the investor.

Equity investment…

In the equity investment scenario, you become a private money partner. You then share a percentage of the profits. What percentage might that be? It depends on the agreement between the two of you.

That investor is now in part ownership with you, and at that point you have incurred no debt. It’s a comforting thought to be in a deal and have no monthly payments.

As partners, you share the risk. If the property were to go vacant, you’ll not be continually shelling out more money just to cover the debt service. If your goal is to work your business debt-free, you’ll have peace of mind knowing you aren’t going it alone.

The downside of this arrangement is that, first of all, there’ll be less profits for you in the deal. And secondly, you will be giving up part of your control.

Debt-free investing is possible

Contrary to what you’ve been told; contrary to what you may have believed in the past, it is absolutely possible to create a solid, growing investment business and never go one single penny into debt.

Whatcha think?

We sure do want to know what you think about this step-by-step plan. Does it sound like something you’d like to try? Leave your comments below.

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Category: Real Estate Investment Financing Strategies

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