Carrying a note on a paid off rental property

[Bryen Blankenship]

I have a fully paid off rental property with a solid tenant in place, but it's in a state with high property taxes (IL). The current tenant wants to purchase a home, but doesn't have a down payment larger enough to qualify for a loan. I'm thinking about doing owner financing and carrying the note. By doing this I can avoid a few things:

1. Paying increasing property taxes

2. Paying property management 

3. Paying for property insurance

Because the property has increased in value I believe I can increase my monthly profit by a couple of hundred dollars and avoid the headaches of managing the property. My question(s) the BP community is what are the steps I need to take in order to make this happen?

This is what I believe I need to do:

1. Create a promissory note 

2. Collect a down payment (10-20%) of purchase price

3. Transfer title

Thanks in advance for the help!

[Bob Norton]

@Bryen Blankenship You will want to also record a mortgage against the property to secure your promissory note wen you transfer title.  Otherwise, you may find that the buyer has borrowed against the property and another loan in front of yours and there is no equity left in the property.  Make sure you work with an attorney to get all the paperwork correct.

Also, you will want to make sure that the property taxes and insurance on the property is escrowed and paid by the buyer, so that you are protected from tax liens and catastrophic damage to the property.  Make sure you are named as additional insured on the insurance policies.  There are escrow companies that will collect the payments, hold/pay the funds for the taxes and insurance, and remit the net payments to you.  They charge a fee that your tenant-buyer should pay for as part of the promissory note.

By the way, if your current tenant doesn't have the down payment to qualify for a loan, how are you going to collect a 10%-20% down payment from him?