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.
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