How This “Negative Cash Flow” Deal Made Profit

Hey everybody, I'm Zachary Beach, CEO of smartrealestatecoaches.com, and welcome to another Deal Structure Sunday. I have 2 amazing people on today because they went ahead and solved a problem that a seller could not solve for over a year. The current state of the market in most markets is forcing sellers to either remain on the market for an extended period of time Or drastically drop their price or quite frankly expire over and over and over again. We're seeing that across 80+ markets that we're currently in with our community. If this is the first time you've been to a Deal Structure Sunday, go ahead and make sure you click that subscribe button. And if this is the first time that you've been a part of this YouTube channel and you're not quite sure what creative financing is or how to buy real estate without cash, credit, or banks, go ahead and check the show notes. Or the notes below. And that way you can dive into our quick 20-minute masterclass and learn all these strategies that we're currently doing at a very high level all across the country. Now, I want to go ahead and I want to welcome Rick out of Florida along with Rick from New Hampshire, because they together— Rick being our coach out of Nashua, New Hampshire, with us for a long time, helping Rick down in Florida. Go ahead and structure another creative deal in his backyard. So first and foremost, guys, welcome to another Deal Structure Sunday.

Thank you.

Thanks, Eric.

Yeah, well, it's see you guys even like talk together. Like this is like Rick Square. And if we could just get Rick like a Rick Rick Abbiadia, Hailmar Mustache, we will all be in and we'd be hanging out with the cool Ricks. Okay. So before we go ahead and dive in and we'll share my screen in just a moment, if we could, Rick Morano, just give us a little bit of your background just in case people haven't seen the other deals that you did on our YouTube channel. Give a little bit of background of kind of who you are, what you do for a living currently, and maybe what you've done currently within our Wicked Smart community.

Well, I have been a I've been working in the healthcare field for about 30 years, about 30-plus years. And I went from taking images, taking x-rays and different modalities and switching over to database work. So now I'm managing where those images are going. So I've been doing that for about 30 years. And then we started flipping houses and that kind of changed with all the loans not being able to, you know, the provider's not giving us money. So we switched over to this.

Got it. Yeah, I was going to ask, I mean, because you did a lot of virtual flipping too. Like, were you buying in like the Midwest or something? Yep.

We had 2 properties in Missouri, very far away, hard to manage.

Yeah. And you actually transitioned one of those flips from a tenant to selling on rent-to-own utilizing this strategy as well. Is that accurate?

That is correct. Right now it has a lessee in it. A tenant buyer, and I'm waiting for it to cash out in almost a year.

Well, that's awesome. So not only are you utilizing your original strategy of fix and flipping and then changing them to rent to own, which we actually see a lot of investors now joining our community doing so, but now you're taking on deals from the very beginning. So maybe you and Rick can walk us through this particular seller, like where we found him, What type of deal it was, maybe, and just so people can get a sense that are outside of our community, maybe how the interaction went back and forth between you guys in order to get this deal under contract.

Yeah. So this was a call that I got, a lead from my VA who's making my calls for me. And I talked to them and they explained their situation. They actually moved out of state because of family reasons. And They left their property. This was going to be their maybe forever home. So they put a lot of heart and soul and they fixed it up and they were— the place looks immaculate, but they had to go. And it's been sitting there vacant for a year because they had it on the market and it wouldn't sell.

And did they give you any feedback on like why it was sitting on the market and didn't sell?

Well, part of it was this is Florida, so we have hurricanes. So while they were in the middle of trying to sell it, the hurricanes came in, so they had to pull it off the market. The interest rates went up. Just, just, you know, nothing because of the property itself, just the market.

Now, Rick, while you were— Rick, while you were working with, with Rick, this is good. It's too much. While you're working with Rick, walk us through the conversation with the sellers as well. Maybe was there anything that, that you saw know, from your experience on why we knew this was going to be a good creative deal?

No, Rick had me help him out with this one as far as structuring it and everything, but I had not talked to the sellers on this.

I don't. No, which is awesome. I know obviously, Rick, you're continuing to move forward in your progress with communicating with sellers and getting these deals under contract. So you were mentioning earlier, right? So they relocated, And they, this property has basically been vacant, sitting on the market for an entire year?

For an entire year. So when I went to go talk to them, I was originally thinking an AO, and then I went to go see the place and I was talking to the seller about it and brought up a lease purchase. And then after I found out that they were actually gone for one whole year because of the capital gains possibility, Rick helped me structure a sub-to deal.

