Owner Financing Question

My strategy is to buy and hold. My price range has been around 30k. I’m trying to get around the 20% down with banks, plus banks I’m talking with won’t loan under 50k. As someone who plans on buying multiple properties to use as rentals is Dodd Frank going to hinder me from doing this?

You need to look at smaller banks. Mr. Wells Fargo may not loan less than 50k but Mr. Local Bank will. Can’t speak to Dodd Frank as we do all commercial lending with local banks. If you can get a couple houses paid off in a few years, you can leverage those into bigger deals. One thing to think about is that if you don’t have 6k to put down on a house, you may have a hard time with money for rehab and repairs.


It would seem counter-intuitive, but you’re wading into the least profitable price point, if not the most risky.

One of the many reasons this price range is risky is that the values in this price range will likely remain relatively stagnant, and the dollar amounts to repair/rehab a $30K house are the same as the $60K house.

Worse …after you’ve spent $8K rehabbing the $30K house, it’s still only worth $30K.

However, after you’ve spent say $8K rehabbing the $60K house, it’s now worth $60K.

Of course, that’s assuming you purchased both of these houses at least $8K below their retail value, and invested the same amount into the property.

Well, you’ll leverage half as much money, percentage-wise, into the $60K house, than you will with the $30K house.

So, what?

Well, assume the $60K house appreciates 2% over 12 months, for a total appreciation of $1,200.

That’s a $1,200 return on your $8,000 investment, for a 15% total equity return.

It would take over six years of straight-line appreciation to break even on just your rehab investment.

Meantime, the $30K house might also appreciate 2% over 12 months, for a total appreciation of $600.

That’s a $600 return on your $8,000 investment, for a 7% total equity return.

It would take over thirteen years of straight-line appreciation to break even on just your rehab investment.

Well…by then, you’ll have rehabbed this a couple of times.

That all said, the rent/price ratio may be better on the cheaper house. That advantage should theoretically shorten the time to recapture your investment.

The issue is that the actual dollar amount spent to maintain either house is the same for each house. Again, it doesn’t cost more to maintain a $60K house than it does a $30K house. However the percentage of money spent on the $30K is MUCH higher.

So, the smarter play is buy a $60K, at a 20% discount, less repairs, instead of buying a $30K house, at a 20% discount, less repairs.

Another danger sign for buying low-end rentals is low market rents.

Whatever market rent is, you can bet that half that will go to overhead. The remaining half will go to debt service and cash flow.

Well, on a $30K house with rents hovering around say $500/mo, you will simply feed this investment money to keep it afloat, if not donate many dollars, and hours, to it’s management and maintenance.

I would write a lot more, but you should seriously consider investing in higher-priced rentals.

What do you think?

I agree with upping my price point. It will offer me more options for financing. My wife and I have stellar credit, money in the bank, and great jobs. I was just trying to keep the prices low so I can leverage the money I do have better. My goal was to have the 30k houses paid off within 5 years. The rents range anywhere between 6-800 per month. I’m not looking for fixers at this time, only turnkey properties, or light cosmetic repairs. My goal is just to keep going, and use that income to create more. What I really want is to find someone who will loan me 30-40k on a steady basis, I put no more than 5k down, and the balance paid off within 5 years. This is why I really like owner financing.

That’s a very straightforward plan.

If there’s enough inventory, and you’re willing to remain patient, you can find sellers who will walk from their existing mortgages, and let you take them over in exchange for $5000. That’s more money than they probably put down to buy the house. That’s a 16% down payment…!

Likely these will be low-equity, high loan-to-value properties. The lack of equity, combined with the difficulty in selling, will to create a motivated seller.

I would locate sellers that were having a hard time selling, and offer them the 16% down (or less, or offer notes, etc.) and take over their mortgages in exchange for their deeds.

I do this on half-million dollar, turn-key properties.  I've had sellers walk with only twenty bucks in their pocket.  Others have required several thousand to bring up back payments, or to help the seller move.

Meantime I immediately resell the house for a premium price, with seller financing, and ask for 10% down.  It's a very fast transaction from beginning to end.   

Meantime, there’s rarely anything prohibiting you from paying down the loan faster than scheduled, apart from pre-payment penalties built into some loans.

The thing you must realize and be willing to navigate around, is that your expenses are going to run 50% of your gross scheduled rent. So, if your rents are $800/mo, you can expect to have $400 available for debt service. If your debt service is only $200/mo, than you’ve got $200 for cash flow. If you’re accelerating the pay-down of the mortgage, that $2400/yr will go to that end.

Frankly, paying down, even a $30K house in five years, is too optimistic IF YOU EXPECT THE CASH FLOW TO PAY FOR THAT. Otherwise, you will be donating time and money to achieve that goal.

It’s alright to adjust to a 10-year payoff. I think that would be more achievable, less stressful, if not realistic (and much less costly to you).

Another option would be to see if you could wrap two home purchases into one mortgage, using both as collateral. In this way, you can keep your price point plus meet minimum lending requirements. But, I would definitely check with your lender first to see if this is even an option and if the interest rates, closing costs etc would change the profitability.