Buy owner financed at 9% interest or rent and save

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Buy owner financed at 9% interest or rent and save

Mike Walsh
Louisville, KY · Member since 2017 · 4 posts · 3 votes

Hello Bigger Pockets. I currently own a house in Louisville Kentucky which I am going to start using as an airbnb rental. So I need a place to live.

I recently quit my job because I have 2 companies that make more than I did at my job. I am pretty sure I would not qualify for a loan. However I strongly believe I can get a loan in 2 years.

I found a house with the owner willing to finance. It's 1,300 sqft in Saint Matthews and I believe it's worth $250k but needs minor repairs. It also has a full attic which I will refinish giving me another 5-700 sqft. With houses selling at over 150/sqft that'd add $75-100k to the value correct?

Here is what they want:

$230k purchase price

$10k down

9% interest (They will not move even one percent)

Over 30 years

No pre-payment penalty 

I realize these numbers don't meet requirements as a rental property, but it will always be a primary residence. Would I be crazy to pay 9% interest on it? Or does it make sense because there's significant value add and 20k in instant equity? Would I be better off renting for 2 years then getting a loan through the bank?

Thanks in advance. 

1Reply
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Most Popular Reply

Erik HitzelbergerPro Member
Investor · Louisville, KY · Member since 2011 · 331 posts · 278 votes
9y

@Mike Walsh  The lease/rent portion is largely a math problem.  If you buy under the terms you described, the PI portion is $1770.  With some rough approximations on taxes and insurance your monthly payment is going to be around $2250. After 2 years, you will have paid down $3150 in principal.

So, you can go rent a house for up to $2250, keep the $10,000 and forgo $3150 in principal reduction.  Note that the break-even point for this part is is to rent for ~$2120.  At this point, you lose whatever equity is in the house and whatever appreciation you would get over the next 2 years.  I can't speak to your valuation, but something pretty drastic would have to happen for the average house in St Matthews to not appreciate at least 3-5% per year over the next few years.  Even if you dismiss the initial equity (or count it as closing costs when you sell), the appreciation could mean $14-23K in equity.  This puts your break-even rent/buy rate between $1275 and $1667.   

You can decide how aggressive or conservative you want to be with those numbers. Also, we are talking about your primary home.  There is emotional value in owning and in not having to move again in 2 years.  These are factors you have to weigh.   

2Reply
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12 Replies

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  • Nick Robinson
    Rexburg, ID · Member since 2017 · 5 posts · 3 votes
    9y

    I'm a newbie so take everything I say with a grain of salt but you would only pay around 3k in principal over the 2 years. How much could you rent for? If you can save more than the estimated 23k over the 2 years your better off renting IMO.

    1Reply
  • David Melton
    Investor · Louisville, KY · Member since 2016 · 5 posts · 5 votes
    9y

    If you intend to make it a principal residence why not go with bank finance? 

    Adding livable square footage may not return the square foot rate you expect. This is very much a case by case situation.

    0Reply
  • Account Closed
    Johnson City, TN · Member since 2014 · 586 posts · 705 votes
    9y

    That 20k in instant equity is going to be wiped out over a two year period of time because of the high interest rate that you will be paying. As far as houses selling for $150 soft, is that the cost of the house backing out the lot value or does that cover the lot also? A finished attic will probably be worth less per sqft than a first floor area. If any of this is true, then your addi

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    Unless you are well-versed in the different types of deeds and different types of SF, I'd pass.

    A QCD with a LC or CFD is crap. Make sure you know what you are getting into @Mike Walsh

    0Reply
  • Jay Leisten
    Real Estate Broker · Louisville, KY · Member since 2014 · 362 posts · 232 votes
    9y
    Attic SF isn't going to be 1 for 1 with your 150$/sf as it's unlikely to be conforming heights but it would add value. 9% is pretty high fo seller finance. Should be 6-7% with legit credit issues. If you've got proof of income on the 2 businesses for 2 years you can get a loan from several local portfolio lenders.
    0Reply
  • Shaheed Crier
    Edmonton , Alberta · Member since 2017 · 27 posts · 4 votes
    9y
    I wouldn't touch that high interest payment. You would be better off renting for 2 years. Maybe get an extra bedroom in the place you rent and do the airbnb to see how good it can pay. Also try the portfolio lender as mentioned above.
    0Reply
  • William R.
    Investor · Louisville, KY · Member since 2013 · 139 posts · 43 votes
    9y
    I'd start by talking to Planning and Design to make sure that you can add that additional sq ft of living space in the attic, because you will have it pull a permit. I believe they use the sq ft of the lot to calculate the allowable finished sq ft. I'd also talk to some banks anyway, just to be sure that your not able to get financing. I'd want to refinance out asap, you can find cheaper money somewhere.
    0Reply
  • Jeremy P.
    Investor · Orlando, FL · Member since 2017 · 80 posts · 39 votes
    9y

    If you're wanting a lower interest rate (9% seems high). Conventional or even Private Money is better. You can always try the 3 Offer Approach

    1st Offer (Lowball) All Cash $199K (Make sure you have the cash to close or you're just wasting everyone's time)

    2nd Offer Little Better but you want to set them up for the last offer

    $210k 20% Down 0% interest with payments over time

    3rd  Offer Full Price or More

    $250k 20% down 0% interest with payments over time

    Why did I offer more than they want? by over paying 20K (and them saying yes to 0%) I am saving on the Interest during the loan term.

