Hold a note or take the money and run?

Question

Hello BP famI come to you today with a problem; A GOOD problem, as they say.The situation:

I've reached a point in my journey where it makes sense to sell one of my LTR properties. The fruit is ripe for picking. My goal is to grow my pockets in order to fund flips.

HELOC doesn't make sense because I already have a HELOC on a different property. i was recently turned down by a HML because my HELOC was not liquid enough for their comfort..

My dilemma:

I have a buyer lined up to purchase with a conventional mortgage, OR they could easily assume my current mortgage (lender approved).

If I go with an Assumption, I would get a small down payment, maybe walk away with 5k in my pocket after the tax-man is done with me. This would give me Truly Passive Income from a note that I would hold in 2nd position on the property. $600 a month in Pure Cash Flow! No clogged toilets or leaky roofs, every investor's dream, right?! BUT... this would not help with my liquidity issue.

I'm in the building stage of my REI career. It seems wasteful to hold a note in my current position, yet I have this nagging feeling that I shouldn't pass it up.

What would you do in my position?

Thanks for taking the time to read, i look forward to hearing everyone's opinion.

cheers

Bill B. · Answer

Anything less than 20% down and 10% interest rate, you take the cash and run. How much time/money do you lose if they never make a payment? What if they make a few and things go south? They get sick, they lose their job, the property value drops 5%.

You can make 4-5% guaranteed money from the bank. That’s cashflow. Your loan payments are not “pure cashflow”. They are return of capital, taxable capital gains, and taxable interest. Only the interest is cashflow.

Ps. If this is going to be their home and not an investment there are a boatload of regulations and laws you DO NOT want to violate regarding balloons, interest rates and such.

Randy Rodenhouse · Answer

I assume you are saying that you would sell the house on a wrap (second position). If the buyer buys the house by assuming the loan you will not own the home anymore (no cash flow) since the deed will be transferred to the buyer and they will pay the mortgage directly.  Please clarify.

I personally love owner financing homes that were rentals since it is income for many years and not just a one time profit (which you now have to go out and find another house).  Also the downside to outright sale is that the entire gain from the sale will be taxed versus the installment sale (owner finance) which you will pay taxes only on the amount of interest each year and the one time downpayment.

Overtime it snowballs and now I have 90 checks coming in with massive cash flow.

Ray Hage · Answer

In this stage of your RE "career", I'd probably just sell it. You can potentially make much more money (with flips as you mentioned) than whatever percentage you're going to hold the note for. If you had a bunch of properties and needed/wanted to sell more than one at a time, maybe you would hold a note.

Samuel Bradstreet · Answer

Randy's post confirms that contract installment sales works well for taxes. The major difference from a deed transfer and a wrap, is that the seller maintains legal title (deed goes into escrow) until the buyer refinances and pays off the contract. We just added PNC as an affiliate to work with the buyers during the required FNMA 1 year seasoning period and then refinance them to conventional deed/mortgage.

Downpayments and interest rates and contract value are all flexible since there is no purchase mortgage. And most commercial lenders like the much higher contract value, and can remain in first position until the buyer gets their refinance.

Good luck and thanks for reading.

https://homeownermakers.com/se...

John Alosio · Answer

@Chris Seveney

@Randy Rodenhouse

To clarify with rough numbers..., I would "seller carry" the difference between sale price (250k) v.s. what i owe on the property (170k) and hold a note for 80k.

Samuel Bradstreet · Answer

Good morning. We are running ads now to try to get our new trademarked method of selling rentals into rental investors' toolboxes. Agreed that selling a house and transferring deed with a second mortgage back makes the seller into a mortgage holder; really bad position!

Check out our new Qualified Contract for Deed system, aimed at tenants who can't get a traditional mortgage, but are steady good paying renters, into immediate ownership.

Free website at www.HomeownerMakers.com/seller... and detailed training available

Samuel Bradstreet · Answer

Oops, our first post. Website is at https://homeownermakers.com/se...

Chris Seveney · Answer

@John Alosio

I am confused - if someone assumes your mortgage it means the mortgage goes in their name and they pay the lender. You wouldn’t get cash flow from it?

Either case it’s almost always better to sell and get your money.

Hold a note or take the money and run?

Most Popular Reply