Cash Flow Principles 101
You have undoubtedly seen the word "Cash Flow" in the news lately.
Maybe you've seen someone on the Internet or late night television talking about how you can make millions in the Cash Flow business.
That sounds great but what are they really talking about - what is this cash flow business? In order to learn about this exciting business we must first understand the underlying conditions that allow the cash flow business to exist in the first place.
When an individual is interested in buying a piece of property, they typically need to borrow money from a bank or lending institution.
Once financing is secured it is simple to purchase the property.
What happens, however, if the purchaser discovers that they can't get financing? What if their credit score doesn't allow them to get a loan from a financial institution? There are even stories of people with good credit that got the loan approved but the lender backed out before the closing date on the property! Now what!? This is where the cash flow business comes into play.
It starts with something called seller carry back financing.
In this scenario the seller of a property chooses to loan money to the buyer the same way a bank would.
Therefore the buyer of the property strikes up a loan agreement with the seller of the property, and the buyer sends payments to the seller (instead of a bank).
The "cash flow" is the payment coming monthly to the property seller.
I can hear the question in your mind - "Why on earth would anyone decide to carry payments on a property they sold?" They could be backed up against the wall and need to sell the property fast due to a pending move.
Maybe a buyer shows up at their door with a really large down payment ready to go but can't get traditional financing.
That's hard for the seller to turn down! Another reason could be that the buyer was able to qualify at a bank for most of the price of the home but can't get that last little bit of financing to make it happen.
That means the seller would have to carry a second position note for a smaller amount to make the property sale happen.
When someone sells a home and carries the payments, that person can dictate the interest rate, the down payment requirements and the terms on the loan.
(Of course, legal advice from a qualified attorney is an absolute necessity to set up a loan on a property so that all parties' interests are looked after.
) A bank might give a qualified person a rate of 6% with a thirty year term while the seller carrying the payments might be able to get a twenty year term at 9% or even higher! When was the last time you saw an investment return like that? Now, along with benefits, there can be risks involved with carrying payments.
If the home buyer could not qualify for a loan at a bank, what does that say about their ability to pay? The seller might negotiate and get exactly what they wanted for an interest rate, but what if the buyer defaults? Now what? By requiring a down payment, the seller can help to protect themselves in a foreclosure situation.
What about collecting the payments on a monthly basis? What if the payor needs to be constantly reminded to send in their payment each month? That can take a lot of time and energy.
As you can see, there are a lot of factors involved that one needs to know before carrying payments.
Now that we have a good overview of what the basics are, what exactly is the cash flow business? Of course, one part is the business of collecting payments as a note holder.
Another part is that the person getting the payments can also choose to sell them for a lump sum of cash.
Let's take a look at an example.
Let's say that a person sold their property and has been collecting payments for thirty-two months on a thirty year loan (which is three hundred and sixty payments).
That means there are three hundred and twenty-eight payments left on the term of the loan.
The note holder could choose to sell those remaining payments to a buyer.
This means they would be free of the burden of collecting payments and get a lump sum of cash in return.
There are several factors that are considered when a buyer looks at purchasing the payments, but the fact remains that a note holder can get a significant amount of cash for the payments left on the loan.
So the cash flow business really comes down to the simple fact that the bank is NOT the only one that can loan money to help purchase property.
Regular folk have been doing it for centuries and will probably continue to do so for a long time to come.
Maybe you've seen someone on the Internet or late night television talking about how you can make millions in the Cash Flow business.
That sounds great but what are they really talking about - what is this cash flow business? In order to learn about this exciting business we must first understand the underlying conditions that allow the cash flow business to exist in the first place.
When an individual is interested in buying a piece of property, they typically need to borrow money from a bank or lending institution.
Once financing is secured it is simple to purchase the property.
What happens, however, if the purchaser discovers that they can't get financing? What if their credit score doesn't allow them to get a loan from a financial institution? There are even stories of people with good credit that got the loan approved but the lender backed out before the closing date on the property! Now what!? This is where the cash flow business comes into play.
It starts with something called seller carry back financing.
In this scenario the seller of a property chooses to loan money to the buyer the same way a bank would.
Therefore the buyer of the property strikes up a loan agreement with the seller of the property, and the buyer sends payments to the seller (instead of a bank).
The "cash flow" is the payment coming monthly to the property seller.
I can hear the question in your mind - "Why on earth would anyone decide to carry payments on a property they sold?" They could be backed up against the wall and need to sell the property fast due to a pending move.
Maybe a buyer shows up at their door with a really large down payment ready to go but can't get traditional financing.
That's hard for the seller to turn down! Another reason could be that the buyer was able to qualify at a bank for most of the price of the home but can't get that last little bit of financing to make it happen.
That means the seller would have to carry a second position note for a smaller amount to make the property sale happen.
When someone sells a home and carries the payments, that person can dictate the interest rate, the down payment requirements and the terms on the loan.
(Of course, legal advice from a qualified attorney is an absolute necessity to set up a loan on a property so that all parties' interests are looked after.
) A bank might give a qualified person a rate of 6% with a thirty year term while the seller carrying the payments might be able to get a twenty year term at 9% or even higher! When was the last time you saw an investment return like that? Now, along with benefits, there can be risks involved with carrying payments.
If the home buyer could not qualify for a loan at a bank, what does that say about their ability to pay? The seller might negotiate and get exactly what they wanted for an interest rate, but what if the buyer defaults? Now what? By requiring a down payment, the seller can help to protect themselves in a foreclosure situation.
What about collecting the payments on a monthly basis? What if the payor needs to be constantly reminded to send in their payment each month? That can take a lot of time and energy.
As you can see, there are a lot of factors involved that one needs to know before carrying payments.
Now that we have a good overview of what the basics are, what exactly is the cash flow business? Of course, one part is the business of collecting payments as a note holder.
Another part is that the person getting the payments can also choose to sell them for a lump sum of cash.
Let's take a look at an example.
Let's say that a person sold their property and has been collecting payments for thirty-two months on a thirty year loan (which is three hundred and sixty payments).
That means there are three hundred and twenty-eight payments left on the term of the loan.
The note holder could choose to sell those remaining payments to a buyer.
This means they would be free of the burden of collecting payments and get a lump sum of cash in return.
There are several factors that are considered when a buyer looks at purchasing the payments, but the fact remains that a note holder can get a significant amount of cash for the payments left on the loan.
So the cash flow business really comes down to the simple fact that the bank is NOT the only one that can loan money to help purchase property.
Regular folk have been doing it for centuries and will probably continue to do so for a long time to come.
