What Is the Advantage of Seller Financing for Investors Who Are Looking to Buy
Advantage #1
1. There’s no limit on the number of homes that I can buy using seller financing.
If you are an aggressive investor and you want to build up a significant portfolio of properties and are depending on standard mortgages from mortgage companies, you are limited to 10 total. A certain number with Fannie Mae and a certain number with Freddie Mac. Now for a lot of people that’s a lot of real estate to do. But if you want to do a lot more than that, you can.
Advantage #2
2. Better terms. These contracts can be customized to meet your needs as an investor.
If you were to get a mortgage from a bank to buy a rental property, most of the time you would be putting 25% down. If you want to buy a rental property using seller financing, you can do it all day long with only 10% down. Sometimes even lower than that.
So, typically you can buy 2 houses with seller financing you could only buy one house with the same down payment. You can find more homes by using seller financing as a method of financing. And a lot of times when you use me to represent you, I can negotiate a lower interest rate with the seller than what current market rates are.
Many times, you can negotiate lower interest rates than the bank is offering.
The other thing that happens is the home will increase in value over time. So, I may choose to buy a house with seller financing initially regardless of whether I can qualify for a mortgage from a financial institution. And then two years down the road the value goes up. Now I go in and refinance the house based on the current market value and now my loan-to-value ratio is such that I don’t have to come up with any more for a down payment, and I could also finance the closing cost. So, this is a cool trick to use as an investor by buying homes on seller financing first.
Advantage #3
3. You have all the benefit of the owner even though you may not be on title.
You can make improvements, you can refinance at the current market values, and you get the depreciation tax benefits. Even though you may not be on title. It is still a legitimate purchase. You have an equitable title.
The title will be transferred into your name when the contract is paid off.
Advantage #4
4. Use seller financing to do a 1031 exchange.
If you have an investment property that you want to cash out but you don’t want to pay for another mortgage, and you don’t want to have to pay taxes, you can sell your rental property and go out and buy multiple rentals with the cash you got from the sale of that house using a 1031 exchange to defer taxes.
You could then turn around and sell them with seller financing so that you don’t have to be a landlord. The Tenant-Buyers take care of all the maintenance, taxes, and Insurance.
Advantage #5
5. Buy investment property with seller financing and sell with seller financing. Don’t be a landlord.
You can buy a house on a Contract for Deed, make improvements, and then I turn around and sell it to another buyer on a Contract for Deed. You are still in the middle of the deal but if you buy a property for $3090,000 on a Contract for deed fix it up a little bit and then turn around and sell it for $50,000 to somebody else on the Contract for deed that is a big benefit.
If you’re an investor and you like selling to other investors, you can do a bunch of those and just create a bunch of small little spreads.
For landlords who want rental properties to turn into cash flow for retirement. It is better to have a seller-financing property than to have a renter in that property and don’t have to worry about being a landlord.
Advantage #6
6. Use seller financing to do Fix and Flips instead of hard money.
This one is huge. There’s no reason to use hard money. Always use seller financing to buy a house from a seller when the house is in bad condition. Use seller financing instead of hard money, fix it up, and then turn around and sell it and at that point, you pay off the seller financing contract.
Many times, the seller sees the benefit of having a seller financing contract where they’re earning income after they’ve sold it and they will be very interested in continuing with that seller financing contract. Now you have a situation where you can sell it to somebody else on a contract for deed, and you don’t have to pay off your original mortgage. You can sandwich that seller right in between a contract with another buyer.
Advantage #7
7. Hedge against inflation.
One of the great benefits of investing in real estate is that it is a great hedge against inflation. Typically, real estate will go up in value so it will protect your money against inflation. Rents will always go up over time. And we are assuming that values are going to keep going up over time. Typically, values go up by 3 to 6%. That is not just 3 to 6% of the money they invested but of the total value of the real estate. So that gives an investor an increase in their net worth on the cash they invested much more than 3 to 6%.
Advantage #8
8. Spread your tax liability over the term of the contract.
When you sell your investment property the traditional way, you must pay 100% of the capital gains taxes in the year you sell. However, when you use a seller financing contract you can pay the capital gain taxes in the year you receive the payments using the installment method to spread them out over the term of the loan.