Owner Financing Tax Advantages

[Sandra Holt]

I am looking to buy a property where I have a friendly relationship with the current owner.  I'd like to propose owner financing to her because I want to avoid the closing costs of a conventional loan.  Who gets the tax benefit from the property though (mortgage interest deduction, etc.)?  If the mortgage is recorded, then I'm assuming that I do.  Can anyone clarify this for me?  

Also, other than flexible terms and paying interest rate to a friend and not a bank, what are the other advantages of owner financing?  I'd like to buy another property this year and if I have to go through a bank to get that one financed, will it look better to the bank to have an owner financed property or since it's recorded, does that not matter? Thanks for any and all responses!

[Taylor Shields]

The relationship is your single greatest advantage! Banks don't care about you and they don't let you control the terms. You both get a tax benefit as she won't have to pay a large chunk of capital gains to the government and you get to deduct interest. 

I don't know if you have already had the seller finance discussion with her but a great way to get that door open is asking, "what will you do with the money from the sale of the property?" Then you can explain what kind of return you could get her and it would be secured by this property that she knows and is familiar with. GET AS LONG OF TERMS AS POSSIBLE.

Some additional benefits: Many times the seller who is financing will come back to you and say they want to get some cash or they want you to cash them out because they need it for something. At that point you can negotiate a significant discount.

Since you are the maker of the note you would have the ability to move the note to be secured by a different property (as long as there is sufficient equity), or should you sell the property you would be able to leave the note in place and use it for or to aid in the purchase of another property. To move the note you would need the beneficiary to sign a reconveyance. If your friend (the beneficiary) has been receiving payments for a while its likely that she wont want to be cashed out and you can use that cheap money over and over again. 

You also have the ability to split the note into pieces and secure them against separate properties (with beneficiary approval). Should you sell the property, You also have the ability to wrap the note with your own note for long term cash flow. There are all kinds of creative things you can do with seller financing. 

I don't know exactly how this financing would affect you when getting a institutional loan.

What kind of terms are you thinking for the note? and what kind of cash flow will that get you?