January 30, 2025 • 7 mins
Owner financing offers a unique alternative to traditional bank lending, allowing real estate investors to build superior cash flow and leverage their investments effectively. This episode highlights the benefits of owner-financed deals, including enhanced relationships with sellers, improved debt-to-income ratios, and better negotiating power.
• Benefits of leveraging owner financing
• Understanding cash-on-cash returns in real estate
• Building relationships with property sellers
• Flexibility in negotiations during market changes
• Advantages of improved debt-to-income ratios
• Mutual benefits for sellers in owner financing deals
• Challenges in locating owner financing opportunities
• Conclusion emphasizing the effectiveness of owner financing
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
The short and easy answer that I typically give
when someone asks me well, whydo you want to buy with owner
finance and why not use a bank?
Is because we get betterleverage.
So if you're an investor andyou're looking to buy multiple
properties, you're talking aboutthe volume that we do.
You're not just buying onerental property or two or three.
You're buying dozens Eventually, and a lot of times the number
(00:20):
is 11.
When you get to a certain ratewith bank financing on rental
properties, your terms skyrocket.
Your down payment goes up intothat 25, 30, or 35% down range
and your interest rate willusually still be pretty decent.
But by having to put such amassive down payment it'll throw
off your cash flow numbers.
So the more leverage you canget as a general rule of thumb,
(00:45):
the better your cash on cashreturn is going to be.
For those of you that don'tknow what a cash on cash return
is, I'll give a quick, superbrief example of how to
calculate that.
So let's say we're buying aproperty for round numbers,
that's a million dollars andlet's say that property's NOI
net operating income.
So the income that propertygenerates is a rental.
After paying all of theexpenses loan payment, HOAs,
(01:07):
taxes, insurance.
Let's say that number is$100,000.
So your million-dollar propertyis generating $100,000 in net
income every year.
So if we go and buy thatproperty cash, we're earning 10%
on our money because we takeour $1 million cash investment,
divide that by the $100,000 inincome that investment generates
(01:27):
and that's 10%.
So that's our cash on cashreturn.
If we buy that same propertywith 20% down, let's look at the
numbers on that.
So now, instead of our cashinvestment being $1 million,
it's now $200,000 cash.
The property is stillgenerating the same amount of
income because nothing haschanged.
The only thing that's changedis the way we purchased the
(01:47):
property.
So let's say, on the $800,000loan that we have, let's say we
got a 5% interest rate withinterest only amortization.
That means our annual loanpayments, our debt service, is
going to be about $40,000 a yearon that property.
So now we take our $100,000 netoperating income and we have to
(02:08):
deduct our loan payments fromthat.
So now, instead of making a netof $100,000, we're now making
$60,000 on that property.
But now, since we invested$200,000 to get $60,000, instead
of investing $1,000,000 to get$100,000, divide that $60,000 by
the $200,000 investment, youcan see we've tripled our cash
on cash returns.
Instead of earning 10%, nowwe're earning 30%.
(02:30):
So that's a real round numberexample of using leverage to
create a higher cash on cashreturn.
And if you had a milliondollars or you can do the same
thing if you had $100,000 andthe numbers are the same instead
of buying one property cash andgenerating 10%, you can use
that five times.
Now you've got five propertiesthat are now earning you 30%.
(02:50):
So over the course of the longhaul, your million dollars is
earning you $300,000 a yearinstead of $100,000 a year.
So that's the first thing.
The leverage is better.
Typically, the terms are better.
The purchase price is what wecare about the least.
When we buy with ownerfinancing, we almost always pay
either at list price or evenslightly above list price to get
(03:12):
favorable leverage, favorableinterest rates.
When you do that, it's notuncommon for us to get a three
and a half percent, four percent, always usually five percent.
The highest I've ever paid is6%, and so with those interest
rates, a lot of times that canbe better as well.
The other thing is, since we'renot using bank financing, we're
(03:32):
dealing with a human beinginstead of a bank, which I could
talk for an hour and a halfabout the benefits of dealing
with a person instead of WellsFargo or Bank of America,
because you've got an actualhuman being you can build a
relationship with Over time asthe market adjusts.
It gives more flexibility.
Let's say the market crashes,for example, and the balloon
payment comes up on these loans.
If we're dealing with a bank,you're out of luck.
(03:55):
Good luck getting anyone on thephone that you can even really
negotiate with, that even hasthat authority.
You're going to spend hours incustomer service lines to talk
to someone that doesn't know you, doesn't know your relationship
with the property.
They're looking at aspreadsheet.
You're dealing with a humanbeing.
You've built a track record.
You've made timely payments foryears.
They know you, they know you,they know your story and they
also know what's happening inthe market.
(04:16):
So we've had it before wherethe market crashed and okay,
let's negotiate an extension andit's easy to do, it doesn't
take months of paperwork andbank statements and nonsense.
It's a phone call, it's anemail.
That's one thing.
Let's say the market booms.
This is something too, sinceyou're dealing with a person and
we had this happen on aproperty in Pollock Pines,
California.
