Use Seller Financing for Investing in Rental Property

Seller financing is a great tool to have as an option for investing in rental property.

It's typically used to buy raw land since banks generally don't loan money for land. Here's some situations you can use it when buying investment rental property:

• use owner financing as a second lien against the property to make the down payment
• use it for the first lien position
• create "wrap-around" financing (new financing that wraps around existing financing)

When you sell a property you can use owner financing as a way to create a high interest stream of income.

• when you don't have the cash for a down payment or want to preserve your cash for repairs
• quick closing
• reduced closing costs
• loan does not show up on your credit record
• the property can be sold "as is" (banks sometimes require expensive repairs to approve a loan)
• the seller can spread the profits of the sale over a long time period, reducing taxes
• for the seller, providing financing is a way to get high interest rate payments secured by a lien on the house. When CD rates are very low this can be quite enticing to a seller
• the seller can often negotiate a higher selling price as well

As with most things, there are disadvantages to seller financing:

• If the seller defaults on the senior financing, the property could be foreclosed under you. You would have to come up with money to pay for the senior loan immediately or lose all of your investment.
• the seller might put a lien against the property unknown to you
• if you need the money right away, you will probably have to discount the mortgage
• in some States (like NY) it takes a long time to foreclose if the buyer defaults

There are two ways of transferring property through seller provided financing. The first involves providing the buyer with the Title to the property through a promissory note and Deed of Trust. A Buyer could re-sell this property and continue to keep the first financing in place. A second method involves creating a "Land Contract". In the later case the seller still holds the Title and cannot convey the property until the financing is paid off.

I once bought 6 properties from a single seller using wrap around financing. Unfortunately, the seller defaulted and I was unable to pay off the loan. If you do chose to buy a property with seller financing make sure that there are some safeguards in place to pay any senior liens on the property. For example, you could pay the senior loan directly or make your payments into an escrow account that pays taxes and senior loan payments. Make sure that the Land Contract is recorded. If you are selling a property this way, investigate the credit history of the buyer thoroughly.

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