Okay. So just, just so everybody can get caught up because we walked through what's interesting with this deal. Right. And this is the beauty of getting better and better and better at creative financing is that you walk through and you wouldn't— I mean, when I— when we first met, I don't think you would have processed all of these different strategies. But what Rick is stating is that he Originally approached the seller with one of our strategies known as an AO. That's what we— it's called the sign out. Basically what that means is that we go ahead and we'll go ahead and structure a lease purchase agreement with the seller, which just simply means we're agreeing upon a price and a monthly payment and a timeframe. And then, and then we're going to go in, we're going to go as if we are going to buy the property, but we're going to go find a tenant buyer. Now, these tenant buyers are who we sell to. And there are people that need time to qualify for bank loans. And then once we have that buyer and that buyer package, we're going to go assign it to the seller and we're only going to get paid one time. So if you're not caught up on our strategies, we get paid 3 times on every single deal, our nonrefundable deposits, our cash flow, and we build in equity when we're acquiring deals and selling them on rent to own. Then we go ahead and assign it back to the seller. Rick then goes through and says, okay, well, It's more advantageous and maybe more advantageous for the seller if I then actually remain a part of the deal instead of having them have to manage it from out of state. And clearly they didn't want to be landlords or they would have rented it while they were— while the property has been vacant. So Rick steps in and says, okay, we're going to do a lease purchase agreement. Well, a lease purchase agreement just again gives us control but not ownership. Then once Rick realized like, oh, they've been out of state for a long time and there may be an opportunity for me to actually acquire this and own it, he then transitioned to a subject-to deal, which we're going to go out and buy the property subject to the existing loan. And then there's going to be a seller financing portion of it as well, which is the equity of the seller. So we just walked through multiple strategies and then eventually arrived At the one that fit best for the seller and then best for Rick as well. So that's really how the creative process works, is by slowly chipping away and finding out which is going to be the best strategy. Okay, so we go ahead and we land on a subject-to deal. So at this point in time, I'm going to go ahead, I'm going to share my screen so we can walk through the numbers on this. And Rick, I'll be out of here. You said that this is about the time In which you get brought into the deal. Now, Rick Abbiati is the coach of Rick Morato in this circumstance. So maybe you can walk us through you guys' process now when it comes to having or putting this deal under contract. Now we're going over to you, Rick Abbiati. Walk us through you guys' conversations in regards to this deal.

So Rick relayed to me the situation with the seller, and it was— we originally structured it as an AO, as Rick said, but he came back and said the game has changed and told me the situation. So I recommended he go with a subject-to owner finance, and that way he completely controls the property and has ownership of it. As you had mentioned. And then we ran the numbers. We thought, well, this, this is going to work, you know, for all parties. So that's what we went— that's what we ended up going with.

Well, I mean, if, if we actually walk through the numbers in this circumstance, Rick would originally netted probably like $10,000 to $15,000 if he did the original strategy and then the secondary strategy. So it'd be like an AL would be my guess, right? You're wanting to get part of the non-refundable deposit. So maybe $15K all in all. Then you guys go to a lease purchase, which is great. You could probably get roughly the same amount of numbers we're getting with the subject-to, yet Rick is leaving all the tax benefits and control on the table. So instead, you guys switch to a subject-to deal. Let's go ahead and dive in. So we bought a subject-to. Where do we find this deal?

A VA call from MyPostLeads.

Okay. This was an expired listing. VA goes ahead and makes the phone call, which is exactly how we tend to progress our business. First, the community member, the associate, goes ahead and makes his own phone calls, gets really good at communicating with sellers, then go ahead and bring a VA in so we can drastically increase the amount of lead flow so we start getting more and more of these deals. So this is an expired listing. The property was on the market at one point in time, and then now it came off. The listing, you guys then go ahead and we buy it subject to the existing loan. What was the mortgage balance on there?

$285,768.

Okay, so we go ahead and buy it. There was originally a mortgage on the property. We're going to keep that mortgage in place, yet the title is going to transfer to Rick's company. He's going to own it now. And now we go ahead and we start making payments on the seller's behalf. Okay, so there was equity in the deal. So instead of paying the seller their equity upfront, you guys go ahead and structure a seller financing second. The total amount is how much? And then what was the structure of that seller financing?

They're going to get the $29,231 at the end when there's the final closing with the tenant buyer.

Got it. So the structure is just no money towards it, no interest, no monthly payments. Just correct. Okay, awesome. And then the balloon is doing 48 months.

Correct.

Okay, so we go ahead and we buy it for roughly, say, $300,000 and we go ahead and— or $305,000 and we go ahead and sell it. And these are projected. We got this property under agreement. These are now projected to sell at roughly $349,000 as well. Now, how did you guys come to the conclusion of what we should sell it for to our tenant buyers?

