So recently i have been contacting owners directly in one of my markets, Boise area (whole treasure valley), i have been targeting small multi family 5-24 units. the thing about this market, like many others now is the fact the the prices are super high and it is difficult to find good deals. so what i started doing is running numbers three different ways...
1. the price i can pay with conventional financing, like 25% down 4-5% interest 25yr am ect. this price is always the lowest.
2. i run the numbers with owner financing with 10% down 30yr am 10 yr term with 3-4% interest. this price is a little higher
3. owner financing with 10% down 30yr am 10yr pay BUT with 0% interest. this price is always way higher so it catches the owners attention way more.
i think i heard this on one episode and am wondering what you all think about this strategy??
the benefit for the owner is they get the interest up front in the form of higher price and there is also tax advantages with interest income taxed at ordinary income rate as opposed to principal pay down taxed at capital gains rates.
so what am i missing??? i don't really see the down side of offering above market value for a property if i am paying no interest and my cash on cash is high. as long as i plan to keep for a long period.
ENLIGHTEN ME ;) THANKS
@Justin Hannah there really is no bad side to it. Many sellers won't go for that option simply because they aren't familiar with it and don't understand it. You're essentially paying their note with income that you're collecting from their property because they'll take the property back if you default on the payments.
For the owner, the IRS applies a minimum imputed interest rate, which the seller will have to pay interest income taxes on, whether he collects “interest” or not. Right now I think it’s about 3%.
seller though has to pay imputed interest.. so when they talk to their accountant and they get those facts could make it less attractive.. not sure what imputed interest rate is today but suspect about 3 to 4% so they have to pay tax like they were getting 3 to 4% interest even though they are not.. I do quite a bit of Zero interest owner carry on my properties that I sell to investors. so very familiar with this aspect. I don't dig into the numbers I just know I have to pay it. what ever my account does.. in that 12 inch thick stack of returns LOL
Originally posted by @Justin Hannah :
@Jay Hinrichs @Wayne Brooks thank you for that, i was not aware. i guess they are still getting a higher price from me though because im not paying the interest. thanks!
ya they just have to run the numbers I suspect with MF owners this is a non starter though for most..
for me I use it to sell odd ball or properties I foreclose on.. non interest notes never default or at least I have never had one default the payor gets so much equity so quick they just stick with it..
Ordinary income tax rates would usually be higher than capital gains rates. I am not sure about the imputed interest as every time I have sold (SFHs) with seller finance terms I had a much higher interest rate baked in. It may be possible to structure the sale as an installment sale (like a layaway) without obligating the seller to pay tax on imputed interest but please, check with an accountant on that. A benefit to a seller is that they do not have to pay tax on funds that they have not received. So, if they have a large tax liability on the sale of a property, they can spread that liability over several years. Again, please explore with an accountant to see if this could apply to your situation.
@Justin Hannah I was successful with a similar 3 option strategy... option 1: cash (lowest price), option 2: owner financing 0 down and option 3 owner financing 10% down 0% interest. I was hoping for the 0 down option but they accepted the much lower cash offer :) But when they are all a win in one form or another, you really can’t go wrong. Keep it up!