(04:36):
It's right, by Tahoe, we stillowed $150,000 on the owner
finance note.
We went to sell the propertybecause the market had
appreciated so quickly and Isaid to the lien holder I said,
hey, if we paid you off a yearand a half early, would you take
100,000 instead of 150?
I thought that'd be anegotiation point.
They just said okay, so we gotan extra $50,000 in reduction on
(04:58):
the back end.
That's obviously something thatyou could never even begin to
dream of doing with a bank, butat least you have that
opportunity to negotiate becauseit's a human being that might
need the cash and it might beadvantageous for them to get it
all now at that point.
You never know.
The other thing is if you'reusing bank financing.
Over time I had one client andpartner.
(05:19):
He had 11 properties with bankfinancing.
It messed up his debt to incomeratio, so all of those
properties are on his personalcredit.
So when it came time torefinance his home, his personal
residence where he actuallylived he couldn't do it because
his debt to income ratio was soscrewed up With owner financing.
While you typically will do acredit check to make sure that
(05:40):
the credit's good, it doesn'tshow up anywhere on your
personal credit.
So you have the income comingin but you don't have the debt,
so it actually improves yourdebt to income ratio.
That's a huge, huge benefit ofnot tying up your personal
credit so much for investment.
It gives you the flexibility tolive your life, enjoy the
benefits of the cash flow you'renow generating without the
(06:02):
downside of it.
So those are a few of the keyreasons I mean again, I could
literally do an hour and a halftwo hours talking about all the
benefits we've seen beyond that.
At the end of the day, there's alot of benefit to just being
able to build the relationshipwith a person and, quite frankly
, most of the people that willsell with owner financing.
It's a benefit for them as well, Because instead of taking that
(06:24):
cash right now, putting it intheir bank, where they're going
to earn 0.2 percent interest, orput it in a CD, you might get
one and a half percent if youlock up your money for five
years, or you might get 1.5% ifyou lock up your money for five
years.
Now they get cash up front andthey get a premium on the
purchase price and they'reearning 4%, 5%, 6% interest on
their money and secured by anasset that they're intimately
(06:45):
familiar with because it wastheir property that they chose
to sell.
So it's good for them as well,and usually these people that
will sell these properties willhave more than one.
That's another reason why Ilove buying, owner finance and
dealing with a person, buildingthat relationship, showing them
how stable we are with makingour payments on time so that we
can hopefully buy otherproperties from them with the
same structure as well.
So that's my little snippet foranyone that asks why we buy
(07:10):
with owner financing Again, theyare hard to find.
If it was easy, everybody woulddo it.
With owner financing Again,they are hard to find.
If it was easy, everybody woulddo it.
But we have tried and truesince 2009.
This is the best strategy andformula that makes sense to make
our numbers work, and I'mthankful to anyone that took the
time to watch this brief videoand I hope that it added some
value.
The short and easy answer that I typically give
when someone asks me well, whydo you want to buy with owner
finance and why not use a bank?
Is because we get betterleverage.
So if you're an investor andyou're looking to buy multiple
properties, you're talking aboutthe volume that we do.
You're not just buying onerental property or two or three.
You're buying dozens Eventually, and a lot of times the number
(00:20):
is 11.
When you get to a certain ratewith bank financing on rental
properties, your terms skyrocket.
Your down payment goes up intothat 25, 30, or 35% down range
and your interest rate willusually still be pretty decent.
But by having to put such amassive down payment it'll throw
off your cash flow numbers.
So the more leverage you canget as a general rule of thumb,
(00:45):
the better your cash on cashreturn is going to be.
For those of you that don'tknow what a cash on cash return
is, I'll give a quick, superbrief example of how to
calculate that.
So let's say we're buying aproperty for round numbers,
that's a million dollars andlet's say that property's NOI
net operating income.
So the income that propertygenerates is a rental.
After paying all of theexpenses loan payment, HOAs,
(01:07):
taxes, insurance.
Let's say that number is$100,000.
So your million-dollar propertyis generating $100,000 in net
income every year.
So if we go and buy thatproperty cash, we're earning 10%
on our money because we takeour $1 million cash investment,
divide that by the $100,000 inincome that investment generates
(01:27):
and that's 10%.
So that's our cash on cashreturn.
If we buy that same propertywith 20% down, let's look at the
numbers on that.
So now, instead of our cashinvestment being $1 million,
it's now $200,000 cash.
The property is stillgenerating the same amount of
income because nothing haschanged.
The only thing that's changedis the way we purchased the
(01:47):
property.
So let's say, on the $800,000loan that we have, let's say we
got a 5% interest rate withinterest only amortization.
That means our annual loanpayments, our debt service, is
going to be about $40,000 a yearon that property.
So now we take our $100,000 netoperating income and we have to
(02:08):
deduct our loan payments fromthat.
So now, instead of making a netof $100,000, we're now making
$60,000 on that property.
But now, since we invested$200,000 to get $60,000, instead
of investing $1,000,000 to get$100,000, divide that $60,000 by
the $200,000 investment, youcan see we've tripled our cash
on cash returns.
