Using Seller Financing to Buy Rental Property

seller financing

A misconception of seller financing is that it is only good for the buyer.

Financing is one of the major topics where questions arise when it comes to buying rental property.

Where do you get the money?

How do I save the money?

Where do I go to get a loan?

There are endless questions about the financing component of investment property purchases and I want to shed some light on the strategy of using seller financing to buy property.

What is seller financing?

Seller financing is a great strategy for anyone who is looking for a potentially more creative approach to acquiring rental property.

In its most basic terms, seller financing is when the seller acts as the bank in that you will pay your “monthly mortgage payment” to the seller, based off of negotiated terms, not a banking institution.

How to Find Seller Financing Deals

It really comes down to you understanding the strategy enough to be able to approach a seller and ask them directly if they would be open to selling using this financing.

When a seller is selling the property, as a buyer, you could approach them and ask them if they’re interested in seller financing.

Essentially, you negotiate terms with the seller, no banks involved, no loans involved. You as the seller and buyer may negotiate all terms of the deal. This could result in putting 10% down on the property, you may negotiate a 5% interest rate.

The seller will hold the note to the property and you will make your monthly payments to the seller.

There are a lot of pros and cons to using seller financing for both parties.

One of the pros for the investor is that you don’t have to deal with the banks. You might be able to get better terms if you negotiate just with the seller, then you could get going to a bank.

For instance you can negotiate deals with your closing costs, purchase price and avoid a higher interest rate. You can also negotiate the length of the loan term. So where a bank conventional loan may typically be a fixed rate loan for 30 years, you could negotiate a shorter time period with a lump sum payment if that is what you wish.

The key is there is much more flexibility than with working with a bank for the real estate investor.

Read More: The Ultimate Guide to Financing Rental Property

Another pro of using seller financing for the investor is that it won’t count toward your number of allowed properties using financing with the banks. A lot of banks will only allow you to have so many rental properties financed and you will start to hit barriers as you buy more property. This allows you to keep a property “off the books” so to speak.

One more important thing to note is that many individuals run into issues with qualifying for a mortgage loan due to poor credit.

A traditional lender will take a heavy look at your credit history and credit score to determine whether you can qualify for the loan you are looking to access.

With seller financing you can avoid this.

There are also pros for the seller.

But what you may often find is that sellers may not understand what this strategy is and it will be your job to explain it to them and how it can be beneficial for them too.

One of the advantages that you can share with them is that if they wish to continue to earn monthly income, this strategy would allow that. They could sell the home receive a down payment and still continue to get monthly payments.

Another pro for the seller that you could approach them with is that maybe you pay them half in cash and then maybe you only finance half of it with them.

This could be advantageous for them because then they would only be paying tax on half of the value versus the full amount if it is being sold as an investment property.

The key is that buyer and seller agree, on their own terms, what the deal looks like and have the real estate attorneys draw up the contract and closing documents to adhere to the negotiated terms.

So if financing has been an obstacle that you have struggled to overcome, this could be the creative strategy you’ve been looking for to acquire that next property.