Investing in physical real estate is a great addition to your investment portfolio. It can help you diversify your holdings and be a source of income. It also offers tax breaks, wealth generation, and notably, is a hedge against inflation.
How you sell your real estate, however, is just as important as how you buy it. If you want to ease your tax burden, earn long-term passive income, while no longer having to fulfill the obligations of owning a home, then creating a selling financed note is an investment strategy to consider.
With seller financing the seller finances the buyer’s purchase of the property. In this case, the seller establishes the terms of the loan instead of going through a bank or a lender. Payments for the property are then made in P&I installments just like a traditional mortgage.
There are several key benefits to this setup:
Ease your tax burden. When you sell your property, the money you generate on the sale will be subject to a steep capital gains tax. If instead you create a mortgage note, your tax obligation will be spread out over the life of the loan instead of having to pay it as a lump sum within the tax year.
You can earn interest. Since seller-financed notes involve P&I payments, you will generate additional income over the life of the loan.
You open yourself up to a wider range of buyers. By offering owner financing, you can attract buyers who can’t easily qualify for traditional financing. While that may seem like a situation you want to avoid, the truth is not all people who fit this description are significantly more risky. A good example of this, is someone who is self-employed.
Earn from the property without the responsibility. As you collect your monthly payments you can have piece of mind knowing that you no longer have to maintain the property, pay real estate taxes, or keep an insurance policy. That’s the new homeowner’s responsibility.
Of course, there is always the risk that the buyer will be unable to make the monthly payments. In that case, you will need to actively seek a resolution, and this can be a headache. For this reason, if you’ve never offered seller-financing before, then you should consider using a licensed mortgage loan originator (LMLO) to both underwrite and generate your mortgage note. They can also determine if the buyer is truly in a position to purchase your property and in some cases collect the monthly payments.
Regardless, selling-financed notes are definitely a tool you should keep in your investment toolbox.
