Ace Attorney: Rise From the Ashes (Day Two, Trial Latter) (part 3)
Wherein I attempt to liveblog a mostly text-based videogame. The trial continues! Lunch is over and yet we’re still being fed indigestible statements.
Court has recessed briefly for information-gathering. The clock says it's not even noon, but I feel like we've heard hours’ worth of (mostly untrue) testimony.
Lana has been called to the judge's chambers for reasons unknown. Ema is realizing just how much of a, what's the polite word, “freewheeler” she's chosen to represent her sister. But Phoenix is still flailing about when any other defense attorney in this world would have given up, so she'd best appreciate him.
It's the cowboy! Who pointedly mentions Lana's scarf, which he saw her wearing on the day of the murder. Since she wasn't wearing it in the photograph taken afterward, presumably the missing muffler is...in the car muffler? Was she trying to hide something, or give Edgeworth carbon monoxide poisoning? And just why is Marshall dropping us this helpful hint?
Court resumes with Edgeworth on the verge of some kind of conniption fit. The judge lists off his symptoms concernedly - oh NO surely you didn't eat one of the lunchboxes, Edgeworth! I've already been wondering how Angel Starr resisted the urge to give you food poisoning for two years, and that was before you verbally eviscerated her on the witness stand.
...Hello, who's this?
Peach suit, white hair, pink glasses and an avuncular folksy charm. You. I don't like you.
"Udgey?" Is that the judge's name, or some sort of twee pig-latin nickname for Judge? And "Wrighto" and "Worthy". And he can get away with calling people slightly demeaning and offbeat nicknames, because apparently he's the district chief of police, Damon Gant. Phoenix is chastised for not recognizing him, which is probably fair.
Okay, that technique of taking away the dialogue box for several seconds while Gant cocks his head and blinks at us is quite effective. This, we're silently being told, is a character so powerful they can interrupt the flow of the game itself.
The judge notes that it's been "over two years" since Gant was in the courtroom. That matches when Angel was fired. This is all about one case, isn't it? The case Lana and the victim worked on, the case that got Marshall demoted.
Gant has brought some false sympathy for Edgeworth and also Lana's missing scarf, which was indeed found stuffed in the car muffler. (So the lunchlady was telling the truth about at least something.) The scarf was wrapped around a switchblade with a tag on it. So, not a personal possession like Edgeworth's knife, but...an exhibit? Something from storage? Like, evidence storage?
Edgeworth is justifiably upset that the police investigation didn't notice a scrap of red cloth hanging out of the car muffler inches away from the body. Gant's initial sheepish admission that "this is embarrassing, even for us" suddenly turns into that blinking Look again. I feel like a trap is about to be sprung.
It's the envelope from yesterday, the one delivered by the hapless mailman! Who told Edgeworth it wasn't related to the case, so he refused to take it. Ouch. It is Edgeworth's error, but there's something gleefully malicious about the way Gant just set him up and then sucker-punched him. There was no need for this to be a public humiliation. In fact, it could've been discreetly sorted out before Gant got on the stand. Or before trial started this morning.
(Why IS he on the stand? He's not a testifying witness. He just kinda...strolled in and took over. )
The judge asks Phoenix to examine the switchblade. The knife tip is broken off and the blade and handle have bloodstains. The tag, when I zoom in focus to max, says "S-L 9 2". As for the envelope, it appears to be an autopsy report on Goodman, and doesn't mention the muffler or switchblade at all. It also has a much vaguer timeframe than 5:15.
Edgeworth tries to regain face by demanding an explanation about the missed evidence. This is a bad, bad idea. I could've told you that even before Gant delightedly agrees to testify.
Gant says the knife is special, but that he can't say how unless a "connection is proven between the knife and Goodman." Um. Doesn't the very presence of the knife, deliberately concealed at the crime scene, in itself mean it's not only connected but vital to understanding what happened? I don't think you should get to withhold that information.
Nor do I think "we were having a bad day" is an acceptable excuse for not investigating the crime scene properly. Cops get aggressively motivated when one of their own is attacked, everybody knows that. Or was Goodman some kind of pariah?
