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Updated almost 5 years ago on . Most recent reply
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Seller Financing Interest Rate - How does that work?
So I am in negotiations with a friend to buy 2 local rental properties, both 2 bed/2 bath- which would be my first investment property. Total value is $750K, and his mortgage is 1800 total for both. I would put 25K down (he doesn't need big money ASAP) for a total loan of $725k. Running numbers I can pay his mortgage plus $400 per month (so $2200 total) and still have $400 left for me. The homes are near Boulder, Co, so the possible rise in home value and/or rent rates is very appealing.
The question is that he wants an interest rate based on the 725K "loan". I explained that he is not giving me any of his actual money, rather the loan is based on the value of the homes. I said that I am basically paying him $400 to allow me to pay his mortgage, deal with tenants, and take care of repairs, etc.
Also, I offered a balloon payment after 5 years. By my math, that equals me paying 132,000 to him over 5 years, then owing him $618,000. He says that my monthly payments are really only the $400, not the full $2200 as he would be paying that anyways.
So who is right here or are we both a bit right/wrong. I understand that seller financing really comes down to whatever we agree to, but he has put it on me to present him with the structure and I want to be fair and honest from the start.
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@AJ Johnson At a quick glance, I don't see how this is a good deal in anyway - $750k for a two properties - there are far better deals out there, IMO. Plus because the seller still has a mortgage, so you wouldn't be able to transfer title to you without possibly triggering the due on sale clause. Without transferring title, you don't get the tax benefits of rental property, like depreciation.