Using Owner-Financing As A Source of Income Investment
I'd love some input into the idea of buying cheap properties in a economically depressed area with cash, and selling them with owner financing as a means of income.
I have purchased two properties in the past with owner financing when the market was bad, with low down-payments. One was raw land, the other was a condo and the terms were 10% interest with a 10 year balloon payment. Both were great opportunities for me and I profited on both.
My thinking is that I'm in my 60's and although I have property management experience and am good at it, I would rather not have to deal with repairs in the middle of the night, etc.
So, I'd like feedback on this idea:
Buy a cheap property, such as an old mobile home on it's own lot (I am allergic to HOAs) for cash. I can probably buy one for around $50,000.
Maybe do just a little cosmetic work to it.
Sell it as-is, but in livable condition. I think can probably sell it for $65,000 because of offering owner-financing.
I would hope to find a buyer who would just make monthly payments for many years. The mortgage payment would be less than they would pay for rent in a similar building.
Terms: 5% down, 10% interest, 30 years. Prepayment penalty for first 5 years (max allowed by CA). Insurance would be required with me named on policy to be notified if they miss payments, and I can collect taxes with the payment as long as they agree to do that, under CA law, so I can keep the taxes up to date.
If they can only make the monthly payments, the payments should be mainly interest for up to 20 years. I would expect them to re-sell it before then.
My hope would be that a flipper doesn't buy it, but with the price and pre-payment penalty, I think I'd still come out ahead by selling it myself without an agent (I had a license in my previous life) and have bought and sold without agents.
If my math is right, I should make 7% - 10% return on it.
One downside is that in CA with the newer laws that are kinder to buyers who go into foreclosure, if the buyers can't/don't make the payments, I have to work with them to a degree before I could foreclose on them.
The money invested in this property would not be money I would have to rely on, so if I did have to foreclose and spend money on it to fix it back up, etc., I would be fine if I didn't have the income and would have money to fix any damages, etc.
I do understand that this would be termed an installment sale, and capital gains would be spread out over time.
I met a man who had a property in WA when I lived there that had an old hardware store building on it and a residence. While I lived in the area, he sold it three times. I rented a unit above the old hardware store from him at one point. I said it must be a bummer that people keep ending up in foreclosure and he ends up with the property again (different people tried different businesses in the building in this small town). He laughed and said he was making money hand over fist on it. He was able to keep the down-payments and then when they foreclosed, he was able to sell it again for more money, as the market kept increasing. And the buyers were responsible for repairs in the meantime. I thought it was an intriguing idea.
So, pros and cons? What am I missing?