...wait. What??? What Gant's saying is so bizarre I misread it. There was a SECOND murder, at precisely the same time (and that's an awfully precise time), at the police department? "Not officially linked to this case" my aunt Fanny.
And Phoenix isn't supposed to ask about it in cross-examination? I predict that will last about five seconds, because we're going to press every one of these statements hard enough to extract olive oil.
Starting with the knife. Both Phoenix and Edgeworth push for more, but Gant refuses. Can I make a connection that will impress the judge? My inventory contains a phone, a shoe...and a note found in the trunk of the car that says "6-75 12/2". Which looks a lot like "2/21 SL-9" if you turn it upside down.
Gant is acting as though this is a circus and he's never seen a clown before, delighted at everything Phoenix and the judge say. This conveys an impression of total contempt behind a fig leaf of friendliness that can't be questioned. It's a passive-aggressive masterpiece. Somewhere in the audience Himemiya Anthy is probably taking notes.
And his facade barely flickers when faced with the memo. The knife was evidence in a case (duh). Stolen from the evidence room...and that's it? That's all we get?
Oh, this guy is skilled. Edgeworth quite reasonably asks why he wasn't told about this impossibly coincidental murder, and Gant promptly insinuates that he's incompetent because he didn't proactively ask. As though a proper prosecutor would have called the department every day with a checklist of possible events. Why, I bet you didn't even consider a Godzilla attack contingency, did you? Tsk tsk.
Gant continues to playfully refuse to give information on this second murder (except that a suspect has been arrested). He offers to give Phoenix one data point of his choice: where, how or when. Apparently this trial has turned into a game show.
We already know when, so I choose where. And Gant makes a curious distinction. The crime took place in the evidence room (where the knife came from), but he won't say where the corpse was found. Was the body moved? As they say, he is playing a game and it is called silly buggers. I'm absolutely assuming he is behind both murders (though sadly he can't have committed both, unless something paranormal or very complicated is going on).
Phoenix points out that a knife being stolen from the evidence room and then found at crime A, precisely when crime B is committed in the evidence room, is a pretty "duh" link. Edgeworth supports by mentioning the note. Whoever wrote it (Goodman, the murderer, or Lana) presumably either stole the knife or was investigating its theft. Even the judge agrees this has to count. Gant just does his blink thing again.
And says his men took two days to assemble that logic. In other words, he knew. And he STILL wants to play games. He'll talk "unofficially", but not reveal the name of the victim. (Why is that so important?) When pressed, he offers another one-data-point choice. I choose ID number which should be easy to link to a name...although apparently Gant doesn't think so.
Victim ID number: 5842189. The judge looks expectant. I have a horrible idea, and check the court record.
Yep. It's Goodman's ID number.
Simultaneous murders of the same victim in different locations? That's an impressive level of silly buggers, chief. And you didn't want this to come out in the trial? If I didn't already know Lana was innocent by video-game rules, I'd know it now.
Even this doesn't faze Gant. (I really wanted to see him look thwarted. Damnit.)
Edgeworth keeps on asking "Why didn't I hear about this?" even though the answer is always "Because Gant has it in for you, and you just gave him another opening to attack." It's as though he can't quite believe what is happening.
Yep, there's that trap-springing look again. With the first honest expression I think we've seen on Gant's face so far! Just for one frame, a flicker of anger and malice. This time he claims the police department sent Edgeworth all the information in that envelope delivered by Hapless Mailman Meekins, which Edgeworth didn't look at.
Hang on. That's not even true. We have that envelope in the court record, and...*scrolls up*...it's an autopsy report on Goodman. It doesn't say which. Even if Edgeworth had read it, he would have had no reason to think there was a second crime and victim. Moreover, Gant already raked him over the coals for not reading it, in this same trial session! No...as the trap unfolds, Gant seems to be claiming this is an entirely different envelope also delivered by Meekins(?) It doesn't make sense.
But truth isn't going to matter here. This is a career-destroying maneuver, and it's uncomfortable to watch. Edgeworth is helpless under the crushing accusations, protesting vainly that Gant could have submitted all this evidence when the trial started. Well, yes, that's what anyone but your enemy would have done... The flicker of malice is back as Gant rubs it all in with a technicality about evidence law.
