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Not only is hard equity financing potentially less expensive, but if handled effectively, you can substantially magnify your profits by financing multiple properties at once. Of course, you must leave yourself enough capital to repair the property and carry the mortgage payments for approximately 6 months. Here´s an example of how effective proper leverage can be:
HARD MONEY FINANCING DOESN'T COST YOU. IT MAKES YOU MONEY AND YOU RISK LESS!! HERE'S HOW:
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Scenario One: Scenario Two:
Buy one property, for all cash: Buy two properties, financed at 15%:
(80% of your purchase financed; Close your sale in six months)
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The Figures
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Scenario One
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Scenario Two
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Cost
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Cash Outlay
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Cost
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Cash Outlay
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Final resale price
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$ 75,000.00
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$ 75,000.00
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Purchase price
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$ 40,000.00
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$ 40,000.00
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$ 40,000.00
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$ 8,000.00
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Closing costs - purchase
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$ 1,500.00
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$ 1,500.00
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$ 3,000.00
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$ 3,000.00
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Hard financing costs:
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6 mos. interest @ 15%
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$ -
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$ -
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$ 2,400.00
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$ 2,400.00
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3% Origination Points
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$ -
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$ -
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$ 960.00
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$ 960.00
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Opportunity costs (what your
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borrowed money would
have earned had it
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remained in the bank -
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namely 1%)
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$ 160.00
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$ 160.00
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$ 40.00
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$ 40.00
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Property renovation costs
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$ 15,000.00
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$ 15,000.00
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$ 15,000.00
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$ 15,000.00
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Water, electric, lawn maint.
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$ 500.00
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$ 500.00
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$ 500.00
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$ 500.00
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Property fire insurance
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$ 150.00
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$ 150.00
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$ 150.00
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$ 150.00
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Prorated property taxes and
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closing costs on sale
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$ 1,500.00
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$ 58,810.00
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$ -
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$ 1,500.00
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$ 63,550.00
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$ -
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Total cash outlay
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$ 57,310.00
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$ 30,050.00
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Profit from sale
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$ 16,190.00
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$ 11,450.00
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Cash on cash return:
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28.2%
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38.1%
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Cash on cash return, annualized:
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56.4%
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76.2%
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Scenario two presents the projections for only one of the two properties you have purchased. When you double the figures in Scenario Two, you realize that due to the benefit of short-term financing, that in the same 6-month time period as in Scenario One, you produce an additional $6,710 profit while risking only $2,790 in additional cash.
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