Advice on Seller Financing?

Question

Hello everyone!

I was wondering if I can get the BP community's advice on purchasing my first investment property! I am really interested in a condo that is located in Tx. The list price is $126,500. The seller is open to seller financing. Looking at comps in the same apartment complex, I believe the condo can easily get $1,500 in rent every month. My agent told me that I can get it for $125K purchase price with 10% down and a 5 year term (seller is open alternative terms if those don't work). I believe that at the 5 year mark the condo would be renting for about $2K a month.  This is my first investment property and I have never done or considered doing seller financing.  Do you guys think those are favorable terms and what would be some things you recommend I negotiate with? My main goal is I want to make sure that the $1500 income in rent is breaking even and that I am not losing money. Would you recommend I negotiate longer terms? What would be an acceptable interest rate/amortization that you think I should negotiate. Would you recommend I go through conventional loan instead of seller financing?

Thank you all so much for your continued help in my investing journey! I am really excited to get my first deal in the books and start my REI career!

Eliott Elias · Answer

What is the interest rate? The monthly payment seems high, if the seller cares about a high monthly payment let the majority go to principal.

Drew Sygit · Answer

whts the interest rate?

Daniel Parrish · Answer

Congratulations, I love owner financing I think it’s the greatest investment tool that you can use for a investor . If you can get the seller to agree to 10% down on an owner finance matching prime rate or lower for a 10 year or more term you’ll hit a home run.

The only thing I’ll tell you to be cautious on his pre-payment penalties and making sure that the seller is receiving your payments every month. Many owner finance agreements that I’ve worked on Have very extreme foreclosure clauses. So please make sure that the seller gets their payments.

Mohammed Nasser · Answer

@Conner Olsen

Thanks so much for your reply Conner! My agent thinks the terms we can get are 10% down with 7% interest and a 5 year balloon payment on a 30 year amortization schedule. I will want to start negotiations at a lower interest rate (maybe 5% as suggested above). Yes, I always account for vacancy, capex, and maintenance. I will also be paying 8% in property management too.

Thanks again!

Henry Clark · Answer

Check if HOA.   Check on fees and potential fee changes.

Mohammed Nasser · Answer

@Charles Carillo

Hi Charles,

Thanks so much for your input! I think that is great advice. I think the seller would be open to a 7 year term and we can suggest a 5% interest and negotiate on that. I really like the idea of interest only payments. As for the rent, according to Rentometer, there are currently identical apartments (same bed and bath count and square footage) in the same complex being rented out for $1,650 a month, so I think $1,500 is a bit below market price. That being said, the condo I am interested in is in good condition and move-in ready, but could use some TLC. So I think making some minor cosmetic renovations, I can improve the quality of the condo and increase rents. It is also in a good area surrounded by multiple hospitals and a university so I believe rents in that area will go up significantly from year to year. I think depending on the interest rate agreed on, I can determine if I want to use seller financing or suggest a conventional loan. Thanks again!

Conner Olsen · Answer

Depends on your interest rate. Also don't count on rents going up 30% in 5 years (unless $1500/month is under market right now). Also account for vacancy, capex, maintenance. For a condo I've been using $150/month for capex and maintenance (just a guess, I don't own condos) and 8% for vacancy.

Charles Carillo · Answer

@Mohammed Nasser

I always push for longer terms (with no prepayment penalty). For interest rates; maybe ask for 5% and go from there. The seller is getting their price so they might be able to extend the term to 7 years (interest only) and work with you on the interest rate. If they do not extend the term; 5 years still gives you ample time to refinance. My other question is what is your business plan for getting rent to $2,000 in 5 years? Or are you just assuming with the market? I would have more of a plan for increasing rent.