(Ah, this detail might be relevant: Edgeworth apparently submitted a list of evidence to be used in the trial, which of course did not include things he didn't know existed. That flies in the face of all Phoenix Wright games past and present, in which new evidence is produced about every five minutes during trial, this one included.)
This morning's Public Career Assassination, I mean trial, comes to an end with Gant mentioning the rumors about Edgeworth, and even using his own brief status as a defendant against him. Edgeworth can do nothing but formally grovel. He begs for one more day of trial to investigate all this new information. The judge grants it,of course, but joins in condemning him.
I don't know why Gant wants to get rid of Edgeworth, but it's obvious the plan is to fire him after tomorrow's trial no matter what happens. The only way to save Edgeworth (and oh yeah, our actual client who's barely been mentioned lately) is to bring Gant down. I am on board with this. He's a mean lying stinkyhead and he's smug about it. Get him, Phoenix!
(Rereading my notes from last time, I'm remembering the moment when Angel Starr told Edgeworth "I might be able to save you". Did she know this was coming down? )
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EFFORTS OF NATIONAL ASSOCIATION OF REALTORS (NAR) DURING PANDEMIC
WASHINGTON (March 27, 2020) - because the House of Representatives' voted Friday to send a historic COVID-19 relief package to President Trump, the National Association of Realtors® published a comprehensive guide to the $2 trillion, 880-page bill educating Realtors® on the numerous benefits secured by NAR. The nation's largest trade association is additionally offering separate, evolving guidance to assist its members navigate the crisis.
"This bipartisan relief bill delivers a much-needed win for the American people and for our nation's 1.4 million Realtors®," said NAR PresidentVince Malta. "Over recent weeks, NAR has worked tirelessly with Congressional leaders to make sure small business owners, the self-employed and independent contractors were included within the federal response to the present national crisis. With every two home sales-generating one job during this country, the $64000 estate industry will represent a key piece of our national recovery, and NAR will continue fighting for key provisions in an exceedingly fourth relief package expected within the coming weeks."
The measure includes:
$350 billion for the tiny Business Administration 7(a) loan program, allowing eligible small businesses to secure up to $10 million toward mortgage interest, rents, utilities, and payroll costs.
A significant expansion of unemployment insurance for the self-employed and independent contractors that would provide benefits for up to 39 weeks. These workers don't seem to be usually covered under traditional state unemployment benefit programs.
An employee retention step-down estimated to supply $50 billion to companies that retain existing employees.
Rebates of $1,200 to single filers and $2,400 to joint filers, plus $500 for every child, subject to income limitations.
A 60-day foreclosure moratorium and up to 1 year of mortgage forbearance. Among a number of other initiatives, NAR is additionally working with lawmakers to expand access to remote online notary services and supply direct rental assistance for families who have income loss thanks to COVID-19.
The National Association of Realtors® is America's largest trade association, representing over 1.4 million members involved altogether in aspects of the residential and commercial property industries. Amidst the COVID-19 pandemic, states over the United States are executing limitations on which organizations can stay open and who must work remotely. A few industry gatherings, including the NAR, have found a way to advocate for the lodging business and guarantee that officials are taking self-employed entities and entrepreneurs into thought when drafting enactment.
As states are at present overwhelming their own principles, NAR is additionally working with state relationships to characterize realtors related administrations as "fundamental" in any crisis presentations. NAR has likewise advocated for cutoff time alleviation for the working capital safe dock for Qualified Opportunity Funds, just as for 1031 like-kind trades 180-day fulfillment cutoff times to help with delays in settlements as title organizations close during the flare-up. It is additionally "working with other exchange affiliations and industry accomplices to extend access to remote online legal official administrations, give direct rental help to families who have salary misfortune due to COVID-19, and push for alleviation for landowners from the money related commitments of restraint and foreclosures ."
