What's going on everybody. It's Matt Faircloth. Welcome, welcome to the Mentorship Monday
program. My name is Matt and my company is called the Derosa Group. Let me bring in my
cohost, Justin Fraser. Justin, who is our guest today? Who is the lucky candidate to
be here [crosstalk 00:00:12].
Barbara Freund is here with us today. I'm so excited. Barbara is a friend of mine. Barbara,
come on in. Barbara [crosstalk 00:00:20] over the weekend. And I said, Barbara, you have
to come on Mentorship Monday, please, please, please. So here you are. How are you doing
man?
I'm doing really good. I'm excited to be with my two fellas over here.
Awesome to have you here too Barbara. Great to see you. What can we do man? Hop into the
brains, pick away. How can we brighten your day man? What's up?
All right. So my boyfriend has a property that he owns in Philadelphia. He currently
has it mortgaged, owes around 370, it might a little bit lower than that. And its current
market value, I'm sure you kind of see it on the screen, is between like 445 and 475.
I'm currently working with another real estate investor friend of mine who's doing like a
lease purchase option. He's going to be giving us around 20,000 down. We're under, I think
three month contract for him to then find another tenant buyer situation, that kind
of deal. And he's also going to be paying us monthly 2,500. It would rent for around
2,500 to 2,700, somewhere around in there.
I just want to know that it's kind of our best move. It's a very sizable house. It's
2,500 or 400 I believe if I'm not wrong on those numbers. And it's a four bed, three
bath. And I like, I don't know. I get in my head about it because I'm like, "It's such
a big house. What if we rented each room out because it's kind of like a younger neighborhood?"
Or something like that. So I was just thinking, if all that equity is sitting there-
You ain't doing that during COVID man.
Yeah.
No, you're not doing, you're not renting a room during COVID. Come on, man.
True.
Who is doing that? Who's signing on there? Who's signing that contract? I don't think
it's a big deal. I would do that if I was that age, whatever-
Well, the reason I was thinking it might be a good opportunity is because so many people
are probably downsizing. They're moving from more expensive neighborhoods and going into
something that they can maybe afford because of a loss of income or something like that.
That's why I was kind of going with it.
Do y'all live there? Do you and your boyfriend live in the property now?
We were, yeah.
Okay, so did he live there two of the last three years, or two of the last five years?
He has, two of the last five years.
Why would you do this lease option thing? Why? This sounds complicated. Why we doing
it?
At the end of it, it looks like we would net the most, if we were to sell this way rather
than go through a traditional broker.
So you're saving the broker fee. Is that it? Are they committed? Have they committed with
this lease option? Have they committed a purchase price to you?
Yes. It's three, I'm sorry, 465 I think.
All right, now we're talking. Okay. Now we're talking 90 grand. Okay. And it's tax free.
The reason I ask that and for our listeners, the reason why I asked if Barbara's boyfriend
had lived in the property for two of the last five years is because when he liquidates this
property, he'll get to keep all the proceeds tax free because, oh yeah, see look at that
face. I didn't realize [crosstalk 00:03:39] 90 grand is like a shot of heroin into your
veins, man. I mean, it's like, you're going to have to, you got to figure what to do with
that. Right?
Yeah.
Because that's going to being like, "Oh shit, look at this." And if you got, if you're going
to give half of that away to the man, that's a big conversation, right? I mean, you might
have to give 30 to 40 grand away of that in tax. But if you get to keep all of the tax
fee because it was his primary residence-
It was, yeah.
[crosstalk 00:04:07] that's a huge thing man. So to everybody watching, what to do about
taxes is a big question when you talk about selling property. It should be your, that
should be a part of the calculation. But because you lived there, you guys get to keep it tax
free. Now there's another reason why you want to sell sooner than later. If it goes so long
to where he has not lived in the property for two out of the last five, let's say he
moved out four years ago, and you want to keep cash flowing it, then he can no longer
sell it tax free. That makes it a way bigger thing. And yeah, you do [crosstalk 00:04:41]
in exchange. Right? So there is a window where two out of the last five, two out of the last
five plays, if that makes sense. And you want to sell it in that window so he can keep all
the money tax free.
Yeah, that-
So you can only have been out of that house maximum for three years by the time you sell
it. Okay?
Okay.
This also would be a time to state that Justin and I are not certified public accountants.
To talk about tax issues, talk to your local CPA. Not talking to, talking to all of our
listeners. You guys should talk to your local CPA before you just take mine and Justin's
advice.
Absolutely. So the situation here Barbara, you have committed to this lease option buyer?
Or are you just about to make a decision? Or where are we in the process?
We're committed to it, but he's someone that I've known for many years, and if we were
to back out, he would be acceptant of that. He committed to it for three months. Yeah.
Okay. [crosstalk 00:05:40] And how long have you been out of the house?
We've been out of the house since the 1st of September, so-
Oh okay, so just a week?
Yeah.
So, so you could really have two and a half years and be more than comfortable from a
tax perspective if he gave that option. I'd be concerned if you had [crosstalk 00:05:56].
