Cash flow negative on a seller carry deal with no interest

Portland, Oregon
General Real Estate Investing
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Cash flow negative on a seller carry deal with no interest

Brett Chandler
Investor · Gresham, OR · Member since 2019 · 38 posts · 15 votes

Anyone out there ever done a seller carry deal with no down payment and no interest? I was approached by my neighbor about an off market deal. She owns a rental property and we share a lot line. Her husband passed away unfortunately so she’s trying to offload the rental while she can still file jointly.

It’s not a great benefit to own the house, but it does solve some property access issues for us. More importantly, the math seems like a no-brainer. It’s worth 475K, needs $20K in repairs. We agreed on terms of $420K for the purchase price with zero down and zero interest. Payment will be $5K/mo for 7 years. Long term tenant is paying under market rents at $2K/mo. It’s obviously cash flow negative, but the full payment (that my W2 income can cover) would go straight to principal. I figure we would be out of pocket $260K over the next 7 years and have a paid for property worth $600K+. We are structuring the deal with no penalty for pre-payment for all the ‘leverage’ pushers out there ;). Never done a seller carry deal. Anything I’m missing here?

To add a layer, my wife doesn’t want the house. I’ll choose her over an amazing deal every day of the week, but I want to know what the experienced folks out there think of the deal. Bonus points for anyone who knows how to help me convince my wife that it’s a good deal. Or wants to partner up - on the deal, not as a wife…

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
4h

Brett, the structure is attractive on the surface, but I’d slow down on one part in particular: “0% interest” does not necessarily mean the IRS treats the transaction as having zero interest.

If you buy for $420K, put nothing down, and pay $5K/month for seven years, the economics are obviously compelling compared with conventional financing. But seller-financed real estate with inadequate stated interest can trigger the unstated/imputed-interest rules, where part of what everyone calls principal is treated as interest for federal tax purposes. The seller may have ordinary interest income even though the note says 0%.

So I’d have both sides’ CPAs review the note before signing it, especially because there may also be installment-sale planning available for the seller. IRS guidance generally allows gain on qualifying installment sales to be recognized as principal payments are received, but interest is separately reported as ordinary income.

On your side, I’d also stop thinking of the entire $5K payment as “equity creation.” Economically, yes, you’re paying down the obligation quickly, but I’d still underwrite the property as a rental: $2K rent against a $5K payment means you’re intentionally contributing roughly $3K/month before taxes, insurance, repairs, vacancy, and the initial $20K rehab. You need to be comfortable carrying that even if something changes with your W-2 income.

I’d also get an attorney to document the deed, note, security instrument, default provisions, insurance, taxes, prepayment language, and what happens if either party dies during the seven-year term. With a neighbor relationship and a recently widowed seller, I’d want the legal terms to be especially clear so nobody has a different memory of the deal later.

From the tax side, once you own the rental, depreciation still matters, and depending on the property and your broader facts, cost segregation may be worth evaluating. If your wife actually becomes a co-owner or partner in the investment rather than simply supporting the decision, make sure the ownership structure is chosen intentionally because a multi-member entity taxed as a partnership can create a separate partnership return and K-1s.

The price and financing are interesting. I’d just make sure the after-tax seller-finance structure and the negative carry work as well as the headline “0% financing” does.

Feel free to DM me, I’d be happy to send over a few resources that might help with rental underwriting, seller-financing tax considerations, and downside planning.

[email protected]941-914-7779
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  • James Mc Ree
    Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 933 votes
    12h

    Is your financing a mortgage or contract for deed? The latter has more risk for you in a default.

    How do you buy a property you write is worth $475k, do $20k in repairs and end up with $600k value? Forced value? That's a nice improvement and I question if the property is really worth $475 now for you to get a 6:1 improvement ratio. It may be worth more than you think.

    Are you including taxes, insurance, maintenance, vacancy and other expenses in your 7-year plan?

    You have to work it out with your wife. There's a story there you haven't shared.

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    • Brett Chandler
      OP
      Investor · Gresham, OR · Member since 2019 · 38 posts · 15 votes
      10h

      @James Mc Ree Thanks for the response! Her lawyer was going to work up the contract, but sounds like I need to do some more research to figure out how to structure the contract.

      I was estimating the future value at 5% appreciation 🤞🏼. I’m new to estimating costs, but I did factor taxes, insurance, maintenance, and vacancy as well as the income tax benefits and rent increases over the next 7 years.

      Everything is fine with the Mrs, she’s just not in love with the house and would rather make something cute than win the money game, which has honestly kept us out of trouble over the years.