LAND OWNERS AND RENTERS
A few associations - including NAR, the National Multifamily Housing Council, the Council for Affordable and Rural Housing, the National Association of Home Builders and numerous others - united to draft an alliance letter that bids direct rental help for families who encountered lost salary due to COVID-19. It focuses on the requirement for alleviation for land owner-related weights, for instance, contract and other money-related commitment self-control, and cautions against cover ousting bans. On March 23, the Federal Housing Finance Agency (FHFA) approved Fannie Mae and Freddie Mac to suit self-control for multifamily proprietors, given that they stop expulsions to leaseholders unfit to pay lease because of COVID-19.
REALTORS EVALUATION, MORTGAGE
To keep on encouraging realtors exchanges, FHFA added adaptability to mortgage provisions, explicit evaluations and work checks. In the declaration, additionally, on March 23, FHFA approved Fannie Mae and Freddie Mac to actualize "evaluation options," to maintain a strategic distance from the face to face cooperation; just as proceed with work confirmations through email from the business, if incapable to verbally check, or by means of a bank explanation that shows an ongoing finance store, or an ongoing year-to-date pay receipt.
As per the declaration, banks should keep on using sound guaranteeing judgment to guarantee these choices are proper to the borrower's conditions.
The options stretch out to May 17, 2020.
PRIVATE COMPANIES AND INDEPENDENT CONTRACTORS
A few letters from NAR and other industry bunches have squeezed Congress to give effectively open, unbound credit to businesses and any independently employed people to guarantee they can pay their laborers, lease and some other expenses. These letters mentioned the following :
Suspend the recording of business returns and the installment of all business expenses to the national government for the span of the pandemic; and change the Tax Code to, among different things, reclaim the capacity of organizations to carry back any networking misfortunes against earlier year charge installments.
Suspend the utilization of Section 163(j) confinement on intrigue cost conclusions for the charge year 2020 to abstain from punishing organizations for obtaining during this emergency.
Suspend Section 461(l) misfortune constraint ongoing through organizations to permit organizations to fully deduct any misfortunes they bring about this year. Conclusion– NAR also is pushing for some real estate services to be deemed essential during the crisis. "Many of our state associations are reaching out to their governors on this issue. Our country is facing rapidly rising unemployment," the NAR letter noted. "There are 9.5 million jobs in the real estate, rental and leasing industry, real estate school and every two home sales generate one job."
Other NAR initiatives include a request to the Treasury Department and IRS to ease deadlines for the working capital safe harbor for Qualified Opportunity Funds. So these efforts are being done by the NAR to stabilize the real estate scenario in their country which occurred due to a pandemic.
Source - https://bit.ly/2V5XfRz
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Creative Financing - How It Can Help You
Why You Need a Creative Financing
Building your real estate investing portfolio is like crafting a custom home. You need a set of reliable and flexible tools in order to build a solid structure.
Like a hammer, traditional bank financing is a common tool that everyone knows how to use. And there’s nothing wrong with a hammer. If you have a nail, it sure is handy.
But I’m here to tell you that depending only upon bank financing for real estate investing is a handicap. It’s like building a house with one tool. It will limit your business over the long run.
Other investors with a larger toolbox that also includes creative financing will have a natural advantage against you. They will build their real estate portfolio faster, more consistently, and with a better long-term result.
There are multiple reasons why this is true. I’ll explain just a few here.
Real Estate Cycles
Real estate markets go up and down, often in 7-10 year cycles. The best real estate deals are found during the down cycles. Think about 2008-2009 when blood was in the streets and good real estate deals were plentiful.
But guess what? Down cycles are when banks lend the least money. Even if you recognize good deals, your ability to buy them will be limited if you can’t borrow money. On the other hand, creative financing smooths out the curves of these cycles and works during up and down times.
For example, in the downturn of 2009, we were able to obtain plentiful private financing from individuals who were scared of the stock market and sick of tiny bank CD rates. At this time when banks would not loan money against investment real estate, our private lenders felt very secure with tangible real estate that produced rent far in excess of their interest payment.
At the same time, many sellers couldn’t get rid of their properties. They were much more open to seller financing during the down cycle than they would have been before. So, rather than working against us, the down real estate cycle actually improved our ability to finance deals creatively.
