Owner Finance Income vs Rental Income

General Landlording & Rental Properties
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Owner Finance Income vs Rental Income

Kesha Hamilton
Memphis, TN · Member since 2021 · 41 posts · 6 votes

Hello,

I am in the process of acquiring more property for passive cashflow. The more I think about it, I am leaning towards doing owner financing instead of a rental because it may be more beneficial, but want to be more insight on anything I may be overlooking. With owner financing, I wouldn't have to worry about property maintenance, the income would be more stable because I'd be dealing with an "owner" as opposed to a renter ie less turnover, I don't have to keep up with taxes & insurance, etc.  Overall, it just seems like a more stable strategy with less headache. 

Are there any downsides I may be overlooking? I know one is not being able to take advantage appreciation of the property and loss of equity. 

And for those of you who do owner financing, are you the point of contact should the owner need to contact you? What are some systems you have in place for payment collection, correspondence, admin, etc? 

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    2y

    Any downsides you are overlooking?   Yes.  Too many to go into in a simple post.

    Most millionaires in the US are created by OWNING real estate.  They are not made by owner-financing the sale of real estate.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    2y

    One day these will be paid off and you will have to start over.

    If the person stops paying you will have to do a costly and time consuming foreclosure instead of a simple eviction.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    2y
    Quote from @Kesha Hamilton:

    Owner financing can work, but it generally doesn't. You tend to attract buyers who can't qualify through a traditional lender, which means they are high-risk. They often have terrible credit and won't care about trashing it some more by failing to fulfill your contract.

    If you consider owner financing, you need a good mortgage, promissory note, and solid protections. I believe the initial downpayment should be 10% or more so you have enough cash to handle a foreclosure and turnover. There are additional protections, but it's too much to spell out and you should really consult an attorney.

    As @Greg Scott pointed out, true wealth comes from holding property, not selling it.

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  • Kesha Hamilton
    OP
    Memphis, TN · Member since 2021 · 41 posts · 6 votes
    2y
    Quote from @Nathan Gesner:
    Quote from @Kesha Hamilton:

    There are situations where people need owner financing because they're self employed & make the money, and may not have all their financials together. I am working with a couple now where both have excellent credit but they get paid in cash and didnt have the traditional docs required by a lender (tax returns, etc). BUT they make plenty of money and pay their bills on time. I'd definitely require a minimum score and would require at least 20% down. I wouldn't just take anybody. You have to look like you're on track to be able to qualify within the next 3-5 years because there would be a balloon payment. I find that many S/E people would fit this mold. 

    Owner financing can work, but it generally doesn't. You tend to attract buyers who can't qualify through a traditional lender, which means they are high-risk. They often have terrible credit and won't care about trashing it some more by failing to fulfill your contract.

    If you consider owner financing, you need a good mortgage, promissory note, and solid protections. I believe the initial downpayment should be 10% or more so you have enough cash to handle a foreclosure and turnover. There are additional protections, but it's too much to spell out and you should really consult an attorney.

    As @Greg Scott pointed out, true wealth comes from holding property, not selling it.


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