Investor · Northridge, CA · Member since 2012 · 249 posts · 73 votes
What interest do you usually offer a seller in a creative financing deal??
I'm in negotiations with a seller who owns her property free and clear and she liked the idea of getting a down payment and carrying a note for the rest, she called me hours after and asked me for interest (she asked for 4%)
First off 4% for seller financing is a GREAT rate assuming it's a 30 year fixed. Usually sellers want a premium for seller financing of 1-2% higher than current mortgage rates.
Yes @Christina R. It's called the AFR - Applicable Federal Rate.
The IRS enforces this and releases an AFR monthly. If you lend at below the AFR there are tax consequences. It's to prevent people from just doing 0% loans or getting around gift taxes.
Current AFR is 3.29% for a long term loan. ie.30 year loan
@Zaid R. the question is do the terms meet your exit strategy? If you want it as a rental can you cash flow at 4%? Tell us what do you plan on doing with it?
I'm getting 6-8% on my seller carry backs when selling.
When buying I'm offering 6% for short term loans (12 months or less, resale after rehab) and that rate gets accepted. For longer term, I'm offering as low as low as 4%, with the sellers always countering higher. If your seller is happy with 4% then go for it.
I just did a sub2 and took over a 3.5% loan. That rate doesn't show up very much in my world. Must have more!
@Manny Cirino I plan to fix it up a little (carpet) then rent it out. My cashflow is going to be rent minus payments to seller (and of course taxes, maintenance..etc).
@Bob E. rehab of around 20k, rents are around $1850 and i was planning to manage it myself
@Bill Jones You mentioned your deals end up being around 5%, is this the number you start with usually? also what's the number of payments you usually start the negotiations with? I'd love to know
Curious -is there a benchmark set by the IRS in terms of interest rate on property financing - for example could a seller agree to zero % for higher sale price perhaps . . then the loan is secured with the seller in first position - it's recorded, etc . . is there anything about doing a 0% interest rate on a recorded mortgage that is going to p*&^ off the IRS?
There are IRS guidelines for different loan lengths for minimum interest that must e applied or else it is considered a gift and will be taxed as such. All info is available on IRS site.
First off 4% for seller financing is a GREAT rate assuming it's a 30 year fixed. Usually sellers want a premium for seller financing of 1-2% higher than current mortgage rates.
Yes @Christina R. It's called the AFR - Applicable Federal Rate.
The IRS enforces this and releases an AFR monthly. If you lend at below the AFR there are tax consequences. It's to prevent people from just doing 0% loans or getting around gift taxes.
Current AFR is 3.29% for a long term loan. ie.30 year loan