Increased Risk
Do you know how you can tell that a bank is in control of your lending relationship? Because their army of attorneys wrote the enormous book of papers you sign at a loan closing. You get the privilege of signing the papers as-is, or you can take a hike!
That big stack of papers is all about transferring risk. The attorneys working for the bank essentially transfer as much risk as possible from the bank to you. The risk equation may be out of balance in the bank’s favor, but the terms are not negotiable.
On the other hand, everything is negotiable with creative financing. It’s possible to find win-win agreements with sellers, private individuals, or small businesses who are willing to finance to you. These agreements can reduce your personal risk and still satisfy the needs of the other party.
Lack of Control
Success in real estate investing depends upon consistently being able to acquire funding for new deals. But the application and approval process for bank financing is largely outside of your control. Today you may be able to get seven loans, but tomorrow the policy may change to five. And the changes do not always make sense.
On the other hand, creative financing is limited only by your ability to find good deals and to prove yourself to the individuals providing the financing. With your hustle and intelligence unleashed by creative financing, the potential upside of your investing business is virtually unlimited.
Lack of Speed
Ignoring all of the other problems above, bank loans are just too slow. For the best investment acquisitions, you must move very quickly. But bank loans require drawn out application processes, appraisals, and multiple layers of approval.
By the time you finish the first step of your traditional bank application, I will have already used creative financing to close the deal. For example, we recently closed a deal in three days. We would have been lucky to get a return call from the bank by the time we already bought the property!
The Basics of Creative Financing
Luckily, adding creative financing tools to your toolbox is not rocket science. You probably already know the basics. If you have used a promissory note, a mortgage, a deed of trust, or a lease, you understand the fundamentals of how creative financing works.
But there is still a learning curve to understand the nuances and the unique applications of these tools. Almost daily in the Biggerpockets Forums, a newbie investor complains that a local closing attorney or title company refuses to close their creative financing deal or says that what they’re doing is illegal.
While I can empathize with the situation, my hunch is that most new investors really don’t understand the tool themselves. It’s like this closing attorney sees a small child climbing up to turn on a power saw. The attorney may not know how to use the power saw either, but he knows enough to scream “stop!” before the child cuts off his finger!
So, the goal of my explanations below is to make you more familiar with five of the most common and useful creative financing tools. I will share diagrams and examples that will explain how the tools are used. Once you get the basics, you can then study them more in depth from sources like Brandon Turner’s No Money Down book, the creative financing forum here on BiggerPockets, or my favorite teachers like John Schaub.
I’ll begin to unpack these creative financing tools by explaining the tool you’re probably all familiar with, traditional bank financing.
A Picture of a Traditionally Financed Closing
If you’re going to be able to understand creative financing and explain it to a skeptical attorney, real estate agent, or seller, you need to first understand each piece of a typical transaction.
The diagram above shows the relationship between all of the parties of a typical closing. There are four primary entities involved:
The Seller
The Buyer (you, if purchasing an investment)
The Bank (lender)
The Closing Agent (an attorney or title company)
In this example, a purchase and sale agreement was signed at some point before closing between the buyer and seller. The price was $50,000. Also before closing, a loan commitment agreement was made between the buyer and the bank. The loan was $40,000, and the buyer provided $10,000 or 20% as a down payment.
The closing attorney or title company uses these pre-closing agreements to oversee the closing transaction (a.k.a. escrow) to ensure the other three parties are treated fairly per the terms of their contracts. The items actually exchanged between the parties include:
Money — from the bank to the buyer (a loan)
Two contracts, a promissory note, and a mortgage (or deed of trust in some states) — from the buyer to the bank
A deed — from the seller to the buyer
Money — from the buyer to the seller
For those of you already investing, this may seem basic. But it’s important to start here before doing transactions that are a little more creative because these creative tools use the same basic format.
Now I’ll unpack my 5 favorite creative financing power tools from my toolbox.
Power Tool #1: Seller Financing
In the picture above, did you notice the main difference between a seller financing transaction and a transaction with a bank loan? Obvious, right? There is no bank!
