Seller Financing: Why should I do it?

There are many types of note investing and seller financing. Some are short term and some are long term. This article mainly focuses on long term note investing, which means buy-and-hold style investments, not flips. There is lots of information on note investing for flips and I'll put some book recommendations at the bottom of the article.
Holding a property vs holding a note on the property is mainly about how much work and how much risk you want to take on. Notes typically have less work and less risk, but less upside if the market were to explode for some reason. Both can get a similar income every month depending on the loan terms, so it comes down to your goals and comfort level.

Pros of holding a note:

• No management
• No maintenance costs
• Steady income with no ongoing work
• If it doesn't perform, foreclose on the property and get it back
• Note value does not depreciate if the market falls
• Payments are largely on the interest for the first part of the holding term, so if the new owner does sell later, you get a lot of equity.

Pros of owning a building:

• Steady income if managed well
• Value of building appreciates with the market
• Potential tax benefits

Cons of holding a note:

• Value does not appreciate with the market
• Fewer tax benefits

Cons of owning a building:

• Management
• Maintenance costs
• If it doesn't perform: sell, declare bankruptcy, or work harder
• Building value depreciates if market falls

As you might have guessed, note investing like this works best at the top of the market when buildings are valued highly. The term is also important. If the note lasts for 25 or 30 years, you probably want to set aside some funds for the end of that time frame to invest in something else to continue earning income. A common practice is that a note investor will re-invest money in the original borrower when the loan term is up or the asset is sold, but there are also many other options.

A quick example how this might work

Let's say you own a building earning $70K a year. It's valued at $1M right now and you owe $200K to the bank. You bought/built the building a while ago, so maybe you owe the bank $1.5K a month and keep $4.3K for yourself. That's a lot of numbers, but most importantly, keep in mind the income.
So now you could:

1. 1. Sell for $1M, but hold the note.
2. 2. The buyer pays you $200K, which you then pay to the bank so you no longer have a mortgage.
3. 3. Set up a mortgage with the buyer so they owe you $800K over the next 30 years.
4. 4. Start earning $4K a month from the new owner and never worry about management or maintenance.
5. 5. Maybe the new owner wants to sell after 15 years, so he does and you get about $540K in cash from the sale (because he's mostly been paying off the interest so far).
6. 6. Take your $540k and invest in a new note, building, syndication, etc.

So you can see that holding a note doesn't necessarily mean that you'll get a lot less income. In some scenarios, especially with short term loans, you might earn more income.