Not only have you found this here blog, but you’ve also decided to join the sexy world of investing in real estate. I 100% guarantee it will be more exciting than two chicks at once.
There are a number of advantages to investing in real estate, provided you’re smart enough to do it in markets that aren’t crazy like Toronto or Vancouver. There’s a whole system in place that lets you leverage the investment by at least five times your original investment. This leverage lets you make bank on the capital employed.
Real estate isn’t that hard from an operational perspective either. Sure you might end up with a crazy tenant or two, but there are ways to get those kinds of people out. And it really isn’t that hard to deal with tenants provided you know the law. Having an experienced landlord in your corner helps a lot too.
Related: the really easy way to build your own real estate empire.
One of the big problems with investing in real estate is the limitations placed on you by the bank. Once you get one or two rentals going, they usually shut you down because the more rentals you have, the more risk you take. Banks are more scared of risk than I am of the dark.
The good news is there’s a way around financing property through the bank. Here’s how owner financing can be incredibly powerful for the average real estate investor.
What’s owner financing?
Owner financing is pretty simple. Instead of getting a mortgage from the bank, you get financing from the owner of the place. Well, former owner once he sells the place to you.
Yeah, we know Nelson. Who doesn’t know what owner financing is?
Geez, italics guy is kind of a dick.
Are you going to tell the nice people italics guy is you, you no-talent hack.
Way to ruin the surprise, jerk.
Let’s start at the beginning. Why exactly would an owner want to give a chump like you financing anyway?
There are a few reasons, but most of the time it comes down to one big factor. The owner can’t really sell the place and is looking to make buying it more attractive. So they offer a perk.
The owner might be getting other benefits from this too. It’s a simple way to convert a lump sum to cash flow, which might appeal to somebody who’s close to retirement age. The owner could also command a higher price or get a nice interest rate by giving financing. And giving somebody financing is a hell of a lot more attractive than doing a rent to own deal.
Siri, remind me to do a blog post on why rent-to-own deals are terrible for owners.
My Android phone: (explodes)
The benefits for the buyer can be pretty sweet too. The biggest one is not having to qualify for a mortgage at a bank. If you’re already sitting on a handful of properties (or a crummy credit score), dealing with one guy you can charm (with or without cleavage, your choice) is a lot easier than trying to convince a banker to give you money. Damn them with their rules and numbers and logic and whatnot.
A banker isn’t going to let you do something like borrowing a down payment, but I’m sure you could convince random landlord Bob that it’s not such a bad idea. Hell, Bob probably isn’t going to bother asking where the down payment comes from. He’s inexperienced in the world of mortgages, so he probably won’t think to ask.
Buyers should keep in mind that it’s going to be hard to talk a seller into giving you a mortgage at 2.5%. I charge between 8% and 10% when I do private mortgages, but you should be able to do a little better. Somewhere in the 5-7% range is probably pretty realistic given the interest rate environment. So when you’re buying a owner financed house, you’ve got to be getting at least a double-digit cap rate to even consider borrowing money at 7%.
Implementing the plan
Now that we know all about owner financing, here’s how you can use it to really add to your real estate empire.
Your first step is talking to your Realtor. If you’re serious about buying real estate you probably already have one. All you need to do is tell them that you’re looking for rental properties that the owner is willing to finance.
Or, if that doesn’t work, start approaching older landlords you know. Sell them on the benefits of taking a little less in return, but having the freedom to step away from their real estate. The nice thing about doing it this way is you might find someone who’s willing to do it for two or three properties. They get to unload their holdings, you get nice-sized deal. It’s a win-win.
Depending on the strength of the market, this search might take a while. It’s best to do it in a market that’s slow.
The next step is to come up with a down payment. It is possible to do this without coming up with a down payment, but I wouldn’t count on it. Hell, I’d be inclined to think there’s something wrong with the place if the owner is willing to sell it to you for nothing down.
Once the two of you come together on a price, down payment, interest rate, and other important terms, it’s time to go to the lawyer and get the agreement finalized. The previous owner will be transferred from being an owner to having the mortgage on the property. You’ll get ownership and the responsibility of fixing the place, finding tenants, and so on.
And that’s really about it. A private mortgage holder doesn’t have the ability to report to the credit bureaus; they won’t know you have this debt. The only way they’ll find out is if the owner forecloses on your ass.
Should you do it?
If you’re serious about buying real estate, I’d say owner financing should be something that is at least in the back of your mind. It’s not going to work in a hot real estate market. But for those of you who don’t live in Canada’s five largest cities, I bet there’s potential to make this happen. You just gotta make sure the return is enough that you can afford the higher interest rate.