Related: How to Use Owner Financing to Create Wealth And Grow Your Portfolio
In fact, technically, there is not even a loan. As you can see, the seller never gives the buyer any money like a bank would. Instead, the seller just agrees to let the buyer pay the purchase price over time with monthly installments (i.e. an installment sale).
In exchange for this financing arrangement, the seller (not a bank) receives the promissory note and mortgage as security.
The beauty of this arrangement is that there are only two parties — the buyer and the seller. The seller does not have loan committees, underwriters, or Fannie Mae-conforming rules.
You make an offer to the seller, the two of you negotiate, and if it makes sense for both parties, you move forward.
But how common is seller financing, really? Well, Ben Leybovich, a well-known creative financing writer here on BP who I respect, once wrote that seller financing is rare and usually only used on ugly pig properties. While I normally nod my head at Ben’s articles, I shook my head and chuckled at this one. Maybe Ben has been looking under the wrong rocks.
It’s true that seller financing is not as common or as easy to obtain as more traditional tools. It’s also true that seller financing does not make a bad deal magically turn into gold. But don’t let its difficulty dissuade you from its ultimate value.
Seller financing is an incredible tool that is well worth the effort. And it is one of the clearest win-win transactions in the entire real estate business.
For example, my business recently bought an income property using seller financing with a 10% down payment (yes, in a hot market and yes, in a desirable location). Once stabilized and rented, this property will likely make us over $1,000 per month in net income for decades to come. And that does not include the benefits of future capital gains.
What’s more? The seller and I are pals. He is happy as a clam in water because he loves monthly checks without the hassles of being a landlord. I have saved him the trouble of putting a big chunk of his money into investments like stocks or bank CDs that he doesn’t like or understand. And he receives a much larger income than he would with most traditional investments.
Who is the only party not happy with the transaction? I guess it’s the bank, who didn’t get my seller’s money in a CD so that they could loan it to me at a higher interest rate!
Power Tool #2: Private Loan From a Self-Directed IRA
As you see above, this creative financing tool is structurally very similar to a closing with a bank loan. The only difference is that the lender is a self-directed IRA (individual retirement account) and not a bank.
Most retirement accounts invest in traditional assets like mutual funds or bonds. But a self-directed IRA is a way to use retirement savings to invest in alternative assets like real estate, notes, tax liens, and more. Specialized custodians who allow self-direction hold the assets and process transactions, and keep records for the IRS.
The point of this tool is to borrow the IRA funds from other individuals, not from your own IRA. You must be very careful not to engage in IRS-prohibited transactions. Loaning money to yourself or to your business is clearly off limits.
But as long as you follow the rules, you have enormous opportunities to find sources of funds for your real estate deals. Even a few years ago in 2012, total IRA accounts in the United States totaled over 5.68 TRILLION dollars!
Chances are that someone you know in your local network has funds available and would be willing to loan them to you. Some of the best candidates are other real estate investors who can’t loan that money to themselves. Your deals give them the perfect opportunity to invest in local assets that they know and understand.
This has been the tool that I use the most often from my creative financing toolbox. Like seller financing, it is a win-win arrangement. It gets you the funds you need, and your IRA lender receives a solid return and good collateral.
Power Tool #3: Private Loans (Outside of an IRA)
I didn’t include a diagram here because it is the exact same process as the previous tool. The only difference is that the private lender uses funds outside of an IRA.
Who would have that kind of money? More people than you think.
The most likely candidate is an individual with a large net worth. And if you understand the principle of books like The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, this person WON’T be the one driving the expensive car or wearing fancy clothes. So, don’t underestimate anyone you meet!
My favorite way to find these individuals is at real estate networking events like Bigger Pockets meetups or your local real estate club. Attend these events and get to know people. Find the experienced old guys and gals in the back of the room. Ask questions. Make friends. Once you get to know people, they may be willing to loan money to you.
I love that borrowing from high net worth individuals also brings more benefits than just getting the money. In addition to borrowing money, you also borrow their expertise and experience!
A couple of my own private lenders became mentors and close advisors. While they may have been interested anyway, the fact that I had their money made them VERY interested in my success. Their tips, feedback, encouragement, and friendship over the years have been an essential part of my own success on their deals and on others.
