A Free Car

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Updated 12/21/06

A Free Car!

This discussion will cover many options for you to use the note business to pay your bills. I will show you how to use free notes to pay for free cars, Boats and houses. Of course this is a creative thing to do with the business and I hope you will look at it with the eyes of an investor. It is important that you put these steps into play only with the thought of an investor and not a hungry consumer.

That said, I will give you an example or two of how the note business can give you free things. How about a car for example? Would you like a free car? Would you like a free house? You can have it if you work creatively with the funds you have available through your credit. Here is the example I did:

A Free Note

The note: This part of our discussion is explained in more details on one of the Saturday classes about buying notes with none of your own money. Many people mistakenly think they cannot buy notes without money. That is not true. I heard once from an investor that money as we know it today is like Monopoly money. So have fun with it. I think that allowed me a change in my thinking and I started “Playing” more like it is all a game. It is after all. The “money” we use is not coinage or anything of great value but simply a piece of paper that acts as a “note” from the federal government. Supposedly it is backed by gold somewhere. If you let yourself relax a bit and have fun with life then you will see more success with all your investments.

The note was found through a bit of networking. A colleague of mine told me about a chance to create a note for $5,000 with 50% return interest only payments. The note is unsecured and backed by a good man’s name and a contract. It consists of a cashier’s check that the investor is going to hold for investment purposes. He is a broker in town and he deals with foreclosure auctions (trustee sales). He is well known and liked in the community and I myself knew him well therefore, the good feeling of doing this investment. He often brings investors from out of state to buy properties at these auctions. Some times these investors do not bring the required $5,000 needed at the day of the auction if they are the winning bidder. Since the check is required he must have one each time he goes. He is a Broker and not so much an investor and so for whatever reason he finds it worth doing to hold the cashier’s check and pay 50% for it. He holds this check in case he needs it for one of these investors. He sends me $50.00 per week until he needs to use the check and then he will refund the total amount the day after he uses it. I find this a great investment and I don’t really care myself what his reasons are. He is willing to pay and I am willing to receive. It is as simple as that. Don’t complicate it.

This didn’t sound like too bad an idea to me. I told the Broker I wanted in right away. When I called him he said he was not in need for one of these at the time and I begged him to keep me in mind when the need arose again. I got a call two weeks later from him stating that he would need to hold another check. I was in! I used a line of credit from the bank to get the money for the cashier’s check. I was making positive cash at no cost to me. I have this line of credit and others like it lined up just for these opportunities. If not this note then there are many others I have access to through my networking efforts. There is one right now available that I will likely buy with a similar amount and a huge accelerated payoff and large monthly payments. It is a second position hard money loan. The note and circumstances is not the important thing here. The fact is they are there and available and I know how to find them and use them. That is what you have to learn. Don’t get caught up with trying to understand the numbers and the details. When you find a deal that may work then worry about the details. If you can make positive cash then do it. Don’t analyze it to death. Just do it. The notes are there and if you listen to Talmadge you will get more insight to how to buy them without pulling anything out of your pocket. There are so many options for you.

The House: One thing I have always tried to do is find a way to make a good thing better. If there is a good opportunity there is bound to be a way to make it a better opportunity. So After I had learned about the note business I began thinking about how to find the cash to buy the notes. I was dabbling in Real Estate investing a bit as well and realized that the homes I was looking at were a gold mine of equity wealth! The house I live in as well is a Gold Mine. It must be used properly however to make it work as an investment and not a mistake. So I will try to explain how you can use this gold Mine without putting it at an unacceptable risk. First I must say there is risk in everything. These days it can be a great risk just to walk outside your door so don’t get hung up on the idea of risk. Just manage that risk so you know how to handle it.

What I found as I started thinking about using equity to buy notes is that not only could I buy the notes with none of my own money but I can actually use the note payments to make my house payment or other such payments. Now this can get a bit complicated and it is more the idea that is important to understand than the actual details of the deal itself. For example, I recently had two notes that were bringing in over $1600 per month combined payments. That is a fairly decent house payment for many of us. That is one of the first things I realized when I started to receive those payments. Now let’s look at some numbers for those of you just dieing to know how it all works in detail:

House value = $185,000

House 1^st Mrtg = $140,000

House Equity = $45,000

These figures show you how much equity is available. This is similar to my situation when I first started buying notes. Now let’s look at how to make the notes pay the bills or most of them;

With this situation my payment on that first mortgage would be about $900.00/mo.

If I take out a second or a home equity line of credit for say $20,000 it will cost maybe $150 to $200 more each month. That is about the amount I paid for the two notes that were making payments of roughly $1,600 per month.

