Originally posted by Tyler McCracken on 10/4/2009 at www.askthelandlord.com
Owner Financing is Out There: A Tale of a Win/Win Arrangement & The Power of Compounding.
There was a day that I was shy/scared/intimidated (or whatever you want to call it) to ask a Seller if they’d consider owner financing. After being in the business for many years I have witnessed multiple win/win scenario’s and some unbelievable terms provided by owners willing to provide financing to get rid of their perceived problem: a piece of real estate. I have one particular client whom is notorious for securing zero (yes, I typed 0%) percent financing arrangements. Let me warn that one must learn to build a relationship with a seller, listen to their needs, and instill confidence that you have both the capacity and capability to perform. I have found that seeking owner financing for real estate investments in Charlotte, North Carolina to be a fantastic tool to have as a real estate professional.
A few years back I made the decision to sell off a 14 unit apartment complex to take some profit off the table and diversify the proceeds into multiple investments. Part of my goal was to replace 50% of those lost 14 units with 7 Single Family Homes (SFH). I had an investor friend whom had arranged a purchase of 6 SFH’s from a local landlord with owner financing on these Charlotte, NC rentals. He was a bit concerned he had bitten off more than he could chew, knew a wholesale fee could be made, and offered me an opportunity to reach my goal. I choose two homes: paid him a wholesale fee, received recorded confirmation from the seller of the terms/conditions, and proceeded on my way with two new additions to the rental portfolio.
This is not a story of “no-money down” as I was redeploying cash and more importantly to make the deal doable: satisfy the needs of a wholesaler and seller. I will provide no money down stories another time. I bought these two homes for $83k with $25.5k down. I had to put $15k into rehab on one so that totals $37.5k down on a total investment of $98K ($83k purchase plus $15k rehab). Not a traditional no brainer deal nor a perceived great “return on investment”. But I ask you to continue to read and listen to the story and its goal –which really should be a cornerstone of every investors goals.
Here is the real key: the financing. The deal was that the remainder balance of $57.5k was to be financed on a 7 year amortization, no balloon, at an eight percent (8%) interest rate. That computes into a Monthly Principal & Interest Payment of $667.62 – set the amortization schedules up on that and enjoy the forced monthly savings of the principal component with only a 10 year commitment! Now, there is another equation to this story you maybe asking yourself? What are these things worth? Well, they weren’t outright steals –but I will say that the proceeding year I was wholesaling homes in the same neighborhood for $80k in the worst conditions. Today, the two homes are conservatively valued from $80-100k apiece.
Your probably wanting to know another BIG EQUATION to the story? Yes? How about the rents so I can handle the financing terms…. Well the combined rents are $1,010 per month. Truthfully for another $10-15k capital improvement the combined rents should be at least $1,250 per month. However, the place I haven’t improved has 33+ year residents at $305 per month. EGADS you say? Well here is where you, I, other investors and perhaps even “guru’s” may differ.
You see this place is a 1930’s craftsman home with pine wood floors in mint condition -one could eat off of….. It’s in great shape, well cared for with the exception that it hasn’t received modern upgrades over the years. Heck, the residents were at $175 per month when I bought it a few years back. Let me add another equation to the factor….
This is in an emerging market were my creative loafers are still somewhat shy of the neighborhood and a place were a/c units walk and the certainty of your next residents financial stability is uncertain.
So, I’ve elected to slowly increase the rents to help greatly improve the odds that I don’t lose these residents whom are likely to be there another 5, 10, 15+ years…. For those that truly now what they’re doing in the game of rentals, “Slowing The Turn”…, as I refer to it as in tenant turnover is the name of the game. Sure I could do the $15k improvement and raise the rent some 200-300 dollars but I greatly improve my odds of multiple tenants, multiple move outs, multiple months of vacancy, and multiple times of more repairs due to those turnovers….. IF I BOUGHT IT RIGHT, FINANCE IT RIGHT, DON’T OVER-LEVERAGE IT, & MANAGE IT PROPERLY, then it gets me to my end goal for this deal: Wealth Creation.
Of course, we can run those what if scenarios with greater rent (and even far greater for those that like to push top section 8 rents)…, but anyone who’s done this for a little while understands (as with anything in life) that you always bring in a little less then projected and pay out much more than thought…..
So next spring I will be at the half way mark and only 5 years to go to have these 2 SFH’s “Free & Clear”…. That’s true wealth creation. Not the fast way of merchandising: flipping, wholesaling, and/or rehab to resell; however, its an example of how to do it the slow and steady way by buying it right and being able to actually do it in 10 years versus they hypothetical way of 30 years with traditional financing. You see sometimes it’s a lot more than just about location…. Most times its just as important on how you get from point A to point B. Unless you’re paying all cash for deals (that’s a whole other topic), It’s all about the financing to get you there.
For those that haven’t ramped up their amortization tables yet…. I owe @$36.5k today on those two homes… -not to mention conservatively valued at $180k (for both) with an initial $37.5k outlay. (Don’t even need to discuss rents vs. expenses over time as we’ve been in the black) Find an amortization program. Map out my scenario and see how that forced savings entices one to watch the balance sheet grow (in the correct direction) each month.
Can you do this? Absolutely!
All you have to do is…. learn to build a relationship with a seller, listen to their needs, and instill confidence that you have both the capacity and capability to perform. Actually performing goes without saying.. This scenario will not work for all the deals; however, instilling this in some creates real wealth in no time. Imagine if one did this with more than just these two homes…. Multiply it by 5, 10, or even 20…..
Notice I’ve not done any Return on Investment calculations? Is it really necessary if the real goal is creating wealth? Actually, yes. So what does that mean? You see just coming up with these numbers can be a whole other topic. You post your analysis for all to see and learn. After all, if you’re not crunching the numbers (taking action) your not truly learning.
Now take the blinders off and go out and do it….
- Comment by Sean(CA) on October 4, 2009 at 2:23pm
- Delete Comment Excellent article on a very interesting subject.
- Comment by SPIVALAW on October 5, 2009 at 6:33am
- Delete Comment Great story!!!Keep in mind IRS may impute interest on 0% deals. Last one I saw was 4%.
- Comment by SPIVALAW on October 11, 2009 at 6:09am
- Delete Comment I like to add a “substitution of collateral” clause.
You are right owner financing is win win
- Comment by Tyler – NC on October 11, 2009 at 6:26am
- Delete Comment Absolutely Howard. Substitution of Collateral is key!!! That is a whole nother topic and thus will be another blog post of mine.
- Comment by Renate Galuska on October 11, 2009 at 3:54pm
- Delete Comment Great Story, can you find me a similar deal?