I've read a bunch of posts on seller financing and balloon payments and I can't seem to find a direct answer.
Im looking at purchasing a 3-4 unit multifamily (non-owner) property with seller financing. Lets say 10% down on a $180,000 = 18,000 down. Assume a %5, 30 yr amort. with 5 year balloon payment. When that time comes my balance $156,763 is due. Provided the value of the home doesn't change, the bank is going to want an additional payment of $21,763 to meet a 75/25 LTV ratio. I could prob pay that from my full time jobs income but is this trade off for getting in with only 10% down? Is their another way? Or do most people just counter this by forcing appreciation?
@George S Depends on your lenders LTV requirements for cash-outs. Most are 70% LTV which means you'll have to bring more to the table. I try to buy properties that need fixing so I can create that extra value spread to cover the cash-out refi, just like you mentioned. Just getting a real good under-market price on the deal is an option as well.
If you're going to pursue this strategy, make sure you're familiar with all the underwriting guidelines that lenders use. The more you make yourself attractive as a borrower, the easier it will be/better chance you'll have to get financing when that balloon comes due.
Have multiple exit strategies. What will you do if you can't refinance? will you be able to sell? If you have to sell quickly to get out of the deal, it might be hard to do so with only 10% equity.
I'm just throwing out things to be mindful of, getting in with 10% down is great IF the deal is great. Just plan ahead!
When I buy on land contract I do a 10 year amortization so that the principle is paid down much more quickly. That way when I have to pay the balloon I don't have to pay any cash into the deal. This will only work of course if you can afford to break even because you probably aren't going to cash flow very well at a 10 year amortization.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing