where is the end with Owner Financing?

Question

Hello everybody

I'm Investor outside of the country and investing in the Detroit market.
my target is buy and hold for now, and I been buying with cash only since I started. lately I became aware to the Owner Financing option.
some seller are OK with me not providing SS# or credit since I'm out of the country.

here is my problem. lets say I have a positive cash flow for $5000 a month. sometimes its enough to put down in a Owner Financing deal since the prices I deal with are from 30-50k.

the question is where do I know where to stop? It looks to me like I can leverage my self and buy a new property every month but I don't want to to get to a situation that every little bump can kill me with foreclosed on these properties.

leverage is important to me since I cant get any finance from any banks in the US for that.

thank you

Pat L. · Answer

Short term OF Ballon payments would also necessitate a serious review of your exit strategies!!!

Daniel Gura · Answer

thank you so much!

Joseph Lieberman · Answer

Other than the obvious, why not make a risk table? Figure out where your "doomsday" scenario actually is.

IE: If you have 2 properties and they both become vacant at the same time (lets just say 10% chance per month, so 1% chance that they'll both be vacant) I am sure you can afford to keep both running indefinitely while you sort out your exit or get new renters in.

What happens when you expand that to 3, 4, 10, 20 properties. At some point you'll hit your zero sum number, that is the point you absolutely need to start expanding your cash cushion for a buy/hold disaster (Large repairs + renters leaving doomsday event).

You know your personal economics better than I do, but that is how I would approach it. The more properties you have the higher odds of having "some empty" but the lower odds of having "total disaster" - but it's usually the statistical outliers that screw us in life :)

Obviously I am not suggesting you run without a cash cushion until you hit zero sum by the way, I am saying you need to have that PLUS an increasing percent of cash on hand as you expand your debt leveraging. Go too far, too fast, and you're going to screw yourself.

Long story short: I'd plan for some worst case scenario dependent on region. Something like 10% occupancy for 3 months+? Not really sure since I haven't leveraged myself out of my income level (though I have certainly thought about it).

Karen Margrave · Answer

Daniel Gura Bill Gulley is correct, just because you can doesn't mean you should. There's a reason some areas are inundated with foreclosures that are still available, and it's usually the local economy is still in the hole. Therefore; what is your strategy? To rent out the properties and hold them? How well do you know the areas you are investing in? Do you run comps on your properties, work with a local agent or ? Even though you may be getting great deals, and able to rent out for extremely low rents, if someone is unemployed, etc., even extremely low rents can be too high.

Don't get me wrong, if you have solid tenants in your properties that can cover any debt, that's great. I'm just cautioning you to do your homework on the markets you're investing in. Obviously they will have issues, otherwise you wouldn't be able to get those buys, but protect yourself as best you can, and GOOD LUCK!! Keep us posted.

Bill Gulley · Answer

Daniel, Just because you can doesn't mean you should!

I'm not familiar with that market, other than knowing prices are rock bottom and there are give aways there, so I assume there are motivated sellers that would jump at seller financing.

Still not sure you will fing a good deal every month dealing long distance as you are.

But, if you do, seems your concer is overloading yourself, if you have six months reserves of payments (PITI) for each property you probably don't need to worry about a foreclosure.

Always have an exit strategy, refinance it or sell it, for any deal.

Proceed with caution, make sure the property is a deal and worth buying, have reserves for each property in liquid assets, have an exit plan and you should be fine. :)

where is the end with Owner Financing?

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