I have a friend who invested in in a 4plex and his goal for the property is to sit on it for a year, earn the Capital Gains tax break, then sell it owner finance.
The plus here, in his words, as an owner finance sale, is that he’ll earn money during that year, then sell it at close to or more than original cost. He will continue to recieve monies for the property through the loan term, and won’t have to deal with the property. If the buyer forfeits, then he gets his property right back.
Bought it at 37k appraised at 50k after repairs (already done).
He’s put 1,200 of his own into it, and cashflow is currently at 750+/mo.
Oh yea, we talked about this post, as I posted it, and drummed up a snafu. So there are two questions now… :
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What do you think about this approach with the goal of owner financing the loan?
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We came to a snafu with property gains… is there a time window (this would be in Texas) where the gains would have to be rolled into a new investment, and if the owner/financing does not cover the capital gain within that window, is he at a loss?
Thanks
If this is in Texas then make sure he’s aware of the recent legal changes.
As of Sept. 1st 2005 the Texas Legislature made it increasingly more difficult for sellers/investors to owner finance or lease option a property.
Some of the highlights of the changes are that you cannot seller finance / contract for deed a property that you do not own outright. You also cannot lease option a property for more than 3 years without owning the property outright. If you owner finance a property improperly and the tenants/borrowers stop paying you have to forfeit ALL of the money they have paid you since day 1 back to them. The legislature has deemed that the buyer should not lose this equity they have in the property due to some unscrupulous sellers/investors.
If he paid cash for this property on the front end then it’s a different story (but you mention he’s only put $1200 of his own money into it so I’m guessing he didn’t).
Also bear in mind that if you owner finance a property that you currently do not own outright many lenders may invoke their ‘due on sale’ clause, which simply means that if the property is sold their note becomes due in full. They don’t have to invoke this clause, but they are entitled to if they wish.
Wow, very informative! I will pass all this info on to my pal.