Owner Financing Question
Let's say I'm the owner which is true.
I have a $137K ($139K Appraisal) rental property that I am currently renting for $1150/month. I'd like to convert these tenants to owners via my financing. I have a loan for $130K. I plan to use a Lawyer to disperse the payments from my buyer to my mortgage company and myself.
How do I provide the buyer with Mortgage Interest Deductions?
Do I still get mortgage interest deductions too, or do I just have an expense for the property?
Plan is to Owner Finance for 3 Years at 1% higher than my loan & for a value of $159K based on escallated value from $139K at 7% per year. (Buyer Option to finance 3 more years also at same value, no escallations.)
Basically yields $300/mo cash flow for 3 yrs or 6 yrs & roughly $26K at closing.
Buyer gets a payment of $150 more than rent, but a tax deduction of 25 to 30% of his payment for a cost savings.
How does this sound? Am I missing something?
Excellent job realizing the usefulness of owner financing. You haven't really missed anything here but I do have some thoughts for you:
1. Check with your lawer to see what you must do if you sell on contract and the people don't pay. You want to make sure you can kick them out quickly and you aren't forced to foreclose. This is state specific.
2. When pricing a property for sale it doesn't matter so much what you paid for it. You didn't mention your interest rate but I would sell it for as high as you can reasonably do. For me a 7.9% rate works although my only concern is if interest rates go up people won't be modivated to buy me out. I've tried to get people in at 8.9% but I haven't been able to easily.
3. Consider using a loan servicing company such as www.sellerloans.com instead of your attorney to collect and dispurse the payments. This company is likely much cheaper than your attorney and will do all paperwork concerning writoffs, etc.
4. You are able to write of your underlying interest as a decution but you must also report you income. For example, you have a $1300 rent and a $1000 payment, of which $900 is interst. You report $1300 subtract $900 interest which leaves you with $400 taxable montly profit. Of course you can write off other expenses associated with this.
5. You will need a landlord type insurance policy and I would recommend you have your buyer pay for this.
6. I would also have your buyer be responsible for property tax. Escrow 1/12 each month.
GOOD LUCK
First of all - Myfogger thanks for the reference to that site - very good material.
Now in response to the above, Myfogger says it very well. Just a couple thoughts - how long has your tenant been renting from you? Are you going to apply their previous rent as credit for a down payment?
The reason I ask these questions:
What if somewhere down the road you want to acquire another property, but you have all your credit line tied up in this one? If you structure your seller financed property with the right LTV, interest rate, credit rating, etc. you maximize the value of your note.
Why is this important? Because if you want to get cash to buy your next project you can sell off future payments on your note to raise subsequent funds and the cash flow would resume after those payments are done.
For example: You need say $20,000 to put down on a new rehab project. A note buyer would buy enough payments to get you that $20,000. For simplicity let's say 20 payments. On payment #21
you start receiving the payments again.
In the note business this is called a partial purchase and we refer to it as
a Hallmark gift - the gift that keeps on giving...
So those are just some additional thoughts. Good luck!
[addsig]