Seller Financing: Learn The Benefits Real Estate Investors Need to Know!

Owner financing offers a unique alternative to traditional bank lending, allowing real estate investors to build superior cash flow and leverage their investments effectively. This episode highlights the benefits of owner-financed deals, including enhanced relationships with sellers, improved debt-to-income ratios, and better negotiating power.

• Benefits of leveraging owner financing 
• Understanding cash-on-cash returns in real estate 
• Building relationships with property sellers 
• Flexibility in negotiations during market changes 
• Advantages of improved debt-to-income ratios 
• Mutual benefits for sellers in owner financing deals 
• Challenges in locating owner financing opportunities 
• Conclusion emphasizing the effectiveness of owner financing

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Transcript

Speaker 1 0:00

The short and easy answer that I typically give when someone asks me well , why do you want to buy with owner finance and why not use a bank ? Is because we get better leverage . So if you're an investor and you're looking to buy multiple properties , you're talking about the volume that we do . You're not just buying one rental property or two or three . You're buying dozens Eventually , and a lot of times the number is 11 . When you get to a certain rate with bank financing on rental properties , your terms skyrocket . Your down payment goes up into that 25 , 30 , or 35% down range and your interest rate will usually still be pretty decent . But by having to put such a massive down payment it'll throw off your cash flow numbers . So the more leverage you can get as a general rule of thumb , the better your cash on cash return is going to be . For those of you that don't know what a cash on cash return is , I'll give a quick , super brief example of how to calculate that . So let's say we're buying a property for round numbers , that's a million dollars and let's say that property's NOI net operating income . So the income that property generates is a rental . After paying all of the expenses loan payment , HOAs , taxes , insurance . Let's say that number is $100,000 . So your million-dollar property is generating $100,000 in net income every year . So if we go and buy that property cash , we're earning 10% on our money because we take our $1 million cash investment , divide that by the $100,000 in income that investment generates and that's 10% . So that's our cash on cash return . If we buy that same property with 20% down , let's look at the numbers on that . So now , instead of our cash investment being $1 million , it's now $200,000 cash . The property is still generating the same amount of income because nothing has changed . The only thing that's changed is the way we purchased the property . So let's say , on the $800,000 loan that we have , let's say we got a 5% interest rate with interest only amortization . That means our annual loan payments , our debt service , is going to be about $40,000 a year on that property . So now we take our $100,000 net operating income and we have to deduct our loan payments from that . So now , instead of making a net of $100,000 , we're now making $60,000 on that property . But now , since we invested $200,000 to get $60,000 , instead of investing $1,000,000 to get $100,000 , divide that $60,000 by the $200,000 investment , you can see we've tripled our cash on cash returns . Instead of earning 10% , now we're earning 30% . So that's a real round number example of using leverage to create a higher cash on cash return . And if you had a million dollars or you can do the same thing if you had $100,000 and the numbers are the same instead of buying one property cash and generating 10% , you can use that five times . Now you've got five properties that are now earning you 30% . So over the course of the long haul , your million dollars is earning you $300,000 a year instead of $100,000 a year .

Speaker 1 2:58

So that's the first thing . The leverage is better . Typically , the terms are better . The purchase price is what we care about the least . When we buy with owner financing , we almost always pay either at list price or even slightly above list price to get favorable leverage , favorable interest rates . When you do that , it's not uncommon for us to get a three and a half percent , four percent , always usually five percent . The highest I've ever paid is 6% , and so with those interest rates , a lot of times that can be better as well .

Speaker 1 3:29

The other thing is , since we're not using bank financing , we're dealing with a human being instead of a bank , which I could talk for an hour and a half about the benefits of dealing with a person instead of Wells Fargo or Bank of America , because you've got an actual human being you can build a relationship with Over time as the market adjusts . It gives more flexibility . Let's say the market crashes , for example , and the balloon payment comes up on these loans . If we're dealing with a bank , you're out of luck . Good luck getting anyone on the phone that you can even really negotiate with , that even has that authority . You're going to spend hours in customer service lines to talk to someone that doesn't know you , doesn't know your relationship with the property . They're looking at a spreadsheet . You're dealing with a human being . You've built a track record . You've made timely payments for years . They know you , they know you , they know your story and they also know what's happening in the market . So we've had it before where the market crashed and okay , let's negotiate an extension and it's easy to do , it doesn't take months of paperwork and bank statements and nonsense . It's a phone call , it's an email . That's one thing . Let's say the market booms .

Speaker 1 4:31

This is something too , since you're dealing with a person and we had this happen on a property in Pollock Pines , California . It's right , by Tahoe , we still owed $150,000 on the owner finance note . We went to sell the property because the market had appreciated so quickly and I said to the lien holder I said , hey , if we paid you off a year and a half early , would you take 100,000 instead of 150 ? I thought that'd be a negotiation point . They just said okay , so we got an extra $50,000 in reduction on the back end . That's obviously something that you could never even begin to dream of doing with a bank , but at least you have that opportunity to negotiate because it's a human being that might need the cash and it might be advantageous for them to get it all now at that point . You never know .

Speaker 1 5:12

The other thing is if you're using bank financing . Over time I had one client and partner . He had 11 properties with bank financing . It messed up his debt to income ratio , so all of those properties are on his personal credit . So when it came time to refinance his home , his personal residence where he actually lived he couldn't do it because his debt to income ratio was so screwed up With owner financing . While you typically will do a credit check to make sure that the credit's good , it doesn't show up anywhere on your personal credit . So you have the income coming in but you don't have the debt , so it actually improves your debt to income ratio . That's a huge , huge benefit of not tying up your personal credit so much for investment . It gives you the flexibility to live your life , enjoy the benefits of the cash flow you're now generating without the downside of it . So those are a few of the key reasons I mean again , I could literally do an hour and a half two hours talking about all the benefits we've seen beyond that .

Speaker 1 6:12

At the end of the day , there's a lot of benefit to just being able to build the relationship with a person and , quite frankly , most of the people that will sell with owner financing . It's a benefit for them as well , Because instead of taking that cash right now , putting it in their bank , where they're going to earn 0.2 percent interest , or put it in a CD , you might get one and a half percent if you lock up your money for five years , or you might get 1.5% if you lock up your money for five years . Now they get cash up front and they get a premium on the purchase price and they're earning 4% , 5% , 6% interest on their money and secured by an asset that they're intimately familiar with because it was their property that they chose to sell . So it's good for them as well , and usually these people that will sell these properties will have more than one . That's another reason why I love buying , owner finance and dealing with a person , building that relationship , showing them how stable we are with making our payments on time so that we can hopefully buy other properties from them with the same structure as well . So that's my little snippet for anyone that asks why we buy with owner financing Again , they are hard to find .

Speaker 1 7:12

If it was easy , everybody would do it . With owner financing Again , they are hard to find . If it was easy , everybody would do it . But we have tried and true since 2009 . This is the best strategy and formula that makes sense to make our numbers work , and I'm thankful to anyone that took the time to watch this brief video and I hope that it added some value .