After months of research, I was finally ready to take the plunge in the summer of 2013. I had a pre-approval in place from a bank, but I knew I was going to be limited in regards to the number of properties that I could purchase via traditional financing. So while I was scouting around for great investment opportunities, I was also keeping my eyes open for seller financing opportunities.
Seller Financing Is Great For Investors
- While starting out in buy and hold real estate investing, banks will not consider you a ‘seasoned’ investor. To count income from rental properties in their evaluation of you, they want to see at least two years history. With owner financing, it is up to the owner to determine your worthiness.
- Most often this transaction will not show up on your credit report, helping your DTI ratio.
- A 3-5 year balloon payment via seller financing will give you plenty of time to show two years of rental income on the property, thus making it easy to refinance with a bank at that time.
- The vetting process and closing is so much easier than traditional financing.
- The one negative is that in general you are going to pay a much higher interest rate and of course there will generally be a balloon date.
Real Estate Purchase Analysis
Purchase Date: September, 2013
Type: Single Family Bungalow
Purchase Price: $56,000
Terms: Owner financing via land contract. 8% APR based on a 30 year amortization with a 3 year balloon payment with a 25% down payment.
Out of Pocket Costs: $15,000
Income And Cash Flow
Equity At Closing: $15,000
Monthly Rent: $900 – Home is rented and lease expires in May, 2014
Cap Rate: 11%
Estimated Monthly Cash Flow (Using 50% Rule): $141.82
Estimated Cash on Cash Return – Year 1: 23.13%
Mortgage – Principal and Interest: $308.18
Property Tax: $75.00
Utilities – Water: $25
Property Management: $79
Expense Fund – Repairs and Vacancies (Using 50% Rule): $217.50
Total Expenses: $758.18