Sell a Property Turnkey or Sell a Note and Hold Property?

[Taylor Jennings]

I just deleted about 30 lines of rambling in this post... I cut the fat.

SCENARIO 1

Would you sell a Property at 10.5% CAP for $48k (19% Equity) to make $16k and be clean of the house?

or

SCENARIO 2

Would you sell a Note at 8.0% APR on a 30yr at 70% LTV to pull $42k out, make $10k instantly and hold the property at a 13% CAP while Cash Flowing $138/mo?

[Dion DePaoli]

This is confusing for sure.

IF your sell the property with Seller Financing, where you become the Mortgagee, you are actually selling the property.  It seems like that concept is not well established or is missed altogether.

"In #2 I would be "creating a note" at $42k (30% LTV) and my Operating Expenses would drop slightly for insurance and prop management (which I didn't mention in the details) so my CAP % should go up to 13% with cash flow increasing and purchase price dropping?"

It's not clear why the property is being sold at such a discount. 30% LTV with a $42k mortgage means the value of the property is around $140,000 since $42k is 30% of that number. So, the property is being sold at a $100k discount?? Why?

I am guessing the above is simply not worded or articulated correctly.  At the time of sale, if you sell for $42k, that sets the value of the Subject Property at $42k.  There is mention of a $10k down payment, so the Sale Price = $42k and the Loan Amount = $32k which is actually a 76% LTV not 30%.  

Get rid of all the "Cap Rate" references when talking about the note.  If you Sell the property and provide Seller Finance, you have NO Cap Rate, you are no longer in possession of the real property and therefore you do not capitalize it.  If you Sell the property, the Borrower who is also the Buyer is the entity who capitalizes the property.  A Mortgagee does not have insurance expenses, those are required of the Buyer/Borrower.  A Mortgagee does not have property management expenses as the property is NOT the Mortgagee's to manage.  You will have yield, but is not clear what that yield will be since the cost basis of the asset is not defined in the post.  It is safe to assume, I suppose, you paid less than $42k since that is the SF sale price.  So your yield and total return will be at 8% or better depending on the details.  

In regards to the tax accounting, do not count your chickens until they hatch.  The transaction and Seller must qualify as an investor and not as a dealer.  If you are designated a dealer, then the interest income will be treated as ordinary income.  If Seller is designated an investor, the gain is capital.  You should see your CPA about this as it not a straight forward idea as expressed above.

In general, holding a portfolio of properties where you are liable for the repayment is most of all residential loan transactions.  It is only in commercial transactions where you really see non-recourse loans.  (not personally responsible)  That said, the primary residence underwriting will look to offset the costs of holding those mortgage obligations by using 75% of the property's rental income.  In addition, reserves will be looked for, for each property.  Those same reserves do not have to be set aside in underwriting.  In other words, the reserves you hold for those properties also help qualify as your personal reserves in the underwriting of the loan.  Without getting in to too much detail, most likely the you are fine if you are a fair ways into your loan underwriting, provided the assets given in the interview can be proven.  I would not over think it.