Being an investor that owner finances houses can be a very lucrative business. The two most advantageous elements of this business model are that you don't have tenant problems and you can earn money on other people's money.
The way this works is that you buy houses at a deep discount, and there are plenty of them out there when you know where and how to look for them. Frequently these houses are in disrepair. However, you don't need to rehab them when you are offering owner financing. You take some risk selling to people with less than a stellar credit history but big rewards can come from that risk.
This business model often works best in working class neighborhoods. That is where you are most likely to find rental houses and other houses for sale that will not attract retail buyers. Rental houses that landlords have allowed to fall into disrepair and owner occupied houses that have not been maintained. These aren't the only houses that work with this model but these make the best example.
Rehabbing these houses and flipping them is the business model most investors are familiar with. That's because the flipping model enables investors to pull all of their money plus the profit out when they sell to a fully qualified buyer. When you owner finance a less qualified buyer, you don't invest in repairs but you have to take your profit over 20 years instead of all at once. That's where other people's money comes in.
This is why owner financing can be better than Zero Interest Financing. Private financing has become widely available for several reasons. For one, it's simply easier for people connect in today's high tech world. All sorts of funding sites have popped up on the internet. There is also plenty of money available to borrow. One major source of the money are the retirement accounts of the 73 million baby boomers. They are looking for investments secured by real estate rather than gambling on Wall Street.
Owner financing means you need multiple funding sources. At least until you have 20 or 30 monthly income streams coming in from the houses you owner finance. That's where other people's money comes in.
Because you are taking a risk with buyers that have less than pristine credit, you can charge a higher interest rate. You attract other people's money by offering them a higher return than they expect from Wall Street and then secure it with the real estate you sell. Let's say you finance a house for 12% interest. You then offer the other people 10% and you collect the remaining 2% in the middle. For you, that's better than zero interest financing. You're also selling for a huge profit. Often for 70% to 100% more than what you bought it for.
Some people are going to think this is unethical but you're really offering a service to everyone involved. A major key to the selling formula is that the house payment be close to the average rent in the neighborhood. You enable buyers to own a house when they would otherwise be throwing away rent money (even if they are paying a higher interest rate). For the other people's money, you are offering a predictable rate of return secured by real estate. You do need to be up front with the other people by letting them know that the real estate isn't always worth the full amount of the loan (you bought at a deep discount and didn't make any repairs). Your ace in the hole here is that you have a business model that can again sell the house with owner financing if a buyer should default on the loan.
There are consumer protection laws that have changed the rules to this business model in recent years. Also, laws vary by state. Make sure you fully understand the laws before implementing this business model.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.