Now let’s put it all together here:

$900.00 house payment

$200.00 second payment

$1,100.00 total going out now

$1,600.00 coming in which leaves

$500.00 per month positive cash

This is where you have to have the responsibility of an investor. You must continue to think like an investor. Do not think like a consumer and say “I have $1,600 free money each month now. I can buy a bigger house or a new car or a boat or anything else. What we have done is like a consolidation. You should not consolidate to free up funds for spending but for investing. One of the best investments you can make first is to pay off any debts you have. Debt is a Slave master. Debt is bad and it is the opposite of investing so, if you have debt then take that extra money and pay off the debt first. Only then can you look at it as extra funds. (That can be re-invested, right?)

So you continue to make your normal payment that you have been making all along and you pay extra on the second. Before you know it the second is paid of and you likely still have payments coming in. Then you can use the remainder payments to make extra payments on your house or other bills you want to bite down. If you do not have other debts and have already eliminated them then you can reward yourself a bit perhaps and put most of the extra cash into an account to re-invest in your business. That shows you how you could use a note to pay for your mortgage.

The Car: Now let’s discuss the free car; I have been driving around in an older vehicle that still had good gas mileage and while it was not much of a looker it worked well for me. My wife on the other hand was not as excited about my “Junker” as I was. She was not too thrilled when she had to drive it around. It had a few dings in it (some from her driving) and just did not have that shine. She wanted me to get a new car. Nothing too expensive, mind you. Nothing too fancy but newer than the one I was driving. So we were looking.

Then my father told me that he was looking for an “older” vehicle to commute with. I told him I might have the perfect solution for him. Being the good son I was I offered my “older” vehicle to my father for a very low price. He was thrilled. My wife was suddenly unhappy that I had given away our perfectly good vehicle. What happened to “I think you need a new car?” I guess that is another discussion and some different coaching so we won’t go into that but my solution for her was to say “look we have $200 a month coming in from this note. Lets just use that to pay for the car.” She was a little more acceptable to the idea of a new car now.

So we went to talk to her Brother in law who is an Auto Broker. I guess because that is what you call an honest used car dealer or something. We explained what we would like and of course he had just the car, three of them actually. We decided which one we wanted and bought it with the family discount which is not the same as it used to be but still enough that there was room. We got the loan through the dealership with a local C.U. Then we talked to the credit union about getting a higher amount on the loan and got enough to pay off the line of credit used for the cashier’s check. The final deal worked out like this:

Note: $5,000 interest only

Payments: $50.00 weekly

Car loan: $295/mo

Note payments: $200/mo

My cost for car: $95/mo

OK so it’s not free exactly but I’m happy with the arrangement. Now to work on that house…

The following give more insights to another way to get free things. This is a little different approach but also has some good insights.

THE BEST THINGS IN LIFE ARE FREE

by John D. Behle

The following article is an excerpt from Mr. Behle's book - "Creative Paper Formulas"

Special Note: The examples are a few years old when some of my investment yields were higher. The examples work the same way at lower yields, because the financing and cost of money are lower. I work on the spread between my cost of money with banks and investors and the yields I can purchase at. The spread stays about the same when yields rise and fall and the examples hold true.

"The best things in life are free" usually applies to non-material items. I agree with that definition and could write several newsletters on that subject. I would like to show you some material things that ARE free!

FREE CARS

The greatest profit in "paper" is to find a way to immediately realize all or a portion of the discount in the note immediately. To do so raises your rate of return tremendously. Let's look at a way to turn the discount in a note into a quick profit.

Your local banker has a problem and he needs you. He has cars and other items that he has repossessed and needs to sell. He usually takes losses and will be real excited to learn he doesn't have to.

The scene begins like this. First, you begin to build your paper portfolio. Using many different techniques, buy or get control of some real estate paper that you can trade. Next, approach your local financial institution and see what they have that they would like to liquidate.

I approached a credit union recently and they are excited about the possibility of trading paper for their repossessed cars.

The approach is simple. If they buy a note from me at a yield of 11% then I will take 20% of their proceeds and buy their worst headache.

The benefits for them are simple. I buy their problems from them at market value or their "book" value. they do not take any loss and they get immediate cash. They also purchase a good safe note with a good rate of return.

The benefits to me may not be clear until you see the numbers. Let's say that I have a $20,000 note and my banker has a $4,000 car. Here's the note:

$20,000, 11%, $227.32, 180 mo.