Yep. So that was looking at the comps. The comps supported the asking price or the price that we— the purchase price of the property. And because it's a rent-to-own, that brings in a little bit higher price. So we mark it up, not significantly, but we tried to keep it below the $350,000 threshold. Because there's a difference between $349,000 and $350,000 psychologically.

And I might add some extra nines in there. Is it $349,900 or is it $349,999?

$349,999.

Okay.

Love it. Fair. It's like buying that pack of gum psychologically. We're going to— we're going to eke that out even though it's like a dollar less. I love it. All right. So we go ahead and we're projecting to make at least 10% down as a nonrefundable deposit, which is $35,000. What I want to draw people's attention to, which is interesting because I talk about this quite frankly a lot, either on podcasts or at live events, is that every single creative deal needs to be measured holistically. Because what we're going to look at right now is the monthly cash flow and you're going to see that it's negative. And most investors, because they're not receiving a large nonrefundable deposit, are going to pass on this deal. And that's probably why this probably sat on the market for so long. But let's walk through this. So our monthly payment to the— on the seller's mortgage is $2,660. Do we know what interest rate that is, out of curiosity?

I do not remember.

It's probably decently high. It's probably a loan that was created within the last couple of years.

Yeah, it was. It was 2 years ago, so it's probably in the 5 or 6 range.

Got it. Okay. Again, this is really important. If you're watching this right now and you're currently utilizing other real estate investment strategies, we're going to talk through why you could still make a good amount of money on a deal that doesn't cash flow. And Rick Abbiati is the perfect person to talk about this because he was kicking and screaming on one of the first deals in which we did, and there was negative cash flow. that we did with him. But I'm sure you ended up getting a significant amount of profit on that deal. Right to it, Rick. What did you end up netting on that deal that you had to pay out of pocket on a monthly basis?

Well, it was originally projected over a 48-month deal at right around $100,000. I think it was $102,000 and it was a negative $25 a month cash flow. And yeah, I didn't really kick and scream, but I questioned it anyway. Yeah, I cashed out early within 24 months, so I believe it was like $70-something thousand.

$70-something thousand deal with negative cash flow. Again, I just want— if you're watching this right now and you're passing on deals just because they're not cash flowing, because we're seeing that a lot right now based on the new mortgages, that there is an opportunity to still make significant amount of money on these deals by utilizing our 3-payday strategy. Okay. So our buyers are going to pay us $2,323. So we have a negative $337 per month, but $16K, negative $16K out of pocket if it goes the full term. Now, With our deals, right? If Rick was making good cash flow on this deal, then we probably would not push our buyers to cash us out as soon as possible. But because we have negative cash flow, we may be more aggressive with getting the buyer to the finish line is the point, because we're actually receiving a good portion of the money upfront and on the back end, which means we want to get to the finish line sooner. So, Rick, out of curiosity, more out of when you were originally looking at this deal, what were your thoughts when you started to see like there was going to be negative cash flow and how were those conversations with your coach?

Well, I was concerned, especially when I saw it was 337 rather than the 28 that Rick had. So yeah, I was concerned that I was going to be going backwards, not forwards. And No, I have confidence in the coaches and they wouldn't let me make a huge mistake like that.

Well, and this deal is contingent upon finding a third-party buyer, is that correct?

That is correct.

Okay.

The other thing, Zach, you know, based upon the payday 1 of $35,000 and that on top of that is the first month's rent of $2,323. So it's a total payday 1 of $37,000.

$323,000. Well, let's talk through some of these strategies. So first and foremost, this deal is 100% contingent upon finding our tenant buyer. So Rick is not committing to any of this until he has a buyer in hand, which means that Rick has to feel really good about the nonrefundable deposit he is collecting with this buyer before he even decides to commit to the deal. So you're already going to be Positive profits in the deal before you even commit to it, which is really important for people to hear in regards to these strategies. Because at the end of the day, we aren't having any of our community members commit to a deal, especially if they're using our contracts, until we have profits in hand. So, and if you take the 2323, right, and you divide it by the 337. You already have like six months worth of rent already in your pocket before you go ahead and commit to this deal as well. Like you already have that negative cash flow covered when it comes to that, which is a good good cash flow strategy. Okay, so if we go accept this buyer and we already collected thirty five thousand plus first month's rent, we if we look at our back end or payday three, we Bought the property for $304,000. We've sold it for $349,999. So we increased it by $35,000. We then are receiving $545 in principal paydown every single month as well, which is also important, right? Because technically we are still at a positive profit on a monthly basis. Even though we're at negative cash flow, because we have $545 in principal paydown every single month. So even if Rick had to come out of pocket and pay that, he's still paying down the principal loan by more than his negative cash flow, which again makes this a profitable deal. We already collected $35,000, so we have $26,000 in equity built in over the 48 months, which brings this deal That Rick is wiring for little to no money down. He's not even including the tax benefits or writing out the interest here, but it's $47,000 in all 3 paydays. Now, when we look at this deal, Rick, and I know that you're— we were talking previous before this, you're in the process of either vetting or getting really close to having a tenant buyer in in hand as well. Is that accurate?

