As a property investor, chances are you have done extensive research into the best ways to invest and grow your wealth. Like many investors, you have done your due diligence in seeking out the best opportunities, and finding ways to maximize them. You’ve diversified your investments into multiple streams of income, and have learned when to take risks and when to play it safe.
A GOOD investment will secure you an income and a profit (usually). A GREAT investment is going to grow wealth while minimizing risk and offering great flexibility.
Idealistic? Impossible, even? Not at all.
What are the major concerns with property investments?
Taxes – When you own investment property, you are paying not only the property tax but also capital gains on any rent you collect. Not terrible, necessarily, but what if you could get rid of both and still have a steady income?
Tenants – Some tenants are amazing. They pay on time, take care of the property, and are all-around great people. Other tenants? Not so much. Not just that, but when you own property, the upkeep and maintenance is ultimately your responsibility. The structure and land must be maintained for you to continue earning money.
Turnaround – Property investments can be great, but they are also rife with uncertainty. Changes in the market affect how much you can realistically charge for rent. Tenants may or may not stay for more than six months to a year, meaning that not only are you often needing to look for new tenants but that you are constantly hoping that this set doesn’t break the plumbing. Selling the property is possible, but who wants to deal with a realtor?
There is a way to make the most out of your investment property while getting rid of the annoyances associated with investment property.
Seller financing allows you to maintain a steady income without worrying about any of the three above mentioned issues. AND, if you find that you are ready to move on and cash out your mortgage note, a seller financed mortgage note can be sold to a note buyer, fairly quickly after the sale if said loan is structured in a way that is attractive to an investor.
By carrying your own mortgage note, you eliminate the troublesome aspects of property ownership while maintaining the perks. The property is no longer your responsibility, although you own the buyer’s debt which is secured by the home. The sale operates like a regular home sale, although the income and the potential for interest remains solidly in your hands instead of transferring to a bank.
So what about this takes those troublesome aspects of a good investment and eliminates them, making the investment a GREAT one?
Owning a home or another investment property incurs property taxes. You can dispense with them by selling the property for sure. That said, you will be on the hook for capital gains taxes. You could use the 1031 exchange and buy another property, which will leave you right back where you started. Suddenly your investment is costing you money, no matter which way you slice it.
However, when you carry the note on your property as you sell it, you avoid both, at least for the time being. You don’t technically own the property anymore, so no taxes (or homeowners insurance!) there. And capital gains tax doesn’t kick in until you start collecting on the principal of the loan. If you structure the loan properly, you can avoid collecting on any of the principal for quite some time, providing you with a steady income free of the burden of capital gains tax.
I once heard a teacher say that the hardest thing about teaching was the parents. Turns out, the same is often true of investment property ownership. Tenants can be the worst thing about owning a rental property. Tenants have no investment in the property, and your ability to make money off the property in the future rests with them. Not exactly an ideal situation for a great investment.
If you really do not like your tenants or if you are just tired of being a landlord, seller financing your property allows you to continue receiving an income (and often at a higher rate of return than you would have been able to collect in rent) without worrying about what tenants are doing with the property. You don’t own it, only the note, so what the buyers do to the property is now the least of your concerns (assuming it is properly insured and has you, the lender, as the loss payee on the policy).
When you carry only the note on the property, you are not responsible for maintenance or repairs, or things like homeowners insurance or HOA fees. That lands squarely in the lap of the new owners, leaving you to collect payments free of cumbersome maintenance costs.
When you seller finance, your income is locked in for however long you own the note. The terms are set in legal stone and the payments are constant month to month. If you decide to sell, you aren’t as concerned about what is going on with the real estate market, because you aren’t selling the property, only the note. A note buyer is looking at the money to be made on the note, rather than how much the property itself can potentially earn.
You also don’t have to worry about someone skipping out on the rent because these are homeowners, not tenants. If they want out of the property, they have to sell it and pay off what they owe you.
If you find you would rather not own the note anymore for whatever reason, selling your mortgage note is now a simple matter of requesting an offer from a mortgage buyer. They can buy all or part of the note, often in a matter of only a few weeks. This provides you an easy exit strategy, should it become necessary.
The beauty of seller financing is that it negates the most negative aspects of investment ownership. It significantly lowers your tax payments, possibly even eliminating them for a time, keeps you from having to deal with lousy tenants or the responsibility of home maintenance, and provides you a great deal of flexibility and an easy exit strategy should it become necessary. It takes your already good investment of property and turns it into a great one, where profit is maximized, and risk and worry are minimized.
Are you ready to sell real estate notes?