If I could purchase the note for a 15.3% yield, then I would pay $16,000. This means I pay $16,000 and then immediately sell the note for $20,000. I take my $4,000 profit and buy their car. Their headache became my free car.

$16,000, 15.3%, $227.32, 180 mo.

What's even nicer is that I can buy most notes at an 18% yield or better. If so, that means I will walk away with an extra $1,884 in cash for gas money for my new car.

$14,116, 18%, $206.08, 180 mo.

Another possibility would be to deviate from the ratio and purchase a $5,000 car and pocket almost $900. That is about a 4:1 ratio instead of the 5:1 ratio.

FREE HOUSES

This technique works with any kind of property that the banker may have. Who cares what the property is, it's free! We also have a bank that will do the same thing with their foreclosed real estate. For example, multiply the last figures by 100 times. Free houses can be nice too!

FREE LIFE INSURANCE

How would between $200,000 and $1,000,000 in free life insurance sound to you? Does that fit the definition of "HAPPY NEW YEAR?" Here's how:

Let's say you borrow $7,058 in equity out of your property and invest it in a $10,000 note. If the note paid $113.66 per month for 180 months, your rate of return would be 18%. If the $7,058 were borrowed at a 12% interest rate, the payment would be $84.71 per month. The difference in cash flow would be $28.95 per month - enough to buy about $200,000 in term life insurance for someone 30 years old.

Multiply the figures by 5, borrow about $35,000, buy a $50,000 note and have enough cash flow for $1,000,000 in life insurance. In addition, you have added $50,000 in paper to your portfolio that you can use to make further profits - like trading for a free car.

FREE CASH FLOW

Here's how to buy a note (real estate, contract, Trust Deed Note or Mortgage Note - "paper") and get paid to do it. Financing real estate paper can be easy and profitable. These are the terms of the note we are going to buy.

$20,000.00 balance, 12%, $220.22 per month, 240 months

When discounted to yield 21%, this note could be purchased for $12,388.16. In other words, in the market place, when someone sells this note (let's say it's a Trust Deed Note), it is worth $12,388.16. You can buy this note - and do it for free.

Find one or more investors that would be happy with a safe, secure 16% rate of return. In this example we will use two investors. They will receive a monthly cash flow secured by real estate.

Buy the Trust Deed Note with the money from the investors and secure their investment with a note you are buying. Their note is secured by the Trust Deed Note which is secured by the real estate. The total monthly payments to the investors will be $172.35 and the payment coming in will be $220.22 per month.

Option 1 - Pocket the cash flow
The difference in the monthly cash flow is $47.87 per month for 240 months. This totals $11,488.80 which isn't bad for a free cash flow. Picture how nice it would be to do this with 10 notes.

Original note - $20,000.00, 12%, $220.22, 240 mo.

Investor note - $12,388.16, 16%, $172.35, 240 mo.

(This consists of two notes of $6,194.08 - 86.17/month)

Option 2 - 100% finance - early amortization
If the cash flow is all put toward paying the investor loans off, they will be paid in 43 months (3.58 years). At that time, the full $220.22 will come to you - for the next 197 months (over 16 years). The total of the payments that you receive would be $43,383.34.

$12,388.16, 16%, $220.22, 42 mo.

FREE CASH

Finance the amount the cash flow will cover instead of just the cost (which is less). At the rate of 16% over 240 months, a payment of $220.22 per month would amortize a loan amount of $15,828.86. Subtract out your purchase price of $12,388.16 and that leaves $3440.70 cash to fill any empty space in your wallet. On top of that, you have equity in the note of $4171.12. That means you have BEEN PAID over $3400 cash to buy a note that you'll have over $4100 equity in.

TAX FREE

The cash in your hand is tax free (at the moment) because it's borrowed money. Also, almost anything you do with paper can be tax free through several ways.

Let me tell you about two of these ways.

#1 - Corporate Pension and Profit Sharing Plans
You can invest in "paper" through your Corporate Pension and Profit Sharing Plan. The profits are totally tax deferred until later.

#2 Self Directed IRA's
"Self directed" Individual Retirement Accounts (IRA's) can be set up existing accounts can be changed to a self directed plan. If your existing plan is with a bank, you may be able to work with them or for no-penalty, you can change the administrator to a company that specializes in self directed accounts and will allow you to call the shots as to where and what your IRA invests in.

John D. Behle, is one of the premier educators and practitioners in the field of "Real Estate Paper". John has an extensive background in consulting and coaching. In addition to the original "The Paper Game" book published in 1982, he is the author of 7 other books, several home study courses and over 200 nationally published magazine and newsletter articles on paper investment. You can visit him on the web at www.papergame.com.