Owner Finance vs. Conventional to Buy Rental Property
I am looking at a property to buy and hold as a rental. It is a 3 bed, 2, bath, 2 car garage, 1,800 sq. ft. built in 1980. It will need carpet, paint and a few minor repairs. The rental comps are $1100. I will be able to get that for this house, maybe a little more.
The owner wants $80,000, that’s his number; I might do a little better. The comps are around $110,000. I am estimating $12,000 in repairs to get it ready to rent.
The owner said he would consider owner financing but on a max 10 year term. We didn’t talk down payment or rates. I chose 8% interest and 5% and 10% down. I don’t know if he would agree to these terms. I have not bought a property with owner financing, so I might be doing the math wrong. With that said; I came up with this:
1. Owner financed, 10 years, 8% interest, 5% down, payment of $922, PITI $1168, cash down $4000
2.Owner financed, 10 years, 8% interest, 10% down, payment of $874, PITI $1120, cash down $8000
3.Conventional, 15 years, 5% interest, 20%, payment, payment of $506, PITI $752, cash down $16,000
4.Conventional, 30 years, 5% interest, 20%, payment, payment of $344, PITI $590, cash down $16,000
With these numbers, it has a very negative cash flow for the owner financing scenarios. Both of the conventional routes should produce a decent cash flow. All the other variables will be the same, vacancy rate, repairs, etc.
I am in a cash position to absorb the negative cash flow. However, my current investing mind set is cash flow driven. Would you consider the owner financing on the 10 year term? Less cash to get into the deal and year 11 would look pretty good. Or would you put in more cash up front to have cash flow from the beginning?