Why does he need a lease option? Why can't he just get a mortgage and buy it? Why does
he need a lease option?
Because he's going to be selling it to another tenant buyer.
Oh, he's straddling the deal? So he's going to take it from y'all at 465 and then-
Do a wrap around mortgage, and then sell it for more.
I would want to get a chunk of that if I were you. I would lower the 475 or 465 or whatever
it is to 450 and say, okay, I want a percentage of whatever your up sale is because to me,
and I've so I sold a few houses in Kensington that were smaller than this, less bedrooms,
for more money than you're talking about right now. [crosstalk 00:06:41] on side of the L.
Okay? See, I'm talking Philly talk, you know what I'm talking about.
Wait, wait, wait, on the other side of the other side of the L?
The other side. Oh my goodness.
The other side?
The other side of the tracks, yes. [crosstalk 00:06:54] Yes man. New construction man.
Oh, okay.
Right, but not for nothing, man. Listen Fishtown is the spot. Right?
Yeah.
Well Barbara, how old is this house? I don't think you told us today.
Yeah, it's two years. It's a [crosstalk 00:07:10].
Only a two year old house?
Yeah.
It's still under warranty. In Philly you got to do a 2 and 10. It's [crosstalk 00:07:17]
eight years-
[crosstalk 00:07:18] and a bunch of stuff, so yeah.
Yeah man. Yeah, man, you got something going on there. That's not ... I'm not saying 450
or whatever's not the number, but have you and your boyfriend run really deep comps?
Or at least talked to a realtor about what the property may be worth?
The realtor that he was actually using had put us at 465. That's where we got that number
from, was the realtor that he had it listed with for a little while. And then my friend
approached us. And then we kind of did the numbers and ended up getting out of that contract
with her.
It's a win for you guys, but I just would be careful that he's not going to put it up
on the street and get 580 for it. I mean, you never know, not for nothing. Maybe I'm
wrong. I probably am. I don't know the Fishtown that well. I just know I did some stuff, not
in Fishtown, further away.
So [Natalie Vain 00:00:08:14], "If someone experienced thinks that they can make money
wrapping your deal, why can't you just do that and sell to the end buyer and keep some
of the extra profit? Never sell to a middleman unless you think they're making a mistake."
Good point. This is a friend of yours. I get it. And we want to help friends out, but not
for nothing. This is not a not-for-profit that you guys are running. You guys are in
business and it's your boyfriend's property. He deserves the right as the owner of the
property to make as much as he can on that property. [crosstalk 00:08:42] So my guess
is your wraparound man is not going to make ... He wouldn't be going through all that
and taking all that risk if he was going to make 5,000 bucks on the wraparound deal. You
know?
Yeah.
He's going to make multiple, like in the mid five figures. I would require something like
that if I was going to do a deal like that. Put yourself in his shoes. How much profit
would you have to make to put yourself at risk to go and be obligated to pay you guys
a rent payment every month until his buyer comes around? You know?
Yeah.
Right.
So as much as I think this is a good arrangement, I'd rather see you do the deal where you get
a chunk of the upside, more of like a partnership.
[crosstalk 00:09:20] is there any, do you have a pain point that he's solving? Is it
a time crunch that you have to get out of this payment? Or something else where this
was really weighing you down?
I mean, it would kind of stink because we are currently renting now. So we're going
to be paying for two houses, one being vacant obviously. But that would be the only slight
pain point.
Okay.
Yeah. But it's a crazy market. It's Fishtown.
You're not a distressed seller.
If this guy flaked you guys could lease that place or sell it, like literally snap of your
fingers, man. So I would ... How much? You want to rent it for 2,500 bucks a month?
Yeah. That's [crosstalk 00:10:05]-
What's your cost basis? What's your mortgage payment?
The mortgage is 2150.
Okay. All right. I would approach this guy. If he's your friend, your boyfriend's buddy,
I'd approach them as a partner.
He's my buddy.
What?
My buddy, I can [crosstalk 00:10:20].
All right, cool. All right, anyway, your buddy. So I would go to your buddy and say, "Listen,
have I got a deal for you my friend? I'm going to cut the rent back. I'll cut the rent back
to like 22, 23, right above my cost. Here's my mortgage payment, my PITI. Any maintenance,
any taxes, whatever, we split it, anything above the above the housing cost. So if we
have to send a handyman in there for 200 bucks, I'll kick in a hundred. You kick in a hundred.
Okay. All right. I want a baseline number of 450. Anything above that, we split at some
negotiated percentage. Maybe you guys get a heavier, this is more complicated, but maybe
it's sliding scale. Maybe any dollar above 450, between 450 and 475 gets split 60/40,
and anything about 475 goes to 60/40 his way. To where you guys get ... The more money he
gets for the property, the more money he makes. But you guys still get a ride along the whole
way up. Right?
Okay. I like that.
Now it should be said right now, I am making this shit up right now. Okay. This is not
[crosstalk 00:11:33] This is coming out of an area down here. Okay?
Got it.
But sometimes the best, most creative financing deals do. This is just called creative financing.
