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Owner Finance vs Hold and Rent

By
Real Estate Broker/Owner with Jeanne Gavish, Keller Williams Realty Elite Partners

Update for 2014: Since I wrote this blog post,  The Consumer Financial Protection Bureau (CFPB) has issued its Loan Originator Rule to implement the new Dodd-Frank requirements, and investors utilizing Seller Financing may now be classified as a loan originator under the Rule.  If you are considering Seller Financing, seek competent Legal Counsel regarding the Federal Rule and exclusions under the Rule. Refer to my post on qualifying exclusions.

I received a call from a potential real estate investor this week.  She had researched local Realtors and liked my bio and background.  She asked if we could meet to discuss how she could increase her monthly cash flow.  She had cash to invest and was looking at the great prices of houses, but confused and nervous about how to best invest in today's real estate market.

Should she buy, hold and rent the properties?  Or buy, rehab, and resell with owner finance?  My answer?

It depends on her end goal.  I remembered myself as a novice investor fifteen years earlier, asking myself the same questions. 

If I sold and held a mortgage, I would have the cash flow but not have to pay the real estate taxes and insurance.  I would have no calls if the air conditioner broke, or the appliances stopped working.  I would have monthly cash flow  without the hassles.  However, at the end of thirty years, I would have nothing.  For me, the fact that I would reach retirement at the same time my mortgage payments received would end helped me decide that was not the best option for me.

I decided that buying and renting afforded me the cash flow I needed, and when my retirement years arrived, my mortgage would be paid off, allowing me extra income when my working years were ended.  The down side?  I would be responsible for maintenance, taxes, insurance, vacancies and all of the responsibilities of property management.

For me, the decision to be a landlord worked out very well and property management has become an integral part of my real estate career.

  That is not to say that this decision if best for every investor.  I am well aware that having the nightmare tenant can sour an investor to being a landlord ever again, and I respect their decision.

Investing in real estate has risks like any other investment, and is a very subjective experience.  It was an educational experience for my novice investor, and she left with much to digest.  I look forward to helping her, whichever route she chooses.

 

Comments (8)

Ben Benita
Ben Benita - Gainesville, VA
Speaker, Author, Game Changer, Coach

that is the FIRST question I ask persons that invest money with me:

What is more improtant, getting cash flow now, or, equity later.

MOST times the correct answer SHOULD be cash flow FIRST, then EQUITY.... I know MANY millionaire investors that have cash flow issues!!!!

Apr 11, 2011 03:43 PM
Wallace S. Gibson, CPM
Gibson Management Group, Ltd. - Charlottesville, VA
LandlordWhisperer

I too am getting these calls * we have a VERY BRISK rental market with incoming military families and new-hires to 2 BIG medical facilities as well as UVA - knowing what to buy and where is key to having a successful investment portfolio!

Apr 12, 2011 12:19 AM
June Piper-Brandon
Coldwell Banker Realty - Columbia, MD
Creating Generational Wealth Through Homeownership

I work mostly with investors and I have some that will buy hold and rent, some that buy hold and resell and occasionally I have one that will hold seller financing.  It's not something I would do, however, that's not to say I wouldn't in the future.  I did hold a mortgage for a young couple a few years ago when they couldn't get bank financing because they had no credit.  I held the mortgage for 5 years and after that they were able to refinance.   It worked out for me, if they hadn't paid I would have just gotten the property back.

Apr 12, 2011 12:43 AM
Jeanne M. Gavish
Jeanne Gavish, Keller Williams Realty Elite Partners - Spring Hill, FL
Keller Williams Realty Elite Partners - CIPS,GRI,S

I agree Ben.  My new investor was a  little overwhelmed by all the information and questions, but having a goal and a strategy is key to investing success.

Apr 12, 2011 01:04 AM
Jeanne M. Gavish
Jeanne Gavish, Keller Williams Realty Elite Partners - Spring Hill, FL
Keller Williams Realty Elite Partners - CIPS,GRI,S

Wallace, We have a very brisk rental market too.  I wrote a blog about today's tenants being yesterday's homeowners.  A totally different type of tenant and I think many people who lost their homes will stay tenants for a very long time.  Perfect investment opportunity for landlord investors.

Apr 12, 2011 01:06 AM
Jeanne M. Gavish
Jeanne Gavish, Keller Williams Realty Elite Partners - Spring Hill, FL
Keller Williams Realty Elite Partners - CIPS,GRI,S

June, I have done both.  I prefer holding and renting and many of the private mortgages I held refinanced during the easy money market.  This cut my cash flow and left me with a chunk of money I had to reinvest during a time when prices were high. 

Apr 12, 2011 01:09 AM
Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

Jeanne, 

What I LOVE about this blog post is that there are many types of opportunities and you hit on great logic of what works for you.  (We are in the same camp, but realize not everyone is:-)

Understanding your emotional makeup and how you can handle the tenant issues make a huge factor in investment decisions.  

We do a ton of property management and the critical factor is a good tenant or NO tenant!

All the best, Michelle

 

Apr 13, 2011 03:00 PM
Jeanne M. Gavish
Jeanne Gavish, Keller Williams Realty Elite Partners - Spring Hill, FL
Keller Williams Realty Elite Partners - CIPS,GRI,S

Michelle,

Thank you for your enthusiastic comments.  I agree that being a Landlord is not for everyone.  With the proper professional Management, it can be a rewarding long term investment.

Apr 14, 2011 01:12 AM