The Situation: Why a Flip to the beach made sense
A man in his late forties owned a condo inland in San Diego County. This condo was worth $900,000. He owned it free and clear. He was renting the property, producing rental income. Let’s call the inland property “Property A”.
He found an opportunity to purchase a property (“B”) on the coast for $900k. This property offered two financial opportunities:
- The residential building (“B”) on this coastal property could be improved.
- Furthermore, the property also had enough land and was zoned to build a second residence (“C”) on it.
Based on #1 and #2, he realized that this could increase the value of the property and offer a great flipping opportunity.
What happened next:
• Based on the equity in property “A” RanchoTed gave him a loan for $450,000. The rent he is receiving covers the loan payments.
• RanchoTed gave him a second loan of $550k, based on the value of the coastal property which had a price of 900k.
• The borrower now had $1M in funds (450k + 550k). He bought the coastal property (“B”) for 900k and used the remaining $100,000 to improve the existing residence on that property.
• He then needed a construction loan of $450k to build a second residence (“C”) on the coastal property (property “B”).
• In this scenario, we could not give him a construction loan without refinancing the existing loan he had on property “B”. That is because we could not put such a large construction loan of $450k into the second position behind the first loan of $550k.
• Therefore, we refinanced the existing loan on property “B” and gave him the money for the construction of the new residence “C”; totaling $1M in all (550k+450k).
• When residence “C” was built, he sold it for $1 M. In the process he made around half a million dollars in profit, which allowed him to pay off the loan on the coastal property “B”.
• Through this flip to the beach, he now lives in the original but improved residence on property “B”, which he now owns free and clear.
• Not only did he improve and upgrade his life to living on the beach in Southern California, but he also owns the property free and clear!
• He still has his inland property (“A”) as a rental with a 450k loan on it – yet, the loan payments are covered by the rental income.
Doesn’t this sound like the American Dream to you? He makes around half a million dollars, all with the money RanchoTed lent him. This is a great example of incredible leverage. We worked hard to buy his inland property and own it completely. Then he leveraged that property in two ways. He got a loan on it that allowed him to flip the coastal property, This flip ended up earning him enough profit to allow him to live on the beach in Southern California. As we all know that costs a fortune.
In addition, he still has a rental property that covers his loan on the inland property. When that loan is paid in full, he will then own two properties free and clear.