That's why I came to you, Matt.
I hear ya. I can pull a lot out of my [crosstalk 00:11:49] Matt will pull this out of his ass.
No, this is creative financing 101 guys. This is about finding win-win arrangements. When
you're working with wholesalers, creative sellers, creative buyers and stuff like that.
I try and find win-wins. And so I would snap back a little bit more of your baseline numbers,
meaning the minimum number you need to get in rent and the minimum number that you need
to get in sell price on the property. And if he says, no, I know he's your buddy right,
but if he says no, it's because he knows that he can liquidate this joint for 625. I know
that's probably not true, but you might want to talk to two more realtors before you engage
in this deal. And you might want to just try and negotiate something. Justin, what do you
think?
What you just ended on was exactly where I was going to go, is I want more than one realtor's
opinion on the price of this property because for this guy to ... He's an investor in the
area. He's knows what that house is going to go for. A two year old house, Matt is saying
that he sold properties in that neighborhood, that area for a lot more. My feeling is this
house is worth more than you think it is. And so I would want multiple opinions on the
value of that house, so get that. And then you can run the numbers and see, this seems
like a nice way for your buddy to make some money, for you to make some money. You don't
have to go through a realtor, but you should consider all the options.
What are you going to do with the sales proceeds? That's the next question. So now you and your
boyfriend are going to walk out of here, and by the way, when Liz and I, who I have been
married to now for 15 years, were dating, we were buying rental properties with each
other too. So totally cool. So you guys are going to be walking out with I don't know,
80, 90 grand, and maybe some icing on the cake too on top of that, if you negotiate
a good partnership with this guy. So now what, with the money?
I want to reinvest and he also wants to reinvest.
In what?
Real estate.
No, I get that. I know you're not going to go buy Bitcoin, but I mean [crosstalk 00:13:57]
Rental properties. [crosstalk 00:13:59].
I'm going to buy myself a mobile home park. I'm going to buy myself a trailer. I guess
as long as you and your boyfriend had thought of it. And what's great is because it's not
that the tax implications of it, it's not going to be money burning a hole in your pocket.
Do y'all already have your housing situation set up at your new spot? You've got a new
place you're renting?
Yes. We have a new rental that we're currently in. This is the beautiful common area.
I know I was going to say, that's very lofty looking of you. It's probably an old factory
conversion or something like right?
I think it is actually. I'm pretty sure.
That's very Philly. Cool.
Okay, so you got 90 grand and then you've got options. You're going to buy, you're going
to go single small duplex multifamily route, maybe in Philly where you know, or any thoughts
on that?
I mean, we haven't discussed it super thoroughly. Obviously we want to stick back into real
estate somehow. I have kind of been dabbling in wholesale with no luck. So I figured maybe
we would, maybe I would come across something that made sense numbers wise for us to keep.
Well, if I could offer it up, I would go to a growing gentrifying part of Philly. Call
it like your Germantown, your Brewerytown, something like that. And go and buy a two,
three or four unit, small, multi on low money down, on an FHA. And even maybe even an FHA
with a 203k construction loan blended in. Then go and buy it and renovate it and then
rent it out. And then live there for like a year. And then flip it or do it again. I
would house hack with your boyfriend. If y'all want to live together like that, then I would
make your homestead part of your rental business. You know what I'm saying?
My two cents, that's what I would do if you guys like living in Philly, if you already
live in the city. You might not find what I'm talking about in Fishtown, because Fishtown
has already gone like that, but you could go right across the L, to Kensington and find
a beater, two family, three family, four family. And live in it and clean it up, fix it up,
straighten it up and then get rid of it. And then either refinance it and get rid of it,
or move on to the next one after a year or two.
Okay. I like that. I'm definitely going to make him watch this video and get him onboard.
Nice, get him on board.
Well, after you sell, whatever the outcome is on the lease option, you'll have to come
back and get us an update on what you did. [crosstalk 00:16:31] we talk about the next
deal.
Barbara thank you for being here. I sure appreciate you being a part of the Mentorship Monday
program program.
Thank you for having me.
Thanks Barbara, see you soon.
See you soon.
That was great.
Yeah man.
I love the creative financing stuff. I love the sliding scale option that you mentioned
that you just [crosstalk 00:16:49] I mean, your interests are aligned. Right?
Yeah.
Because that puts the most upside for this guy, if he can really produce and get up over
that 475 number, the more he gets, the more it goes in his pocket. And then that's better
for her too. So that's the definition of a win-win.
Yeah, and you make it a win for him by dropping his cost basis, by dropping like, "Hey, listen,
your rent, I'm dropping your rent and your strike price with me." So it's a win-win,
so great. Guys, one more time, send an email over to helpme@derosagroup.com. That is help
me at Derosa Group dot com if you want to sit and rap with Justin and I here on the
Mentorship Monday program. Justin, my friend enjoy the rest of your Labor Day my friend.
For all the hard labor you do, enjoy your Labor Day, man.
You too have a good one, man.
Thanks for watching guys. Have a great profitable week.