Instead of earning 10%, nowwe're earning 30%.
(02:30):
So that's a real round numberexample of using leverage to
create a higher cash on cashreturn.
And if you had a milliondollars or you can do the same
thing if you had $100,000 andthe numbers are the same instead
of buying one property cash andgenerating 10%, you can use
that five times.
Now you've got five propertiesthat are now earning you 30%.
(02:50):
So over the course of the longhaul, your million dollars is
earning you $300,000 a yearinstead of $100,000 a year.
So that's the first thing.
The leverage is better.
Typically, the terms are better.
The purchase price is what wecare about the least.
When we buy with ownerfinancing, we almost always pay
either at list price or evenslightly above list price to get
(03:12):
favorable leverage, favorableinterest rates.
When you do that, it's notuncommon for us to get a three
and a half percent, four percent, always usually five percent.
The highest I've ever paid is6%, and so with those interest
rates, a lot of times that canbe better as well.
The other thing is, since we'renot using bank financing, we're
(03:32):
dealing with a human beinginstead of a bank, which I could
talk for an hour and a halfabout the benefits of dealing
with a person instead of WellsFargo or Bank of America,
because you've got an actualhuman being you can build a
relationship with Over time asthe market adjusts.
It gives more flexibility.
Let's say the market crashes,for example, and the balloon
payment comes up on these loans.
If we're dealing with a bank,you're out of luck.
(03:55):
Good luck getting anyone on thephone that you can even really
negotiate with, that even hasthat authority.
You're going to spend hours incustomer service lines to talk
to someone that doesn't know you, doesn't know your relationship
with the property.
They're looking at aspreadsheet.
You're dealing with a humanbeing.
You've built a track record.
You've made timely payments foryears.
They know you, they know you,they know your story and they
also know what's happening inthe market.
(04:16):
So we've had it before wherethe market crashed and okay,
let's negotiate an extension andit's easy to do, it doesn't
take months of paperwork andbank statements and nonsense.
It's a phone call, it's anemail.
That's one thing.
Let's say the market booms.
This is something too, sinceyou're dealing with a person and
we had this happen on aproperty in Pollock Pines,
California.
(04:36):
It's right, by Tahoe, we stillowed $150,000 on the owner
finance note.
We went to sell the propertybecause the market had
appreciated so quickly and Isaid to the lien holder I said,
hey, if we paid you off a yearand a half early, would you take
100,000 instead of 150?
I thought that'd be anegotiation point.
They just said okay, so we gotan extra $50,000 in reduction on
(04:58):
the back end.
That's obviously something thatyou could never even begin to
dream of doing with a bank, butat least you have that
opportunity to negotiate becauseit's a human being that might
need the cash and it might beadvantageous for them to get it
all now at that point.
You never know.
The other thing is if you'reusing bank financing.
Over time I had one client andpartner.
(05:19):
He had 11 properties with bankfinancing.
It messed up his debt to incomeratio, so all of those
properties are on his personalcredit.
So when it came time torefinance his home, his personal
residence where he actuallylived he couldn't do it because
his debt to income ratio was soscrewed up With owner financing.
While you typically will do acredit check to make sure that
(05:40):
the credit's good, it doesn'tshow up anywhere on your
personal credit.
So you have the income comingin but you don't have the debt,
so it actually improves yourdebt to income ratio.
That's a huge, huge benefit ofnot tying up your personal
credit so much for investment.
It gives you the flexibility tolive your life, enjoy the
benefits of the cash flow you'renow generating without the
(06:02):
downside of it.
So those are a few of the keyreasons I mean again, I could
literally do an hour and a halftwo hours talking about all the
benefits we've seen beyond that.
At the end of the day, there's alot of benefit to just being
able to build the relationshipwith a person and, quite frankly
, most of the people that willsell with owner financing.
It's a benefit for them as well, Because instead of taking that
(06:24):
cash right now, putting it intheir bank, where they're going
to earn 0.2 percent interest, orput it in a CD, you might get
one and a half percent if youlock up your money for five
years, or you might get 1.5% ifyou lock up your money for five
years.
Now they get cash up front andthey get a premium on the
purchase price and they'reearning 4%, 5%, 6% interest on
their money and secured by anasset that they're intimately
(06:45):
familiar with because it wastheir property that they chose
to sell.
So it's good for them as well,and usually these people that
will sell these properties willhave more than one.
That's another reason why Ilove buying, owner finance and
dealing with a person, buildingthat relationship, showing them
how stable we are with makingour payments on time so that we
can hopefully buy otherproperties from them with the
same structure as well.
So that's my little snippet foranyone that asks why we buy
(07:10):
with owner financing Again, theyare hard to find.
If it was easy, everybody woulddo it.
With owner financing Again,they are hard to find.
If it was easy, everybody woulddo it.
But we have tried and truesince 2009.
This is the best strategy andformula that makes sense to make
our numbers work, and I'mthankful to anyone that took the
time to watch this brief videoand I hope that it added some
value.
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