Seller Financing Deal Structure

[Jonathan Dickerson]

An investor friend offered me first crack at buying his paid-for 5bd/3ba SFH that appraises for $500k and is currently rented for $3k/month on a 12-month lease. Expenses HOA - $125/month,

TAXES - $222/month,

INSURANCE - $333/month, Property management - 8% of rent = $240/month. Expecting annual appreciation of 4% on the property value and 5% on the rent, HOA, taxes and insurance. The seller is open to seller financing. I was hoping to structure a deal that involves paying the seller every month and then a balloon payment in 5 years (when I can get an 80% LTV cash out refinance to put a mortgage on the property without having to put any money down because I'll have built up at least 20%). Any suggestions on what is a fair amount to offer for the monthly interest payments and the balloon payment? Thanks all!

[Drago Stanimirovic]

Hi Jonathan,

Given your situation, a good approach would be to structure the deal with interest-only payments for the first five years, which will keep your monthly costs lower while you build equity. A fair interest rate for seller financing typically ranges between 4% and 6%. For example, at 5%, your monthly interest payment on a $500,000 loan would be about $2,083. This amount aligns closely with your rental income after expenses, so you’d be cash-flow neutral or slightly positive.

At the end of the five-year term, you could aim for a balloon payment based on the property’s future value, which should appreciate by around 4% annually. This would increase the property’s value to about $608,000, and you could look at an 80% loan-to-value refinance, which should give you enough to cover most, if not all, of the remaining balance.

This structure allows you to minimize upfront costs and take advantage of property appreciation over time. If you need further help fine-tuning this or want to explore financing terms, feel free to reach out!

Best,

Drago