Unlock 3 Profit Zones in Owner Financing with the Seller's Loan
Hey gang, this is Mike with My Real Estate Dojo. Today we're going to explore the three profit zones in owner financing. Whether you're a real estate investor, realtor, or buyer, you've probably seen ads on Craigslist for owner financing or rent-to-own homes. You might be wondering how this works. Let's break it down and reveal the three ways you can profit from owner financing, even if you don’t own the house free and clear.
Understanding Owner Financing
The first thing to understand about owner financing is that you don’t need to own the house outright. This is a crucial point. You can still have a mortgage on the property, known as the underlying note. With this approach, you can profit from the property in three significant ways.
Profit Zone #1: Down Payment
When you offer owner financing, the first profit zone is the down payment from the buyer. Many buyers who are interested in owner financing cannot qualify for traditional FHA or conventional loans due to bad credit or being small business owners. However, these buyers often have substantial down payments. By requiring a down payment of 10%, 20%, or even 30%, you secure an immediate profit. This initial chunk of money boosts your cash flow right from the start.
Profit Zone #2: Monthly Cash Flow
The second profit zone is the monthly cash flow. Let's assume you have an existing mortgage on the property with an interest rate of 3%. When you sell the house with owner financing, you can wrap the mortgage and charge the buyer a higher interest rate, say 8% or 9%. This spread between your underlying mortgage rate and the rate you charge the buyer generates monthly cash flow.
For example, if your monthly mortgage payment at 3% is $800, and you charge your buyer $1,300 at 8%, you pocket the $500 difference every month. This additional income stream continues until the buyer either refinances or pays off the loan.
Profit Zone #3: Back-End Profit
The third profit zone is the back-end profit. When the buyer eventually pays off the loan, typically through refinancing or selling the property, you receive the remaining principal balance. Let’s say you sold the property for $100,000. The buyer paid a $20,000 down payment and made monthly payments for ten years. After ten years, they refinance and pay off the remaining $80,000 principal. This lump sum payment is your back-end profit, adding a significant boost to your income.
Advantages of Owner Financing Over Landlording
Owner financing, or holding the note, offers several advantages over traditional landlording:
- Less Maintenance Hassle: The buyer, not you, is responsible for property maintenance and repairs.
- Quality Buyers: Buyers in owner financing deals usually have a stronger commitment because they have made a significant down payment.
- Passive Income: You receive steady monthly payments without the headaches of tenant management.
The Wraparound Mortgage Strategy
A wraparound mortgage is a creative financing technique that allows you to profit from the difference between the underlying mortgage rate and the higher rate you charge the buyer. You continue paying the original mortgage while receiving higher payments from the buyer, thus creating a profitable spread.
Final Thoughts
Owner financing through strategies like seller finance, subject to investing (subto), and wraparound mortgages can be incredibly profitable. The three profit zones—down payment, monthly cash flow, and back-end profit—offer multiple streams of income and reduce the risks and hassles associated with traditional landlording.
If you find value in these insights, please like, share, and comment on my videos. For those who are serious about scaling their real estate investing business, consider joining my Smart Coaching Program. This performance-based program ensures I only get paid when you close deals, aligning our interests for mutual success.
Make 2024 your best year yet. Happy investing!
Feel free to reach out if you have any questions or need further guidance. This is Mike with My Real Estate Dojo. Have a great day, gang!
Disclaimer: This video is for educational purposes only. Individual results may vary. Always conduct your own research and consult with a professional before making any investment decisions.
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