(CHEROKEE LAKE REALTY WRITES A WEEKLY COLUMN FOR THE GRAINGER COUNTY JOURNAL NEWSPAPER. THIS WAS A RECENT QUESTION ASKED BY A READER.)
If you’re asking me to choose, I would go with owner financing. When you rent, you are still responsible for all the maintenance costs that come with owning the property. If the roof needs replacing, it’s on you. Heat pump goes on the blink; it’s your responsibility to either repair or replace it. Hopefully, you are handy in repairing stuff. Otherwise, you must factor in the additional costs of having to pay someone else to do any repairs. Eventually you will have to replace the refrigerator, water heater, range/stove, etc. Property taxes and insurance costs are still your responsibility. The rent you collect must not only provide you with a way to profit from your investment but also have factored in the maintenance costs you will be assuming on a regular basis. And don’t forget, you still need to remain competitive with what other homes are being rented for in the area. Then there is the issue of the renter. Most renters won’t stay in the home for a long time. So, you must include the cost of replacing tenants. Advertising, cleaning up after the former tenant, and allowing for a month or two without rent, while you transition from one renter to another. And there is one more negative. What if your renter gets behind on rent? Now, you must go through the process of eviction, which may involve legal fees and going to court. This may take another month, or more, of going without rental income. If you do go the rent option, make sure you consult with an attorney, understand the laws, and have an iron-clad lease agreement. You can do well with renting a property, it’s still yours and it will continue to appreciate in value, but costs must be taken into consideration.
With owner financing, you have sold the house but are playing the role of the mortgage company. Again, do this through an attorney or a title company, outlining the terms of the loan and under what conditions you have the right to repossess the property if need be. All the maintenance costs referred to earlier fall on the new owner. You are free and clear. Get a good down payment, and don’t go too far out on the term. Five to fifteen years are ideal. The more expensive the property you’re selling, the longer the term. Then the buyer can either refinance with you or seek another lender. And charge an interest rate. Here is where your investment kicks in. You want to sell the property for more than what you paid for it, that’s profit number one. But by charging an interest rate on the payments, you’re adding a second level of profit. Many times, the interest you collect on a loan will be greater than the initial profit you made on selling the home. The interest you recoup on this type of investment will typically be much larger than what a bank will pay you on a certificate of deposit, since those rates have been historically lower.
There is a third option, which is commonly referred to as flipping the home. If you purchased the home at below market price, allowing you to still make some improvements to the house, you can then resell it at a profit. This can be tricky as the costs of remodeling, especially if you are hiring someone to do it, may add substantially to what you paid for the home. But, if you can pull that off, you can mark up the home and sell it for a profit. Some companies have made a living out of doing this, but again, this can get financially tricky. Hope this helps, and if you have any follow up questions feel free to email us.
