Different states treat debt obligations differently; therefore, borrowing money to buy houses carries different levels of risk associated with financing. In California, a person can owe millions of thousands of dollars on a house, and if things don’t work out, just give the house back to the lender and walk away without any liability. But, in many states, if you personally guarantee a loan, even after a home is foreclosed, you will still have to pay any losses the lender incurs if the home sells for less than the loan balance. You could spend years working to pay off what you owe as the interest clock ticks down.

When buying a home to resell, I look for financial terms that do not impose personal liability for debt. My favorite goal is a house that has an existing loan that I can take without liability. Here are a few ways I do this:

1. If I am taking title by Deed of Grant or Warranty Deed, I want to include language to the effect that “Beneficiary is taking title SUBJECT TO any encumbrances, encumbrances, encumbrances, covenants, easements, and record restrictions “.

2. With a Quit Deed, I do not need to add any of that language because it is implicit in a Quit Deed that only the estate the other person owns is conveyed to me, subject to any defects in title claims by others. .

3. As a trustee, corporate officer, LLC managing member, if I add “and not individually” after my name, I assume no personal responsibility for repayment of the loan and may turn the property over to the lender if I am unable to make things work . outside.

4. If, instead of borrowing money to buy a property, I give the seller the same down payment, but for an option to buy the property at an increasing price instead of paying interest on a risky loan. Therefore, I avoid all responsibility for any debt.

5. I can buy the property on a contingent contract and I do not have to complete the sale unless certain contingencies are eliminated. My favorite contingency language is: “The buyer will not be bound by this contract, and the entire security deposit will be returned until the buyer has examined and approved the condition of the premises, title, and financial arrangements as of the date closing”. .” This gives me a lot of last-minute leverage to get risk-free financial terms.

Price is critical when buying a home to resell, but when buying a home for long-term rental, financial terms are paramount. I’m willing to pay more to get seller financing that I can afford comfortably out of rental cash flow. Let’s say a $200,000 free and clear house could be bought for $160,000 in quick cash, but I had to borrow the money at 10% interest, only from a private lender; my payments would be $1,333.33 per month plus another $3,000 or so per year for taxes and insurance. Let’s say that for a full year, my rents averaged $1,250 per month minus about $250 per month in operating expenses. It’s going to cost me about $4,000 a year to own this house. I could afford one house like this, but not ten houses. In other words, negative cash flow seriously limits the total wealth I can accumulate by holding houses for long-term appreciation and amortization.

Suppose I pay the full rental value of the house in exchange for two things: a small cash flow differential and zero interest. Let’s say my financial terms might call for two $100,000 loans: The first loan to be paid off with payments of $1,000 per month for 100 months. The second loan will be paid off in a single balloon payment at the end of 100 months. You would raise this by refinancing the house or selling it. The seller will be paid in full in 8.5 years. Using the same operating expenses, I will balance my cash flow from day one and be able to continue buying houses. Comparing these two approaches, if the house appreciated at 5% per year, at the end of 10 years it would be worth $325,779. In the first case, you would still owe $160,000 and would have paid $40,000 in negative cash flow. In the second case, I would have paid off $100,000 of the debt, leaving $100,000 of debt to pay. In the long run, financing, not the market, is what creates equity.