Land Contract to Traditional Mortgage to Improve Cashflow
In 2021, I purchased 3 residential properties through a single land contract deal (2 SFHs and 1 Double). The sale was 121,400 @ 2.5% for 10 years. This breaks down my mortgage payment to be around 1,200 a month, with about $400 in expenses. My total income on the duplex is $1000. I live in one SFH and the other SFH is uninhabited and temporarily my business' shop and storage (general contractor, full time). Since this sale, I had a hard time finding a bank that understood the Land Contract when I was purchasing another additional property a year later . Luckily I did and now I own and rent another SFH. ALL of these properties are adjacent to each other and are situated in a very unique part of a growing downtown.
The duplex and my house were very well maintained and in great shape thus I have done absolutely nothing in regards to improvements. My intentions, over the next few years is to: 1. Bring the duplex to market rent (From $500ea to $800ea). 2. Totally gut and renovate the uninhabited SFH to rent. ($1,100 rent) 3. Add major improvements to the duplex (roof, HVAC, kitchens, etc.).
With all this is mind, would it be insane to take my land contract ($95K balance) to a bank and get a traditional mortgage? The reason is to lower my monthly payment (virtually in half) and most importantly have easier access to drawing HELOCs for these improvements as time goes on.
I found a bank who gave me a quote for 6.5%, 30yr fixed on each of the properties. I am getting killed in interest but am I better off improving my cashflow?
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@Brennen Waldron
No that is not crazy as long as that cash flow you are taking in is put to good use and reinvested. Run analysis of what your portfolio looks like in 3 or 5 years if you keep the land contract and how much equity you have and net worth compared to refinancing and using that cash for other deals
See which one wins and that’s the choice
I don't think that's a bad idea at all. We don't do conventional loans in OH (only investor) so you might get better advice from an OH lender, but some lenders might treat it like a refi while other will treat it as a purchase. It's up to interpretation by the underwriter. You'll definitely want to gather the front and back of the cancelled checks for the last 12 months of your payments. Since it's likely to an individual, the lender likely won't take a letter confirming your mortgage history from the person you have the contract with vouching for the payment history. Also, you might want to recheck the rate the bank gave you. With this debt ceiling thing going on, the 10-Year Treasury has skyrocketed over the past few days pushing rates up considerably. Conceptually, I think your game plan is solid. I you do go to a bank, I would consider a community bank over a big bank. They will have an easier time wrapping their head around the transaction. Good luck to you!
Quote from @Chris Seveney:
@Brennen Waldron
No that is not crazy as long as that cash flow you are taking in is put to good use and reinvested. Run analysis of what your portfolio looks like in 3 or 5 years if you keep the land contract and how much equity you have and net worth compared to refinancing and using that cash for other deals
See which one wins and that’s the choice
Thanks for this advice! This is a perspective I quite frankly haven’t thought of this in my analysis. The plan with cash flow is to direct it all back into growing and improving my portfolio so that helps me with calculating my decision
Also worth mentioning is that the area these properties are located in are the center of 3 major real estate developments currently under construction, including a new market rate town home development next door. I feel I got in at the right time. Your point allowed me to see a perspective that I hadn’t thought of: the potential of equity growth through appreciation could replace the equity growth I was gaining through the short life of the contract.
Thank you for your input!
Quote from @Doug Smith:
I don't think that's a bad idea at all. We don't do conventional loans in OH (only investor) so you might get better advice from an OH lender, but some lenders might treat it like a refi while other will treat it as a purchase. It's up to interpretation by the underwriter. You'll definitely want to gather the front and back of the cancelled checks for the last 12 months of your payments. Since it's likely to an individual, the lender likely won't take a letter confirming your mortgage history from the person you have the contract with vouching for the payment history. Also, you might want to recheck the rate the bank gave you. With this debt ceiling thing going on, the 10-Year Treasury has skyrocketed over the past few days pushing rates up considerably. Conceptually, I think your game plan is solid. I you do go to a bank, I would consider a community bank over a big bank. They will have an easier time wrapping their head around the transaction. Good luck to you!
Thanks for the input and advice!
You are exactly right as far as the lender I needed to find. After many MANY talks with bankers and trying to articulate land contracts I found a smallish credit union who was willing to work with me on another. Ultimately this is who I’ve decided to take this “refi” to and they’ve locked in my rates as I navigate my decision. Thanks again!
@Brennen Waldron thank you for sharing your story with your land contract. It really helps!. I'm Currently negotiating with a seller right now that wants to do a "agreement for sale" on 20 multifamily units in Mesa, Arizona which is the same thing as a "Land contract" just called something different here. I'm still learning and I wanted to ask
if you have a land contract on your property and it is locked in at a 2.5% interest rate.
why would you want to go to the bank to refinance at a higher interest rate?
and since you don't actually own the property and the deed isn't in your name because you're doing a Land contract. Are you able to go to a bank to do a HELOC OR is your only option to sell or do a Cash out refinance?
and if you don't actually own the property can you receive any tax benefits such as completing a cost segregation study and using depreciation?
and what if the seller goes and gets more debt on the property and put liens on the property and what about property insurance?
I don't mean to bombard you with a bunch of questions but this is all so new new and it's cool learning a new strategy
thanks again for sharing your story for everyone!