Held contract vs Bank Loan questions

[Andrew Zwicker]

I am having some trouble figuring out what to do with this rental house I am purchasing.

Some quick background information before I get too deep into it. I am purchasing this house from someone in the family who doesn't want to deal with their rental house any more. The house is 740 sq ft and currently occupied with a renter who is paying $750.00 per month to live there. The family member that wants to sell it to me would like to hold the contract for $60,000 @ 4% APR. (The house is appraised at $110,00.00)

They would like the contract to be for 10 years with payments of $600.00 per month. The reason they insist on holding the contract is so they can benefit from the interest.

Here is the issue. The roof, landscaping, and bathroom need to be redone.  It will cost me around $10,000.00 to do it if I play my cards right. I only have a small chunk in capital and don't want to run myself dry.

I have calculated the amount of interest they would gain over a 10 year period with this loan and it is just under $13,000. I am considering the option of getting a loan for $70,000.00 and offering that to them as well. This way I am still getting a deal on the house and they are getting an extra $10,000 for the house (not to mention getting paid in full a bit sooner).

I see it as an opportunity to recoup my expenses faster due to a lesser mortgage payment. I would be netting around $4,000 per year as well as being able to write off a good chunk of the interest paid on the loan. I would also be able to borrow against the equity I have in the house which would be around $30,000 ((110k - 72k) @ 80% LTV). Something that I am told would be much harder for me to do with a privately held contract.

Would this be a smart option and what would be the pros and cons for doing this? I am still learning the ropes and would like to start things out right instead of shooting myself in the foot with my first rental.