Landlording vs. Seller Financing

Buying & Selling Real Estate
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Landlording vs. Seller Financing

Mark Allen
Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes

I'm currently in the Dallas - Ft. Worth market - I haven't been investing long (since 2009), but recently I've been turning my rentals into paper via seller financing. Many of these properties have mortgages with less than 20% of equity, and one is paid off. I can make $200-$500/month in cash flow by converting (or wrapping) these properties, put a 3rd party loan servicing company in place, and NEVER have to deal with tenants again. 

Example - I had one property left in Austin. $150k principal balance, 3.5% fixed interest, $1050 PITI, $1350 rent. Property taxes were on the rise and eating my cash flow. I decided to wrap this mortgage as to not have to deal with tenants or the increase in property taxes. I sold the home for $205k (market value was $195k), $15k down, 6% fixed, 30-years... I now am cash flow positive $450+.

I'd like to hear why others (not just DFW market, but Atlanta, Phoenix, Nashville, Memphis, etc.) choose to be long-term landlords and deal with tenant screening, repairs, vacancies, etc. (with or without a property manager). What are the positives and why do you choose to be a landlord? What are your concerns about seller financing and turning into the bank?

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y

I like your business model as an exit strategy @Mark Allen.  Dodd-Frank and the Safe Act has added a few layers of risk to the lender on owner-occs, but for someone wanting out of the LL thing, I like it and have done it before as well.

For me, it's taxes and lack of control being the big barriers.  I've turned a highly tax-advantaged, passive income investment into interest (ordinary income) cap gains, and dep recapture.  

There are also a lot of headaches inherent with wraps (how do we split up the 1098 bank interest or deal with insurance and DOS issues to name a couple). I also no longer own the asset and need to foreclose in case of default.

If exiting during a soft or stagnant market, I will consider SF I am sure.  In a frothy seller's market like now, I would rather 1031 and delay  (or forego entirely) the tax hit and reset depreciation on my older properties. 

To reduce management headaches almost entirely on my houses, I offer 2-yr lease options to well-qualified, ownership-minded tenants. The almost readies. I then sell conventionally and need no magic at tax time.

Good idea and good discussion!

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  • Ed B.
    Real Estate Investor · Sacramento, CA · Member since 2010 · 292 posts · 103 votes
    10y

    For me, the only reason to be a landlord is if the property is well-located enough to attract decent tenants who are reliable, and you anticipate appreciation gains large enough to offset any hassles endured during ownership. If  the property doesn't have these two things, or even one  of them, I think you'd be better off selling it. I would only consider owner finance if a cash sale was too difficult to achieve: Slow market, and or the area is not high enough quality for a buyer willing to go through the rigors of getting a loan, for example.  You simply may not have any other choice if traditional financeable buyers are avoiding your property because of condition, floor plan, location, etc.  IMO, seller financing is rarely better for the seller, but can be very handy when his options are limited. Try to avoid investing situations where  you have to pull rabbit out of a hat tricks to accomplish your goals. 

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    Selling on Seller financing in states that foreclosures have short and easy repossession procedures are the way to go.

    Dodd Frank and Ability to Repay rules need to be adhered to.

    See an RMLO to approve your Buyers

    1Reply
  • Art G.
    Wholesaler · Ojai, CA · Member since 2016 · 107 posts · 74 votes
    10y

    @Brian Gibbons good points you raise!  I have had so many opinions on DoddFrank, its hard to know what to believe. What I gather is that as long as its a "normal" deal, and seller does less than 3, its really not an issue.

    Also what is this RMLO you speak of?

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    @Art G.

    I know an investor in Texas who has done hundreds of wrap around mortgage deals.

     Step one he buys the property w private first mortgage money, with no Due on Sale Clause, and PLer knows all about the wrap.

    Step two he sells to a wrap buyer who has been properly underwritten by a RMLO (registered  mortgage loan originator).

