rentral property that you live in? financing? multiple questions.

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rentral property that you live in? financing? multiple questions.

Clyde Benfer
Williamsport, PA · Member since 2011 · 3 posts · 0 votes

Hello, I have never purchased a property but am looking at buying one this summer and would like some advice/knowledge.

Background: 3 story Victorian house. 2 bedroom 1st floor apartment, 2 bedroom 2nd floor apartment, and 1 bedroom top apartment.

1. What tax issues would I run into if I lived in the top floor and rented out the bottom 2?

2. The seller told me they were willing to carry a mortgage for me. What are the pros and cons of a bank mortgage vs the seller carrying the mortgage?

3. Monthly payments are a combination of the principle and interest rate. Would it be advantageous to ask the seller to have a lower mortgage on the house and a high interest rate such as 25%? My thought process here is that the monthly payment would equal out at a certain point due to the seller carrying the mortgage they get their money either way (they get the high interest payments). The benefit to me would be that I would get a massive mortgage interest deduction. Is this possible? legal?

The seller is motivated to sell due to getting up there in age and has multiple properties they wouldn't mind selling but the seller is very savvy and has owned a few million $ in properties in the past.

Any advice is well appreciated.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Rental property taxes really require a CPA, IMHO. What you're proposing isn't uncommon, though.

    Seller carry can be great. You may be able to give a lower down payment, need less cash reserves, qualify with lower credit scored and with less income. They can also be a way for a seller to get an above market price and charge an above market interest rate. If you're putting in a nice down payment, have good credit, good income and some cash in the bank, you can get really low rates right now. Probably around 4%, maybe less, for an owner occupied property. Don't pay above market, either price wise or interest rate if you qualify with a regular lender.

    If you had a bunch of properties and were having a hard time getting bank financing, then owner financing is a way to get financed when banks won't. But that doesn't sound like the case.

    The big advantage to a low price and a high interest rate would be that you could turn around and refinance and pay off the seller at the low price. I can't imagine a seller going for this unless they stick in a big pre-payment penalty.

    Most states have usury laws that limit interest rates.

    Be sure the seller owns it free and clear. "Wrapping" an existing mortgage is possible, but opens up a can of worms that you should avoid if possible. Do the transaction at a real title company (or lawyer, if that's who does closings in your area.) Get title insurance and have all the documents properly recorded. Strongly consider getting a lawyer to check out everything for you. One of your own choosing, unrelated to the seller or his lawyer.

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