    I would do a smaller loan term also:

    1. Are you going to keep this for 30 years? Maybe in a Land Trust so it passes to your Children, etc.

    2. Are you going to try to BRRRR? (Where is the Equity if you have 30 years? you need to wait till year 7 or 10 before you can try to pull anything out)

    3. Smaller Loan Term gets Equity Faster and Mortgage paid down faster

    0Reply
  • Erik HitzelbergerPro Member
    Investor · Louisville, KY · Member since 2011 · 331 posts · 278 votes
    9y

    @Mike Walsh  The lease/rent portion is largely a math problem.  If you buy under the terms you described, the PI portion is $1770.  With some rough approximations on taxes and insurance your monthly payment is going to be around $2250. After 2 years, you will have paid down $3150 in principal.

    So, you can go rent a house for up to $2250, keep the $10,000 and forgo $3150 in principal reduction.  Note that the break-even point for this part is is to rent for ~$2120.  At this point, you lose whatever equity is in the house and whatever appreciation you would get over the next 2 years.  I can't speak to your valuation, but something pretty drastic would have to happen for the average house in St Matthews to not appreciate at least 3-5% per year over the next few years.  Even if you dismiss the initial equity (or count it as closing costs when you sell), the appreciation could mean $14-23K in equity.  This puts your break-even rent/buy rate between $1275 and $1667.   

    You can decide how aggressive or conservative you want to be with those numbers. Also, we are talking about your primary home.  There is emotional value in owning and in not having to move again in 2 years.  These are factors you have to weigh.   

    2Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    9y
    Originally posted by @Mike Walsh:

    Hello Bigger Pockets. I currently own a house in Louisville Kentucky which I am going to start using as an airbnb rental. So I need a place to live.

    I recently quit my job because I have 2 companies that make more than I did at my job. I am pretty sure I would not qualify for a loan. However I strongly believe I can get a loan in 2 years.

    I found a house with the owner willing to finance. It's 1,300 sqft in Saint Matthews and I believe it's worth $250k but needs minor repairs. It also has a full attic which I will refinish giving me another 5-700 sqft. With houses selling at over 150/sqft that'd add $75-100k to the value correct?

    Here is what they want:

    $230k purchase price

    $10k down

    9% interest (They will not move even one percent)

    Over 30 years

    No pre-payment penalty 

    I realize these numbers don't meet requirements as a rental property, but it will always be a primary residence. Would I be crazy to pay 9% interest on it? Or does it make sense because there's significant value add and 20k in instant equity? Would I be better off renting for 2 years then getting a loan through the bank?

    Thanks in advance. 

     Why don't you think you can qualify for regular financing?

    0Reply
  • Mike Walsh
    OP
    Louisville, KY · Member since 2017 · 4 posts · 3 votes
    9y
    Originally posted by @Shaun Weekes:
    Originally posted by @Mike Walsh:

    Hello Bigger Pockets. I currently own a house in Louisville Kentucky which I am going to start using as an airbnb rental. So I need a place to live.

    I recently quit my job because I have 2 companies that make more than I did at my job. I am pretty sure I would not qualify for a loan. However I strongly believe I can get a loan in 2 years.

    I found a house with the owner willing to finance. It's 1,300 sqft in Saint Matthews and I believe it's worth $250k but needs minor repairs. It also has a full attic which I will refinish giving me another 5-700 sqft. With houses selling at over 150/sqft that'd add $75-100k to the value correct?

    Here is what they want:

    $230k purchase price

    $10k down

    9% interest (They will not move even one percent)

    Over 30 years

    No pre-payment penalty 

    I realize these numbers don't meet requirements as a rental property, but it will always be a primary residence. Would I be crazy to pay 9% interest on it? Or does it make sense because there's significant value add and 20k in instant equity? Would I be better off renting for 2 years then getting a loan through the bank?

    Thanks in advance. 

     Why don't you think you can qualify for regular financing?

     I quit my job and only have 5 months of income for my business as well as no tax returns yet for my business. I know 2 years is the minimum.

    @Erik that was incredibly helpful, thank you.

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    9y
    Originally posted by @Mike Walsh:
    Originally posted by @Shaun Weekes:
    Originally posted by @Mike Walsh:

    Hello Bigger Pockets. I currently own a house in Louisville Kentucky which I am going to start using as an airbnb rental. So I need a place to live.

    I recently quit my job because I have 2 companies that make more than I did at my job. I am pretty sure I would not qualify for a loan. However I strongly believe I can get a loan in 2 years.

    I found a house with the owner willing to finance. It's 1,300 sqft in Saint Matthews and I believe it's worth $250k but needs minor repairs. It also has a full attic which I will refinish giving me another 5-700 sqft. With houses selling at over 150/sqft that'd add $75-100k to the value correct?

    Here is what they want:

    $230k purchase price

    $10k down

    9% interest (They will not move even one percent)

    Over 30 years

    No pre-payment penalty 

    I realize these numbers don't meet requirements as a rental property, but it will always be a primary residence. Would I be crazy to pay 9% interest on it? Or does it make sense because there's significant value add and 20k in instant equity? Would I be better off renting for 2 years then getting a loan through the bank?

    Thanks in advance. 

     Why don't you think you can qualify for regular financing?

     I quit my job and only have 5 months of income for my business as well as no tax returns yet for my business. I know 2 years is the minimum.

    @Erik that was incredibly helpful, thank you.

     The minimum is actually 1 year if you can show a license for 2 years.  Depending on what you do you might have that.  If you don't have a license at all I would get one from your city today as this will help you in the future for lending purposes.

    0Reply
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