Does the rent count towards paying off the mortgage?

13 Replies

If I get a property under a land contract say for $100k and the monthly payment is $700, will the $700 payment pay down the $100k?

@Pedro Oliva

It's depends on how it's structured, generally it is a note with some interest tied to a 30 year amortization schedule, with some kind of a balloon to be paid off or refinanced in 5 to 10 years

I've seen simple interest, compound interest, interest only payments, interest paid every six months, etc.

Look up imputed interest on www.irs.gov website, which means lowest possible interest that the IRS will allow

Generally speaking, part of the $700 will pay down the 100k but it depends on how it is structured. Usually a portion of the $700 would go towards interest, taxes, and insurance and the remainder would pay down the balance of the loan just like a traditional mortgage. However, if you set up say an interest only loan with a balloon payment at the end, then no since your payment would only be going to interest.

There are many ways to structure a deal and every deal/seller is different so find what works for you and the seller and go from there.

Generally speaking, part of the $700 will pay down the 100k but it depends on how it is structured. Usually a portion of the $700 would go towards interest, taxes, and insurance and the remainder would pay down the balance of the loan just like a traditional mortgage. However, if you set up say an interest only loan with a balloon payment at the end, then no since your payment would only be going to interest.

There are many ways to structure a deal and every deal/seller is different so find what works for you and the seller and go from there.

And I'm a little confused on what you mean by "rent " since the land contracts I am familiar with all include a payment to the seller since I am purchasing the property... There shouldn't be any rent involved. Perhaps you are asking more about a lease option or a rent-to-own which would be different from what I have stated above. I've personally never seen a land contract with rent payments.

Sorry about the double post... It was only supposed to edit my original post to include that last paragraph and now I can't remove the original one. Maybe because I'm posting from my phone? IDK

@Sheri Ulm

If any rent is applied toward either purchase price or down payment it is considered a financing arrangement 

Since Jan 2014 the Dodd Frank law affects financing arrangements so don't do rent credits; seller concessions can be used instead of rent credits

@Brian Gibbons

Yes I am aware of financing arrangements. However, the OP asked about "rent" and "land contract" together. I've personally never seen a land contract that involved any sort of rent but that's not to say they don't exist somewhere (I don't know if they do or not but in my mind paying rent goes against the purpose of a land contract, which is a purchase). Having said that, maybe a land contract can include a rent to own type purchase (Again, don't know, never seen one like that but I've never seen a million dollars either and that exists. Maybe someone more familiar can enlighten me on this?)

As for Dodd Frank that pretty much ruined "rent to own deals" IMO. To much at risk and too many hoops to jump thru as a seller. As a buyer it doesn't apply to me since I'm an investor and not purchasing to live in the properties... But then I wouldn't be doing rent to own as an investor either since I'm not the tenant. My point being the seller financing to me on a land contract doesn't have to worry about Dodd Frank since I'm an investor and I'm not purchasing as a primary residence. But again, there is no "rent" involved.

Hope this makes sense since it's late and hard to explain when tired.

@Pedro Oliva

Perhaps you can clarify if it is really "rent" as stated in your topic or a "monthly payment" as stated in your post.

@Sheri Ulm

Investor to investor there is no Dodd Frank if vendee-buyer is not owner occupant :)

@Brian Gibbons

My point exactly. Thank you for putting it in much simpler terms :)

CFDs have been around longer than I have, you should do some searching on BP about the issues with executed deeds, circumventing foreclosure laws not being in title, besides the Dodd-Frank matters. 

And no, there are no rents in a CFD, at least not for the RE. I could give examples of buying the property and leasing personal property that could be included in a CFD, beyond the scope of this thread I'm sure.

Be careful about assuming because you buy as an investor that you are exempt from Dodd-Frank, classification of loans and property can be different, always best to check with the state finance department how they view single family residential. Some investors, builders, developers, fix and flip have additional requirements as a seller, even if they sell to a landlord......properties that have had recent construction done. 

There may be a hybird installment contract available that passes ownership on a restricted basis until the obligation is fully paid, the concept is to have the title restored to the seller if less than 10% of the principle has been paid with notice of default and a deed of trust provision if 10% or more has been paid.  It would be compliant with state laws concerning equity and foreclosure, which need to be addressed state by state. More on that later. 

For this OP, I suggest you stick to a note and deed of trust with seller financing, not a CFD. But, check with a local attorney. :)

@Sheri Ulm , sorry for the confusion what I meant by rent was the actual payment to seller. I thought rent and or payment could be used interchangeably. My concern with a land contract/ lease option was if I made payments to seller that it would not reduce the final amount to be paid in full at the remainder of agreed terms.

If you SELL on land contract, you have repossession issues if Buyer-Vendee defaults.

If you SELL on land contract for owner occupant, as a Seller you have Dodd frank issues.

Always sell on terms with a lease and separate option, no rent credits, use seller concessions.

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When buying on  terms, look at lease w option, sub2, wrap, contract for deed, etc.  

Real Estate is local, see an attorney.

See or talk to

http://www.biggerpockets.com/users/HHS

Best guy I know in the Hoosier State.

@Pedro Oliva

That's what I figured you meant but never hurts to make sure.

Again, it will depend on the terms of the deal but any land contract I do always has the payments paying off the loan. It's just another seller finance option. The one I'm currently in my payments include taxes and insurance in addition to the amount due to the seller.

Hope this helped a little.

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