Can seller finance really work?

Question

As a investor, if I can buy property using owner (seller) financing, it is good for leverage.But using this technical, can investor still get positive cash flow?

If it can not get positive cash flow, the leverage becomes over leverage,anyone helps out here?

Thank you

Rocky V. · Answer

@Vincent Chen It's just another tool that needs to be in your toolbox.  You never know what a seller's motivation is.   I've done deals at 0% interest because the owners were so adamant on price.  You never know who is going to say "yes".  This worked out perfectly for me.

Todd Magin · Answer

@Vincent Chen

After re-reading your post, I can provide a more generic answer.  If you imagine paying all cash for the property and calculate your cash on cash return (this is the capitalization rate) and if it's more than the interest rate that you'll pay, then the property will be cash positive.   The larger the difference between the cap rate and your interest rate, the better the cash flow and the better your margin of error.

The more you leverage the property (aka with seller financing), the higher the risk that you take during a downturn in the market because your cash flow is less than when not leveraged.

However, if you buy at a deep discount, leveraging is your friend because your risk is already diminished due to the low purchase price.

Todd Magin · Answer

@Vincent Chen

I think the BP community will need more information as the answer will vary greatly with the deal and the terms.  If you're buying "retail" then the answer may be no because you'll be over-leveraged, but in most cases when you're buying at the right price, seller financing is a good deal, assuming the terms of the loan are reasonable.

Please provide some numbers that we can chew on. :)