Calculating interest for a seller finance

4 Replies

Hi Everyone,

I have found a 4 unit property that cashflows well at a price I know the seller isn't going to like. I thought I'd offer him seller financing and show him how he could save on taxes and make more on the property by holding the note. How do I calculate interest to show him how much more he'd make over the life of the loan? I seriously need to know how to do the math. And, I know he won't want to hold the note for long since he's 84. Do I tell him interest only for 3 years and then get bank financing assuming in 3 years I'll have enough of a track record that banks will finance me? I'm new so I don't even know how to figure out interest only. Is it calculated by month or by year? Thanks in advance for dumbing it down for me.

Generally, when someone is getting seller financing that makes the deal more valuable to them--the buyer. That means the price goes up. If I understand correctly, you are planning on offering a price you think will be unlikely to succeed plus you are asking for financing concessions. You are correct that there will be few 84 year olds who will be interested in seller financing. It seems unlikely that your offer will get you a deal.

Does the cash flow calculation include a down payment? If a larger down payment on a higher sales price leads to the same cash flow (if that's what you are looking for) then I would offer that with a 5 year balloon payment. This way the seller gets some cash up front, feels better about the price, will agree to the sale, and you get the rental. Just make sure you have the 5 year plan to pay the guy back with either private money or a bank loan.

Interest-only is easy. If the rate is 10% and the loan is $200,000, your monthly payment is [(200,000) * (0.10)]/12 = $1,666.67. Multiply the principal by the rate, then divide by 12.

An amortizing loan is a lot harder to explain, but interest-only is pretty straightforward.