All Forum Posts by: Andrew Kiel

@Justin Ake let me expand a bit more on the power of selling a partial.  Let's say you sell a property and end up with a $100,000 note at 8% interest for 30 years.  That calculates out to $733.76 per month.  What if you sell the first 5 years of the note payments for $36,000?

The buyer gets the right to $733.76 per month for 60 months (total return of $39,095.73 to be exact).  You get $36,000 now.  That's a 8.221% rate of return for the buyer of the partial.  After 5 years you get the remainder of the note back or 300 more payments at $733.76 and the note is still worth a bit over $95k - $95,069.86 to be precise.

Try looking at it a slightly different way with some quick math:

$900,000 sales price

$22,500 cost of purchase (appraisal, points, lender fees, title fees, etc - 2.5%)

$90,000 cost of sale (10% commissions, closing costs, buyer credits)

$64,000 carrying costs (6 months at 10%)

$25,000 additional carrying costs (6 months taxes, utilities, HOA, misc)

$100,000 rehab cost (the number used above)

$68,500 profit 

= $530,000 max allowable offer.

Some numbers may be a bit high, others may be a bit low.  Not taking any "boo-boos" into account either (even the most experienced flippers tend to come in over budget on projected rehab costs).  The formula used above is a solid rule of thumb.  Build a good spreadsheet and do your best to use conservative numbers (over estimate your expenses and costs and under estimate your resale).  There can also be some market risk - I've seen several experienced flippers get hurt badly even when the market just hiccups let alone takes a real downturn.

@Justin Ake - The world of notes may be as fascinating as real estate.  There are many books, groups, seminars, etc. on the topic and you can really go down the rabbit hole on the subject.  In short you can buy or sell notes at a discount or premium to "face value".  You can sell part of the monthly payment (think $1000 monthly split in half).  You can sell part of the term of the note (say you're retiring in 5 years, sell the first 5 years of a 30 year note and get the back 25 years - this one can be an amazing wealth builder).  I have a friend of mine that uses multiple strategies inside of a Roth 401(k) and has turned a small amount into millions over the last 10 years.  A little knowledge and creativity can go a long way!

"The most expensive thing you can have is a closed mind"

@Justin Ake - I wouldn't rule out the idea of seller financing quite so quickly. It can be a wonderful opportunity for both you and the buyer.  I have personally purchased AND sold many properties with owner financing.  It can be a wonderful tool to have in the right circumstances.

I'd also like to add some clarity to a couple of your questions.

1. Can I still use this home’s equity for other deals while the buyer is paying it off in the next few years? 

I agree with the "No" answer above, however it may not be the right question.  If you sell a property with owner financing it's no longer yours to use the equity.  What you do get in return is a note.  You can sell the note, borrow against the note, sell part of the note, etc.

3. How are my taxes calculated and what years would I pay for the profit I make?

There often is an aura of mystery around installment sales.  There is only one proper way to handle this from an IRS point of view: IRS Form 6252. It's a fairly simple form and I think it should help answer a lot of questions.

We should scrutinize any seller finance deal, there absolutely is more risk than a "normal" sale.  I have found when the right buyer comes along, it's a great tool for both me (as seller) and the buyer.  When we decide to move forward with one, we often get a premium on the sale price of the home AND the interest rate received relative to the market rate.

I'm going to rant for a moment to try and unpack my thinking.  Banks are stupid! Here is an extreme example but I think it proves the point.  A good friend and colleague of mine was working with a home buyer a couple of years back.  The buyer is a dentist with $200,000 to put down on a house and had a FICO score of over 800.  He has been a dentist for over 10 years.  18 months prior he purchased a dental practice from a retiring colleague.  He was trying to buy a $600k home with conventional financing and could not qualify.  Why? - He had to have owned the business for at least two years.  It's far harder to qualify for conventional loans if you're a business owner or self-employed and that equals opportunity.

When I look at doing a potential owner finance deal the most important thing for me is skin in the game.  Generally at least 15-20% down is the magic number I'm looking for.  It's far more unlikely someone will walk away from that, and if they do, that's a lot of "hurt money".  Also, be well aware of "Dodd-Frank Act" if you ever intend to do more than 1 seller financed transaction per year.

@Michael D Bryan - Always great to see new investors and Tucson is a great place to invest.  There are also some really great resources for anyone starting out with some local groups such as AZREIA where we have monthly meetings and some great subgroups, including a new investor subgroup.  I also host a meetup event (Building Wealth through Real Estate Investment) at my office for new and experienced investors alike.  Best wishes on the beginning of your real estate investment journey!

@Mohammed Milord - I concur with @Nathan M kiefer and @Steve K. comments above.  Don't overleverage.  This type of product carries high risk.  What if you can't refinance due to appraisal, market conditions (interest rates, outside "black swan events" like COVID, etc.).  Or the other likely problem - negative cash flow (the income projections aren't addressed here, and it seems highly likely based on the financing.)  My opinion is this would be a high risk move that could wipe you out before you ever get started.

"I'm not interested in seller financing as an alternative because I'm an introvert and not very good at sales."  - I would challenge you to reframe your thinking here.  You don't have to become a great salesperson to be a good real estate investor BUT it certainly helps.  Books by Tommy Hopkins, Zig Ziglar are some great places to start.  

There is an immense amount of wisdom in the replies to this post, I hear a lot of positivity overall with a solid sprinkling of caution.

I also question the validity of the agent's scenario you mention above in regards to taxes - you should speak to your CPA on how this purchase would impact you.  There are some things like section 179 depreciation that may also benefit you (which is phasing out, we're at 60% for 2024).  This gets quite tricky and you should seek professional advice.

Here's the part about the post that really jumps out at me as a red flag: the math.  I have a lot of "guidelines" in real estate investing yet only one unbreakable rule - "don't get into a negative cash flow situation, EVER".  Based on the post, I'm not sure if the units are identical.  If you have a $6000 per month interest only payment and the best case scenario is renting both units for $5000 per month (you only mention renting one unit for $2500, perhaps the other "owner" unit is far nicer and commands more rent?) this sounds like a bad situation.

My suggestion is to start with looking at this from a pure investment scenario first (where both units are rented), and if the numbers work (I seriously doubt the do) then look at it from a owner occupied angle.

@Konnie Yazzie - Hi Konnie and welcome.  For anyone starting out, I'd highly recommend starting with AZREIA .  The next Tucson meeting is this coming Tuesday 2-13-24 at the Tucson Area Association of Realtors (TAAR) Building on Tucson Blvd near Grant Rd.  It starts around 5:15 with networking.  The above link is the calendar of events/subgroups which has a great variety of topics.

In my opinion the best of all worlds is something very safe and liquid.  I personally am using Fidelity Advisor Floating Rate Hi Income fund (FFRIX).  Currently paying 8.21% (floating).

Notes are great, being a hard money lender is great (we do both) but some cash that is reasonably safe and very liquid is always important for that great deal that comes up and needs funding yesterday.

First and foremost, a good title agent is really key.  And to be specific - it's the person, not the company.  Find someone who is well versed and capable of handling your specific type of transaction.  

I'd probably say that secondly, a great real estate agent that understands creative financing is also important unless you plan on that person to be you.  The brokerages and the errors and omissions insurance carriers are making creative financing more and more difficult for the agents themselves.  In my market (Tucson) I'm aware of 2 large brokerages that bar their agents from doing most creative deals - even for themselves!