Quinton writes: What is owner finance? Would you recommend doing that as an investment strategy?
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Welcome to the real investing show with Tim Herriage each day, we’ll provide real investing for everyday investors. Tim is a nationally recognized real estate investing expert podcast, host and public speaker. He built his businesses from the ground up and is here to help you do the same. Here is your host Tim Herriage.
Welcome back to real investing today. My name is Tim Herriage. We’ve got a great question. One that I hope really makes my friends angry and they ride in to tell me I’m wrong because I like to argue now, I’m just kidding. Today. Quenton writes, what is owner finance? Would you recommend doing that as an investment strategy? So I recommend you learn the strategy, Quenton. I recommend you use it sparingly. Um, for instance, we will still owner finance properties that are less conforming. Maybe have multiple add-ons or, um, are not busy streets, uh, or that are structurally sound that we know someone would want to come in and put five or 10% down and then do all the renovation themselves. But in general, I do not recommend owner finance as an investment strategy because here it goes, the hot take. The thing that people don’t believe don’t agree with me on owner financing is not investing.
Owner financing is income. It’s just like flipping. It’s just like wholesaling it’s it’s income. You are selling a property on installment sales. So you are, you’re a dealer, it’s a widget, you’re just selling it a different way. So investment is something you’re going to have for the long term. Investment is something that is going to appreciate and grow over time and owner finance mortgage absolutely does the opposite every single month. Your note receivable, the net present value of, uh, the unpaid principle balance of that note goes down because every month they’re paying principle on an amortization every month, your income goes down because every month on an amortization, they pay a little more principle, then they pay interest. And so for the first seven years or so, it’s almost all interest. So it’s actually good income. But after that, by year 15, it’s almost all principles.
So it’s very little income and every month your net worth goes down. So you’re losing the tax benefits of appreciation and depreciation. You’re losing the, um, benefit of appreciation. And, um, ultimately if it’s a 30 year mortgage, you offer someone where they make a down payment. After 30 years, you have nothing left. So to me, owner financing, not investing, it is a good exit strategy for real estate investors to master, to capitalize in down times to take advantage of market cycles, to take advantage of, um, I’d say unique property situations, but no, I do not recommend owner financing as an investment strategy because in my professional personal opinion, it is not. So Quentin died. That’s a great question. I hope it helps. Um, if you have any further questions, just hop on over to, Ihavelunchmoney.com. Submit your question. That’s it for me today. Folks. See tomorrow.
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Scott Carson says
I totally agree with you on this. We see way too many investors who owner-finace a home but then get upset when they need to cash in on their equity (which is now tied up in a note), but can’t get it because they don’t have seasoning on the note or they didn’t structure the deal/note properly to get the most if and when they need to sell it. I only recommend it if you can’t sell the real estate traditionally or have taken the property over via subject to.