      0Reply
  • Reuben Ilyich
    Member since 2026 · 1 post · 0 votes
    6h

    I’d rerun it at 3% appreciation. I wouldn’t want seven years of 5% growth to be what makes the deal work.

    I’d still call it negative cash flow, though. At 0% interest, that $5k loan payment is paying down principal. That’s valuable. But with $2k coming in, you’re covering $3k a month before taxes, insurance, repairs and vacancy. Building equity helps your net worth; you still need to comfortably afford those payments.

    The rent is worth looking at. Check comparable rentals and what the lease and local rules allow before counting on increases. A gradual adjustment could help, but I’d run the numbers at the current rent first.

    Get your own real estate attorney to review the title transfer and seller-financing documents, including what happens if the seller passes away before the loan is paid off.

    And I’d ask your wife whether it’s the monthly commitment or this particular house that bothers her. Would she feel differently about putting that money into a place she wanted to live in? That’s worth understanding before committing to the house next door.

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    4h

    Brett, the structure is attractive on the surface, but I’d slow down on one part in particular: “0% interest” does not necessarily mean the IRS treats the transaction as having zero interest.

    If you buy for $420K, put nothing down, and pay $5K/month for seven years, the economics are obviously compelling compared with conventional financing. But seller-financed real estate with inadequate stated interest can trigger the unstated/imputed-interest rules, where part of what everyone calls principal is treated as interest for federal tax purposes. The seller may have ordinary interest income even though the note says 0%.

    So I’d have both sides’ CPAs review the note before signing it, especially because there may also be installment-sale planning available for the seller. IRS guidance generally allows gain on qualifying installment sales to be recognized as principal payments are received, but interest is separately reported as ordinary income.

    On your side, I’d also stop thinking of the entire $5K payment as “equity creation.” Economically, yes, you’re paying down the obligation quickly, but I’d still underwrite the property as a rental: $2K rent against a $5K payment means you’re intentionally contributing roughly $3K/month before taxes, insurance, repairs, vacancy, and the initial $20K rehab. You need to be comfortable carrying that even if something changes with your W-2 income.

    I’d also get an attorney to document the deed, note, security instrument, default provisions, insurance, taxes, prepayment language, and what happens if either party dies during the seven-year term. With a neighbor relationship and a recently widowed seller, I’d want the legal terms to be especially clear so nobody has a different memory of the deal later.

    From the tax side, once you own the rental, depreciation still matters, and depending on the property and your broader facts, cost segregation may be worth evaluating. If your wife actually becomes a co-owner or partner in the investment rather than simply supporting the decision, make sure the ownership structure is chosen intentionally because a multi-member entity taxed as a partnership can create a separate partnership return and K-1s.

    The price and financing are interesting. I’d just make sure the after-tax seller-finance structure and the negative carry work as well as the headline “0% financing” does.

    Feel free to DM me, I’d be happy to send over a few resources that might help with rental underwriting, seller-financing tax considerations, and downside planning.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    1h

    ONly thing I see here is the imputed interest for the seller has no effect on the borrower also this is no big deal .. you simply do a mortgage / or deed of trust with the corresponding note.. Simple.. You open escrow review and understand the title commitment.. lawyer or escrow company will make sure taxs are paid at closing and any other seller obligations.. So that part of it is just standard real estate.

    I have sold many of my properties I ended up taking back POST GFC with zero % financing I usually got some downpayment though. For a seller this is Rock solid paper the buyers NEVER defaulted as they were earning so much equity each month..

    As if its a deal or not thats your family decision if you can afford the negative cash flow just look at it like seller is not only financing the house but the downpayment with zero % and 7 years goes very fast and owning it out right and if your not like me at the end of my RE adventure you will enjoy many years of massive cash flow and have a paid for asset.. Banks love to see those. Just my thoughts If I could find a deal like this I would do it personally.

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  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    44m

    @Brett Chandler here is an idea. You take over the house at $420,000 then you put $20,000 into the house. You then sell the house for $500,000 with 10% down on seller financing at 7% on a 30 year mortgage. Their monthly payment is roughly $3000 a month plus taxes and insurance. You take the $50,000 and you divide that by $2,000 and that gives you 25 months or about 2 years. You pay the previous owners the $5,000 monthly payment ($3,000 from his mortgage and $2,000 from the down payment that he gave you). After 25 months you now owe $295,000. You then go and get a 25 year mortgage at let's say 7% and your payments are now $2000 a month.  You now cash flow $1000 a month until the buyer pays you off. 

    I am not including any tax implications and I know that you would lose the 0% interest. I'm just sharing a concept. 

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