When you are dead set on acquiring your first multifamily properties, you will need to explore several financing options and secure one that’s right for you and your investment partners.
Although loans are the most common sources, you can also consider getting funds through seller financing. We had to do that in our first acquisition many moons ago. Since we did not have a track record, we found this was a great option.
For this option, you simply ask the seller of a multifamily property if they can finance the deal themselves. Normally, they wouldn’t mention this as they advertise the properties on the market. Still, the following advantages:
If you lack resources but you want to purchase multifamily properties, seller financing is right for you. It basically involves getting a loan (usually 70-80%) from the property owner. You give the rest as down payment and cover the initial closing cost of acquiring the property.
Under this setup, you as the buyer will have the responsibility of paying back the seller (through a promissory note) based on the terms you have agreed upon.
Seller financing is a great option. It makes it a lot easier for people to start living their lives without applying for loans from banks and lenders. For people who are into multifamily investing just as I am, then seller financing is a good strategy for getting around high interest rates.
Moreover, acquiring a multifamily property using funds from the seller can significantly shorten the selling process. Unlike with traditional lenders, sellers can readily agree to the funding needed for the acquisition. There is still some level of formality involved, but it’s not as stringent compared to loan transactions with banks and lenders.
It’s also quite a bit advantageous for the Sellers because they don’t need to pay a capital gains tax upon sale. When you sell with owner financing and report it as an installment sale, you will realize the gain over several years. Instead of paying taxes on the capital gains all in that first year, you pay a much smaller amount as you receive the income. This allows you to spread out the tax hit over many years.
However, it’s still crucial to look at the disadvantages of choosing a seller financing option for multifamily properties.
One issue with seller financing is the fact that it entails greater risk to multifamily investors. For one, sellers can demand large payments, which often push buyers into a tight corner.
Another disadvantage with this option is the fact that you’ll end up paying more than what you have been initially offered. For instance, the seller may decide to raise the interest rate based on your credit score.
Finally, seller financing isn’t really a good choice if you lack a good system for maintaining your cash flow. Since you are paying back the money spent by the property owner, it’s only proper to keep your finances in check. Otherwise, you will risk defaulting on the property, especially if it still shoulders too much debt.
Apparently, it takes a lot of experience as an investor to nail a good deal through seller financing. In reality, you just have to weigh options carefully.
Still, there’s always a good time to consider seller financing. Just as long as you have a compelling reason, you can always get funds for acquiring your first apartment complex. If you are a first-time investor, it’s important to never lose sight of your goals.
You should focus on getting your very first multifamily properties. This will determine how you will go on acquiring more properties under your belt.