    Good points: you can do alot of them, they do not need to be in perfect condition like a landlord rental, no loans on public record (better to use land trusts for ownership records), etc.

    If more investors would learn how to raise private mortgage money and not rely on credit and PGs from banks, they could amass many more properties.

    2Reply
  • Art G.
    Wholesaler · Ojai, CA · Member since 2016 · 107 posts · 74 votes
    10y

    YOU ARE A ROCKSTAR! @Brian Gibbons

    0Reply
  • Chris Soignier
    Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    10y
    @Brian Gibbons, are you referring to Mitch?    Sounds like you share his (and my) views on how to do it right! 

    Originally posted by @Brian Gibbons:

    @Art G.

    I know an investor in Texas who has done hundreds of wrap around mortgage deals.`

     Step one he buys the property w private first mortgage money, with no Due on Sale Clause, and PLer knows all about the wrap.

    Step two he sells to a wrap buyer who has been properly underwritten by a RMLO (registered  mortgage loan originator).

    Good points: you can do alot of them, they do not need to be in perfect condition like a landlord rental, no loans on public record (better to use land trusts for ownership records), etc.

    If more investors would learn how to raise private mortgage money and not rely on credit and PGs from banks, they could amass many more properties.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    Mitch Stevens is a good trainer in private lending acquisitions and in subsequent wrap sales.

    1Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    A point about asset protection and lawsuit prevention.

    Liability insurance is all good and fine. 

    Say you have 10 properties filled with tenants

    Say one tenant slips and falls and starts a law suit

    Her lawyer does an asset search on your 10 properties

    You have an LLC with basic liability insurance

    Say you have $500,000 in equity on your 10 properties 

    You think your protected?

    I'd rather hold private mortgages...and equity strip all bank mortgages, i.e. Maximize loan to value

    0Reply
  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    Just stumbled upon this topic from 6 mos ago. I don't use credit to purchase, only purchase with cash.  I just started investing in real estate this year, but have purchased 6 properties already, flipped 4 cash sells and just sold my first with seller financing. My original intention was Buy & Flip to build up more cash and than start Buy & Hold.  But I am leaning towards doing seller financing.  It seems like a good approach, buying deeply discounted properties for cash that do not need much work, than sell them for full value by offering seller financing.  Example: purchase a $100,000 home for $70,000 from a motivated seller and turn around and sell it for $100,000 by offering seller financing.  You're making 30% plus the interest until they pay it off and you're not a landlord.  Am I missing something???????

    0Reply
  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    9y
    I landlord for an inflation hedge. If we have inflation, rents go up accordingly (or should) vs a fixed note. I love my fixed rate mortgages...just in case.
    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Steve Vaughan:

    I like your business model as an exit strategy @Mark Allen.  Dodd-Frank and the Safe Act has added a few layers of risk to the lender on owner-occs, but for someone wanting out of the LL thing, I like it and have done it before as well.

    For me, it's taxes and lack of control being the big barriers.  I've turned a highly tax-advantaged, passive income investment into interest (ordinary income) cap gains, and dep recapture.  

    There are also a lot of headaches inherent with wraps (how do we split up the 1098 bank interest or deal with insurance and DOS issues to name a couple). I also no longer own the asset and need to foreclose in case of default.

    If exiting during a soft or stagnant market, I will consider SF I am sure.  In a frothy seller's market like now, I would rather 1031 and delay  (or forego entirely) the tax hit and reset depreciation on my older properties. 

    To reduce management headaches almost entirely on my houses, I offer 2-yr lease options to well-qualified, ownership-minded tenants. The almost readies. I then sell conventionally and need no magic at tax time.

    Good idea and good discussion!

    I have similar concerns as I consider doing this. I think I may be better off selling to a traditional buyer instead of my tenant that has a past bankruptcy. I figure I can 1031 into 2 more houses instead of waiting for a 30 year payoff on a 500K house...

    0Reply
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