Owner-Finance w/ Interest Only Loan. Good idea? Bad Idea?

Question

I found a seller willing to sell to me on owner-finance terms, and he only wants to talk about interest-only payments. My initial strategy was to find a tenant-buyer for a lease-option, as this property doesn't need enough rehab to be a good flip. I'm a newbie, and was figuring my monthly payments to seller would reduce the principal a bit until balloon payment. Any advice on doing interest-only with the seller on a 5-year balloon? Good idea or bad idea?

Chris Mullenberg · Answer

@Caleb Heimsoth and @Joe Villeneuve  yeah probably too much of a wildcard property to risk it. Being so close to the university, bedrooms are going at $600-$700/month each but this house is too small. If it were a 4/2 in similar location I'd be all over it.

Joe Villeneuve · Answer

If you're not able to cover all of your expenses (rent not high enough), then I'm walking (running) away from this property.  In that case, any form of financing won't work...and IO payments are just worse.

Success here is completely dependent on the deal being a possitive cash flow property.

Chris Mullenberg · Answer

@Joe Villeneuve for sure! Seller wants $335k price, $25k down, 6% interest-only, 5year balloon. That interest only payment would be $1,550/mo. Adding in taxes/insurance puts total monthly payment about $1,761. Those same loan terms on a PITI would put monthly payment around $2,100. Only catch now is that I'm not sure I can lease the home for more than the $1,761/mo. That would be seriously pushing it for a 2/1 in this area, even with it being super close to the university. One wildcard is that it's zoned to allow in-home business and has detached garage too, so maybe a unique tenant who needs that would like it. Artisan or contractor who would want to run a little business there. Thanks for the input!

Chris Mullenberg · Answer

@Patrick Liska good point, I would plan to make my purchase contingent on having a tenant-buyer signed to a lease before closing. If I can't find one, I'll let the deal go. One of the terms of course is to give the seller his desired price, so I would be banking a bit on being able to sell it for a higher price when I sell down the road. Thanks for the help!

Joe Villeneuve · Answer

On the surface, without knowing the exact numbers, I would say this is a great idea.  This will allow you to cash flow higher.

Patrick Liska · Answer

1st you have a lot of if's in there and counting on finding someone to do a lease option, not saying you can not, but you may not get that. 2nd an interest only loan does not pay down the principal as you want to do, it is just that, interest only, the full principal would be due at the 5 year balloon. you would have to have someone locked in to buy it by then, or get a mortgage from a bank to pay it off. if you rent it only during that time, make sure you make enough in rent to pay the interest and have enough to pay the principal when it comes due.