Take over existing low interest loan or get new financing?

Question

I have an opportunity to do a land contract for single family.  With the land contract, I would keep their 2.99% interest payment of $1230/month (including taxes & insurance), give them $ down, and it would be paid off in 9 years.  Or...get my own new financing at 6.??% for 20 years.

My payment would be much lower, say roughly $850, which will generate more monthly cash flow, but I'm adding 12 years of payments.

Rents in the area are between $850 and $1500/mo for a 3/2.  I'd like some opinions on which option would be better and why...

Greg Scott · Answer

If you choose to go with the land contract, you will have a significant amount of negative carry.  I would only do that if you have a large amount of reserves, enough to cover this property for a few years and take the hit of any loss income (e.g. job) since the Fed is intent on creating a recession soon.

Whether you intend to hold this property for a few years or forever, I wouldn't get the 20-year note.  I'd get a 30 year note.  Generally, the higher leverage you can maintain, particularly on a cash-flowing asset, the higher your overall returns.  Equity in a property makes everyone feel good but equity doesn't produce profit, the asset does.

John M. · Answer

$850 payment vs a $1230 payment?  I would choose the the lower payment.  Why would you care if the mortgage note is longer as long as you are making a profit and your tenant is paying down the loan for you.

Ryan Armstrong · Answer

Thanks for responding, Greg!

So, every lender I've spoken to says 20 years is max for income properties.  I know 30 years is a thing if I'm living there, but I won't be.   I'd love to find a lender that will do 30 years on it, so maybe there's one in here somewhere who could reach out??? ;-)