Rental Vs. Seller Financed - Which is better?

2 Replies

I ran across a condo that actually cash flowed in CA. I called the agent and she said the complex was maxed out on rental availability, so this unit could not be rented, must be owner occupied.

Creatively, I'm thinking about buying it and reselling with seller financing. I will have a higher cashflow since I will not have to pay HOA, or any other expenses, but I have to put in more of my money, and I will be limited because I do not control the condo.

Hoping to get some help with analyzing this deal. Any advice and criticism about my numbers is welcome.

Condo is offered at $195,900. Rent in the area is $1,600, HOA is $390. With ~$5,000 in repairs, would be worth $210K

As a rental

  • I purchase with 30% down (cash invested ~$58K)
  • Cash flow: $440/month
  • COCROI: 8.32%

As a Seller financed

  • I Offered owner $179K (Cash)
  • $5,000 repair costs.
  • list the condo for $210,000. In the case that someone does not want to buy with seller financing, we will profit $18,000 for the flip
  • financing offered: 0% down, 5% APR, 5 year mandatory refinance with bank.

The new owner will pay $1,290 + $390 HOA for a total payment of $1,680, (compare that to $1,600 average rent in area)

I will cash flow $1,127 (compared to $440 if rental)

At 5 years, when they have to refinance, the payoff will be ~$192K, adding the P&I from the last 5 years, the total return would be $261k


My feedback isn't necessarily about the numbers of the deal. I would just recommend that you are cautious about buying a condo as a rental that isn't "allowed" to be a rental. Basically you are stuck with a very narrow window of exit strategies should owner finance not work out as planned. If you can't rent it out because of the HOA, what will you do if you can't find a qualified buyer that wants to do owner financing? Would you be willing to move into it or would it have to sit vacant until you do find someone that wants to owner finance? Also, another thing to consider would be your strategy if the value (rental and/or ARV) of the condo decreased during your finance period? Your buyer may not want to move forward with the purchase at the 2019 agreed upon pricing if they can now buy a similar condo for significantly less.

I would also look at the tax implications of structuring it this way. I know that when you structure a deal as an owner finance deal, you loose some of the tax advantages of a traditional rental. That's a CPA question though. :) 

I personally wouldn't feel comfortable buying this condo, but that's just my risk tolerance. I prefer long term rentals with more stability than this deal can offer. 

I was a little misleading... Initially I wanted to buy as a rental unit, but when the agent told me it could not be rented, I thought about buying it and doing seller financing... I would never rent a unit in a complex where rentals were not allowed. You're right, Tons of legal issues with that.

This is very similar to a lease to own option, but structured as seller financing, because Lease to own is still renting technically.

ARV goes down scenario. I have thought of this, and it is risky... I have no problem with the buyer backing out, and giving the unit back to me. I would just do the seller financing again, or sell. The buyer is actually paying the same as rent in the area, so even if prices go down, I don't think rents will decrease that much. It would make sense for the buyer to keep making payments even if they plan to not refinance in the future. We are coming to a recession??? maybe??? and condos get hit first in recessions, so the chances of the price going down are probably pretty high. The question is, how much will they go down, and for how long?