Seller Financing- rookie trying to understand the numbers

[Phil Fowler]

Hi Guys,

Phil Fowler here. I'm new to the Bigger Pockets community and have been listening to the podcast for about 3 weeks now. I love the knowledge but after listening to Brandon speak of his deal with on the $1 million MHP I want to make sure I understand owner financing.

This is from episode 272! He said the park was bought for $1million, he put 10% down and the seller made an interest rate of 5%.

If I understand correctly he put 100k down and the owner made 45k a year off interest or in other words, Brandon wrote a check for $3,750 a month?

So in essence he was able to purchase a million dollar MHP with 100k and paying the owner $3,750 a month until the remaining 900k is paid?

Numbers aren't my thing but I'm trying to get a better grasp off all of this. Thanks guys!

[Mitch Messer]

Hi @Phil Fowler and welcome to BiggerPockets! You've almost got it. Yes, on a $1 million property, he'd purchase by putting down $100K (10%), leaving a balance of $900K (called the principal). At 5% interest, that would be $45K a year ($3750/mo) to the seller.

Problem is, that $45K would only cover the interest on the $900K. Ten (or a hundred) years from now, the balance would still be $900K.

In order to eventually pay of the balance, the interest has to be paid plus an amount to reduce the balance with every payment. This act of reducing the principal over time is called amortization.

Amortized over, say, 15 years, the monthly payment would be more like $7,117/mo.