While I personally have never used hard money loans, I would also lump hard money lending into this same creative financing tool. Hard money, or asset-backed loans, are an alternative to traditional bank financing. And while the cost is generally higher than normal, the availability and speed of funds make them very helpful to many investors.
Power Tool #4: Master Lease With Option to Buy
The tool of master leasing is where we begin to think outside the box even more. So, stay with me.
In the illustration above, a burned out landlord named Jane owns a quadruplex building. Jane has let the building run down, and she has not even filled two vacancies from bad tenants who recently moved out. She’s just too tired.
Jane then gets a letter from an energetic entrepreneur named Chris who offers a creative solution to her problem. Chris offers to lease her building for five years for the same amount she currently receives in rent from two tenants ($1,000 per month). He also offers to perform immediate cosmetic repairs like painting and carpeting that will cost him $5,000.
Jane will continue to pay for taxes and insurance and handle any major capital expenses (roof, heat-and-air systems, structural issues). Chris will be responsible for all vacancy costs, turnover costs, maintenance costs, etc.
Because Chris’s lease gives him the right to sublease all four units to sub-tenants, his gross rent collected in this case is $2,000. As you can see in the picture below, if his vacancy and maintenance expenses are $400 per month, he receives positive cash flow of $600 per month — or $36,000 over the next 5 years!
Stacking up a few deals like this could make for a very lucrative side income for Chris, or he could really ramp it up with more deals to completely replace his income from a job.
But why stop there? Let’s see if Chris can make it even better using another tool — the option to buy.
If Jane, the burned out quadruplex landlord, was willing to give Chris, the entrepreneur, a master lease, might she also be willing to give him an option to buy the property? There’s a good chance.
An option would essentially give Chris the right (but not the obligation) to purchase the property for a set price for a certain period of time. In exchange, Jane receives consideration for selling him the option.
In this case, Chris’s consideration is the $5,000 he spends to spruce up the cosmetics of the property. Jane will give him a credit in the amount of $5,000 when he finally executes his option.
Chris’s option strike price is $120,000. Once he gets the building rented and looking good, he then will have the chance to make money from the option any time during his 5-year option window.
Multiple Exit Strategies With Options
A well-crafted option gives Chris at least three profitable exit strategies.
First, Chris could patiently save a down payment and look for permanent financing and/or partners. This will allow him to buy the building and keep it as a long-term hold investment. Because he has five years to accomplish this, he can shop around until he finds the best terms.
Second, Chris could use this as the replacement property in a 1031 exchange. This would allow him to sell another rental property he owns, exchange into this property, and defer his taxes on the gain of the sale. Given that many investors don’t have the perfect property picked out when they execute a 1031 exchange, this can be a BIG benefit.
Third, Chris could sell his option to another investor. Let’s say he finds a landlord investor who is willing to buy this property for $160,000. He could simply assign his option contract to him (yes, contracts can be sold), and his fee for the assignment would be the difference between $160,000 and his strike price of $120,000, or $40,000.
So, in addition to the $36,000 Chris earns from operating the rental over 5 years, he also receives a profit of $35,000 ($40,000 – $5,000 initial investment) from assigning his contract.
That’s a total of $71,000! Not a bad payday considering he invested only $5,000, some hard work, and a little creativity.
And perhaps even more exciting than the $71,000 profit, the lease option allowed Chris to use enormous leverage without the typically enormous risk of traditional bank financing.
Remember the bank’s army of attorneys I wrote about earlier?
If things go badly with Chris’s lease option, he has only risked his $5,000 initial investment, his time and energy, and any potential negative cash flow during the five years of his lease. After that, he could legally just walk away.
Related: The Lease Option: How I Creatively Structured a Deal With Very Little Down
Try that with a bank loan!
Power Tool #5: Master Lease + Option (With a Credit Partner)
If you liked master leases and options with sellers, this next tool will give you a different way to use the same technique. Instead of lease optioning the property from a seller, you lease option it from a credit partner.
Let me explain.
