As a commercial real estate investor, you probably know the importance of using leverage in order to acquire profitable properties with less money down.
However, there is another type of commercial real estate investment properties that can offer you an even better deal than the most flexible private lender can: OWNER FINANCED PROPERTIES.
Owner financed properties are properties in which the owner sets up what is essentially a private mortgage. The buyer pays a down payment, and then instead of making payments to a bank, makes payments to the owner.
The seller holds a lien on the property, just as a bank does. If the buyer stops paying the mortgage payments, then just as with a bank, the owner can foreclose on them. The owner will then be able to keep the down payment, and of course the payments that were made on the property up until then.
OWNER FINANCING CAN SAVE YOU MONEY
As a buyer, you can save thousands of dollars using owner financing. Closing costs, application fees, and buy-down points are some common examples of up-front charges that brokers and mortgage lenders charge for loaning you money. For commercial income properties, the total savings can total tens and hundreds of thousands of dollars.
WHY SELLERS CHOOSE OWNER FINANCING
It might seem strange that an commercial income property owner would want to offer you financing. However, for owners, seller financing offers a huge financial savings as well.
- First of all, an owner financed property allows the seller to save thousands of dollars in taxes. Normally when a commercial real estate investment property is sold, capital gains taxes are due immediately, unless a 1031 exchange is done. With owner financing, payments to the owner are spread out over the long term, allowing the owner to spread out the tax liability over many years.
- Second, owner financed mortgages allow the seller to enjoy passive income from the interest on the mortgage – even though they no longer own the property.
- Third, being open to owner financing means you have more potential buyers for your property. There are investors who have decent credit, but are unable to qualify for a traditional loan.
Keep in mind when considering owner financed properties that although they may seem easier to get, the owner will still want to vet your ability to repay the mortgage. In addition, just because a property may be easier to qualify for, doesn’t mean you should automatically assume that it’s the right property for you. Make sure you do your due diligence to ensure the property has profit potential for the long-term.
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