What is truly amazing about real estate investing is there is absolutely no need to try and fit a square peg in a round hole. There are many different ways other than owning rental properties to generate significant passive income while still being secured by a hard asset. One of my favorite investment strategies that I have utilized extensively over the years is owner financing.
In this article we will look at the benefits of owner financing and see if this could be a good fit for your financial and lifestyle goals.
Substantial Passive Income:
A real estate secured note is generally going to produce a strong monthly payment to you that is vastly superior to more traditional investments like stocks or bonds. For retirees facing the “yield crisis,” this high level of consistent income can be extremely attractive.
Secured by Tangible Asset:
It is hard to find many other assets that offer the tangible security of real estate. Having lived in Houston when Enron collapsed, I saw first-hand the devastation that can occur when stock holders are wiped out. It was absolutely catastrophic for many families as life savings vanished overnight. With a real estate note, if your borrower should default then you would foreclose on the property. Property laws in Texas are very strong, and generally strong throughout the United States, from a lender’s perspective.
Other than collecting a check from the mailbox, with a real estate note there really isn’t much management at all as long as the borrower is living up to their end of the agreement. You are free to travel, vacation, or do whatever you please without much responsibility from your side. Should the borrower fail to honor their obligation, you will most likely need to hire an attorney to begin the collection/foreclosure process.
Great for Properties That Don’t Fit Your Rental Standards:
I spend a significant amount of my marketing investment on finding tremendous deals on Off-Market Properties. Often I come across extremely attractive deals on properties that I am not interested in keeping as a rental property. Perhaps the property is too old or needs too many repairs or simply the economics just don’t justify the headaches. These properties are great candidates to sell via owner financing and allow you to create a terrific stream of passive income.
Creating Phantom Money and Charging Interest on It:
Owner financing is probably the closest an ordinary person can come to emulating the tremendous benefits a bank enjoys. Not only do you get to create money “out of thin air,” you also get to charge interest on it. What a system! (See Example 1 below)
In addition to the interest you receive off of phantom money, you can also financially benefit from the spread between the rate you borrow money at and the rate you “lend” money at. (See Example 1 below)
Delay/Reduce Tax Impact on Rehabs:
Rehabbing properties can be tremendously profitable. One major drawback however is that the profits are typically going to be taxed at the ordinary income tax rate (which can exceed 35%). By utilizing owner financing, you may be able to substantially defer and reduce your tax rate because it is an installment sale. Please consult with a qualified CPA to understand the full tax advantages and implications.