That is accurate.

I have a buyer's meeting on Friday and today's Wednesday.

That's awesome. So once Rick has this buyer and once he accepts them, then we're going to go ahead and start working towards close. As I mentioned, we already are going to have profits in hand before we actually go ahead and close on this deal. Super, super interesting deal in regards to in regards to this, because it just brings up that point of we got to look at all these deals holistically. I want to give one more example. So if, if you are a traditional renter and I would say like a long-term, long-term hold investor, in order to get into those deals using traditional financing, you have to put somewhere between 20% and 25% down to even create cash flow. You're going to be paying somewhere between 7.7 to, let's say, 7.125 is what the investor loans are currently going for based upon the research today in today's market, which means that it's either going to be very low cash flow or negative cash flow if using a property management company. So although that negative cash flow looks a bit challenging for some, The reality is this deal is actually in really good shape because of the amount of money Rick is receiving upfront. Because if you just made, say, $300 a month each year when it comes to these deals, right, that's— was that $3,600 in cash flow? Rick is now pushing, pulling forward his profits and is receiving 10 times as much cash flow all upfront, which is extremely impactful when it comes to these types of strategies. Rick and Rick, as we kind of roll towards the ending here, maybe any thoughts or ahas or anything along the lines that the, you know, the person watching this Deal Structure Sunday, maybe some insight into this deal.

Yeah, I'd say one of the things is, um, Rick was also reaching out to one of our other coaches, Mike McCready, and, you know, he has access to all of us. So it was, you know, who was available at the time. So Mike worked part of it, and then I worked the remainder of it.

So who got the, uh, credit in the, uh, the coaches challenge right now?

I hope I did. Okay.

Gotta find out. We always keep our coaches competitive, so that's awesome. How about you?

I was— well, I was working with Rick a lot because he's in my time zone. It's a little easier to get a hold of him, just mainly because of that. But probably my biggest aha is actually not on the seller side, it's on the buyer side. This buyer that I have coming up, was actually from a bandit sign that it's in front of the house. And I've been getting a lot of leads just from that, which totally surprised me.

Not sure where to get started? Go to smartrealestatecoach.com/getgoing for free books, strategy calls, and a whole bunch more. We're going to help you get going the wicked smart way. We've been after this for over a decade doing exactly that. I love that. Actually, one of the first deals that we ever did came from that rent-to-own sign in the yard because we had this gentleman. He was a mason driving by the property on a daily basis when it was on the market with an agent. Never called the agent because he knew he couldn't qualify for a loan. We placed a rent-to-own sign in the yard. We had that property closed out on a rent-to-own in 2 weeks with a $20,000 deposit. So it's so important that you bring that up because you never know who is driving by that property, although it'd be old school, and you never know who is in that neighborhood that wants to either have their daughter or their son or a friend move into that neighborhood that just can't qualify for a bank loan. So thanks for bringing that point up. As we come to a wrap, maybe just the outside looking in, Rick or Rick, whoever wants to comment on this, and somebody looking to get involved in creative financing, maybe even looking at communities to be involved with, any thoughts in regards to structuring deals with us inside our community or even getting involved The only thing I can say is I wish I would've joined sooner because I would be so far ahead. Yeah.

And to add to that, it's because of the availability of the coaches, you know, and we've all been through this whole process before on multiple deals. It gives another perspective and also it covers your hind end. You know, with Rick, and he's mentioned that a few times, says, geez, you know, I thought I was going to be negative on this, but it's alternate alternative ways to look at it, be creative, and try to meet the needs of the seller and in making it work for everybody. Love it.

We're keeping it rated PG here on this YouTube channel here. Thanks, Rick, for that. Appreciate both of you guys coming by again. Every single Sunday we put together a deal. Structure Sunday. We've been doing this for many, many years now. So if you want to get notified, go ahead and make sure you click that subscribe button. And that way you can see each and every one of the deals in which we're putting together. Because right now in this current market, the amount of creative deals that are happening inside our community are drastic. So you know that every single week you get a new insight, a new way to structure deals. Again, I'm Zach Beach, CEO of Smart Real Estate Coach. I look forward to seeing you next Sunday.