Preserving The Equity of Your Rentals Continued

Topics: Landlording


 Turn negative cash flow houses into positive cash flow houses by selling them to your tenants. When you have a house that tenants won't buy for cash, or for which they cannot pay higher rents, trade negative cash flow for positive cash flow by selling on time and carrying the Note.

It's an axiom of the finance business that you can charge higher interests and a higher price. When you factor into the mix the $8000 tax credit, and the extra deductions for home interest and taxes, a current tenant – or someone else's tenant – can afford to buy your house with a small down payment and “interest only” terms. Let's look at an illustration of this:

Suppose a tenant who is now paying $1000 per month rent were to buy a house worth about $125,000 – which would be a pretty decent house in most areas today. If he could afford $2500 (2%) for the down payment and finance the $122,500 balance on 7% interest-only wrap around terms with $715 payments, he could afford to borrow the down payment at 0%, payable over a year at $250 per month and still be getting off cheaper than he would be by paying rent.

Bear in mind that we're using gross terms. We haven't included taxes, maintainence, and insurance as additional costs, but we also haven't included the fact that he could file an amended form W4 with his employer, and reduce his witholding taxes by $75 or so per month to cover his extra costs.

From the landlord's point of view, what was a negative cash flow investment for him could be turned into positive cash flow when all the costs were paid for by the new owner. His 7% interest ($715) per month plus the $2500 down payment would be a lot better than paying negative cash flow. Furthermore, there would no longer be any costs for management, marketing, vacancy, repairs, etc.

Of course this presumes that the payment for the existing loan that was wrapped was lower than the payment being paid by the buyer. In this situation, it might be far better for the buyer to enter into a short sale purchase with the owner; which would at least relieve the owner of making payments on a mortgage that was too high for the house.


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