Let’s say an entrepreneur named Karla finds a great rental property deal worth $150,000 that can be bought for $100,000. The only problem is that she doesn’t have the money to close. She knows a private lender named Jim with $20,000 cash, but obviously that’s not enough.
After further questioning, Karla learns that Jim does have excellent credit and can get a mortgage loan. So, the two of them agree to the following:
Karla, the entrepreneur, assigns the purchase contract to Jim, the credit partner.
Jim applies for a traditional bank loan and purchases the property for $100,000.
Karla immediately master leases the property for 5 years at $525 per month net-net-net rent (i.e. she pays all expenses).
She also retains an option to repurchase at a higher price ($110,000).
She manages the rental until future exit strategies are available.
Karla then proceeds to rent to a sub-tenant for $1,200 per month. Her net income looks something like this:
$1,200 – $500 (operating expenses) – $525 (rent) = $175 per month net income
While $175 seems like a nice cash flow, Karla will be wise to set aside a good portion of her cash in reserve for capital expenses and vacancies.
Meanwhile, Jim uses the $525 rent from Karla to pay his $425 mortgage payment, and he still has $100 leftover to put in his pocket.
Another Option, Another Profitable Exit Strategy
Just like the lease option example with the seller, Karla has multiple options for exit strategies, including refinancing, 1031 exchanging, or assigning. The choice she makes will depend on the circumstances and resources available to her at the time.
But what if this property has great long-term prospects? What if Karla can’t obtain long-term financing? What if both parties want to stay in the deal together as partners?
To accomplish this, they could make a slightly different credit partner arrangement.
Jim could give Karla an option for 20 years instead of 5. But instead of an option for 100% of the property, Karla retains an option to purchase a 50% interest in the property at 50% of the original purchase price.
In this case, Karla would pay $50,000 to Jim whenever the option is executed. Jim would then deed a 50% free-and-clear interest in the property to Karla, or he could sell her a 50% in an LLC if that makes more sense.
Why would either party do this? Because perhaps this location is prime, and 20 years from now, the property could appreciate from $150,000 to $400,000. And during that time, perhaps the rents could increase significantly for Karla, and the loan will certainly keep getting paid down for Jim.
At year 20, Jim has used the rents from Karla to pay down his loan from $80,000 to $40,000. So, his 50% portion of the equity in the property is now worth $200,000 – $40,000 or $160,000.
Karla, on the other hand, controls $150,000 of equity ($200,000 – $50,000 option price), but she has yet to put up any capital. As before, she again has multiple excellent options.
If Jim wants to, Karla could refinance and buy out Jim’s equity of $200,000. Or Karla could sell her equity to Jim for $150,000 cash. Or if both partners want to cash out, they can just sell the property and divide their winnings.
In the end, Jim turned $20,000 into $160,000 completely passively, and he also received $1,200 in rental income for 20 years. It’s very likely his income was completely sheltered by the depreciation of the property, meaning he paid very little in taxes until the sale.
For a bonus exercise, do the math on Jim’s internal rate of return (IRR). I’ll give you a clue that it’s better than he’d get historically in the stock market.
Karla invested zero money up front, and she used her creativity and property management skills to accumulate $150,000 of wealth. And along the way, she built a steadily growing stream of positive monthly income.
And because I know how smart and ambitious Karla is, she probably did another 9 deals just like this so that after 20 years, she created over $1.5 million in wealth and thousands of dollars in cash flow per month.
Aren’t these power tools fun?!
What Tools Are in YOUR Toolbox?
As I said way back in the very beginning, these are tools my business partner and I have used over the years in our own business. They have served us well. Our toolbox and our tools are well worn now.
But the point of the article is about you. The question is, can you use any of these tools to build wealth and income for yourself?
My advice is not to fill up your toolbox with too many tools at once. It’ll just weigh you down unnecessarily.
And you don’t need to give up your old tools, even the hammer of traditional financing. If it’s already working for you, keep using it.
Instead, decide on one or two of these tools that you’d like to add to your toolbox. Then commit to master that tool.
Learn about it. Practice it. Ask questions. Then, as quickly as possible, start using the tool in your real estate investing.
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