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A Powerful and Ethical Money Making Idea

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The following is a simple money making concept that is potentially powerful and is also a good example of how we can create value in many different ways. This is not a new idea, but once you understand it you can find all sorts of new ways to apply it. The idea is the basis for rent-to-own furniture stores, payment plans for engagement rings, and easy-financing at used car lots. It is simply this: add value by making it easier for the customer to buy, and you can sell more at a higher price. I'll explain it further with a real estate example, because I have had some experience in this area.

I used the technique when I bought my first piece of real estate. Using money saved from a $3.40-per-hour job, I paid $3,500 for a couple acres along a dirt road through a forest, and spent several hours cleaning it up. I put up a hand-made sign and sold it for $4,750 two weeks later. But it wasn't the cleaning up and outlining of a driveway that sold it as much as the terms: $250 down, $100 per month at 11% interest.

There are a lot of people who do not save money. This makes it difficult for them to make large purchases that either require cash for the full price or a large down payment. I know investors who did something similar to this with houses, paying cash and selling with a low down payment and easy terms. I later bought a small rental home for $19,000 and sold it months later (with no agent and probably only $400 in closing costs) for $22,000 with $1,000 down and payments of $300 monthly at 9% interest. I made thousands of dollars in interest over the coming years.

Notice how this is different from other money making schemes in real estate. It isn't necessary to buy very far (if at all) below market value. It also doesn't require fixing up a place, which also adds real value, and might be part of the plan, but is also more complicated. The value you add is in making the property easy to buy.

The woman who bought that first lot I sold still owned it years later when it was worth closer to $15,000, so she probably doesn't mind having paid more than the cash value originally. The man who bought the rental from me kept it rented through the years, and makes even more cash flow now that it is paid off, so he can't complain. And, if it is their best option available, potential home owners would certainly be happy to buy from investors on payments rather than paying rent, even if they do pay a bit more than those who can get a traditional mortgage loan.

An Ethical Money Making Idea?

If real value is created and people are helped, it is perfectly ethical to make a profit. On the other hand, I think it passes beyond helping and becomes exploitation of people's ignorance in the case of many (but certainly not all) rent-to-own sales. For example, many years ago a friend was renting a bunk bed and dresser for her children for $20 per week, and I calculated that she would have to pay almost $700 before she owned them. I bought a better set in great condition at a rummage sale for $25 and gave it to her so she could return the rentals. She just didn't know that good used furniture was available used or that it didn't make sense to pay $700 for a set that probably cost less than $300 new at the time.

To my mind it seems there is a difference between making it easy to buy a house -- something that is good for the buyer most of the time -- and making it easy to go into debt for a fancy stereo or video game when people are struggling to meet their more important needs. But there are areas where the balance is much less clear. Easy financing for a used car, which allows one to charge a low-income family an extra two thousand dollars and a high interest rate may seem exploitive, but it can also help them get jobs that require transportation.

I'm not saying that we need to judge the ethics of those who make it easy for customers to buy. Any given purchase may have its own unique circumstances, so it would be tough to judge in any case. Still, if we use the idea ourselves to make money, we might sometimes see when we are actually helping people and when we are just helping them into more financial troubles. At that point we each have a decision to make about how we want to do business.

Again, it isn't always going to be clear when it is truly adding value to make it easier for a person to buy something, but there are classes of purchases where that seems more likely to be the case. They include:

- Easy financing for homes, when the buyer has the income to afford it.

- Easy financing for education meant to improve job prospects.

- Easy financing for business equipment when there is a clear and reasonable plan for the business.

Essentially the ethical approach is to make it easy for customers when they are either enriching their lives or at least not making them worse. You might, for example, have a business buying used furniture and reselling it with easy terms, and in this way give those with low income a valuable alternative to the rent-to-own places and to high-priced new furniture in general. A used wooden kitchen table set that you buy for $90 and sell for ten payments of $18 (total: $180) might be every bit as functional as the same table bought new for $400 cash, or bought through a rent-to-own place for $800. In that case you have helped the buyer while making a decent profit.

Getting back to the business side of this (though I will often detour into ethics in these pages), it might seem that the general idea of buying for cash and selling for payments is only workable for those with a lot of capital. Certainly having money in the bank helps, but you can do this using credit as well, especially as a way to get started. Consider the scenario in the following example.

Suppose your friend needs a new blind-cleaning machine to expand his cleaning business. They cost $3,000, but he has no cash and his credit cards are maxed out at the moment. So you negotiate a price of $2,800 and buy the machine using your own credit card, one which charges 12% interest. Your payments will be $54 monthly. You sell the machine to your friend for $3,300, with payments of $100 monthly and 18% interest. If all goes well, you'll make a profit of $500 on the sale, and make a couple hundred more on the difference between the 12% you pay in interest and the 18% you charge. Meanwhile your friend might add hundreds of dollars in monthly revenue to his business with the new tool. He does well and you do well.

On a larger scale, if you have the equity in your home, you might borrow $50,000 to buy and repair a small home that you then sell for $75,000. You can add value both by fixing the place up and making it easy to buy. Perhaps you sell it to a responsible young couple for $3,000 down and $500 per month, with the interest rate a couple points above what you are paying on your loan. Even if it's only worth $70,000 as a cash sale, the couple will likely do better than renting.

Make it easy to buy things that should be bought. It's a profitable and ethical money making strategy.


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