Buy owner financed at 9% interest or rent and save

[Mike Walsh]

Hello Bigger Pockets. I currently own a house in Louisville Kentucky which I am going to start using as an airbnb rental. So I need a place to live.

I recently quit my job because I have 2 companies that make more than I did at my job. I am pretty sure I would not qualify for a loan. However I strongly believe I can get a loan in 2 years.

I found a house with the owner willing to finance. It's 1,300 sqft in Saint Matthews and I believe it's worth $250k but needs minor repairs. It also has a full attic which I will refinish giving me another 5-700 sqft. With houses selling at over 150/sqft that'd add $75-100k to the value correct?

Here is what they want:

$230k purchase price

$10k down

9% interest (They will not move even one percent)

Over 30 years

No pre-payment penalty 

I realize these numbers don't meet requirements as a rental property, but it will always be a primary residence. Would I be crazy to pay 9% interest on it? Or does it make sense because there's significant value add and 20k in instant equity? Would I be better off renting for 2 years then getting a loan through the bank?

Thanks in advance. 

[Erik Hitzelberger]

@Mike Walsh  The lease/rent portion is largely a math problem.  If you buy under the terms you described, the PI portion is $1770.  With some rough approximations on taxes and insurance your monthly payment is going to be around $2250. After 2 years, you will have paid down $3150 in principal.

So, you can go rent a house for up to $2250, keep the $10,000 and forgo $3150 in principal reduction.  Note that the break-even point for this part is is to rent for ~$2120.  At this point, you lose whatever equity is in the house and whatever appreciation you would get over the next 2 years.  I can't speak to your valuation, but something pretty drastic would have to happen for the average house in St Matthews to not appreciate at least 3-5% per year over the next few years.  Even if you dismiss the initial equity (or count it as closing costs when you sell), the appreciation could mean $14-23K in equity.  This puts your break-even rent/buy rate between $1275 and $1667.   

You can decide how aggressive or conservative you want to be with those numbers. Also, we are talking about your primary home.  There is emotional value in owning and in not having to move again in 2 years.  These are factors you have to weigh.