In a housing market where credit is harder to come by, Arizona investment property buyers need to find creative ways to purchase real estate. Seller financing is tool that can be used, but is it right for your investment strategy? It is important to analyze each investment to discover what tool makes sense and what has the best return potential.
Some of the advantages of seller financing to Arizona investment property buyers includes quick closing times, flexible credit qualifications, and minimal capital needed. In most cases you are dealing directly with the seller, so it does not take much time to close on a transaction. No more waiting months to close on a short sale or REO property. Flexible credit qualifications are typical, since this is a more non-traditional type of financing. Many investors may not have what it takes on paper to get a traditional mortgage; self-employed, tax deductions, business assets, etc. The credit flexibility of seller financing is definitely a benefit. The minimal down payment needed can also free up an investor’s capital, so that they can diversify their portfolio by purchasing multiple properties. This can be very important, especially in a depressed real estate market.
Arizona investment property buyers can benefit from seller financing.
Not only are there advantages for the buyer, but there are also benefits to the seller. Some of these benefits include an additional option to differentiate themselves from other sellers, cash flow opportunity, and the ability to sell the note to another investor. In troubled real estate markets, sellers can advertise seller financing as an additional option in an effort to stand out to buyers and sell their property more quickly. Also, holding the note can create a cash flow opportunity, as the seller would be getting monthly payments based on the terms of the note. This could provide a good rate of return with minimal risk. If the buyer defaults on the note, the seller would have the ability to foreclose on the property. There is also a market to sell a seller financed note. Investors are purchasing these notes, which could provide another benefit to the seller.
Let’s look at the example below on how an investor could use seller financing to purchase Arizona investment property.
Single family residence in Phoenix, Arizona listed for $100,000. The seller is willing to carry a note on the property at 7% (5 year balloon with payments amortized over 30 years), as long as the buyer comes in with 10% down payment.
Seller Financed Note
Loan Amount – $90,000
Interest Rate – 7%
Monthly Payment – $598.77
Down Payment – $10,000
Investors Potential ROI
Monthly Rental Income – $1,100/mo ($11,000/yr, assuming a 2 month vacancy)
Property Tax – $100/mo ($1,200/yr)
Homeowners Insurance – $50/mo ($600/yr)
Property Management Fee – $95/mo (assuming a 10% fee)
Total Cash on Cash Return – 10.64%
As you can see from the example above, you are able to realize a 10.64% return. You are able to take advantage of the power of leverage by using seller financing. Not only would you be realizing a double digit return, but would only be investing a minimal amount of cash allowing you to purchase multiple investments. This provides diversification to your real estate portfolio.
Like most forms of leverage, seller financing is a debt. This information is not telling investors to run out and take on a bunch of debt, as having too much debt will have a very negative impact on your investment return potential. Seller financing is just another tool in your investment tool belt. It may or may not be the best option for your investment strategy. Find out if seller financing is right for you and learn more about using the power of leverage in buying Arizona investment property with Clear Vision Investment Group.
